FINA 441, Study Guide, Test 2, Final Exam
Chapters 17-25
The final exam will consist of two parts.
 The first part of the exam will be closed-book and will cover the subject material on the
study guide below. This part of the exam should take no more than an hour. Expect a
mixture of objective questions (e.g. T/F, MC) and short answers.
 The second part of the test will be open-book, open-note. You may use your laptops or go
to the computer lab. Expect mostly objective questions. Anything we have covered since
the mid-term exam (in the textbook or out of the textbook) might show up on this part of
the test. Doing your assignments, paying attention in class and reading your chapters are
prerequisites for doing well on this part.
Both parts of the test must be completed within the two-hour period, so if you take too long on the
closed-book portion, there will be insufficient time to complete the open-book portion.
What follows are questions/topics that you should be able to answer for the closed-book portion.
Chapter 17
1. Suppose your friend Archie needs a loan ($100,000, 30-year, 4% fixed-rate loan) so that he
can buy a house. At the same time, suppose that you happened to have $100,000 to invest.
Why might you rather loan your $100,000 to the bank (by investing in a savings account at
1%) and let the bank make the loan to Archie, as opposed to loaning directly to Archie? In
other words, what does a financial intermediary (bank) do to justify making only 1%
instead of 4% on your money? What risks does the bank absorb?
2. Where does a bank get the money that it lends out? (i.e. what are the common sources of
funds?)
3. Be able to distinguish between transactions deposits, savings deposits, time deposits, and
MMDAs. Which of these is usually the cheapest source of funds for a bank? The most
expensive?
4. What does a bank usually do with the money it obtains? (i.e. what are the normal uses of
funds?) If loans provide higher rates of return, why doesn’t a bank loan out all of its
money?
5. For the latest period examined, how did the sources and uses of funds differ between Baker
Boyer Bank (BBB) or Banner Bank (BB)? How did the income statements of BBB and BB
differ?
Chapter 18
6. Where can a bank be chartered? Which government organizations regulate a federallychartered bank? A bank chartered by WA State?
7. When and why was deposit insurance created? What main organization provides insurance
for 90% of banks and savings institutions? Who pays the premiums? What is the current
insurance coverage dollar amount? When, why and by how much was the dollar ceiling
last changed? What types of accounts are insured? If Dick and Jane have some bank
accounts that are joint, separate, IRAs, and business accounts, what are the rules
determining whether their bank accounts are insured or not? What are the arguments for
government deposit insurance? What are the arguments against deposit insurance? What
is the moral hazard problem associated with deposit insurance, both from depositors’ and
bank managers’ perspectives?
8. Over the last century, which decades saw the most bank failures? Why then?
9. What steps did FDR take in response to the 1933 banking crisis?
10. Why are banks required to maintain a certain level of capital? Why do banks fight against
having too much capital? Are risky banks required to maintain more capital than non-risky
banks? How did the Basel III Accord recently adopted by the U.S. affect capital levels?
11. What was TARP? Was it good or bad or both? Explain.
12. How are bank loans regulated? How are bank investments regulated?
13. Why did the government originally feel that mixing banking with security, underwriting,
brokerage, mutual fund, and insurance services was bad? When was this prohibition
relaxed? What is the main concern about this today?
14. Why did the government originally feel that allowing banks to expand across state lines
was bad? When did the government change its view on this? What are the benefits of
having large, nationwide banks? The drawbacks?
15. Be able to intelligently discuss the major provisions of the Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2010 (i.e. What steps were taken to prevent a repeat of the
2008-2009 financial crisis?) Pay particular attention to the PowerPoint slides which
summarize the main ideas behind Titles, 1,3,4,5,6,7,9,10,13 and 14. Is Dodd-Frank fully
implemented today?
16. What does the CAMELS rating measure? What scale is used (e.g. is a 1.0 good or bad)?
17. Why should the government rescue a failing bank? Why should the government not rescue
a failing bank?
Chapter 20
Note: Although we didn’t formally cover this chapter, the subject material was addressed by the
credit union project and by the problem on that was done in class (10e, p. 529; 11e, p. 563).
18. Know the overall format of a bank’s income statement. Be able to complete a problem
similar to Forecasting Bank Performance problem we did in class for Hawaii Bank (see p.
529 for 10th edition and p. 563 for 11th edition).
19. What are the two main sources of gross interest income? Why do loans usually provide a
higher return than investments? What additional costs come with giving loans? Why
doesn’t a bank loan out all of its money (i.e. why does a bank have any investments other
than loans)?
20. What are the main sources of gross interest expense? If time deposits (CDs) are more
expensive, why would a bank issue them?
21. What does the loan loss provision represent?
22. What are examples of non-interest income?
23. What are examples of non-interest expenses?
24. Know how to calculate and interpret ROA and ROE.
25. What affect would there be on the income statement of a bank or credit union that stopped
investing in loans and invested all its funds in Treasury securities instead? (i.e. how would
this affect net interest income, provision for loan losses, non-interest income and expense,
net income?)
Chapter 21
26. What is a thrift or savings institution? How does it differ from a commercial bank?
27. How does an S&L differ from a savings bank? In which geographical region are most
savings banks located?
28. Why did the savings institution (S&L) crisis occur in the 1980s? What was the cost per
taxpayer?
29. How were savings institutions affected by the recent mortgage/financial crisis? What was
the name of the largest S&L in the nation that went bankrupt in Sept/08? What lead to its
downfall?
30. How do credit unions differ from banks? (Consider characteristics such as ownership,
terminology, services provided, taxability, who can be a customer/member, volunteerism,
etc.)
31. What advantages do credit unions have over banks? Disadvantages?
32. Why do banks dislike credit unions? Is their dislike justified? What actions have banks
taken against credit unions? How have credit unions retaliated?
33. Would credit unions usually have more or less of the following risks than a bank: liquidity
risk? Why? Default or credit risk? Why? Interest-rate risk? Why?
Financial Institutions Project
Review what you learned about credit unions and be able to discuss concepts related to CAMEL
(capital, asset quality, earnings, management, liquidity, and interest-rate risk). For example, is a
capital ratio of 5% considered good or bad for a small credit union? How about a delinquency
loan rate of 5%? What about an ROA of 2%? Etc.
Chapter 22
34. Be able to distinguish between three broad categories of finance companies and be able to
give examples of each. What are the advantages of having a captive finance company?
35. How do the services of finance companies differ from the services that other financial
institutions offer?
36. What are the major sources and uses of funds at a finance company?
37. For what purpose would people usually borrow from small local consumer finance
companies (e.g. The Cash Store)? For what purpose would people usually borrow from
large, national consumer finance companies?
38. How are finance companies regulated? What does usury mean? What level of APR is
typically charged in cash-checking stores?
39. How do the following risks differ between consumer finance companies and other financial
institutions: liquidity risk, interest-rate risk, and credit risk?
Chapter 23
40. Under what circumstances would mutual funds have to pay income tax? Why do capital
gains distributions often occur in late December of each year?
41. How is the NAV calculated and at what time of day? Review the spreadsheet example of
how various transactions affect the NAV.
42. What are types of distributions mutual funds make to shareholders?
43. What are the different types of expenses faced by mutual fund shareholders? In what range
do typical expense ratios fall for a mutual fund? What is the Vanguard 500 total expense
ratio and is it a good or bad ratio, compared to the competition? What are the following:
front-end load, bank-end load, 12b-1 fees?
44. Why do mutual funds (and pension funds) have a lot of power in corporate America? Do
you agree that when people become passive investors in mutual funds (instead of investing
in corporate stock), they give up their vote as the social conscience of America?
45. Are most mutual funds open or closed end? What’s the difference?
46. What advantages do mutual funds offer to individual investors compared to investing in
individual stocks?
47. What advantages does an ETF have over a mutual fund?
48. What advantages do index funds, such as the Vanguard 500, have over actively-managed
funds?
49. Be able to briefly explain the mutual fund scandal (late trading and market timing) and the
government’s response. Who is Peter Scannell and why is he a hero?
50. How does venture capital differ from private equity?
51. What is a hedge fund and why/how have they been regulated? Why does the gov’t not
regulate hedge funds as much as it does mutual funds? Does the LTCM case support or
detract from the view that award-winning academics can use their great knowledge to
generate superior returns? Who was Bernie Madoff and what did he do?
52. What is a REIT? How do equity and mortgage REITS differ?
Chapter 24
53. T or F: During most of the 20th century, investment banking operations in the U.S. were
separated from commercial banking operations.
54. What do investment banks (securities firms) do? What are their functions? How do they
generate revenue?
55. Since the beginning of 2008, what happened to each of the following what were
independent investment banks: Bear Stearns? Merrill Lynch? Lehman Brothers?
Goldman Sachs? Morgan Stanley?
56. Review the notes you took on the documentary “Inside the Meltdown.” Why did the
government “bail out” Bear Stearns, Fannie Mae, and Freddie Mac . . . but not Lehman
Brothers? Why was AIG bailed out? What does moral hazard mean? Did the gov’t
correctly predict the impact of Lehman’s failure? Why did the government purchase
preferred stock (and not common stock) in its attempt to inject capital (and thereby
confidence) in the U.S. financial/banking system? Was TARP necessary in your opinion?
Why or why not? Has TARP turned out to be financially successful for the government?
57. Regarding the analyst research scandal (particularly at Merrill Lynch), what did analysts do
that was so reprehensible?
58. When security firms trade investments for their own accounts (proprietary trading),
sometimes they take excessive risks. Be able to give a few spectacular examples. How
does the Volcker Rule affect proprietary trading?
59. What does the SIPC do? T or F: You lose $495,000 by risky trading; but do not worry . . .
the SIPC will cover your loss in full.
Chapter 25
60. Be able to distinguish between defined benefit and defined contribution plans. Which puts
more risk on the employee? Which has investment choices made by the employee? Which
has shorter vesting periods and tends to be portable? Which passes value on to heirs?
61. What are the trends in the numbers of DBPs and DCPs? What do you think is causing this
trend?
62. Do pensions managed by trusts usually have more or less risky investments than those
managed by insurance companies? Why?
63. What does the PBGC do? What is its current health? What industries have experienced
the most pension failures that have contributed to the PBGC’s problems? Does it appear
that a taxpayer bailout will eventually be needed?
64. Understand the parameters of the Social In-Security problem. What are the main factors
causing the problem? Approx. when will the projected outgo exceed the income? When
do experts predict that the trust fund be depleted? What are some possible solutions?
Which solution is most likely? What was former President Bush’s proposal regarding
Social Security? Was he suggesting a move towards a DBP or a DCP?
65. How are insurance companies regulated and by whom? How does Dodd-Frank change the
regulation landscape?
66. Who rates insurance companies and how are they rated? Is a rating of AA better than
AAA?
67. Why do life insurance companies like to invest in corporate and government bonds?
68. Why do property/casualty insurance companies like to invest in municipal bonds?
69. What is the difference between a mutual-owned and stock-owned insurance company? Are
there more mutual or stock-owned insurance companies today? Which are usually bigger
in size?
70. How are the objectives of insurance and derivative securities similar?
71. What brought down AIG?
Financial Market Indicators Project
72. As you know, the final exam is not comprehensive (ignores the first half of the quarter over
financial markets). To appease the instructor’s guilty conscience for failing to give a
comprehensive final, there will be a few basic questions about the financial indicators
tracked during the quarter. Know the definitions for each indicator. [See little red comment
boxes on spreadsheet link on website.] Be able to discuss the indicator trends over the
quarter (e.g. stock markets, interest rates, inflation, federal debt/deficit, the price of oil and
gold, VIX, MSFT stock/options, USD, Euro, Yen, etc.), what caused the trends, and how
these trends relate to the overall economy.