Chapter 5
The Performance of Nontraditional Banking Companies
Multiple Choice
1. Investment banks generally engage in all of the following types of business activities except:
a. proprietary trading.
b. goodwill recovery.
c. market making.
d. securities underwriting.
e. advisory services
Answer: b
2. If a security is a first-time placement for a firm, it is called a(n):
a. initial public offering.
b. first time equity offering.
c. primary offering.
d. secondary offering.
e. seasoned offering.
Answer: a
3. If a firm already has stock outstanding that is publically traded, additional offerings are
called:
a. initial public offering.
b. second time equity offering.
c. primary offering.
d. secondary offering.
e. flavored offering.
Answer: d
4. The underwriting process involves all of the following except:
a. helping a firm design a security to meet all legal requirements.
b. identifying potential buyers.
c. pricing the security.
d. selling the security to the market place.
e. All of the above are part of the underwriting process.
Answer: e
1
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom
use.
5. During the underwriting process, the investment bank receives payment for all of the
following except:
a. flotation costs.
b. legal costs.
c. Federal Reserve costs.
d. accounting costs.
e. marketing costs.
Answer: c
6. Which of the following investment banking services would be classified as an advisory
services?
a. Managing investments for governments.
b. Designing an initial public offering
c. Acting as a broker that facilitates security trading
d. Running a hedge fund
e. Proprietary trading
Answer: a
7. When an investment bank stands willing to buy securities from participants who want to
sell and to sell securities to participants who want to buy, it is:
a. underwriting.
b. market making.
c. principal investing.
d. proprietary trading.
e. organizing a market.
Answer: b
8. When an investment bank commits its own funds to take a risk position in an underlying
security, it is known as:
a. underwriting.
b. market making.
c. proprietary trading.
d. organizing a market.
e. brokering.
Answer: c
2
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom
use.
9. A __________ is an investment fund that is limited to a small number of sophisticated
investors.
a. money market mutual fund
b. private equity fund
c. risk management fund
d. hedge fund
e. market development fund
Answer: d
A commercial bank is an investment fund that is limited to a small number of sophisticated
investors- False
10. On Goldman Groups’ 2012 balance sheet, Financial Instruments Owned consists of:
a. cash.
b. collateralized agreements.
c. derivative securities.
d. a. and b.
e. a. and c.
Answer: e
11. On Goldman Groups’ 2012 balance sheet, ___________ consist of securities that Goldman
Sachs has loaned under an agreement to repurchase at a later date.
a. collateralized agreements
b. financial instruments
c. collateralized financings
d. receivables
e. payables
Answer: c
12. ______________ represent amounts owed to Goldman Group by brokers, the firm’s
customers, and counter-parties to derivative contracts.
a. Collateralized agreements
b. Financial instruments
c. Collateralized financings
d. Receivables
e. Payables
Answer: d
3
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom
use.
13. ______________ represent amounts owed by Goldman Group to brokers, the firm’s
customers, and counter-parties to derivative contracts.
a. Collateralized agreements
b. Financial instruments
c. Collateralized financings
d. Receivables
e. Payables
Answer: e
14. Goldman Group listed all of the following key risk faced by the firm in its 2007 annual report
except:
a. widening credit spreads..
b. an increase in the number of securities underwritings.
c. declines in equity values.
d. declines in the number of mergers and acquisitions.
e. an increase in market volatility.
Answer: b
15. Under FASB 157, Level _______ assets valuation are based on observable market prices for
the identical instrument.
a. 1
b. 2
c. 3
d. 4
e. 5
Answer: a
16. Under FASB 157, Level _______ assets valuation are based on observable market prices for
similar assets or liabilities.
a. 1
b. 2
c. 3
d. 4
e. 5
Answer: b
4
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom
use.
17. Under FASB 157, Level _______ assets valuation are based on management’s best judgment
of what the underlying asset is worth.
a. 1
b. 2
c. 3
d. 4
e. 5
Answer: c
18. Under FASB 157, the valuation of Level 1 assets is labeled:
a. marking to market.
b. marking to matrix.
c. marking to myth.
d. marking to major.
e. marking to minor.
Answer: a
19. Under FASB 157, the valuation of Level 2 assets is labeled:
a. marking to market.
b. marking to matrix.
c. marking to myth.
d. marking to major.
e. marking to minor.
Answer: b
20. Under FASB 157, the valuation of Level 3 assets is labeled:
a. marking to market.
b. marking to matrix.
c. marking to myth.
d. marking to major.
e. marking to minor.
Answer: c
21. The Dodd-Frank Volker Rule:
a. allows commercial and investment banks to merge.
b. prohibits proprietary trading using FDIC insured funds.
c. encourages investing and sponsoring of hedge funds
d. both a. and b.
e. both b. and c.
Answer: b
5
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom
use.
22. Mutual of Omaha bank is charted as a:
f. commercial bank.
g. consumer bank.
h. mutual savings bank.
i. thrift.
j. credit union.
Answer: d
23. BMW Bank is chartered by the:
a. state of Utah.
b. FDIC.
c. Federal Reserve.
d. Office of the Comptroller of the Currency.
e. National Credit Union Administration.
Answer: a
24. Historically, most industrial loan companies have operated to:
a. accept deposits.
b. assist their parent company in some facet of the firm’s core business.
c. exclusively make commercial loans.
d. increase the safety and soundness of the parent company.
e. purchase municipal securities.
Answer: b
25. Which of the following is not a criticism against granting commerce companies industrial
loan company charters?
a. There should be a separation between commerce and banking to protect customers
from potential conflicts of interest.
b. Firms could become so large and powerful that they might dominate business in many
communities.
c. Industrial loan companies are not subject to the same regulations as commercial banks.
d. All of the above are criticisms against granting commerce companies industrial loan
company charters
e. a. and b. only
Answer: d
True/False
26. Investment banks are prohibited from making a market in the stock of publically traded
companies.
Answer: False
6
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom
use.
27. When an investment bank acts as a broker, it does not take ownership of the underlying
security.
Answer: True
28. Net interest income made up a significant portion of Goldman Groups’ net revenue in 2012.
Answer: False
29. “Hot money” represents Goldman Groups’ greatest credit risk.
Answer: True
30. Today, most industrial loan companies are located in Florida.
Answer: False
31. Mortgage origination makes up the largest portion of Goldman Groups’ business.
Answer: False
32. Goldman Group has converted from an investment bank to a bank holding company.
Answer: False
33. Mutual of Omaha’s business model is to combine insurance and banking activities.
Answer: True
34. BMW bank has more financial leverage than its peers.
Answer: True
35. BMW Financial Services is owned by BMW Bank.
Answer: False
Essay
36. Discuss the four types of businesses that investment banks traditionally engage in.
37. Discuss the risks faced by Goldman Group.
38. Discuss why community banks might oppose Wal-Mart from being granted a charter for an
industrial loan company.
39. Explain how Mutual of Omaha Bank “fits into” Mutual of Omaha’s business model.
40. Discuss the benefits to BMW North America of owning BMW Bank.
7
© 2015 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom
use.