Review for Chapters 12 and 13
1.
Depository institutions are the most important source of credit to
A)
mutual funds.
B)
large businesses.
C)
small businesses.
D)
state governments.
2.
A)
B)
C)
D)
The largest type of depository institution in the United States is
savings-and-loans
commercial banks
credit unions
mutual funds
3.
A)
B)
C)
D)
What type of loan led the wave of bank lending in the 1970s and 1980s?
Consumer loan
Commercial mortgage
Loans to state and local governments
Commercial paper
4.
A)
B)
C)
D)
Banks are prohibited from holding __________________ in their portfolio of assets.
commercial paper
local government securities
farm mortgages
corporate stock
5.
As a source of bank funds, __________________ has fallen by nearly two-thirds in
relative importance since 1970.
A)
time deposits
B)
transactions deposits
C)
savings deposits
D)
equity
6.
Regulation Q was responsible for the drop in importance of __________________ as a
source of bank funds.
A)
time deposits
B)
transactions deposits
C)
savings deposits
D)
equity
7.
Non-transactions deposits are different from transactions deposits in that
A)
transactions deposits have unlimited check writing privileges while non-transactions
deposits do not
B)
transactions deposits have limited check writing privileges while non-transactions
deposits have unlimited check writing privileges
C)
transactions deposits have no check writing privileges while non-transactions deposits do
D)
transactions deposits have no check writing privileges while non-transactions deposits
have limited check writing privileges
8.
Since 1970 there has been a huge increase in the relative importance of
__________________ as a source of bank funds.
A)
negotiable CDs
B)
time deposits
C)
foreign deposits
D)
transactions deposits
9.
A)
B)
C)
D)
Which of these qualifies as a “miscellaneous liability” of a bank?
repurchase agreements
negotiable CDs
transactions deposits
savings deposits
10.
A)
B)
C)
D)
With overnight repos, __________________ gain access to short-term funds to lend.
corporations
banks
governments
consumers
11.
The decline in the relative importance of transactions deposits as a source of bank funds
between 1970 and 1997 can be attributed to
A)
the general increase in interest rates on other types of assets.
B)
movements of transactions deposits to thrifts.
C)
the extension of unlimited check writing privileges to many non-transactions deposits.
D)
the increase in large-sized negotiable CDs as sources of bank funds.
12.
A package of nontraded financial instruments can be transformed into a traded financial
instrument through the process of
A)
collateralization.
B)
repurchasing.
C)
securitization.
D)
underwriting.
13.
A)
B)
C)
D)
A bank’s net interest income is
the same as net operating income.
the difference between interest on loans and interest expense.
the same as net operating income before expenses.
the difference between total interest income and interest expense.
14.
A bank with some monopoly power may be able to __________________ the rate on its
deposits and so __________________ its net interest income.
A)
lower, lower
B)
lower, raise
C)
raise, lower
D)
raise, raise
15.
A)
B)
C)
D)
A bank’s net interest margin can be adversely affected by all of the following except
credit risk.
interest rate risk.
leverage risk.
stock market risk.
16.
For S&Ls in the early 1980s the __________________ cost of short-term deposits turned
their net interest margin __________________.
A)
increasing, positive
B)
increasing, negative
C)
decreasing, positive
D)
decreasing, negative
17.
For banks, net interest income is becoming a __________________ proportion of their
total operating income as the banks are __________________ nontraditional sources of revenue.
A)
rising, shifting into
B)
rising, pulling out of
C)
D)
falling, shifting into
falling, pulling out of
18.
Because banking is very __________________-intensive, a bank generally becomes
successful if it can __________________ the ratio of salary and wages to total assets.
A)
capital, raise
B)
capital, lower
C)
labor, raise
D)
labor, lower
19.
If a security held by a bank falls in market value, that loss
A)
must be recorded by the bank, no matter what.
B)
will be recorded by the bank only if the security is of the type they hold to maturity.
C)
will be recorded by the bank only if the security is of the type they often sell before
maturity.
D)
will be recorded by the bank only if it sells the security.
20.
A)
B)
C)
D)
The ratio of equity to total assets is a measure of a bank's __________________ risk.
credit
leverage
interest rate
liquidity
21.
A)
B)
C)
D)
A bank can lower its leverage risk by
issuing more stock.
buying more securities and making fewer loans.
more closely matching the average maturity of its assets and liabilities.
taking in fewer deposits and relying more in miscellaneous liabilities to raise funds.
22.
The ratio of non-performing loans to total loans is a measure of a bank's
__________________ risk.
A)
credit
B)
leverage
C)
interest rate
D)
liquidity
23.
A)
B)
C)
D)
A forward looking measure of a bank’s credit risk is
the ratio of loan charge-offs as a percent of total loans.
the ratio of non-performing loans to total loans.
ratio of non-performing loans to total assets.
the ratio of equity to total loans.
24.
A)
B)
C)
D)
The GAP ratio is a measure of __________________ risk.
credit
leverage
interest rate
liquidity
25.
The difference between a bank’s assets that will be re-priced in less than one year and
the bank’s liabilities that will be re-priced in less than one year expressed as a percent of total
assets is
A)
a measure of liquidity risk.
B)
called the GAP ratio.
C)
earnings at risk ratio.
D)
a measure of credit risk.
26.
A 25-year floating rate mortgage has its rate adjusted twice a year. This gives it a repricing maturity of
A)
six months.
B)
twenty-four years and six months.
C)
twenty-five years.
D)
fifty years.
27.
Banks can lower their liquidity risk by having more __________________ on their
balance sheet.
A)
government securities
B)
transactions deposits
C)
loans
D)
savings deposits
28.
Because banks are act as dealers in financial instruments such as bonds, foreign
currency and derivatives, they are exposed to
A)
credit risk.
B)
liquidity risk.
C)
trading risk.
D)
interest risk.
29.
A)
B)
C)
D)
Because transactions deposits can be withdrawn at any time, banks are exposed to
credit risk.
liquidity risk.
trading risk.
interest risk.
30.
A)
B)
C)
D)
The McFadden Act was passed to prevent
banks from competing on the basis of deposit rates.
foreign banks from operating in the United States.
large nationwide banks from forming.
banks from holding corporate stock as an asset.
31.
A)
B)
C)
D)
A major loophole was punched through the McFadden Act as banks
formed bank holding companies.
developed negotiable certificates of deposit.
began paying interest on checkable deposits.
converted themselves into savings-and-loans.
32.
A)
B)
C)
D)
The Glass-Steagall Act prevented commercial banks from
opening branches in other states unless the bank is part of a bank holding company.
getting into investment banking.
selling shares in themselves in the open market.
issuing commercial paper.
33.
A)
B)
C)
D)
A stand-by letter of credit issued by a bank is __________________ of that bank.
an asset
a liability
technically both an asset and a liability
neither an asset nor a liability
34.
Since 1960 U.S. banks have __________________ the proportion of their total lending
which is done overseas.
A)
reduced to near zero
B)
scaled back
C)
held nearly constant
D)
increased
35.
In a typical year, about __________________ of bank business loans in the U.S. are
made by foreign-owned banks through their branches here.
A)
ten percent
B)
twenty percent
C)
one-third
D)
one-half
36.
A)
B)
C)
D)
The Bahamas and Cayman Islands are known for their warm, sandy beaches and their
Edge Act corporations.
shell banks.
section 20 affiliates.
high taxation.
37.
dollars.
A)
B)
C)
D)
Suppose that Samsung, a South Korean corporation, issues bonds denominated in
These are
called foreign exchange bonds.
called Eurobonds.
called shell bonds.
imaginary, since it is against international law to do this.
38.
A)
B)
C)
D)
Eurobonds are bonds that are
sold outside the borrowing corporation’s home country.
sold in Europe.
money market instruments.
almost always underwritten by a single bank.
39.
A)
B)
C)
D)
IBFs are designed to compete with
Eurobonds.
off-balance-sheet activities.
shell branches.
letters of credit.
40.
A)
B)
C)
D)
Credit unions made it through the 1980s in relatively good shape because
most of their depositors were individuals.
most of their depositors were businesses.
they held many mortgages among their assets.
they held no mortgages among their assets.
41. Life insurance companies are supervised and regulated by the
A)
Federal Home Loan Bank Board.
B)
Securities and Exchange Commission.
C)
states in which they operate.
D)
Federal Reserve.
42.
Over 90 percent of life insurance companies are structured as __________________
companies. Over 50 percent of industry assets are controlled by companies structured as
__________________ companies.
A)
mutual, mutual
B)
mutual, stock
C)
stock, mutual
D)
stock, stock
43.
A)
In recent years the life insurance industry has emphasized
whole life policies.
B)
C)
D)
group insurance.
less risky investments.
the purchase of short-term assets.
44.
A)
B)
C)
D)
For a whole life policy, the policy holder pays
premiums based on current interest rates.
a constant premium.
premiums that vary with mortality risk.
constantly declining premiums.
45. For term life insurance, the policy holder pays
A) premiums based on current interest rates.
B)
a constant premium.
C)
premiums that vary with mortality risk.
D)
constantly declining premiums.
46.
Life insurance companies have increased their purchases of corporate stock in recent
years in an effort to
A)
reduce risk.
B)
increase asset returns.
C)
increase liquidity.
D)
reduce taxes.
47.
A)
B)
C)
D)
Universal life insurance was created in response to
the popularity of whole life insurance.
the popularity of variable life insurance.
high interest rates.
deregulation of banking.
48.
that is
A)
B)
C)
D)
An employee who retains earned pension benefits after leaving a job has a pension plan
whole life.
guaranteed.
vested.
funded.
49.
Until the 1980s most private pension plans were “defined __________________” plans
under which the periodic employer payment into the plan was __________________.
A)
benefit, variable
B)
benefit, preset
C)
contribution, variable
D)
contribution, preset
50.
A fully funded pension liability is one in which
A)
the Pension Benefit Guaranty Corporation insures full benefit payments.
B)
enough money has been set aside to ensure that the promised pension can be paid out
after allowing for interest payments.
C)
the yield on the pension fund is equal to the inflation rate.
D)
corporation pension contributions are equal to employee contributions.
51.
Suppose a new employee is promised a pension payment of $8000 in the twenty-fourth
year after joining the firm. The current pension contribution of $1200 a year. Assuming an eight
percent rate of return, this pension plan is said to be
A)
fully funded.
B)
partly funded.
C)
unfunded.
D)
fully vested.
52.
A)
B)
C)
D)
The problem of vesting and funding are avoided by __________________ pension plans.
both defined benefit and defined contribution
defined benefit
defined contribution
neither defined benefit nor defined contribution
53.
A)
B)
C)
D)
Compared with the average man, the average woman pays
less for health insurance but more for life insurance.
less for life insurance but more for health insurance.
more for life and health insurance.
less for life and health insurance.
54.
A)
B)
C)
D)
Property and casualty insurance companies are supervised and regulated by the
Federal Home Loan Bank Board.
Securities and Exchange Commission.
states in which they operate.
Federal Reserve.
55.
Relative to life insurance companies, the liabilities of property and casualty insurance
companies are
A)
longer-term.
B)
more unpredictable.
C)
less risky.
D)
subject to higher taxes.
56.
Property and casualty insurance companies tend to invest heavily in municipal bonds
because
A)
the bonds have higher yields than corporate bonds.
B)
property and casualty insurance companies are required by regulators to hold at least 20
percent of their assets in the form of municipal bonds.
C)
the bonds are tax-exempt.
D)
they hold large state and local government pension funds, thus requiring them to hold an
equal amount of municipal bonds.
57.
A)
B)
C)
D)
Pension funds are partially guaranteed by the
Social Security Administration.
Federal Deposit Insurance Corporation.
Federal Reserve.
Pension Benefit Guaranty Corporation.
58.
A)
B)
C)
D)
In dollar terms the most important of all forms of property and casualty insurance is
automobile liability insurance.
home owners insurance.
medical malpractice insurance.
fire insurance.
59.
A portfolio manager for a property and casualty insurance company who anticipates a
recession is likely to shift the company's portfolio into
A)
short-term securities.
B)
preferred stock.
C)
common stock.
D)
long-term corporate bonds.
60.
Mutual funds that offer limited shares that are not redeemable are referred to as
A)
B)
C)
D)
open-end.
closed-end.
negotiable.
nonnegotiable.
61.
A)
B)
C)
D)
The net asset value of an open-end mutual fund is equal to the
profits of the fund.
dividends paid out by the fund.
market value of the securities held by the fund.
price-earnings ratio of the fund.
62.
Assume that a no-load open-end mutual fund holds securities with a total market value of
$12 million, has no liability, and has 500,000 shares outstanding. The net asset value par share
of this fund is
A)
$24.
B)
$60.
C)
$24 million.
D)
$60 million.
63.
A)
B)
C)
D)
A mutual fund that charges a sales commission is a
load fund.
no-load fund.
closed-end fund.
premium fund.
64.
A)
B)
C)
D)
Which of the following would likely be involved in a new bond offering?
A commercial bank.
An investment bank.
A broker.
A dealer.
65.
A)
B)
C)
D)
Unlike brokers, securities dealers
operate in secondary markets.
risk capital losses.
trade “used” securities
operate in primary markets.
66.
A)
B)
C)
D)
The two major types of finance company are
capital market and money market.
public and private.
consumer and commercial.
insured and uninsured.
67.
A)
B)
C)
D)
Finance companies are the largest issuers of
commercial paper.
shares.
long-term securities.
repurchase agreements.
68.
A)
B)
C)
D)
“Bootstrap financings” are buyouts financed by
the company managers’ own assets.
finance companies.
junk bonds.
new issuance of bonds.
69.
An Oldsmobile dealer may turn to a __________________ like GMAC for loans in
purchasing vehicles for his inventory.
A)
investment bank
B)
broker-dealer
C)
bootstrap financing company
D)
captive finance company
70.
A)
B)
C)
D)
Investment banks operate in the
secondary market.
primary market.
securitized market.
money market.
71.
A)
B)
C)
D)
Unlike dealers, brokers
deal in the primary market.
deal in equity and not in debt.
do not buy or sell for their own account.
get most of their funds from consumer deposits.
72.
A)
B)
C)
loans.
D)
A leveraged buyout is
a form of short-term lending to finance companies when they buy a company.
the acquisition of a company financed by debt.
the sale of commercial paper to finance purchases of bundles of securitized non-traded
borrowing by finance companies to make loans.
73.
Mezzanine debt funds hold quite __________________ assets issued by
__________________ companies.
A)
risky; small to midsized
B)
risky; large
C)
safe; small to midsized
D)
safe; large
74.
A venture capital fund buys the__________________ of a new company and hopes to
profit from __________________.
A)
debt; repayment of the debt at maturity
B)
debt; interest payments on that debt
C)
equity; dividends from the equity
D)
equity; eventual sale of that equity
75.
A)
B)
C)
D)
“Subordinated” debt is one form of __________________ debt.
mezzanine
uncollateralized
zero-coupon
risk-free