Fin 326 Final Set #1

Front 1

Customer deposits are classified on a bank’s balance sheet as liabilities.

Back 1

T

Front 2

A free-rider problem exists when an investor assumes that other investors who have more at risk will collect information and monitor the actions of the firm.

Back 2

T

Front 3

The Fed controls the fed funds rate by using open market operations (sales and purchases of government bonds) to change the demand curve for federal funds.

Back 3

F
They control the supply curve.

Front 4

In comparison to the U.S. Federal Reserve, the People’s Bank of China (China’s central bank) is less willing to use changes in the reserve requirement to control the money supply in China.

Back 4

F
Discussed in class, the PBOC has recently changed reserve requirements.

Front 5

During the last 30 years in the U.S., the most dramatic increase in the share of assets in FIs in the U.S. has been in investment companies.

Back 5

T

Front 6

An investor holding a long position in an asset benefits from a falling asset price.

Back 6

F

Front 7

If the Fed undertakes an open market sale of securities, it will end up shifting the supply curve for federal funds to the left, thus driving up the fed funds rate.

Back 7

T

Front 8

The maturity structure of the liabilities of commercial banks tends to be longer than the maturity structure of their assets.

Back 8

F

Front 9

The current unemployment rate in the U.S. is closest to:
a. 4%
b. 5%
c. 6%
d. 7%
e. 8%

Back 9

b. 5%

Front 10

Excluding potential financial service customers from the marketplace is know as:
a. credit allocation.
b. redlining.
c. agency costs.
d. diversification.
e. delegated monitoring.

Back 10

b. redlining.

Front 11

The strongest argument for an independent Federal Reserve rests on the view that subjecting the Fed to more political pressures would impart:
a. an inflationary bias to monetary policy
b. a deflationary bias to monetary policy
c. a tendency for higher volatility in monetary policy
d. a counter-cyclical bias to monetary policy

Back 11

a. an inflationary bias to monetary policy

Front 12

In the PBS video clip “Silent Watchdogs,” former corporate treasure Peter Siris describes the following conflict of interest at investment banking firms:
a. if an investment bank wanted his firm’s business, then its research analysts needed to generate favorable publicity for his firm.
b. if an investment bank wanted his firm’s business, then it needed to offer discounted loan terms to his firm.
c. if an investment bank wanted his firm’s business, then it needed to reduce its otherwise large commissions to his firm.
d. if an investment bank wanted his firm’s business, then it needed to reduce its short selling of his firm’s stock.
e. Peter Siris mentioned none of these conflicts of interest.

Back 12

a. if an investment bank wanted his firm’s business, then its research analysts needed to generate favorable publicity for his firm.

Front 13

Consider the financial commercials by Countrywide Financial (home equity loans), UBS (investment banking), and Charles Schwab (stock brokerage). According to our discussion in class, which firm appeared to be in the highest margin business?
a. Charles Schwab
b. Countrywide Financial
c. UBS
d. All three firms appeared to be in equally high margin businesses.

Back 13

c. UBS

Front 14

Consider a single person having 'taxable' income of $70,000 in 2005. Using the following marginal tax rates (from the IRS for 2005), compute how much Federal tax is due. (Do the simplest calculation possible, don't think about state taxes, the alternative minimum tax or any other complications.)

Now, compute this person’s average tax rate (i.e. not the marginal tax rate). Which number below is closest to this person’s average tax rate (i.e. find the minimum absolute value of the difference from your number).

0...7,300 10% (7,150 for 2004)
...29,700 15% (29,050 for 2004)
...71,950 25% (70,350 for 2004)
..150,150 28% (146,750 for 2004)
..326,450 33% (319,100 for 2004)
>326,450 35%
Please round to the nearest 100. E.g. enter "$15,157" as "15200".
a. 10%
b. 15%
c. 17.5%
d. 20%
e. 25%

Back 14

d. 20%
7300*0.10 +
(29,700 - 7,300)*0.15 +
(70,000 - 29,700)*0.25

= 730 + 3,360 + 10,075 = 14,165

Average tax rate = 14,165/70,000 = 20.2%

Front 15

The portion of the income statement that reflects money set aside for possible future credit losses is:
a. net interest income.
b. non interest expense.
c. the provision for loan losses.
d. net interest margin.
e. the reserve for loan losses.

Back 15

c. the provision for loan losses.