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### 15 Cards in this Set

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 Compared to an auditing firm, the OCC will spend relatively less time examining a commercial bank’s financial statements. T The economic definition of the value of an FI's equity is the book value of assets minus the book value of liabilities. F market value = #shares outstanding*(market price) State insurance agencies typically do not maintain cash reserves to compensate policy holders of insurers who may go bankrupt in the future. T If the average maturity of an FI’s assets is 5 years and the average maturity of its liabilities is 5 years, then the FI has no interest rate risk exposure. F If the Fed undertakes an open market sale of securities, it will end up shifting the demand curve for federal funds to the right, thus driving up the fed funds rate. F These days the Federal Reserve relies less on discount loans than on open market operations to control the money supply in the U.S. Also, it relies more on open market operations than on changes in the reserve requirement. T The first statement is true. The second is true as well. In duration analysis, the times at which cash flows are received are weighted by the relative importance in present value terms of the cash flows arriving at each point in time. T To find the geometric average return for an investment, you find the total return for the investment (including any dividends or interest) for each year. Then you sum these returns and divide by the number of years. F Two people (Anne and Bob) have the same annual taxable income of \$80,000. Anne’s \$80k includes wages and long-term capital gains while Bob’s just has wages. All else equal, you should expect Bob to pay more U.S. income tax. T Consider a typical wage earner who has a lot of fixed-rate loans outstanding (e.g. car loans, home loans, student loans), and who does not invest in bonds. This person’s wages will generally increase as inflation increases and will therefore be indifferent to the rate of inflation in the economy. F This person wins as inflation increases. Wages are higher but fixed-rate loan payments don’t change. Thus the % of income spent on loan payments declines. More precisely, the borrower repays the loan with currency that has less value than what the lender expected to receive. The repricing gap model is a market-valuation based model. F It’s based on accounting values, not market values. The market value of a fixed-rate liability will decrease as interest rates decrease. On the other hand, the market value of a fixed-rate asset will increase as interest rates decrease. F Any fixed-rate financial instrument will increase in value as interest rates decrease. It doesn’t matter who holds it, or if it’s a bond or a loan, its value will increase. You manage a U.S.-based corporation that is owned by U.S. shareholders. You have incurred loans in Japan, denominated in Yen. You hear that the Japanese Yen weakened today against the \$U.S. Considering only your Japanese loans, this is good news. T 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. F Discussed in class, the PBOC has recently changed reserve requirements. For a given change in interest rates, fixed-rate assets with shorter-term maturities will have greater changes in price than fixed-rate assets with longer maturities. F