Fin 326 Final Set #3

Front 1

Why is the failure of a large bank more detrimental to the economy than the failure of a large steel manufacturer?
a. There are fewer steel manufacturers than there are banks.
b. The bank failure usually leads to a government bailout.
c. Since the steel company's assets are tangible, they are more easily reallocated than the intangible bank assets.
d. The large bank failure reduces credit availability throughout the economy.
e. Everyone needs money, but not everyone needs steel.

Back 1

d. The large bank failure reduces credit availability throughout the economy.

Front 2

Which of the following observations was NOT made in the WSJ article "Tightening the Belt"?
a. In redirecting the firm, Mr. Prince plans to emphasize profitable operations in the U.S., which should generate a relatively quick increase in earnings.
b. Citigroup has recently lost ground to Bank of America in the credit-card issuance business, falling behind to BOA and J.P. Morgan Chase.
c. Citigroup shares have risen 20% since CEO Charles Prince took over in October 2003.
d. Recently, Citigroup has had a difficult time controlling expenses.
e. Citigroup has unloaded noncore businesses such as insurance and mutual-fund units.

Back 2

a. In redirecting the firm, Mr. Prince plans to emphasize profitable operations in the U.S., which should generate a relatively quick increase in earnings.

Front 3

Which of the following is not an example of a transaction cost?
a. You pay a commission to Etrade for purchasing 100 shares of stock.
b. You pay interest to Wells Fargo on a personal loan.
c. You buy shares in a mutual fund and pay a 4% 'front-end' load.
d. You wire funds from your Bank of America checking account and pay a wire-transfer fee.
e. You apply for a mortgage and have to pay a $400 loan application fee.

Back 3

b. You pay interest to Wells Fargo on a personal loan.

Front 4

Risk diversification, in a bank's loan portfolio, limits the possibilities of bad outcomes by reducing
a. off-balance-sheet risk.
b. operational risk.
c. firm-specific credit risk.
d. systematic credit risk.
e. technology risk.

Back 4

c. firm-specific credit risk.

Front 5

The financial panic of 1907 resulted in such widespread bank failures and substantial losses to depositors that the American public finally became convinced that
a. the Federal Reserve System had failed to serve as lender of last resort.
b. a central bank was needed to prevent future panics.
c. the Second Bank of the United States had failed to serve as lender of last resort.
d. the first Bank of United States has failed to serve as lender of last resort.

Back 5

b. a central bank was needed to prevent future panics.

Front 6

A 5-year bond has an annual coupon of 4.0%, a face value of $1000, and yields 6.0%. What is the price of the bond?

Back 6

Price = 1000/1.06^5 + (40/0.06)[ 1 - 1/1.06^5 ] = 747.26 + 168.49 =
915.75

Front 7

The market value of a fixed-rate liability will increase as interest rates decrease, just as the market value of a fixed-rate asset will increase as interest rates decrease.

Back 7

T

Front 8

A risk-averse person would prefer to gamble $100 on one fair coin toss (pay $100 if the coin is tails, receive $100 if the coin lands heads), rather than gambling $10 on 10 separate coin tosses.

Back 8

F
The expected outcome is the same, but the standard deviation of the outcomes is greater with just one toss.

Front 9

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.

Back 9

T
The first statement is true. The second is true as well.

Front 10

State insurance agencies typically do not maintain cash reserves to compensate policy holders of insurers who may go bankrupt in the future.

Back 10

T

Front 11

Mark-to-market accounting is a market value accounting method that reflects the prices of assets and liabilities when purchased.

Back 11

F

Marked-to-market is adjusting asset and balance sheet values to reflect current market prices.

Front 12

Suppose that East Asian central bankers decide to sell large portions of their holdings of U.S. Treasury Securities. As a result, interest rates in the U.S. should fall.

Back 12

F

Front 13

The repricing gap approach calculates the gaps in each maturity bucket by subtracting the rate sensitive liabilities (RSL) from the rate sensitive assets (RSA) on the balance sheet.

Back 13

T

Front 14

For a given change in interest rates, fixed-rate assets with longer-term maturities will have greater changes in price than assets with shorter maturities.

Back 14

T

Front 15

The maturity of a portfolio of assets or liabilities is a weighted average of the market values of the assets or liabilities that comprise that portfolio.

Back 15

F