Q&A Hero

Q: The capital structure of banks, like that of all corporations, consists of:a. Demand deposits.b. Debtc. Equity.d. Time deposits.e. b and c only.

Q: Until the 1960, Regulation Q had virtually no impact on the ability of banks to compete with other financial institutions to obtain funds because:a. Market interest rates stayed below the ceiling rate.b. Market interest rates stayed above the ceiling rate.c. Market interest rates and the ceiling rate stayed the same.d. The ceiling rate stayed below the market interest rates.e. None of the above.

Q: Member banks can borrow from the Fed in order to:a. Meet short-term liquidity needs.b. Increase their earnings.c. Meet required reserves.d. a and c only.e. All of the above.

Q: The discount rate is the interest rate charged to:a. Borrow excess reserves.b. Borrow funds at the discount window.c. Borrow funds from commercial banks.d. a and b only.e. None of the above.

Q: If actual reserves exceed required reserves, the difference is referred to as:a. Spread income.b. Secondary reserves.c. Excess reserves.d. Total reserves.e. None of the above.

Q: The market where banks can borrow and lend reserves is called the:a. Open market. b. Federal funds market.c. Discount window.d. Money market.e. None of the above.

Q: Banks are highly leveraged financial institutions, which means that most of their funds come from:a. Deposits.b. Borrowing from the Federal Reserve through the discount window.c. Capital gains from the sale of securities.d. a and b only.e. All of the above.

Q: Loans to nonfinancial corporations, financial corporations and government entities fall into the category of:a. Individual banking.b. Institutional banking.c. Global banking.d. None of the above.e. All of the above.

Q: Depository institutions accommodate net withdrawals and loan demand by:a. Attracting additional deposits.b. Selling securities it owns.c. Raising short-term funds in the money market.d. Using existing securities as collateral for borrowing from a federal agency or other financial institution.e. All of the above.

Q: In generating spread income, depository institutions face several risks. They include:a. Credit risk.b. Regulatory risk.c. Interest rate risk.d. a and b only. e. All of the above.

Q: Depository institutions include:a. Savings and loans associations.b. Savings banks.c. Credit unions.d. Commercial banks.e. All of the above.

Q: Describe the differences between direct and indirect investment and provide an example of each.

Q: Discuss the primary reasons for financial innovation.

Q: Explain how financial intermediaries provide at least one of four economic functions.

Q: The ultimate causes of financial innovations include:a. Increased volatility of interest rates, inflation, equity prices, and exchange rates.b. Advances in computer and telecommunication technologies.c. Financial intermediary competition.d. Changing global patterns of financial wealth.e. All of the above.

Q: One of the results of the financial innovations, which have occurred since the 1960, has been the introduction of market-broadening instruments, which increase the liquidity of markets and the availability of funds by:a. Attracting new investors.b. Offering new opportunities for borrowers.c. Reallocating financial risk to those less adverse to them.d. a anb b only.e. All of the above.

Q: Liquidity-generating innovations:a. Increase the liquidity of the market.b. Allow borrowers to draw upon new sources of funds.c. Allow market participants to circumvent capital constraints imposed by regulations.d. a and b only.e. All of the above.

Q: When financial institutions' activities are restricted in the areas of lending, borrowing, and funding, the regulation is referred to as:a. Financial activity regulation.b. Disclosure regulation.c. Regulation of financial institutions.d. Regulation of foreign participants.e. None of the above.

Q: Government regulation of financial markets takes which of the following forms?a. Disclosure regulation.b. Financial activity regulation.c. Regulation of financial institutions.d. Regulation of foreign participants. e. All of the above.

Q: "Market failure" is cited by economists as a reason for:a. Increased globalization. b. Regulation.c. Competition.d. Competitive markets.e. None of the above.

Q: A perfectly competitive market is characterized by:a. Governmental regulation.b. Efficiency.c. Low-cost production.d. b and c only.e. All of the above.

Q: The advantage of liquidity which financial intermediaries offer savers means that savers may:a. Request the withdrawal of funds at any time.b. Redeem their shares at any time.c. Borrow against the cash value of their insurance policy.d. All of the above.e. None of the above.

Q: Which of the following is true concerning a Type-II liability?a. Amount and timing of cash outlay are known.b. Amount and timing of cash outlay are unknown.c. Amount of cash outlay is known while timing of cash outlay is unknown.d. Amount of cash outlay is unknown while timing of cash outlay is known.e. None of the above.

Q: A fixed-rate deposit represents what type of liability to a financial institution?a. Type I liability.b. Type II liability.c. Type III liability.d. Type IV liability.e. None of the above.

Q: Depository institutions seek to generate income by:a. The difference between the return that they earn on assets and the cost of their funds.b. Selling money for more than it costs to buy money.c. The bid-ask spread.d. a and b only.f. None of the above.

Q: With a debit card,a. A bill is sent to the debit cardholder periodically requesting payment for transactions that have been made in the past.b. Funds are immediately withdrawn from the purchaser's account at the time the transaction takes place.c. Funds are withdrawn periodically (usually once a month) for transactions made by the cardholder during the previous month.d. All of the above.e. None of the above.

Q: Investors who place their funds in an investment company, which in turn invests the funds received in the stock of a large number of companies benefit from:a. Diversification.b. Reduced risk.c. Lower cost.d. All of the above.e. a and b only.

Q: In contrast to individual investors, financial intermediaries will be willing to make longer term loans, and at a lower cost to borrowers, because:a. They are counting on successive deposits providing the funds until maturity.b. Individual investors are more apt to make long-term loans.c. All risk is eliminated.d. None of the above.e. All of the above.

Q: Maturity intermediation has implications for financial markets in that:a. Investors have more choices concerning the maturity of their investments.b. Borrowers have more choices for the length of their debt obligations.c. Investors will require that long-term borrowers pay a higher interest rate than on short-term borrowing.d. a and c only.e. All of the above.

Q: Financial intermediaries transfer financial assets that are less desirable into other financial assets, which are more widely preferred by the public. This transformation involves which of the following economic functions?a. Providing maturity intermediation.b. Risk reduction via diversification.c. Reducing the costs of contracting and information processing.d. Providing a payments mechanism.e. All of the above.

Q: Which of the following transactions is an example of direct investment?a. An investment company buys a portfolio of stocks and bonds.b. An individual makes a deposit at a commercial bank.c. Owning an equity claim against an investment company.d. a and b only.e. All of the above.

Q: Depository institutions acquire the bulk of their funds by offering their liabilities to the public in the form of deposits. The depository institutions are:a. Commercial banks.b. Savings and loan associations.c. Savings banks.d. Credit unions.e. All of the above.

Q: Treasury securities are debt obligations that are issued by:a. Municipal governments.b. Nonfinancial businesses. c. Central governments.d. Financial enterprises.e. None of the above.

Q: Financial institutions provide which of the following services:a. Exchanging financial assets on behalf of customers.b. Providing investment advice.c. Managing portfoliosd. Assisting in the creation of financial assets.e. All of the above.

Q: Distinguish between the role and function of financial assets and financial markets.

Q: Describe the properties of financial assets that determine or influence their attractiveness to different classes of investors.Key Issues:a. Moneyness.b. Divisibility and denomination.c. Reversibility.d. Term to maturity.e. Liquidity.f. Convertibility.g. Currency.h. Cash flow and return predictability.i. Complexity.j. Tax status.

Q: Explain the different ways to classify financial markets and give an example of each.

Q: Securities traded in the external market are distinguished by:a. Being accessible only to foreign investors.b. Being offered simultaneously to investors in a number of countries.c. Being issued outside the jurisdiction of any single country.d. Being traded in Europe only.e. b and c only.

Q: The risk attached to financial assets whose cash flows are not denominated in U.S. dollars is called:a. Credit risk.b. Inflation risk.c. Foreign-exchange risk.d. Market risk.e. None of the above.

Q: The bid-ask spread:a. Is the difference between the price the market maker is willing to sell a financial asset and the price the market maker is willing to buy a financial asset.b. Reflects the amount of risk the market maker is assuming by making a market.c. Is affected by the thickness of the market.d. All of the above are correct.e. None of the above.

Q: Two basic types of derivative instruments are:a. Stocks and bonds.b. Options and futures.c. Bonds and swaps.d. Forward contracts and stocks.e. None of the above.

Q: Which of the following statements is incorrect?a. Derivative instruments derive their value from the price of the underlying financial instrument.b. Derivative instruments give the holder the right, but not the obligations, to buy or sell a financial assets.c. Derivative instruments can be used for speculative purposes.d. Derivative instruments can be used for accomplishing a specific financial objective.e. None of the above.

Q: Securities of issuers not domiciled in the country are traded in which market(s)?a. Domestic market.b. Foreign market.c. International market.d. Euromarket.e. None of the above.

Q: Which of the following is not a factor in the integration of financial markets throughout the world?a. Increased institutionalization of financial markets.b. Advances in telecommunications and computer technologies.c. Deregulation or liberalization of major financial markets.d. Expanded role of the World Bank.e. None of the above.

Q: Securities with a maturity of less than one year are traded in the:a. Bond market.b. Money market.c. Capital market.d. Euromarket.e. None of the above.

Q: Financial assets that are bought and sold amongst investors are traded in the:a. Derivatives market.b. Primary market.c. Secondary market.d. Commodities market.e. None of the above.

Q: When an issuer sells a new financial asset to the public, it is sold in the:a. Primary market.b. Intermediate market.c. Secondary market.d. Commodities market.e. None of the above.

Q: Common stock issued by Digital Equipment Corporation is traded in which of the following markets?a. Money market.b. Debt market.c. Derivatives market.d. Capital market.e. None of the above.

Q: The price discovery process is an economic function, which refers to:a. Financial markets that reduce the search and information costs.b. Financial markets that signal how funds in the economy should be allocated among financial assets.c. Financial markets that provide a mechanisms for an investor to sell a financial asset.d. Financial markets that offer liquidity.e. None of the above.

Q: The length of time between the date the instrument was issued and is scheduled to make final payment is called:a. Holding period.b. Term to maturity.c. Maturity.d. b and c only.e. All of the above.

Q: Which of the following are properties of financial assets?a. Reversibility.b. Moneyness.c. Liquidity.d. Marketability. e. a, b and c only.

Q: The principal economic functions of financial assets include:a. The transfer of funds from those with surplus funds to those who need funds.b. The transfer of ownership from seller to buyer.c. The transfer of funds so as to redistribute the unavoidable risk associated with the cash flow generated by tangible assets among those seeking and providing the funds.d. a and c only.e. All of the above.

Q: Which of the following risks are associated with realizing the expected cash flows?a. Default risk.b. Purchasing power risk.c. Foreign-exchange risk. d. All of the above.

Q: The process of valuing financial assets does not include:a. Estimating the cash flows.b. Determining the length of time the asset is held.c. Determining the appropriate discount rate.d. Discounting the expected cash flows.e. All of the above.

Q: Financial assets represent a residual claim in the case of:a. Preferred stock.b. Common stock.c. Partnership share.d. b and c only.e. All of the above.

Q: Financial assets are referred to as debt instruments in the case of:U.S. Treasury bonds.a. Corporate bonds.b. Corporate stock.c. Municipal bonds.d. a, b, and d only.

Q: Which one of the following are examples of financial assets?U.S. Treasury bonds.a. Foreign bonds.b. Home mortgage loan.c. Common stock.d. All of the above

Q: Which of the following is NOT a factor that may cause the prepayment risk on a pool of mortgages to differ from the PSA's assumed pattern? A. The age of the mortgage pool. B. Geographic location. C. Seasons in the year in which the mortgage was originated. D. Full or partial amortization of the payments. E. Assumability of mortgages in the pool.

Q: Which of the following good news and bad news effect is NOT true when mortgage interest rates decline, resulting in faster repayments? A. Lower market yields reduce the discount rates on any mortgage cash flows and increase the present value of any given stream of cash flows (good news effect). B. Low yields lead to faster prepayment of the mortgage pool's principal (good news effect). C. With early prepayments comes fewer interest payments in absolute terms (bad news effect). D. Faster cash flows due to prepayments can only be reinvested at lower interest rates (bad news effect). E. Faster cash flows due to prepayments can be reinvested at higher interest rates (good news effect).

Q: Investors in mortgage-backed pass-through securities are exposed to a variety of risks. Compared to other fixed-income securities, the most unique of these risks is A. prepayment risk B. default risk C. credit risk D. interest rate risk E. liquidity risk

Q: The characteristics of a Collateralized Mortgage Obligation (CMO) securities issue include all of the following EXCEPT A. the tranches will have different coupon rates. B. the CMO securities are insured separately from the GNMA pass-through securities. C. the principal payments are made totally to the earliest remaining tranche. D. GNMA pass-through securities are used as collateral in a trust to support the CMOs. E. the CMO securities are split into different tranches or groupings.

Q: Servicing a pass-through security refers to A. an FI processing of all payments. B. an FI provision of clearing services to set up the pass-through. C. broker/dealer services provided by the FI to the ultimate holders of the pass-through. D. guarantee by the FI of all principal and interest payments. E. an FI provision of liquidity services to the ultimate holders of the pass-through.

Q: Which of the following is the is a source of prepayment risk on a typical FNMA mortgage-backed pass-through security? A. Refinancing. B. Default risk. C. Housing turnover. D. Non-assumable mortgages. E. All of the above.

Q: Which is the oldest mortgage-backed security sponsoring agency? A. GNMA. B. FNMA. C. FHA. D. FMHA. E. FHLMC.

Q: Which of the following are functions of GNMA? A. Engaging in swap transactions where it swaps mortgage-backed securities with an FI for original mortgages. B. Sponsors mortgage-backed securities programs by FIs such as banks, thrifts, and mortgage bankers. C. Acts as a guarantor to investors in mortgage-backed securities regarding the timely pass-through of principal and interest payments on their sponsored bonds. D. All of the above. E. Answers B and C only.

Q: Which of the following factors occurred in the early 2000s and created concerns about the ability of Fannie Mae and Freddie Mac to manage their portfolios of assets? A. Fannie Mae miscalculated the value of its mortgages that created a restatement of its stockholder equity. B. Both agencies overcharged lenders for services they provided. C. Fannie Mae operated for some time with a sharp increase in interest rate risk on its balance sheet. D. All of the above. E. Answers B and C only.

Q: Which of the following is an incentive to securitize mortgage assets? A. To reduce the regulatory tax burden on the FI. B. To adjust the gap exposure of the FI. C. To improve the liquidity of the FI. D. To generate non-interest sensitive fee income. E. All of the above.

Q: On September 7, 2008, both FHMA and FHLMC were placed under conservatorship by the A. Federal Reserve. B. Federal Housing Finance Agency. C. Federal Deposit Insurance Corporation. D. Federal Home Loan Bank. E. Comptroller of the Currency.

Q: The Government National Mortgage Association A. is a private corporation owned by shareholders. B. purchases pools of mortgages originated by FIs. C. provides timing insurance to investors in mortgage-backed securities. D. only approves conventional and FHA/VA insured mortgages. E. was the first agency to securitize residential mortgages.

Q: Which of the following government agencies or government-sponsored enterprises are NOT directly involved in the creation of mortgage-backed pass-through securities? A. Government National Mortgage Association. B. Farmers Home Administration. C. Federal National Mortgage Association. D. Federal Home Loan Mortgage Corporation. E. All of the above are directly involved.

Q: All else equal, advantages of a DI operating as an asset broker in regard to mortgages includes all of the following EXCEPT A. lower regulatory taxes. B. increased fee-based income. C. increased liquidity. D. decreased asset and liability duration mismatch. E. increased capital requirements.

Q: As of 20, the amount of mortgage-backed securities outstanding was approximately A. $2.9 trillion. B. $5.1 trillion. C. $7.9 trillion. D. $11.0 trillion. E. $15.0 trillion.

Q: Which of the following assets have not been securitized by FIs? A. Mortgages. B. Credit card receivables. C. Auto loans. D. Debts of Lesser Developed Countries (LCD debt). E. Student loans.

Q: Which type of loans are securitized most often? A. Residential mortgages. B. Credit card loans. C. Auto loans. D. Student loans. E. Commercial and industrial (C&I) loans.

Q: A commercial bank operating under an originate-to-distribute model is acting most like A. an asset transformer. B. an asset broker. C. a portfolio lender. D. an asset accumulator. E. an investment bank.

Q: Which of the following is not accomplished by securitization of assets? A. Increases the liquidity of assets. B. Provides a new source of funds. C. Increases the costs of monitoring. D. Decreases the duration of assets. E. Decreases the costs of regulation.

Q: Which of the following is a primitive form of asset securitization? A. Loan sales. B. Pass-through security. C. Collateralized mortgage obligation. D. Mortgage-backed bond. E. Timing insurance.

Q: The packaging of loans into asset pools and then selling portions of the pool to investors is known as A. security creation. B. securitization. C. loan transfer. D. loan collateralization. E. mutual fund management.

Q: Certificates of Amortizing Revolving Debts are asset-backed securities that have a claim on automobile installment loans.

Q: The discount effect and the prepayment effect are negatively correlated in their impact on the value of a principal-only (PO) mortgage-backed strip security.