Advanced Financial Management Exam Review
Course Introduction
Advanced Financial Management delves into the strategic aspects of financial decision-making within organizations. This course covers topics such as capital budgeting, risk analysis, capital structure, working capital management, mergers and acquisitions, and corporate valuation techniques. Emphasis is placed on integrating financial theory with practical case studies to enable students to critically assess and solve complex financial challenges. The course also explores contemporary issues in global finance, ethical considerations, and the use of financial modeling tools to support executive-level financial planning and policy formulation.
Recommended Textbook
Financial Institutions Management A Risk Management Approach 9th Edition by Anthony Saunders
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26 Chapters
3081 Verified Questions
3081 Flashcards
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Page 2
Chapter 1: Why Are Financial Institutions Special
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100 Verified Questions
100 Flashcards
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Sample Questions
Q1) The adverse effects on the economy that can occur because of major disturbances to the special functions or services provided by financial institutions are negative externalities.
A)True
B)False
Answer: True
Q2) As a delegated monitor, an FI's actions reduce agency costs.
A)True
B)False
Answer: True
Q3) Advantages of depositing funds into a typical bank account instead of directly buying corporate securities include all of the following EXCEPT
A) monitoring done by the bank on your behalf.
B) increased liquidity if funds are needed quickly.
C) increased transactions costs.
D) less price risk when funds are needed.
E) better diversification of deposited funds.
Answer: C
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Chapter 2: Financial Services: Depository Institutions
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226 Verified Questions
226 Flashcards
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Sample Questions
Q1) Currently (2015)J.P.Morgan Chase is the largest bank holding company in the world and operations in 60 countries.
A)True
B)False
Answer: False
Q2) The ability of diversification to eliminate much of the risk from the asset side of the balance sheet of an FI is the result of choosing assets that are less than perfectly positively correlated.
A)True
B)False Answer: True
Q3) An FI acting as an agent in matching savers and borrowers of funds can attain economies of scale and provide this service more efficiently than either the saver or borrower could on their own.
A)True
B)False Answer: True
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Chapter 3: Financial Services: Finance Companies
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82 Flashcards
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Sample Questions
Q1) Sales finance companies do not directly compete with depository institutions for consumer loans.
A)True
B)False
Answer: False
Q2) Home equity loans have
A)become less profitable for finance companies.
B)seen reduced demand since the Tax Reform Act of 1986 was passed.
C)interest charges that are not tax deductible.
D)a higher bad debt expense than those on other finance company loans.
E)allows customers to borrow on a line of credit secured with a second mortgage on their home.
Answer: E
Q3) A company that specializes in making installment loans to consumers would best be categorized as a
A)sales finance institution.
B)personal credit institution.
C)business credit institution.
D)lease finance company.
Answer: B
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Chapter 4: Financial Services: Securities Firms and Investment Banks
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119 Verified Questions
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Sample Questions
Q1) Which of the following is true?
A)Investment bankers earn fees based on the success of their placements when they underwrite using a best-efforts basis.
B)Investment bankers earn fees based on the success of their placement when they underwrite using firm-commitment basis.
C)With best-efforts underwriting,investment bankers act as principals because they purchase securities from the issuer and sell them at a higher price.
D)An investment banker is acting as an agent when conducting a firm-commitment offering of securities.
Q2) Cash management accounts were an early attempt by commercial banks to provide investment banking services to individuals.
A)True
B)False
Q3) In comparison to a typical commercial bank,an investment bank is likely to have
A)lower levels of capital.
B)higher reliance on long-term debt.
C)lower levels of repurchase agreements.
D)higher levels of net interest margin.
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Chapter 5: Financial Services: Mutual Fund and Hedge Fund Companies
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129 Verified Questions
129 Flashcards
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Sample Questions
Q1) Regarding the relative asset size and asset growth rate of mutual fund sectors between 1980 and 2015,
A)long-term funds had more assets at the end of 2015,but short-term funds had grown at a faster rate since 1980.
B)long-term funds had more assets at the end of 2015,and long-term funds had grown at a faster rate since 1980.
C)short-term funds had more assets at the end of 2015,but long-term funds had grown at a faster rate since 1980.
D)short-term funds had more assets at the end of 2015,and short-term funds had grown at a faster rate since 1980.
Q2) A change from commercial bank deposits to money market mutual funds typically allows an investor to benefit from higher yields,but with the cost of losing deposit insurance coverage.
A)True B)False
Q3) Equity mutual funds may contain common stock,but not preferred stock.
A)True B)False
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Chapter 6: Financial Services: Insurance Companies
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124 Flashcards
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Sample Questions
Q1) A term life policy allows the policyholder to vary the maturity of the policy.
A)True
B)False
Q2) As of 2015,the primary regulator of both the life and property-casualty insurance industry is/are the
A)state insurance commissions.
B)NAIC.
C)Federal Reserve.
D)IRIS.
Q3) The largest property-casualty (PC)insurance companies have become less influential over the past decade.
A)True
B)False
Q4) In recent years,the total assets of insurance companies in the U.S.have been decreasing.
A)True
B)False
Q5) Insurance guarantee funds are administered by federal insurance regulators.
A)True
B)False
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Chapter 7: Risks of Financial Institutions
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Sample Questions
Q1) Insolvency risk is a consequence of the other risks to which FI is exposed.
A)True
B)False
Q2) Foreign exchange risk is that the value of assets and liabilities may change because of changes in the level of interest rates.
A)True
B)False
Q3) The risk that many borrowers in a particular country fail to repay their loans as a result of a recession in that country relates to
A)credit risk.
B)sovereign risk.
C)currency risk.
D)liquidity risk.
Q4) Systematic credit risk can be reduced significantly by diversification.
A)True
B)False
Q5) Credit risk and interest rate risk cannot affect insolvency risk.
A)True
B)False
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Chapter 8: Interest Rate Risk I
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Sample Questions
Q1) What is the FI's maturity gap?
A)-2.03 years.
B)-2.50 years.
C)-1.07 years.
D)-0.70 years.
Q2) One reason to exclude NOW accounts when estimating a bank's repricing gap is because the interest rates paid on these accounts typically do not change with the level of market rates.
A)True
B)False
Q3) Large banks have adopted interest rate risk measurement models based on market value accounting and duration.
A)True
B)False
Q4) When interest rates increase,banks are more likely to be forced to increase rate-sensitive liabilities to replace decreased balances in demand deposits and savings accounts.
A)True
B)False
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Chapter 9: Interest Rate Risk II
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Sample Questions
Q1) Using present value bond valuation techniques,calculate the exact price of the bond after the interest rate increase of 20 basis points.
A)$1,007.94.
B)$992.02.
C)$992.06.
D)$996.01.
Q2) Duration is related to maturity in a nonlinear manner through the current yield to maturity of the asset.
A)True
B)False
Q3) Market value accounting reflects economic reality of an FIs balance sheet.
A)True
B)False
Q4) What is the FI's interest rate risk exposure?
A)Exposed to increasing rates.
B)Exposed to decreasing rates.
C)Perfectly balanced.
D)Exposed to long-term rate changes.
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11
Chapter 10: Credit Risk: Individual Loan Risk
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Sample Questions
Q1) RAROC (Risk-adjusted return on capital)is a measure of a firm's cost of debt.
A)True
B)False
Q2) The condition of no arbitrage profits implies that profits cannot be made without taking some risk.
A)True
B)False
Q3) Which of the following refers to restrictions in loan and bond agreements that encourage or forbid certain actions by the borrower?
A)Mortality rates.
B)RAROC.
C)Implicit contracts.
D)Covenants.
Q4) What is the expected probability of default in year 2 of two-year maturity B-rated debt?
A)2.83 percent.
B)3.00 percent.
C)4.43 percent.
D)2.68 percent.
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Chapter 11: Credit Risk: Loan Portfolio and Concentration
Risk
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Sample Questions
Q1) One advantage of portfolio diversification methods is that they are applicable to all FIs,regardless of their size.
A)True
B)False
Q2) Concentration limits are used to either reduce or increase exposure to specific industries.
A)True
B)False
Q3) The expected return of a portfolio of loans is equal to the weighted average of the expected returns of the individual loans.
A)True
B)False
Q4) Which of the following is the legislation that required bank regulators to incorporate credit concentration risk into their evaluation of bank insolvency risk?
A)The Bank Holding Company Act (1956).
B)FDIC Improvement Act (1991).
C)Depository Institutions Deregulation and Monetary Control Act (1980).
D)Garn-St.Germain Depository Institutions Act (1982).
Page 13
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Chapter 12: Liquidity Risk
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Sample Questions
Q1) When comparing banks and mutual funds,
A)mutual funds have more liquidity risk than banks because all shareholders share the loss of value on a pro rata basis.
B)mutual funds have less liquidity risk than banks because all shareholders share the loss of value on a pro rata basis.
C)mutual funds have more liquidity risk than banks because all shareholders have the ability to withdraw their money on a first-come first basis.
D)mutual funds have less liquidity risk than banks because all shareholders have the ability to withdraw their money on a first-come first basis.
Q2) Consider a mutual fund with 100 shareholders who each invested $10 for a total of $1,000.If the assets of the mutual fund are worth $900,what is the net asset value for each one of the mutual fund shares?
A)$0.9.
B)$9.
C)$90.
D)$10.
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Chapter 13: Foreign Exchange Risk
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109 Flashcards
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Sample Questions
Q1) Your U.S.bank issues a one-year U.S.CD at 5 percent annual interest to finance a C $1.274 million (Canadian dollar)investment in two-year,fixed rate Canadian bonds selling at par and paying 7 percent annually.You expect to liquidate your position in one year.Currently,spot exchange rates are U.S.$0.78493 per Canadian dollar.
What is the end-of-year profit or loss to the bank if in one year Canadian bond rates increase to 7.538 percent? (Assume no change in either current U.S.interest rates or current exchange rates,U.S.$0.78493/C $1. )
A)Loss of U.S.$5,000.
B)Profit of U.S.$15,000.
C)Loss of C $119,000.
D)Profit of C $50,000.
Q2) The FX markets of the world have become one of the largest of all financial markets.
A)True
B)False
Q3) As of June 2015,U.S.banks were net short British pounds.
A)True
B)False
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15
Chapter 14: Sovereign Risk
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Sample Questions
Q1) In international finance,the investment ratio is determined by dividing the value of real investment by the
A)total foreign exchange reserves.
B)real investment.
C)gross national product.
D)value of exports.
Q2) In international finance,the import ratio is determined by dividing the value of imports by the
A)total foreign exchange reserves.
B)real investment.
C)gross national product.
D)value of exports.
Q3) Which of the following variables can have a negative impact on the probability of rescheduling in the credit scoring model to estimate sovereign country risk exposure?
A)The debt service ratio.
B)The import ratio.
C)The variance of export revenue.
D)The investment ratio.
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Chapter 15: Market Risk
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Sample Questions
Q1) The DEAR of a bank's trading portfolio has been estimated at $5,000.It is assumed that the daily earnings are independently and normally distributed. What is the 20-day VAR?
A)$5,000.
B)$10,000.
C)$15,811.
D)$22,361.
Q2) The capital requirements of internally generated market risk exposure estimates can be met
A)only with two types of capital.
B)only with Tier 1,Tier 2,or Tier 3 capital.
C)with retained earnings and common stock only.
D)only with retained earnings,common stock,and long-term subordinated debt.
Q3) In the early 2000s the market risk capital requirement was a large proportion of the total risk capital requirements for the largest U.S.banks.
A)True
B)False
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Chapter 16: Off-Balance-Sheet Risk
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Sample Questions
Q1) A $200 million loan commitment has an up-front fee of 20 basis points and a back-end fee of 25 basis points on the unused portion.
The up-front fee is
A)$250,000.
B)$4,000,000.
C)$400,000.
D)$775,000.
Q2) When an FI pre-commits to lending at a fixed rate,it is exposed to
A)credit risk.
B)interest rate risk.
C)takedown risk.
D)funding risk.
Q3) If an FI enters into a loan commitment,it is essentially entering into a forward contract.
A)True B)False
Q4) Funds transferred on Fedwire are settled at the end of the day.
A)True B)False
Page 18
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Chapter 17: Technology and Other Operational Risks
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Sample Questions
Q1) Appropriate technology may allow an FI to achieve lower-cost funding.
A)True
B)False
Q2) Retail banking services and products in recent years have moved strongly toward electronic payment technology.
A)True
B)False
Q3) Regulators have proposed that operational risk should be measured for the purpose of meeting overall capital adequacy.
A)True
B)False
Q4) New retail products and services based heavily on technology often are risky because of the high usage rate necessary to make them positive net present value projects.
A)True
B)False
Q5) CHIPS guarantees that any wire transfer is final at the time it is made.
A)True
B)False
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Chapter 18: Liability and Liquidity Management
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Sample Questions
Q1) Because of penalties imposed for early withdrawal,a CD depositor is unlikely to withdrawal the CD funds from the bank before maturity.
A)True
B)False
Q2) What is the average implicit interest rate on a $100,000 account if the bank's average management costs are $2,500 and annual fees average $1,750?
A)4.25 percent.
B)2.50 percent.
C)1.75 percent.
D)0.75 percent.
Q3) Which of the following observations is NOT true of a liquid asset?
A)It can be turned into cash quickly.
B)Conversion to cash entails low transaction costs.
C)Conversion to cash happens with little or no loss in principal value.
D)It is traded in an active market.
E)Large transactions may move its market price substantially.
Q4) NOW accounts allow the explicit payment of interest.
A)True
B)False
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Chapter 19: Deposit Insurance and Other Liability
Guarantees
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Sample Questions
Q1) The Financial Institutions Reform,Recovery,and Enforcement Act (FIRREA)restructured the savings association deposit insurance fund and transferred its management to the FDIC.
A)True
B)False
Q2) The current "too big to fail" policy doctrine relies on the separation of small depositors who would receive deposit insurance and large depositors who would not receive the benefits of deposit insurance.
A)True
B)False
Q3) Which of the following is not a Least-Cost Resolution (LCR)requirement under FDICIA?
A)Consider and evaluate all possible resolution alternatives by computing and comparing their costs on a present value basis,using realistic discount rates.
B)Place a bank or thrift into receivership as soon as its capital falls below some positive book value level.
C)Document the evaluation and the assumption on which it is based.
D)Retain documentation for at least five years.
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Chapter 20: Capital Adequacy
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Sample Questions
Q1) The Basel capital requirements differ from previous capital standards in all except one of the following ways?
A)More stringent capital standards for large banks than for small banks.
B)Inclusion of off balance sheet assets in the asset base.
C)Restrictions on the amount of goodwill that can be counted towards primary or Tier I capital.
D)Risk weighting of assets on the basis of credit risk exposure.
Q2) In the NAIC model for life insurance companies,which risk captures the risk of adverse changes in mortality risk and morbidity risk?
A)Interest rate risk.
B)Business risk.
C)Asset risk.
D)Foreign exchange risk.
E)Insurance risk.
Q3) Under Basel II (2006),regulatory minimum capital requirements for credit,market,and operational risks are covered in the first pillar of the regulation.
A)True
B)False
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22
Chapter 21: Product and Geographic Expansion
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Sample Questions
Q1) Concern about the improper transfer of inside information has been used to justify product segmentation on the grounds of
A)safety and soundness issues.
B)economy of scale and scope issues.
C)conflict of interest issues.
D)deposit insurance issues.
Q2) International expansion often produces revenue-risk diversification benefits for U.S.banks.
A)True
B)False
Q3) Offices of foreign banks may be examined by the Federal Reserve under the FBSEA of 1991.
A)True
B)False
Q4) The Herfindahl-Hirschman Index (HHI)is a measure of A)market concentration.
B)profitability.
C)market performance.
D)annual sector growth.
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Chapter 22: Futures and Forwards
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Sample Questions
Q1) The terms of futures contracts traded in the U.S.are set by the exchange on which they propose to be traded,but are subject to approval by the A)Federal Reserve.
B)Commodity Futures Trading Commission.
C)CME Group (formerly Chicago Mercantile Exchange).
D)Chicago Board of Trade.
Q2) A credit forward agreement specifies a credit spread on a benchmark U.S.Treasury bond.
A)True
B)False
Q3) An off-balance-sheet forward position is used to hedge the FI's on-balance-sheet risk exposure.
A)True
B)False
Q4) An adjustment for basis risk with a value of "br" less than one means that the percent change in the spot rates is greater than the change in rate in the deliverable bond in the futures market.
A)True
B)False
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Chapter 23: Options, Caps, Floors, and Collars
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Sample Questions
Q1) Open interest refers to the dollar amount of outstanding option contracts.
A)True
B)False
Q2) An FI manager purchases a zero-coupon bond that has two years to maturity.The manager paid $76.95 per $100 for the bond.The current yield on a one-year bond of equal risk is 12 percent,and the one-year rate in one year is expected to be either 16.65 percent or 15.35 percent.Either rate is equally probable.
What is the yield to maturity for the two-year bond if held to maturity?
A)27.99 percent.
B)13.54 percent.
C)29.95 percent.
D)14.00 percent.
Q3) Banks that are more exposed to rising interest rates than falling interest rates may seek to finance a cap by selling a floor.
A)True
B)False
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Chapter 24: Swaps
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Sample Questions
Q1) A contract that is a fixed-floating interest rate swap with a third party acting as an intermediary is known as
A)a pure credit swap.
B)a total return swap.
C)an off-market swap.
D)a plain vanilla swap.
Q2) The Wall Street Reform and Consumer Protection Act of 2010 established comprehensive regulation of over-the-counter (OTC)derivatives including swaps.
A)True
B)False
Q3) A swap that technically is a succession of forward contracts on interest rates is A)a commodity swap.
B)a credit swap.
C)a currency swap.
D)an equity swap.
E)an interest rate swap.
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Chapter 25: Loan Sales
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Sample Questions
Q1) The definition of a highly leveraged transaction (HLT)loan as adopted by U.S.bank regulators in 1989 includes
A)doubling the borrower's liabilities which results in a leverage ratio higher than 50 percent.
B)involving a buyout,acquisition,or recapitalization.
C)results in a leverage ratio higher than 75 percent.
D)All of the options.
Q2) Loan sales do not completely protect the lending FI from credit risk exposure because
A)defaults may reduce the ability of the lending bank to sell loans in the future.
B)a loan sale contains an implicit quality guarantee by the lending FI.
C)loans are always sold with recourse.
D)regulators require the lending FI to make restitution for defaulted loans.
Q3) A type of company that specializes in distressed loans is
A)a bank loan mutual fund.
B)a domestic bank.
C)a foreign bank.
D)an investment bank.
E)a vulture fund.
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Page 27
Chapter 26: Securitization
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Sample Questions
Q1) An interest-only (IO)mortgage-backed strip is a rare example of a negative duration asset.
A)True
B)False
Q2) One hundred identical mortgages are pooled together into a pass-through security.Each mortgage has a $150,000 principal,a fixed annual interest rate of 8 percent (paid monthly),and is fully amortized over a term of 30 years.
What is the weighted average life of the above mortgage pool?
A)30 years.
B)2 months.
C)1.998 months.
D)1 month.
Q3) It is advantageous for the residential mortgage holder to refinance because market interest rates on new mortgages are less than interest rates on existing mortgages.
A)True
B)False
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