Financial Institutions Management
Final Test Solutions
Course Introduction
Financial Institutions Management explores the structure, functions, and operations of various financial institutions, including commercial banks, investment banks, insurance companies, and non-bank financial intermediaries. The course examines the regulatory environment, risk management strategies, and the impact of economic and financial market developments on institutional decision-making. Emphasis is placed on understanding asset-liability management, interest rate risk, liquidity risk, and credit risk, as well as how financial institutions innovate and adapt to changing technologies and global trends. Through case studies and practical examples, students gain insights into the challenges and opportunities faced by financial managers in a dynamic marketplace.
Recommended Textbook
Financial Markets and Institutions 9th Edition by Jeff Madura
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Chapter 1: Role of Financial Markets and Institutions
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Sample Questions
Q1) Those participants who receive more money than they spend are referred to as
A)deficit units.
B)surplus units.
C)borrowing units.
D)government units.
Answer: B
Q2) Debt securities are certificates that represent debt (borrowed funds) by the issuer.
A)True
B)False
Answer: True
Q3) If financial markets were ____, all information about any securities for sale in primary and secondary markets would be continuously and freely available to investors.
A)efficient
B)inefficient
C)perfect
D)imperfect
Answer: C
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Page 3
Chapter 2: Determination of Interest Rates
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Sample Questions
Q1) The ____ sector is the largest supplier of loanable funds.
A)household
B)government
C)business
D)none of the above
Answer: A
Q2) What is the basis of the relationship between the Fisher effect and the loanable funds theory?
A)the saver's desire to maintain the existing real rate of interest
B)the borrower's desire to achieve a positive real rate of interest
C)the saver's desire to achieve a negative real rate of interest
D)B and C
Answer: A
Q3) At any given point in time, households would demand a ____ quantity of loanable funds at ____ rates of interest.
A)greater; higher
B)greater; lower
C)smaller; lower
D)none of the above
Answer: B
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Chapter 3: Structure of Interest Rates
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Sample Questions
Q1) Assume that the current yield on one-year securities is 6 percent, and that the yield on a two-year security is 7 percent.If the liquidity premium on a two-year security is 0.4 percent, then the one-year forward rate is
A)8.0 percent.
B)7.6 percent.
C)3.0 percent.
D)7.0 percent.
Answer: B
Q2) Some types of debt securities always offer a higher yield than others.
A)True
B)False
Answer: True
Q3) If the liquidity premium exists, a flat yield curve would be interpreted as the market expecting ____ in interest rates.
A)no changes
B)a slight decrease
C)a slight increase
D)a large increase
Answer: B
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Page 5
Chapter 4: Functions of the Fed
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Sample Questions
Q1) Which of the following is currently a main role of the Federal Reserve's Board of Governors?
A)regulating commercial banks
B)regulating foreign trade
C)controlling monetary policy
D)A and C
Q2) Adjustment of the primary credit lending rate is the most common means by which the Fed controls the money supply.
A)True
B)False
Q3) The Board of Governors is composed of
A)seven members appointed by the President of the United States.
B)the 12 presidents of Fed district banks.
C)the Federal Open Market Committee, plus the Federal Advisory Council.
D)the Federal Open Market Committee, plus the President of the United States.
Q4) The Policy Directive is provided by Board of Governors to the FOMC.
A)True
B)False
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Chapter 5: Monetary Policy
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Sample Questions
Q1) The time lag between when an economic problem arises and when it is reported in economic statistics is the
A)recognition lag.
B)implementation lag.
C)impact lag.
D)open-market lag.
Q2) Which of the following is not true with respect to inflation targeting?
A)The Fed could lose credibility is the inflation rate deviates substantially from the Fed's target inflation rate.
B)A complete focus on inflation could result in a much higher unemployment rate.
C)Inflation targeting may not only satisfy the inflation goal, but could also achieve the employment stabilization goal in the long run.
D)If unemployment is slightly higher than normal, while inflation is at the peak of the target range, and inflation targeting approach would like advocate a loose monetary policy.
Q3) The Fed is more likely to use a stimulative policy during a strong-dollar period.
A)True
B)False
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Chapter 6: Money Markets
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Sample Questions
Q1) When firms sell commercial paper at a ____ price than they projected, their cost of raising funds is ____ than projected.
A)higher; higher
B)lower; lower
C)A and B
D)none of the above
Q2) The yield on NCDs is ____ the yield of Treasury bills of the same maturity.The difference between their yields would be especially large during a ____ period.
A)greater than; recessionary
B)greater than; boom economy
C)less than; boom economy
D)less than; recessionary
Q3) Money market securities are must have a maturity of three months or less.
A)True
B)False
Q4) There is no limit to the amount of T-bills that can be purchased by noncompetitive bidders in a T-bill auction.
A)True
B)False
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Chapter 7: Bond Markets
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Sample Questions
Q1) Rule 144A, which allows small individual investors to trade privately-placed bonds (and some other securities) with each other without requiring that the firms that issued the securities to register them with the SEC.
A)True
B)False
Q2) ____ are not primary purchasers of bonds.
A)Insurance companies
B)Finance companies
C)Mutual funds
D)Pension funds
Q3) Which of the following statements is incorrect?
A)The municipal bond must pay a risk premium to compensate for the possibility of default risk.
B)The Treasury bond must pay a slight premium to compensate for being less liquid than municipal bonds.
C)The income earned from municipal bonds is exempt from federal taxes.
D)All of the above are true.
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Chapter 8: Bond Valuation and Risk
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Sample Questions
Q1) When two securities have the same expected cash flows, the value of the ____ security will be higher then the value of the ____ security.
A)high-risk; low-risk
B)low-risk; high-risk
C)high-risk; high-risk
D)low-risk; low-risk
E)none of the above
Q2) If analysts expect that the demand for loanable funds will increase, and the supply of loanable funds will decrease, they would most likely expect interest rates to ____ and prices of existing bonds to ____.
A)increase; increase
B)increase; decrease
C)decrease; decrease
D)decrease; increase
Q3) The long-term, risk-free interest rate is driven by inflationary expectations, economic growth, the money supply, and the budget deficit.
A)True
B)False
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Chapter 9: Mortgage Markets
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Sample Questions
Q1) Fannie Mae and Freddie Mac experienced financial problems during the credit crisis because they:
A)were unwilling to finance new mortgages.
B)invested heavily in balloon mortgages.
C)invested only in prime mortgages that offered very low returns.
D)invested heavily in subprime mortgages.
Q2) Mortgages are packaged, but segmented into ____ (or classes) before mortgage-backed securities are issued.
A)balloon payments
B)caps
C)tranches
D)strips
Q3) Caps on mortgage rate fluctuations with adjustable-rate mortgages (ARMs) are typically
A)2 percent per year and 5 percent for the mortgage lifetime.
B)5 percent per year and 15 percent for the mortgage lifetime.
C)0 percent per year and 10 percent for the mortgage lifetime.
D)3 percent per year and 8 percent for the mortgage lifetime.
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11
Chapter 10: Stock Offerings and Investor Monitoring
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Sample Questions
Q1) Normally, only the owners of preferred stock are permitted to vote on certain key matters concerning the firm, such as the election of the board of directors.
A)True
B)False
Q2) There is strong evidence that IPOs of firms perform ____ on average over a period of a year or longer.
A)well
B)poorly
C)very well relative to other firms in their industry
D)none of the above
Q3) Assume a firm that is valued at $800 million with 6 million shares of stock outstanding.This firm's stock should have a price of $____ per share.
A)6.00
B)80.00
C)133.33
D)none of the above
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Chapter 11: Stock Valuation and Risk
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Sample Questions
Q1) If security prices fully reflect all market-related information (such as historical price patterns) but do not fully reflect all other public information, security markets are
A)weak-form efficient.
B)semi-strong form efficient.
C)strong form efficient.
D)B and C
E)none of the above
Q2) The dividend discount model states that the price of a stock should reflect the present value of the stock's future dividends.
A)True
B)False
Q3) Morgan stock has an average return of 15 percent, a beta of 2.5, and a standard deviation of returns of 20 percent.The Treynor index of Morgan stock is
A)0.04.
B)0.05.
C)0.35.
D)0.03.
E)none of the above
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13
Chapter 12: Market Microstructure and Strategies
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Sample Questions
Q1) A trading halt prevents a stock from experiencing a loss in response to news.
A)True
B)False
Q2) Assume a stock is initially priced at $50, and pays an annual $2 dividend.An investor uses cash to pay $25 a share and borrows the remaining funds at a 12 percent annual interest.What is the return if the investor sells the stock for $55 at the end of one year?
A)50 percent
B)30 percent
C)10 percent
D)16 percent
E)8 percent
Q3) The SEC's ____ requires the orderly disclosure of securities trades by various organizations that facilitate the trading of securities.
A)Division of Corporate Finance
B)Division of Market Regulation
C)Division of Enforcement
D)none of the above
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Chapter 13: Financial Futures Markets
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Sample Questions
Q1) According to the text, when a financial institution sells futures contracts on securities in order to hedge against a change in interest rates, this is referred to as
A)a long hedge.
B)a short hedge.
C)a closed out position.
D)basis trading.
Q2) Systemic risk reflects the risk that a particular event could A)cause losses at a firm due to inadequate management control. B)spread adverse effects among several firms or among financial markets.
C)cause a loss in value due to market conditions.
D)have a larger effect on the futures position than on the position being hedged.
Q3) If there are ____ traders with buy offers than sell offers for a particular contract, the futures price will ____ until this imbalance is removed.
A)more; decrease
B)more; rise
C)fewer; rise
D)none of the above
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Chapter 14: Options Markets
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Sample Questions
Q1) When a stock index option is exercised, the cash payment is equal to a specified dollar amount
A)multiplied by the index level.
B)multiplied by the exercise price.
C)multiplied by the difference between the index level and the exercise price.
D)multiplied by the sum of the index level and the exercise price.
Q2) A speculator purchases a put option for a premium of $4, with an exercise price of $30.The stock is presently priced at $29, and rises to $32 before the expiration date.What is the stock price at which the speculator would break even?
A)$26
B)$34
C)$28
D)$29
E)$32
Q3) Backdating implies that CEO (or other executives) reset the date that their options were granted to a different date when the stock price was lower.
A)True
B)False
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Chapter 15: Swap Markets
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Sample Questions
Q1) A plain vanilla swap enables firms to exchange ____ for ____.
A)fixed rate payments; variable interest rate payments
B)a high interest rate foreign currency; a low interest rate foreign currency
C)a low interest rate foreign currency; a high interest rate foreign currency
D)bonds; stocks that pay dividends
Q2) The Bank of Moronto has negotiated a plain vanilla swap in which it will exchange fixed payments of 10 percent for floating payments equal to LIBOR plus 0.5 percent at the end of each of the next three years.In the first year, LIBOR is 8 percent; in the second year, 9 percent; in the third year, LIBOR is 7 percent.What is the total net payment the Bank of Moronto makes over the three-year period if the notional principal is $10 million?
A)F1F1F1S1 F1F1F10600,000
B)600,000
C)450,000
D)F1F1F1S1 F1F1F10450,000
E)none of the above
Q3) An equity swap involves the exchange of interest payments for payments linked to the degree of change in a bond index.
A)True
B)False
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Page 17
Chapter 16: Foreign Exchange Derivative Markets
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Sample Questions
Q1) In a(n) ____ exchange rate system, the foreign exchange market is totally free from government intervention.
A)pegged
B)dirty floating
C)freely floating
D)Bretton Woods
E)none of the above
Q2) Which of the following is most likely to provide currency forward contracts to their customers?
A)commercial banks
B)international mutual funds
C)brokerage firms
D)insurance companies
Q3) If the spot rate ____ the exercise price, a currency ____ option would not be exercised.
A)remains below; call
B)remains below; put.
C)remains below; put
D)A and B
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Page 18
Chapter 17: Commercial Bank Operations
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Sample Questions
Q1) When banks need funding for just a few days, they would most likely
A)issue bonds and then call them.
B)issue stock and then repurchase it.
C)borrow in the federal funds market.
D)issue NCDs.
Q2) The bank holding company structure allows more flexibility to borrow funds, issue stock, repurchase the company's own stock, and acquire other firms.
A)True
B)False
Q3) Transaction deposits do not include A)demand deposits.
B)NCDs.
C)NOW accounts.
D)all of the above are transactions deposits
Q4) The federal funds rate is typically ____ the primary credit lending rate. A)greater than B)less than C)equal to D)none of the above
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Chapter 18: Bank Regulation
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Sample Questions
Q1) National banks are regulated by ____, and state banks are regulated by ____.
A)the Comptroller of the Currency; their state agency
B)the Comptroller of the Currency; the Comptroller of the Currency
C)their state agency; their state agency
D)their state agency; the Comptroller of the Currency
Q2) A federal bank charter is issued by the
A)Comptroller of the Currency.
B)Securities and Exchange Commission.
C)U.S.Treasury.
D)Federal Reserve.
E)none of the above
Q3) The Financial Services Modernization Act of 1999
A)gave banks and other financial service firms less freedom to merge.
B)allowed financial institutions to offer a diversified set of financial services without being subjected to stringent constraints.
C)offers very few benefits to a financial institution's clients.
D)increased the reliance of financial institutions on the demand for the single service they offer.
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Chapter 19: Bank Management
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Sample Questions
Q1) Other things being equal assets with ____ maturities and ____ frequent coupon payments have shorter durations.
A)shorter; more
B)shorter; less
C)longer; more D)longer; less
Q2) Petri Bank had interest revenues of $70 million last year and $30 million in interest expenses.About $300 million of Petri's $800 million in assets are rate-sensitive, while $600 million of its liabilities are rate-sensitive.Petri Bank's gap is $____.
A)F1F1F1S1 F1F1F10300 million
B)300 million
C)F1F1F1S1 F1F1F10500 million
D)500 million
Q3) A gap ratio of less than one suggests that
A)rate-sensitive assets exceed rate-sensitive liabilities.
B)an increase in interest rates would increase the bank's net interest margin.
C)rate-sensitive liabilities exceed rate-sensitive assets.
D)a decrease in interest rates would decrease the bank's net interest margin.
E)B and D
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Page 21
Chapter 20: Bank Performance
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Sample Questions
Q1) For a given level of return on assets, a bank with a higher level of capital will have a lower
A)return on equity.
B)leverage measure.
C)noninterest income.
D)liquidity.
Q2) Which of the following is not a factor that affects cash flows of a commercial bank?
A)changes in economic growth
B)changes in the risk-free interest rate
C)changes in industry conditions
D)changes in management abilities
E)all of the above are factors that affect cash flows of a commercial bank
Q3) When only equity counts as capital, the leverage measure is
A)equal to the capital ratio.
B)equal to return on assets.
C)the inverse of return on assets.
D)assets divided by equity.
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22
Chapter 21: Thrift Operations
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Sample Questions
Q1) Deposits at credit unions are called
A)NOW accounts.
B)money market deposit accounts.
C)shares.
D)credit union deposit accounts.
Q2) Most of the assets of savings institutions (SIs) are owned by SIs in the ____ asset size category.
A)less than $100 million
B)more than $1 billion
C)between $100 million and $300 million
D)between $300 million and $1 billion
Q3) Stock-owned savings institutions ____ susceptible to unfriendly takeovers.Mutual savings institutions ____ susceptible to unfriendly takeovers.
A)are; are not
B)are; are
C)are not; are
D)are not; are not
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23
Chapter 22: Finance Operations
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Sample Questions
Q1) If finance companies were confident about projections of ____ interest rates, they may consider using the funds obtained from issuing bonds to offer loans with ____ rates.
A)declining; variable
B)rising; fixed
C)rising; variable
D)A and B
Q2) Which of the following is not a main source of funds for finance companies?
A)bank loans
B)commercial paper issues
C)bonds
D)deposits
Q3) After interest rates increase, finance companies tend to use more long-term debt to lock in the cost of funds over an extended period of time.
A)True
B)False
Q4) Some finance companies offer credit card loans through a particular retailer.
A)True
B)False
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Chapter 23: Mutual Fund Operations
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Sample Questions
Q1) Equity real estate investment trusts invest
A)in mortgage and construction loans.
B)directly in properties.
C)in common stocks issued by construction companies.
D)in common stocks issued by real estate brokerage firms.
Q2) A mutual fund prospectus does not contain
A)minimum amount of investment required.
B)return on the fund since its inception.
C)investment objective of the mutual fund.
D)exposure of the mutual fund to various types of risk.
E)fees incurred by the mutual fund.
Q3) A front-end load is a withdrawal fee assessed when you withdraw money from the mutual fund.
A)True
B)False
Q4) An expense ratio represents ____ divided by the fund's ____.
A)annual fees charged to investors; 12b-1 fees
B)annual fees charged to investors; net asset value
C)initial sales charge (load); 12b-1 fees
D)initial sales charge (load); net asset value
Page 25
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Chapter 24: Securities Operations
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Sample Questions
Q1) The insurance limit of the Securities Investor Protection Corporation (SIPC) is $____.
A)100,000
B)200,000
C)500,000
D)1,000,000
E)none of the above
Q2) When securities firms raise capital for corporations, their primary role is as a(n)
A)intermediary.
B)lender (creditor).
C)investor.
D)B and C
Q3) As a result of a spinoff, asymmetric information problems between managers and investors may be reduced.
A)True
B)False
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26
Chapter 25: Insurance and Pension Fund Operations
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Q1) In recent years, defined-contribution plans have commonly been replaced by defined-benefit plans.
A)True
B)False
Q2) Real estate values are very stable over time and usually have little impact on the market value of a life insurance company's asset portfolio.
A)True
B)False
Q3) Pension funds whose contributions are dictated by the benefits that will eventually be provided are called ____ plans.
A)defined benefit
B)defined contribution
C)beneficiary
D)guarantor-insured
Q4) ____ represent the most popular asset of life insurance companies.
A)Corporate bonds
B)Treasury securities
C)Corporate stock
D)State and local bonds
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