Financial Management
Textbook Exam Questions
Course Introduction
Financial Management is a course designed to introduce students to the fundamental principles and practices involved in managing the financial resources of organizations. The course covers key concepts such as financial analysis, budgeting, investment decision-making, capital structure, risk management, and valuation of assets. Students will learn how to interpret financial statements, assess financial performance, understand the time value of money, and apply various techniques for making sound business and investment decisions. Through case studies and practical exercises, students gain insights into both short-term and long-term financial planning, equipping them with the skills necessary for effective financial decision-making in a dynamic business environment.
Recommended Textbook
Financial Markets and Institutions 6th Edition by Anthony Saunders
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Chapter 1: Introduction
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Q1) There are three types of major financial markets today: primary,secondary,and derivatives markets. The NYSE and NASDAQ are both examples of derivatives markets.
A)True
B)False
Answer: False
Q2) The Securities Exchange Commission (SEC)does not
A)decide whether a public issue is fairly priced.
B)decide whether a firm making a public issue has provided enough information for investors to decide whether the issue is fairly priced.
C)require exchanges to monitor trading to prevent insider trading.
D)attempt to reduce excessive price fluctuations.
E)monitor the major securities exchanges.
Answer: A
Q3) The New York Stock Exchange (NYSE)is an example of a secondary market. A)True
B)False
Answer: True
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Chapter 2: Determinants of Interest Rates
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Q1) Explain the logic of the liquidity premium theory of the term structure. Answer: Securities with different maturities are not perfect substitutes so the unbiased expectations theory does not strictly hold. In particular,there is a preference for shorter-term holdings. Thus,to induce investors to invest long-term,a premium interest rate over what could be earned by investing short-term and rolling the investment over must be offered.
Q2) According to the market segmentation theory,short-term investors will not normally switch to intermediate- or long-term investments.
A)True
B)False Answer: True
Q3) The risk that a security cannot be sold at a predictable price with low transaction costs at short notice is called liquidity risk. A)True
B)False Answer: True
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Chapter 3: Interest Rates and Security Valuation
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Q1) A zero coupon bond has a duration equal to its maturity and a convexity equal to zero.
A)True
B)False
Answer: True
Q2) A corporate bond has a coupon rate of 10 percent and a required return of 10 percent. This bond's price is
A)$924.18.
B)$1,000.00.
C)$879.68.
D)$1,124.83.
E)not possible to determine from the information given.
Answer: B
Q3) The higher a bond's coupon,the lower the bond's price volatility.
A)True
B)False
Answer: True
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Chapter 4: The Federal Reserve System,
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Q1) What does the 2004 Check 21 law allow? Why was this law passed? Does it benefit the customer or banks? Explain.
Q2) Recently,oil prices have risen in the United States,generating concerns that inflation may increase. If the Fed wishes to ensure that inflation does not get out of hand,the Fed could
A)intervene in the currency markets to push the value of the dollar down.
B)decrease the discount rate.
C)lower the target Fed funds rate.
D)lower the target money supply growth rate.
E)reduce reserve requirements at banks.
Q3) From October 1983 to July 1993,the Federal Reserve targeted
A)the Fed funds rate.
B)borrowed reserves.
C)nonborrowed reserves.
D)M1.
E)M3.
Q4) What are the main responsibilities of the FOMC?
Q5) What are the four major functions of the Federal Reserve System?
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Chapter 5: Money Markets
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Q1) How does a banker's acceptance (BA)help create more international trade?
Q2) Why do most money market securities have large denominations?
Q3) The most liquid of the money market securities are
A)commercial paper.
B)banker's acceptances.
C)T-bills.
D)Fed funds.
E)repurchase agreements.
Q4) A dealer is quoting a $10,000 face 180-day T-bill quoted at 2.75 bid,2.65 ask. You could buy this bill at ______________ or sell it at _______________.
A)$9,869.23; $9864.36
B)$9864.36; $9,869.23
C)$9,867.50; $9,862.50
D)$9,862.50; $9,867.50
E)none of the options
Q5) The largest secondary money market in the United States is the secondary market for T-bills.
A)True
B)False
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Chapter 6: Bond Markets
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Q1) Bonds rated below Baa by Moody's or BBB by S&P are junk bonds.
A)True
B)False
Q2) Interest income from Treasury securities is ________________,and interest income from municipal bonds is always ________________.
A)exempt from federal taxes; exempt from all taxes
B)taxable at the state level only; exempt from state taxes only
C)taxable at federal level only; exempt from federal taxes
D)taxable at the state level; taxed at the federal level
E)totally tax exempt; exempt from state taxes
Q3) An investor is in the 28 percent federal tax bracket and pays a 9 percent state tax rate and 4 percent in local income taxes. For this investor a municipal bond paying 6 percent interest is equivalent to a corporate bond paying _____ interest.
A)11.79 percent
B)10.17 percent
C)9.08 percent
D)9.68 percent
E)8.47 percent
Q4) What is the difference between General Obligation and Revenue bonds?
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Chapter 7: Mortgage Markets
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Q1) What three major ways has the federal government assisted the mortgage markets? Explain.
Q2) A ___________ placed against mortgaged property ensures that the property cannot be sold (except by the lender)until the mortgage is paid off.
A)collateral
B)lien
C)writ of habeas corpus
D)down payment
E)writ of certiorari
Q3) Discount points are paid to reduce the down payment required.
A)True
B)False
Q4) Which one of the following types of mortgages is likely to become more popular as the average age of the U.S. population increases?
A)GEM
B)GPM
C)SAM
D)PLA
E)RAM
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Chapter 8: Stock Markets
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Q1) In what major ways do stocks differ from bonds?
Q2) Which of the following information is NOT usually found in a Wall Street Journal stock quote?
A)dividend yield
B)price-earnings ratio
C)closing price of the stock
D)stock rating
E)ticker symbol
Q3) Suppose that over the last 10 to 15 years significantly large numbers of investors have been able to earn abnormal returns from using the firm's publicly available financial information to forecast growth in earnings and dividends. This would be evidence that the markets are not
I. weak form efficient.
II. semi-strong form efficient.
III. strong form efficient.
A)I only
B)I and II only
C)III only
D)II and III only
E)I,II,and III
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Chapter 9: Foreign Exchange Markets
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Q1) A U.S. bank has made £50 million in Britain and has £40 million in deposits. The bank's currency trading desk has also contracted to buy £20 million and has short positions of £15 million. What is the bank's net exposure?
How could they use forward contracts to hedge the exposure? If the bank has exposures in euros and yen,would you recommend they use the forward hedge?
Why or why not?
Q2) If the United States has inflation of 3 percent and Europe has inflation of 5 percent,the value of the euro should increase,ceteris paribus.
A)True
B)False
Q3) If the euro per yen ratio falls,the value of the yen has risen.
A)True
B)False
Q4) A U.S. bank has made £12 million worth of loans and £10 million worth of deposits in Britain. The bank would benefit from a drop in the value of the pound against the dollar.
A)True
B)False
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Page 11
Chapter 10: Derivative Securities Markets
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Q1) A credit forward is a forward agreement that hedges against an increase in default risk on a loan after the loan has been created by a lender.
A)True
B)False
Q2) In a bear market,which option positions make money?
I. Buying a call
II. Writing a call
III. Buying a put
IV. Writing a put
A)I and II
B)I and III
C)II and IV
D)II and III
E)I and IV
Q3) Suppose a stock is priced at $50. You are bullish on the stock and are considering buying March calls with an exercise price of $45 and $55,respectively. The 45 call is priced at $8.50 and the 55 call is quoted at $2.75. What should you consider in deciding which to purchase if you do not plan on exercising prior to maturity?
Be specific.
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Page 12
Chapter 11: Commercial Banks: Industry Overview
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Q1) Commercial banks are the __________________ financial intermediary in the United States as measured by asset size.
A)largest
B)second-largest
C)third-largest
D)fourth-largest
E)fifth-largest
Q2) Why are banks different from other depository institutions?
Q3) Equity capital at commercial banks in 2013 comprised about ____________ of liabilities and equity.
A)25 percent
B)21 percent
C)55 percent
D)11 percent
E)5 percent
Q4) Banks have an average total debt ratio of about 90 percent.
A)True
B)False
Q5) Why did bank profitability decline beginning in late 2006 and through 2008?
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Chapter 12: Commercial Banks Financial Statements and Analysis
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Q1) A bank has interest income to total assets ratio of 5.45 percent and has noninterest income of $45 million and total assets of $700 million. What is the bank's asset utilization ratio?
A)5.45 percent
B)6.43 percent
C)9.67 percent
D)15.02 percent
E)11.88 percent
Q2) Oceanside Bank converts a dollar of equity into 10 cents of net income and has $9.50 in assets per dollar of equity capital. Oceanside also has a profit margin of 15 percent.
What is Oceanside's AU ratio?
A)1.05 percent
B)3.55 percent
C)5.56 percent
D)6.45 percent
E)7.02 percent
Q3) Banks have higher leverage than most manufacturing firms.
A)True
B)False
Q4) What are the differences between purchased funds and core deposits?
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Chapter 13: Regulation of Commercial Banks
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Q1) Areas of commercial bank regulation designed to encourage banks to lend to socially important sectors such as housing and farming are termed ______________________ regulations.
A)safety and soundness
B)consumer protection
C)investor protection
D)credit allocation
E)monetary policy
Q2) Look at the following simplified bank balance sheet. Assume that the bank has no off-balance-sheet commitments.
Q3) Why have some states placed restrictions on intrastate and interstate branches? What historical laws gave this right to states? What law changed these restrictions?
Q4) In the United States,regulators currently use a ________________ to calculate required reserve balances.
A)lagged reserve accounting system
B)contemporaneous reserve system
C)homoscedastic reserve system
D)two-day computation period
E)accrual accounting period
Page 15
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Chapter 14: Other Lending Institutions: Savings Institutions,
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Q1) A captive finance company is one that
A)is owned by a retailer or manufacturer.
B)is owned by a bank holding company.
C)is owned by its depositors.
D)lends only to high-risk individuals that cannot obtain loans elsewhere (i.e.,captives).
E)is regulated at the federal level.
Q2) Credit unions have several advantages over banks. These include the following:
I. Credit unions are not taxed.
II. Credit unions are better diversified than banks.
III. Credit unions can collectively pool funds.
IV. Due to regulations,credit unions have better economies of scale and scope than banks.
V. Because of their ties to employers credit unions have better personnel expertise than banks.
A)I and II only
B)I and III only
C)III and IV only
D)III,IV,and V only
E)I,III,and V only
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Chapter 15: Insurance Companies
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Q1) The largest asset category of life insurers is _______________ and the largest liability category is ___________.
A)bonds; separate account items
B)separate account items; current policy claims
C)bonds; policy reserves
D)policy reserves; mortgage loans
E)common stock; dividend reserve
Q2) An insurance line has a loss ratio of 72 percent and an expense ratio of 35 percent,and the firm pays 2 percent of premiums to policyholders as dividends. What level of investment yield is needed to make the P&C firm break even?
A)5 percent
B)7 percent
C)9 percent
D)11 percent
E)18 percent
Q3) The cash surrender value of a life insurance policy is the present value of expected future payouts on the policy.
A)True
B)False
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Chapter 16: Securities Firms and Investment Banks
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Q1) A best efforts offering is one in which
A)the underwriter bears the risk of an unsuccessful offering.
B)the bid-ask spread is exceptionally high,but the investment banker does his best to sell the issue anyway.
C)the investment banker acts as a principal for the issuer.
D)the investment banker acts only as a distribution agent.
E)the issue can only be privately placed.
Q2) An investment banker agrees to a firm commitment offering of two million shares of Ace stock. The offer price is set at $55 and the spread is 50 cents per share. If the stock is actually sold to the public at $53.80,however,what is the investment banker's gain or loss?
A)$1,400,000 gain
B)$1,400,000 loss
C)$500,000 gain
D)$500,000 loss
E)None of the options
Q3) What are the major types of firms in the investment banking industry?
Briefly describe each.
Q4) What are soft dollar fees or commissions?
How can these lead to conflicts of interest for investment bankers?
Page 18
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Chapter 17: Investment Companies
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Q1) One of the recent trading abuses in the mutual fund industry was allowing selected investors to rapidly trade in and out of a mutual fund in order to profit on stale prices. This practice is called
A)diluted brokerage.
B)front running.
C)directed order flow.
D)soft dollar commissions.
E)market timing.
Q2) Hedge funds may be classified into three types based on their investment strategies and risk level. What are the three types and their broad risk levels? Many different strategies exist in each type. List one example strategy in each type.
Q3) Offshore hedge funds are not subject to taxation on fund distributions nor to U.S. estate taxes.
A)True
B)False
Q4) Open-end fund shares often trade at a discount or premium relative to NAV.
A)True
B)False
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Chapter 18: Pension Funds
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Q1) Pension contributions paid to insured pension funds and the assets purchased with these funds become the legal property of the insurance company and are not the legal property of the individual pension fund contributors.
A)True
B)False
Q2) Why do insured pension plans invest in less risky assets than uninsured pension plans?
Q3) A retirement account specifically designed for self-employed persons is a
A)Roth IRA.
B)traditional IRA.
C)Keogh.
D)Penny Benny.
E)public pension plan.
Q4) If you are married and you and your spouse make $160,000 total per year,you are not allowed to contribute to an IRA.
A)True
B)False
Q5) What are the main provisions of ERISA?
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Chapter 19: Types of Risks Incurred by Financial Institutions
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Q1) A bank has invested in U.S. Treasury investments that mature in two years. They will be held until maturity. The investments are funded with three-year maturity time deposits. The primary risk this bank faces is
A)refinancing risk.
B)reinvestment risk.
C)liquidity risk.
D)credit risk.
E)off-balance-sheet risk.
Q2) Breakdowns of ATMs and fraudulent use of information stored on a bank's computer system are examples of operational risk.
A)True
B)False
Q3) What are the three major objectives of technological investments at FIs? What are the major risks involved with these investments?
Q4) A bank that has made floating rate loans funded by longer maturity deposits is at risk from falling interest rates.
A)True
B)False
Q5) How does foreign exchange risk arise for an FI?
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Chapter 20: Managing Credit Risk on the Balance Sheet
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Q1) A corporate loan applicant has cash of $40,receivables of $50,and inventory of $20. The applicant also has current debts of $65. If the bank's policy requires a current ratio of 1.75 or better and an acid test ratio of 1.25 or better would the applicant receive the loan?
A)Yes,because the applicant's current ratio and acid test ratios are acceptable.
B)No,because the applicant's current ratio and acid test ratios are both unacceptable.
C)No,because although the applicant's current ratio is acceptable,its acid test ratio is not.
D)No,because although the applicant's acid test ratio is acceptable,its current ratio is not.
Q2) The base loan rate accounts for
I. the firm's cost of funds.
II. the firm's required return on equity.
III. the credit risk of the loan.
A)I only
B)I and II only
C)II and III only
D)I and III only
E)I,II,and III
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Chapter 21: Managing Liquidity Risk on the Balance Sheet
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Q1) Bank A has a loan-to-deposit ratio of 110 percent,core deposits equal 55 percent of total assets,and borrowed funds are 25 percent of assets. Bank B has a loan-to-deposit ratio of 80 percent. Core deposits are 65 percent of assets and borrowed funds are 5 percent of assets. Which bank has more liquidity risk? Ceteris paribus,which bank will probably be more profitable when interest rates are low?
A)Bank A; Bank A
B)Bank A; Bank B
C)Bank B; Bank A
D)Bank B; Bank B
E)You can't tell
Q2) If a bank meets a net deposit drain by borrowing money in the fed funds market,it is using purchased liquidity.
A)True
B)False
Q3) Explain the relationship between each of the following ratios and liquidity risk.
Q4) The Fed now operates the discount window differently than it used to. What are the major changes?
Q5) Why might a bank face abnormal deposit drains?
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Chapter 22: Managing Interest Rate Risk and Insolvency
Risk on the Balance Sheet
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Q1) If D<sub>A</sub> > kD<sub>L</sub>,then falling interest rates will cause the market value of equity to rise.
A)True
B)False
Q2) A bank has book value of assets equal to $800 million and market value of assets equal to $1,100 million. The bank has book value of liabilities of $700 million and market value of liabilities equal to $850 million. The bank's market-to-book ratio is
A)2.5.
B)2.0.
C)1.5.
D)1.0.
E)0.67.
Q3) A bank's balance sheet is characterized by long-term fixed-rate assets funded by short-term variable-rate liabilities. Most likely the bank has a
A)positive repricing gap and a positive duration gap.
B)positive repricing gap and a negative duration gap.
C)negative repricing gap and a positive duration gap.
D)negative repricing gap and a negative duration gap.
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Chapter 23: Managing Risk Off the Balance Sheet With
Derivative Securities
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Q1) The buyer of an American-style bond call option has the right,but not the obligation,to sell the bond at a set price until the option expires.
A)True
B)False
Q2) A U.S. corporation has a yen-denominated loan it must repay in six months. A long position in yen futures could help offset the corporation's foreign exchange risk.
A)True
B)False
Q3) A macrohedge is a hedge of a particular asset or liability exposure to a change in a macroeconomic variable.
A)True
B)False
Q4) Plain vanilla interest rate swaps are exchanges of
A)principal only.
B)interest only.
C)principal and interest.
D)principal and currency.
E)interest rate and currency.
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Chapter 24: Managing Risk Off the Balance Sheet With Loan
Sales and Securitization
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Q1) On January 1 a bank had originated 500 30-year fixed rate mortgages with a 6.25 percent coupon at par. The average mortgage size is $255,000. The bank charges a 1 percent origination fee for each mortgage,but processing costs amount to 0.4 percent. After securitization the bank will retain 35 basis points in fee income for servicing the mortgage payments. The cost of this processing is 12 basis points. What is the total amount of net fee revenue generated from the mortgages over the year?
Q2) When a vulture fund acquires a distressed loan,the fund usually assists the distressed firm's managers in formulating a long-term plan for restoring profitability. A)True
B)False
Q3) A loan sold without recourse generates a contingent liability for the selling bank. A)True
B)False
Q4) How does a PAC CMO differ from a sequential pay CMO?
Q5) How does a mortgage pass-through differ from a CMO?
Q6) Why are MBBs the least used form of mortgage securitization?
Page 26
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