Investment Banking
Exam Answer Key
Course Introduction
This course provides a comprehensive overview of the investment banking industry, focusing on key areas such as corporate finance, mergers and acquisitions, initial public offerings, underwriting, and trading. Students will gain a thorough understanding of the roles and responsibilities of investment bankers, develop analytical skills to evaluate financial statements and valuation techniques, and explore regulatory frameworks and ethical considerations within the industry. Through case studies and real-world examples, the course equips students with practical knowledge of deal structuring, risk management, and client advisory services, preparing them for careers in investment banking and related financial sectors.
Recommended Textbook
Financial Markets and Institutions 12th Edition by Jeff Madura
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26 Chapters
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Chapter 1: Role of Financial Markets and Institutions
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Sample Questions
Q1) Most mutual funds raise funds by issuing securities and then lend the funds to individuals and small businesses.
A)True
B)False
Answer: False
Q2) ____ concentrate on mortgage loans.
A) Finance companies
B) Commercial banks
C) Savings institutions
D) Credit unions
Answer: C
Q3) If markets are ____, investors could use available information ignored by the market to earn abnormally high returns.
A) perfect
B) active
C) inefficient
D) in equilibrium
Answer: C
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Page 3
Chapter 2: Determination of Interest Rates
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Sample Questions
Q1) According to the Fisher effect, when the inflation rate is lower than anticipated, the real interest rate is relatively low.
A)True
B)False
Answer: False
Q2) If the federal government reduces its budget deficit, this causes a(n) ____ in the supply of loanable funds and a(n) ____ in the demand for loanable funds.
A) increase; no change
B) decrease; no change
C) no change; increase
D) no change; decrease
Answer: D
Q3) At any point in time, households and businesses demand a greater quantity of loanable funds at lower rates of interest.
A)True
B)False
Answer: True
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Chapter 3: Structure of Interest Rates
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Sample Questions
Q1) Yield curves are always upward sloping.
A)True
B)False Answer: False
Q2) Investors will always prefer the purchase of risk-free Treasury securities, since other securities have a higher level of risk.
A)True
B)False
Answer: False
Q3) Which of the following statements is not true with respect to debt securities?
A) Some types of debt securities always offer a higher yield than others.
B) Debt securities offer different yields because they exhibit different characteristics that influence the offered yield.
C) In general, securities with favorable characteristics will offer higher yields to entice investors.
D) All of the above are true with respect to debt securities.
Answer: C
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Chapter 4: Functions of the Fed
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Sample Questions
Q1) To increase the money supply, the Fed may increase the reserve requirement ratio.
A)True
B)False
Q2) The ____ meets with the Board of Governors twice a year and offers views on the economic circumstances and financial services needs of consumers and communities.
A) Consumer Financial Protection Bureau
B) Federal Advisory Council
C) Community Advisory Council
D) Federal Trade Commission
Q3) The ____ rate is the interest rate charged on the Fed's short-term loans to depository institutions.
A) federal funds
B) prime
C) primary credit lending
D) real
Q4) All commercial banks are required to be members of the Fed.
A)True
B)False
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Chapter 5: Monetary Policy
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Sample Questions
Q1) Which of the following might be monitored as an indicator of inflation?
A) consumer price index
B) gold prices
C) oil prices
D) All of the above may be indicators of inflation.
Q2) Which of the following is true about an increase in the U.S. government's budget deficit?
A) It will lead to global crowding out if U.S. interest rates fall below the level of interest rates in other countries.
B) It will cause outflows of foreign funds from the United States as foreign investors move their funds to other countries.
C) It will cause an inward shift in the aggregate demand for funds curve.
D) None of the above
Q3) The relationship between the interest rate on loanable funds and the level of business investment is positive.
A)True
B)False
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Chapter 6: Money Markets
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Sample Questions
Q1) When an investor purchases a six-month (182-day) T-bill with a $10,000 par value for $9,700, the Treasury bill discount is ____ percent.
A) 5.93
B) 6.12
C) 6.2
D) 6.02
E) none of the above
Q2) Money markets are used to facilitate the transfer of short-term funds from individuals, corporations, or governments with excess funds to those with deficient funds.
A)True
B)False
Q3) In general, the money markets are widely perceived to be efficient in the sense that the prices reflect all available public information.
A)True
B)False
Q4) Most repo transactions use government securities.
A)True
B)False
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Chapter 7: Bond Markets
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Sample Questions
Q1) Corporate bonds are more standardized than stocks.
A)True
B)False
Q2) Corporate bonds are sometimes packaged by commercial banks into ___________, in which investors receive the interest or principal payments generated by the debt securities.
A) collateralized debt obligations (CDOs)
B) credit default swaps
C) reverse loans
D) inverted bonds
Q3) Assume U.S. interest rates are significantly higher than German rates. A U.S. firm with a German subsidiary could achieve a lower financing rate without exchange rate risk by denominating thebonds in
A) dollars.
B) euros and making payments from U.S. headquarters.
C) euros and making payments from its German subsidiary.
D) dollars and making payments from its German subsidiary.
Q4) Bond dealers do not have an inventory of bonds.
A)True
B)False
Page 9
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Chapter 8: Bond Valuation and Risk
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Sample Questions
Q1) Hurricane Corp. recently purchased corporate bonds in the secondary market with a par value of $11 million, a coupon rate of 12 percent (with annual coupon payments), and four years until maturity. If Hurricane intends to sell the bonds in two years and expects investors' required rate of return on similar investments to be 14 percent at that time, what is the expected market value of the bonds in two years?
A) $9.33 million
B) $11.00 million
C) $10.64 million
D) $9.82 million
E) none of the above
Q2) 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
Q3) Any announcement that signals stronger than expected economic growth tends to increase bond prices.
A)True
B)False
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Chapter 9: Mortgage Markets
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Sample Questions
Q1) Which of the following mortgages allows the home purchaser to obtain a mortgage at a below-market interest rate throughout the life of the mortgage?
A) second mortgage
B) growing-equity mortgage
C) graduated-payment mortgage
D) shared-appreciation mortgage
Q2) ___ economic growth will probably ____ the risk premium on mortgages and ____ the price of mortgages.
A) Strong; increase; decrease
B) Strong; increase; increase
C) Weak; decrease; increase
D) Weak; increase; increase
E) Weak; decrease; decrease
Q3) Which of the following will typically require homeowners to ultimately request a new mortgage?
A) graduated-payment mortgage (GPM)
B) growing-equity mortgage
C) balloon-payment mortgage
D) shared-appreciation mortgage
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Page 11
Chapter 10: Stock Offerings and Investor Monitoring
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Sample Questions
Q1) All countries that have stock markets have similar laws regarding the financial information that must be provided by public companies.
A)True
B)False
Q2) In addition to extended sessions offered by the stock exchanges, some electronic communications networks (ECNs) allow for trading at any time.
A)True
B)False
Q3) ____ are portfolios of international stocks created and managed by various financial institutions.
A) International mutual funds
B) American depository receipts
C) Exchange rate options
D) Initial public offerings
Q4) Venture capital (VC) funds usually invest in publicly traded businesses.
A)True
B)False
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Chapter 11: Stock Valuation and Risk
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Sample Questions
Q1) The limitations of the dividend discount model are more pronounced when valuing stocks
A) that pay most of their earnings as dividends.
B) that retain most of their earnings.
C) that have a long history of dividends.
D) that have constant earnings growth
Q2) The January effect refers to the ____ pressure on ____ stocks in January of every year.
A) downward; large
B) upward; large
C) downward; small
D) upward; small
Q3) A higher beta for an asset reflects
A) lower risk.
B) lower covariance between the asset's returns and market returns.
C) higher covariance between the asset's returns and the market returns.
D) none of the above
Q4) Stock price volatility increased during the credit crisis.
A)True
B)False
Page 13
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Chapter 12: Market Microstructure and Strategies
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Sample Questions
Q1) ____ from a broker requires the investor to put up additional collateral.
A) maintenance margin
B) initial margin
C) margin call
D) trading halt
Q2) ____ may facilitate stock transactions by taking positions in specific stocks.
A) Board members
B) Capstone members
C) Market makers
D) None of the above
Q3) On May 6, 2010, the "__________" occurred, when stocks on the New York Stock Exchange (NYSE) declined by more than 9 percent on average before reversing and recovering most of those losses onthat same day. Much of the trading occurred within a half hour, which is thought to be the most volatile half hour in the history of the NYSE.
A) credit cefault crisis
B) swap crisis
C) specialist crash
D) flash crash
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Chapter 13: Financial Futures Markets
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Sample Questions
Q1) ____ take positions in futures to reduce their exposure to future movements in interest rates or stock prices.
A) Hedgers
B) Day traders
C) Position traders
D) None of the above
Q2) Which of the following statements is incorrect with respect to cross-hedging?
A) Even when the futures contract is highly correlated with the portfolio being hedged, the value of the futures contract may change by a higher or lower percentage than the portfolio's market value.
B) If the futures contract value is more volatile than the portfolio value, hedging will require a greater amount of principal represented by the futures contracts.
C) The effectiveness of a cross-hedge depends on the degree of correlation between the market values of the two financial instruments.
D) If the price of the underlying security of the futures contract moves closely in tandem with the security being hedged, the futures contract can provide an effective hedge.
E) All of the above are correct with respect to cross-hedging.
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Page 15
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) American-style stock options can be exercised only just before expiration.
A)True
B)False
Q3) An increase in uncertainty results in a higher implied standard deviation for the stock, which means that the writer of an option requires a higher premium to compensate for the anticipated increase in the stock's volatility.
A)True
B)False
Q4) An option with a higher exercise price has a higher call option premium and a lower put option premium.
A)True
B)False
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Page 16
Chapter 15: Swap Markets
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Sample Questions
Q1) When a bank participates in a swap of fixed interest rate payments for floating-rate payments, or a swap of currencies, it
A) can match up two parties but cannot take a position in the swap.
B) can match up two parties or can take a position in the swap.
C) cannot match up two parties and cannot take a position in the swap.
D) cannot match up two parties but can take a position in the swap.
Q2) An advantage of a ____ over other interest rate swaps is that the fixed-rate payer has the flexibility to avoid exchanging future interest payments.
A) callable swap
B) putable swap
C) zero-coupon for floating swap
D) forward swap
Q3) An interest rate collar involves the purchase of an interest rate cap and the simultaneously sale of an interest rate floor.
A)True
B)False
Q4) Interest rate floors are commonly used to hedge against lower interest rates.
A)True
B)False
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Chapter 16: Foreign Exchange Derivative Markets
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Sample Questions
Q1) The primary advantage of currency options over forward and futures contracts is that they provide a right rather than an obligation to purchase or sell a particular currency at a specified pricewithin a given period.
A)True
B)False
Q2) ____ in the supply of euros for sale will cause the euro to ____.
A) increase; appreciate
B) increase; depreciate
C) decrease; depreciate
D) none of the above
Q3) The act of capitalizing on the discrepancy between the forward rate premium and the interest rate differential is called
A) triangular arbitrage.
B) locational arbitrage.
C) covered interest arbitrage.
D) interest rate parity.
Q4) The following information refers to Fresno Bank and Champaign Bank.
A)True
B)False
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Chapter 17: Commercial Bank Operations
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Sample Questions
Q1) Bank capital represents funds obtained through ____ and through ____.
A) issuing stock; offering long-term CDs
B) issuing repurchase agreements; issuing bonds
C) issuing stock; retaining earnings
D) offering long-term CDs; issuing bonds
Q2) In a revolving credit loan, the bank typically charges businesses a commitment fee on any unused funds.
A)True
B)False
Q3) The interest rate banks charge on business loans is known as the A) federal funds rate.
B) primary credit lending rate.
C) prime rate
D) call money rate.
Q4) The interest rate charged on loans between depository institutions is commonly referred to as the
A) federal funds rate.
B) discount rate.
C) primary credit lending rate.
D) none of the above
Page 19
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Chapter 18: Bank Regulation
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Sample Questions
Q1) Which of the following is not a specific criterion that regulators use to monitor banks?
A) capital adequacy
B) dollar value of fixed assets
C) asset quality
D) earnings
E) sensitivity to financial market conditions
Q2) The Depository Institutions Deregulation and Monetary Control Act of 1980 allowed banks to set their own
A) reserve requirements.
B) capital ratios.
C) interest rates on savings deposits.
D) corporate loan interest rates.
Q3) The Sarbanes-Oxley Act was enacted to make corporate managers, board members, and auditors more accountable for the accuracy of the financial statements that their respective firms provide.
A)True
B)False
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Chapter 19: Bank Management
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Sample Questions
Q1) Macon Bank has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million. Macon Bank's net interest margin is
A) $1 million.
B) -$1 million.
C) 5 percent.
D) -5 percent.
Q2) Floating-rate loans completely eliminate interest rate risk.
A)True
B)False
Q3) A common method for banks to reduce their credit risk is to
A) specialize in loans to just one or a few particular industries in which they have expertise in assessing creditworthiness.
B) specialize in loans to companies whose earnings patterns are quite similar over time.
C) A and B
D) none of the above
Q4) Banks increase their risk by increasing their capital as a percentage of assets
A)True
B)False
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Chapter 20: Bank Performance
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Sample Questions
Q1) Banks with relatively ____ ROAs often incur ____ noninterest expenses.
A) low; very low
B) low; very high
C) high; very high
D) none of the above
Q2) Interest income generated from all a bank's assets is called
A) net interest margin.
B) the spread.
C) gross interest income.
D) net interest income.
Q3) If a bank has long-term fixed-rate assets and short-term liabilities, and interest rates increase over time, its net interest margin should A) decrease B) increase C) stay the same.
D) either A or B, depending on whether the asset maturities exceed 10 years
Q4) Banks increase their loan loss reserves in order to boost their reported earnings.
A)True
B)False
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Chapter 21: Thrift Operations
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Sample Questions
Q1) High economic growth results in more risk for a savings institution, since its consumer loans, mortgage loans, and investments in debt securities are more likely to default.
A)True
B)False
Q2) To manage interest rate risk, a savings institution could use
A) fixed-rate mortgages.
B) currency options.
C) interest rate futures contracts.
D) letters of credit.
Q3) In general, savings institutions are larger than commercial banks.
A)True
B)False
Q4) Because credit unions are for-profit organizations, their income is taxable. A)True
B)False
Q5) Credit unions use the majority of their funds to invest in the stock market. A)True B)False
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Chapter 22: Finance Company Operations
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Sample Questions
Q1) A finance company's cash flows are _____ related to changes in economic growth and may be ____ related to changes in the risk-free rate.
A) positively; inversely
B) inversely; positively
C) inversely; inversely
D) positively; positively
Q2) When interest rates increase, finance companies tend to use more long-term debt to lock in their cost of funds over an extended period of time.
A)True
B)False
Q3) Consumer finance companies sometimes provide mortgage loans to individuals.
A)True
B)False
Q4) Consumer finance companies primarily focus on A) consumer loans.
B) consumer advising.
C) consumer regulation.
D) none of the above
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Page 24
Chapter 23: Mutual Fund Operations
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Sample Questions
Q1) Which of the following statements is incorrect?
A) Investors can purchase shares directly from an open-end fund at any time.
B) The number of shares of an open-end fund is always changing.
C) Open-end funds typically maintain some cash on hand in case investments exceed redemptions.
D) There are many different categories of open-end mutual funds.
Q2) Which of the following statements is incorrect?
A) Mutual funds serve as a key financial intermediary.
B) Managers of mutual funds do not analyze economic and industry trends.
C) Because of their diversification, management expertise, and liquidity, mutual funds have grown at a rapid pace.
D) Some mutual funds offer check-writing privileges.
Q3) Closed-end funds are closed to new investment but allow redemptions by shareholders.
A)True
B)False
Q4) Many businesses that go public are partially backed by venture capital before the IPO.
A)True
B)False
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Chapter 24: Securities Operations
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Sample Questions
Q1) The price of newly issued stock should be ____ the market price of the firm's outstanding stock.
A) about the same as
B) much more than
C) much less than
D) B or C, depending on the amount of stock to be issued
Q2) ____ is not a service that a securities firm provides in placing bonds.
A) Origination
B) Underwriting
C) Distribution
D) Advising
E) All of the above are services that securities firms provide in placing bonds
Q3) Which of the following does not play a role in regulating securities trading?
A) Financial Industry Regulatory Authority
B) Resolution Trust Corporation
C) New York Stock Exchange
D) Federal Reserve
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26
Chapter 25: Insurance Operations
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Sample Questions
Q1) ____ insurance provides insurance for a policyholder only over a specified period.
A) Term
B) Whole life
C) Universal
D) A and C
Q2) A ____ life insurance company is owned by its policyholders; most life insurance companies are ____.
A) stock-owned; mutual
B) mutual; mutual
C) stock-owned; stock-owned
D) mutual; stock-owned
Q3) _____ insurance provides a financial payout if specified employees of a business become disabled or die.
A) Best person
B) Employment liability
C) Key employee
D) Credit line
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Page 27
Chapter 26: Pension Fund Operations
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Sample Questions
Q1) Pension funds managed by life insurance companies concentrate on A) common stock.
B) bonds and mortgages.
C) preferred stock.
D) money market instruments.
Q2) Pension funds managed by life insurance companies are normally referred to as
A) trust portfolios.
B) insured plans.
C) matched plans.
D) projective plans.
Q3) If pension fund investment decisions are made with the objective of generating cash flows at the same time as planned outflow payments, the fund follows a ____ strategy. When comparing matchedfunding and projective funding, ____ is more flexible for portfolio managers.
A) matched funding; matched funding
B) projective funding; matched funding
C) projective funding; projective funding
D) matched funding; projective funding
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