Investment Banking
Mock Exam
Course Introduction
Investment Banking is a comprehensive course that explores the key functions, structures, and operations of investment banks in the global financial system. Students will examine the roles of investment banks in areas such as securities underwriting, mergers and acquisitions advisory, corporate restructuring, and capital raising through equity and debt markets. The course delves into the analytical frameworks and valuation methods used in deal-making, alongside discussions on regulatory issues, risk management, and ethical considerations. Through case studies and practical assignments, students develop a deep understanding of the strategies, challenges, and impact of investment banking on business growth and capital markets development.
Recommended Textbook Financial Markets and Institutions 11th Edition by Jeff Madura
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Chapter 1: Role of Financial Markets and Institutions
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Q1) The main reason that depository institutions experienced financial problems during the credit crisis was their investment in:
A)mortgages.
B)money market securities.
C)stock.
D)Treasury bonds.
Answer: A
Q2) Since markets are efficient, institutional and individual investors should ignore the various investment instruments available.
A)True
B)False
Answer: False
Q3) When security prices fully reflect all available information, the markets for these securities are said to be perfect.
A)True
B)False Answer: False
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Page 3
Chapter 2: Determination of Interest Rates
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Q1) The supply of loanable funds in the U.S. is partly determined by the monetary policy implemented by the Federal Reserve System.
A)True
B)False
Answer: True
Q2) If inflation turns out to be lower than expected
A)savers benefit.
B)borrowers benefit while savers are not affected.
C)savers and borrowers are equally affected.
D)savers are adversely affected but borrowers benefit.
Answer: A
Q3) The federal government demand for loanable funds is ____. If the budget deficit was expected to increase, the federal government demand for loanable funds would ____.
A)interest elastic; decrease
B)interest elastic; increase
C)interest inelastic; increase
D)interest inelastic; decrease
Answer: C
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Page 4
Chapter 3: Structure of Interest Rates
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Q1) In some time periods there is evidence that corporations initially financed long-term projects with short-term funds. They planned to borrow long-term funds once interest rates were lower. This specifically supports the ____ for explaining the term structure of interest rates.
A)liquidity premium theory
B)expectations theory
C)segmented markets theory
D)A and C
Answer: B
Q2) Assume that the Treasury experiences a large increase in the budget deficit and issues a large number of T-bills. This action will ____ the supply of T-bills in the market and place ____ pressure on the yield of T-bills.
A)decrease; downward
B)decrease; upward
C)increase; upward
D)increase; downward
Answer: D
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Chapter 4: Functions of the Fed
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Q1) To increase the money supply growth, the Fed could
A)sell government securities in the secondary market.
B)increase the primary credit lending rate.
C)increase the reserve requirement ratio.
D)all of the above
E)none of the above
Q2) ____ credit extended by the Fed to financial institutions may be used for any purpose and is available only to depository institutions that satisfy specific criteria reflecting financial soundness.
A)Primary
B)Secondary
C)Tertiary
D)None of the above
Q3) The ____ is directly responsible for conducting monetary policy.
A)Federal Advisory Council
B)FOMC
C)Senate
D)President of the United States
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6
Chapter 5: Monetary Policy
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Q1) In the "operation twist" strategy used in 2011 and 2012, the Fed sold _______ Treasury securities and used the proceeds to purchase ________ Treasury securities.
A)long-term; short-term
B)short-term; long-term.
C)short-term; long-term
D)long-term; short-term.
Q2) Which of the following was not true of the eurozone during the Greek crisis?
A)Fear of a financial crisis throughout Europe discouraged investors and firms from moving funds into Europe.
B)By using a more stimulative monetary policy than it desired, the European Central Bank aroused concerns about potential inflation in the eurozone.
C)There was concern that the austerity conditions could weaken the country's economy further.
D)Greece, Spain, and Portugal focused their efforts on reducing tax rates in order to stimulate their economies.
Q3) The Fed needs the approval of the presidential administration to make decisions.
A)True
B)False
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Chapter 6: Money Markets
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Q1) When a firm sells its commercial paper at a ____ price than projected, their cost of raising funds will be ____ than what they initially anticipated.
A)higher; higher
B)lower; lower
C)higher; lower
D)lower; higher
E)Answers C and D are correct.
Q2) A major drawback to investing in Treasury bills is that they cannot easily be liquidated.
A)True
B)False
Q3) Because money market securities have a short-term maturity and typically cannot be sold easily, they provide investors with a low degree of liquidity.
A)True
B)False
Q4) T-bills do not offer coupon payments but are sold at a discount from par value. A)True
B)False
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Chapter 7: Bond Markets
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Q1) A protective covenant may
A)specify all the rights and obligations of the issuing firm and the bondholders.
B)require the firm to retire a certain amount of the bond issue each year.
C)restrict the amount of additional debt the firm can issue.
D)none of the above
Q2) A sinking-fund provision is a requirement that the issuing firm retire a certain amount of the bond issue each year.
A)True
B)False
Q3) Structured notes are issued by firms to borrow funds, and the repayment of interest and principal is based on specified market conditions.
A)True
B)False
Q4) The coupon rate of most variable-rate bonds is tied to
A)the prime rate.
B)the discount rate.
C)LIBOR.
D)the federal funds rate.
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Chapter 8: Bond Valuation and Risk
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Q1) The credit risk premium tends to be larger for bonds that have longer terms to maturity.
A)True
B)False
Q2) A bond portfolio containing a large portion of zero-coupon bonds will be more favorably affected by declining interest rates than a bond portfolio containing no zero-coupon bonds.
A)True
B)False
Q3) Which of the following is most likely to cause a decrease in bond prices?
A)a decrease in money supply growth and an increase in the demand for loanable funds
B)a forecast of decreasing oil prices
C)a forecast of a stronger dollar
D)an increase in money supply growth and no change in the demand for loanable funds
Q4) The valuation of bonds is generally perceived to be more difficult than the valuation of equity securities.
A)True
B)False
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Chapter 9: Mortgage Markets
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Q1) The credit crisis is mostly attributed to the use of:
A)strict criteria applied by mortgage originators.
B)liberal criteria applied by mortgage originators.
C)very tough credit ratings applied to mortgages.
D)fixed-rate mortgages with long terms to maturity.
Q2) An investor in interest-only collateralized mortgage obligations (CMOs) would not be concerned that homeowners will prepay the underlying mortgages.
A)True
B)False
Q3) 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.
Q4) Borrowers who have a lower level of income relative to the periodic loan payments are more likely to default on their mortgages.
A)True
B)False
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Chapter 10: Stock Offerings and Investor Monitoring
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Q1) Since the Sarbanes-Oxley Act of 2002, the initial returns resulting from an IPO have generally been smaller.
A)True
B)False
Q2) The largest organized exchange, listing the largest firms, is the
A)New York Stock Exchange.
B)American Stock Exchange.
C)Midwest Stock Exchange.
D)Pacific Stock Exchange.
Q3) Initial public offerings (IPOs) perform ____ on the day following the IPO and ____ for periods of a year or longer after the IPO.
A)well; poorly
B)poorly; well
C)well; well
D)poorly; poorly
Q4) A firm will typically attempt to sell shares from a secondary offering
A)far below the prevailing market price.
B)far above the prevailing market price.
C)at the prevailing market price.
D)at the offer price of the IPO.
Page 12
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Chapter 11: Stock Valuation and Risk
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Sample Questions
Q1) Bolwork Inc. is expected to pay a dividend of $5 per share next year. Bolwork's dividends are expected to grow by 3 percent annually. The required rate of return for Bolwork stock is 15 percent. Based on the dividend discount model, a fair value for Bolwork stock is $____ per share.
A)33.33
B)166.67
C)41.67
D)60.00
Q2) The value-at-risk method is intended to warn investors about the potential maximum loss that could occur.
A)True
B)False
Q3) When evaluating stock performance, ____ measures variability that is systematically related to market returns; ____ measures total variability of a stock's returns.
A)beta; standard deviation
B)standard deviation; beta
C)intercept; beta
D)beta; error term
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Page 13
Chapter 12: Market Microstructure and Strategies
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Q1) A short-interest ratio of 20 or more indicates that many investors
A)believe that the stock price is currently overvalued.
B)believe that the stock price is currently undervalued.
C)are selling the stock short.
D)both A and C
Q2) A margin call from a broker means that the investor is required to provide more collateral (cash or stocks) or sell the stock.
A)True
B)False
Q3) Mark would like to purchase a stock priced at $70. The stock is not expected to pay any dividends in the coming year. Mark can either put up the entire amount and purchase the stock, or borrow half of the investment amount from his brokerage firm at an annual interest rate of 12 percent and put up the remainder. Mark thinks he can sell the stock for $100 after one year. If Mark borrows from his brokerage firm, his estimated return on the stock would be ____ percent.
A)42.86
B)85.71
C)73.71
D)30.00
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Page 14
Chapter 13: Financial Futures Markets
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Q1) The basis is the
A)difference between the price of a security and the price of a futures contract on the security.
B)gain or loss from hedging with futures contracts.
C)difference between a futures contract price and the initial deposit required.
D)price paid for a futures contract after accounting for transactions costs.
E)price paid for an option contract.
Q2) Dynamic asset allocation involves the switching between risky and low-risk investments by institutional investors over time in response to changing expectations.
A)True
B)False
Q3) Speculators in futures contracts that normally close out their futures positions on the same day that the positions were initiated are referred to as A)day traders.
B)hedgers.
C)closed-end traders.
D)position traders.
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Chapter 14: Options Markets
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Q1) Which of the following can normally be found in quotations for stock options provided by the financial media?
A)exercise price, expiration date, and implied volatility
B)exercise price, expiration date, and most recently quoted premium
C)expiration date, implied volatility, and trading volume
D)expiration date, most recently quoted premium, and implied volatility
Q2) Market makers
A)can execute stock option transactions for their customers.
B)can trade options for their own account.
C)are subject to the risk of losses from their positions in options.
D)benefit from the spread.
E)all of the above
Q3) Options on stock indexes representing non-U.S. stocks are ____; options exchanges have been established ____.
A)available; in numerous non-U.S. countries
B)not available; in numerous non-U.S. countries
C)available; only in the United States
D)not available; only in the United States
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Chapter 15: Swap Markets
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Q1) 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
Q2) A ____ swap allows the party making floating-rate payments to terminate the swap prior to maturity.
A)zero coupon-for-floating
B)forward
C)callable
D)putable
Q3) According to the text, any political aspects that prevent a counterparty on a swap from meeting its payment obligations represent
A)sovereign risk.
B)basis risk.
C)credit risk.
D)none of the above
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Chapter 16: Foreign Exchange Derivative Markets
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Q1) Purchasing Power Parity suggests that the exchange rate will on average change by a percentage that reflects the ____ differential between two countries.
A)income
B)interest rate
C)inflation
D)tax
Q2) ____ serve as financial intermediaries in the foreign exchange market by buying or selling currencies to accommodate customers.
A)Pension funds
B)International mutual funds
C)Insurance companies
D)Commercial banks
E)None of the above
Q3) A system whereby one currency is maintained within specified boundaries of another currency or unit of account is a
A)pegged system.
B)free float.
C)dirty float.
D)managed float.
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Page 18
Chapter 17: Commercial Bank Operations
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Sample Questions
Q1) Money market deposit accounts (MMDAs)
A)require a maturity of 6 months or longer.
B)allow a limited number of checks to be written against the account.
C)pay a higher interest rate than CDs.
D)none of the above
Q2) A ____ is a time deposit offered by some large banks to corporations, with a specific maturity date, minimum deposit of $100,000 or more, and a secondary market.
A)retail CD
B)negotiable CD
C)market CD
D)protective CD
Q3) Before establishing foreign branches, a U.S. bank must obtain the approval of the:
A)U.S. Treasury.
B)U.S. Commerce Department.
C)Federal Deposit Insurance Corporation.
D)Federal Reserve.
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Chapter 18: Bank Regulation
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Q1) Which of the following statements is incorrect?
A)The validity of a bank's estimated VAR is assessed with backtests in which the actual daily trading gains or losses are compared to the estimated VAR over a particular period.
B)Some banks supplement the VAR estimate with stress tests.
C)In general, the VAR model does not lend itself to determine capital requirements.
D)All of the statements above are correct.
Q2) As a result of the Reigle-Neal Act, bank customers have benefited because of lower costs to banks and because of convenience.
A)True
B)False
Q3) The opening of a commercial bank in the United States
A)does not require a charter.
B)always requires a charter from a state government.
C)always requires a charter from the federal government.
D)requires a charter from a state or the federal government.
E)requires a charter from both the state and federal government.
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Chapter 19: Bank Management
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Sample Questions
Q1) Banks can resolve cash deficiencies by
A)creating additional liabilities.
B)selling assets.
C)buying back common stock.
D)increasing dividend payouts.
E)A or B
Q2) Leskar Bank has $2 million in rate-sensitive liabilities and $3 million in rate sensitive assets. Leskar's gap ratio is ____.
A)1.5
B)0.67
C)$1 million
D)none of the above
Q3) Assume a bank accepts deposits on Australian dollars (A$) and makes some fixed-rate loans in British pounds. Which of the following would reduce the bank's profit margin?
A)the A$ appreciates against the pound
B)the A$ is stable against the pound
C)the A$ depreciates against the pound
D)the British interest rates increase
E)C and D
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Chapter 20: Bank Performance
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Q1) A(n) ____ in interest rates could reduce a commercial bank's expected cash flows because the interest paid on deposits may ____ than the interest earned on loans and investments.
A)increase; increase to a greater degree
B)increase; increase to a lesser degree
C)decrease; increase to a greater degree
D)decrease; increase to a lesser degree
Q2) Net interest income is the difference between gross interest income and interest expenses and is measured as a percentage of A)liabilities.
B)shareholder's equity.
C)assets.
D)revenues.
Q3) Which of the following factors affecting a bank's gross interest income is not influenced by the bank's policy decisions?
A)maturity and rate sensitivity of the bank's assets
B)market interest rate movements
C)the bank's loan rate
D)composition of the bank's assets
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Page 22
Chapter 21: Thrift Operations
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Sample Questions
Q1) ____ risk is probably the least concern for savings institutions.
A)Liquidity
B)Exchange rate
C)Credit
D)Interest rate
Q2) A contract that allows for the purchase of a specified debt security for a specified price at a future point in time is known as a(n)
A)interest rate futures contract.
B)interest rate swap contract.
C)interest cap contract.
D)security swap contract.
Q3) ____ are not a main source of funds for savings institutions.
A)Deposits
B)Borrowed funds
C)Capital
D)Mortgages
Q4) In general, savings institutions are larger than commercial banks.
A)True
B)False
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Chapter 22: Finance Company Operations
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Q1) Compared to other lending financial institutions, finance companies have a ____ loan delinquency rate, and the average rate charged on loans is ____ on average.
A)lower; lower
B)lower; higher
C)higher; higher
D)higher; lower
Q2) Consumer finance companies sometimes provide Business finance companies to individuals.
A)True
B)False
Q3) 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
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Chapter 23: Mutual Fund Operations
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Q1) The composition of asset allocation funds
A)is focused completely on one type of security as specified by the particular mutual fund.
B)is fixed and not altered by the mutual fund managers.
C)A and B
D)none of the above
Q2) A(n) ____ fund contains a sales charge.
A)load
B)no-load
C)closed-end
D)open-end
E)none of the above
Q3) Exchange traded funds can be
A)traded throughout the day.
B)purchased on margin.
C)sold short.
D)all of the above
Q4) Shares of open-end mutual funds are purchased and sold on exchanges.
A)True
B)False
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Chapter 24: Securities Operations
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Q1) Which of the following does not play a role in regulating securities trading?
A)National Association of Securities Dealers
B)Resolution Trust Corporation
C)New York Stock Exchange
D)Federal Reserve
Q2) The fees that securities firms charge for advising clients on a possible merger are typically dependent on whether the merger takes place.
A)True
B)False
Q3) Even after new stock is issued, a securities firm may continue to provide advice on the timing, amount, and terms of future financing.
A)True
B)False
Q4) Securities firms avoided exposure to mortgages during the credit crisis because they sold their mortgage holdings before the crisis began.
A)True
B)False
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26
Chapter 25: Insurance and Pension Fund Operations
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Q1) Pension funds managed by life insurance companies are normally referred to as A)trust portfolios.
B)insured plans.
C)matched plans.
D)projective plans.
Q2) If a pension fund holds long-term, fixed-rate bonds, the market value of the portfolio will ____ during periods when interest rates ____.
A)increase; increase
B)decrease; increase
C)decrease; decrease D)none of the above
Q3) Mortgage insurance protects:
A)homeowners against damage to their home such as from storms or fire.
B)homeowners in the event that they cannot make their mortgage payments.
C)the lender who provided the mortgage in the event that the homeowner defaults on the mortgage.
D)all of the above
Q4) Group insurance policies are very popular for employers and employees.
A)True
B)False
Page 27
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