Investment Banking
Test Questions
Course Introduction
This course provides an in-depth exploration of investment banking, covering its key functions such as underwriting, mergers and acquisitions, asset management, and capital raising activities. Students will learn about the structure and operations of investment banks, the regulatory environment, and the role of investment bankers in guiding corporate clients through complex financial transactions. Emphasis is placed on financial modeling, valuation techniques, risk assessment, and ethical considerations in investment banking. Real-world case studies and current industry practices equip students with practical skills and insights necessary for pursuing careers in investment banking and related financial sectors.
Recommended Textbook
Financial Markets and Institutions 8th Edition by Frederic Mishkin
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Chapter 1: Why Study Financial Markets and Institutions?
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Sample Questions
Q1) The largest one-day drop in the history of the American stock markets occurred in A) 1929.
B) 1987.
C) 2000.
D) 2001. Answer: B
Q2) Holding everything else constant,as the dollar strengthens foreigners will buy more U.S.exports.
A)True
B)False Answer: False
Q3) In a bull market stock prices are rising,on average.
A)True
B)False Answer: True
Q4) Interest rates are determined in the bond markets.
A)True
B)False Answer: True
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Chapter 2: Overview of the Financial System
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Sample Questions
Q1) The New York Stock Exchange is an example of a primary market.
A)True
B)False
Answer: False
Q2) Fire and casualty insurance companies are what type of intermediary?
A) Contractual savings institution
B) Depository institutions
C) Investment intermediaries
D) None of the above
Answer: A
Q3) Which of the following statements about financial markets and securities are true?
A) A bond is a long-term security that promises to make periodic payments called dividends to the firm's residual claimants.
B) A debt instrument is intermediate term if its maturity is less than one year.
C) A debt instrument is long term if its maturity is ten years or longer.
D) The maturity of a debt instrument is the time (term) that has elapsed since it was issued.
Answer: C
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Chapter 3: What Do Interest Rates Mean and What Is Their
Role in Valuation?
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Sample Questions
Q1) (I)Prices of longer-maturity bonds respond more dramatically to changes in interest rates. (II)Prices and returns for long-term bonds are less volatile than those for short-term bonds.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.
Answer: A
Q2) When a bond's price falls,its yield to maturity ________ and its current yield
A) falls; falls
B) rises; rises
C) falls; rises
D) rises; falls
Answer: B
Q3) The real interest rate is actually the ex ante real interest rate because it is adjusted for actual changes in the price level.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Why Do Interest Rates Change?
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Sample Questions
Q1) When the expected inflation rate decreases,the demand for bonds ________,the supply of bonds ________,and the interest rate ________.
A) increases; increases; rises
B) decreases; decreases; falls C) increases; decreases; falls D) decreases; increases; rises
Q2) When people begin to expect a large run up in stock prices,the demand curve for bonds shifts to the ________ and the interest rate ________.
A) right; rises
B) right; falls C) left; falls D) left; rises
Q3) A movement along the demand (or supply)curve occurs when the quantity demanded (or supplied)changes at each given price (or interest rate)of the bond in response to a change in some other factor besides the bond's price or interest rate.
A)True
B)False
Q4) What is the difference between systematic and nonsystematic risk?
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Chapter 5: How Do Risk and Term Structure Affect Interest
Rates?
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Sample Questions
Q1) When the corporate bond market becomes less liquid,other things equal,the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________.
A) right; right
B) right; left
C) left; left
D) left; right
Q2) If the expected path of one-year interest rates over the next four years is 5 percent,4 percent,2 percent,and 1 percent,then the pure expectations theory predicts that today's interest rate on the four-year bond is
A) 1 percent.
B) 2 percent.
C) 4 percent.
D) none of the above.
Q3) The risk structure of interest rates describes the relationship between the interest rates of different bonds with the same maturities.
A)True
B)False
Q4) How would a severe recession affect the risk premium on corporate bonds?
Page 7
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Chapter 6: Are Financial Markets Efficient?
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Sample Questions
Q1) Which of the following does not weaken the efficient markets hypothesis?
A) Mean reversion
B) Success of buy-and-hold strategy
C) January effect
D) Excessive volatility
Q2) Evidence in favor of market efficiency does not include
A) random-walk behavior.
B) technical analysis.
C) performance of investment analysts and mutual funds.
D) the January effect.
Q3) Important implications of the efficient market hypothesis include which of the following?
A) Future changes in stock prices should, for all practical purposes, be unpredictable.
B) Stock prices will respond to announcements only when the information in these announcements is new.
C) Sometimes a stock price declines when good news is announced.
D) All of the above.
E) Only A and B of the above.
Q4) What is a rational bubble?
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Chapter 7: Why Do Financial Institutions Exist?
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Sample Questions
Q1) An advantage of providing multiple financial services within one financial institution is that it
A) lowers information costs.
B) develops broader long-term relationships with customers.
C) both A and B of the above.
D) none of the above.
Q2) The free-rider problem
A) occurs when people who do not pay for information take advantage of the information other people have to pay for.
B) suggests that the private sale of information will only be a partial solution to the lemons problem.
C) prevents the private market from producing enough information to eliminate all the asymmetric information that leads to adverse selection.
D) all of the above.
Q3) Why should we be concerned about conflicts of interest in the financial services industry?
Q4) How does the U.S.differ from other countries with respect to the source of funding for nonfinancial business?
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Chapter 8: Why Do Financial Crises Occur and
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Sample Questions
Q1) In addition to having a direct effect on increasing adverse selection problems,increases in interest rates also promote financial crises by ________ firms' and households' interest payments,thereby ________ their cash flow.
A) increasing; increasing
B) increasing; decreasing
C) decreasing; increasing
D) decreasing; decreasing
Q2) Describe a special purpose vehicle. How are they related to the creation of collateralized debt obligations?
Q3) Which of the following factors led up to the Greece debt crisis in 2009-2010?
A) Speculative attacks on the euro and a rise in actual and expected inflation
B) A decline in tax revenues resulting from a contraction in economic activity
C) A double-digit budget deficit
D) All of the above
E) only B and C of the above
Q4) Discuss why some view the Fed as a culprit in the U.S.housing bubble during the 2000s.
Q5) Describe how the European debt crisis evolved.
Q6) Explain the relationship between agency theory and a financial crisis.
Page 10
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Chapter 9: Central Banks and the Federal Reserve System
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Sample Questions
Q1) The many regional Federal Reserve banks resulted from a compromise between parties favoring
A) the establishment of a central bank and those opposed to its establishment.
B) a private central bank and those favoring a government institution.
C) the establishment of the Board of Governors in Washington, D.C., and those preferring its establishment in New York City.
D) none of the above.
Q2) Which of the following functions are not performed by any of the twelve regional Federal Reserve banks?
A) Check clearing
B) Conducting economic research
C) Setting interest rates payable on time deposits
D) Issuing new currency
Q3) The theory of bureaucratic behavior when applied to the Fed helps to explain why the Fed
A) is supportive of congressional attempts to limit the central bank's autonomy.
B) is secretive about the conduct of future monetary policy.
C) sought less control over banks in the 1980s.
D) is willing to take on powerful groups that may threaten its autonomy.
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Chapter 10: Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics
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Sample Questions
Q1) If the Fed uses the federal funds rate as an interest rate target,fluctuations in the reserves demand curve will cause ________ to fluctuate.
A) nonborrowed reserves
B) the federal funds interest rate
C) Treasury bill interest rates
D) the inflation rate
Q2) What is the argument for the Fed paying interest to banks on required reserves? Are there good arguments for not doing this?
Q3) The Federal Open Market Committee makes the Fed's decisions on the purchase or sale of government securities,but these purchases or sales are executed by the Federal Reserve Bank of
A) Chicago.
B) Boston.
C) New York.
D) San Francisco.
Q4) Discuss some of the issues central banks will face maintaining price stability as a short-run goal?
Q5) Compare the advantages and disadvantages of monetary targeting and inflation targeting.
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Chapter 11: The Money Markets
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Sample Questions
Q1) If the Fed wants to raise the federal funds interest rate,it will ________ securities to ________ the banking system.
A) sell; add reserves to B) sell; remove reserves from C) buy; add reserves to D) buy; remove reserves from
Q2) Government securities dealers frequently engage in repos to A) manage liquidity.
B) take advantage of anticipated changes in interest rates.
C) lend or borrow for a day or two with what is essentially a collateralized loan.
D) do all of the above.
E) do only A and B of the above.
Q3) In general,money market instruments are low-risk,high-yield securities.
A)True
B)False
Q4) Interest rates on banker's acceptances are low because the risk of default is very low.
A)True
B)False
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Chapter 12: The Bond Market
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Sample Questions
Q1) A requirement in the bond indenture that the firm pay off a portion of the bond issue each year is called
A) a sinking fund.
B) a call provision.
C) a restrictive covenant.
D) a shelf registration.
Q2) The primary issuers of capital market securities include
A) the federal and local governments.
B) the federal and local governments, and corporations.
C) the federal and local governments, corporations, and financial institutions.
D) local governments and corporations.
Q3) Most municipal bonds are revenue bonds rather than general obligation bonds. A)True B)False
Q4) What types of risks should bondholders be aware of and how do these affect bond prices and yields?
Q5) What is the difference between a general obligation bond and a revenue bond?
Q6) What role do restrictive covenants play in bond markets?
Q7) Distinguish between general obligation and revenue municipal bonds.
Q8) Why don't federal,state,and local governments issue equity claims?
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Chapter 13: The Stock Market
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Sample Questions
Q1) Holding other things constant,a stock's value will be highest if its dividend growth rate is
A) 15%.
B) 10%.
C) 5%.
D) 2%.
Q2) What are the advantages and disadvantages of exchange traded funds (ETFs)fro trading stocks?
Q3) A stock currently sells for $30 per share and pays $1.00 per year in dividends.What is an investor's valuation of this stock if he expects it to be selling for $37 in one year and requires a 12 percent return on equity investments?
A) $38
B) $33.50
C) $34.50
D) $33.93
Q4) The Gordon growth model assumes that a stock's dividend grows at a constant rate forever.
A)True
B)False
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Chapter 14: The Mortgage Markets
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Sample Questions
Q1) The interest rate borrowers pay on their mortgages is determined by
A) current long-term market rates.
B) the term.
C) the number of discount points.
D) all of the above.
Q2) Borrowers tend to prefer ________ to ________,whereas lenders prefer ________.
A) fixed-rate loans; ARMs; fixed-rate loans
B) ARMs; fixed-rate loans; fixed-rate loans
C) fixed-rate loans; ARMs; ARMs
D) ARMs; fixed-rate loans; ARMs
Q3) The percentage of the total loan paid back immediately when a mortgage loan is obtained,which lowers the annual interest rate on the debt,is called
A) discount points.
B) loan terms.
C) collateral.
D) down payment.
Q4) Explain the features of mortgage loans that are designed to reduce the likelihood of default.
Q5) How has the modern mortgage market changed over recent years?
Page 16
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Chapter 15: The Foreign Exchange Market
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Sample Questions
Q1) The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries.
A) theory of purchasing power parity
B) law of one price
C) theory of money neutrality
D) quantity theory of money
Q2) If the interest rate on foreign deposits increases,holding everything else constant,
A) the expected return on these deposits must also increase.
B) the expected return on domestic deposits must decrease.
C) the expected return on domestic deposits must increase.
D) both A and B of the above.
E) both A and C of the above.
Q3) In the long run,________ affect the exchange rate.
A) relative price levels
B) tariffs and quotas
C) productivity
D) all of the above.
Q4) What are some of the long-run determinants of the exchange rate?
Q5) Explain the theory of purchasing power parity.
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Chapter 16: The International Financial System
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Sample Questions
Q1) A central bank's international reserves are its holdings of assets denominated in foreign currencies.
A)True
B)False
Q2) Under a fixed exchange rate regime,if the domestic currency is initially ________,that is ________ par,the central bank must intervene to buy the domestic currency by selling foreign assets.
A) overvalued; below B) overvalued; above
C) undervalued; below
D) undervalued; above
Q3) Because other countries hold dollars as international reserves,a U.S.official reserve transactions deficit can be financed by
A) an increase in U.S. international reserves.
B) an increase in foreign holdings of dollars.
C) a decrease in foreign holdings of dollars.
D) only A and B of the above.
Q4) Briefly explain what it means to be a "reserve-currency" country.What are the advantages? Can you think of any disadvantages?
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Chapter 17: Banking and the Management of Financial Institutions
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Sample Questions
Q1) Which of the following statements is an accurate description of modern liability management?
A) Greater flexibility in liability management has allowed banks to increase the proportion of their assets held in loans.
B) New financial instruments enable banks to acquire funds quickly.
C) The introduction of negotiable CDs have significantly reduced the percentage of funds that banks borrow from one another to finance loans.
D) All of the above have occurred since 1960.
E) Only A and B of the above have occurred since 1960.
Q2) Explain how a capital crunch can lead to a credit crunch in our economy.
Q3) Given a bank's return on assets,the higher the bank capital,the higher the return for the owners of the bank.
A)True
B)False
Q4) The value-at-risk method for estimating a bank's risk exposure measures the losses a bank could incur under a worst-case scenario.
A)True
B)False
Page 19
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Chapter 18: Financial Regulation
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Sample Questions
Q1) Describe the CAMELS rating system used by bank examiners.
Q2) Because asymmetric information problems in the banking industry are a fact of life throughout the world,bank regulation in other countries is similar to that in the United States.
A)True
B)False
Q3) The existence of deposit insurance can increase the likelihood that depositors will need deposit protection,as banks with deposit insurance
A) are likely to take on greater risks than they otherwise would.
B) are likely to be too conservative, reducing the probability of turning a profit.
C) are likely to regard deposits as an unattractive source of funds due to depositors' demands for safety.
D) are placed at a competitive disadvantage in acquiring funds.
Q4) The Depository Institutions Deregulation and Monetary Control Act of 1980
A) approved NOW accounts nationwide.
B) restricted the use of ATS accounts.
C) imposed interest rate ceilings on bank loans.
D) did all of the above.
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Chapter 19: Banking Industry: Structure and Competition
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Q1) In the usual GNMA pass-through security,the ________ has direct ownership of a pro-rata share of the portfolio of mortgage loans.
A) seller
B) buyer
C) financial institution issuing the mortgage loan
D) financial institution securitizing the mortgage loan
Q2) The Federal Reserve Act required all ________ banks to become members of the Federal Reserve System,while ________ banks could choose to become members of the system.
A) state; national
B) state; municipal
C) national; state
D) national; municipal
Q3) What new forms of banking have been spawned by the advances in information technology of the past two decades? Is it likely that traditional banks will disappear as a result of these innovations? Why?
Q4) What financial innovations are best explained as attempts to avoid regulations?
Q5) Are bank consolidations and nationwide banking good things? Why?
Q6) Explain the innovations that have been created to lower interest-rate risk.
Page 21
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Chapter 20: The Mutual Fund Industry
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Sample Questions
Q1) Hedge funds have a minimum investment requirement of between $100,000 and $20 million,with the typical minimum investment being $1 million.
A)True
B)False
Q2) The near collapse of Long Term Capital Management was caused by
A) the high management fees charged by the fund's two Nobel Prize winners.
B) the fund's high leverage ratio of 20 to 1.
C) a sharp decrease in the spread between corporate bonds and Treasury bonds.
D) a sharp increase in the spread between corporate bonds and Treasury bonds.
E) the fund's shift away from a market-neutral investment strategy.
Q3) Which of the following is not a proposal to deal with abuses in the mutual fund industry?
A) Strictly enforce the 4:00 pm net asset value rule.
B) Make redemption fees mandatory.
C) Disclose compensation arrangements for investment advisers.
D) Increase the number of dependent directors.
Q4) What are the five benefits of mutual funds?
Q5) What is the difference between an open-end and a closed-end mutual fund?
Q6) What are two key differences between a traditional mutual fund and a hedge fund?
Q7) What benefits do mutual funds offer investors?
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Chapter 21: Insurance Companies and Pension Funds
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Sample Questions
Q1) Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices?
A) Collection of information and screening of potential policyholders
B) Risk-based premiums
C) Deductibles and coinsurance
D) All of the above
E) Only A and B of the above
Q2) The earliest form of insurance was ________ insurance.
A) life
B) health
C) automobile
D) property and casualty
Q3) Who has the strongest incentive to monitor the performance of individual pension plans such as Keoghs and IRAs? Explain.
Q4) Keogh plans and IRAs are
A) individual pension plans.
B) government pension plans.
C) corporate pension plans.
D) public pension plans.
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Chapter 22: Investment Banks, Security Brokers and Dealers,
and Venture Capital Firms
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Q1) In a ________,a security is sold between investors,and does not (necessarily)involve the corporation or government agency ultimately using the funds.
A) primary market
B) secondary market
C) capital market
D) money market
Q2) An additional perk of a private equity firm is that the profits for both CEOs and the partners are taxed at the 15% capital gains rate rather than the 35% rate they would suffer if the income was received as income.
A)True
B)False
Q3) Which of the following is the second phase in the life cycle of a venture capital deal?
A) A limited partnership is formed and funds are raised.
B) Funds are invested in start-up companies.
C) The venture firm exits the investment.
D) The venture firm seeks approval from the S.E.C.
Q4) What niche in the financial system do venture capital firms fill?
Q5) What is underwriting?
Page 24
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Chapter 23: Risk Management in Financial Institutions
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Q1) Effective screening and information collection together form an important principle of credit risk management.
A)True
B)False
Q2) Banks' attempts to solve adverse selection and moral hazard problems help explain loan management principles such as
A) screening and monitoring of loan applicants.
B) collateral and compensating balances.
C) credit rationing.
D) all of the above.
E) only A and B of the above.
Q3) Referring to Table 23.2,if interest rates rise by 5 percentage points,then bank profits (measured using gap analysis)will
A) decline by $0.5 million.
B) decline by $1.5 million.
C) decline by $2.5 million.
D) increase by $2.0 million.
Q4) What is gap analysis and why is it important to a bank?
Q5) What is duration gap analysis and why is it important to a bank?
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Chapter 24: Hedging with Financial Derivatives
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Q1) A forward contract is more flexible than a futures contract.
A)True
B)False
Q2) Futures contracts are regularly traded on the A) Chicago Board of Trade.
B) New York Stock Exchange.
C) American Stock Exchange.
D) Chicago Board Options Exchange.
Q3) Using options to control interest-rate risk reduces the chance of a loss but increases the chance of a gain.
A)True
B)False
Q4) Which of the following features of Treasury bond futures contracts were not designed to increase liquidity?
A) standardized contracts
B) traded up until maturity
C) not tied to one specific type of bond
D) can be closed with offsetting trade
Q5) Explain the difference between a macro hedge and a micro hedge for a financial institution.
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Chapter 25: Financial Crises In Emerging Market Economies
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Q1) In contrast to most advanced economies that typically denominate debt in domestic currency,emerging market economies denominate many debt contracts in foreign currency.
A)True
B)False
Q2) In Stage Three of a financial crisis in an emerging market economy,the currency mismatch refers to ________.
A) the mismatch between size of the actual notes and the high price levels need to buy basic goods
B) the difference in the currency FX markets over time
C) the mismatch between the currency of the stock and bond markets
D) the fact that most debt in emerging market economies is denominated in U.S. dollars
Q3) In Argentina,the primary force leading to their financial crisis in 2001 was ________.
A) fiscal mismanagement on the part of the government
B) financial liberalization
C) fraud in financial markets
D) all of the above
E) only B and C of the above
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Chapter 26: Savings Associations and Credit Unions
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Q1) Why have commercial banks gone to court in an effort to limit the activities of credit unions?
Q2) The purpose of reserve requirements
A) is to limit the expansion of the money supply.
B) is to ensure adequate liquidity for the institutions.
C) is both A and B of the above.
D) is neither A nor B of the above.
Q3) Credit unions are owned by stockholders.
A)True
B)False
Q4) "Zombie S&Ls"
A) paid above market interest rates to attract deposits to fuel their lending boom.
B) offered loans at below market interest rates to expand their lending.
C) drove down the profitability of solvent S&Ls, threatening to turn them into "zombies" too.
D) did all of the above.
E) did only A and B of the above.
Q5) What factors contributed to creating the thrift crisis?
Q6) How has the thrift industry been transformed since FIRREA?
Page 28
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Chapter 27: Finance Companies
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Sample Questions
Q1) A balloon loan requires
A) multiple payments at odd, random intervals.
B) periodic payments of principle and interest.
C) a single large payment at the loan's maturity to retire the debt.
D) a steadily increasing payment (floating balloon) to retire the debt.
Q2) Finance companies face much stricter regulations than commercial banks.
A)True
B)False
Q3) Commercial paper is an important source of funding for finance companies.As presented in the Consolidated Finance Company Balance Sheet,commercial paper represents about ________ of their liabilities.
A) 3.9%
B) 5.8%
C) 12.5%
D) 20.0%
Q4) A sales finance company differs from a captive finance company primarily in regulations and other restrictions.
A)True B)False
Q5) Describe the process of factoring? When and why is it used?
Page 29
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