Exam 2 Flashcards
During a so-called “flight to safety” the yield on US treasuries tend to ____ well the price of US treasuries tends to ____
decrease, increase
A company has issued a one-year coupon bond with a face value of $10,000. Suppose that there is a 25% probability that the company will default on the bond, in that case, the bond is worth $1,000. What price should the bond sell for today?
$7,750
In general, a bank makes its profits by gathering ____ and issuing ____
A. Short-term assets, long-term assets
B. Short-term assets, long-term liabilities
C. Short-term liabilities, long-term liabilities
D. Short-term liabilities, long-term assets
D. Short-term liabilities, long-term assets
Which of the following statements is true?
A. Leverage increases expected return and increases risk
B. Leverage increases expected return but has no effect on risk
C. Leverage decreases expected return and increases risk
D. Leverage has no effect on expected return but increases risk
a. Leverage increases expected return and increases risk
Which of the following will increase the npv of a project?
A. An increase in the discount rate
B. A decrease in the amount of initial cash investment
C. A decrease in the final period cash flow
D. Both b and c will increase and npv
E. All would decrease npv
b. A decrease in the amount of initial cash investment
The Federal Reserve’s open market operations influence interest rates that banks charge each other for overnight loans by changing ____ on the banking system’s balance sheet
A. Amount of assets B. Amount of labilities C. Amount of capital D. Composition of assets E. Composition of liabilities
D. Composition of assets
If a bond is upgraded, we expect the yield to ____ and the assets of a bank that owned the bond to ____.
A. Rise, fall
B. Fall, rise
C. Rise, rise
D. Fall, fall
B. Fall, rise
If a bond is downgraded, we expect its risk premium to ____ and the assets of a bank that owned the bond to ____
A. Rise, rise
B. Fall, fall
C. Rise, fall
D. Fall, rise
C. Rise, fall
The probability of a bond defaulting has decreased. In general,
A. The risk premium will increase B. The price will increase C. The yield will increase D. The old will decrease E. Both B and D are correct
e. Both B and D are correct
A debt covenant is designed to limit risk taking by borrowers, this is an attempt to solve
A. A moral hazard problem
B. An adverse selection problem
C. A principal-agent problem
D. An access to Capital problem
a. A moral hazard problem
Reserves are a ____ to the bank
A. Liability B. Asset C. Equity D. Revenue E. None of the above
B. Asset
A bank lends existing cash as a mortgage, this mortgage is a ____ to the bank
A. An increase in assets B. An increase in equity C. A decrease in liability D. A decrease in assets E. None of the above
e. None of the above
composition in assets
If a bank’s assets increase while its capital stays the same, then
A. Its liabilities must increase B. It's leverage must increase C. Its leverage must decrease D. Both A and B are correct E. Both A and C are correct
D. Both A and B are correct
If a bank shifts its assets from a 30-year treasury bond to a 30-year mortgage, it’s
A. Liquidity risk has increased B. Credit risk has decreased C. Liquidity risk has decreased D. Interest rate risk has increased E. Both A and D are correct
a. Liquidity risk has increased
A bank has a lot of long-term bonds held in assets, as interest rates rise, this will tend to ____ the bank’s blank.
A. Increase, assets B. Reduce, liabilities C. Increased, capital D. Increased, liabilities E. None of the above
e. None of the above
decrease, assets
When the Federal Reserve buys bonds from a bank, the Fed’s assets ____ and its liabilities ____
A. Increase, increase
B. Decrease, decrease
C. Increase, decrease
D. Decrease, increase
a. Increase, increase
A bank run is an extreme example of
A. Foreign exchange risk B. Trading risk C. Default risk D. Liquidity risk E. Interest rate
D. Liquidity risk
In general, a bank would prefer to attract deposits in the form of ____ because these deposits help to minimize ____.
A. Demand deposits, liquidity risk
B. Large certificates of deposit, liquidity risk
C. Checking accounts, credit risk
D. Savings accounts, default risk
B. Large certificates of deposit, liquidity risk
When the Federal Reserve provides a loan to a bank, the bank’s assets ____ and its liabilities ____, while its capital ____.
A. Increase, increase, increase B. Increase, stays the same, increase C. Decrease, stays the same, decrease D. Increase, increase, stays the same E. Stay the same, increase, stay the same
D. Increase, increase, stay the same
If a bank has $90 million in assets and capital of $10 million, its debt to equity ratio is
a. 5
b. 6
C. 9
D. 10
e. None of the above
e. None of the above
8
Liquidity risk is a potential problem for banks because
A. A bank funds itself with short-term assets
B. A Bank funds itself with short-term liabilities
C. A Bank funds itself with long-term assets
D. A Bank funds itself with long-term liabilities
B. A Bank funds itself with short-term liabilities
In general, banks would like to ____ leverage and increase ____ because this tends to increase profits.
A. Increase, capital B. Decrease, capital C. Increase, liabilities D. Decrease, assets E. None of the above
C. Increase, liabilities
Too-big-to-fail banks are a ____ problem because the banks have an incentive to ____ the riskiness of their activities
A. Adverse selection, increase
B. Asymmetric information, decrease
C. moral hazard, increase
D. Moral hazard, decrease
C. Moral hazard, increase
The Glass-Steagall act of 1938 required commercial banks to
A. Sell off their investment banking operations
B. Eliminate the FDIC
C. Required Federal Charter Banks to meet their branding restrictions of the states
D. Required all states Banks to get Federal charters
a. Required commercial Banks to sell off their Investment Banking operations
The Gramm-Leach-Bliley Act
A. Repealed the Riegle-Neal Interstate Banking and Branching Efficiency Act.
B. Repealed the Glass-Steagall Act prohibition of merging between commercial banks and insurance or security firms
C. Repealed the McFadden acts restriction on Bank branching
D. Reinforced the Glass-Steagall Act limitation on Commercial banking’s ability to merge with insurance or security firms by increasing the penalties for doing so
B. Repealed the Glass-Steagall Act prohibition of mergers between commercial banks and insurance or security firms
The principal-agent problem is a
A. Potential problem due to adverse selection
B. When stockholders are not acting in the best interest of managers
C. A potential problem due to moral hazard
D. Due to managers not being able to monitor stockholder behavior
E. Both B and C
c. A potential problem do to moral hazard
A bank has profits of $1,000 with a capital base of $1,000 and a debt to equity ratio of 5. The bank has a ROA of ____.
A. 10% B. 15% C. 20% D. 25% E. None of the above
e. None of the above 16.67%
