FIN 413 Final Exam Questions With Complete Solutions
A bank's assets... Correct Answers Should include a big amount
of loans
About how many banks use derivatives? Correct Answers 1420
banks
About how many dollars of mortgage pools were outstanding in
2016? Correct Answers $7.88 Trillion
About what percentage of mortgages are securitized? Correct
Answers About 50% to 60%
Are all banks' domestic deposits insured? Correct Answers No,
just $250,000 per account type, per person, per bank
Argentina has refused to pay loans made to it by foreign
institutions three times. This is an example of: Correct Answers
Sovereign risk
As an investor in a pass-through, what type of risk are you
exposed to? Correct Answers Default risk and prepayment risk
As an investor, which is riskier: general obligation or revenue-
backed bonds? Correct Answers General obligation bonds
As of June 2019, how many credit unions were there and how
many accounts did they hold? Correct Answers 5308 credit
unions, holding 118.3 million accounts
,Banks are really good at two important skills when issuing
loans. What are those two skills? Correct Answers Screening
and monitoring
Besides deposits, how else do banks fund themselves? Correct
Answers Through long-term debt and equity
Briefly, yet explicitly, state one way that mutual funds are
different from hedge funds Correct Answers Hedge funds
require larger capital investments from shareholders than mutual
funds do, and can take riskier strategies
Can a bank fully escape credit risk? Correct Answers No
Can a coupon on a US Treasury be any non-negative number?
Correct Answers No
Can debt be traded? Correct Answers Yes
Conceptually, what is the Fed Funds rate? Correct Answers The
rate charged by banks to borrow excess reserves from each other
to meet Fed reserve requirements
Conceptually, what is the forward rate? Correct Answers A
future, short-term interest rate
Consider a 5-year 2.5% TIPS bond that was issued on October
15th, 2018. What days should it make coupon payments?
Correct Answers October 15th and April 15th
,Consider a bank with a large amount of unused commercial lines
of credit. What risks is this bank exposed to? Correct Answers
Credit, off-balance sheet, and interest rate risk
Consider an American bank that invests in Euro-denominated
Italian Sovereign bonds. What risks is this bank exposed to?
Correct Answers Foreign exchange, Sovereign, Credit, and
liquidity risk
Consider an insurance company that underwrites property
insurance along the Florida coast and a huge hurricane just blew
through causing 30% of its customers catastrophic damage. The
insurance company invests its premiums 15% in cash, 15% in
Treasuries, 45% in Corporate and Sovereign Bonds, and 25% in
equity. What kinds of risk is the insurance company exposed to?
Correct Answers Liquidity, interest rate, credit, foreign
exchange, sovereign, and insolvency risk
Consider two banks, each with $100 million in assets. Rock
Chalk Bank has $40 million in loans and $60 million in cash and
Treasuries. Jayhawk Bank has $80 million in loans, $5 million
in cash, and $15 million in municipal bonds. What if Rock
Chalk Bank has $25 million in unused commitment sand
Jayhawk Bank has no off-balance sheet activity. Does this affect
your risk assessment? Why? Correct Answers Yes and no. The
unused commitments could hit the balance sheet, but Rock
Chalk Bank has enough cash to offset the additional loans and
would still be more stable than Jayhawk Bank
Consider two banks, each with $100 million in assets. Rock
Chalk Bank has $40 million in loans and $60 million in cash and
, Treasuries. Jayhawk Bank has $80 million in loans, $5 million
in cash, and $15 million in municipal bonds. Which bank is
riskier and why? Correct Answers Jayhawk bank, it has less
cash and more riskier assets like loans and municipal bonds
Consider two banks, each with $100 million in assets. Rock
Chalk Bank has $40 million in loans and $60 million in cash and
Treasuries. Jayhawk Bank has $80 million in loans, $5 million
in cash, and $15 million in municipal bonds. Which bank should
be required to hold more capital? Correct Answers Jayhawk
Bank
Do many financial contracts rely upon LIBOR? Correct
Answers Yes, about $200 Trillion do
Does the draw down of an unused commitment affect a bank's
balance sheet? Correct Answers Yes
Does the draw down of an unused commitment affect a bank's
income statement? Correct Answers Not immediately, but
eventually interest and fee income from the draw down do hit
the income statement
Does the US Treasury issue callable securities now? Correct
Answers No
Equity capital at commercial banks is usually about ______ of
total liabilities and equity Correct Answers 11 percent
A bank's assets... Correct Answers Should include a big amount
of loans
About how many banks use derivatives? Correct Answers 1420
banks
About how many dollars of mortgage pools were outstanding in
2016? Correct Answers $7.88 Trillion
About what percentage of mortgages are securitized? Correct
Answers About 50% to 60%
Are all banks' domestic deposits insured? Correct Answers No,
just $250,000 per account type, per person, per bank
Argentina has refused to pay loans made to it by foreign
institutions three times. This is an example of: Correct Answers
Sovereign risk
As an investor in a pass-through, what type of risk are you
exposed to? Correct Answers Default risk and prepayment risk
As an investor, which is riskier: general obligation or revenue-
backed bonds? Correct Answers General obligation bonds
As of June 2019, how many credit unions were there and how
many accounts did they hold? Correct Answers 5308 credit
unions, holding 118.3 million accounts
,Banks are really good at two important skills when issuing
loans. What are those two skills? Correct Answers Screening
and monitoring
Besides deposits, how else do banks fund themselves? Correct
Answers Through long-term debt and equity
Briefly, yet explicitly, state one way that mutual funds are
different from hedge funds Correct Answers Hedge funds
require larger capital investments from shareholders than mutual
funds do, and can take riskier strategies
Can a bank fully escape credit risk? Correct Answers No
Can a coupon on a US Treasury be any non-negative number?
Correct Answers No
Can debt be traded? Correct Answers Yes
Conceptually, what is the Fed Funds rate? Correct Answers The
rate charged by banks to borrow excess reserves from each other
to meet Fed reserve requirements
Conceptually, what is the forward rate? Correct Answers A
future, short-term interest rate
Consider a 5-year 2.5% TIPS bond that was issued on October
15th, 2018. What days should it make coupon payments?
Correct Answers October 15th and April 15th
,Consider a bank with a large amount of unused commercial lines
of credit. What risks is this bank exposed to? Correct Answers
Credit, off-balance sheet, and interest rate risk
Consider an American bank that invests in Euro-denominated
Italian Sovereign bonds. What risks is this bank exposed to?
Correct Answers Foreign exchange, Sovereign, Credit, and
liquidity risk
Consider an insurance company that underwrites property
insurance along the Florida coast and a huge hurricane just blew
through causing 30% of its customers catastrophic damage. The
insurance company invests its premiums 15% in cash, 15% in
Treasuries, 45% in Corporate and Sovereign Bonds, and 25% in
equity. What kinds of risk is the insurance company exposed to?
Correct Answers Liquidity, interest rate, credit, foreign
exchange, sovereign, and insolvency risk
Consider two banks, each with $100 million in assets. Rock
Chalk Bank has $40 million in loans and $60 million in cash and
Treasuries. Jayhawk Bank has $80 million in loans, $5 million
in cash, and $15 million in municipal bonds. What if Rock
Chalk Bank has $25 million in unused commitment sand
Jayhawk Bank has no off-balance sheet activity. Does this affect
your risk assessment? Why? Correct Answers Yes and no. The
unused commitments could hit the balance sheet, but Rock
Chalk Bank has enough cash to offset the additional loans and
would still be more stable than Jayhawk Bank
Consider two banks, each with $100 million in assets. Rock
Chalk Bank has $40 million in loans and $60 million in cash and
, Treasuries. Jayhawk Bank has $80 million in loans, $5 million
in cash, and $15 million in municipal bonds. Which bank is
riskier and why? Correct Answers Jayhawk bank, it has less
cash and more riskier assets like loans and municipal bonds
Consider two banks, each with $100 million in assets. Rock
Chalk Bank has $40 million in loans and $60 million in cash and
Treasuries. Jayhawk Bank has $80 million in loans, $5 million
in cash, and $15 million in municipal bonds. Which bank should
be required to hold more capital? Correct Answers Jayhawk
Bank
Do many financial contracts rely upon LIBOR? Correct
Answers Yes, about $200 Trillion do
Does the draw down of an unused commitment affect a bank's
balance sheet? Correct Answers Yes
Does the draw down of an unused commitment affect a bank's
income statement? Correct Answers Not immediately, but
eventually interest and fee income from the draw down do hit
the income statement
Does the US Treasury issue callable securities now? Correct
Answers No
Equity capital at commercial banks is usually about ______ of
total liabilities and equity Correct Answers 11 percent
