FIN 413 EXAM BANK WITH ACTUAL QUESTIONS AND
VERIFIED ANSWERS LATEST UPDATE RATED A+(financial
management)
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?
Jayhawk bank, it has less cash and more riskier assets like loans and municipal bonds
What is the difference between APR and EAR?
APR reflects simple interest; EAR captures compounded interest
Name one circumstance in which you would use APR
We use APR to calculate periodic interest rates
Name one circumstance in which you would use EAR
We use EAR to compare bank savings account interest rates that have different rates and
compounding frequencies
Provide two classifications of financial markets and an example security or transaction for
each
Primary Market - new securities issued
Secondary Market - existing securities are traded
Provide two examples of money market instruments (securities)
3-month Treasury Bill and Commercial Paper
Provide two examples of capital market instruments (securities)
Preferred Stock and 10-Year Corporate Bonds
Can debt be traded?
Yes
How can we distinguish between two major types of financial institutions?
,Whether they accept deposits
How do dollars flow between suppliers of funds and users of funds in a world without
financial intermediaries?
A direct exchange
How do dollars flow between suppliers of funds and users of funds in a world with financial
intermediaries?
An indirect exchange
How does a mutual fund work?
It pools funds from investors, manages a portfolio of securities, extracts a fee then divides out
the returns according to the initial investments
Name one difference between a hedge fund and a mutual fund
A hedge fund can make riskier investments than a mutual fund
Name one difference between an ETF and a mutual fund
Investors purchase ETFs on the equity market and purchase mutual funds directly from the fund
Name one difference between a pension fund and a mutual fund
A pension fund investment is typically a long-term investment, while a mutual fund investment
horizon can be for any time horizon. So mutual funds hold more cash than pension funds.
List two functions of financial markets and/or intermediaries
1) Channel savings into real investments
2) Increase market liquidity
What are two ways in which financial institutions benefit the economy?
1) Provide monitoring services (at lower cost)
2) Increase market liquidity
What is one way in which financial institutions benefit the economy?
They act as a conduit for executing monetary policy
Name three types of risk that financial institutions face
Interest rate risk, Credit risk, and Operational risk
Why is Enterprise Risk Management important to Financial Institutions
,Financial institutions are very complex organizations, and it's not enough to analyze risk in each
division or subsidiary. You need to aggregate risk exposure across business lines, aah the
enterprise level and then manage the aggregated risk
List two financial regulators
1) The Fed (Federal Reserve System)
2) The SEC (Securities and Exchange Commission)
What country has the most long-term debt outstanding?
United States
What country has the least long-term debt outstanding?
Argentina
Which financial market is the biggest in the world?
NYSE Euronext (U.S.)
What is the largest bank in the world (by assets)?
Industrial Commerce Bank of China ($3.42 Trillion)
Provide four fundamental factors that affect interest rates
Production opportunities, risk, time preference for consumption, and expected inflation
Explain the concept of the inflation premium
The compensation investors require to maintain purchasing power over the life of their
investment
How do we decompose debt interest rates (formula)?
r = r* + IP + MRP + DRP + LP + SPRP + FXRP
Which bond should have a higher interest rate: a 3-month US Treasury or a 3-year US
Treasury? Why?
3-year US Treasury because the Maturity Risk Premium is higher for the 3-year security
Which bond should have a higher interest rate: a 3-month US Treasury or a 3-month
Argentine Sovereign? Why?
3-month Argentine Sovereign because it should have a higher liquidity premium, default risk
premium, foreign exchange risk premium, and maybe inflation risk premium
, Which bond should have a higher interest rate: a 5-year AA Corporate or a 5-year B
Corporate? Why?
5-year B Corporate because it should have a higher default risk premium
Which bond should have a higher interest rate: a 5-year US Treasury or a 5-year A Corporate?
Why?
5-year A Corporate because it should have a higher liquidity risk premium and default risk
premium
What is term structure?
The relationship between time to maturity and discount rates
What is the main idea behind the Loanable Funds Theory?
That interest rates are determined by supply and demand of money
What is the main idea behind the Unbiased Expectations Theory?
That expectations of future short-term interest rates determine the shape of the yield curve
What is one problem with the Unbiased Expectations Theory?
It assumes that investors are indifferent between short-term and long-term investments
What is one strength of the Unbiased Expectations Theory?
It allows for a downward-sloping, or flat, yield curve
What is the main idea behind the Liquidity Premium Theory?
That expectations of future short-term rates along with an incentive to invest in longer-term
securities determine the shape of the yield curve
What is one significant difference between the Unbiased Expectations and Liquidity Premium
Theories?
Liquidity Premium theory incorporates a liquidity risk premium, but Unbiased Expectations does
not allow for any risk premiums
What is the main idea behind the Market Segmentation Theory?
That different general maturities have their own supply and demand curves and you need to
compensate investors to get them to switch to a different maturity preference
Conceptually, what is the forward rate?
VERIFIED ANSWERS LATEST UPDATE RATED A+(financial
management)
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?
Jayhawk bank, it has less cash and more riskier assets like loans and municipal bonds
What is the difference between APR and EAR?
APR reflects simple interest; EAR captures compounded interest
Name one circumstance in which you would use APR
We use APR to calculate periodic interest rates
Name one circumstance in which you would use EAR
We use EAR to compare bank savings account interest rates that have different rates and
compounding frequencies
Provide two classifications of financial markets and an example security or transaction for
each
Primary Market - new securities issued
Secondary Market - existing securities are traded
Provide two examples of money market instruments (securities)
3-month Treasury Bill and Commercial Paper
Provide two examples of capital market instruments (securities)
Preferred Stock and 10-Year Corporate Bonds
Can debt be traded?
Yes
How can we distinguish between two major types of financial institutions?
,Whether they accept deposits
How do dollars flow between suppliers of funds and users of funds in a world without
financial intermediaries?
A direct exchange
How do dollars flow between suppliers of funds and users of funds in a world with financial
intermediaries?
An indirect exchange
How does a mutual fund work?
It pools funds from investors, manages a portfolio of securities, extracts a fee then divides out
the returns according to the initial investments
Name one difference between a hedge fund and a mutual fund
A hedge fund can make riskier investments than a mutual fund
Name one difference between an ETF and a mutual fund
Investors purchase ETFs on the equity market and purchase mutual funds directly from the fund
Name one difference between a pension fund and a mutual fund
A pension fund investment is typically a long-term investment, while a mutual fund investment
horizon can be for any time horizon. So mutual funds hold more cash than pension funds.
List two functions of financial markets and/or intermediaries
1) Channel savings into real investments
2) Increase market liquidity
What are two ways in which financial institutions benefit the economy?
1) Provide monitoring services (at lower cost)
2) Increase market liquidity
What is one way in which financial institutions benefit the economy?
They act as a conduit for executing monetary policy
Name three types of risk that financial institutions face
Interest rate risk, Credit risk, and Operational risk
Why is Enterprise Risk Management important to Financial Institutions
,Financial institutions are very complex organizations, and it's not enough to analyze risk in each
division or subsidiary. You need to aggregate risk exposure across business lines, aah the
enterprise level and then manage the aggregated risk
List two financial regulators
1) The Fed (Federal Reserve System)
2) The SEC (Securities and Exchange Commission)
What country has the most long-term debt outstanding?
United States
What country has the least long-term debt outstanding?
Argentina
Which financial market is the biggest in the world?
NYSE Euronext (U.S.)
What is the largest bank in the world (by assets)?
Industrial Commerce Bank of China ($3.42 Trillion)
Provide four fundamental factors that affect interest rates
Production opportunities, risk, time preference for consumption, and expected inflation
Explain the concept of the inflation premium
The compensation investors require to maintain purchasing power over the life of their
investment
How do we decompose debt interest rates (formula)?
r = r* + IP + MRP + DRP + LP + SPRP + FXRP
Which bond should have a higher interest rate: a 3-month US Treasury or a 3-year US
Treasury? Why?
3-year US Treasury because the Maturity Risk Premium is higher for the 3-year security
Which bond should have a higher interest rate: a 3-month US Treasury or a 3-month
Argentine Sovereign? Why?
3-month Argentine Sovereign because it should have a higher liquidity premium, default risk
premium, foreign exchange risk premium, and maybe inflation risk premium
, Which bond should have a higher interest rate: a 5-year AA Corporate or a 5-year B
Corporate? Why?
5-year B Corporate because it should have a higher default risk premium
Which bond should have a higher interest rate: a 5-year US Treasury or a 5-year A Corporate?
Why?
5-year A Corporate because it should have a higher liquidity risk premium and default risk
premium
What is term structure?
The relationship between time to maturity and discount rates
What is the main idea behind the Loanable Funds Theory?
That interest rates are determined by supply and demand of money
What is the main idea behind the Unbiased Expectations Theory?
That expectations of future short-term interest rates determine the shape of the yield curve
What is one problem with the Unbiased Expectations Theory?
It assumes that investors are indifferent between short-term and long-term investments
What is one strength of the Unbiased Expectations Theory?
It allows for a downward-sloping, or flat, yield curve
What is the main idea behind the Liquidity Premium Theory?
That expectations of future short-term rates along with an incentive to invest in longer-term
securities determine the shape of the yield curve
What is one significant difference between the Unbiased Expectations and Liquidity Premium
Theories?
Liquidity Premium theory incorporates a liquidity risk premium, but Unbiased Expectations does
not allow for any risk premiums
What is the main idea behind the Market Segmentation Theory?
That different general maturities have their own supply and demand curves and you need to
compensate investors to get them to switch to a different maturity preference
Conceptually, what is the forward rate?
