FIN 480 EXAM 2 QUESTIONS AND ANSWERS
D - Answers - During a so-called "flight to safety" the yield on U.S. treasuries tends to
__________________ while the prices of U.S. treasuries tends to
__________________.
A. Increase; increase
B. Decrease; decrease
C. Increase; decrease
D. Decrease; increase
C - Answers - A company has issued a 1-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 $1000. What price should this bond sell for today?
A. $2500
B. $7500
C. $7750
D. $10000
E. None of the above
D - Answers - 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
A - Answers - 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 on risk.
D. Leverage has no effect on expected return but increases risk.
B - Answers - 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 the initial cash investment
C. A decrease in the final periods cash flow
D. Both B and C would increase the NPV
E. All would decrease the NPV
, Composition of assets - Answers - The Federal Reserve's "open market operations"
influence interest rates that banks charge each other for over-night loans by changing
_______________ on the banking system's balance sheet.
Fall; rise - Answers - If a bond is upgraded, we would expect the yield to
_______________ and the assets of a bank that owned this bond to
________________.
Rise; fall - Answers - If a bond is downgraded, we would expect its risk premium to
_________________ and the assets of a bank that owned this bond to
____________________.
The price will increase, the yield will decrease - Answers - The probability of a bond
defaulting has decreased. In general,
_________________________________________
A moral hazard problem - Answers - A debt covenant is designed to limit risk taking by
borrowers, this is an attempt to solve _________________________
Asset - Answers - Reserves are a ___________________ to a bank.
Composition of assets - Answers - A bank lends existing cash as mortgage, this
mortgage is ____________________ to the bank.
D - Answers - If a bank's assets increase while its capital stays the same, then
A. Its liabilities must increase
B. Its leverage must increase
C. Its leverage must decrease
D. Both A and B are correct
E. Both A and C are correct
Liquidity risk is increased - Answers - If a bank shifts its assets from 30-Treasury Bonds
to 30-year mortgages, its _____________________________
decrease, assets - Answers - A bank has a lot of bonds held as assets, as interest rates
rise, this will tend to _______________________ the bank's ____________________.
Increase; increase - Answers - When the Federal Reserve buys bonds from a bank, the
Fed's assets ________________ and its liabilities __________________.
Liquidity Risk - Answers - A bank run is an extreme example of
_______________________.
D - Answers - During a so-called "flight to safety" the yield on U.S. treasuries tends to
__________________ while the prices of U.S. treasuries tends to
__________________.
A. Increase; increase
B. Decrease; decrease
C. Increase; decrease
D. Decrease; increase
C - Answers - A company has issued a 1-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 $1000. What price should this bond sell for today?
A. $2500
B. $7500
C. $7750
D. $10000
E. None of the above
D - Answers - 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
A - Answers - 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 on risk.
D. Leverage has no effect on expected return but increases risk.
B - Answers - 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 the initial cash investment
C. A decrease in the final periods cash flow
D. Both B and C would increase the NPV
E. All would decrease the NPV
, Composition of assets - Answers - The Federal Reserve's "open market operations"
influence interest rates that banks charge each other for over-night loans by changing
_______________ on the banking system's balance sheet.
Fall; rise - Answers - If a bond is upgraded, we would expect the yield to
_______________ and the assets of a bank that owned this bond to
________________.
Rise; fall - Answers - If a bond is downgraded, we would expect its risk premium to
_________________ and the assets of a bank that owned this bond to
____________________.
The price will increase, the yield will decrease - Answers - The probability of a bond
defaulting has decreased. In general,
_________________________________________
A moral hazard problem - Answers - A debt covenant is designed to limit risk taking by
borrowers, this is an attempt to solve _________________________
Asset - Answers - Reserves are a ___________________ to a bank.
Composition of assets - Answers - A bank lends existing cash as mortgage, this
mortgage is ____________________ to the bank.
D - Answers - If a bank's assets increase while its capital stays the same, then
A. Its liabilities must increase
B. Its leverage must increase
C. Its leverage must decrease
D. Both A and B are correct
E. Both A and C are correct
Liquidity risk is increased - Answers - If a bank shifts its assets from 30-Treasury Bonds
to 30-year mortgages, its _____________________________
decrease, assets - Answers - A bank has a lot of bonds held as assets, as interest rates
rise, this will tend to _______________________ the bank's ____________________.
Increase; increase - Answers - When the Federal Reserve buys bonds from a bank, the
Fed's assets ________________ and its liabilities __________________.
Liquidity Risk - Answers - A bank run is an extreme example of
_______________________.
