FIN 480 FINAL EXAM QUESTIONS AND ANSWERS
During a so called "flight to safety" the yield on US treasuries tends to _______ while
the yield on risky bonds tends to _______. - Answers - Decrease;Increase
In general, a bank makes its profits by transforming _____ into _____. - Answers -
Short-term liabilities ; long-term assets
Which of the following will increase the NPV of a project? - Answers - *A decrease in
the amount of initial cash investment
*A decrease in the discount rate
*An increase in final periods cash flow
*Receiving a period's cash flow earlier than expected
The Feds "open market operations" influence interest rates that banks charge each
other over-night loans by changing the _____ on the banking system's balance sheet. -
Answers - composition of assets
If a bond is upgraded, we would expect the yield to ____ and the assets of a bank that
owned this bond to _____ - Answers - Fall ; Rise
If a bond is downgraded, we would expect its risk premium to _________ and the
assets of a bank that owned this bond to _______. - Answers - Rise ; Fall
A debt covenant is designed to limit risk taking by borrowers, this is an attempt to solve
- Answers - A moral hazard problem
Reserves are ______ to a bank - Answers - Assets
If a bank's assets decrease while its liabilities stays the same, then - Answers - its
leverage must increase
If a bank shifts its assets from 30-yr Treasury Bonds to 30-yr mortgages, its - Answers -
Liquidity risk has increased
A bank has a lot of long-term bonds held as assets, as interest rates rise, this will tend
to ________ the bank's ______ - Answers - Decrease ; Assets ??
In general, a bank would prefer to attract deposits in the form of ____ because these
deposits help minimize _________ - Answers - Large CD's ; liquidity risk
If a bank has $100 million in assets and capital of $10 million, its debt-to-equity ratio is: -
Answers - 9
, Liquidity Risk is a potential problem for banks because - Answers - A bank funds itself
with short-term liabilities
In general, banks would like to ______ leverage by increasing ______ because this
tends to increase profits. - Answers - Increase ; liabilities
A bank has profits of $1000 with a capital base of $1000 and a debt to equity ratio of 5.
The bank has a ROA of ____ - Answers - ROA = Net income / Total Assets
--> Capital = 1000, debt-to-equity is 5:1, so debt = 5000. Capital + Debt = Assets
(5000+1000=6000)
1000/6000 = 16.67%
The Gramm-Leach-Bliley Act: - Answers - Repealed the Glass-Steagall Act's prohibition
of mergers between commercial banks and insurance or securities firms
The Glass-Steagall Act of 1933: - Answers - Required commercial banks to sell of their
investment banking operations
A bank has two types of assets, risk-free cash and risky loans. The bank regulator
assigns a risk weight of either 0 or 1 t0 assets. Suppose this bank has $1,000 of cash
and $9,00 of loans and tier 1 capital = $500. What is this bank's capital adequacy ratio?
what is the leverage ratio? - Answers - 5.55% ; 5%
Gold would be a superior commodity money compared to wheat because: - Answers -
Wheat is perishable
An investment costs $1,000 and has a 25% probability of returning $1,400; a 25%
probability of returning $1,600; and a 50% probability of returning $1,800 ; the expected
value of the investment is ____ while the value at risk (VaR) is _____ - Answers -
calculate this ; none of the above
The current price of a $1,000 face value 1-yr zero-coupon bond is $945. What is the
implied interest rate? - Answers - 5.82%
Which of the following will decrease the NPV of a project? - Answers - *Increasing the
amount of the initial cash investment
*Receiving a period's cash flow later than expected.
*An increase in the discount rate
*Decreasing the final periods cash flow
You buy a bond today for $100. Tomorrow, someone comes along and offers to
purchase for $90. What does this imply about their risk premium relative to yours? If the
bond has a $10 coupon, what is someone's yield? - Answers - Higher premium, 11.11%
During a so called "flight to safety" the yield on US treasuries tends to _______ while
the yield on risky bonds tends to _______. - Answers - Decrease;Increase
In general, a bank makes its profits by transforming _____ into _____. - Answers -
Short-term liabilities ; long-term assets
Which of the following will increase the NPV of a project? - Answers - *A decrease in
the amount of initial cash investment
*A decrease in the discount rate
*An increase in final periods cash flow
*Receiving a period's cash flow earlier than expected
The Feds "open market operations" influence interest rates that banks charge each
other over-night loans by changing the _____ on the banking system's balance sheet. -
Answers - composition of assets
If a bond is upgraded, we would expect the yield to ____ and the assets of a bank that
owned this bond to _____ - Answers - Fall ; Rise
If a bond is downgraded, we would expect its risk premium to _________ and the
assets of a bank that owned this bond to _______. - Answers - Rise ; Fall
A debt covenant is designed to limit risk taking by borrowers, this is an attempt to solve
- Answers - A moral hazard problem
Reserves are ______ to a bank - Answers - Assets
If a bank's assets decrease while its liabilities stays the same, then - Answers - its
leverage must increase
If a bank shifts its assets from 30-yr Treasury Bonds to 30-yr mortgages, its - Answers -
Liquidity risk has increased
A bank has a lot of long-term bonds held as assets, as interest rates rise, this will tend
to ________ the bank's ______ - Answers - Decrease ; Assets ??
In general, a bank would prefer to attract deposits in the form of ____ because these
deposits help minimize _________ - Answers - Large CD's ; liquidity risk
If a bank has $100 million in assets and capital of $10 million, its debt-to-equity ratio is: -
Answers - 9
, Liquidity Risk is a potential problem for banks because - Answers - A bank funds itself
with short-term liabilities
In general, banks would like to ______ leverage by increasing ______ because this
tends to increase profits. - Answers - Increase ; liabilities
A bank has profits of $1000 with a capital base of $1000 and a debt to equity ratio of 5.
The bank has a ROA of ____ - Answers - ROA = Net income / Total Assets
--> Capital = 1000, debt-to-equity is 5:1, so debt = 5000. Capital + Debt = Assets
(5000+1000=6000)
1000/6000 = 16.67%
The Gramm-Leach-Bliley Act: - Answers - Repealed the Glass-Steagall Act's prohibition
of mergers between commercial banks and insurance or securities firms
The Glass-Steagall Act of 1933: - Answers - Required commercial banks to sell of their
investment banking operations
A bank has two types of assets, risk-free cash and risky loans. The bank regulator
assigns a risk weight of either 0 or 1 t0 assets. Suppose this bank has $1,000 of cash
and $9,00 of loans and tier 1 capital = $500. What is this bank's capital adequacy ratio?
what is the leverage ratio? - Answers - 5.55% ; 5%
Gold would be a superior commodity money compared to wheat because: - Answers -
Wheat is perishable
An investment costs $1,000 and has a 25% probability of returning $1,400; a 25%
probability of returning $1,600; and a 50% probability of returning $1,800 ; the expected
value of the investment is ____ while the value at risk (VaR) is _____ - Answers -
calculate this ; none of the above
The current price of a $1,000 face value 1-yr zero-coupon bond is $945. What is the
implied interest rate? - Answers - 5.82%
Which of the following will decrease the NPV of a project? - Answers - *Increasing the
amount of the initial cash investment
*Receiving a period's cash flow later than expected.
*An increase in the discount rate
*Decreasing the final periods cash flow
You buy a bond today for $100. Tomorrow, someone comes along and offers to
purchase for $90. What does this imply about their risk premium relative to yours? If the
bond has a $10 coupon, what is someone's yield? - Answers - Higher premium, 11.11%
