TAKE HOME Exam #2 FIN331 BRING SCAN TRON TO CLASS

1. Types of conflicts of interest that arise in universal banks include all of the following except
A) securities issuers served by the underwriting department will benefit from aggressive sales of the securities
issue to customers of the bank, whereas the customers expect unbiased investment advice.
B) a bank may make loans to a firm on overly favorable terms to obtain fees from it for performing activities
such as underwriting the firm's securities.
C) when an auditor provides an overly favorable audit in an effort to solicit or retain audit business.
D) to sell its insurance products, a bank may try to influence or coerce a borrowing or investing customer.
E) All of the above baby
2. The approaches to reconciling conflicts of interest from least intrusive to most intrusive is
A) leave it to the market; regulate for transparency; supervisory oversight; separation of functions; socialization
of information production.
B) leave it to the market; supervisory oversight; socialization of information of information production; regulate
for transparency; separation of functions.
C) regulate for transparency; supervisory oversight; leave it to the market; socialization of information of
information production; separation of functions.
D) leave it to the market; regulate for transparency; separation of functions; supervisory oversight; socializaion
of information production.
E) HELP
3. The Global Legal Settlement includes what key element?
A) It directly reduces conflicts of interest.
B) It provides incentives for investment banks not to exploit conflicts of interest.
C) It has measures to improve the quality for information in financial markets.
D) All of the above
E) None of the all of the above
4. All _____ are open-end investment funds that invest only in money market securities.
A) Stock funds
B) Bond funds
C) Money market mutual funds
D) all of the above
E) what of the above
5. _______ bonds combine stocks into one fund.
A) Hybrid
B) Money market
C) Municipal
D) Equity
E) James
6. Government bonds are essentially default risk free, _________ returns.
A) and will yield high
B) and will yield the highest
C) but will have relatively low
D) but will not beat checking account interest rate
E) none of the above

7. Mutual fund companies frequently offer a number of separate mutual funds called
A) indexes.
B) complexes.
C) components.
D) actuariries.
E) all in the family
8. ______ means the investors can convert their investment into cash quickly at a low cost.
A) Liquidity intermediation
B) Denomination intermediation
C) Diversification
D) Managerial expertise
E) Cash in donation box at church
9. The net asset value of a mutual fund is
A) determined by subtracting the fund's liabilities from its assets and dividing by the number of shares
outstanding.
B) determined by calculating the net price of the assets owned by the fund.
C) calculated every 15 minutes and used for transactions occurring during the next 15-minute interval.
D) calculated as the difference between the fund's assets and its liabilities.
E) the net returns made that D-day in your ROTH IRA, which you should open now before answering the next
questions, serious, go open your ROTH IRA right NOW!
10. People who take their money out of insured bank deposits to invest in uninsured money market mutual
funds have _________ risk because money market funds invest in _________ assets.
A) high; long-term
B) low; short-term
C) high; short-term
D) low; long-term
E) High; Scary
11. What insurance protects against liability for harm the insured may cause to others as a result of product
failure or accidents?
A) Property insurance
B) Health insurance
C) Life insurance
D) Casualty insurance
E) Disability insurance
12. __________ is an insurance product that will help if you live longer than you expect. For an initial fixed
sum or stream of payments, the insurance company agrees to pay you a fixed amount for as long as you live.
A) A life term insurance proper
B) Disability insurance
C) An annuity
D) Health savings insurance
E) Whole Life insurance

13. All insurance is subject to several basic principles including all of the following except
A) the insured must provide full and accurate information to the insurance company.
B) the insured is to profit as a result of insurance coverage.
C) the loss must be quantifiable.
D) there must be a relationship between the insured and the beneficiary.
E) insurance product must be approved by the state the policy is sold in.
14. The certainty equivalent for risk-averse people who buy insurance is the
A) maximum loss they may sustain.
B) expected loss they may sustain.
C) insurance premium they pay.
D) profit the insurance company earns.
E) how much money they can make when they watch their spouse die.
15. To prevent adverse selection, health and life insurance companies may do all the following except
A) charge higher premiums to people with certain pre-existing health conditions.
B) require potential policyholders to submit medical records.
C) refuse to sell policies to people with certain pre-existing health conditions.
D) charge the same premiums to all policyholders.
E) send someone to visit the potential policyholder and weight them and take a DNA sample.
16. Since depositors, like any lender, only receive fixed payments while the bank keeps any surplus profits, they
face the _________ problem that banks may take on too _________ risk.
A) adverse selection; little
B) adverse selection; much
C) moral hazard; little
D) moral hazard; much
E) Shark Tank; too
17. Deposit insurance
A) attracts risk-prone entrepreneurs to the banking industry.
B) encourages bank managers to take on greater risks than they otherwise would.
C) reduces the incentives of depositors to monitor the riskiness of their banks' asset portfolios.
D) does all of the above.
E) does only A and B of the above.
18. Regular bank examinations and restrictions on asset holdings indirectly help to reduce the _________
problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be discouraged from
entering the banking industry.
A) moral hazard
B) adverse selection
C) ex post shirking
D) post-contractual opportunism
E) drug
19. The Federal Deposit Insurance Corporation Improvement Act of 1991
A) reduced the scope of deposit insurance in several ways.
B) eliminated restrictions on nationwide banking.
C) allowed well-capitalized banks to do some securities underwriting.
D) did only A and B of the above.
E) did only A and C of the above.

20. In one sense, _________ appears surprising since it means that the bank is not _________ its portfolio of
loans and thus is exposing itself to more risk.
A) specialization in lending; diversifying
B) specialization in lending; rationing
C) credit rationing; diversifying
D) screening; rationing
E) she or he; marrying
21. Lines of credit and long-term relationships between banks and their customers
A) reduce the costs of information collection.
B) make it easier for banks to screen good from bad risks.
C) enable banks to deal with moral hazard contingencies that are neither anticipated nor specified in restrictive
covenants.
D) do all of the above.
E) do only A and B of the above.
22. If First State Bank has a gap equal to a positive $20 million, then a 5 percentage point drop in interest rates
will cause profits to
A) increase by $10 million.
B) increase by $1.0 million.
C) decline by $10 million.
D) decline by $1.0 million.
E) decline by $100,000 bucks.
23. Duration analysis involves comparing the average duration of the bank's _________ to the average duration
of its _________
A) securities portfolio; non-deposit liabilities.
B) loan portfolio; non-deposit liabilities.
C) loan portfolio; rate-sensitive liabilities.
D) rate-sensitive assets; rate-sensitive liabilities.
E) assets; liabilities.
24. Regulations restricting branching have promoted the development of what two financial innovations?
A) bank consolidation and nationwide banking
B) bank holding companies and automated teller machines
C) money market mutual funds and sweep accounts
D) reserve requirements and restrictions on interest paid on deposits
E) idiocy and lunacy
25. A financial innovation that enables banks to avoid the "tax" from reserve requirements by taking any
balances above a certain amount in a corporation's checking account at the end of the business day and investing
them in overnight securities that pay interest is
A) a money market mutual funds.
B) deposit rate ceilings.
C) sweep account.
D) disintermediation.
E) shhh, dont tell anyone.

26. A from of electronic money used on the Internet to pay for goods and services is
A) e-money.
B) e-cash.
C) a smart card.
D) a virtual bank.
E) bip-coin
27. In 1975, financial institutions developed financial derivatives that include
A) adjustable-rate mortgage.
B) futures contracts.
C) financial engineering.
D) virtual bank.
E) bit-coin
28. The National Banking Act of 1863, and subsequent amendments to it,
A) created a banking system of federally-chartered banks.
B) established the Office of the Comptroller of the Currency.
C) broadened the regulatory powers of the Federal Reserve.
D) did all of the above.
E) did only A and B of the above.
29. Which is a description of a private equity firm?
A) Public shares are retired.
B) A public company goes private.
C) The firm is no longer subject to controls and oversight required of publicly held companies.
D) All of the above.
E) Some of the above
30. There are _________ risk and _________ returns to investors in private equity buyouts.
A) high; low
B) low; high
C) high;high
D) low; low
31. When taking a particular course of action for a private equity firm, the CEO of a privately held company
needs to convince _________ that it is a good decision.
A) the shareholders
B) the managing partners
C) no one
D) both (a) and (b)
32. Which is an advantage to a private equity buyout?
A) They are subject to the controversial regulations included in the 2002 Sarbanes-Oxley Act.
B) The CEOs frequently have more time and flexibility to enact changes need to turn around sub-par
companies.
C) both A and B.
D) neither A nor B.
E) both C & D

33. The advantage to of mutual funds is that they

A) require no cash up front to buy a minimum of 100 shares of a stock.
B) give investors with relatively small amounts of cash to invest access to large-denomination securities.
C) always yield the highest returns.
D) both (a) and (b) of the above.
E) All of the above
34. In a direct placement
A) the issuer bypasses the dealer and sells indirectly to the end investor.
B) the dealer sells directly to the end investor.
C) the issuer bypasses the dealer and sells directly to the end investor.
D) none of the above.
E) all of the above.
35. Which of the following is not an advantage a banker's acceptance?
A) The exporter is paid immediately.
B) The exporter is shielded from foreign exchange risk because the local bank pays in domestic funds.
C) The exporter has to asses the creditworthiness of the importer because the importer's bank guarantees
payment.
D) All of the above are advantages.
E) None of the above.
36. The main role of investment companies in the money market is to
A) trade on behalf of commercial accounts.
B) to mediate the symmetric information problem between server-lender and borrower-spenders.
C) both (a) and (b).
D) neither (a) nor (b).
E) make me money, not you.
37. Money market transactions
A) do not take place in any one particular location or building.
B) are usually arranged purchases and sales between participants over the phone by traders and completed
electronically.
C) both (a) and (b).
D) none the the above.
E) Costco
38. What new debt instruments compete for funds with government bonds, corporate bonds, and stocks that are
low-risk securities that have higher yields than comparable government bonds and attract funds from around the
world?
A) Subprime mortgages
B) Private pass-throughs
C) Securitized mortgages
D) Mortgage-backed mutual funds
E) James bonds
39. Which of the following terms are found in mortgage loan contracts to protect the lender from financial loss?
A) Collateral
B) Down payment
C) Private mortgage insurance
D) All of the above
E) Equity

40. The percentage of the total loan paid back immediately when a mortgage loan is obtained and lowers the
annual interest rate on the debt is called
A) discount points.
B) loan terms.
C) collateral.
D) down payment.
E) free riders
41. A dirty float is
A) when the value of a currency is pegged relative to the value of one other currency.
B) when the value of a currency is allowed to fluctuate against all other currencies.
C) when countries intervene in foreign exchange markets in an attempt to influence their exchange rates by
buying and selling foreign assets.
D) when the value of a currency is pegged relative to an anchor currency.
E) loan with dirt on it.
42. The official reserve transactions balance is referred to as
A) the capital account.
B) the current account.
C) the trade balance.
D) net change in government international reserves.
E) Huh
43. _________ is when the domestic currency is backed 100% by a foreign currency and in which the noteissuing authority establishes a fixed exchange rate to this foreign currency and stands ready to exchange
domestic currency for the foreign currency at this rate whenever the public requests it.
A) Dollarization
B) Currency board
C) Devaluation
D) Revaluation
E) Loan Sharking
44. The interest parity condition
A) can be used to explain how the exchange rate is determined.
B) simply means that the expected returns on both dollar assets and foreign assets.
C) both of the above.
D) neither of the above.
E) is a bad STD
45. Quotas
A) are restrictions placed on the quality of foreign goods that can be imported.
B) fees placed on imported goods.
C) are restrictions placed on the quantity of foreign goods that can be exported.
D) none of the above.
E) all of the above

46. The Purchasing Power Parity

A) has significant predictive power in the short run.
B) the starting point for understanding how exchange rates are determined.
C) does not take into account that many goods and services are not traded across borders.
D) none of the above.
E) pee pee pee
47. Net worth
A) is the difference between current assets and current liabilities.
B) is the difference between assets and liabilities.
C) is total assets divided by total liabilities.
D) is total assets plus total liabilities.
E) is failed Financial Institutions
48. A bank
A) has the ability to profit from the information it produces.
B) avoids the free-rider problem by primarily making private loans rather than by purchasing securities that are
traded in the open market.
C) becomes experts in determining good firms from bad firms.
D) all of the above.
E) is Satan Lucifer Morningstar the Devil
49. The disadvantage of swaps is that
A) they lack liquidity.
B) it is difficult to arrange for a counterparty.
C) they suffer from default risk.
D) all of the above.
E) none, there are no disadvantages to swaps, are you kidding me, what a stupid question!
50. The biggest danger of financial derivatives occurs
A) when notional amounts exceed a bank's capital.
B) when financial market prices and rates are highly volatile.
C) in trading activities of financial institutions.
D) in the large amount of credit exposure.
E) when you invest in them or do not invest in them but you should have and not.