Financial Institutions T/F

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Financial Institutions T/F
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2010-12-02 23:07:49
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Financial Institutions True False
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Financial Institutions True False
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  1. Banks which assume higher risk will always earn higher returns.
    F
  2. Banks operate under the same regulatory structure as any other financial services firms.
    F
  3. Banks usually pay low explicit interest rates on demand deposit accounts.
    F
  4. Savings deposits are a larger percent of funding for small banks, compared to large banks.
    T
  5. Most banks issue negotiable certificates of deposits.
    F
  6. Fed Funds purchased is an important short-term asset for large banks.
    F
  7. Eurodollars are dollar denominated deposits owned by foreigners.
    F
  8. Banks hold a substantial volume of low-risk corporate bonds because of their high yields.
    F
  9. The prime rate is the lowest loan rate offered by banks.
    F
  10. With interest rates expected to decrease in the future, banks would prefer to make floating-rate loans rather than fixed rate loans.
    F
  11. Demand deposits represent the largest deposit source of funds for commercial banks.
    F
  12. A bank's investment account provides liquidity and income.
    T
  13. Matched-funding loan pricing is a practical application of term structure.
    F
  14. Loan pricing must attempt a competitive rate of return on bank shareholder's equity.
    T
  15. Unlike loan sales, the originating bank continues to earn interest on its securitized loans.
    F
  16. Fed Funds sold represent an important source of borrowed funds for commercial banks.
    F
  17. Capital notes are a nondeposit liability of banks.
    T
  18. A sale of Fed Funds by a bank most likely represents a decrease in its excess reserves.
    T
  19. "Off-balance-sheet" activities are exempt from regulation.
    F
  20. A bank holding company might apply for a "financial" holding company status from the Fed if it were planning to purchase a life insurance company.
    T
  21. Banks need more liquidity than other businesses because of their large proportion of short-term assets.
    F
  22. Banks have lower capital ratios than industrial firms because bank assets are less risky.
    T
  23. Liability liquidity management suggests that banks hold Treasuries for liquidity.
    F
  24. Concentration ratios are utilized in managing the credit risk of an institution.
    T
  25. Liability management theory assumes certain types of highly rate-sensitive funding sources are always available if the bank pays the market rate or better.
    T
  26. Monitoring customer credit ratings is a commonly used loan workout technique.
    F
  27. A key performance ratio used to evaluate a bank's management is the ratio of net income to total average assets, often called ROAA.
    T
  28. Bank returns on average assets are normally lower than returns to average equity.
    T
  29. A bank that has increased its ROAA by increasing its risk-taking may find its stock price declining.
    T
  30. Banks with high capital ratios tend to have more stable returns to average equity (ROAE) than banks with low capital ratios.
    T
  31. Banks need liquidity for both deposit withdrawals and loan demand.
    T
  32. Banks face a liquidity/profitability trade-off in financial decisions.
    T
  33. A bank with a GAP will see its stock price fall if the Fed tightens monetary policy.
    F
  34. A zero duration gap immunizes a bank against interest rate risk.
    T
  35. Adequate liability liquidity has replaced the need for asset liquidity.
    F
  36. A high positive maturity GAP position is less risky than a high negative GAP position.
    F
  37. A bank with a negative maturity GAP will see a decline in earnings if interest rates fall.
    T
  38. Interest rate risk can reduce the earnings of the bank, but not its cash flow.
    F
  39. A bank with a high positive duration GAP will see a decline in value if interest rates rise.
    T
  40. A bank with a negative duration GAP can "macrohedge" by selling futures.
    F
  41. IBFs may be established by a U. S chartered depository institution, a U. S. branch or agency of a foreign bank or the U. S. office of an Edge Act Corporation.
    T
  42. The Edge Act of 1919 permitted U.S. banks to create international banking facilities.
    F
  43. U.S. bank regulators allow U.S. banks overseas to engage in all banking activities allowed by the host country.
    F
  44. Representative offices can accept deposits and make loans in the host country.
    F
  45. Foreign branches of U. S. banks are subject to both the host nation's regulations and the regulations in the U. S.
    F
  46. International banking facilities (IBFs) operate as subsidiaries of bank holding companies.
    F
  47. Edge Act corporations can engage in some types of equity investments.
    T
  48. An international loan syndicate is a risk reduction technique.
    T
  49. Expropriation and nationalization are two methods of guaranteeing payment of U.S. bank loans to developing countries.
    F
  50. Until the passage of the International Bank Act of 1978, foreign banks enjoyed substantial operating advantages over domestic banks.
    T
  51. Pooling risk entails lending by several banks to a foreign borrower.
    T
  52. Foreign branches of U.S. banks evolved in the 1960s as a reaction to capital flow regulations in the U.S.
    T
  53. Shell branches pay no local taxes and generally operate in relatively stable political environment.
    T
  54. U.S. banks have been permitted to engage in a wider range of business activities in foreign countries than at home in order to be competitive with foreign banks.
    T
  55. Representative offices are usually established to coordinate business between domestic and foreign banks.
    F
  56. Shell branches are developed for international money market transactions without contact with the public of the host country.
    T
  57. IBFs collect small domestic deposits and make foreign loans.
    F
  58. Sovereign loans to LDCs are usually rescheduled rather than foreclosed.
    T
  59. Pooling and third-party guarantees are two methods of reducing international currency risk.
    F
  60. Bank failures are now treated as a remote contingency at best.
    F
  61. Regional and industry recessions were and still are a major cause of bank failures.
    T
  62. The Comptroller of the Currency is the oldest bank regulatory agency.
    T
  63. Traditional level-premium deposit insurance encouraged excessive risk-taking.
    T
  64. Federal deposit insurance has prevented widespread bank panics.
    T
  65. The FDIC charters many state banks.
    F
  66. All state banking authorities have the power to charter banks.
    T
  67. The FDIC generally prefers to just pay off depositors of a failed bank.
    F
  68. A "too big to fail" policy encourages small banks to take higher risks.
    F
  69. Private deposit insurance has not proven effective in preventing depositor panic.
    T
  70. In a clean bank purchase and assumption, the FDIC retains a "put" option to return bad loans to the acquiring bank.
    F
  71. The American public has determined that the market is an adequate regulator of banks.
    F
  72. Banks are regulated in part to protect the nation's money supply, much of which is a liability of the banking industry.
    T
  73. A role of the central bank is to provide liquidity and prevent panic.
    T
  74. Bailout of large banks by federal regulators is an example of market discipline.
    F
  75. The Federal Reserve System controls the money supply and is not a bank regulator.
    F
  76. Regulators have eliminated moral hazard in large bank and thrift firms.
    F
  77. The Glass Steagall restrictions separating investment and commercial banking were finally repealed in 1999.
    T
  78. In a purchase and assumption, the acquiring bank assumes all deposits in the failed bank.
    T
  79. Safety and soundness regulations promote price competition among banks.
    F
  80. "Mutual" institutions are owned by their depositors.
    T
  81. S&Ls were originally established to take advantage of a tax loophole.
    F
  82. Federal Home Loan Banks are among the regulators of savings institutions.
    F
  83. "Negative maturity GAP" S&Ls may actually profit in a recession.
    T
  84. Federal Home Loan Banks were disbanded years ago.
    F
  85. Thrifts assume interest rate risk because maturities of their liabilities and assets are typically unmatched.
    T
  86. The Federal Savings and Loan Insurance Corporation insures deposits of S&Ls.
    F
  87. The Office of Thrift Supervision is the principal federal regulator of S&Ls.
    T
  88. Congress gave thrifts the right to make consumer loans so they could diversify their assets and shorten their asset durations.
    T
  89. Adjustable rate mortgages insulate thrifts against risk.
    F
  90. Mortgages remain the most important asset of savings institutions.
    T
  91. Securitization has not "caught on" in the thrift industry.
    F
  92. Noninterest income has become an important source of revenue for thrifts.
    T
  93. Noninterest expenses of thrifts have declined significantly.
    F
  94. Thrifts assume less interest rate risk and manage it better than they did 25 years ago.
    T
  95. Credit unions were originally organized with the idea that members could pool their funds together and make low-cost loans to themselves as a group.
    T
  96. Credit risk may be reduced by selling credit life insurance to credit union members.
    F
  97. Liquidity risk is reduced by deposit insurance and the presence of credit union "centrals".
    T
  98. Credit unions have shortened the duration of their loan portfolios by making mortgage loans.
    F
  99. Credit unions have higher loan losses than commercial banks.
    F
  100. Credit unions are exempt from federal income tax on income from financial assets.
    T
  101. A finance company in a recession would worry more about credit risk than interest rate risk.
    T
  102. Consumer lending is subject to more regulations than business lending.
    T
  103. Consumer protection legislation has had an impact on the strategy of finance companies.
    T
  104. The fixed cost of loan origination and servicing explains why finance companies prefer small shorter-term loans over large longer-term loans.
    F
  105. Finance companies borrow in large amounts, lend in small amounts.
    T
  106. Most business credit extended by finance companies is unsecured.
    F
  107. The major expenses of a finance company are salaries and loan losses.
    F
  108. Deregulation has made all lending institutions more alike than different.
    F
  109. The thrift crisis of the 1980s was caused by a combination of unsound lending practices and inadequate interest rate risk management.
    T
  110. The U.S. Central Credit Union is a principal regulator of credit unions.
    F
  111. Industrial banks may arguably be likened to finance companies that issue savings deposits.
    T
  112. Life insurance companies provide protection against death.
    F
  113. Life insurance companies are the oldest financial intermediary in the United States.
    T
  114. The assets of life insurance companies are not as marketable as those of casualty/property insurance companies because life companies have greater certainty of claims.
    T
  115. An annuity provides both insurance against premature death and savings features.
    F
  116. Property/liability insurance companies pay little federal income tax, thus explaining their large portfolio of state and municipal, tax-exempt securities.
    F
  117. Social Security is a fully funded pension program.
    F
  118. Health insurance includes protection against the risk of large, unexpected medical expenses and/or the loss of income from illness or disability.
    T
  119. Objective risk is the deviation of actual from expected.
    T
  120. Universal life became popular in the inflationary, high interest periods of the 1980s because interest rates on universal life policies vary with market rates.
    T
  121. Pension funds, which count on current contributions to make payments to retirees, are under funded.
    T
  122. The nature of the assets of life insurance companies influence the type of liabilities they may issue.
    F
  123. The sale of term life insurance was an important factor explaining the growth and large size of life insurance companies.
    F
  124. Pure risk and objective risk are both assumed by life insurance companies.
    T
  125. Insurance premiums are directly related to expected dollar losses.
    T
  126. The liability of Lloyds of London members on assumed risks are unlimited.
    T
  127. Though stock companies dominated the number of life insurance companies, mutuals are dominant in terms of assets and insurance in force.
    T
  128. A deductible is a form of loss-sharing.
    T
  129. Term life policies provide maximum life insurance dollar protection for consumers for a given amount of premium.
    T
  130. Life insurance and pension reserves are liquid asset balances held by life insurance companies to pay losses and pension benefits.
    F
  131. Investment income tends to offset premium income, thus reducing premiums for the insured.
    F
  132. Business interruption is an example of an indirect loss.
    T
  133. Any risk is insurable for a high enough premium.
    F
  134. Property/casualty insurers have a tax incentive to hold preferred stock.
    T
  135. Municipal bonds are a logical investment for qualified pension plans.
    F
  136. Liability risk is much easier to gauge than property risk.
    F
  137. The law of large numbers practically guarantees that an insurer will be profitable if it has enough policy holders.
    F
  138. "Fully contributory plans" are funded with employee contributions only.
    T
  139. All insurers must deal with the problem of adverse selection.
    T
  140. "Superannuation" is an unwelcome development to the underwriter of a life annuty.
    T
  141. Insurance is almost entirely regulated by state, not federal law.
    T
  142. Investment banking operations occur in the direct financial market.
    T
  143. The Glass-Steagall Act of 1933 has eliminated banks from any underwriting activities.
    F
  144. Commercial banks may underwrite low-risk securities in the direct financial markets.
    T
  145. A security underwriting takes place in the primary market, subsequent trading in the security takes place in the secondary market.
    T
  146. A dealer earns a commission for bringing buyers and sellers together.
    F
  147. An underwriter's selling group assumes underwriter risk.
    F
  148. Discount brokers offer investment advice at prices below full-service security brokerage houses.
    F
  149. Venture capital financing usually entails some managerial involvement and equity ownership.
    T
  150. The Banking Act of 1933, known as the Glass-Steagall Act, has effectively kept commercial banks out of the commercial lending area.
    F
  151. Investment banking firms provide both financing and investment services for borrowers and lenders, respectively.
    T
  152. The 40% margin rule requires the buyer/seller of a security to provide at least 60% of the funds necessary to cover the transaction, borrowing 40%.
    F
  153. Venture capital firms compete with commercial banks for new business loans.
    F
  154. Discount brokers offer investment advice at prices below full service security brokerage houses.
    F
  155. Security brokers and dealers obtain most of their funds from customers and banks.
    T
  156. Venture capital recipients are often called angels.
    F
  157. Seed financing is the first stage of venture capital financing.
    T
  158. Under the Glass-Steagall Act commercial banks were permitted to underwrite and trade Federal government securities and general obligation bonds of states and municipalities.
    T
  159. Before the Financial Services Modernization Act of 1999, the Supreme Court (1988) of the U.S. provided commercial banks permission to underwrite commercial paper and municipal revenue bonds, but not equities.
    T
  160. SEC Rule 144A permitted borrowers in private placements the opportunity to trade their obligations.
    F
  161. A best efforts sale of securities is likely to generate more revenue for the investment banker than an equivalent underwriting of securities.
    F
  162. Mezzanine or bridge financing is the interim financing before public offerings of securities.
    T
  163. In an underwritten offer, the risk of selling the issue at a price higher than that promised to the issuer is borne by the investment bank.
    T
  164. In an underwritten offering, the investment bank is compensated based on the number of securities sold.
    F
  165. Universal banks are financial institutions that are allowed to do only commercial banking activities.
    F
  166. The Banking Act of 1933, known as the Glass-Steagall Act, has effectively kept commercial banks out of the commercial lending area.
    F
  167. Balanced funds generate higher proportion of income than growth and income funds and are less volatile.
    T
  168. Market arbitrage by hedge funds is the simultaneous buying and selling of a security or derivative of the security to exploit market pricing differentials.
    T
  169. When purchasing load mutual fund, the NAV includes the load charge for purchasing the mutual funds.
    F
  170. Money market mutual funds invest in commercial paper, large bank CDs, and short-term government securities.
    T
  171. Unit investment trusts have a high security turnover rate, increasing their costs over equivalent mutual funds.
    F
  172. Income funds are made up of a portfolio of mortgage-backed securities only.
    F
  173. Mutual funds offer diversification and professional investment management for the fees charged.
    T
  174. Closed-end investment companies stand ready to redeem their shares at their present asset value.
    F
  175. Money market mutual funds invest in commercial paper, large bank CDs, and short-term government securities.
    T
  176. Money market mutual funds are not subject to reserve requirements.
    T
  177. When purchasing load mutual fund, the NAV includes the load charge for purchasing the mutual funds.
    F
  178. Closed-end investment companies provide shareholders with maturity intermediation.
    F
  179. An underwriting of General Motor's common stock is an IPO.
    F
  180. Security brokers and dealers obtain most of their funds from customers and banks.
    T
  181. No-load mutual funds are commonly sold by security brokers and dealers.
    F
  182. Load mutual fund shares may be sold back to the fund.
    T
  183. Closed-end investment companies= securities often sell at a discount of their NAV.
    T
  184. If interest rates are expected to fall very soon, the bond mutual fund manager is likely to have a high cash position.
    T
  185. Unit investment trusts have a high security turnover rate, increasing their costs over equivalent mutual funds.
    F
  186. The major investment of mutual funds is common stock.
    T
  187. Hedge funds are typically organized as limited partnerships with the fund manager as the general partner.
    T
  188. Hedge funds have been popular diversification investments for high wealth investors.
    T
  189. Arbitrage activities of hedge funds tend to increase capital market efficiency.
    T
  190. Short-selling activities of hedge fund look for high growth companies.
    F

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