Q&A Hero

Q: What is the basic difference(s) between term and whole life insurance?

Q: There are two current trends in the financial industry which run in opposite directions. What are they?

Q: The growth of internet banking seems to be on the rise. Discuss what the continued growth of internet banking should do to both the economies of scale and scope of banking.

Q: Owners and managers have cited three reasons for the creation of large financial firms or universal banks. What are these reasons?

Q: Explain why a domestic bank in the U.S. might create a subsidiary bank in a foreign location like the Cayman Islands.

Q: The Riegle-Neal Interstate Banking and Branching Efficiency Act has allowed banks to diversify themselves geographically. Has this geographical expansion resulted in the harm to consumers that early supporters of anti-branching laws feared? Explain.

Q: The number of banks in the U.S. has fallen almost by half in the past twenty years or so. Was this the result of bank failures or were some due to another cause? Explain.

Q: It has been argued that regulations can often be the source of innovation. Provide an example of this in the banking industry.

Q: Explain why anti-branching laws often created credit crunches that slowed economic growth.

Q: It has been argued that the laws that prohibited branch banking were needed to protect consumers from large monopoly banks. Does that argument hold up to close scrutiny? Explain.

Q: Fannie Mae, Ginnie Mae, and Freddie Mac are examples of: A. private regulatory bodies that supervise home mortgage lenders.B. government-sponsored enterprises chartered to encourage home lending.C. government-sponsored enterprises that were chartered to encourage small business loans.D. government-sponsored enterprises that provide homeowners insurance to people that cannot obtain it from private insurers.

Q: Congress chartered Sallie Mae to make loans to: A. homeowners.B. customers of securities brokers.C. small business owners.D. students.

Q: The main difference between sales finance and consumer finance is: A. the type of borrower.B. the size of the purchase involved.C. the length of time until the loan has to be repaid.D. one deals with equipment leasing and the other does not.

Q: A business needs a loan to help keep its shelves stocked. This is an example of: A. an inventory loan.B. sales finance.C. equipment leasing.D. consumer finance.

Q: Most finance companies specialize in one of three loan types. Which of the following is not one of those three types? A. Consumer loans for purchases such as appliancesB. Margin loans for buying stockC. Sales loans for purchases such as carsD. Business loans for firms to use to buy new equipment

Q: Accounts receivable loans provided by finance companies provide firms with: A. start-up capital.B. the ability to turn a liability into an asset.C. the ability to turn a relatively illiquid asset into liquidity.D. inventory loans.

Q: Finance companies perform all of the following functions, except: A. issue commercial paper and securities.B. take deposits.C. make loans.D. lease equipment to firms.

Q: Which of the following is not true about the information and advice investment bankers provide to clients? A. It is public information that the bank compiles and makes available to anyone.B. It is highly valued if the fees paid for it are any indication of its value.C. It is often used to identify possible acquisition and merger candidates.D. It helps improve the allocation of resources across the economy.

Q: The main risk that investment banks face from their underwriting services is: A. the client will not pay for the service.B. the company issuing the securities will go bankrupt.C. the price investors pay for the security is less than the guaranteed price to the issuing firm.D. the price paid by investors exceeds the guaranteed price to the issuing firm.

Q: The practice of "placing the issue" is conducted by: A. the underwriting services of investment banks.B. mutual fund companies.C. brokerage firms.D. commercial banks.

Q: The category of financial intermediaries called securities firms includes each of the following, except: A. mutual funds.B. brokerages.C. investment banks.D. credit unions.

Q: The gap between LIBOR and the expected Federal Reserve policy interest rate provides a key measure of which of the following: A. the direction of movement of the Euro relative to the U.S. dollar on the foreign exchange market.B. the persistence and intensity of the liquidity crisis.C. the expected length of a coming global recession.D. the movement of the U.S. stock market.

Q: The interest rate at which banks lend each other Eurodollars is known as: A. the international federal funds rate.B. the London Interbank Offered Rate.C. the discount rate.D. the International Prime Rate.

Q: Often Eurodollar deposits earn higher returns than U.S. bank deposits for all of the following reasons except: A. Eurodollar deposits are not subject to U.S. reserve requirements.B. the bank does not have to pay deposit insurance premiums on these deposits.C. regulatory compliance may be more costly for a foreign bank than a U.S. bank.D. taxes on the profits on banks outside the U.S. may be lower on banks inside the U.S.

Q: Eurodollars are: A. the currency of the European Economic Union.B. euro-denominated deposits in U.S. Banks.C. dollar-denominated deposits in banks outside the United States.D. dollars that are specially printed for use abroad to minimize counterfeiting.

Q: The growth of international banking has: A. decreased the competition that domestic banks face.B. decreased the efficiency of most banks.C. enhanced economic growth in many countries.D. increased the monopoly power of most banks.

Q: An Edge Act Corporation is: A. a company created so a U.S. bank can operate in more than one state.B. a subsidiary of a bank created to provide insurance and securities services.C. a company created by a non-bank corporation used to purchase and operate banks.D. a subsidiary of a domestic bank that is established specifically to engage in international banking transactions.

Q: The Gramm-Leach-Bliley Act: A. repealed the Riegle-Neal Interstate Banking and Branching Efficiency Act.B. repealed the Glass-Steagall Act's prohibition of mergers between commercial banks and insurance or securities firms.C. repealed the McFadden Act's restriction on bank branching.D. reinforced the Glass-Steagall Act's limitation on commercial banks' availability to merge with insurance or securities firms by increasing the penalties for doing so.

Q: One result of the Riegle-Neal Interstate Banking and Branching Efficiency Act was that: A. banking system efficiency decreased.B. banks became less geographically diversified.C. banking system efficiency increased.D. banks became less geographically diversified and banking system efficiency decreased.

Q: The sharp reduction in the number of banks that has occurred since the mid-1990s has been due primarily to: A. bank failures from increased competition.B. bank mergers.C. the closing of banks by federal regulators.D. the revoking of state bank charters.

Q: One of the results of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 was: A. a reversal of the branching restrictions of the McFadden Act.B. an increase in the number of banks in the U.S.C. a decrease in the average size of banks.D. a decrease in commercial banks but an increase in the number of savings and loans and savings banks.

Q: The Federal Deposit Insurance Corporation (FDIC) was created: A. in 1933 as a part of the Glass-Steagall Act.B. when the Federal Reserve was created in 1914.C. prior to the stock market crash of 1929.D. in 1927 as a part of the McFadden Act.

Q: As a result of technology, many small businesses today: A. are located closer to their bank.B. are located further from their bank.C. have more face-to-face interactions with their banker.D. no longer need banks.

Q: The bank failures that occurred during the early years of the Great Depression: A. hurt large depositors the most since it was the large money center banks that failed.B. hurt small depositors the most since it was mainly small banks that failed.C. hurt the government insurance funds since FDIC covered most of the losses of depositors.D. totaled about 30% of total bank customer deposits.

Q: In the early years of the Great Depression, 1929-1933: A. over one half of all U.S. banks failed.B. two-thirds of U.S. banks failed.C. more than a third of all U.S. banks failed.D. a little less than one-quarter of U.S. banks failed.

Q: Banks exert some control over who will regulate them because banks: A. spend a lot of money contributing to political campaigns.B. can switch their charter from state to federal and vice versa.C. have the right to decide on which regulator will oversee their bank.D. pay the salary of the regulator.

Q: In the U.S. today: A. most banks are federally chartered.B. most banks are state chartered.C. there are approximately equal numbers of state and federally chartered banks.D. all new banks are federally chartered.

Q: The dual banking system in the U.S. today refers to: A. a bank's ability to issue checking and saving accounts.B. a bank's ability to own another financial institution.C. the ability of banks to be either federally or state chartered.D. a deposit institution's decision to be either a bank or a savings and loan.

Q: Prior to the Civil War most state banks issued their own banknotes. This resulted in all of the following problems except: A. their values decreased as the holder moved further from the bank.B. they were worthless if the bank failed.C. they were not efficient as a means of payment if the holder was far from the bank.D. they were usually redeemable in gold.

Q: A unit bank is a bank that: A. only makes one type of loan, (i.e.; home mortgages).B. only offers savings accounts.C. provides a myriad of financial services, so customers get all or most of their financial needs taken care of at the bank.D. has no branches.

Q: Unit banks are: A. banks with no branches.B. more numerous in the United States than they were in previous decades.C. no longer permitted to exist in the United States.D. commercial banks that have combined into one unit with an investment bank.

Q: If someone wants to start a bank today they would have to: A. obtain a charter from the federal government.B. simply have $5 million is startup capital, a charter is no longer needed.C. obtain a charter either from the federal or state government.D. obtain a state charter, the federal government stopped issuing charters in 1970.

Q: If a bank has $100 million in assets and a net worth of $10 million, its debt-to-equity ratio is: A. 10 to 1.B. 5 to 1.C. 9 to 1.D. 0.1 to 1.

Q: The financial crisis in the United States in 2007-2009 brought about all but which of the following changes: A. a rise in the number of unit banks.B. an increase in the deposit share of the top four U.S. commercial banks.C. the placement of the two government-sponsored enterprises for housing finance into conservatorship.D. a run on money-market mutual funds.

Q: Which of the following bank assets would be categorized as secondary reserves? A. U.S. Treasury billsB. CashC. Mortgage loansD. Deposits at the Federal Reserve

Q: Suppose that a bank initially has a leverage ratio of 8 to 1. If this bank increases its capital by $1 million and its assets by $10 million, then the bank's: A. risk increases and its leverage decreases.B. liabilities decrease and its leverage increases.C. leverage decreases and its liabilities increase.D. leverage and risk increases.

Q: The largest liability for commercial banks in the U.S. is: A. demand deposits.B. non-transaction deposits.C. borrowing from other U.S. banks.D. borrowing from the Federal Reserve.

Q: A bank's loan loss reserves are: A. the amount of loans that have defaulted in the past twelve months.B. the same as equity capital.C. an amount the bank sets aside to cover potential losses from defaulted loans.D. a liability of the bank since it is a source of funds.

Q: If a bank sells off all of its assets and pays all of its liabilities, the amount remaining would be its: A. net profit.B. reserves.C. net worth.D. excess reserves.

Q: Suppose a particular depository institution that specializes in residential mortgages is owned by its depositors. The institution is probably a: A. regional or super-regional bank.B. money center bank.C. community bank.D. savings bank.

Q: Suppose a particular bank is very large in terms of assets, and makes consumer and residential loans as well as commercial and industrial loan. The bank is probably a: A. regional or super-regional bank.B. money center bank.C. community bank.D. savings bank.

Q: Of the more than 6,100 banks in the United States at the end of 2013, by far the greatest numbers of them were: A. regional banks.B. money center banks.C. community banks.D. savings banks.

Q: Savings and loan institutions: A. are owned by the depositors.B. originally were formed primarily to make home mortgages.C. today offer a much smaller array of services than when originally formed.D. are owned by depositors who also have a common bond.

Q: The fact that returns from the stock market are less volatile over long-periods of time suggests that: A. investors are more risk averse over the long run.B. stock markets are efficient.C. people get comfortable with the stocks they own.D. stock market bubbles have become more common.

Q: Money Center Banks differ from community banks in all of the following ways except: A. they are usually much smaller.B. they obtain their funds primarily through borrowing and not by deposits.C. they are a much smaller percentage of the total number of banks.D. they are actively engaged in the money market.

Q: When stock prices reflect fundamental values: A. all investors will have positive returns.B. the allocation of resources will be more efficient.C. all companies will have an easier task of obtaining financing for investment projects.D. the overall level of the stock market should move higher.

Q: Index funds are often preferred to other mutual funds because: A. they offer greater diversification.B. they are managed better.C. they have greater liquidity.D. on average they have lower management fees.

Q: Management fees for mutual funds are: A. different across funds and can significantly impact the return to an investor.B. fixed by regulation.C. fixed by regulation but can vary by the size of the fund.D. usually a percentage of the return achieved by fund managers.

Q: Management fees for mutual funds are: A. fixed by regulation.B. fixed by regulation and can vary by the size of the fund.C. usually a percentage of the gains the fund achieves.D. usually a percentage of the funds under management.

Q: Mutual funds are characterized by the fact that they all: A. have the same management fee set by regulation.B. require the same minimum investment of $10,000.C. provide some degree of diversification.D. provide the same degree of liquidity.

Q: Professor Jeremy Siegel, of the University of Pennsylvania, conducted research that showed that: A. over the long run, stocks have been less risky than bonds.B. over the long run, bonds have been less risky than stocks.C. over the long run, bonds frequently outperform stocks.D. investors should only own stocks for short periods of time to maximize returns.

Q: Professor Jeremy Siegel, of the University of Pennsylvania, did research showing that: A. owning stocks over the long run produces returns below the risk-free return.B. if an investor owns stocks for a very short time the risk is greater than if the stocks are held for a long time.C. the return on the S&P 500 for a 25-year period often produces returns below zero.D. bonds really are less risky to hold over the long-term.

Q: Stocks appear to present risk, yet many people have substantial parts of their wealth invested in them. This behavior could be explained by: A. people are irrational in their investment behavior, only focusing on positive outcomes.B. people are not very risk-averse and do not require a risk premium for stocks.C. investing in stocks over the long run is not as risky as short-term holdings of stocks.D. people are not efficient users of information.

Q: According to the theory of efficient markets, mutual fund managers may be expected to earn above-average returns if they: A. take on less risk.B. have access to illegal, private information.C. participate in efficient markets.D. have learned from investing in the same stocks repeatedly.

Q: The required stock return an investor seeks can best be represented by which of the following? A. Risk Premium - Risk-free ReturnB. Risk-free Return × Risk PremiumC. (Risk-free Return + Risk Premium)/(1 + i)D. Risk-free Return + Risk Premium

Q: According to the theory of efficient markets: A. investors use rules of thumb to make choices about which stocks to buy and sell.B. investors are able to use forecasts based on the dividend-discount model to generate above-average returns.C. a portfolio manager who charges no commission should not, on average, outperform an individual investor with access to the same funds.D. the stock price should remain constant.

Q: The basic dividend-discount model is a bit of an oversimplification for valuing stocks because it: A. ignores expected dividend growth.B. ignores the value of future dividends.C. ignores the risk involved in holding stocks.D. cannot handle stocks that do not pay dividends.

Q: All other things equal, a decrease in the equity risk premium leads to a(n): A. increase in the required return on stock.B. decrease in the present value of stock.C. increase in the price of equity shares.D. decrease in dividend growth.

Q: As a company issues more debt: A. its leverage decreases.B. the share of financing from equity increases.C. the expected return to equity holders falls.D. risk increases.

Q: In the event of bankruptcy, stockholders: A. are paid before bondholders.B. receive at least their initial investment due to limited liability.C. could lose more than their initial investment.D. are the last to be paid and could end up losing what they have invested.

Q: Consider the effect of business cycles on bondholders versus stockholders. We expect that business cycles will affect: A. bondholders and stockholders about the same.B. bondholders more since the amount they receive depends on profits.C. stockholders more since they are residual claimants.D. bondholders more since they do not have any claim to property.

Q: Without the stockholders' limited liability, the risk from the use of leverage would: A. be significantly less.B. be significantly greater.C. still be the same.D. be irrelevant.

Q: The fact that many corporations use debt financing as well as equity financing creates all of the following except: A. the opportunity for a greater expected return for the stockholders.B. greater risk for the stockholders.C. leverage for the stockholders.D. consistently lower debt-to-equity ratios.

Q: As the corporation uses more debt financing, which of the following holds true for the stockholders? A. The expected return to the stockholders decreases and the standard deviation of that return decreases.B. The expected return to the stockholders increases and the standard deviation of the return decreases.C. The expected return to the stockholders increases and the standard deviation of the return increases.D. The expected return to the stockholders decreases and the standard deviation of the return increases.

Q: A share of stock resembles a consol in all of the following ways except that the: A. share of stock does not have a maturity date.B. annual dividend the stock pays resembles the coupon on a consol.C. prices of both can be computed using a variation of the net present value formula.D. are both residual claims.

Q: You start with a portfolio valued at $500. Over the next twelve months it loses 40%; the following year it has a gain of 30%. At the end of two years your portfolio is worth: A. $390.B. $450.C. $300.D. $410.

Q: Suppose that the current dividend for a stock is Dtoday, the expected dividend growth rate is r, and the interest rate is i. If we ignore risk, which of the following represents the dividend-discount model formula for the fundamental price of a stock? A. Dtoday/(i + g)B. (i + g)/DtodayC. Dtoday(1 + g)/(i - g)D. Dtoday/(i - g)

Q: You start with a $1000 portfolio; it loses 50% over the next year, the following year it gains 50% in value. At the end of two years your portfolio is worth: A. $1,000.B. $500.C. $750.D. $950.

Q: The dividends that stockholders receive are: A. fixed by contract and paid annually.B. distributions from profits.C. paid before all other obligations of the company are met.D. always equal to the average amount of interest paid to a bond holder, adjusting for the value of the holdings.

Q: People differ on the method by which stock should be valued. Some people are chartists, others behaviorists. The basic difference between these groups is: A. chartists rely on astrological charts to predict stock values, behaviorists rely on psychology.B. behaviorists are finance based, chartists study charts of investor psychology.C. chartists study charts of stock prices; behaviorists focus on investor psychology and behavior.D. chartists and behaviorists are the same in their approach; essentially there aren't any differences.