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Banking
Q:
The yield to maturity is the discount rate that equates a security's purchase price with the stream of income expected until it is sold to another investor.
Q:
Call risk refers to the right of debt collectors to call in the loans in advance of maturity and get an early repayment.
Q:
Inflation risk is the possibility that the purchasing power of interest income and repaid principal from a security or loan will be eroded by rising prices for goods and services.
Q:
Business risk is the risk that a bank may experience a cash shortage and will have to sell some of its investments securities.
Q:
One investment maturity strategy, called the front-end loaded policy, requires that the bank put all of its investment portfolio in long-term securities.
Q:
One investment maturity strategy popular among smaller institutions is the ladder or spaced-maturity policy. It is popular because it does not take much expertise to implement.
Q:
Interest rate risk is the risk financial institutions face due to changes in market interest rates.
Q:
Treasury notes and bonds are issued by the federal government and are coupon paying instruments.
Q:
Commercial paper is a short-term debt instrument issued by major banks.
Q:
Treasury bills are the long term debt obligations issued by the federal government.
Q:
Lower interest rates increase the present value of all projected cash flows from a loan-backed security resulting in a rise in its market value.
Q:
Stripped mortgage-backed securities make maturity matching of bank assets and liabilities easier to accomplish than do most other investment securities that banks buy.
Q:
Stripped mortgage-backed securities fully protect investors from having to reinvest their income at lower interest rates.
Q:
The principal risk to a financial institution buying CMOs is market risk.
Q:
The principal risk banks face from investing in structured notes is credit (default) risk.
Q:
When a bank irrevocably guarantees a commercial paper issue, the bank's credit rating substitutes for the borrower's credit rating.
Q:
An eligible acceptance is one that can be used as collateral for borrowing from the Federal Reserve Banks.
Q:
Bankers' acceptances are considered to be among the safest of all money market instruments.
Q:
Eurocurrency deposits that some banks purchase as investments generally carry higher market yields than domestic time deposits issued by comparable-size U.S. banks.
Q:
Interest income and capital gains from a bank's portfolio of investment securities are taxed in the United States as ordinary income.
Q:
According to the textbook, a majority of securities held in U.S. banks' investment portfolios are state and local government bonds.
Q:
Stripping a security eliminates prepayment risk.
Q:
Prepayment risk on securitized assets generally increases when interest rates rise.
Q:
A short-term IOU offered by major corporations that is of short maturity (most of these lOUs mature in 90 days or less) is known as a CMO.
Q:
Investment securities are expected to help stabilize a financial institution's income.
Q:
Investment securities are expected to "dress up" a bank's balance sheet, according to the textbook.
Q:
Bank income from loans is usually taxable.
Q:
Investments in securities provide diversification for a bank's assets because most loans come from the local areas served by a bank's offices.
Q:
A(n) ________________ is a picture of how market interest rates differ across loans and securities of varying times to maturity.
Q:
A lending institution that sells lower-yielding securities at a loss in order to reduce current taxable income, while simultaneously purchasing higher-yielding new securities in order to boost future returns is doing a(n) _______________.
Q:
________________ is the risk that loans will be terminated or paid off ahead of schedule. This is a particular problem with home mortgages and other consumer loans that are pooled and used as collateral in securitized assets.
Q:
________________ are instruments that are closely related to CMOs that also partition the cash flow from a pool of mortgage loans or mortgage-backed securities into multiple maturity classes in order to reduce the cash-flow uncertainty of investors.
Q:
________________ are a type of municipal bond that are paid only from certain stipulated sources of funds.
Q:
________________ are a type of municipal bond that are backed by the full faith and credit of the issuing government.
Q:
________________ are time deposits of fixed maturity issued by the world's largest banks, headquartered in financial centers around the globe. The heart of this market is in London.
Q:
A security issued by the federal government with greater than 10 years to maturity at the time of issue is called a(n) _______________.
Q:
Marketable notes and bonds sold by agencies owned by the government or sponsored by the government are known as _______________.
Q:
Banks may invest in municipal bonds issued by smaller local governments and claim 80 percent of deductions for tax purposes on the interest amount of funds borrowed to purchase these securities. These bonds are known as ____________ bonds.
Q:
An investment maturity strategy which calls for a bank to have all of its investment assets in very long term maturities is known as the ________________________.
Q:
Long-term debt obligations of major corporations (with maturities beyond five years) are known as _______________________.
Q:
Claims against the expected income and principal generated by a pool of similar type of loans are known as ________________________.
Q:
Securities sold by Fannie Mae, Freddie Mac, and other similar agencies owned or sponsored by the federal government are known as ________________________.
Q:
_________________________ are instruments which have more than one year to reach maturity.
Q:
_________________________ are instruments which have less than one year to reach maturity.
Q:
A(n) _________________________ is an interest-bearing receipt for the deposit of funds in a bank for a stipulated time period. Ones that are oriented towards business customers or institutions are known as jumbos.
Q:
A money market security which represents a bank's commitment to pay a stipulated amount of money, on a specific future date, under specific conditions, and which is often used in international trade is known as a(n) ________________________.
Q:
A short term debt security issued by major corporations is known as _________________.
Q:
A security issued by the federal government with 1 to 10 years to maturity when it is issued is called a(n) ________________________.
Q:
__________________ is the risk that a company whose bonds a financial institution owns, may retire the entire issue in advance of its maturity, leaving the bank with the risk of earnings losses resulting from reinvesting the cash at lower interest rates.
Q:
_________________________ is the risk that the economy of the market area in which a bank service, may take a down turn in the future.
Q:
_________________________ is the risk that a bank may have to sell a part of its investment portfolio before maturity for a capital loss.
Q:
The most aggressive investment maturity strategy calls for a bank to continually shift the maturities of its securities in response to changes in forecasts of interest rates and is called the _________________.
Q:
_________________________ are imposed by the federal, state, and local governments to guarantee the safety of their deposits with banks.
Q:
A(n) _________________________ is one where the interest portion of a security is sold separately from the principal portion.
Q:
An investment maturity strategy which calls for a bank to have one-half of its investment portfolio in very short term assets and the other half in long term assets is known as the ________________________.
Q:
Debt instruments issued by cities, states, and other political entities and which are exempt from federal taxes are collectively known as ________________________.
Q:
A(n) _________________________ is a security issued by the federal government which has less than one year to maturity when it is issued.
Q:
Recently, the regular collateralized debt obligations (CDO) market has been surpassed by:
A. credit swaps.
B. credit options.
C. credit-default swaps.
D. total-return swaps.
E. synthetic collateralized debt obligations.
Q:
Which of the following is true regarding regulatory rules for standby credit letters issued by banks?
A. They must list the standby credit letter as a liability on their balance sheet
B. They do not have to list standby credit letters when assessing the risk exposure to a single credit customer
C. They must apply the same credit standards for approving standby credit letters as direct loans
D. They can apply lower capital standards to standby credit letters than loans
E. None of the options is true
Q:
Which of the following is a reason for standby credit letters' growth in the recent years?
A. The growth of bank loans sought by companies in recent years
B. The decreased demand for risk-reduction devices
C. Regulatory embargo on traditional lenders
D. The rapid growth of direct financing by companies
E. All of the options are correct
Q:
What prompted a surge in loan sales in the 1980s?
A. A wave of corporate buyouts
B. An increase in lesser-developed country loans
C. A loosening of government regulations
D. An increase in international lending
E. None of the options is correct
Q:
Which of the following is a concern regulators have about securitization?
A. The risk of being an underwriter for asset-backed securities that cannot be sold
B. The risk of acting as a credit enhancer and underestimating the need for loan-loss reserves
C. The risk that unqualified trustees will fail to protect investors in asset-backed instruments
D. The risk that loan servicers will be unable to satisfactorily monitor loan performance
E. All of the options are concerns regulators have about securitization
Q:
According to the textbook, what is the minimum size of the loan-backed securities offerings that are likely to be successful?
A. $1 million
B. $10 million
C. $25 million
D. $100 million
E. $1 trillion
Q:
Which of the following is a disadvantage of using loan-backed bonds for a bank?
A. The cost of funding often rises
B. There is greater default risk on the bonds
C. Loans used as collateral for the bonds must be held until the bonds reach maturity
D. Loan-backed bonds have shorter maturities than deposits
E. All the options are disadvantages of loan-backed bonds
Q:
Which of the following is an advantage of using loan-backed bonds for a bank?
A. Loans used as collateral for the bonds can be sold before the maturity of the bonds
B. Loan-backed bonds have longer maturities than deposits
C. Banks do not have to meet regulatory capital requirements on loans used as collateral
D. Banks can use fewer loans as collateral than the amount of bonds issued
E. All the options are advantages of loan-backed bonds
Q:
In a collateralized mortgage obligation (CMO), a tranche:
A. promises a different return (coupon) to investors.
B. acts as a liquidity enhancement.
C. carries a different risk exposure.
D. options A and C are correct.
E. All of the options are correct.
Q:
The coupon rate promised to investors on securities issued against a pool of loans is 6.5%. The default rate on the pool of loans is expected to be 3.5%. The fee to compensate a servicing institution for collecting payments on the loan is 2%. Fees to set up credit and liquidity enhancements are 5%. The residual income on this pool of loans is 7%. What is the expected yield on this pool of loans?
A. 24%
B. 12%
C. 10%
D. 6.5%
E. None of the options is correct.
Q:
A group of loans pooled for securitization is expected to yield a return of 23%. The coupon rate promised to investors on securities issued against the pool of loans is 8%. The default (charge-off) rate on the pooled loans is expected to be 4.5%. The fee to compensate a servicing institution for collecting payments on the loans is 2%. Fees to set up credit and liquidity enhancements are 3%. The fee for advice on how to set up the pool of securitized loans is 1%. What is the residual income on this pool of loans?
A. 18.5%
B. 9%
C. 4.5%
D. 2%
E. None of the options is correct
Q:
Why are securitized loans often issued through a special-purpose entity?
A. Because the securitized loans often add risk to the bank and need to be held separately
B. Because the securitized loans are not profitable for the bank and need to be held separately
C. Because the special-purpose entity might fail and this prevents the failure of the bank
D. Because the bank might fail and this protects the credit status of the securitized loans
E. All of the options are correct
Q:
Which of the following is an advantage of securitizing loans?
A. Diversifying a lender's credit risk exposure
B. Reducing the need to monitor each individual loan's payment stream
C. Transforming illiquid assets into liquid securities
D. Serving as a new source of funds for lenders and attractive investments for investors
E. All the options are advantages of securitizing loans
Q:
When an issuer of securitized loans sets aside a cash reserve to cover loan defaults, they are providing an:
A. internal credit enhancement.
B. external credit enhancement.
C. internal liquidity enhancement.
D. external liquidity enhancement.
E. None of the options is correct
Q:
When an issuer of securitized loans includes a standby letter of credit with the securitized loans, they are providing an:
A. internal credit enhancement.
B. external credit enhancement.
C. internal liquidity enhancement.
D. external liquidity enhancement.
E. None of the options is correct.
Q:
When an issuer of securitized loans divides them into different risk classes or tranches, they are providing an:
A. internal credit enhancement
B. external credit enhancement
C. internal liquidity enhancement
D. external liquidity enhancement
E. None of the options is correct.
Q:
Investors in securitized loans normally receive added assurance that they will be repaid in the form of guarantees against default issued by:
A. the originator.
B. the special-purpose entity.
C. the trustee.
D. the servicer.
E. a credit enhancer.
Q:
Someone who collects the payments on the securitized loans and passes on those payments to the trustee is called:
A. the originator.
B. the special-purpose entity.
C. the trustee.
D. the servicer.
E. the credit enhancer.
Q:
In a securitization process, someone appointed to ensure that the issuer fulfills all the requirements of transfer of loans to the pool, and provides all of the services promised to investors in the securities is called:
A. the originator.
B. the special-purpose entity.
C. the trustee.
D. the servicer.
E. the credit enhancer.
Q:
Loans that are to be securitized are passed on to ____________. This helps ensure that if the lender goes bankrupt, it does not affect the credit status of the pooled loans.
A. the originator
B. a special-purpose entity
C. the trustee
D. a servicer
E. the credit enhancer
Q:
A bank or any other lender whose loans are pooled is called:
A. the originator.
B. the special-purpose entity.
C. the trustee.
D. the servicer.
E. the credit enhancer.
Q:
The principal sellers of risk protection via credit derivatives include all of the following except:
A. insurance companies.
B. securities dealers.
C. fund management firms.
D. banks.
E. None of the options is correct.
Q:
Securitization is used by the banks to:
A. fund a portion of a loan portfolio.
B. allocate capital more efficiently.
C. diversify funds sources.
D. lower the cost of fund raising.
E. All the options are correct.