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Finance
Q:
Shareholder wealth maximization means
A) maximizing earnings per share.
B) maximizing dividends per share.
C) maximizing the price of existing common stock.
D) maximizing stockholders equity.
Q:
A financial manager is considering two projects, A and B. A is expected to add $2 million to profits this year while B is expected to add $1 million to profits this year. Which of the following statements is MOST correct?
A) The manager should select project A because it maximizes profits.
B) The manager should select the project that maximizes long-term profits, not just one year of profits.
C) The manager should select project A or he is irrational.
D) The manager should select the project that causes the stock price to increase the most, which could be A or B.
Q:
Maximization of shareholder wealth
A) represents a zero sum game in which one corporation gains at the expense of others.
B) provides benefits to society as scarce resources are directed to their most productive use.
C) is not a practical goal since it cannot be measured effectively.
D) is achieved only if cash flows exceed accounting profits.
Q:
The primary goal of a publicly owned corporation is to ________.
A) maximize dividends per share
B) maximize shareholder wealth
C) maximize earnings per share after taxes
D) minimize shareholder risk
Q:
Shareholders react to poor investment or dividend decisions by causing the total value of the firm's stock to fall, and they react to good decisions by bidding the price of the stock up.
Q:
Only a firm's financial decisions affect its stock prices.
Q:
The goal of profit maximization ignores the risk of financial decisions.
Q:
One problem with maximization of shareholder wealth as a goal is that it ignores risk taken by the firm's financial decisions.
Q:
The payment of a dividend to current shareholders will have no impact on a corporation's share price because the cash paid is not available to future potential shareholders who may want to buy the corporation's stock.
Q:
The goal of the firm's financial managers should be the maximization of the total value of the firm's stock.
Q:
Corporate managers should accept investment projects that maximize profits in the short run because of the time value of money.
Q:
It is important to evaluate a corporate manager's financial decision by measuring the effect the decision should have on the corporation's stock price if everything else were held constant.
Q:
Shareholder wealth maximization means maximizing the price of the existing common stock.
Q:
The fundamental goal of a business is to maximize the retained earnings available to the corporation's shareholders.
Q:
Each financial decision made by a corporate manager can be evaluated by its direct impact on the corporation's stock price.
Q:
Financial management deals with the maintenance and creation of economic value or wealth.
Q:
The average durations and dollar amounts of assets and liabilities held in Freedom Bank are shown as the below:Asset and Liability ItemsAvg.Duration(yrs)$ AmountInvestment Grade Bonds12.00$65.00Commercial Loans4.00$400.00Consumer Loans8.00$250.00Deposits1.10$600.00Nondeposit Borrowings0.25$50.00What is the weighted average duration of Freedom Bank's asset portfolio? What is the weighted average duration of Freedom Bank's liability portfolio? What is the leverage-adjusted duration gap?
Q:
Formosa Independence Bank has DA = 2.45 years and DL = 1.08 years. In addition, this bank has total assets of $375 million and liabilities of $337.5 million. The CFO of Formosa Independence Bank wishes to effectively reduce the duration gap to one year by hedging with T-Bond futures that have a market value of $115,000 and a DFut = 8 years. How many contracts are needed and should the bank buy or sell them? If D stands for duration.
Q:
Why the capital in a financial institution can protect against credit risk and interest rate risk?
Q:
DCB bank has an assets size $1,200 million, with duration DA = 2.5 years, DL = 0.80 years. In addition, the total liability is $1,104 million. According to the duration gap model, what size interest rate change would make the institution insolvent if rates are currently 5%?
Q:
Explain the dilemma between liquidity, solvency and profitability. Why liquidity risk can lead to insolvency risk?
Q:
To get DE to equal zero to protect the equity value in the event of an interest rate change, the bank could
A) Reduce DA to 1.2 years
B) Increase DL to 2.5 years
C) Increase DL to 2.77 years
D) Reduce DA to zero
E) Increase DL to 3.10 years
Q:
If interest rates increase 100 basis points the predicted dollar change in equity value will equalA) $10,171,698B) -$10,171,698C) $12,724,528D) -$12,724,528E) $4,928,756
Q:
What is the bank's duration gap in years?
A) 1.432
B) 1.488
C) 1.587
D) 1.656
E) 1.722
Q:
A macro hedge is a
A) Hedge of a particular asset or liability
B) Hedge using futures on macroeconomic variables
C) Hedge using options in liabilities
D) Hedge without basis risk
E) Hedge of an entire balance sheet
Q:
A bond portfolio manager has a $25 million market value bond portfolio with a 6 year duration. The manager believes interest rates may increase 50 basis points. Which of the following could be used to help limit his risk?
I. Sell the bonds forward.
II. Buy bond futures contracts.
III. Buy call options on the bonds.
IV. Buy put options on the bonds.
A) I only
B) II only
C) I and III only
D) II and III only
E) I and IV only
Q:
A microhedge is a
A) Hedge against a change in a particular macro variable
B) Hedge of a particular asset or liability
C) Hedge of an entire balance sheet
D) Hedge using options
E) Hedge without basis risk
Q:
Suppose a T-Bond futures contract has a duration of 9 years and has a current market price of $98,750. Market interest rates are 6 percent today but are expected to rise to 7.5 percent. What is the change in this futures contract's market price from this change in interest rates?
A) +$12,577
B) -$12,577
C) +$62,883
D) -$62,883
E) -$33,578
Q:
Suppose a bank has an asset duration of 5 years and a liability duration of 2.5 years. This bank has $1000 million in assets and $750 million in liabilities. They are planning on trading in a Treasury bond future which has a duration of 8.5 years and which is selling right now for $99,000 for a $100,000 contract. How many futures contracts does this bank need to fully hedge itself against interest rate risk?
A) 3714 contracts
B) 3125 contracts
C) 2971 contracts
D) 371 contracts
E) 37 contacts
Q:
A bank wishing to avoid higher borrowing costs would be most likely to use:
A) A short or selling hedge in futures.
B) A long or buying hedge in futures.
C) A call option on futures contracts.
D) B and C above.
Q:
A bank has an average asset duration of 5 years and an average liability duration of 3 years. This bank has total assets of $500 million and total liabilities of $250 million. Currently, market interest rates are 10 percent. If interest rates fall to 8 percent, what is this bank's change in net worth?
A) Net worth will decrease by $31.81 million
B) Net worth will increase by $31.81 million
C) Net worth will increase by $27.27 million
D) Net worth will decrease by $27.27 million
E) Net worth will not change at all
Q:
A bond has a duration of 7.5 years. Its current market price is $1125. Interest rates in the market are 7% today. It has been forecasted that interest rates will rise to 9% over the next couple of weeks. How will this bank's price change in percentage terms?
A) This bond's price will rise by 2 percent.
B) This bond's price will fall by 2 percent.
C) This bond's price will not change
D) This bond's price will rise by 14.02 percent
E) This bond's price will fall by 14 .02 percent
Q:
A bank has an average asset duration of 1.15 years and an average liability duration of 2.70 years. This bank has $250 million in total assets and $225 million in total liabilities. This bank has:
A) A negative duration gap of 1.55 years.
B) A positive duration gap of 1.28 years.
C) A negative duration gap of 3.85 years.
D) A negative duration gap of 1.28 years.
Q:
A bank with a positive interest-sensitive gap will have a decrease in net interest income when interest rates in the market:
A) Rise
B) Unchange
C) Fall
D) A bank with a positive interest-sensitive gap will never have a decrease in net interest income
Q:
A bond has a face value of $1,000 and five years to maturity. This bond has a coupon rate of 13 percent and is selling in the market today for $902. Coupon payments are made annually on this bond. What is the yield to maturity (YTM) for this bond?
A) 13.25%
B) 12.75%
C) 16.00%
D) 11.45%
Q:
A bank has Federal funds totaling $25 million with an interest rate sensitivity weight of 1.0. This bank also has loans of $105 million and investments of $65 million with interest rate sensitivity weights of 1.40 and 1.15 respectively. This bank also has $135 million in interest-bearing deposits with an interest rate sensitivity weight of 0.90 and other money market borrowings of $75 million with an interest rate sensitivity weight of 1.0. What is the weighted interest-sensitive gap for this bank?
A) $50.25
B) $-15
C) -$50.25
D) $34.25
Q:
Please calculate the 10-day Value-at-Risk (VaR) for this 2-million USD portfolio.
A) $ 99,864.02
B) $111,842.52
C) $115,627.25
D) $131,529.81
E) $135,784.62
Q:
If the coefficient of correlation between USD/TWD and USD/JPN is 0.25. Please calculate the DEAR for this 2-million USD portfolio.A) $29,892.55B) $21,842.32C) $15,672.22D) $31,579.78E) $25,784.66
Q:
Refer to the information below for questions 15-17:As a portfolio manager of Asian Investments and Co., you like to evaluate the Value-at-Risk of your currency holding of Taiwanese and Japanese assets. Use the historical data in the past 20 years, you obtain the following information regarding the exchange rate between USD ($) with Taiwanese Dollar (TWD) and Japanese Yen (JPY):DEAR and VAR Calculations:Time Horizon (Days) =10Lower Tail Probability=0.005$ AmountStandard DeviationAdverse MoveDEAR (TWD)1,000,0000.00502.58DEAR (JPY)1,000,0000.01002.58DEAR (TWD and JPY)2,000,000?2.58where DEAR is daily earnings-at-risk, standard deviation is the volatility calculated by the historical data, adverse move is the t-value of the lower bound of the distribution of asset value.Please calculate the DEARs for TWD and JPN in USD.A) $9,892.55; $22,544.78B) $11,842.32; $22,784.71C) $15,672.22; $14,784.56D) $11,928.93; $52, 874.78E) $12,892.39; $25,784.78
Q:
ABC Bank has $39 million invested in T-Bonds with a 16-year duration, $39 million in 6 month maturity T-Bills, and $75 million invested in consumer loans with a 3 year duration. If they are all portfolios of this bank, what is the duration of the bank's asset portfolio in years?A) 5.95 yearsB) 6.50 yearsC) 7.23 yearsD) 8.78 yearsE) 9.51 years
Q:
Bank A has a loan to deposit ratio of 75%, core deposits equal 62% of total assets and borrowed funds are 5% of assets. Bank B has a loan to deposit ratio of 120%. Core deposits are 55% of assets and borrowed funds are 20% of assets. Which bank has more liquidity risk? Ceteris paribus, which bank will probably be more profitable when interest rates are low?
A) Bank A; Bank A
B) Bank A; Bank B
C) Bank B; Bank A
D) Bank B; Bank B
Q:
Which one of the following is a source of liquidity risk for a bank?
A) Predicted increase in net deposit withdraws before holidays
B) A natural disaster in the bank's community
C) Corporation calls in a bond the bank is holding
D) Maturation of notes payable
Q:
A bank has a positive gap and estimates that the spread between risk-sensitive assets and risk-sensitive liabilities will move directly with interest rates. If interest rates fall the bank's overall NII will
A) Fall
B) Rise
C) Necessarily be unchanged
D) Rise or fall depending on the size of the spread affect relative to the size of the CGAP effect
Q:
If all interest rates on the two sides of balance sheet decline by 65 basis points, when other things are equal, what is the change in net interest income for Formosa Independence Bank over the year?
A) $0
B) $1,400,000
C) -$1,400,000
D) $1,592,500
E) -$1,592,500
Q:
Refer to the information below for questions 9-10:Formosa Independence Bank has the following balance sheet:AssetsReturnMill $Liabilities and EquityCostMill $Cash0.00%$ 35Fixed rate deposits3.50%$240Investments (< 1 year)4.00%$400Rate sensitive deposits2.00%$360Short term loans (< 1 year)6.00%$280Fed fund borrowings2.50%$ 75Long term fixed rate loans (maturity > 1 year)6.75%$250Long term borrowings at fixed rate (maturity > 1 year)5.50%$119Total$710Equity$ 66Total$710The bank's one-year gap between assets and liabilities is (Mill $)A) $425B) $245C) $174D) $140E) $126
Q:
What is Formosa International Bank's total net liquidity?A) $4,520B) $6,500C) $5,200D) $7,280E) $6,900
Q:
What is Formosa International Bank's total uses of liquidity?
A) $6,500
B) $14,500
C) $14,900
D) $16,280
E) $15,760
Q:
Refer to the information below for questions 6-8:Formosa International Bank (FIB) (mill$)Funds borrowed$6,300Maximum amount FIB can still borrow$8,600Cash"type assets$4,700Excess cash reserves$ 100Federal Reserve borrowings$ 200What is Formosa International Bank's total sources of liquidity?A) $16,520B) $13,400C) $14,200D) $12,280E) $15,760
Q:
In 2008, many banks encounter liquidity issues and experienced deposit withdrawal or bank run. Which one of the following alternatives is an appropriate way to deal with deposit withdrawal?A) Increasing in Euro dollar depositsB) Contacting an investment banker to find new corporate depositsC) Increasing Fed funds borrowedD) Issuance of a negotiable CDE) Selling the bank's holdings of T-bills
Q:
Which of the following results in a net liquidity drain?
A) Demand deposits increase $120; loans increase $80
B) Reverse repurchase agreements increase $50; demand deposit decrease $50
C) Repurchase agreements increase $100; Demand deposit decrease $50
D) Demand deposits decrease $120; loan repayments are $250
E) Demand deposits increase $10; loans decrease $10
Q:
Which one of the following situations creates the most liquidity risk?
A) Long term assets funded by short term liabilities
B) Short term assets funded by short term liabilities
C) Long term assets funded by long term liabilities
D) Short term assets funded by long term liabilities
E) Long term liabilities funded by short term assets
Q:
The gain or loss to a bank from the use of a financial futures contract depends upon:
A) The duration of the underlying security named in the futures contract
B) The initial futures price
C) The change expected in interest rates divided by 1 + the original interest rate.
D) All of the above.
E) None of the above.
Q:
The number of futures contracts that a bank will need in order to fully hedge the bank's overall interest rate risk exposure and protect the bank's net worth depends upon (among other factors):
A) The relative duration of bank assets and liabilities.
B) The duration of the underlying security named in the futures contract.
C) The price of the futures contract.
D) All of the above.
E) None of the above.
Q:
Microhedging is to use risk-management instruments such as futures and options to reduce the interest rate risk of banks.
Q:
The VaR are most effective in assessing potential risk for the non-traded assets.
Q:
Value at risk (VaR) is to measure price or market risk of a portfolio of assets and attempt to determine the maximum loss they might sustain over a designated period of time.
Q:
As interest rates increase, a long call option position on a bond decreases in value.
Q:
A U.S. company has a euro denominated loan it must repay in 6 months. A short position in euro futures could help offset the corporation's foreign exchange risk.
Q:
Swaps are usually the best hedging tool to use to hedge short term risks in a half year or less.
Q:
Writing a call option on a bond pays off if interest rates decrease.
Q:
Basis risk is the risk that the prices or value of the underlying spot and the derivatives instrument used to hedge do not move predictably relative to one another.
Q:
If duration of asset is less than the liability leverage times the duration of liability, then falling interest rates will cause the market value of equity to rise.
Q:
Maximizing a bank's profit, providing liquidity, and maintaining solvency are goals of a consistent direction for bankers.
Q:
The number of futures contracts needed to hedge a position increases as the bank's duration gap increases.
Q:
In the typical quality swap a borrower with a negative duration gap is more likely to pay all or part of the other swap party's long-term interest rate.
Q:
The sensitivity of the market price of a financial futures contract depends upon the duration of the security to be delivered under the futures contract.
Q:
One of the most popular methods of neutralizing duration gap risks is to buy and sell financial futures contracts.
Q:
The buyer of a loan in participation has a double risk exposure, one to the borrower and one to the selling bank.
Q:
A bank's financing gap is calculated as average loans minus average deposits plus liquid assets.
Q:
If a bank has a positive repricing gap, falling interest rates increase profitability.
Q:
A rate sensitive asset is one that either matures within the maturity bucket or one that will have a payment change within the maturity bucket if interest rates change.
Q:
A firm informs the bank they will immediately draw down the maximum amount on their credit line. This is an example of liability side risk.
Q:
Insolvency occurs when an institution's duration gap becomes positive.
Q:
Large banks tend to rely more on deposits and small banks tend to rely more on purchased liquidity.
Q:
You invest $1,000,000 in Formosa Growth Fund. The Fund charges a front end load of 5.75% and an annual expense fee of 1.25% of the average asset value over the year. You believe the fund's gross rate of return will be 11% per year. What will your investment portfolio be worth in one year?
Q:
What are the functions that investment companies and mutual funds provide to the public?
Q:
How do hedge funds take advantage of capital market inefficiencies and end up making the markets more efficient?
Q:
Why have exchange-traded funds become popular in the last few years? Name one and specify what it tracks.
Q:
Why are there so many different mutual funds offered for sale?
Q:
How is the marketing channel of distribution different for load mutual funds vs. no-load funds?