Q&A Hero

Q: Always use the average corporate tax rate to calculate the tax shields for firms.

Q: T F 41. Current theory suggests that banks exist because of imperfections in our financial system.

Q: T F 59. Financial institutions face two major kinds of interest rate risk. These risks include price risk and reinvestment risk.

Q: Analysis of past monthly movements in IBM's stock price produces the following estimates: a = 2. 5% and b = 1. 6. If the market index subsequently rises by 12% in one month and IBM's stock price increases by 20%, what is the abnormal change in IBM's stock price? A. +1.7% B. +8% C. -1.7% D. None of the above

Q: The correlation measures the: A. Rate of movements of the return of individual stocks B. Direction of movement of the return of individual stocks C. Direction of movement between the returns of two stocks D. Stock market volatility

Q: T F 30. The product line diversification effect occurs when a traditional banking service and a nontraditional banking service are not very correlated with each other and reduce the overall risk of the bank.

Q: 48. The correlation coefficient between stock A and the market portfolio is +0.6. The standard deviation of return of the stock is 30% and that of the market portfolio is 20%. Calculate the beta of the stock. A. 1.1 B. 1.0 C. 0.9 D. 0.6

Q: T F 40. Lending institutions act as delegated monitors and can diversify and reduce their risk exposure, resulting in increased safety for savers funds.

Q: 49. Historical nominal return for stock A is -8%, +10% and +22%. The nominal return for the market portfolio is +6%, +18% and 24%. Calculate the beta for stock A. A. 1.64 B. 0.61 C. 1.0 D. None of the above

Q: T F 58. Financial securities that are the same in all other ways may have differences in interest rates that reflect the differences in the ease of selling the security in the secondary market at a favorable price.

Q: If the standard deviation of returns of the market is 20% and the beta of a well-diversified portfolio is 1.5, calculate the standard deviation of the portfolio: A. 30% B. 20% C. 10% D. none of the above

Q: T F 29. Trust services are a relatively new service for banks.

Q: Stock X has a standard deviation of return of 10%. Stock Y has a standard deviation of return of 20%. The correlation coefficient between stocks is 0.5. If you invest 60% of the funds in stock X and 40% in stock Y, what is the standard deviation of a portfolio? A. 10% B. 20% C. 12.2% D. None of the above

Q: T F 39. The recent erosion of the banking market share relative to other financial institutions means that banking is a dying industry.

Q: Mass Company is investing in a giant crane. It is expected to cost 6.6 million in initial investment and it is expected to generate an end of year cash flow of 3.0 million each year for three years. Calculate the MIRR for the project if the cost of capital is 12% APR. A. 17.3% B. 15.3% C. 23.8% D. 22.1%

Q: T F 57. The yield curve is constructed using corporate bonds with different default risks so the bank can determine the risk/return tradeoff for default risk.

Q: If the sign of the cash flows for a project changes two times then the project has: A. one IRR B. two IRRs C. three IRRs D. None of the above

Q: T F 28. Trust services have no impact on the deposits of the bank.

Q: 29. Project X has the following cash flows: C0 = +2000, C1 = -1,300 and C2 = -1,500. If the IRR of the project is 25% and if the cost of capital is 18%, you would: A. Accept the project B. Reject the project

Q: T F 38. A greater proportion of major corporations have deserted the banking system in recent years to raise borrowed funds directly from the open market.

Q: The following are some of the shortcomings of the IRR method except: A. IRR is conceptually easy to communicate B. Projects can have multiple IRRs C. IRR method cannot distinguish between a borrowing project and a lending project D. It is very cumbersome to evaluate mutually exclusive projects using the IRR method

Q: T F 56. Interest-sensitive gap, relative interest-sensitive gap and the interest-sensitivity ratio will often reach different conclusions as to whether the bank is asset or liability sensitive.

Q: If an investment project (normal project) has IRR equal to the cost of capital, the NPV for that project is: A. Positive B. Negative C. Zero D. Unable to determine

Q: T F 27. A nonproprietary mutual fund is where the bank acts as a broker for a nonaffiliated mutual fund but does not act as an investment advisor.

Q: Which of the following statements regarding the discounted payback period rule is true? A. The discounted payback rule uses the time value of money concept. B. The discounted payback rule is better than the NPV rule. C. The discounted payback rule considers all cash flows. D. The discounted payback rule exhibits the value additive property.

Q: T F 37. Money-center banks usually service local communities, towns, and cities, offering a narrow menu of services to the public.

Q: 9. You are given a job to make a decision on project X, which is composed of three independent projects A, B, and C which have NPVs of + $70, -$40 and + $100, respectively. How would you go about making the decision about whether to accept or reject the project? A. Accept the firm's joint project as it has a positive NPV B. Reject the joint project C. Break up the project into its components: accept A and C and reject B D. None of the above

Q: T F 55. Interest-sensitive gap techniques do not consider the impact of changing interest rates on stockholders equity.

Q: 8. If the NPV of project A is + $30 and that of project B is - $60, then the NPV of the combined project is: A. +$30 B. -$60 C. -$30 D. None of the above.

Q: T F 26. A bank's nondeposit investment products include IRAs, Keoghs and MMDAs.

Q: 7. If the net present value (NPV) of project A is + $100, and that of project B is + $60, then the net present value of the combined project is: A. +$100 B. +$60 C. +$160 D. None of the above

Q: T F 36. The number of independently owned banks has risen in the United States over the last decade.

Q: Which of the following investment rules has value adding-up property? A. The payback period method B. Net present value method C. The book rate of return method D. The internal rate of return method

Q: T F 54. For most banks interest rates paid on liabilities tend to move more slowly than interest rates earned on assets.

Q: The Wall Street Journal quotation for a company has the following values: Div: $1.12, PE: 18.3, Close: $37.22. Calculate the dividend pay out ratio for the company (Approximately). A. 18% B. 55% C. 45% D. None of the above

Q: According to the textbook, one likely outcome of the current financial crisis for both commercial and investment banks is __________________.

Q: T F 35. According to the textbook, high-volume banking is required to make efficient use of automation and other technological innovations.

Q: T F 53. Banks with a negative cumulative interest-sensitive gap will benefit if interest rates rise, but lose income if interest rates decline.

Q: T F 70. Following the recent global credit crisis, regulators have begun to emphasize the need for loan originators to know their borrowers better and retain some of the risk on loans that they sell.

Q: T F 34. When banks serve as conduits for government policy this is referred to as their agency role.

Q: T F 52. Banks with a positive cumulative interest-sensitive gap will benefit if interest rates rise, but lose income if interest rates decline.

Q: T F 69. Commercial banks are the largest originator of household loans. Answer: True

Q: T F 33. The role performed by banks in which they stand behind their customers when those customers are unable to pay a debt obligation is known as the guarantor role.

Q: T F 51. If a bank's interest-sensitive assets and liabilities are equal than its interest revenues from assets and funding costs from liabilities will change at the same rate.

Q: T F 68. The “direct cash flow” method and “cash flow by origin” are two very different ways of assessing the cash flows of a potential borrower.

Q: T F 32. The role performed by banks in the economy in which they transform savings into credit is known as the intermediation role.

Q: T F 50. A financial institution is liability sensitive if its interest-sensitive liabilities are less than its interest-sensitive assets.

Q: T F 67. Net cash flow from operations is the borrower’s net income expressed in cash rather than on an accrual basis.

Q: T F 30. According to the delegated monitoring theory banks are able to attract borrowing customers because they pledge confidentiality.

Q: T F 49. Short-term interest rates tend to rise more slowly than long-term interest rates and to fall more slowly when all interest rates in the market are headed down.

Q: T F 66. The A in the CAMELS rating system stands for asset quality.

Q: T F 29. According to the textbook, banks are those financial institutions that today offer the widest range of financial services of any business firm in the economy.

Q: T F 48. Bankers cannot determine the level or trend of market interest rates; instead, they can only react to the level and trend of rates.

Q: T F 65. Agriculture loans are loans that are made to individuals to finance vacations, purchase durable goods and other retail goods.

Q: T F 28. The etymological roots of the word "bank" trace this word back to an Italian term referring to a "money-changer's table".

Q: T F 47. Under the so-called funds management view bank management's control over assets must be coordinated with its control over liabilities so that asset and liability management are internally consistent.

Q: T F 64. Commercial and industrial loans are loans to businesses to cover such things as purchasing inventory, paying taxes and meeting payroll expenses.

Q: T F 27. Nonbank banks can offer deposits to the public, but these deposits are not eligible for insurance coverage by the FDIC.

Q: T F 46. Under the so-called liability management view in banking the key control lever banks possess over the volume and mix of their liabilities is price.

Q: T F 63. A written loan policy gives loan officers and the bank’s management specific guidelines in making individual loan decisions and in forming the bank’s loan portfolio.

Q: T F 26. Under U.S. federal law, an institution making only loans to households and offering uninsured checkable deposits and savings deposits qualifies as a commercial bank.

Q: T F 45. A liability-sensitive bank will experience an increase in its net interest margin if interest rates rise.

Q: T F 62. A loan workout is when the bank and the customer initially negotiate the terms of the loan.

Q: T F 44. If interest rates fall when a bank is in an asset-sensitive position its net interest margin will rise.

Q: T F 61. For ease and convenience most banks have the loan review conducted by the same person who makes the loan. This is particularly true of large banks.

Q: T F 43. The ultimate goal of liability management is to gain control over a financial institution's sources of funds.

Q: T F 60. Affirmative covenants restrict a borrower from doing certain things.

Q: T F 42. Asset management strategy in banking assumes that the amount and kinds of deposits and other borrowed funds a bank attracts are determined largely by its management.

Q: T F 59. Negative covenants require the borrower to take certain actions.

Q: T F 58. There are three principal sources of cash to repay a loan. These are cash flows generated from sales or income, funds generated from the liquidation of assets and funds raised by selling debt or equity securities.

Q: T F 57. Cash is one of the 6 C’s of lending and refers to the fact that the lender wants to make sure the borrower has the ability to generate enough cash to repay the loan.

Q: T F 41. Usually the principal goal of asset-liability management is to maximize or at least stabilize a bank's margin or spread.

Q: is the phenomenon that interest rates attached to various assets often change by different amounts and at different speeds than interest rates attached to various liabilities,

Q: T F 56. Loan review is considered to be a luxury, not a necessity for most banks, especially those with sound lending policies.

Q: T F 76. A financial institution with a negative gap would like to receive the floating rate in an interest-rate swap.

Q: T F 55. A restriction against a borrower taking on new debt is an affirmative covenant in a loan contract.

Q: T F 75. The number of futures contracts needed to hedge a position increases as the bank's duration gap increases.

Q: T F 54. Accounts receivable financing means that a bank actually takes over ownership of receivables, whereas factoring means that a bank merely lends money on a borrowing customer’s receivables and the customer still has ownership of the receivables.

Q: T F 74. Virtually all banks in the U.S. use derivative contracts to hedge their risks.

Q: T F 53. A rating of “5” is the highest and best rating that a U.S. bank can receive under the CAMEL rating system.