FINANCE HW

Exam

Name___________________________________

MULTIPLE CHOICE.  Choose the one alternative that best completes the statement or answers the question.

1)  The demand for an asset rises if ________ falls. 1)

A)  risk relative to other assets              B) wealth C) expected return relative to other assets D) liquidity relative to other assets

2)  Banks’ attempts to solve adverse selection and moral hazard problems help explain loan 2) management principles such as A) credit rationing.

B)   collateral and compensating balances.

C)   screening and monitoring of loan applicants.

D)  all of the above.

E)   only A and B of the above.

3)  When a lender refuses to make a loan, although borrowers are willing to pay the stated interest rate             3) or even a higher rate, it is said to engage in ________.

A)  credit rationing B) constrained lending C) strategic refusal D) collusive behavior

4)  If a bank has more rate- sensitive liabilities than rate- sensitive assets, then a(n) ________ in interest 4) rates will ________ bank profits.

A)  increase; increase               B) increase; reduce

C) decline; not affect                                                            D) decline; reduce

First National Bank

Table 23.1

5)  Referring to Table 23.1, if interest rates rise by 5 percentage points, then bank profits (measured     5) using gap analysis) will

A)  increase by $1.5 million.  B) decline by $0.5 million.

C) decline by $2.5 million.                                                 D) decline by $1.5 million.

First National Bank

Table 23.2

7)  Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for      7) several maturity subintervals by the change in the interest rate is called A) basic gap analysis.

B)   the maturity bucket approach to gap analysis.

C)   the segmented maturity approach to interest- exposure analysis.

D)  the segmented maturity approach to gap analysis.

E)   none of the above.

8)  If a decline in interest rates causes the market value of a bank’s net worth to rise, then the bank       8) must have a ________.

A) positive duration gap                                                     B) positive gap

C) negative duration gap                                                    D) negative gap

B)   does not measure the sensitivity of net worth to interest rate changes.

C)   does not measure the sensitivity of income to interest rate changes.

D)  is calculated assuming that the yield curve is flat.

E)   is calculated assuming that the yield curve does not change.

10)  One problem with basic gap analysis is that it

A)  is calculated assuming interest rates on all maturities are equal.

B)   does not measure the sensitivity of income to interest rate changes.

C)   is calculated assuming interest rates on all maturities change by equal amounts.

D)  applies only to financial institutions.

E)   measures the sensitivity of net worth to interest rate changes.

11)  A bank manager concerned about interest income who expects interest rates to fall and who knows              11) the bank currently has a positive gap should ________ rate- sensitive assets and ________ rate- sensitive liabilities.

A)  decrease; decrease              B) decrease; increase

C) increase; increase                                                            D) increase; decrease

12)  The number of contracts outstanding in a particular financial future is the ________.          12)

A)  open interest        B) outstanding balance

C) index level                                                                         D) demand coefficient

14)  When a financial institution hedges the interest- rate risk for a specific asset, the hedge is called a 14) ________.

A)  macro hedge     B) futures hedge C) micro hedge   D) cross hedge

15)  An increase in the volatility of the underlying asset, all other things held constant, will ________ the 15) option premium.

A)  not affect             B) increase C) decrease D) Not enough information is given.

16)  A financial contract that obligates one party to exchange a set of payments it owns for another set of             16) payments owned by another party is called a ________.

A)  cross put option               B) swap

C) cross call option                                                               D) cross hedge

17)  If Second National Bank has more rate- sensitive assets than rate- sensitive liabilities, it can reduce                17) interest- rate risk with a swap which requires Second National to A) receive a fixed rate while paying a floating rate.

B)   both receive and pay a floating rate.

C)   both receive and pay a fixed rate.

D)  pay a fixed rate while receiving a floating rate.

18)  The use of financial derivatives by financial institutions to hedge can decrease risk. However, they 18) can also increase risk. Which of the following examples illustrates this?

A)  Some institutions such huge amounts of derivatives that the amounts exceed capital.

B)   Financial derivatives allow financial institutions to increase their leverage.

C)   All of the above are valid examples.

D)  None of the above are valid examples.

19)  Factors that cause the demand curve for bonds to shift to the left include   19)

A)  an increase in the liquidity of stocks.

B)   an increase in the inflation rate.

C)   a decrease in the volatility of stock prices.

D)  all of the above.

E)   none of the above.

20)  According to the expectations theory of the term structure,              20)

A)  buyers of bonds prefer short- term to long- term bonds.

B)   interest rates on bonds of different maturities move together over time.

C)   the interest rate on long- term bonds will exceed the average of expected future short- term interest rates.

D)  all of the above.

E)

only A and B of the above.