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Chapter 10

Terms in this set (29)

60. An important investment security popular with banks that must by law mature within one year from the date of issue and which has a high degree of safety and marketability is the:
A) Treasury bill
61. A bank's promise to pay the holder a designated amount of money on a designated future date and is often used in international trade is known as a (or an):
C) Bankers' acceptance
62. Pools of mortgages put together either by a government agency or by a private investment banking corporation to raise more loanable funds for the issuer are known as a (or an):
C) CMO
63. Fluctuations in the timing of cash payments flowing from an underlying pool of securitized assets is referred to as:
B) Prepayment risk
64. Principal roles that a financial institution's investment portfolio play include which of the following?
A) Income stability
B) Geographic diversification
C) Hedging interest rate risk
D) Backup liquidity
E) All of the above
65. _____________ is the method by which banks can provide a safeguard for the deposits of governmental units.
Pledging
66. The most aggressive investment maturity strategy that calls for the bank to continually shift the maturities of its securities in response to changes in interest rates and other economic conditions is the
B) Rate expectations approach
67. Which of the following statements is (are) correct regarding duration?
B) In comparing two loans with the same maturity and the same interest rate, a fully amortized loan will have a shorter duration than a loan with a balloon payment.
68. Which of the following is not one of the Capital Market instruments in which banks invest?
E) Commercial paper
69. Which of the following is true of Treasury bills?
A) Interest on Treasury bills is exempt from state income taxes.
B) Interest on Treasury bills is exempt from federal income taxes.
C) Treasury bills pay a lower pretax yield than comparable corporate securities.
D) All of the above are true.
E) A and C only***
70. In recent years security dealers have assembled pools of federal agency securities whose principal interest yield may be periodically reset based on what happens to a stated interest rate or may carry multiple coupon rates that are periodically adjusted; the foregoing describes a:
D) Structured note
71. Banks are generally not allowed to invest in speculative grade bonds. What kind of risk is this designed to limit?
C) Credit risk
72. A security where the interest payments and the principal payments are sold separately is called:
D) A stripped security
73. Which of the following is true? Mortgage prepayment risk:
A) Is higher on high interest rate mortgages
74. A bank replaces 5-year corporate bonds with a yield to maturity of 9.75 percent with 5-year municipal bonds with a yield to maturity of 7 percent. This bank is in the 35 percent tax bracket and these bonds have the same default risk. What is the most likely reason this bank changed from the corporate to the municipal bonds?
D) Tax exposure
75. Suppose a bank has found bank qualified municipal bonds which have a nominal gross rate of return of 8 percent and that it can borrow funds needed for this purchase at a rate of 6.25 percent. This bond is in the 35 percent tax bracket. What is the net after-tax return on this bond?
B) 3.5 percent
77. Which of the following would not be considered a bank qualified municipal security?
E) A Treasury bond to finance government debt.
82. A security which was created by the Treasury to protect against inflation risk is called a(n):
D) TIPS
83. A financial institution that is concerned about the possibility that the purchasing power of both the interest income and principal income will decline on a loan is concerned about which of the following things?
E) Inflation risk
84. A bank that is concerned that the economic conditions of the market area they serve may take a downturn with falling demand for loans and higher bankruptcies in the areas is concerned about which of the following things?
A) Business risk
85. Which of the following is a characteristic of Treasury bills?
C) They are discount securities
86. The investment maturity strategy which calls for the bank to put all of their investment assets into very long term securities is called the:
B) Back-end-loaded maturity policy
97. The Dillinger State Bank has purchased a bond from the Interstate Manufacturing Company that has 15 years to maturity and has a coupon rate of 12.5%. Market interest rates have recently declined to 8% and the Dillinger State Bank is worried that the Interstate Manufacturing Company will retire the bond and issue new ones with a lower coupon rate. What type of risk is the Dillinger State Bank worried about?
E) Prepayment risk
98. The Terrell State Bank is a small bank located in Guyman, Oklahoma. All of their loans are agriculture and small business loans in Guyman. They want to buy a municipal bond from the state of South Carolina. What type of risk are they likely trying to reduce with this purchase?
C) Business risk
99. The Caldwell National Bank has purchased a bond that pays a coupon rate of 10.5%. They are a little concerned because they believe rates will decrease in the future and they will not be able to reinvest the coupon payments at the same rate. What type of risk are they concerned about?
B) Interest rate risk
100. Moody's Investor Service has added the numbers 1, 2 and 3 to some of their ratings. What type of risk are these ratings attempting to measure?
A) Credit risk
101. The Roy State Bank has just purchase a portfolio of asset backed securities. What type of risk do these securities have that other securities do not have?
E) Prepayment risk
104. The Goodknight Company has issued securities with 45 days to maturity. What type of security have they issued?
A) Commercial Paper
105. The Dakota National Bank has purchased a security issued by the state of Tennessee that has 20 years to maturity. What type of security have they purchased?
E) Municipal Bond
THIS SET IS OFTEN IN FOLDERS WITH...