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Financial Institutions Exam 2

Terms in this set (112)

securities with maturities of one year or less are classified as
money market instruments
at any given time, the yield on commercial paper is _____ the yield on a T-Bill with the same maturity
slight higher than
Which of the following is not a money market security
common stock
large corporations typically make ____ bids for T-bills so they can purchase larger amounts
competitive
the federal funds market allows depository institutions to borrow
short-term funds from each other
T-bills and commercial paper are sold
at a discount from par value
if an investor buys a T-bill with a 90-day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield
about 12.5%
an investor purchased an NCD a year ago in the secondary market for $980,000. He redeems it today and receives $1,000,000. He also receives interest of $30,000. The investor's annualized yield on this investment is ____ percent
5.1
which of the following is true of money market instruments?
their yields are highly correlated over time
treasury bills are sold through ___ when initially issued
auctions
a protective covenant may
restrict the amount of additional debt the firm can use
interest earned from Treasury bonds is
exempt from state and local taxes
___ bids for treasury bonds specify a price that the bidder is willing to pay and a dollar amount of securities to be purchased
competitive
if interest rates suddenly ____, those existing bonds that have a call feature are ___ likely to be called.
decline, more
some bonds are "stripped," which means that
they are transferred into principal-only and interest-only securities
which of the following is not mentioned in the text as a protective covenant
the appointment of a trustee in all bond indentures
the principal-only and the interest-only payments derive from a 20-year, 3.2% coupon bond with a par value of $10,000 and semi-annual interest payments will be, respectively
$10,000 paid in 20 years, 40 payments of $160
how much would an investor pay for the following T-bond assuming a face value of $1,000. Rate: 3.5%, Maturity date: July 2012, Bid: 95:22, Ask: 95:28, Yield: 4.32%
958.75
Harry potter can purchase bonds with 15 years until maturity, a par value of $1,000, and a 9% annualized coupon rate for $1,100. Mr. Potter's yield to maturity is ____ percent
7.84
Ed Wood, a private investor, can purchase $1,000 par value bonds for $980. The bonds have a 10%, pay interest annually, and have 20 years remaining until maturity. Mr. Wood's yield to maturity is ___ percent
10.24
if analysts expect that the demand for loanable funds will increase, and the supply of loanable funds will decrease, they would most likely expect interest rates to ___ and prices of existing bonds to ____
increase, decrease
zero-coupon bonds with a par value of $1,000,000 have a maturity of 10 years, and a required rate of return of 9%. What is the current price?
422,411
as interest rates increase, long-term bond prices
decrease by a greater degree than short-term bond prices
assume that the price of a $1,000 zero coupon with five years to maturity is $567 when the required rate of return is 12%. If the required rate of return suddenly changes to 15%, what is the price elasticity of the bond?
-.494
if the coupon rate equals the required rate of return, the price of the bond
should be equal to its par value
Hurricane corp. recently purchase corporate bonds in the secondary market with a par value of $11 million, a coupon rate of 12%, and four years until maturity. If hurricane intends to sell the bonds in two years and expects investors' required rate of return at that time on similar investments to be 14% at that time, what is the expected market value of the bonds in 2 years?
10.64 million
the actual response of a bond's price to a change in bond yields is
convex
if the level of inflation is expected to ____, there will be ____ pressure on interest rates and ____ pressure on the required rate of return on bonds
increase, upward, upward
with a(n) ____ strategy, funds are allocated to bonds with a short term to maturity and bonds with a long term to maturity. This, this strategy allocates some funds to achieving a relatively high return and other funds to covering liquidity needs.
barbell
a bond has 3 years remaining to maturity, a $1,000 par value, and 8% coupon rate, and a 6% yield to maturity. What is the duration and modified duration of this bond?
2.79 years and 2.63 years, respectively
a 15-year, $100,000 mortgage has a fixed mortgage rate of 9%. In the first month, the total mortgage payment is $____, and $____ of this amount represents payment of interest.
1,014, 750
a financial institution has a higher degree of interest rate risk on a ____ than a ____
30-year fixed-rate mortgage, 15-year fixed-rate mortgage
a mortgage which requires interest payments for a three- to five-year period, then full payment of principal, is a(n):
balloon payment mortgage
mortgage companies specialize in
originating mortgages and selling those mortgages
which of the following mortgages allows the home purchaser to obtain a mortgage at a below-market interest rate throughout the life of the mortgage
shared-appreciation mortgage
a ____ mortgage allows the borrower to initially make small payments on the mortgage. The payments then increase over the first 5 to 10 years and then level off.
graduated payment
____ risk is the risk that a borrower may prepay the mortgage in response to a decline in interest rates
prepayment
a balloon-payment mortgage requires interest payments for a 10- to 20-year period, at the end of which the borrower must pay the full amount of the principal
false
"securitization" refers to the private insurance of conventional mortgages
false
____ was created in 1968 as a corporation that is wholly owned by the federal government. It supplies funds to low- and moderate-income homeowners indirectly by facilitating the flow of funds into secondary mortgage markets
Ginnie Mae
firms assume ____ risk when they issue preferred stock than when they issue bonds. The payment of dividends on preferred stock ____ be omitted without the firm being forced into bankruptcy
less, can
the first-time issuance of shares by a specific firm to the public is referred to as a(n)
initial public offering
on average, IPOs of firms tend to perform ____ over a period of a year or longer
poorly
when a corporation first decides to issue stock to the public, it engages in a(n) ____ offering
initial public
buy and sell orders on the OTC market are completed by
a telecommunications network
the ____ is a value-weighted index of stock prices of 500 large US firms
standard and poor's 500
the prevailing price per share dividend by the firm's earnings per share is known as the
price-earnings ratio
initial public offerings perform ____ on the day following the IPO and ____ for periods of a year or longer after the IPO
well, poorly
an example of shareholder activism is
communication with the firm, engaging in a proxy contest, and filing a lawsuit against the board
the ____ is a price-weighted average of stock prices of 30 large US firms
Dow Jones Industrial Average
an investor buys commercial paper with a 60-day maturity for $985,000. Par value is $1,000,000, and the investor holds it to maturity. What is the annualized yeild?
9.14%
____ is a short-term debt instrument issued only by well-known, creditworthy firms and is normally issued to provide liquidity or finance a firm's investment in inventory and accounts receivable
commercial paper
Jarrod King, a private investor, purchases a treasury bill with a $10,000 par value for $9,645. 100 days later, Jarrod sells the T-Bill for $9,719. what is jarrod's expected annualized yield from this transaction
2.8%
A newly issued T-bill with a $10,000 par value sells for $9,750, and has a 90-day maturity. What is the discount?
10%
____ are sold at an auction at a discount from par value
treasury bills
the yield on commercial paper is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period.
greater than, recessionary
the rate at which depository institutions effectively lend or borrow funds from each other is the ____ rate
federal funds
Treasury bills
have an active secondary market
corporate bonds that receive a ____ rating from credit rating agencies are normally placed at ____ yeilds
higher, lower
note maturities are usually ____, while bond maturities are ____
less than 10 years, 10 years or more
the municipal yield curve is typically ____ than the treasury yield curve, and the shape of the municipal yield curve is ____ the shape of the treasury yield curve
lower, similar to
which of the following is not true regarding the call provision
the difference between the market value of the bond and the par value is called the call premium
the yield to maturity is the annualized discount rate that equates the future coupon and principal payments to the initial proceeds received from the bond offering
true
when would a firm most likely call bonds?
after interest rates have declined
a ten-year, inflation-indexed bond has a par value of $10,000 and a coupon rate of 5%. During the first 6 months since the bond was issued, the inflation rate was 2%. Based on this information the annual coupon payment after 6 months will be
510
how much would an investor pay for the following T-bond assuming a face value of $100. Rate: 3.5%, Maturity date: July 2012, Bid: 95:22, Ask: 95:28, Yield: 4.32%
95.69
if a financial institution's bond portfolio contains a relatively large portion of ____, it will be ____.
zero- or low-coupon bonds, more favorably affected by declining interest rates
a(n) ____ in the expected level of inflation results in ____ pressure on bond prices
increase, downward
if the coupon rate ____ the required rate of return, the price of a bond ____ par value
equals, equals
the prices of bonds with ____ are most sensitive to interest rate movements
zero-coupon payments
an expected ____ in economic growth places ____ pressure on bond prices
increase, downward
when two securities have the same expected cash flows, the value of the low-risk security will be ____ than the value of the high-risk security
higher
using a(n) ____ strategy, investors allocate funds evenly to bonds in each of several different maturity classes
laddered
sioux financial corp has forecasted its bond portfolio value for one year ahead to be $105 million, in one year, it expects to receive $10,000,000 in coupon payments. the bond portfolio today is worth $101 million. What is the forecasted return of this bond portfolio
13.86%
a bond has 3 years remaining to maturity, a $1,000 par value, an 8% coupon rate and a 10% yeild to maturity. What is the duration and modified duration of this bond?
2.78 years and 2.52 years, respectively
from the perspective of the lending financial institution, interest rate risk is
lower on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage
in an amortization schedule of monthly mortgage payments
interest payments exceed principal payments early on
for any given interest rate, the shorter the life of the mortgage, the ____ the monthly payments and the ____ the total payments over the life of the mortgage
greater, less
the interest rate on a second mortgage is ____ a first mortgage created at the same time, because the second mortgage is ____ the existing first mortgage in priority claim against the property in the even of default
higher than, behind
an institution that originates and holds a fixed-rate mortgage is adversely affected by ____ interest rates, the borrower who was provided the mortgage is adversely affected by ____ interest rates
increasing, decreasing
which of the following is not a guarantor of federally insured mortgages
the us treasury
a ____ mortgage allows borrowers to initially make small payments on the mortgage, which are then increase on a graduated basis over the first 5 to 10 years, payments then level off from there on
graduated-payment
the difference between the 30-year mortgage rate and the 30-year treasury bond rate is primarily attributable to ____ risk
credit
which pass-through security is backed by mortgages that are insured through private insurance companies
publicly issued pass-through securities
the issuance of pass-through securities by financial institutions that provide mortgages
can reduce their interest rate risk
if investors quickly sell an IPO stock in the secondary market, there will be ____ pressure on the stock's price
downward
a firm can best avoid the time lag between registering new securities with the SEC and actually selling them by
shelf-registration
when the lockup period expires, the share price commonly
decreases significantly
the practice of purchasing IPO stock at the offer price and selling the stock shortly afterward is called
flipping
which of the following statements is incorrect
stocks are issue by corporations to raise short-term funds
shareholders can most easily measure a firm's performance by monitoring changes in its ____ over time
share price
a new stock issuance by a specific firm that already has stock outstanding is referred to as a(n)
secondary stock offering
____ are acquisitions that require substantial amounts of borrowed funds
leveraged buyouts
managers of firms may consider a stock repurchase or even a leveraged buyout when they believe their stock is ____ by the market or a secondary stock offering when they believe their stock is ____ by the market
undervalued, overvalued
which of the following is not a form of shareholder activism
poison pills
if an investor buys a T-bill with a 90-day maturity and $50,000 par value for $48,500 and holds it to maturity, what is the annualized yield?
12.5%
when a bank guarantees a future payment to a firm, the financial instrument used is called
a banker's acceptance
a call provision normally
requires the firm to cal bonds at a price above par value
municipal general obligation bonds are ____. municipal revenue bonds are ____
supported by the municipal government's ability to tax, supported by the revenue generated from the project
in general, variable-rate municipal bonds are desirable to investors who expect that interest rates will
rise
____ bonds have the most active secondary market
treasury
bonds that are not secured by specific property are called
debentures
which of the following statements is true regarding STRIPS
they are created and sold by various financial institutions
for a given par value of a bond, the higher the investor's required rate of return is above the coupon rate, the
greater is the discount on the price
an insurance company purchases corporate bonds in the secondary market with 6 years to maturity. total par value is $55 million. the coupon rate is 11%, with annual interest payments. if the expected required rate of return in 4 years is 9%, what will the market value of the bonds be then?
56,935,022
if bond portfolio managers expect interest rates to increase in the future, the would likely ____ their holdings of bonds now, which could cause the prices of bonds to ____ as a result of their actions
decrease, decrease
at a given point in time, the interest rate offered on a new fixed-rate mortgage is typically ____ the initial interest rate offered on a new adjustable-rate mortgage
above
____ economic growth will probably ____ the risk premium on mortgages and ____ the price of mortgages
weak, increase, decrease
the process by which the lead underwriter solicits indications of interest by institutional investors in an IPO at various possible ____ prices is referred to as ____
offer, bookbuilding
the purpose of a lockup provision is to
prevent downward pressure on the stock's price
sudden favorable news about the performance of a firm will make investors believe that the firm's stock is ____ at its prevailing price
undervalued
a firm has a current stock price of $15.32. The firm's annual dividend is $1.14 per share. The firm's dividend yield is
7.44%
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