Credit, liquidity, and interest rate risk all contribute to a commercial bank's level ofInsolvency riskcheckable deposits that are either demand deposits or NOW accountsTransaction accountsInterest-bearing checking accounts are calledNegotiable order of withdrawal (NOW) accountsCommercial banks have two major sources of funds (other than the equity provided by owners and stockholders):Deposits (main one) and borrowed fundsLargest banks subject to annual stress tests, designed to ensure that the banks are properly capitalized because of what act2010 Wall Street Reform and Consumer Protection Actthe provision of banking services to other banks that do not have the staff resources to perform the services themselvesCorrespondent banking_________ services are offered by only the largest banksTrustActivities of nonfinancial service firms that perform banking services have been termedShadow bankingUltimate measure of a CB's performanceThe value of its common equity to its shareholdersFinancial information on CBs is reported in two basic documents:Report of condition (balance sheet)
Report of income (income statement)A bank's assets are grouped into four major subcategories:(1) cash and due from depository institutions, (2) investment securities, (3) loans and leases, and (4) other assets.time deposits with a face value below $100,000Retail CDstime deposits with a face value of $100,000 or moreWholesale CDsA bank's liabilities are grouped into four major subcategories:Deposits, borrowed funds, other liabilities, and equity capitalWhat factors are encouraging financial institutions to offer overlapping financial services such as banking, investment banking, brokerage, etc?
I. Regulatory changes allowing institutions to offer more services
II. Technological improvements reducing the cost of providing financial services
III. Increasing competitions from full service global financial institutions
IV. Reduction in the need to manage risk at financial institutionsI, II, and III onlyIBM creates and sells additional stock to the investment banker Morgan Stanley. Morgan Stanley then resells the issue to the U.S. public through its mutual funds. This transaction is an example of a(n)Primary Market TransactionDepository institutions includeBanks and thriftsThe largest capital market security outstanding in 2019 measured by market value wasCorporate stockidentifies interest income and expenses, net interest income, provision for loan losses, noninterest income and expenses, income before taxes and extraordinary items, and net income from on- and off-balance sheet activitiesIncome statementNet interest income equationNet interest income = interest income - interest expensea noncash, tax-deductible expense, and it is the current period's allocation to the allowance for loan losses listed on the balance sheetProvision for loan lossesinclude all other income received by the bank as a result of its on- and off-balance sheet activitiesNoninterest incomeTotal operating income equationTotal operating income = interest income + noninterest incomeNoninterest expenseitems consist mainly of personnel expenses and are generally large relative to noninterest incomemeasures a bank's ability to control expenses and thus its ability to produce net income from its operating incomeProfit marginmeasures the extent to which the bank's assets generate revenueasset utilizationROE equationNet Income/EquityROA equationNet Income/Total Assetsmeasures the net return on a bank's earning assetsNet interest marginNet Interest Margin equationNet interest income/earning assetsmeasures the difference between the average yield on earning assets and average cost of interest-bearing liabilitiesspreadSpread equationInterest income/earning assetsmeasures the bank's ability to generate noninterest income to cover noninterest expensesOverhead efficiency________ banking involves deposit taking and lending.Commercial_________ banking involves underwriting, issuing, and distributing securities.Investmentimposed a rigid separation between commercial and investment banksThe Glass-Steagall Actimposed risk-based capital ratios on banks in major industrialized countries.Basel agreementinvolve assistance in the trading of securities in the secondary marketsSecurities servicesspecialize in the purchase, sale, and brokerage of existing securitiesSecurities firmsinvolves the creation of a secondary market in an asset by a securities firm or investment bank.Market makinga ______ takes an active net position in an underlying instrument or asset.tradera professionally managed pool of money used to finance new and often high-risk firms.Venture capitalMoney market mutual funds are insured
True/FalseFalsewealthy individuals who make equity investments.AngelsWhile the S E C sets the overall regulatory standards for the industry, the _______ is involved in the day-to-day regulation of trading practices.Financial Industry Regulatory Authority (F I N R A)Investment program funded by shareholders that trades in diversified holdings and is professionally managed.Mutual fundsInvestment pool that solicits funds from (wealthy) individuals and other investors (e.g., commercial banks) and invests these funds on their behalfHedge fundsan investment company that pools money from shareholders and invests in a portfolio of securitiesMutual fundsfees related to the distribution costs of MF shares.12-b1 feeswhat is the most a MF can charge for 12-b1 fees?0.75%FINRA imposes an annual cap of ______ on shareholder service fees.0.25%an MF with an up-front sales or commission charge that the investor must pay.load fundan MF that does not charge up-front sales or commission charges on the sale of mutual fund shares to investors.no-load fundlong-term mutual funds that are also designed to replicate a particular stock market indexETFsHFs avoid regulation by limiting the number of investors to less than _______ and by requiring investors to be "accredited".100accredited investors must have a net worth over _______ or an annual income of _________1 million, 200 thousandManagement fees on HFs are computed as a percent of total assets under management and run between1.5 and 2 percentgive fund managers a share of any positive returns on a hedge fund.Performance feesAverage HF performance fee20%a benchmark that must be realized before a performance fee can be assessed.hurdle ratewhen a manager does not receive a performance fee unless the value of the fund exceeds the highest NAV it has previously achieved.high-water markare attractive to investors because they provide anonymity and are not subject to U.S. taxes.Offshore HFsHedge funds are heavily regulated
True/FalseFalseMutual funds are more regulated than hedge funds
True/FalseTrueBernard Madoff Investment Securities run by former NASDAQ chairman Bernie Madoff ran a _____ billion Ponzi scheme.$65The collapse of the two Bear Stearns hedge funds led to investor losses of _____ billion$1.6
