FIN: Midterm 3 Exam Answers

Deposit runs

are dangerous because they tend to impair the liquidity and profitability of a financial institution and, thus, threaten its solvency.

When a bank raises the interest rate it pays on its deposits in an attempt to reverse large unexpected deposit withdrawals, holding everything else constant, which of the following is most likely:

The bank's interest expense will increase.

Holding everything else constant, a bank may improve its liquidity by

increasing its legal reserves.

Currently, deposits in banks are insured up to

250,000

Deposit insurance by the FDIC

was established to reduce the risk of runs on bank deposits.

For financing, small and mid-sized businesses depend most heavily on

commercial banks.

Tier II capital

is part of a bank's capital requirement and increases a bank's ability to absorb losses before the FDIC has to compensate insured depositors.

Which of the following are classified as bank off-balance sheet activities?

Standby letters of credit

A loan commitment

generates fee revenue for the issuing bank.

In the 1970s

market interest rates rose above the rates paid by banks on deposit accounts.

The charging of flat (uniform) deposit insurance premiums during the 1980s

encouraged risk-taking at banks and thrifts because depository institutions were not charged for the risk they imposed on the FDIC.

Which of the following instruments are considered "least risky"?

Treasury bills

The financial return to investors in money market securities comes in the form of

a capital gain.

The prices and yields of U.S. Treasury bills in the primary market are set by

competitive bidders in single-price auctions.

Suppose an investor purchased a newly issued 90-day Treasury bills with a $100,000 face value for $99,100. Estimate the yield assuming the investor holds the T-bills to maturity. (Use a 365-day year.)

3.7%

Certificates of deposit (CDs)

are issued by commercial banks.

Stripped Treasury securities (STRIPS)

offer only a one-time cash flow at maturity.

Treasury Inflation-Protected Securities (TIPS) are more attractive than nominal Treasury securities with similar maturities when

actual inflation turns out to be greater than the inflation the market had expected.

Changes in the yield differentials between TIPS and nominal Treasury securities of the same maturity may be used as the market measure of

changes in inflation expectations.

Municipal general obligation bonds are

supported by the municipal government's ability to tax.

The big three credit rating agencies (Moody's, Standard and Poor's and Fitch) are paid by

the companies that ask these firms to rate their securities.

Including a conversion feature in a bond contract would

make the bond more attractive to investors (bondholders)

When a company's debt is upgraded from "junk" to "investment grade," holding everything else constant,

the demand for the company's debt securities tends to increase.

Strict protective covenants in a bond issue

protect the bondholders and lower a firm's cost of borrowing.

If the Federal Reserve were to raise interest rates, holding everything else constant, which of the following would be a likely consequence?

Companies' cost of financing would decline.

When the value of the dollar on foreign currency markets is expected to decrease against the peso, holding everything else constant,

the stock prices of U.S. companies that export to Mexico are likely to increase.

Holding everything else constant, which of the following would likely cause stock prices to increase?

The announcement that an effective vaccine against the coronavirus is ready for distribution.

The required return on a stock may be determined by

the Capital Asset Pricing Model (CAPM).

Using the Treynor Ratio to measure the performance of a portfolio of stocks implies the assumption that

the portfolio is fully diversified so that firm-specific risk is irrelevant.

To help the stock market efficiently allocate resources to their most productive uses,

stock prices should reflect all available public information.