Financial Institutions Class Quiz

Quiz 1

1) The Federal has three major policy tools to affect the monetary policy in the United States. Explain each of the tools, and the way in which financial institutions are used to implement these policies. Use an example for each tool.

2) Explain the operation of the Fed Funds market. How do banks use fed funds as an asset? As a liability? Use an example for each , assuming a fed funds rate of 25 basis points and a $100 million position.

3) Explain each of the following Off Balance sheet commitments:

a) Commitments to Lend

b) Forward/Futures contracts

c) Credit Default Swaps

d) Standby Letters of Credit

e) Bankers Acceptances

How do these activities affect the income statement? Under what conditions would these Off balance sheet activities move on to the balance sheet?

4) Explain the "Volcker Rule", and why it was included in the Dodd Frank Act. In what ways could the implementation of the Volcker Rule reduce systematic risk? In what ways could it increase systematic risk?

5) An investment bank is hired to underwrite an issue of 10 million shares of XYZ corporation, on a best efforts basis. The IB charges a commission of .50 per share. If it sells all 10 million at $10.50 per share, how much does the IB get? How much does XYZ get? If it can only get $7.50 per share, how much does the IB get? How much does XYZ get?

What if it is done on a firm commitment basis, no per share commission. The IB agrees to buy 10 million shares at $9.00 per share. The IB sells all of it to the market at $10.00 per share. What does the IB get? What does XYZ get?

Explain why an IB would choose a best efforts versus a firm commitment underwriting. Why would XYZ choose a firm commitment?

6) Explain the difference between a venture capital and a private equity firm, in terms of the investments they seek, how they are compensated, and the risks that they take.

7) Explain, using an example, how securities firms use repurchase agreements as their major source of funding. Why do they use these as a source of funds?

8) Explain the requirements for "Stress tests" under the CCAR provisions of the Dodd Frank Act.

9) Explain, using examples, the advantages and disadvantages to investing in an Exchange Traded Fund (ETF) instead of a open-end mutual fund.

10) Explain the differences between how a life insurance company generates net income versus a property and casualty insurance company. How do their balance sheets differ? What is the difference in risks between the two types of insurers?