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7 Mar 2019

Many businesses find it generally more efficient to enlist the services of a financial institution when it comes time to raise capital: IE. Investment Banks: An organization that underwrites and distributes new investment securities and helps business obtain financing. Commercial Banks: The traditional department store type of financing serving a variety of savers and borrowers. Financial Service Corporations: A firm that offers a wide range of financial services, including investment banking, brokerage operations, insurance, and commercial banking. Credit Unions: Cooperative association whose members have a common bond such as employees of the same firm. Pension Funds: Retirement plans funded by corporations or government agencies. Life Insurance Companies: Take annual premium payments and invest these funds in stocks, bonds, or real estate and make payments to beneficiaries of the insured parties. Mutual Funds: Corporations that accept money from savers and then use these funds to buy stocks, long-term bonds, or short-term debt issued by business or government. They typically pool funds to reduce risk by diversification. Exchange Traded Funds (ETFs): Buy a portfolio of stocks of a certain type of business sector. IE. media companies, oil companies, Chinese companies, etc. and then sell their own shares to the public. Hedge Funds: Not regulated by the Securities and Exchange Commission (SEC). Typically have large minimum investments of over $1 million and marketed to individuals an institutions with high net worth. Private Equity Companies: Target, buy, and then manage entire firms. Most of the money used to buy these companies is borrowed. Why are the various financial instruments considered claims against a company's future cash flows ?

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Lelia LubowitzLv2

8 Mar 2019

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Position A: Financial Institutions' role as specialists in risk measurement and management is reduced.

Position B: Financial Institutions' role as specialists in risk measurement and management is increased.

Required:

Read the âbackgroundâ below. After reading, select the position you agree with and write a position paragraph supporting either Position A or Position B.

Background: A major event that changed and reshaped the financial services industry was the financial crisis of the late 2000s. As Financial Institutions adjusted to regulatory changes brought about in the 1980s and 1990s, one result was a dramatic increase in systemic risk of the financial system, caused in large part by a shift in the banking model from that of âoriginate and holdâ to âoriginate to distribute.â In the traditional model, banks take short-term deposits and other sources of funds and use them to fund longer term loans to businesses and consumers. Banks typically hold these loans to maturity, and thus have an incentive to screen and monitor borrower activities even after a loan is made. However, the traditional banking model exposes the institution to potential liquidity, interest rate, and credit risk. In attempts to avoid these risk exposures and generate improved return-risk trade-offs, banks shifted to an underwriting model in which they originated or warehoused loans, and then quickly sold them. Indeed, most large banks organized as financial services holding companies to facilitate these new activities. More recently activities of shadow banks, nonfinancial service firms that perform banking services, have facilitated the change from the originate-and-hold model of commercial banking to the originate-and-distribute banking model. In the shadow banking system, savers place their funds with money market mutuals and similar funds, which invest these funds in the liabilities of other shadow banks. Like the traditional banking system, the shadow banking system intermediates the flow of funds between net savers and borrowers. However, instead of the bank serving as the middleman, it is the non-bank financial service firm, or shadow bank, that intermediates. Further, unlike the traditional banking system where the complete credit intermediation is performed by a single bank, in the shadow banking system, it is performed through a series of steps involving many non-bank financial service firms. These innovations remove risk from the balance sheet of financial institutions and shift risk off the balance sheet and to other parts of the financial system. Thus, the financial institutions, acting as underwriters, are not exposed to the credit, liquidity, and interest rate risks of traditional banking.

In your own words, explain what is meant by business and financial risk. Suppose Firm A has greater business risk than Firm B. Is it true that Firm A also has a higher cost of equity capital? Why or Why not? Explain.

1). All of the following statements are false except

an investment bank is a financial firm that assists organizations in raising funds.

a corporation often deposits excess cash in an investment bank.

an investment bank provides checking services for large corporations.

most investment banks help investors buy and sell a corporation's stock.

under current laws, an investment bank provides services to individuals but cannot provide banking services to corporations.

2). (TCO 5) Dave Harris has just purchased a bond with a face value of $1,000 that pays 6%. The purchase price of the bond was $900, and the bond will mature in 5 years. What is the yield to maturity for this bond?

9.8%

3) (TCO 5) A characteristic of serial bonds is that they

will pay no interest payments.

will have varying issue dates.

will have a series of maturity dates.

cannot be called.

will all mature 10 years from the date of issue.

4).

(TCO 3) All of the following are disadvantages of leasing a vehicle except

automatic ownership interest in the car.

unlimited mileage on the car.

no need to meet credit requirements.

lease payments are likely to be lower than loan payments.

All of the other answers are advantages.

5). (TCO 4) John Brown owns a home in Oakland, California and because of the risk of earthquakes, he decides to purchase _____ to cover potential losses.

building and other structures

additional living expenses

personal property

personal liability

specialized coverage

6). (TCO 4) If Mark Wright obtains a permanent disability as a result of an injury on the job, most likely he will receive _____ as a source of disability income.

his employer

Social Security

worker's compensation

an individual insurance policy

his health insurance policy

7). (TCO 4) A(n) _____ is a document attached to an insurance policy that modifies coverage by adding or deleting a specified condition.

rider

waiver of premium

automatic premium loan

beneficiary

incontestability clause

8). (TCO 6) The Capitalist Mutual Fund's net asset value is $28.25. The fund has liabilities of $3 million and 1,600,000 shares have been issued. What is the value of the fund's portfolio?

9). (TCO 6) A benefit associated with an investment in a real estate limited partnership is that the investor

does not have to worry about capital gains tax.

does not have to pay federal income tax.

does not have to pay state income tax.

can invest in a shopping center or large building by investing as little as $5,000.

faces an investment that is very liquid.

10) (TCO 6) Chuck owns a home worth $140,000, a car valued at $30,000, and miscellaneous assets worth $7,500. He owes $75,000 on the home and $12,000 on the car, and has no other debts. His retirement account, in which he is fully vested, contains $17,500 in mutual funds. He is insured with a $250,000 term life insurance policy. What is his net worth?

11). (TCO 7) Brenda wants to leave a message of encouragement to her grandchildren just in case something happens to her in the near future. She would be interested in preparing a(n)

ethical will.

durable power of attorney.

letter of last instruction.

codicil.

formal will.

12). (TCO 7) Marion would be acting in the capacity of a(n) _____ if she is selected to manage the assets of her 16-year-old niece until the niece reaches the age of 21.

1.Federal Deposit Insurance coverage on a single account in a single institution was set at this maximum insurable amount. A) 1,500,000 B) 1,000,000 C) 500,000 D) 250,000 E) 100,000

2.Federal Deposit Insurance coverage on a joint account in a single institution was set at this maximum insurable amount. A) 1,500,000 B) 1,000,000 C) 500,000 D) 250,000 E) 100,000.

3.If you had a 300,000 joint account with a relative in the FDIC insured Merchants Bank, and a second joint account with the same relative in the FDIC Insured Farmers Bank, then how much of your savings would be covered. A) 150,000 B) 300,000 C) 500,000 D) 600,000

4.If you had a 540,000 joint account with a relative in an FDIC insured financial institution, how much of your savings would not be covered. A) 40,000 B) 20,000 C) 250,000 D) 270,000

5.Under the Federal Truth-in-Savings Act, Banks must use a standard ______________ formula when stating the interest paid; which makes it easier for consumers to compare banks offerings. A) APR B) ROI C) APY D) CPI E) None of the above

6.The Savings Act also requires disclosure of _____________________ on any statements provided to customers. A) fees B) APY earned C) both of the above D) None of the above

7.Money Market Mutual Funds (MMMFs) pay earnings to investors/depositors interest rates based on __________. (A) Treasury yields ( B) Prime (C) Libor ( D) Market interest rates

8.Money Market Deposit Accounts at ____________________________ are federally insured. A) Investment companies B) Banks C) Banks & Investment companies D) Banks & Credit Unions

9.You can make arrangements with the bank to pay a check that overdraws your account, this is. A) Withholding B) Reconciling C) Stopping Payment D) Overdraft Protection E) Compounding

10In order to correct a billing error you must notify the creditor in writing _________ days after the bill was mailed. A) ten B) twenty C) thirty D) sixty

11.Once you have notified a creditor of a billing error, they can give damaging information to other ___________ . (A) Creditors; (B) Credit bureaus; (C) both A & B; (D) none of the above

12.Under the new Federal Reserve rules of 2010, the credit card company must notify you _______ days before they can increase your rate or other fees. A) 30, B) 45, C) 60, D) 90.

13.Under the new Federal Reserve rules beginning in Feb. 2010, the credit card company must notify you ___ days before they can make significant changes to the terms of your credit card. A) 30, B) 45, C) 60, D) 90.

14.Your rates can be increased without advanced notice if, _______________________________. (A) the index tied to your variable rate goes up; (B) your introductory rate expires and reverts to the âgo toâ rate; (C) you havenât made your payments as agreed; (D) All of the above

15.The Fair Debt Collection Practices Act prohibits _______________________________ practices. A) abusive, B) deceptive, C) unfair, D) all of the above

16.Medium-priced loans typically cost _______ %. A)5 to 7; B) 6 to 8; C) 9 to 12; D) 8 ti0 20.

17.Expensive loans typically cost _______ %. A)5 to 7; B) 6 to 8; C) 8 to 20; D) 20 to 50.

18.Before the financial crisis of 2008, unethical predatory lending practices exploit __________. A) lower-income borrowers, B) Minority borrowers, C) elderly homeowners, D) all of the above

19.The ____________ favors lenders and dictates that you pay more interest at the beginning of the loan. A) rule of 72; B) rule of 78s; C) rule of the digits; D) catch 22.

20.The new Credit CARD law requires creditors to include a warning in their monthly statements that warn them that paying the minimum due you will ________________________________. A) pay more interest; B) take longer to pay off the balance; C) Both A & B; D) None of the above

21.The Truth in Lending Law requires your creditor disclose whether you are entitled to a ______ of the finance charge if you pay off the loan early. A) discount; B) refund; C) rebate; D) recredit.

22.The Credit Card Act of 2009, amongst other things, limits card issuerâ ability to increase the APR on transferred balances during the __________________ that the credit card account is open. A) first year; B) for 2 years; C) for 5 years; D) during the life of the loan.

23.The Credit Card Act of 2009, amongst other things, restricts the penalties that card issuers can charge for _____________. (A) early payment; (B) going over the credit limit; (C) late payment; D) all of the above.

24.The Credit Card Act of 2009, amongst other things, requires all teaser rates to stay in effect for at least ___ months. A) 6; B) 9; C) 12; D) 18; E) 24.

25.The Credit Card Act of 2009, amongst other things, sets a _________ due date for card payments each month. A) Early B) extended C) consistent D) flexible

26.The Credit Card Act of 2009, amongst other things, restricts card issuers from applying new (higher) interest rates to the ÂÂÂ________ ÂÂÂÂÂÂcard balances. A) remaining, B) existing, C) undisclosed D) all of the above

27.Debt collection agencies cannot contact before ___ a.m. in the morning. A) 6; B) 7; C) 8; D) 9.

28.Debt collection agencies cannot state that you will be ___________ if you do not pay the debt. A) sued in civil court; B) sued for bankruptcy; C) arrested; D) all of the above

29.Debt collection agencies cannot state they are taking legal action if they _________________. A) havenât probable cause; B) donât intend to; C) havenât done due diligence; D) all of the above

30.Debt collection agencies cannot contact you after ______ p.m. A) 7; B) 8; C) 9; D) 10.