Question

1.         When banks encounter liquidity issues experiencing deposit withdrawal or even bank run, which alternative is more appropriate to deal with the situation?

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A)        Increasing overnight funds borrowed

B)        Contacting an investment banker to find new corporate deposits

C)        Issuance of a negotiable certificate of deposit

D)        Selling the bank’s holdings of T-bills

2.         Focus on exploiting the tendency of the equities of companies in a time of change to drop in price. Such an approach belongs to which of the following investment strategy for hedge funds?

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1. Event-driven investing
2. Absolute return objective
3. Directional strategies
4. Market-neutral strategies

3.         The key advantage of a family of mutual funds is

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A)        The ability to diversify an investment portfolio

B)        The ability to add funds on a regular basis

C)        The ability to shift quickly from one type to another with little cost

D)        The ability to transfer one fund management team to another

4.         A valid argument against banks being permitted to directly enter the securities business is that

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A)        They will be increasing their risky activities leading to a potential increase in the moral hazard and adverse selection problems

B)        There is an increase in the likelihood of conflicts of interest between the bank and security issuers

C)        The overall costs of the bank will increase resulting in higher costs and lower returns to depositors

D)        All of the above

5.         The most important developments that have reduced banks’ cost advantages in the past third years include

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A)        The growth of the junk bond market

B)        The competition from money market mutual funds

C)        The growth of securitization

D)        All of the above

6.         An individual invests $6,000 in a no-load fund with a NAV of $32 and an offering price of $34 a share. After one year, this investor has received $0.85 per share in dividends and sells the shares at a NAV of $36. Calculate the holding period return.

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A)        5.56%

B)        8.38%

C)        12.50%

D)        15.16%

7.         An investor evaluating the returns of three recently formed exchange-traded-funds (ETF) gathers the following information:

ETF	Time since inception	Return since inception
1	146 days	4.61%
2	5 weeks	1.10%
3	15 months	14.35%

The ETF with the lowest annualized rate of return is

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A)        ETF 1

B)        ETF 2

C)        ETF 3

D)        They are the same

8.         On a particular day, according to the national Post, the Common Sense Growth fund had a net asset value of $13.81. The offering price was $15.20. Is this a load fund? What is the conventional front-end load?

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A)        No; zero

B)        Yes; 9.27%

C)        Yes; 8.47%

D)        Yes; 9.14%

Hint:    OP = (NAV)/(1 – load)

9.         Arguments supporting entry of commercial banks into the securities business include     

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A)        Increased competition

B)        Reduction in the number of instances involving a conflict of interest

C)        Increased brokerage commissions

D)        All of the above

10.       Which of the following is true about investment companies?

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A)        The NAV of a closed-end fund does not change since the shares of the funds are traded on an exchange or over-the-counter

B)        Open-end funds are more popular than closed-end funds primarily due to their higher level of liquidity

C)        Since hedge funds often take opposing positions (buy and sell at the same time) in similar securities to hedge their risk, hedge funds are thus very low risk investments

D)        None of the above

Answer 1

1) - A is correct - Among many Measures to avoid bank run, banks may borrow from other institutions if they don't have enough cash reserves. Large loans may stop them from going bankrupt.

2) - D is correct - This strategy has lower risk than a long-biased strategy—but the expected returns are lower, too.

3) - A is correct - Ability to diversity is best advantage of investing in mutual fund.

4) - A is correct - Banks are not prohibited but to trade in securities however, too much volatility in the stock market, could hurt their ability to remain in business and repay depositors.