Question

Multiple Choice

9. Banks see a decrease in the value of its bond and loan portfolios when interest rates:

A. decrease.

B. increase.

C. either increase or decrease.

10. Since the corona virus hit the U.S. in March, the stock market, as represented by the Dow Jones Industrial Average, is currently down approximately:

A. 15%

B. 30%

C. 40%

D. 50%

11. The risks that banks see the value of its bonds and loan portfolios when interest rates:

A. decrease.

B. increase.

C. either increase or decrease.

12. One of the frustrations of the funds that were trying to short the housing market in The Big Short was:

A. they could not get any bank or insurance company to sell them credit default swaps on mortgage backed securities

B. they could not get access to the data on the loans that were underlying the mortgage-backed security pools.

C. the rating agencies did not downgrade the mortgage-backed security bonds even though it was clear credit risk was increasing

D. all of the above were frustrations.

13. The Financial Modernization Act of 1999:

A. repealed interest rate regulations called Regulation Q.

B. repealed the Glass-Steagall Act.

C. increased the amount of equity banks must hold on their balance sheets.

D. decreased the amount of equity banks must hold on their balance sheets.

14. Compared to other industries, banks have:

A. more leverage

B. less leverage

C. about the same amount of leverage

15. With respect to leverage, banks:

A. have about 40% debt to assets.

B. have about 90% debt to assets.

C. have about 10% debt to assets.

D. are usually all debt financed.

16. Assume that a bank obtains most of its funds from long-term borrowed funds such as Federal Home Loan Bank borrowings. The bank’s assets are in the form of loans with rates that adjust every six months. The bank would be _______ affected if interest rates increase (think about earnings and cost of funds graph we drew).

A. negatively.

B. favorably.

C. unaffected.

17. A bank owns a portfolio of bonds. The bank would like to hedge against a interest rate increase. It will take a:

1. short position in interest rate futures.
2. Long position in interest rate futures.
3. He bank cannot hedge against a rate increase using futures.

18. The bank’s ROE is defined as:

A. net income divided by total assets

B. net income divided by owners’ equity

C. ROA times the equity multiplier

D. both a and c

E. both b and c

19. In The Big Short, the guys trying to short the housing market:

A. owned the underlying bonds and were trying to buy “insurance” in case something went wrong in the housing market

B. did not own the underlying bonds and were making a bet that something would go wrong in the housing market.

Answer 1

Question 9

Interest rate and price of bond has an inverse relationship among them. When the interest rate rises it will lead to reduction in the price of bond and when the interest rates falls the prices of bond will increase. Bond prices adjust themselves with the interest rates which prevail in the market. When the interest rate increases, the investors will move to buy other securities as a result of which the price of bonds will come down as there will be less demand for bonds in the market.

So the correct answer is B – increase

Note: For remaining questions, please post it separately to be answered.