Liberty BUSI 321 Test 3 Answers Complete Solutions
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Question 1
According to the text, when a financial institution sells futures contracts on debt securities in order to hedge against an increase in interest rates, this is referred to as
Question 2
A(n) ____ is a standardized agreement to deliver or receive a specified amount of a specified financial instrument at a specified price and date.
Question 3
Which of the following statements is incorrect with respect to cross-hedging?
Question 4
Clarke Company plans to satisfy cash needs in nine months by selling its Treasury bond holdings for $4 million. However, Clarke is concerned that interest rates might increase over the next three months. To hedge against this possibility, Clarke plans to sell Treasury bond futures. Thus, Clarke sells ____ futures contract for a price of 99-12. Assuming that the actual price of the futures contract declines to 97-20, Clarke would make a ____ of $____ from closing out the futures position.
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Question 18
Interest rate ____ are interest rate derivative instruments that are normally classified separately from interest rate swaps.
Question 20
The typical purchaser of an interest rate cap is a financial institution that is ____ affected by ____ interest rates.
Question 21
If a U.S. institution in a forward swap would like to lock in the fixed rate that it will pay when the swap period begins, it is probably concerned that interest rates will ____; the counterparty is likely adversely affected by ____ interest rates.
Question 22
____ risk prevents an interest rate swap from completely eliminating a financial institution’s exposure to interest rate risk.
Question 24
Which of the following is not a reason why financial institutions engage in interest rate swaps?
Question 25
When a bank participates in a swap of fixed interest rate payments for floating-rate payments, or a swap of currencies, it
Question 37
From a bank manager’s perspective, the differential in interest between a bank’s loans and its deposits;
Question 39
When banks obtain funds in the federal funds market, the providers of the funds are
Question 40
A ____ is a time deposit offered by some large banks to corporations, with a specific maturity date, a minimum deposit of $100,000 or more, and a secondary market.
Question 42
____ are the largest bank source of funds as a percentage of total liabilities.
Question 43
Banks can increase their potential interest revenues by restructuring their asset portfolio to contain fewer ____ and more ____.
Question 46
Ringo Bank has a profit after taxes of $3 million, total assets of $300 million, and shareholder’s equity of $30 million. Ringo’s return on equity (ROE) is ____ percent.
Question 47
During a period of rising interest rates, a bank’s net interest margin will likely decline if it has a large amount of
Question 48
If interest rates ____, banks with ____ duration gaps will be ____ affected.
Question 49
Because riskier assets offer ____ returns, a bank’s strategy to increase its return will typically entail a(n) ____ in the overall credit risk of its asset portfolio.
Question 50
Macon Bank has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million. Macon Bank’s net interest margin is
