FINA 365 UNL Jinsook Lee Exam 1 Prep--Business Finance Practice Questions &
Rationales 3 versions
This specialized academic study resource features targeted practice questions, verified
answers, and comprehensive mathematical rationales tailored for Exam 1 in Professor
Jinsook Lee’s FINA 365 course at the University of Nebraska-Lincoln. It delivers deep-
dive coverage of introductory corporate finance principles, including the time value of
money, financial statement analysis, ratio evaluations, and interest rate mechanics.
Undergraduate business and finance students will master key analytical formulas and
financial calculators to successfully navigate this high-stakes quantitative milestone.
Question 1
In what year did housing prices begin to deteriorate leading to a jump in defaults in the
subprime mortgage markets and the onset of the recent financial crisis?
A. 2001
B. 2003
C. 2006
D. 2008
Rationale: Housing prices peaked and began to decline in 2006, triggering defaults in
subprime mortgages and the subsequent financial crisis.
Question 2
When a depository institution shifts from an "originate-to-hold" banking model to an
"originate-to-distribute" model, the change is likely to result in:
A. Increased interest rate risk
B. Increased liquidity risk
C. Decreased monitoring costs
D. Decreased fee income
Rationale: Under originate-to-distribute, loans are sold to investors, reducing the
originating bank's need to monitor loan performance over time.
,Question 3
Which of the following repealed the 1933 Glass-Steagall barriers between commercial
banking, insurance, and investment banking?
A. Competitive Equality in Banking Act (1987)
B. Garn-St. Germain Depository Institutions Act (1982)
C. Financial Institutions Reform Recovery and Enforcement Act (1989)
D. Financial Services Modernization Act (1999)
Rationale: The Gramm-Leach-Bliley Act, also known as the Financial Services
Modernization Act of 1999, repealed Glass-Steagall restrictions.
Question 4
Safety and soundness regulations include all of the following layers of protection
EXCEPT:
A. Requirements encouraging diversification of assets
B. The creation of money for those FIs in financial trouble
C. Requiring minimum levels of capital
D. Monitoring and surveillance
Rationale: Safety and soundness regulation does not involve creating money for troubled
FIs. This is not a regulatory function.
Question 5
In a world without FIs, households will be less willing to invest in corporate securities
because:
A. They are subject to price risk when corporate securities are sold
B. They may not have enough funds to purchase corporate securities
C. They tend to prefer shorter, more liquid securities
D. All of the above
,Rationale: Without FIs, households face higher price risk, insufficient funds, and a
preference for liquidity—all of which reduce their willingness to invest directly in corporate
securities.
Question 6
Why do households prefer to use FIs as intermediaries to invest their surplus funds?
A. To receive the benefits of diversification
B. The FI can benefit from combining funds and negotiating lower asset prices and
transactions costs
C. The FI can provide insurance at relatively low cost
D. All of the above
Rationale: FIs offer diversification, economies of scale, and insurance—all of which benefit
households.
Question 7
Which function of an FI reduces transaction and information costs between a
corporation and individual which may encourage a higher rate of savings?
A. Brokerage services
B. Asset transformation services
C. Information production services
D. Money supply management
Rationale: Brokerage services reduce transaction and information costs, encouraging
savings.
Question 8
In its role as a delegated monitor, an FI:
, A. Keeps track of required interest and principal payments on loans it originates
B. Works with financially distressed borrowers in danger of defaulting on their loans
C. Holds portfolios of loans that they continue to service
D. Maintains contact with borrowers to ensure that loan proceeds are utilized for
intended purposes
E. All of the above
Rationale: A delegated monitor performs all these functions on behalf of savers.
Question 9
Customer loans are classified on a DI's balance sheet as:
A. Assets, because the DI's major asset is its client base
B. Liabilities, because the customer may default on the loan
C. Assets, because the DI earns servicing fees on the loan
D. Liabilities, because the DI must transfer funds to the borrower at the initiation of the
loan
E. Assets, because DIs originate and monitor loan portfolios
Rationale: Loans are assets for depository institutions because they represent future cash
inflows.
Question 10
Which of the following is true of off-balance-sheet activities?
A. They involve generation of fees without exposure to any risk
B. They include contingent activities recorded in the current balance sheet
C. They invite regulatory costs and additional "taxes"
D. They have both risk-reducing as well as risk-increasing attributes
Rationale: Off-balance-sheet activities can reduce or increase risk depending on the
activity.
Rationales 3 versions
This specialized academic study resource features targeted practice questions, verified
answers, and comprehensive mathematical rationales tailored for Exam 1 in Professor
Jinsook Lee’s FINA 365 course at the University of Nebraska-Lincoln. It delivers deep-
dive coverage of introductory corporate finance principles, including the time value of
money, financial statement analysis, ratio evaluations, and interest rate mechanics.
Undergraduate business and finance students will master key analytical formulas and
financial calculators to successfully navigate this high-stakes quantitative milestone.
Question 1
In what year did housing prices begin to deteriorate leading to a jump in defaults in the
subprime mortgage markets and the onset of the recent financial crisis?
A. 2001
B. 2003
C. 2006
D. 2008
Rationale: Housing prices peaked and began to decline in 2006, triggering defaults in
subprime mortgages and the subsequent financial crisis.
Question 2
When a depository institution shifts from an "originate-to-hold" banking model to an
"originate-to-distribute" model, the change is likely to result in:
A. Increased interest rate risk
B. Increased liquidity risk
C. Decreased monitoring costs
D. Decreased fee income
Rationale: Under originate-to-distribute, loans are sold to investors, reducing the
originating bank's need to monitor loan performance over time.
,Question 3
Which of the following repealed the 1933 Glass-Steagall barriers between commercial
banking, insurance, and investment banking?
A. Competitive Equality in Banking Act (1987)
B. Garn-St. Germain Depository Institutions Act (1982)
C. Financial Institutions Reform Recovery and Enforcement Act (1989)
D. Financial Services Modernization Act (1999)
Rationale: The Gramm-Leach-Bliley Act, also known as the Financial Services
Modernization Act of 1999, repealed Glass-Steagall restrictions.
Question 4
Safety and soundness regulations include all of the following layers of protection
EXCEPT:
A. Requirements encouraging diversification of assets
B. The creation of money for those FIs in financial trouble
C. Requiring minimum levels of capital
D. Monitoring and surveillance
Rationale: Safety and soundness regulation does not involve creating money for troubled
FIs. This is not a regulatory function.
Question 5
In a world without FIs, households will be less willing to invest in corporate securities
because:
A. They are subject to price risk when corporate securities are sold
B. They may not have enough funds to purchase corporate securities
C. They tend to prefer shorter, more liquid securities
D. All of the above
,Rationale: Without FIs, households face higher price risk, insufficient funds, and a
preference for liquidity—all of which reduce their willingness to invest directly in corporate
securities.
Question 6
Why do households prefer to use FIs as intermediaries to invest their surplus funds?
A. To receive the benefits of diversification
B. The FI can benefit from combining funds and negotiating lower asset prices and
transactions costs
C. The FI can provide insurance at relatively low cost
D. All of the above
Rationale: FIs offer diversification, economies of scale, and insurance—all of which benefit
households.
Question 7
Which function of an FI reduces transaction and information costs between a
corporation and individual which may encourage a higher rate of savings?
A. Brokerage services
B. Asset transformation services
C. Information production services
D. Money supply management
Rationale: Brokerage services reduce transaction and information costs, encouraging
savings.
Question 8
In its role as a delegated monitor, an FI:
, A. Keeps track of required interest and principal payments on loans it originates
B. Works with financially distressed borrowers in danger of defaulting on their loans
C. Holds portfolios of loans that they continue to service
D. Maintains contact with borrowers to ensure that loan proceeds are utilized for
intended purposes
E. All of the above
Rationale: A delegated monitor performs all these functions on behalf of savers.
Question 9
Customer loans are classified on a DI's balance sheet as:
A. Assets, because the DI's major asset is its client base
B. Liabilities, because the customer may default on the loan
C. Assets, because the DI earns servicing fees on the loan
D. Liabilities, because the DI must transfer funds to the borrower at the initiation of the
loan
E. Assets, because DIs originate and monitor loan portfolios
Rationale: Loans are assets for depository institutions because they represent future cash
inflows.
Question 10
Which of the following is true of off-balance-sheet activities?
A. They involve generation of fees without exposure to any risk
B. They include contingent activities recorded in the current balance sheet
C. They invite regulatory costs and additional "taxes"
D. They have both risk-reducing as well as risk-increasing attributes
Rationale: Off-balance-sheet activities can reduce or increase risk depending on the
activity.
