FINA 365 UNL Jinsook Lee Exam 1 Prep: Business Finance Practice Questions &
Rationales
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 DI makes a shift 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Which of the following repealed the 1933 Glass-Steagall barriers between commercial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Modernization Act of 1999, repealed Glass-Steagall restrictions.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
The Community Reinvestment Act and the Home Mortgage Disclosure Act were both
passed to provide incentives to comply with:
A. Credit allocation regulation
B. Entry regulation
C. Investor protection regulation
D. Consumer protection regulation
Rationale: Both acts were designed to protect consumers and ensure fair lending practices.
Question 6
Each of the following is a special function performed by FIs at a macro level EXCEPT:
A. Intergenerational wealth transfers or time intermediation
B. Transmission of monetary policy
C. Interbank lending and investing
D. Denomination intermediation
Rationale: Interbank lending is a micro-level function. Macro-level functions include time
intermediation, monetary policy transmission, and denomination intermediation.
, Question 7
In a world without FIs, households will be less willing to invest in corporate securities
because they:
A. Are subject to price risk when corporate securities are sold
B. May not have enough funds to purchase corporate securities
C. 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 8
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.
Rationales
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 DI makes a shift 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
The Community Reinvestment Act and the Home Mortgage Disclosure Act were both
passed to provide incentives to comply with:
A. Credit allocation regulation
B. Entry regulation
C. Investor protection regulation
D. Consumer protection regulation
Rationale: Both acts were designed to protect consumers and ensure fair lending practices.
Question 6
Each of the following is a special function performed by FIs at a macro level EXCEPT:
A. Intergenerational wealth transfers or time intermediation
B. Transmission of monetary policy
C. Interbank lending and investing
D. Denomination intermediation
Rationale: Interbank lending is a micro-level function. Macro-level functions include time
intermediation, monetary policy transmission, and denomination intermediation.
, Question 7
In a world without FIs, households will be less willing to invest in corporate securities
because they:
A. Are subject to price risk when corporate securities are sold
B. May not have enough funds to purchase corporate securities
C. 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 8
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.
