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FINA 365 UNL Jinsook Lee
Exam 1 | Study Guide |
Practice Questions & Answers
| Comprehensive Exam Prep
FINA 365 — Exam 1: Comprehensive Practice Exam
Exam Coverage Summary
This exam covers the following topic areas:
1. Commercial Banks — Structure, balance sheet composition, historical trends since
1990, business loans vs. mortgages, commercial paper market effects, securitization,
credit risk, equity capital, maturity structure of assets vs. liabilities, off-balance-sheet
activities, money center banks, regulatory forbearance, Federal Reserve membership
advantages, deposit and loan classification.
2. Bank Regulation — Financial Services Modernization Act (1999), Riegle-Neal Act
(1994), Office of the Comptroller of the Currency, FDIC, regulatory forbearance,
branching across state lines, permissible activities.
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3. Thrifts and Credit Unions — Chartering, tax-exempt status, National Credit Union
Administration, deposit rates, regulatory differences from banks.
4. Finance Companies — Primary functions, consumer and business lending, factoring,
sales finance institutions, personal credit institutions, business credit institutions, interest
rates vs. banks, funding sources (commercial paper), capital-asset ratios, regulatory
oversight, growth drivers, subprime lending.
5. Investment Banks and Securities Firms — Underwriting (firm commitment vs. best
efforts), origination and distribution of securities, trading activities, venture capital, SIPC
protection, regulation (SEC, NSMIA 1996, USA Patriot Act 2003), balance sheet
composition, leverage, benchmark of relative size, interindustry mergers, Goldman Sachs
and Morgan Stanley bank charters.
6. Mutual Funds — NAV calculation, open-ended vs. closed-end, ETF mechanics, 12b-1
fees, front-end loads, management fees, total shareholder cost, fund objectives, regulation
(SEC, NASD), abusive activities (market timing, late trading, directed brokerage),
Market Reform Act, growth of the industry.
7. Hedge Funds — Registration requirements, regulatory oversight, investor profiles, high-
water marks, management fees, leverage, risk-taking, Wall Street Reform and Consumer
Protection Act of 2010, disclosure rules, comparison with mutual funds.
Question 1
A commercial bank has shifted its portfolio composition significantly since 1990. Which change
accurately describes this trend?
A) The proportion of business loans increased and mortgages decreased.
B) The proportion of business loans decreased and mortgages increased.
C) Both business loans and mortgages increased proportionally.
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D) Both business loans and mortgages decreased proportionally.
E) The proportion of business loans remained constant while mortgages increased.
B) The proportion of business loans decreased and mortgages increased.
Commercial banks have reduced business lending and expanded mortgage holdings since 1990.
Question 2
The growth of the commercial paper market has had which effect on commercial banks?
A) Increased demand for business loans.
B) Decreased demand for business loans.
C) No effect on business loan demand.
D) Increased demand for mortgages.
E) Decreased demand for consumer loans.
B) Decreased demand for business loans.
Commercial paper offers corporations an alternative to bank borrowing, reducing loan demand.
Question 3
Securitization of mortgages involves which of the following activities?
A) Selling individual mortgages to a single investor.
B) Pooling mortgage loans for sale in financial markets.
C) Holding mortgages until maturity.
D) Converting mortgages into demand deposits.
E) Insuring mortgages against default.
B) Pooling mortgage loans for sale in financial markets.
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Securitization combines loans into pools that are sold as securities to investors.
Question 4
Why is credit risk still a significant concern for bank managers despite equity on the balance
sheet?
A) Equity is too large relative to assets.
B) Equity is small relative to assets, so loan losses can impair solvency.
C) Credit risk is eliminated by equity.
D) Equity is irrelevant to credit risk.
E) Banks hold no equity.
B) Equity is small relative to assets, so loan losses can impair solvency.
Typical banks operate with high leverage, making credit risk a major threat.
Question 5
How does the maturity structure of commercial bank assets compare to liabilities?
A) Assets have longer maturities than liabilities.
B) Assets have shorter maturities than liabilities.
C) Assets and liabilities have identical maturities.
D) Assets have no maturity while liabilities do.
E) Liabilities have no maturity while assets do.
A) Assets have longer maturities than liabilities.
Banks typically fund long-term loans with short-term deposits, creating maturity mismatch.
FINA 365 UNL Jinsook Lee
Exam 1 | Study Guide |
Practice Questions & Answers
| Comprehensive Exam Prep
FINA 365 — Exam 1: Comprehensive Practice Exam
Exam Coverage Summary
This exam covers the following topic areas:
1. Commercial Banks — Structure, balance sheet composition, historical trends since
1990, business loans vs. mortgages, commercial paper market effects, securitization,
credit risk, equity capital, maturity structure of assets vs. liabilities, off-balance-sheet
activities, money center banks, regulatory forbearance, Federal Reserve membership
advantages, deposit and loan classification.
2. Bank Regulation — Financial Services Modernization Act (1999), Riegle-Neal Act
(1994), Office of the Comptroller of the Currency, FDIC, regulatory forbearance,
branching across state lines, permissible activities.
,2|Page
3. Thrifts and Credit Unions — Chartering, tax-exempt status, National Credit Union
Administration, deposit rates, regulatory differences from banks.
4. Finance Companies — Primary functions, consumer and business lending, factoring,
sales finance institutions, personal credit institutions, business credit institutions, interest
rates vs. banks, funding sources (commercial paper), capital-asset ratios, regulatory
oversight, growth drivers, subprime lending.
5. Investment Banks and Securities Firms — Underwriting (firm commitment vs. best
efforts), origination and distribution of securities, trading activities, venture capital, SIPC
protection, regulation (SEC, NSMIA 1996, USA Patriot Act 2003), balance sheet
composition, leverage, benchmark of relative size, interindustry mergers, Goldman Sachs
and Morgan Stanley bank charters.
6. Mutual Funds — NAV calculation, open-ended vs. closed-end, ETF mechanics, 12b-1
fees, front-end loads, management fees, total shareholder cost, fund objectives, regulation
(SEC, NASD), abusive activities (market timing, late trading, directed brokerage),
Market Reform Act, growth of the industry.
7. Hedge Funds — Registration requirements, regulatory oversight, investor profiles, high-
water marks, management fees, leverage, risk-taking, Wall Street Reform and Consumer
Protection Act of 2010, disclosure rules, comparison with mutual funds.
Question 1
A commercial bank has shifted its portfolio composition significantly since 1990. Which change
accurately describes this trend?
A) The proportion of business loans increased and mortgages decreased.
B) The proportion of business loans decreased and mortgages increased.
C) Both business loans and mortgages increased proportionally.
,3|Page
D) Both business loans and mortgages decreased proportionally.
E) The proportion of business loans remained constant while mortgages increased.
B) The proportion of business loans decreased and mortgages increased.
Commercial banks have reduced business lending and expanded mortgage holdings since 1990.
Question 2
The growth of the commercial paper market has had which effect on commercial banks?
A) Increased demand for business loans.
B) Decreased demand for business loans.
C) No effect on business loan demand.
D) Increased demand for mortgages.
E) Decreased demand for consumer loans.
B) Decreased demand for business loans.
Commercial paper offers corporations an alternative to bank borrowing, reducing loan demand.
Question 3
Securitization of mortgages involves which of the following activities?
A) Selling individual mortgages to a single investor.
B) Pooling mortgage loans for sale in financial markets.
C) Holding mortgages until maturity.
D) Converting mortgages into demand deposits.
E) Insuring mortgages against default.
B) Pooling mortgage loans for sale in financial markets.
, 4|Page
Securitization combines loans into pools that are sold as securities to investors.
Question 4
Why is credit risk still a significant concern for bank managers despite equity on the balance
sheet?
A) Equity is too large relative to assets.
B) Equity is small relative to assets, so loan losses can impair solvency.
C) Credit risk is eliminated by equity.
D) Equity is irrelevant to credit risk.
E) Banks hold no equity.
B) Equity is small relative to assets, so loan losses can impair solvency.
Typical banks operate with high leverage, making credit risk a major threat.
Question 5
How does the maturity structure of commercial bank assets compare to liabilities?
A) Assets have longer maturities than liabilities.
B) Assets have shorter maturities than liabilities.
C) Assets and liabilities have identical maturities.
D) Assets have no maturity while liabilities do.
E) Liabilities have no maturity while assets do.
A) Assets have longer maturities than liabilities.
Banks typically fund long-term loans with short-term deposits, creating maturity mismatch.
