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MBC FINAL Questions with Answers (100%
Correct Answers)
What is asymmetric information? Answer: the Borrower knows more than the
loaner (bank)
What are the problems (and solutions) with Asymmetric info (Bank POV)
Answer: Adverse selection - banks want to accept the least risky loans to give
out (solution is screening those who ask for a loan)Moral Hazard - People
break promises and just because a loan seems safe doesn't mean people will pay
you back (solution is banks monitoring loanees actions and transactions)
What is the Primary Market? Answer: the primary markets are the IPO (Initial
Public Offering) and the supplemental offering, their purpose is to sell first issue
stocks/Bonds publically (bought directly from company)
What is the Secondary Market? Answer: The secondary market is the buying
and selling of previously issued Stocks/Bonds (from people who hold them,
provides liquidity, also called trading on exchanges, NASDAQ and NYSE)
What are securities? Answer: Stocks and bonds
What is Usury? Answer: Legal Setting of a max interest rate
What is hard (commodity) money? Answer: gold, silver, precious metals
What is Fiat Money Answer: Money backed by the government
What is Current yield Answer: interest rate / current price of bond
What are Basis points? Answer: a unit of measurement used to describe
changes in interest rates, financial asset prices, and other percentages, one basis
point = 0.01%, 100 basis points = 1%
What are Offerings of Stock? Answer: the selling of stock by a company to raise
capital
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Fed Funds Rate Answer: interest rate that Banks charge each other on
overnight loans
What is the Discount Rate Answer: The rate that the FED charges banks on
loans
Intermediation (indirect finance) vs disintermediation (Direct Finance) Answer:
intermediation has a financial intermediary between loaner and borrower (also
called indirect finance)Disintermediation, no middle man (direct finance)
List and describe the sources and uses of funds for commercial banks Answer:
Sources: Deposits, borrowed funds (used to run a higher loan to deposit ratio),
Capital equity (stock, retained earnings)uses: also known as liabilities, used to
obtain assets
What are the assets (uses of funds) banks have? Answer: Reserves, Cash on
hand, Deposits and correspondent banks (upstream and downstream
correspondents), Securities (some available for sale for profit (affected by
interest rate risk) and others held to maturity(straight investments)), Loans
(commercial, consumer, and real estate), Brick and Mortar (ATMs,
branches....)
What are Annuities Answer: Issued mainly by life insurance companies,
retirement product giving you income for life (if you die young company gets to
keep annuity)
What is term insurance? Answer: temporary cash value
What is whole life insurance? Answer: Permanent cash value
What are secondary loan participations? Answer: an off balance sheet activity
that is the re sale of portions of risky loans at lower interest rates at a premium
(clawback provision from buyer that if they cannot collect, you must pay them
value of loan)
MBC FINAL Questions with Answers (100%
Correct Answers)
What is asymmetric information? Answer: the Borrower knows more than the
loaner (bank)
What are the problems (and solutions) with Asymmetric info (Bank POV)
Answer: Adverse selection - banks want to accept the least risky loans to give
out (solution is screening those who ask for a loan)Moral Hazard - People
break promises and just because a loan seems safe doesn't mean people will pay
you back (solution is banks monitoring loanees actions and transactions)
What is the Primary Market? Answer: the primary markets are the IPO (Initial
Public Offering) and the supplemental offering, their purpose is to sell first issue
stocks/Bonds publically (bought directly from company)
What is the Secondary Market? Answer: The secondary market is the buying
and selling of previously issued Stocks/Bonds (from people who hold them,
provides liquidity, also called trading on exchanges, NASDAQ and NYSE)
What are securities? Answer: Stocks and bonds
What is Usury? Answer: Legal Setting of a max interest rate
What is hard (commodity) money? Answer: gold, silver, precious metals
What is Fiat Money Answer: Money backed by the government
What is Current yield Answer: interest rate / current price of bond
What are Basis points? Answer: a unit of measurement used to describe
changes in interest rates, financial asset prices, and other percentages, one basis
point = 0.01%, 100 basis points = 1%
What are Offerings of Stock? Answer: the selling of stock by a company to raise
capital
, 2
Fed Funds Rate Answer: interest rate that Banks charge each other on
overnight loans
What is the Discount Rate Answer: The rate that the FED charges banks on
loans
Intermediation (indirect finance) vs disintermediation (Direct Finance) Answer:
intermediation has a financial intermediary between loaner and borrower (also
called indirect finance)Disintermediation, no middle man (direct finance)
List and describe the sources and uses of funds for commercial banks Answer:
Sources: Deposits, borrowed funds (used to run a higher loan to deposit ratio),
Capital equity (stock, retained earnings)uses: also known as liabilities, used to
obtain assets
What are the assets (uses of funds) banks have? Answer: Reserves, Cash on
hand, Deposits and correspondent banks (upstream and downstream
correspondents), Securities (some available for sale for profit (affected by
interest rate risk) and others held to maturity(straight investments)), Loans
(commercial, consumer, and real estate), Brick and Mortar (ATMs,
branches....)
What are Annuities Answer: Issued mainly by life insurance companies,
retirement product giving you income for life (if you die young company gets to
keep annuity)
What is term insurance? Answer: temporary cash value
What is whole life insurance? Answer: Permanent cash value
What are secondary loan participations? Answer: an off balance sheet activity
that is the re sale of portions of risky loans at lower interest rates at a premium
(clawback provision from buyer that if they cannot collect, you must pay them
value of loan)
