3317-exam2

Student: ___________________________________________________________________________ 1. An insurance line has a pure loss ratio of 62%, LAE of 18%, an expense ratio of 27%, the firm pays 3% of premiums to policyholders as dividends and has an investment yield to premium ratio of 8%. Which one of the following statements is true? A. The line is profitable because the operating ratio is less than 100 B. The line is profitable because the combined ratio after dividends is greater than 100 C. The line is not profitable because the operating ratio is greater than 100 D. The line is profitable because the combined ratio after dividends is less than 100 2. A decline in the average cost of producing bank services as the size of the bank expands is called A. Revenue economies of scope B. Cost economies of scale C. X efficiencies D. Cost economies of scope 3. The higher the exercise price, the _____ the value of a put and the _____ the value of a call. A. Lower, lower B. Lower, higher C. Higher; higher D. Higher, lower 4. If no information (publicly available or not) can be consistently used to predict stock price changes then the market is A. strong form inefficient B. semi-strong form inefficient C. strong form efficient D. semi-strong form efficient 5. You have taken an option position and if prices drop you could lose a fixed small amount of money, but if prices rise your gain rises with it, you have A. Written a call option B. Bought a call option C. None of the above D. Written a put option

6. The preliminary version of a security offer that is circulated to potential buyers before SEC approval (registration) is obtained is called a A. Waiting period offer B. Final prospectus C. Red herring prospectus D. Due diligence draft 7. If interest rate parity holds and the annual German nominal interest rate is 5% and the U.S. annual nominal rate is 3% and real interest rates are 2% in both countries, then inflation in Germany is about _____ than in the U.S. A. 2% lower B. 4% lower C. 2% higher D. 1% lower 8. An investor starts with $1 million and converts them to 0.65 million pounds which are then invested for one year. In a year the investor has 0.6695 million pounds which she then converts to dollars at an exchange rate of 0.63 pounds per dollar. The U.S. dollar annual rate of return earned was _____. A. 5.69% B. 3.00% C. 4.45% D. 6.27% 9. Which one of the following would provide an example of social inflation? A. Increase in costs on auto physical damage claims B. Rising cost of funeral expenses due to inflation C. Losses to repair damages caused by hurricanes in Florida D. Large malpractice awards beyond the level of damages incurred

10. You buy a stock for $10 per share and sell it for $12 after holding it for slightly over a year and collecting a $0.50 per share dividend. Your ordinary income tax rate is 28% and your capital gains tax rate is 20%. Your after-tax rate of return is _______. A. 17.4% B. 19.6% C. 25.0% D. 20.2% 11. Major liabilities for banks include A. Deposits B. Securities held for sale C. Business loans D. Equity capital

12. The concept underlying purchasing power parity is A. Bretton Woods Agreement B. Law of one price C. Big Mac Index D. The Fisher effect 13. A stock has a spot price of $35. Its May options are about to expire. One of its puts is worth $5 and one of its calls is worth $5. The exercise price of the put must be _____ and the exercise price of the call must be _____. A. 25, 45 B. 40, 30 C. 35, 35 D. 30, 40 14. A speculator may write a call option on stock with an exercise price of $15 and earn a $3 premium if they thought A. The stock volatility would increase B. The stock price would rise above $18 C. The stock price would stay at or above $15 D. The stock price would stay at or below $18

15. A contract where the buyers agrees to pay a specified interest rate on a loan where the loan will be originated at some future time is called a/an A. currency swap contract B. futures loan C. option on a futures contract D. forward rate agreement

16. A U.S. investor has borrowed pounds, converted them to dollars and invested the dollars in the U.S. to take advantage of interest rate differentials. To cover the currency risk the investor should A. Sell pounds spot B. Sell pounds forward C. Buy dollars forward D. Buy pounds forward

17. The preemptive right is designed to A. None of the above B. Allow managers to preempt a stock offering if they do not like the terms of the deal C. Allow existing shareholders the right to sell their existing shares before the new offer D. Allow existing shareholders to buy shares of the new offering if they desire

18. After Bank A merged with Bank B, costs per unit actually rose rather than falling as predicted. This is an example of A. Diseconomies of scale B. Cost economies of scope C. Regulatory burden D. Cost economies of scale 19. The agreement that ended the era of fixed exchange rates for the major economies was called the A. Louvre Accord B. Bretton Woods Agreement C. Smithsonian Agreement II D. Smithsonian Agreement I 20. A U.S. bank converted $1 million to Swiss francs to make a Swiss franc loan to a valued corporate customer when the exchange rate was 1.5 francs per dollar. The borrower agreed to repay the principle plus 5% interest in 1 year. The borrower repaid Swiss francs at loan maturity and when the loan was repaid the exchange rate was 1.4 francs per dollar. What was the bank's dollar rate of return? A. -2.00% B. 6.00% C. 7.14% D. 12.50% 21. The operating ratio is calculated as A. The loss ratio plus the loss adjustment expense ratio plus the commission to premium ratio B. The combined ratio minus the loss ratio C. None of the above D. The combined ratio after dividends minus the investment yield 22. When all the directors up for election are voted on at the same time the procedure is called A. Dual class voting B. Cumulative voting C. Proxy voting D. Straight voting 23. Which of the following is the primary regulator of bank holding company activities? A. FDIC B. State regulatory agency in the chartering states C. Federal Bank Holding Company Board D. Federal Reserve 24. The primary regulator of insurance firms is the A. State insurance regulator B. McCarran-Ferguson Commission C. FDIC D. SEC

25. The following type(s) of life insurance policies do not have a savings feature A. Whole life B. Variable life C. Both C and D do not D. Term life 26. Nationally chartered banks receive chartering and merger approval from the A. Federal Reserve System B. Office of Thrift Supervision C. Office of Comptroller of the Currency D. Federal Deposit Insurance Corporation 27. A European investor can earn a 5% annual interest rate in Europe or about 3% per year in the U.S. If the spot exchange rate is $1.21 per euro at what one year forward rate would an investor be indifferent between the U.S. and Japanese investments? A. $1.1945 B. $1.2467 C. $1.1870 D. $1.2335 28. A card that has a chip implanted in the card that allows the customer to store and spend money for various transactions is called a A. Platinum credit card B. Debit card C. ATM card D. Smart card

29. A decrease in unit costs after a merger due to joint use of inputs in producing multiple products is an example of: A. Cost economies of scope B. X efficiencies C. Cost economies of scale D. Revenue economies of scale 30. The newer forms of ordinary life include A. Term life, whole life and credit life B. Universal life, variable life and variable/universal life C. Variable life, whole and term life D. Term life, whole life and endowment life

31. An insurance line has a loss ratio of 82%, an expense ratio of 32%, and the firm pays 4% of premiums to policyholders as dividends. What level of investment yield is needed to make the P&C firm breakeven? A. 9% B. 7% C. 18% D. 11% 32. The largest center for trading in foreign exchange is A. London B. Tokyo C. Hong Kong D. New York 33. A contract that gives the holder the right to sell a security at a preset price only immediately before contract expiration is a(n). A. American call option B. European put option C. Knockout option D. European call option 34. In terms of volume of trading and market value of firms traded the ________ is the largest U.S. stock market. In terms of number of firms traded the ___________ is the largest in the U.S. A. NASDAQ; AMEX B. NYSE; AMEX C. NYSE; NASDAQ D. NYSE; NYSE 35. Flood insurance is an example of a ____________________ for which it is difficult to predict loss interest. A. High severity, low frequency event B. Low severity, low frequency event C. High severity, high frequency event D. Low severity, high frequency event

36. In terms of profitability, a well run bank usually has an ROA of A. 3-5% B. 15-20% C. 10-15% D. 0.5-3% 37. You have agreed to deliver the underlying commodity in 90 days. Today the underlying commodity price rises and you get a margin call. You must have A. Purchased a forward contract B. A short position in a futures contract C. A long position in a futures contract D. Purchased a call option on a futures contract 38. A professional futures trader who specializes in buying or selling futures contracts for multiple days or weeks is called a A. Position trader B. Hedger C. Scalper D. Day trader 39. The largest single type of holder of common stock ($) is A. Pension funds B. Life insurance firms C. Households D. Mutual funds 40. You buy a stock for $14 per share and sell it for $18 after you collect a $1.00 per share dividend. Your pretax capital gain yield is _____ and your pre-tax dividend yield is _____. A. 21.42%; 5.55% B. 35.71%; 0.00% C. 22.22%; 5.55% D. 28.57%; 7.14% 41. New futures contracts must be approved by A. The Warren Commission B. The Federal Reserve C. The NYSE D. The CFTC

42. At the beginning of the year the exchange rate between the Brazilian Real and the U.S. dollar is 2.5 Reals per dollar. Over the year Brazilian inflation is 16% and U.S. inflation is 2%. If purchasing power parity holds, at year end the exchange rate should be _____ dollars per real. A. 0.3440 B. 0.3509 C. 2.8498 D. 0.3749 43. The provision of banking services to other banks, such as check clearing, foreign exchange trading, etc. are examples of A. Credit derivatives B. Trust services C. Economies of scope D. Correspondent banking 44. Premiums received before the coverage period are termed A. Loss adjustment expenses B. Unearned premiums C. Policyholder's surplus D. Loss reserves 45. The most important legislation affecting regulation of life insurance companies prior to 1999 was the A. McCarran-Ferguson Act B. Investment Company Act C. SEC Act D. McFadden Act 46. From 1951 to the present the fastest growing asset on the balance sheet for U.S. commercial banks has been: A. Securities B. Consumer loans C. Business loans D. Mortgages

47. Which of the following is true? A. Futures contracts require an initial margin requirement be paid B. Forward contracts have no default risk C. Forward contract buyers and sellers do not know who the counterparty is D. Futures contracts are only traded over the counter

48. With _________ voting, all directors up for election are voted on by the shareholders at the same time in one general election. A. Nonparticipating B. Straight C. Cumulative D. Participating 49. A shelf registration allows firms the opportunity to avoid the normal _____ day waiting period by allowing preregistration of securities for up to _____ years. A. 20 day; 1 year B. 15 day; 3 years C. 10 day; 1 year D. 20 day; 2 years 50. An investor starts with 1 million and converts them to 681,300 which is then invested for one year. In a year the investor has 722,178 which she then converts back to euros at an exchange rate of 0.6715pound per euros. The annual euro rate of return earned was _____. A. 6.45% B. 7.23% C. 5.98% D. 7.55%