Deck 14: Investment Banking, insurance, and Other Sources of Fee Income

Question 1

_______________________ emerge when financial organization grows in size and is able to reduce its cost of production per unit of output.

Answer 1

Economies of scale

Question 2

_________________ is the purchase for resale of new stocks,bonds,and other financial instruments in the money and capital markets on behalf of clients who need to raise new money.

Answer 2

Security underwriting

Question 3

Trust department activities usually center upon establishing a ____________ relationship with a customer.

Answer 3

fiduciary

Question 4

The trust department can be a significant source of ____________ for a bank or financial holding company.

Question 5

A(n)_________________________ is a contract that promises to make a cash payment to the beneficiary in the event of the death of the policy holder.

Question 6

_________________________ is the bringing together of two or more firms from different industries in order to offer multiple services.

Question 7

Passage of the __________________ of 1999 granted banks,securities firms,and insurance companies the right to apply to the Federal Reserve Board to become financial holding companies (FHCs).

Question 8

When a financial institution offers a(n)__________________ mutual fund,it acts as broker for an unaffiliated mutual fund or group of funds and does not act as an investment advisor.

Question 9

A(n)_________________________ is a contract that promises to reimburse policy holders for personal injury,property damage,and other losses,in exchange for the policy holder's premium payments.

Question 10

The _________________________ effect brings more than one financial-service industries together to reduce the overall risk of the revenue flows through the company.

Question 11

A(n)_________________________ is a savings instrument in which the customer makes cash payments to an investment manager who invests them in an earning asset.Later the purchaser receives a stream of income from those assets.

Question 12

_______________ are financial advisors to corporations,governments,and other large institutions.They advise their clients on issues relating to raising new capital,entering new market areas,etc.

Question 13

__________________ are one of the earliest services provided by banks and involves the management of customer's property and other assets.

Question 14

Under law and industry practice,a __________ is supposed to be set up between an IB's security underwriting and client advising divisions and the internal unit where proprietary trading of stocks and bonds take place,to prevent the transfer of insider information about clients.

Question 15

The most rapidly growing source of income for banks is ________ income.

Question 16

A(n)_________________________ gives the bank the right to manage the estate of a living person without a court order.This can be amended by the customer as desired.

Question 17

When bank purchases stocks,bonds,mutual funds,and annuities on behalf of their customers,these products are referred to as _______________________.

Question 18

A(n)_________________________ promises a customer,who deposits a lump sum,a guaranteed rate of return over the life of the contract.

Question 19

A(n)__________________ fund,is a type of mutual fund offered through a bank's affiliated company.The bank acts as a transfer agent,custodian,and offers investment advice in this type of mutual fund.

Question 20

_________________________ arise from the potential cost savings that result from being able to use the same management,advertising,and physical resources to offer multiple services.

Question 21

______________ are private investment pools which primarily offer to wealthy investors and major institutions higher investment returns by taking on relatively risky assets.

Question 22

While the trust department performs a variety of roles,their activities center on establishing a fiduciary relationship with the customer.

Question 23

An insurance product or annuity sold by a depository institution is not insured by the FDIC.

Question 24

A proprietary mutual fund is where the bank sells a mutual fund through one of their affiliated companies and where the bank can act as an investment advisor.

Question 25

As a consequence of recent legislation,banks,securities firms,and insurance companies have the right to apply to the Federal Reserve Board to become financial holding companies.

Question 26

Trust services are a relatively new service for banks.

Question 27

Customers have no rights to opt out of having their private information collected by banks and other financial-service firms and being shared with other financial-service firms.

Question 28

Trust services have no impact on the deposits of the bank.

Question 29

The product-line diversification effect occurs when the revenues generated by traditional banking service and a nontraditional banking service are not very correlated with each other and reduce the overall risk of the bank.

Question 30

According to the textbook,one likely outcome of the 2007-2009 financial crisis for both commercial and investment banks is _________________.

Question 31

One of the advantages offered by mutual funds is having a ____________ who monitors the performance of each security held by the fund.

Question 32

A mutual fund is a savings instrument where the customer makes cash payments to an investment manager who invests them in earning assets.Later the purchaser receives a stream of income from these assets.

Question 33

Mutual funds were first set up in France.

Question 34

________________ is the value of a share in a mutual fund.It is the value of the assets held by the mutual fund less any liabilities,divided by the number of mutual fund shares outstanding.

Question 35

A bank's nondeposit investment products include IRAs,Keoghs,and MMDAs.

Question 36

State Street Bank in Boston is a good example of a fee-focused banking company.

Question 37

As a consequence of recent legislation,banks cannot offer insurance products or services.

Question 38

An annuity is a product that offers shares in a pool of securities (stocks,bonds,etc. )and flows through any earnings generated to the shareholding customer.

Question 39

A nonproprietary mutual fund is where the bank acts as a broker for a nonaffiliated mutual fund but does not act as an investment advisor.

Question 40

One attractive feature of investment banking is that it is generally less risky than commercial banking.

Question 41

A bank is considering adding life insurance underwriting to the services it offers.It has estimated that the expected return and standard deviation of its traditional services are 12 percent and 6 percent respectively.It has also estimated that the expected return and standard deviation of its new underwriting services are 18 percent and 10 percent respectively.The correlation between these services has been estimated to be +0.10 and the bank estimates that 90 percent of its business will be from traditional services and 10 percent from the new underwriting services.What is the expected standard deviation of the new combination of services?

A)6.40 percent
B)12.60 percent
C)5.59 percent
D)9.08 percent
E)None of the options is correct.

Question 42

A bank is considering adding life insurance underwriting to the services it offers.It has estimated that the expected return and standard deviation of its traditional services are 12 percent and 6 percent respectively.It has also estimated that the expected return and standard deviation of its new underwriting services are 18 percent and 10 percent respectively.The correlation between these services has been estimated to be +0.10 and the bank estimates that 90 percent of its business will be from traditional services and 10 percent from the new underwriting services.If the bank is expecting that the overall risk of the bank will be reduced by adding the life insurance underwriting to the bank,what type of effect are they expecting?

A)Product-line diversification effect
B)Income diversification effect
C)Market diversification effect
D)Geographic diversification effect
E)None of the options is correct.

Question 43

A financial holding company may include all of the following services except:

A)corporate liquidation.
B)consumer lending.
C)trust services.
D)investment banking.
E)insurance.

Question 44

When a bank is expecting that the overall risk of FHC will be reduced when they combine investment banking services with the traditional banking services,what type of effect are they expecting?

A)Product-line diversification effect
B)Market diversification effect
C)Income diversification effect
D)Geographic diversification effect
E)None of the options is correct.

Question 45

Among potential advantages of combining various financial services activities in one FHC,all of the following can be included except:

A)supplementing traditional sources of funds with new funds.
B)supplementing traditional revenue with new revenue sources.
C)lowering the cost of service production through economies of scale and scope.
D)reducing the risk of failure.
E)increasing earnings fluctuations.

Question 46

A bank would offer insurance services in addition to traditional banking services if it believed in the potential benefits of:

A)reputation.
B)economies of scale.
C)economies of scope.
D)investment services.
E)None of the options is correct.

Question 47

If the correlation between revenues from traditional banking and nontraditional services offered by a bank rises,potential diversification benefits:

A)will rise.
B)will fall.
C)will remain the same.
D)will remain the same but only under certain conditions.
E)cannot be determined.

Question 48

Which of the following trust agreements allows the bank trust officer to act on behalf of a living customer?

A)Revocable trust
B)Irrevocable trust
C)Charitable trust
D)Indenture trust
E)None of the options is correct.

Question 49

The prohibition against combining investment banking and commercial banking activity during the Depression-era,centered on possibly forcing customers seeking loans to buy securities that the IB was trying to sell and increasing the risk exposure of commercial banking firms.

Question 50

Traditionally,the most profitable and best-known investment banking activity is providing client advice.

Question 51

When a bank is expecting to be able to employ the same managers,employees,and physical resources to offer multiple products and generate costs savings they are expecting which of the following effects?

A)Product-line diversification effect
B)Economies of scope effect
C)Economies of scale effect
D)Geographic diversification effect
E)None of the options is correct.

Question 52

Investment bankers are financial advisors to individuals and act as brokers and dealers for those individuals.

Question 53

A bank is considering adding life insurance underwriting to the services it offers.It has estimated that the expected return and standard deviation of its traditional services are 12 percent and 6 percent respectively.It has also estimated that the expected return and standard deviation of its new underwriting services are 18 percent and 10 percent respectively.The correlation between these services has been estimated to be +0.10 and the bank estimates that 90 percent of its business will be from traditional services and 10 percent from the new underwriting services.What is the expected return of the new combination of services?

A)17.40 percent
B)12.60 percent
C)5.59 percent
D)15.00 percent
E)None of the options is correct.

Question 54

Which of the following trust agreements is used to back the issue of securities by a corporation?

A)Revocable trust
B)Irrevocable trust
C)Charitable trust
D)Indenture trust
E)None of the options is correct.

Question 55

Which of the following trust agreements allows wealth to be passed free of gift and estate taxes?

A)Revocable trust
B)Irrevocable trust
C)Charitable trust
D)Indenture trust
E)None of the options is correct.

Question 56

Trust department activities include all of the following except:

A)safeguarding customers' assets.
B)generating earnings.
C)generating large deposits.
D)lending.
E)preparing wills.

Question 57

A 'Chinese wall' is supposed to prevent the transfer of insider information about clients between the investment banker's security underwriting division and the internal unit where proprietary trading of stocks and bonds takes place.

Question 58

Which of the following is an example of a nondeposit investment product of the bank?

A)Time deposit
B)NOW account
C)Passbook savings account
D)Proprietary mutual fund
E)All of the options are correct.

Question 59

Customers purchasing nondeposit investment accounts sold by a bank operating in the United States must be told in writing that:

A)investment accounts are not federally insured.
B)investment accounts are neither deposits nor guaranteed by a depository institution.
C)investment accounts could suffer loss of principal.
D)All of the options are correct.
E)None of the options is correct.

Question 60

A trust department's activities often center around establishing:

A)an independent relationship with the customer.
B)a partnership relationship with the customer.
C)a fiduciary relationship with the customer.
D)a subservient relationship with the customer.
E)None of the options is correct.

Question 61

A customer's pro rata value of a share in a mutual fund,if the assets of the fund were liquidated and liabilities paid off,is called:

A)a mutual fund.
B)an annuity.
C)the net asset value.
D)a hedge fund.
E)None of the options is correct.

Question 62

A savings instrument where the customer makes a lump sum payment to the investment manager who invests the payment in earning assets and later receives a stream of income from the assets is called:

A)a leveraged buyout.
B)an annuity.
C)the net asset value.
D)a hedge fund.
E)None of the options is correct.

Question 63

Which of the following activities of investment banking often leads to large speculative gains or losses during the first few hours of the sale of offering new shares of stock?

A)Leveraged buyouts
B)Security underwriting
C)Initial public offering
D)Hedge funds
E)Annuities

Question 64

Recently,both investment banks and commercial banks have come under a pressure to raise large amounts of capital,which is designed to:

A)increase their interest income.
B)reduce their high volume of assets.
C)increase their leverage ratio.
D)reduce their non-performing assets.
E)reduce their high debt ratio.

Question 65

A virtually regulated private investment pool,which primarily offers its wealthy investors and large institutions,the possibility of higher investment returns by taking on relatively risky assets is called:

A)a mutual fund.
B)an annuity.
C)the net asset value.
D)a hedge fund.
E)None of the options is correct.

Question 66

A company that offers shares in a pool of securities and the returns to the shareholders flow through any earnings generated is called:

A)a mutual fund.
B)an annuity.
C)the net asset value.
D)a leveraged buyout.
E)None of the options is correct.

Question 67

A bank is considering adding security underwriting services to the services it offers.It has estimated that the expected return and standard deviation of its traditional service are 8% and 10% respectively.It has estimated that the expected return and standard deviation of its new securities underwriting services are 16% and 20% respectively.The correlation between these services has been estimated to be -0.3 and the bank estimates that 80% of its business will be from traditional services and 20% from the new services.What is the standard deviation of the new combined firm?

A)7.8 percent
B)10.0 percent
C)12.0 percent
D)15.5 percent
E)20.0 percent

Question 68

A bank is considering adding security underwriting services to the services it offers.It has estimated that the expected return and standard deviation of its traditional service are 8% and 10% respectively.It has estimated that the expected return and standard deviation of its new securities underwriting services are 16% and 20% respectively.The correlation between these services has been estimated to be -0.3 and the bank estimates that 80% of its business will be from traditional services and 20% from the new services.What is the expected return of the new combined firm?

A)8.0 percent
B)9.6 percent
C)12.0 percent
D)14.4 percent
E)16 percent

Question 69

For which of the following banking services can the bank be legally liable for losses due to failure to act as a prudent decision maker?

A)Underwriting insurance services
B)Insurance sales services
C)Trust services
D)Exchange-traded-funds services
E)None of the options is correct

Question 70

Which of the following activities of a bank falls under the insurance sales and underwriting services?

A)Providing risk management services for persons and property.
B)Security underwriting.
C)Brokering securities for clients.
D)Providing credit guarantees.
E)Distributing new securities and interest.

Question 71

A bank is considering adding security brokerage services to the services it offers.It has estimated that the expected return and standard deviation of its traditional service are 6% and 14% respectively.It has estimated that the expected return and standard deviation of its new securities brokerage services are 14% and 24% respectively.The correlation between these services has been estimated to be -0.4 and the bank estimates that 60% of its business will be from traditional services and 40% from the new services.What is the expected return of the new combined firm?

A)14.0 percent
B)10.8 percent
C)10.0 percent
D)9.2 percent
E)6.0 percent

Question 72

The trusts that arise under a probated will and are often used to save on estate taxes are called:

A)revocable trusts.
B)irrevocable trusts.
C)indenture trusts.
D)testamentary trusts.
E)living trusts.

Question 73

A bank is considering adding security brokerage services to the services it offers.It has estimated that the expected return and standard deviation of its traditional service are 6% and 14% respectively.It has estimated that the expected return and standard deviation of its new securities brokerage services are 14% and 24% respectively.The correlation between these services has been estimated to be -0.4 and the bank estimates that 60% of its business will be from traditional services and 40% from the new services.What is the standard deviation of the new combined firm?

A)24.00 percent
B)18.00 percent
C)15.07 percent
D)14.00 percent
E)9.91 percent