Question

1. Which are the followings is NOT correct about the bank holding companies?

a) Easy to transfer resources arounds the numbers of banks within the banking groups

b) Independent investment banks in U.S. formed BHC to expand because they were appealed to the expensive commercial banking business

c) Bank holding companies are tightly regulated by the government

d) Due to McFadden Act, bank in U.S. need to form a bank holding company if it wants to operate in another state

e) None of the above

2. Which of the followings is related to the economy of scope?

a) Investment bank specialize in advisory services expand to insurance business

b) Commercial bank form a BHC to expand its customer base to New York

c) Insurance company to collaborate with commercial bank to expand its customer base

d) Insurance company wants to specialize in advisory services by merging with investment bank

e) a) and d) of the above

3. Which of the following is NOT correct about the credit default swap?

a) It is a derivative instrument that typically requires holder (buyer) to pay a regular insurance premium to the writer (seller) over the life of the contract

b) The holder (buyer) has to own the asset when buying CDS products

c) In the case of default, writer (seller) pays holder (buyer) insured amount of money in return for defaulted asset

d) CDS spread (price) usually increase during economic downturn

e) b）and d) of the above

4. Which of the following is NOT correct about the loan securitization process?

a) Loan originators grant loans to borrowers and sell loan contracts to arrangers

b) Tranches (senior, mezzanine, and junior) usually share different interest rate

c) Arrangers (mostly, investment banks) create SPV to securitize pool of loans

d) Arrangers purchase loan contracts from the loan originators

e) None of the above

Answer 1

1. Option A

Explanation:

Option A is incorrect as there are a lot of restrictions on transfer of resources around the banks within the group

Opton B is correct as a lot of investment banks made banking holding companies to enter into commercial banking business also

Option C is correct as BHCs are managed and regulated by the government

Option D is correct as a bank can not operate in multiple states. It has to form BHC to operate in mutiple states

2. Option E

Explanation:

Option A is correct as economy of scope implies entering into multiple products/services. Investment bank entering into a advisory services will give rise to economy of scope

Option B is incorrect as forming BHCs does not necesaarly imply entering into multiple product/services. A BHC might deal only in one type of service

Option C is incorrect as expanding customer base doesn not imply economy of scope

Option D is correct as economy of scope implies entering into multiple products/services. Insurance company entering into a advisory will give rise to economy of scope

3. Option B

Option A is correct as in a Credit default swap, the buyer pays premium to seller for the insurance provided

Option B is incorrect as it is not necessary for the buyer to won the asset

Option C is correct as the seller has to pay the buyer in case of default

Option D is correct as the probability of default increases with economic downturn and hence the price of credit default swap increases

4. Option E

Option A is correct as loan is given to borrowers and the loan contract is further sold to arrangers in case of loan securitization

Option B is correct as the different tranches have different interest rates based on the risks associated

Option C is correct as the arrangers create SPV from all the loan contracts and sell them to the investors

Option D is correct as the arrangers buy the loan contracts from the loan originators