Question

1.  When banks encounter liquidity issues experiencing deposit withdrawal or even bank run, which alternative is more appropriate to deal with the situation?

A)        Increasing overnight funds borrowed

B)        Contacting an investment banker to find new corporate deposits

C)        Issuance of a negotiable certificate of deposit

D)        Selling the bank’s holdings of T-bills

2. Focus on exploiting the tendency of the equities of companies in a time of change to drop in price. Such an approach belongs to which of the following investment strategy for hedge funds?

1. Event-driven investing
2. Absolute return objective
3. Directional strategies
4. Market-neutral strategies

3.  The key advantage of a family of mutual funds is

A)        The ability to diversify an investment portfolio

B)        The ability to add funds on a regular basis

C)        The ability to shift quickly from one type to another with little cost

D)        The ability to transfer one fund management team to another

4.   A valid argument against banks being permitted to directly enter the securities business is that

A)        They will be increasing their risky activities leading to a potential increase in the moral hazard and adverse selection problems

B)        There is an increase in the likelihood of conflicts of interest between the bank and security issuers

C)        The overall costs of the bank will increase resulting in higher costs and lower returns to depositors

D)        All of the above

5. Schedule III banks are

1. Regulated by the provincial regulators
2. More profitable than Schedule I banks
3. Foreign bank subsidiaries operating in Canada
4. Not members of the CDIC

Answer 1

1) Answer is D.    Selling the bank’s holdings of T-bills

The reason is that whenever the bank faces the liquidity problem, bank will sell the asset that can be easily convertible into cash. As T-bills are easily convertible into cash, banks will sell them to solve the liquidity problem.

2) Answer is A. Event-driven investing

The reason for choosing this option is that event-driven investing strategy aims to exploit the tendency of a company's stock price to drop during a period of change. it takes the advantage of the temporary stock mispricing, before or after the company's event takes place.

3) Answer is C.   The ability to shift quickly from one type to another with little cost

The reason for choosing this option is that fund family offers the flexiblity of choosing the different investment. One can transfer fund from one to another at little or no cost involved.

4)Answer is A.   They will be increasing their risky activities leading to a potential increase in the moral hazard and adverse selection problems.

The reason for choosing this option is that entering into a securities business is too risky which may lead to moral hazard problem which may effect the bank's own activities.

5) Answer is C.Foreign bank subsidiaries operating in Canada

Foreign banks that have been given permission to operate in Canada are schedule iii banks. These banks are not covered under bank act.