FM

CHAPTER 7- EXAMINING THE STOCK MARKET QUESTIONS AND ANSWERS
1. What is the principal way that corporations raise equity capital?
Answer: Common Stock
2. Who sets the level of dividend?
Answer: Board of Directors
3. You buy the stock, hold it for one period to get the dividend, then sell the stock.
Answer: One-period valuation model
4. This model requires to compute the present value of an infinite stream of dividends?
Answer: Generalized dividend model
5. What is the first assumption in Gordon Growth model?
Answer: Dividends are assumed to continue growing at a constant rate forever
6. Who tend to hang on every word that the chairman of the Federal Reserves utters?
Answer: Stock market analysts
7. What is the important determinant of stock prices?
Answer: Monetary policy
8. Why is it important to examine how expectations are formed?
Answer: Because it is difficult to think of any sector in the economy in which expectations are
not crucial
9. It suggests that changes in expectations will occur slowly overtime as past data changes.
Answer: Adaptive change
10. What is the alternative theory of expectations developed by John Muth?
Answer: Rational Expectations
11. This expectation will be identical to optimal forecast ( the best guess of the future) using all
available information.
Answer: Rational Expectations
12. One reason why expectation may fail to be rational.
Answer: People might be aware of all available information but find it takes too much effort to
make their expectation the best expectation the best guess possible.
13. Why do people try to make their expectation match their best guess of th future using all
available information?
Answer: Because it is costly for people not to do so.
14. It is especially strong in financial markets.
Answer: Incentives for equating expectations with optimal forecast
15. It is based on the assumption that prices of securities in the financial markets fully reflect all
available information.
Answer: Efficient market hypothesis
16. An items that have a direct impact on future income streams of the securities.
Answer: Market fundamentals
17. It describes movements of a variable whose future changes cannot be predicted.
Answer: Random walk
18. This analysis aims to study past stock price data and search for patterns such as trends and
regular cycles.
Answer: Technical analysis
19. Fluctuations in stock prices may be much greater than are warranted by fluctuations in their
fundamental value.
Answer: Excessive volatility
20. It implies that stocks with low return today tend to have a high returns in the future.
Answer: Mean reversion

TRUE OR FALSE (ANSWERS ARE ALL TRUE)
________ 21. New information is not always immediately incorpprated into prices.
________ 22. A bubble is a situation in which the price of an asset differsfrom its fundamental
market value.
________ 23. If there is a change in the way a variable moves, there will be a change in the way
expectations of the variable are formed as well.
________ 24. January effect seems to have diminished in recent years for share of large
companies but still occurs for shares of small companies.
________ 25. Small firm effect is one the earliest reported anomalies in which the stock market
did not appear to be efficient.
________26. People would immediately buy the currency and bid its current price thereby
reducing the expected return.
________ 27. Future changes in stock prices should, for all practical purposes, be unpredictable.
________28. Having performed well in the past does not indicate that an investment adviser or
a mutual fund will not perform well in the future.
_______ 29. Mutual funds also do not beat the market.
_______ 30. In an efficient market, all unexploited profit opportunities will be eliminated.
_______ 31. The forecast errors of expectations will, on average, be zero and cannot be
predicted ahead of time.
_______ 32. People might be unaware of some available relevant information, so their best
guess of the future will not be accurate.
_______ 33. People might be aware of all available information but find it takes too much effort
to make their expectation the best guess possible.
_______ 34. Even though a rational expectation equal to optimal forecast using all available
information, a prediction based on it may not be always perfectly accurate.
_______ 35. Accurate expectations are desirable and there are strong incentives for people to
try to make them equal to optimal forecast by using all available information.
_______36. The evidence in support of the efficient markets model is extensive and
contradictory evidence is sparse.
______ 37. The evidence of mean reversion remains controversial
______ 38. Stock prices continue to rise for sometimes after the announcement of
unexpectedly high profit, and they continue to fall after surprisingly low profit announcement.
_______ 39. The internet is great source of information on stock prices and stock movements.
_______ 40. Stocks are valued as the present value of future dividends.
_______ 41. The trader who values the security the most will be willing to pay the most.
_______ 42. The prescription of investors is to pursue buy-and-hold strategy.
_______ 43. Some economists argue that the January effect is due to tax issues.
_______ 44. Research suggests that stock prices may overreact to news announcements and
that the pricing errors are corrected slowly.
_______ 45. The stronger version of the market efficiency is a basic tenet of much analysis in
the financial field.
_______ 46. The market expectations of future securities prices are rational.
_______ 47. The efficient market hypothesis is based on the assumption that prices of
securities in financial market fully reflect all available information.
_______ 48. Rational expectation theory would imply that when today's interest rate is high,
the expectation is that it will fall in the future.
_______ 49. One implication of efficient market hypothesis is that when purchasing a security,
you cannot expect to earn an abnormally high return, a return greater than the equilibrium
price.
_______ 50. Most of the time a firm institute dividends as soon as implied the rapid growth
phase of its life cycle.
CHAPTER 8-ECONOMIC ANALYSIS OF FINANCIAL STRUCTURE
1) American businesses get their external funds primarily from
(a) bank loans. (b) bonds and commercial paper issues. (c) stock
issues. (d) other loans
2) American businesses get their external funds primarily from
(a) common stock issues (b) bonds and commercial paper issues. (c)
government loans d. none of the above.
3) Which of the following is the primary source of external funds used by American businesses
to finance their activities?
(a) Stock (b) Bonds and commercial paper (c) Bank loans (d) Other loans
4) Of the sources of external funds for nonfinancial businesses in the United States, loans from
banks and other financial intermediaries account for approximately _____ of the total.
(a) 6% (b) 40% (c) 55% (d) 60%
5) Of the sources of external funds for nonfinancial businesses in the United States, corporate
bonds and commercial paper account for approximately _____ of the total.
(a) 5% (b) 10% (c) 35% (d) 50%
6) Of the following sources of external finance for American nonfinancial businesses, the least
important
(a) loans from banks. (b) stocks. (c) bonds and commercial paper.
(d) loans from other financial intermediaries.
7) Of the following sources of external finance for American nonfinancial businesses, the most
important is
(a) loans from banks. (b) stocks. (c) bonds and commercial paper.
(d) loans from other financial intermediaries
8) Of the sources of external funds for nonfinancial businesses in the United States, stocks
account for approximately _____ of the total.
(a) 2% (b) 9% (c) 20% (d) 40%

9) In the mid- to late 1980s, American corporations
(a) repurchased such large numbers of shares that stock issues were a negative source of
corporate finance in that period.
(b) took advantage of an especially strong stock market to issue record numbers of new shares
in that period.
(c) generally abandoned corporate bond and commercial paper markets to concentrate on new
stock issues.
(d) have done both (b) and (c) of the above
10) Which of the following statements concerning external sources of financing for nonfinancial
businesses in the United States are true?
(a) Bonds are a far more important source of finance than are stocks.
(b) Stocks and bonds, combined, supply less than one-half of the external funds.
(c) Financial intermediaries such as banks are the most important source of external funds.
(d) All of the above.
(a) Stocks are a far more important source of finance than are bonds.
(b) Stocks and bonds, combined, supply less than one-half of the external funds.
(c) Financial intermediaries such as banks are the least important source of external funds for
businesses.
12) Which of the following statements concerning external sources of financing for
nonfinancial businesses in the United States are true?
(a) Bonds are a far more important source of finance than are stocks.
(b) Stocks and bonds, combined, supply more than one-half of the external funds.
(c) Financial intermediaries such as banks are a relatively unimportant source of external funds.
(d) Only (a) and (b) of the above.

(a) Financial intermediaries such as banks are the most important source of external funds.
(b) Bonds are a far more important source of finance than are stocks
. (c) Stocks and bonds, combined, supply less than one-fifth of the external funds.
(e) Only (a) and (c) of the above
(a) In the mid- to late 1980s, American corporations in the aggregate did not issue shares to
finance their activities.
(b) Issuing marketable securities is not the primary way businesses finance their operations.
(c) Indirect finance is many times more important than direct finance as a source of external
funds.
(d) All of the above
(a) In the mid- to late 1980s, American corporations in the aggregate did not issue shares to
(b) Issuing marketable securities is the primary way businesses finance their operations.
(c) Direct finance is twice as important as indirect finance as a source of external funds to
business.
(d) Direct finance is fifty percent more important than indirect finance as a source of external
funds to business
(a) Banks are the second most important source of external funds to finance their activities.
(b) Stocks are the most important source of external funds to finance their activities.
funds.
(a) Issuing marketable securities is the primary way that they finance their activities.
(b) Bonds are the least important source of external funds to finance their activities.
(c) Stocks are a relatively unimportant source of finance for their activities.
(a) Neither stocks nor marketable securities are the primary source of external funds to finance
their activities.
(b) Stocks were a negative source of corporate finance in the mid- to late 1980s
funds
(e) Only (a) and (c) of the above.
(a) Combined, both stocks and marketable debt securities are the primary source of external
funds to finance their activities.
(b) Stocks were a negative source of corporate finance in the mid- to late 1980s.
(c) Stocks have been the primary source of corporate finance in recent years.
(e) Only (a) and (c) of the above

20) With regard to external sources of financing for nonfinancial businesses in the United
States, which of the following are accurate statements?
(a) Marketable securities account for a larger share of external business financing in the United
States than in most other countries.
(b) Since 1970, less than 5% of newly issued corporate bonds and commercial paper have been
sold directly to American households.
(c) The stock market accounted for a sizeable fraction of the financing of American businesses
in the 1970-1985 period.
(e) Only (a) and (b) of the above.
21) Which of the following are true statements concerning financial structure in the United
States?
(a) The stock market accounted for only a very small fraction of the financing of American
businesses in the 1970-1985 period.
(b) In the mid- to late 1980s, American corporations on average did not issued shares to
(c) Corporations have repurchased large numbers of shares so that the stock market actually
has been a negative source of corporate finance in the mid- to late 1980s.
(d) All of the above are true statements
22) Which of the following are true statements concerning financial structure in the United
States?
(a) Issuing marketable securities is not the primary way businesses finance their operations.
(b) Bonds are a far more important source of finance than are stocks in the United States.
(c) Together, bonds and stocks supply less than one-half of the external funds that corporations
use to finance their activities.
(d) All of the above are true statements.

(a) Direct finance is used in less than 5% of the external financing of American businesses.
(b) Only large, well-established corporations have access to securities markets to finance their
activities.
(c) Bank loans in the United States provide over four times more financing of corporate
activities than do stock markets.
(e) Only (a) and (b) of the above
(a) Smaller businesses that are not well-established almost never raise funds by issuing
marketable securities.
(b) Because well-established corporations are dominant financial market participants, their
issues of marketable securities are the single most important source of funds to finance
businesses.
(c) Direct finance is accounts for more than 50 percent of the external financing of American
businesses. (d) Both (a) and (b) of the above.
25) Nonfinancial businesses in Germany and Japan
(a) raise most of their funds by issuing stock.
(b) raise most of their funds by issuing bonds.
(c) raise most of their funds from nonbank loans.
(d) raise most of their funds from bank loans
(e) raise most of their funds by issuing commercial paper
26) Relative to the situation in the United States, nonfinancial businesses in Germany and
Japan raise more of their funds from
(a) new stock issues.

(b) new bonds issues.
(c) new commercial paper issues.
(d) bank loans
. (e) both (a) and (b) of the above.
27) As a source of funds for nonfinancial businesses, stocks are relatively more important in
(a) the United States. (b) Germany. (c) Japan. (d) both (a) and (c) of the above.
(e) both (b) and (c) of the above.
28) As a source of funds for nonfinancial businesses, banks are relatively the least important
source in (a) Germany. (b) Japan (c) the United States. (d) both (a) and (b) of the
above.
(e) both (b) and (c) of the above.
29) Regulation of the financial system
(a) occurs only in the United States.
(b) protects the jobs of employees of financial institutions.
(c) protects the wealth of owners of financial institutions.
(d) ensures the stability of the financial system.
30) The purpose of regulation of financial markets is to
(a) limit the profits of financial institutions.
(b) increase competition among financial institutions.
(c) promote the provision of information to shareholders, depositors and the public.
(d) guarantee that the maximum rates of interest are paid on deposits.
31) Property that is pledged to the lender in the event that a borrower cannot make his or her
debt payment is called
(a) collateral. (b) points. (c) interest. (d) good faith money.
(32) Collateral is
(a) a prevalent feature of debt contracts for households.
(b) a prevalent feature of debt contracts for business.
(c) is property that is pledged to the lender if a borrower cannot make his or her debt
payments.
(d) all of the above
33) Commercial and farm mortgages, in which property is pledged as collateral, account for
(a) one-quarter of borrowing by nonfinancial businesses.
(b) one-half of borrowing by nonfinancial businesses.
(c) one-twentieth of borrowing by nonfinancial businesses.
(d) two-thirds of borrowing by nonfinancial businesses.
34) Poor people have difficulty getting loans because
(a) they typically have little collateral.
(b) they are more likely to be dishonest.
(c) they are less likely to benefit from access to financial markets.
(d) of all of the above.
35) The predominant form of household debt is
(a) consumer installment debt.
(b) collateralized debt.
(c) unsecured debt.
(d) none of the above
36) Collateralized debt is also know as
(a) unsecured debt.
(b) secured debt.
(c) unrestricted debt.

(d) restricted debt.
(e) promissory debt.
37) Credit card debt is
(a) secured debt.
(b) unsecured debt.
(c) restricted debt
(d) unrestricted debt..
38) A clause in a mortgage loan contract requiring the borrower to purchase homeowner’s
insurance is an example of a
(a) restrictive covenant.
(b) collusive agreement between mortgage lenders and insurance companies.
(c) both (a) and (b) of the above.
(d) neither (a) and (b) of the above.
39) A clause in a mortgage loan contract requiring the borrower to purchase homeowner’s
insurance is an example of a
(a) proscriptive covenant.
(b) prescriptive covenant.
(c) restrictive covenant.
(d) constraint-imposed covenant
40) Which of the following is not one of the eight basic puzzles about financial structure?
(a) Stocks are the most important source of finance for American businesses.
(b) Issuing marketable securities is not the primary way businesses finance their operations.
(c) Indirect finance, which involves the activities of financial intermediaries, is many times more
important than direct finance, in which businesses raise funds directly from lenders in financial
markets.
(d) Banks are the most important source of external funds to finance businesses
(a) The financial system is among the most heavily regulated sectors of the economy.
(b) Issuing marketable securities is the primary way businesses finance their operations.
(c) Indirect finance, which involves the activities of financial intermediaries, is many times more
markets.
(d) Banks are the most important source of external funds to finance businesses.
(a) Only large, well-established corporations have access to securities markets to finance their
activities.
(b) Indirect finance, which involves the activities of financial intermediaries, is many times more
markets.
(c) Collateral is a prevalent feature of debt contracts for households, but not business since
they have many alternative sources for funds.
(d) Banks are the most important source of external funds to finance businesses.
(a) Debt contracts are typically extremely complicated legal documents that place substantial
restrictions on the behavior of the borrower.
(b) Indirect finance, which involves the activities of financial intermediaries, is many times
more important than direct finance, in which businesses raise funds directly from lenders in
financial markets.
(c) Collateral is a prevalent feature of debt contracts for both households and business.
(d) New security issues are the most important source of external funds to finance
businesses.
(a) The financial system is among the most heavily regulated sectors of the economy.
(b) Only large, well-established corporations have access to securities markets to finance their
activities.
(c) Collateral is a prevalent feature of debt contracts for both households and business.
(d) Debt contracts are typically extremely complicated legal documents that place substantial
restrictions on the behavior of the borrower.
(e) Direct finance, in which businesses raise funds directly from lenders in financial markets,
is many times more important than indirect finance, which involves the activities of financial
intermediaries.
45) Financial intermediaries provide their customers with
(a) reduced transactions costs.
(b) increased diversification and reduced risk.
(c) greater liquidity.
(d) all of the above:
46) The benefits financial intermediaries provide their customers include
(a) increased diversification.
(b) reduced risk.
(c) reduced transactions costs.
(d) all of the above.
(47) The current structure of financial markets can be best understood as the result of
attempts by financial market participants to
(a) adapt to continually changing government regulations.
(b) deal with the great number of small firms in the United States.
(c) reduce transaction costs
. (d) cartelize the provision of financial services.
48) Mutual funds lower transactions costs and provide individual investors the benefit of
(a) reduced risk.

(b) diversification.
(c) economies of scale
49) The reduction in transactions costs per dollar of investment as the size of transactions
increases is (a) discounting.
(b) economies of scale.
(c) economies of trade.
(d) diversification
50) A borrower who takes out a loan usually has better information about the potential returns
and risk of the investment projects he plans to undertake than does the lender. This inequality
of information is called
(a) moral hazard.
(b) asymmetric information.
(c) noncollateralized risk.
(d) adverse selection.
CHAPTER 9- THE MANAGEMENT OF FINANCIAL INSTITUTIONS

1) A bank’s balance sheet
(a) shows that total assets equals total liabilities plus equity capital.
(b) lists sources and uses of bank funds.
(c) indicates whether or not the bank is profitable.
(d) does all of the above.
(e) does only (a) and (b) of the above.

2) A bank’s balance sheet
(a) shows that total assets equals total liabilities plus equity capital.
(b) lists sources and uses of bank funds.
(c) indicates whether or not the bank is solvent.
3) Which of the following statements are true?
(a) A bank’s assets are its sources of funds.
(b) A bank’s liabilities are its uses of funds.
(c) A bank’s balance sheet shows that total assets equal total liabilities plus equity capital.
(d) Each of the above
(a) A bank’s assets are its uses of funds.
(b) A bank’s liabilities are its sources of funds.
(c) A bank’s balance sheet has the property that total assets equal the sum of total liabilities
and equity capital.
(d) Each of the above are true.
5) Which of the following statements is true?
(b) A bank’s assets are its sources of funds.
(c) A bank’s liabilities are its uses of funds.
(d) Only (b) and (c) of the above are true.
6) Which of the following statements is false?
(b) A bank issues liabilities to acquire funds.

(c) The bank’s assets provide the bank with income.
(d) Bank capital is an asset in the bank balance sheet
7) Which of the following are reported as liabilities on a bank’s balance sheet?
(a) Reserves
(b) Checkable deposits
(c) Loans
(d) Deposits with other banks
(a) Discount loans
(c) U.S. Treasury securities
(d) Only (a) and (b) of the above
(a) Reserves
(b) Small denomination time deposits
(c) Loans
(d) Deposits with other
(a) Non-transaction deposits
(b) Bank capital
(c) Loans
(a) Discount loans

(b) Cash items in the process of collection
(c) State government securities
(a) Bank capital
(b) Loans
(c) Reserves
13) The share of checkable deposits in total bank liabilities has
(a) expanded moderately over time.
(b) expanded dramatically over time.
(c) shrunk over time.
(d) remained virtually unchanged since 1960.
14) Checkable deposits and money market deposit accounts are
(a) payable on demand.
(b) liabilities of the banks.
(c) assets of the banks.
(d) only (a) and (b) of the above
(a) Checkable deposits are usually the lowest cost source of bank funds.
(b) Checkable deposits are the primary source of bank funds.
(c) Checkable deposits are payable on demand
(d) Checkable deposits include NOW accounts.

16) In recent years the interest paid on checkable and time deposits has accounted for around
_____ of total bank operating expenses, while the costs involved in servicing accounts have
been approximately _____ of operating expenses.
(a) 45 percent; 55 percent
(b) 55 percent; 4 percent
(c) 30 percent; 50 percent
(d) 50 percent; 30
17) In recent years the interest paid on checkable and time deposits has accounted for around
(a) 60 percent of total bank operating expenses.
(b) 45 percent of total bank operating expenses.
(c) 30 percent of total bank operating expenses.
(d) 20 percent of total bank operating expenses.
18) In recent years the costs involved in servicing checkable and time deposit accounts have
been approximately
(a) 65 percent of total bank operating expenses.
(b) 75 percent of total bank operating expenses.
(c) 50 percent of total bank operating expenses.
(d) 25 percent of total bank operating expenses.
(a) The expenses involved in servicing accounts (salaries, building rent, etc.) make up over
half the costs of running a bank.
(b) Non-transaction deposits are the primary source of bank funds.
(c) Demand deposits are checkable deposits that pay no interest.
(d) Technically, savings deposits are not payable on demand
(a) Checkable deposits are usually the lowest cost source of bank funds.
(b) Checkable deposits are payable on demand.
(c) Checkable deposits include NOW accounts.
(d) All of the above are true.
(a) Checkable deposits are payable on demand.
(b) Checkable deposits include NOW accounts.
(c) Checkable deposits are the primary source of bank funds.
(d) All of the above are true.
(e) Only (a) and (b) of the above are true.
(a) Non-transaction deposits are the primary source of bank funds.
(b) Demand deposits are checkable deposits that pay no interest.
(c) Technically, savings deposits are not payable on demand.
(d) All of the above are true
(a) Demand deposits are the primary source of bank funds.
(b) Demand deposits are checkable deposits that pay no interest.
(c) The expenses involved in servicing accounts (salaries, building rent, etc.) make up over half
the costs of running a bank.
(d) Only (a) and (b) of the above are true.
24) Which of the following are transaction deposits?
(a) Savings accounts
(b) Small-denomination time deposits
(c) Negotiable order of withdraw accounts

(d) Certificates of deposit
25) Which of the following are not nontransaction deposits?
(d) Certificates of deposit
26) Which of the following are non-transaction deposits?
(c) Certificates of deposit
27) Which of the following are non-transaction deposits?
28) Large-denomination CDs are _____, so that like a bond they can be resold in a _____
market before they mature.
(a) nonnegotiable; secondary
(b) nonnegotiable; primary
(c) negotiable; secondary
(d) negotiable; primary
29) Because checking accounts are _____ liquid for the depositor than passbook savings, they
earn _____ interest rates.
(a) less; higher
(b) less; lower
(c) more; higher
(d) more; lower
30) Because passbook savings are _____ liquid for the depositor than checking accounts, they
earn _____ interest rates.
(a) less; higher
(b) less; lower
(c) more; higher
(d) more; lower
31) Because _____ are less liquid for the depositor than _____, they earn higher interest rates.
(a) money market deposit accounts; time deposits
(b) checkable deposits; passbook savings
(c) passbook savings; checkable deposits
(d) passbook savings; time deposits
32) Because time deposits are _____ liquid for the depositor than passbook savings, they earn
_____ interest rates.
(a) less; higher
(b) less; lower
(c) more; higher
(d) more; lower
33) Because _____ are less liquid for the depositor than _____, they earn higher interest rates.
(a) passbook savings; time deposits
(b) money market deposit accounts; time deposits
(c) money market deposit accounts; passbook savings

(d) time deposits; passbook
34) Bank capital is listed on the _____ side of the bank’s balance sheet because it represents a
_____ of funds.
(a) liability; use
(b) liability; source
(c) asset; use
(d) asset; source
35) Banks acquire funds from such sources as
(a) checkable deposits.
(b) savings accounts.
(c) reserves.
(e) only (a) and (b) of the above.
36) Banks acquire funds from such sources as
(a) bank capital.
(b) cash items in the process of collection.
(c) reserves.
(d) only (a) and (b) of the above.
37) Banks acquire the funds that they use to purchase income-earning assets from such sources
as
(a) checkable deposits.
(b) savings accounts.
(c) reserves.
(e) only (a) and (b) of the above.

38) Banks acquire the funds that they use to purchase income-earning assets from such sources
as
(a) bank capital.
(b) cash items in the process of collection.
(c) reserves.
39) Bank loans from the Federal Reserve are called _____ and represent a _____ of funds.
(a) discount loans; use
(b) discount loans; source
(c) fed funds; use
(d) fed funds; source
40) Bank reserves
(a) equal bank deposits at the Fed.
(b) include holdings of U.S. government securities.
(c) can be divided up into required and excess reserves.
41) Bank reserves include
(a) deposits at the Fed.
(b) vault cash.
(c) short-term Treasury securities.
(e) both (a) and (b) of the above
42) Bank reserves include
(a) deposits at the Fed and short-term treasury securities.

(b) vault cash and short-term Treasury securities.
(c) short-term Treasury securities and municipal securities.
(d) deposits at other banks and deposits at the Fed
(e) vault cash and deposits at the Fed
43) The fraction of checkable deposits that banks are required by regulation to hold are
(a) excess reserves.
(b) required reserves.
(c) vault cash
44) The sum of reserves, cash items in the process of collection, and deposits in other banks are
know as
(a) secondary reserves.
(b) cash items.
(c) liquid items.
(d) compensating balances
45) Which of the following are reported as assets on a bank’s balance sheet?
(a) U.S. Treasury securities
(b) Loans
(c) Discount loans from the Fed
(a) Discount loans from the Fed
(b) Loans
(c) Borrowings
(a) Cash items in the process of collection
(b) Loans
(c) Borrowings
(c) Borrowings
(d) Bank capital
(b) Deposits with other banks
(c) Checkable deposits
(d) Bank capital
(a) U.S. Treasury securities
(b) Reserves
(c) Loans

CASE ANALYSIS
A. BACKGROUND OF THE BANK OF THE PHILIPPINE ISLANDS
Founded in 1851, Bank of the Philippine Islands is the first bank in the Philippines and
in the Southeast Asian region. BPI is a universal bank and together with its subsidiaries
and affiliates, it offers a wide range of financial products and solutions that serve both
retail and corporate clients.
BPI's services include consumer banking and lending, asset management, insurance,
securities brokerage and distribution, foreign exchange, leasing, and corporate and
investment banking.
The bank has a network of over 800 branches in the Philippines, Hong Kong and
Europe, and close to 3,000 ATMs and CDMs (cash deposit machines).
The establishment of BPI, originally known as El Banco Español Filipino de Isabel II,
ushered in the start of the Philippine banking and finance industry. The bank
performed many functions, from providing credit to the National Treasury to printing
and issuing currency, making it in effect the country's first Central Bank. BPI proudly
carries on this tradition, financing many private and public sector initiatives and
enterprises in support of economic growth and nation building.
BPI is acknowledged as a leading provider of financial services in the Philippines .
B.VISION AND MISSION
Vision:
We aim to build a better Philippines.
Mission:
We nurture every Filipino’s future with a trusted approach to managing money and
innovation that makes life easier every day.
C.SWOT ANALYSIS
STRENGTH
1. Has a multi-channel distribution network comprising 600+ retail branches, 40 investment

centers, commercial partners, telephone banking (BPI Directo) and a home banking service (BPI
Net)
2. Has a strong customer base with approx 2 million customers.
3. BPI has the best capital indicators regardless of the criterion, its pensions are covered.
4. It is the only listed bank which has not issued State-guaranteed debt to manage liquidity, it
records the lowest absolute and relative utilization of ECB resources.
5. The bank has the lowest rate of loan leverage and the lowest credit risk indicators.
6. 10,000 people work as a part of the bank.
WEAKNESSES
Here are the weaknesses in the Banco BPI SWOT Analysis:
1. Its net operating income has been decreasing over the past few years.
2. Limited international presence which increases the geographic risk.
3. It is not completely free from the credit risks with respect to customers and counterparties
which could adversely affect its results.
OPPORTUNITIES
Following are the Opportunities in Banco BPI SWOT Analysis:
1. Its stringent risk management measures with respect to loan portfolios can be lessened in
order to attract more customers.
2. As customers are moving towards mobile banking, it should provide more apps for Android
and IOS devices.
3. Can offer more products in the personal banking segment as it is a growing segment.
4. More global tie-ups can boost the presence of the brand abroad.
THREAT
The threats in the SWOT Analysis of Banco BPI are as mentioned:
1. S&P warned of rating degrade which would affect BPI as the investments would decrease.
2. Erosion of market capital as the stock prices have been decreasing over negative market
sentiment.
3. There is a tight competition as other banks are offering similar products for a better value.
Competitors
Below are the top 3 Banco BPI competitors:
1. Espírito Santo Financial Group
2. BANIF SGPS SA
3. Banco Comercial Portugues SA
D.FINANCIAL REPORT OF BPI

1. ASSETS
2. LIABILTIES
3. NET INCOME
E. ANALYSIS OF EACH PARAMETER
Each graph shows the changes in the amount of assets, liabilities and net income as the time
passed by. It depicts that assets and liabilities has a gradual increased while the net income has
a slow increased.
F. MAJOR PROBLEM FACED BY BPI

A major systems upgrade, which had unintended consequences that some Filipinos recounted.
It was solved after the system upgrade was done, all financial transaction are available as
normal even though it has a slower access due to surge of users.
G. BPI STOCK PRICE BEFORE AND AFTER THE ISSUE
The graph shows that there is a steeped decreased in stock price after the issue occurs.
H. MARKET EFFICIENCY
BPI has evidence of market efficiency because its market prices reflect all available relevant
information. Market is efficient if all information is already incorporated into prices.
I. FINANCIAL INTERMEDIARIES HELP LOWER TRANSACTION COST IN THE

ECONOMY
There are two ways to help lower transaction cost, the economies of scale and expertise.
Economies of scale help lower transaction cost by the reduction of cost per dollar of the
investment as the size of transaction increases. It exists because the total cost of carrying out a
transaction in financial markets increases only a little by the size of the transaction grows.
Meanwhile expertise help lower transaction cost by in rendering services, such as expertise in
computer technology which enables them to offer customers convenient services that make
easier for costumer to conduct transactions.
J .CONCLUSION OF OVERALL PERFORMANCE

BPI Company remains effective though it has experienced major problems such as the
upgrading of system because of the surge of the mobile platform users. Even though its stock
price decreases, it still manages to have a higher net income.
OUTPUT
IN
FINANCIAL
MARKETS
SUBMITTED TO:
JAY A. ROSLINDA
SUBMITTED BY:
CHELLA MAE S. LANGAN, BSMA-II

5. Banco de Oro
ASSETS LIABILITIES
Reserves:
Required -50,000 Deposits -500,000
Excess -450,000
This is the reserves of Banco de Oro if someone withdraws 1,000,000 and the other deposits
500,000 of cash. The amounts becomes negative because the amount withdraw is greater than
the deposits.

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CHAPTER 7- EXAMINING THE STOCK MARKET QUESTIONS AND ANSWERS

1. What is the principal way that corporations raise equity capital?

Answer: Common Stock

2. Who sets the level of dividend?

Answer: Board of Directors

Answer: One-period valuation model

Answer: Generalized dividend model

5. What is the first assumption in Gordon Growth model?

Answer: Dividends are assumed to continue growing at a constant rate forever

Answer: Stock market analysts

7. What is the important determinant of stock prices?

Answer: Monetary policy

8. Why is it important to examine how expectations are formed?

Answer: Adaptive change

10. What is the alternative theory of expectations developed by John Muth?

Answer: Rational Expectations

12. One reason why expectation may fail to be rational.

Answer: Because it is costly for people not to do so.

14. It is especially strong in financial markets.

Answer: Incentives for equating expectations with optimal forecast

Answer: Efficient market hypothesis

Answer: Market fundamentals

17. It describes movements of a variable whose future changes cannot be predicted.

Answer: Random walk

Answer: Technical analysis

Answer: Excessive volatility

Answer: Mean reversion

_______ 29. Mutual funds also do not beat the market.

______ 37. The evidence of mean reversion remains controversial

_______ 42. The prescription of investors is to pursue buy-and-hold strategy.

2) American businesses get their external funds primarily from

(a) 6% (b) 40% (c) 55% (d) 60%

(a) 5% (b) 10% (c) 35% (d) 50%

(d) loans from other financial intermediaries.

(d) loans from other financial intermediaries

(a) 2% (b) 9% (c) 20% (d) 40%

(d) have done both (b) and (c) of the above

(d) All of the above.

(d) All of the above.

(d) Only (a) and (b) of the above.

(d) Only (a) and (b) of the above.

(e) Only (a) and (c) of the above

(d) All of the above

(d) All of the above

(d) All of the above.

(d) All of the above.

(e) Only (a) and (c) of the above.

(d) Only (a) and (b) of the above.

(e) Only (a) and (c) of the above

(d) All of the above.

(e) Only (a) and (b) of the above.

(d) All of the above are true statements

(d) All of the above are true statements.

(d) All of the above.

(e) Only (a) and (b) of the above

25) Nonfinancial businesses in Germany and Japan

(a) raise most of their funds by issuing stock.

(b) raise most of their funds by issuing bonds.

(c) raise most of their funds from nonbank loans.

(d) raise most of their funds from bank loans

(e) raise most of their funds by issuing commercial paper

(a) new stock issues.

(c) new commercial paper issues.