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Chapter 01 – An Overview of the Changing Financial-Services Sector 1-1 CHAPTER 1 AN OVERVIEW OF THE CHANGING FINANCIAL-SERVICES SECTOR Goal of This Chapter: In this chapter you will learn about the many roles financial service- providers play in the […]

Chapter 10 Problem 01 Input Area: Today’s price $1,025.00 Annual coupon payment $60.00 Time-to-maturity (years) 20.00 Par value $1,000.00 Output Area: Yield to maturity 5.79% Chapter 10 Problem 02 Input Area: Yield to maturity 5.00% Time to maturity 10 Face […]

Chapter 10 – The Investment Function in Financial-Services Management 10-1 CHAPTER 10 THE INVESTMENT FUNCTION IN FINANCIAL-SERVICES MANAGEMENT Goal of This Chapter: The purpose of this chapter is to discover the types of securities that financial institutions acquire for their […]

Chapter 11 Problem 01 Input Area: Deposit withdrawals $100 Deposit inflows $95 Scheduled loan repayments $90 Acceptable loan requests $60 Borrowings from the money market $80 Sales of bank assets $40 Stockholder dividend payments $150 Revenues from sale of nondeposit […]

Chapter 11 – Liquidity and Reserves Management: Strategies and Policies 11-1 CHAPTER 11 LIQUIDITY AND RESERVES MANAGEMENT: STRATEGIES AND POLICIES Goal of This Chapter: The purpose of this chapter is to explore the reasons why financial institutions often face heavy […]

Chapter 11 – Liquidity and Reserves Management: Strategies and Policies expected deposit inflows of $26 million, revenues from nondeposit service sales of $18 million, scheduled repayments of previously made customer loans of $23 million, asset sales of $10 million, other […]

Chapter 12 Problem 04 Input Area: Expected Volume of New Deposits Rate Offered on New Funds 1 10,000,000 2.00% 2 15,000,000 2.25% 3 20,000,000 2.50% 4 26,000,000 2.75% 5 28,000,000 3.00% Expected yield on new loans 5.50% Output Area: Total […]

Chapter 12 – Managing and Pricing Deposit Services 12-1 CHAPTER 12 MANAGING AND PRICING DEPOSIT SERVICES Goal of This Chapter: This chapter has multiple goals. One of the most important is to learn about the different types of deposits financial […]

Chapter 13 Problem 04 Input Area: Maturity of CD (days) 60 Denomination 5,000,000 Annual yield 2.95% Output Area: $ amount of interest paid by bank at maturity $24,583.33 $ amount owed at maturity $5,024,583.33 Chapter 13 Problem 05 Input Area: […]

Chapter 13 – Managing Nondeposit Liabilities 13-1 CHAPTER 13 MANAGING NONDEPOSIT LIABILITIES Goal of This Chapter: The purpose of this chapter is to learn about the principal nondeposit sources of funds that financial institutions can borrow from, to help finance […]

Chapter 13 – Managing Nondeposit Liabilities week are projected to equal $680 million The bank also plans to acquire $420 million in 13–12 corporate and government bonds next week. What is the bank’s projected available funds gap? The projected available […]

Chapter 14 Problem 02 Input Area: Expected Return – Traditional Services 3.50% Expected Return-Security Underwriting 10.75% Standard Deviation – Traditional Services 2.50% Standard Deviation – Security Underwriting 8.25% Correlation of Returns Between Two Services 0.25 Proportion of Revenue – Traditional […]

Chapter 14 – Investment Banking, Insurance, and Other Sources of Fee Income 14-1 CHAPTER 14 INVESTMENT BANKING, INSURANCE, AND OTHER SOURCES OF FEE INCOME Goal of This Chapter: This chapter is designed to explore several of the most important non- […]

Chapter 15 Problem 01 Input Area: Tier 1 Capital 4,500,000 Tier 2 Capital 2,500,000 Total Assets 95,000,000 Total risk-weighted assets 75,000,000 Output Area: Leverage ratio 4.74% Total Capital/Total assets 7.37% Tier 1 Capital/Risk weighted assets 6.00% Total Capital/Risk weighted assets […]

Chapter 15 – The Management of Capital 15-1 CHAPTER 15 THE MANAGEMENT OF CAPITAL Goal of This Chapter: The purpose of this chapter is to discover why capital—particularly equity capital—is so important for financial institutions, to learn how managers and […]

Chapter 15 – The Management of Capital Tier 1 Tier 2 Qualifying noncumulative perpetual preferred stock Allowance for loan and lease losses Common stock Subordinated debt under two years to maturity Undivided profits Intermediate-term preferred stock Minority interest in the […]

Chapter 16 Problem 01 Input Area: Source’s of Funds Capital and surplus 300,000,000 Demand Deposits 325,000,000 Time and savings deposits 680,000,000 Subordinated debt 200,000,000 Output Area: Maximum $ amount of real estate loans 476,000,000 Maximum $ amount of loans to […]

Chapter 16 – Lending Policies and Procedures: Managing Credit Risk 16-1 CHAPTER 16 LENDING POLICIES AND PROCEDURES: MANAGING CREDIT RISK Goal of This Chapter: The purpose of this chapter is to learn the steps in a lending process, regulations in […]

Chapter 17 Problem 03 Input Area: Business Assets Annual revenue and Expense Items Cash account 60.00 Net sales 600.00 Accounts receivable 155.00 Cost of goods sold 445.00 Inventories 128.00 Wages and salaries 52.00 Fixed assets 286.00 Interest expense 28.00 Miscellaneous […]

Chapter 17 – Lending to Business Firms and Pricing Business Loans 17-1 CHAPTER 17 LENDING TO BUSINESS FIRMS AND PRICING BUSINESS LOANS Goal of This Chapter: The purpose of this chapter is to explore how bankers can respond to a […]

Chapter 17 – Lending to Business Firms and Pricing Business Loans 17–12 725 Depreciation expenses 12 Liabilities and Equity Selling, administrative, and other expenses 28 Short-term debt: 108 Before-tax net income 6 Accounts payable 117* Taxes owed 1 Notes payable […]

Chapter 18 Problem 03 Input Area: $ Line of credit 75,000 First mortgage 180,000 Second mortgage 25,000 Appraised value 400,000 Output Area: % Of homes estimated market value 70.00% Chapter 18 Problem 07 Input Area: Points Percentage # of accounts […]

Chapter 18 – Consumer Loans, Credit Cards, and Real Estate Lending 18-1 CHAPTER 18 CONSUMER LOANS, CREDIT CARDS, AND REAL ESTATE LENDING Goal of This Chapter: To learn about the different types of loans lenders make to consumers (individuals and […]

Chapter 19 Problem 01 Input Area: Part A Acquiring Bank Acquired Bank Combined Bank Stock Price $25.00 $18.00 Earnings Per Share $6.00 $5.00 Shares outstanding 200,000 50,000 Most recent/expected net earnings 1,200,000 250,000 1,600,000 Part B Acquiring Bank Acquired Bank […]

Chapter 19 – Acquisitions and Mergers in Financial– Services Management 19-1 CHAPTER 19 ACQUISITIONS AND MERGERS IN FINANCIAL- SERVICES MANAGEMENT Goal of This Chapter: The purpose of this chapter is to understand why the financial services industry undertakes so many […]

Chapter 02 – The Impact of Government Policy and Regulation on the Financial-Services Industry 2-1 CHAPTER 2 THE IMPACT OF GOVERNMENT POLICY AND REGULATION ON THE FINANCIAL-SERVICES INDUSTRY Goal of This Chapter: This chapter is devoted to a study of […]

Chapter 20 Problem 06 Input Area: U.S. dollar-denominated assets 475,000,000 U.S. dollar-denominated liabilities 469,000,000 U.S. dollars purchased 75,000,000 U.S. dollars sold 50,000,000 Output Area: Net Exposure to Risk 31,000,000 Chapter 20 Problem 07 Input Area: Net long position 12,000,000 U.S. […]

Chapter 20 – International Banking and the Future of Banking and Financial Services 20-1 CHAPTER 20 INTERNATIONAL BANKING AND THE FUTURE OF BANKING AND FINANCIAL SERVICES Goal of the Chapter: The purpose of this chapter is to learn the different […]

Chapter 03 – The Organization and Structure of Banking and the Financial-Services Industry 3-1 CHAPTER 3 THE ORGANIZATION AND STRUCTURE OF BANKING AND THE FINANCIAL-SERVICES INDUSTRY Goal of This Chapter: The goal of this chapter is to explore the different […]

Chapter 04 Problem 01 Input Area: Initial cost of banking facility $3,300,000.00 Initial other organizing expenses $500,000.00 Year 1 revenue $400,000.00 Year 1 operating expense $160,000.00 Annual growth rate in revenues 4.00% Annual growth rate in expenses 2.00% Required annual […]

Chapter 04 – Establishing New Banks, Branches, ATMs, Telephone Services, and Websites 4-1 CHAPTER 4 ESTABLISHING NEW BANKS, BRANCHES, ATMS, TELEPHONE SERVICES, AND WEBSITES Goal of This Chapter: The purpose of this chapter is to learn how new banks are […]

Chapter 05 Problem 01 Input Area: Report of Condition Total assets 4,000.00 Cash and due from depository institutions 90.00 Securities 535.00 Federal funds sold & reverse repurchase agreements 45.00 Gross loans & leases ? Loan loss allowance 200.00 Net loans […]

Chapter 05 – The Financial Statements of Banks and Their Principal Competitors 5-1 CHAPTER 5 THE FINANCIAL STATEMENTS OF BANKS AND THEIR PRINCIPAL COMPETITORS Goal of This Chapter: The purpose of this chapter is to acquaint the reader with the […]

Chapter 06 Problem 01 Input Area: Expected Dividend $4.75 Dividend growth rate 3.00% Risk-adjusted cost of capital 14.00% Output Area: Current stock price per share $43.18 Chapter 06 Problem 02 Input Area: Years to receipt Expected dividend 1 1 $2.50 […]

Chapter 06 – Measuring and Evaluating the Performance of Banks and Their Principal Competitors 6-1 CHAPTER 6 MEASURING AND EVALUATING THE PERFORMANCE OF BANKS AND THEIR PRINCIPAL COMPETITORS Goal of This Chapter: The purpose of this chapter is to discover […]

Chapter 06 – Measuring and Evaluating the Performance of Banks and Their Principal Competitors 6-14 Asset utilization: Positive value reflects a good portfolio management policies and yield on assets. Equity multiplier: Positive value reflects efficient financial policies. Expense control efficiency, […]

Chapter 07 Problem 01 Input Area: Today’s price $1,195.00 Annual coupon payment $75.00 Time-to-maturity (years) 14.00 Redemption value $1,000.00 Output Area: Yield to maturity 5.47% Chapter 07 Problem 02 Input Area: Today’s price $1,150.00 Annual coupon payment $75.00 Time-to-maturity (years) […]

Chapter 07 – Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques 7-1 CHAPTER 7 RISK MANAGEMENT FOR CHANGING INTEREST RATES: ASSET-LIABILITY MANAGEMENT AND DURATION TECHNIQUES Goals of This Chapter: The purpose of this chapter is to explore […]

Chapter 08 Problem 04 Input Area: Current Scenario Future Scenario Amount borrowed 500,000,000 500,000,000 Interest rate 3.50% 4.50% Maturity in days 180 180 Output Area: Interest cost 8,750,000 11,250,000 Chapter 08 Problem 07 Input Area: Bond duration (years) 10.48 Price […]

Chapter 08 – Risk Management: Financial Futures, Options, Swaps, and Other Hedging Tools 8-1 CHAPTER 8 RISK MANAGEMENT: FINANCIAL FUTURES, OPTIONS, SWAPS, AND OTHER HEDGING TOOLS Goal of This Chapter: The purpose of this chapter is to examine how financial […]

Chapter 09 Problem 01 Input Area: Average expected gross annual yield 6.00% Interest on securities issued 4.00% Expected default rate 3.00% Investment banking fees 0.50% Liquidity facility 0.50% Credit guarantee 0.60% Output Area: Sum of expected costs 8.60% Estimated residual […]

Chapter 09 – Risk Management: Asset-Backed Securities, Loan Sales, Credit Standbys, and Credit Derivatives 9-1 CHAPTER 9 RISK MANAGEMENT: ASSET-BACKED SECURITIES, LOAN SALES, CREDIT STANDBYS, AND CREDIT DERIVATIVES Goal of This Chapter: The purpose of this chapter is to learn […]

Suppose a bank promises an annual return of 6.5 percent on a three month (90-day $150,000 CD), what will be the total amount due to the customer at the end of the three month period? A. $152,437.50 B. $2,437.50 C. […]

Fee income arising from fiduciary transactions include all of the following except: A. fees for checking account maintenance. B. fees for managing and protecting a customer’s property. C. fees for recordkeeping for corporate security. D. fees for dispersing interest and […]

One of the most popular methods of neutralizing duration gap risks is to buy and sell financial futures contracts. Answer: Under the terms of the International Lending and Supervision Act, the size of loan rescheduling fees that U.S. banks charge […]

If a financial institution makes an offsetting sale and purchase of the same futures contract, it has no obligation either to deliver or take delivery of the contract. Answer: Weighted interest-sensitive gap is less accurate than interest-sensitive gap in determining […]

Recent federal guidelines put in place by the Federal Deposit Insurance Corporation require banks to develop written procedures to protect against loss from environmental damage. These procedures are known as the: A. lender protection program. B. environmental risk assessment program. […]

A bond has a face value of $1,000 and five years to maturity. This bond has a coupon rate of 13 percent and is selling in the market today for $902. Coupon payments are made annually on this bond. What […]

“Pyramiding of debt” refers to borrowing from one lender to repay another lender. Answer: The basic strength of the below-prime market pricing model is that there are narrow margins or markups on loans. Answer: TRUE Working-capital loans, unlike most other […]

A customer is seeking a $150,000 home mortgage. The bank requires the customer to pay 1¾ points up front. How much of the loan amount will actually be available to the customer if the bank approves the loan? A. $150,000 […]

Of the principal reasons for regulating banks, what was the primary purpose of the National Banking Act (1863)? A. Separation of commercial and investment banking B. Separation of commercial banking and insurance activities C. Chartering new banks and examining existing […]

If a bank in the United States runs a legal reserve deficit of more than 2 percent of its required daily average legal reserve position, it will be assessed an interest penalty equal to the Federal Reserve’s discount rate plus […]

In general, the longer the maturity of a deposit, the lower the yield a financial institution must offer to its depositors because of the greater interest-rate risk the bank faces with longer-term deposits. Answer: Liquid assets generally have a stable […]

A bank with a positive duration gap experiencing a rise in interest rates will experience an increase in its net worth. Answer: Competition lowers the expected return to a bank from putting its deposits to work. Answer: TRUE Asset conversion […]

According to the text, no-fee savings accounts are on the decline. Answer: Seasonal credit discount window loans generally have the highest interest rates. Answer: FALSE Basis risk exists on interest rate swaps because the interest rate on the swap agreement […]

A bank that is examining the ratio of annual costs of goods sold to average inventory, is examining which category of ratios? A. Expense control measures B. Operating efficiency measures C. Coverage measures D. Liquidity measures E. Leverage measures Answer: […]

The Smith-James Bank has an ROE of 17.5%, an asset utilization ratio of 13%, and a net profit margin of 9%. What is the bank’s ROA? A. 14.96 percent B. 1.58 percent C. 1.17 percent D. 134.62 percent E. None […]

Recoveries on loans previously charged off are added to the Provision for Loan Losses (PLL) account on a bank’s income statement. Answer: Current theory suggests that banks exist because of imperfections in our financial system. Answer: TRUE The oldest approach […]

Under the international capital (Basel) agreement, Tier 2 capital must be raised to a minimum of 4 percent of risk-weighted assets. Answer: Recent research indicates that some merger activity may actually stimulate “de novo” bank entry into the marketplace. Answer: […]

Under current federal law, commercial banks in the United States can issue commercial paper as direct obligations of the banks. Answer: Foreign banks taking retail deposits in the U.S. can qualify for federal deposit insurance. Answer: TRUE Lenders in the […]

You know the following information about the Davis National Bank: Given this information, what is the value of this firm’s total revenues? A. $800 B. $850 C. $150 D. $950 E. $900 Answer: Most loans sold in the open market […]

Which of the following is a disadvantage of using loan-backed bonds for a bank? A. The cost of funding often rises B. There is greater default risk on the bonds C. Loans used as collateral for the bonds must be […]

A treasury bill currently sells for $9,845, has a face value of $10,000 and has 46 days to maturity. What is the bank discount rate on this security? A. 12.49 percent B. 12.13 percent C. 12.30 percent D. 2 percent […]

The basic strength of the below-prime market pricing model is that it allows the bank to lend at low money market interest rates plus a small margin to cover risk exposure and provide a profit margin. Answer: FNMA purchases home […]

The method for figuring out the loan rate wherein the interest amount owed on a loan is added to the principal amount of the loan to determine a borrowing customer’s required installment payments is known as: A. simple interest. B. […]

The change in the market price of an asset due to a change in market interest rates is roughly equal to the asset’s duration times the relative change in interest rates attached to that particular asset. Answer: Under FNMA rules […]

To avoid environmental liability under recent EPA guidelines, a lender must hold a deed of trust, lien, or mortgage. Answer: One of the significant disadvantages of using futures contracts to hedge against interest rate risk is the high commissions that […]

The Wesson Wisconsin State Bank has purchased a bank-qualified municipal bond with a coupon rate of 7.5%. The bank had to borrow funds to make this purchase at a cost of 6%. The bank is in the 25% tax bracket. […]

_____________ indicators tend to be highly sensitive to the season of the year and stage of the business cycle. A. Stored liquidity B. Purchased liquidity C. Balanced liquidity D. Asset liquidity E. Liability liquidity Answer: When an investor first purchases […]

Which of the following created the Truth in Savings Act? A. The FDIC Improvement Act B. The International Banking Act C. The Sarbanes-Oxley Act D. The Gramm-Leach-Bliley Act E. The Financial Institutions Reform, Recovery and Enforcement Act Answer: A bank […]

The cost of nondeposit borrowings is a financial input on a bank’s income statement or Report of Income. Answer: The ratio of cash and government securities to total assets is considered to be a measure of liquidity risk in banking. […]

Mergers with anticompetitive effects cannot go unchallenged by federal authorities unless the banks can show that the combined bank would have significant public benefits. Answer: A put option on currency futures is often used to protect against a rise in […]

Applying for a bank charter from the Comptroller of the Currency is simultaneously followed by an application for FDIC insurance, to expedite the formation process and save duplication of efforts. Answer: In a period of rising interest rates, the times-prime […]

The principal task of the Consumer Financial Protection Bureau (CFPB) is to: A. design the monetary policy. B. ensure safety and soundness of the banking system. C. write new rules to protect customers of the financial services industry. D. provide […]

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 […]

Bank holding companies that want to achieve some reduction in earnings risk through interstate banking, can achieve the same level of risk reduction by entering any of the fifty states. Answer: One investment maturity strategy popular among smaller institutions is […]

The concentration of U.S. bank deposits in the hands of the largest banks has _________ recently. A. declined B. increased C. remained essentially unchanged D. exhibited large fluctuations in both directions E. None of the options are correct Answer: Which […]

Under the simple interest method, a customer saves on interest as an installment loan approaches maturity. Answer: Banks should concentrate their lending on those types of loans in which they have the greatest cost advantage. Answer: TRUE Only federal regulators […]

When an issuer of securitized loans divides them into different risk classes or tranches, they are providing an: A. internal credit enhancement B. external credit enhancement C. internal liquidity enhancement D. external liquidity enhancement E. None of the options is […]