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Chapter 1 Banking and the Financial Services Industry Chapter Objectives 1. Describe the cause and consequences of the credit crisis of 2007 – 2009. 2. Describe the similarities and di!erences between a bank holding company and a &nancial holding company. […]

Answers to End-of-Chapter Questions 1. Goldman Sachs – Converted to a bank holding company. Bear Stearns – Acquired by J.P. Morgan Chase. 2. Mortgages are loans that are secured by residential or commercial real estate. As real estate prices started […]

Chapter 10 Funding the Bank Chapter Objectives 1. Describe the composition and characteristics of bank liabilities. 2. Compare the average interest cost and servicing cost of various bank liabilities. 3. Describe how to estimate the average cost of transactions accounts. […]

Answers to End of Chapter Questions 1. Liquidity risk (low to high): a. DDAs, NOWs, MMDAs, small time deposits, Federal Home Loan Bank b. Cost (low to high): DDAs, MMDAs, small time deposits, NOWs, federal funds, Federal Home Loan Bank […]

Chapter 11 Managing Liquidity Chapter Objectives 1. Describe the relationships between cash holdings and liquidity requirements. 2. Demonstrate the requirements for meeting legal reserves. 3. Explain the impact of sweep accounts on legal reserves at banks. 4. Describe procedures and […]

Answers to End of Chapter Questions 1. Banks must have sufficient cash assets on hand to meet clearing needs. Liquidity 2. Advantage: reduced liquidity risk Disadvantage: high cost because it is a nonearning asset; also, greater potential for fraud or […]

Chapter 12 The Effective Use of Capital Chapter Objectives 1. Explain the structure of risk-based capital standards at U.S. commercial banks. 2. Explain what the function of bank capital is both from the view of bank regulators and bank managers. […]

Answers to End of Chapter Questions 1. High financial leverage magnifies the profitability or loss of a bank. The owner’s portion of financing is relatively small, yet the owner reaps the profits. Debt, although a cheaper source 2. Existing risk-based […]

Chapter 13 Overview of Credit Policy and Loan Characteristics Chapter Objectives 1. Describe recent trends in bank loan growth and quality and data for ditierent-size banks. 2. Provide an overview of the credit process at commercial banks. 3. Describe the […]

Answers to End of Chapter Questions 1. A bank’s credit culture determines the performance of the loan portfolio. The culture indicates the importance of risk assessment and having proper controls in place to allow 2. Business development and credit analysis […]

Chapter 14 Evaluating Commercial Loan Requests and Managing Credit Risk Chapter Objectives 1. Introduce a procedure for analyzing the quantifiable aspects of commercial loan requests. 2. Introduce the fundamental credit issues when analyzing a loan request. 3. Demonstrate the importance […]

Answers to End of Chapter Questions 1. All of the factors are equally important and interrelated. Without satisfactory answers to 2. Collateral is a back-up source of repayment, and should not be used to approve a loan by itself. Loans […]

Chapter 15 Evaluating Consumer Loans Chapter Objectives 1. Describe the characteristics of different consumer loans. 2. Evaluate the competitive environment in the credit card business. 3. Explain why sub-prime loans are popular at many lending institutions. 4. Discuss various consumer […]

Answers to End of Chapter Questions 1. Installment loans are for specific purposes and have fixed payouts. Typically, they are collateralized by the asset purchased with the loan proceeds. An example is a car loan where 2. Expenses include the […]

Chapter 16 Managing the Investment Portfolio Chapter Objectives 1. Describe the bank’s role as a securities dealer and in managing a trading account. 2. Explain the objectives of the investment portfolio. 3. Describe the composition of the average bank’s investment […]

Answers to End of Chapter Questions 1. A bank makes a profit when it sells securities for a higher price than it pays for the securities. 2. Managers are o!en reluctant to take a loss on security sales because losses […]

Chapter 17 Global Banking Activities Chapter Objectives 1. Describe the different types of organizational units that engage in global banking activities. 2. Demonstrate the impact that foreign banking organizations have in U.S. markets. Explain the universal banking model, which is […]

Answers to End of Chapter Questions 1. Eurocurrency refers to any deposit liability denominated in a currency other than that of the country in which the issuing bank is located. Eurodollars are one type of Eurocurrency. 2. International banking facilities […]

Chapter 2 Government Policies and Regulation Chapter Objectives 1. Describe the regulatory environment in which financial services companies compete. 2. Describe the goals and functions of depository institutions. 3. Evaluate how the regulation of depository institutions impacts their safety and […]

Answers to End-of-Chapter Questions 1. Many bank customers value convenience in addition to the range of services and pricing. Banks that have many branches offer greater convenience. It is easier to make deposits, withdraw funds, visit with customer service 2. […]

Chapter 3 Analyzing Bank Performance Chapter Objectives 1. Introduce bank financial statements, including the basic balance sheet and income statement, and discuss the interrelationship between them. 2. Provide a framework for analyzing bank performance over time and relative to peer […]

Answers to End of Chapter Questions 1. For a large bank, assets consist approximately of marketable securities (20%), loans (70%), and other assets (10%). Liabilities consist of core deposits (40%-60%), noncore, purchased liabilities (20%-40%), and other liabilities (5 2. A […]

Chapter 4 Managing Non-Interest Income and Non-Interest Expense Chapter Objectives Introduce financial ratios that characterize a bank’s ability to generate non-interest income and control non-interest expense. Document the sources of bank non-interest income. Explain the significance of the efficiency ratio […]

Answers to End of Chapter Questions 1. Unmonitored expenses can become excessively high. If a bank has not had a plan to control expenses, then cost cung is appropriate and will help the bank be more 2. The primary sources […]

Chapter 5 The Performance of Nontraditional Banking Companies Chapter Objectives 1. Introduce examples of the different forms of nontraditional banking companies. 2. Examine and analyze the financial performance of Goldman Sachs. 3. Examine and analyze the financial performance of Mutual […]

Answers to End of Chapter Questions 1. a. An insurance company offers a wide variety of insurance products including life, health, disability, long-term care, and medical supplements insurance. b. A tradi”onal investment bank major areas of ac”vity include securi”es underwri”ng, […]

Chapter 6 Pricing Fixed-Income Securities Chapter Objectives 1. Introduce the mathematics of interest rates for fixed-income securities. 2. Demonstrate the impact of compounding. 3. Describe the relationship between the interest rate on a security and the security’s market price. 4. […]

Answers to End of Chapter Questions 1. $1,000 (1.02)28 = $1,741.02 Financial calculator solution P/Y = 4 2. $20,000 (1.005)72 = $28,640.89 Financial calculator solution P/Y = 12 N = 72 I/Y = 6 PV =-20,000 FV = ? = […]

Chapter 7 Managing Interest Rate Risk: GAP and Earnings Sensitivity Chapter Objectives 1. Identify factors that cause a bank’s net interest income and net interest margin to change. 2. Describe the traditional static GAP model used to assess a bank’s […]

Answers to End of Chapter Questions 1. Basic steps in GAP analysis: a. Develop an interest rate forecast; the objective is to estimate whether specific b. Select a series of sequential time intervals for determining how many assets and liabilities […]

Chapter 8 Managing Interest Rate Risk: Economic Value of Equity Chapter Objec ves 1. Demonstrate the importance of measuring interest rate risk in terms of price sensitivity of assets, liabilities, and stockholders’ equity. 2. Demonstrate how the economic value of […]

Answers to End of Chapter Questions 1. Basic steps: a. Develop an interest rate forecast. b. Estimate the market values of assets, liabilities, and stockholders’ equity. 2. Low coupon bonds have longer Macaulay’s durations because an investor has to wait […]

Chapter 9 Using Derivafives to Manage Interest Rate Risk Chapter Objecfives 1. Describe the characteristics of financial futures contracts, how they are priced, and basic trading activity. 2. Demonstrate differences between speculation and hedging activity. 3. Explain how banks can […]

Answers to End of Chapter Questions 1. Futures contracts are based on standardized instruments, are traded on organized exchanges, require margins with daily marking to market, and are typically closed 2. All hedging involves some risk in the sense that […]

Historically, most industrial loan companies have operated to: a. accept deposits. b. assist their parent company in some facet of the firm’s core business. c. exclusively make commercial loans. d. increase the safety and soundness of the parent company. e. […]

Use the following firm working capital cycle information. What is the firm’s liability cycle? a. 21 days b. 31 days c. 65 days d. 75 days e. 121 days Answer: Which of the following is not one of the five […]

Under FASB 157, Level _______ assets valuation are based on observable market prices for similar assets or liabilities. a. 1 b. 2 c. 3 d. 4 e. 5 Answer: Under FASB 157, Level _______ assets valuation are based on observable […]

Cash flows from a firm’s normal business activities are reflected in: a. cash flows from investing. b. cash flows from financing. c. cash flows from operations. d. cash flows from income. e. cash flows from budgeting. Answer: Use the following […]

A memorandum of understanding is a legal document that orders a firm to stop an unfair practice. Answer: Today, most demand deposit accounts are owned by individuals. Answer: False In 2008, the U.S. Treasury committed over $50 trillion dollars in […]

A firm’s borrowing base is: a. based on cash flow from operations. b. a measure of long-term profit potential. c. the amount of the firm’s unused credit. d. an estimate of the available collateral on a company’s current assets. e. […]

Covered interest rate arbitrage is possible when: a. both currencies are appreciating. b. the actual inflation rates are identical in both countries. c. the difference in the interest rates in two countries exactly equals the spot-to-forward exchange rate differential. d. […]

If a security is a first-time placement for a firm, it is called a(n): a. initial public offering. b. first time equity offering. c. primary offering. d. secondary offering. e. seasoned offering. Answer: A savings and loan that sold off […]

Which of the following primarily takes futures positions that are outstanding for just minutes? a. Scalper b. Local c. Day trader d. Position trader e. Hedger Answer: A bank can establish a floor on interest rate costs by: a. buying […]

The world’s largest financial company (as of September 2013) is: a. Industrial & Commercial Bank of Chia b. J.P. Morgan Chase & Co. c. Citigroup d. HSBC Holdings e. BNP Paribas Answer: The _________ authorized money market deposit accounts. a. […]

An adequately capitalized bank may obtain brokered deposits without FDIC approval. Answer: A borrower making a changing their accountant could be viewed as a negative signal regarding the borrower’s condition. Answer: True As more lenders securitize loans, the supply of […]

The value of a basis point for 90-day Eurodollar Time Deposit futures contract is: a. $10. b. $100. c. $25. d. $250. e. $500. Answer: If the yield curve is inverted, a portfolio manager can take advantage of this by: […]

Credit cards typically provide lower risk-adjusted returns than other types of consumer loans. Answer: In general, bank capital ratios have increased over the last 100 years. Answer: False A low days inventory on hand and a high inventory turnover relative […]

What is the strength of static GAP analysis relative to duration gap analysis? a. Static GAP analysis recognizes the time value of money of each cash flow. b. Static GAP analysis provides a measure of the total portfolio’s interest rate […]

The Federal Reserve serves as the lender of last resort. Answer: GAP is defined as the difference between fixed-rate assets and fixed-rate liabilities. Answer: False A dual banking system means that both the federal government and individual states charter banks […]

If a bank expects interest rates to decrease in the coming year, it should: a. increase its GAP. b. issue long-term subordinated debt today. c. increase the rates paid on long-term deposits. d. issue more variable rate loans. e. become […]

Which of the following are likely to occur when interest rates rise sharply? a. Fixed-rate loans are pre-paid. b. Bonds are called. c. Deposits are withdrawn early. d. All of the above occur when interest rates rise sharply. e. a. […]

When constructing ratios, average balance sheet data should be used. Answer: Community banks tend to operate in a limited geographic region. Answer: True Banks should never assume any interest rate risk. Answer: False Investment banks are prohibited from making a […]

Use the following firm working capital cycle information. What are the firm’s estimated working capital needs? a. $90 b. $315 c. $660 d. $1,125 e. $2,250 Answer: Why is liquidating collateral not a preferred means of loan repayment? a. It […]