Chapter 20: Bank Performance
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
Copyright Cengage Learning. Powered by Cognero.
Page 2
5. The loan loss provision as a percentage of assets should increase during periods of high economic growth.
a.
True
b.
False
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.20.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
6. A bank’s net interest margin represents the proportion of its investments that are financed with borrowed funds.
a.
True
b.
False
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.20.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
7. If a bank has short-term deposits and provides long-term fixed-rate loans, and interest rates decline over time, its net
interest margin should be:
a.
declining over time.
b.
rising over time.
c.
constant over time.
d.
consistently negative.
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.20.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
8. Net income measured as a percentage of assets is
a.
return on equity (ROE).
b.
return on liabilities (ROL).
c.
return on investment (ROI).
d.
return on assets (ROA).
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.20.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
Copyright Cengage Learning. Powered by Cognero.
Page 3
9. When only equity counts as capital, the leverage measure is
a.
equal to the capital ratio.
b.
equal to return on assets.
c.
the inverse of return on assets.
d.
the inverse of the capital ratio.
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.20.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
10. When only equity counts as capital, the higher the capital ratio, the
a.
lower the leverage measure.
b.
lower the degree of financial leverage.
c.
higher the leverage measure.
d.
A and B
e.
B and C
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.20.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
11. If a bank increases its provisions for loan losses, its interest income is ____, and its noninterest income is ____.
a.
reduced; not affected
b.
reduced; reduced
c.
not affected; reduced
d.
not affected; not affected
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.20.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
12. Return on assets (ROA) will usually reveal when a bank’s performance is not up to par, but it does not indicate the
reason for poor performance.
a.
True
b.
False
ANSWER:
a
Chapter 20: Bank Performance
Copyright Cengage Learning. Powered by Cognero.
Page 5
a.
high return on assets, high capital ratio
b.
high return on assets, low capital ratio
c.
low return on assets, low capital ratio
d.
low return on assets, high capital ratio
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.20.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
17. Banks A and B have the same net income. Bank A has a higher capital ratio and more assets than B. Bank A’s return
on assets is ____ than Bank B’s. Bank A’s return on equity is ____ than Bank B’s.
a.
higher; higher
b.
higher; lower
c.
lower; higher
d.
lower; lower
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.20.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
18. Banks G and H are the same size and have similar operations. Bank G holds the minimum level of capital, and Bank H
holds a higher level of capital. Bank G’s return on equity is probably ____ volatile than that of Bank H. Bank G’s risk
premium is probably ____ than that of Bank H.
a.
less; lower
b.
less; higher
c.
more; higher
d.
more; lower
ANSWER:
c
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.20.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
19. Noninterest income is usually higher for small banks than for money center and large banks because small banks can
charge higher rates on loans to small local businesses.
a.
True
b.
False
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.20.03
Chapter 20: Bank Performance
Copyright Cengage Learning. Powered by Cognero.
Page 7
c.
loan losses
d.
none of the above
ANSWER:
d
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.20.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
24. Banks with relatively ____ ROAs often incur ____ noninterest expenses.
a.
low; very low
b.
low; very high
c.
high; very high
d.
none of the above
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.20.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
25. Bank T generally obtains a high percentage of its funds from negotiable certificates of deposit (NCDs). Bank V
obtains most of its funds from retail CDs. Bank Z obtains its funds from checking accounts. The bank that will likely incur
the highest interest expense is ____.
a.
Bank T
b.
Bank V
c.
Bank Z
d.
all banks are the same
ANSWER:
a
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.20.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Application
26. The value of a commercial bank can be modeled as the present value of its future cash flows.
a.
True
b.
False
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.20.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
Chapter 20: Bank Performance
Copyright Cengage Learning. Powered by Cognero.
Page 9
b.
False
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.20.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
32. Any individual bank’s ROA depends on the bank’s policy decisions, but not on uncontrollable factors relating to the
economy and government regulations.
a.
True
b.
False
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.20.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
33. Access to a bank’s ROA without any other information reveals when its performance is not up to par and the reasons
for its poor performance.
a.
True
b.
False
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.20.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
34. During the credit crisis, the level of ____ was much higher than in other periods.
a.
interest income
b.
income expenses
c.
noninterest expenses
d.
loan loss provisions
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.20.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
35. Changes in ____ are a factor affecting the value of a commercial bank over which the bank has some control.
a.
economic growth
b.
the risk-free interest rate
Chapter 20: Bank Performance
Copyright Cengage Learning. Powered by Cognero.
Page 10
c.
industry conditions
d.
management abilities
e.
none of the above
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.20.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
36. A bank with ____ management may account for ____ loan losses, which _____ reported earnings now.
a.
conservative; smaller; reduces
b.
conservative; larger; reduces
c.
aggressive; larger; increases
d.
aggressive; smaller; has no effect on
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.20.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
37. When interest rates fall, the rates that a bank pays on deposits typically decline less than the interest rates that the bank
earns on its loans and investments.
a.
True
b.
False
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.20.01
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
38. Small banks tend to make more loans to small local businesses, and the rates on these loans are typically lower than
the rates that larger banks charge on the loans they provide to large businesses.
a.
True
b.
False
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.20.02
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
39. Which of the following factors affecting a bank’s gross interest income is not influenced by the bank’s policy
Chapter 20: Bank Performance
Copyright Cengage Learning. Powered by Cognero.
Page 11
decisions?
a.
maturity and rate sensitivity of the bank’s assets
b.
market interest rate movements
c.
the bank’s loan rate
d.
composition of the bank’s assets
ANSWER:
b
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.20.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
40. A bank’s return on assets (ROA) could be lower than desired because of all of the following except:
a.
the bank has experienced heavy loan losses.
b.
the bank was locked into fixed-rate loans prior to a rise in market interest rates.
c.
the bank is receiving a relatively small amount of noninterest income.
d.
the bank has reduced its noninterest expenses.
ANSWER:
d
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FMAI.MADU.15.20.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Comprehension
41. The accounting process used by banks to determine their earnings is still based on subjective decisions, so the earnings
of a bank are partially influenced by the accounting decisions regarding loan losses.
a.
True
b.
False
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.20.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
42. Some banks that are experiencing serious financial problems may prefer to overstate their earnings in order to allow
more time to correct their operations before the regulators force them to close.
a.
True
b.
False
ANSWER:
a
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.20.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge
Copyright Cengage Learning. Powered by Cognero.
Page 12
43. Banks increase their loan loss reserves in order to boost their reported earnings.
a.
True
b.
False
ANSWER:
b
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FMAI.MADU.15.20.03
NATIONAL STANDARDS:
United States – BUSPROG.FMAI.MADU.15.03
STATE STANDARDS:
United States – OH – DISC.FMAI.MADU.15.02
KEYWORDS:
Bloom’s: Knowledge