1. The equity multiplier for a bank measures the amount of _____________________ of the bank
and is one part of the evaluation of the bank’s ROE.
2. __________________________ is the risk that has to do with the quality of the bank’s assets
and, in particular, the bank’s loans.
3. Solvency (or capital) risk for a bank can be measured by__________________________. List
one way solvency risk can be measured.
4. __________________________ are the assets of a financial institution that will mature or be
repriced within a set period of time.
5. __________________________ is the risk that the value of the financial institution’s asset
portfolio (particularly government or other marketable securities) will decline in value.
6. Eurodollars, Fed Funds, Repurchase Agreements, and large CDs together are know as
_____________________.
7. __________________________ is the risk that the financial institution may not be able to meet
the needs of depositors for cash.
8. __________________________ are loans which are past due by 90 days or more.
9. __________________________ reflects the bank’s portfolio management policies and the mix
and yield on the bank’s securities and is one part of the evaluation of ROE.
10. __________________________ reflects the effectiveness of the expense management of the bank
and is one part of the evaluation of ROE.
11. __________________________ measures the return to stockholders on their investment in the
bank. It is the product of net profit margin, asset utilization and the equity multiplier.
12. __________________________ measures the amount of debt or leverage a bank has and is one
part of the evaluation of the bank’s ROE) It is generally a number larger than one.
13. The__________________________ is a standardized report provided by federal regulators which
reports the balance sheet, income statement and other data for all federally supervised banks. It
has this year’s data as well as three previous years and also contains information on peer
institutions.
14. __________________________ measures the bank’s risk of long run survival. It measures the
bank’s capital position and shows if there has been any erosion of capital over time.
15. __________________________ is the risk that shifting interest rates in the market will adversely
affect a financial institution’s net income or the value of its assets or equity.
16. The ____________________ Act restricts combined auditing and consulting relationships in
order to promote auditor independence and objectivity.
17. is one of the most widely respected private institutions
that rates the credit quality of financial institutions.
18. refers to the uncertainty regarding the financial firm’s earnings
due to failures in computer systems, errors, misconduct by employees, lightening strikes and
similar events.
19. refers to variability in earnings resulting from actions taken
by the legal system including unenforceable contracts, lawsuits and adverse judgements.
20. includes violations of rules and regulations. It can include
failure to hold adequate capital which can lead to costly corrective actions.
21. is the uncertainty associated with public opinion. Negative
publicity (whether true or not) can affect a financial firm’s earnings by dissuading customers
from using the services of the institution.
22. As data processing of financial information becomes more important, managers of financial firms
can realize cost savings from , transferring tasks from inside to firm
itself to other firms specializing in information technology.
23. A traditional measure of earnings efficiency is the or total interest
income over total earnings assets less total interest expenses over total interest bearing bank
liabilities. It measures the effectiveness of a firm’s intermediation function in the borrowing and
lending of money.
24. One part of ROE is or net income over pre-tax net operating income
which measures the financial firm’s use of security gains and losses and other tax management
tools to minimize tax exposure.
25. Net profit margin can be split into two parts, and tax management efficiency.
The first part is pre-tax net operating income over total operating revenue which looks at how
many dollars of revenue survive after operating expenses are removed.
26. Financial institutions that pursue the “quiet life” as a goal are really pursuing risk minimization.
27. Attempting to maximize a bank’s stock value is the key objective for banks which should have
priority over all other bank goals.
28. If the expected stream of future bank shareholder dividends rises, a bank’s stock price should also
rise, other factors held constant.
29. If the discount factor associated with the value of a bank’s stock rises, the bank’s stock price
should rise, other factors held constant.
30. A bank’s ROA equals its ROE times the ratio of total assets divided by total equity capital.
31. According to the textbook a bank’s asset-utilization ratio reflects the mix and yield on the bank’s
portfolio of assets.
32. The bank’s profit margin or ratio of net after-tax income to total operating revenue is a measure of
financial leverage for a bank.
33. The ratio of a bank’s net after-tax income to pre-tax net operating income is described in the text
as a measure of tax management efficiency.
34. In the textbook the ratio of pre tax net operating income to total operating revenues is described
as a measure of the effectiveness of a financial institution’s expense-control efficiency.
35. The ratio of non-performing assets to total loans and leases is a measure of credit risk in banking.
36. The measure of a bank’s efficiency and return known as the “earnings spread” subtracts total
interest expenses from all the bank’s interest income and these two items are then divided by total
assets.
37. In recent years the U.S. banking industry’s equity multiplier has generally risen in response to
regulatory pressure to raise more capital.
38. If a bank adds more full-time employees and posts the same net operating income, its employee
productivity ratio, as defined in the text, must fall.
39. The most profitable U.S. banks in terms of both ROA and ROE are medium-size institutions in
the asset size range of $100 million to $10 billion, according to the textbook.
40. ROA measures how capably the management of a financial institution has been converting the
institution’s assets into net earnings.
41. The noninterest margin is generally positive for most banks.
42. The ratio of nonperforming assets to total loans and leases is considered to be a measure of a
bank’s market risk.
43. Charge-offs represent securities a bank decides to sell because they have declined in value.
44. Loans past due for 90 days or more are classified as nonperforming assets.
45. The ratio of cash and government securities to total assets is considered to be a measure of
liquidity risk in banking.
46. The ratio of uninsured deposits to total deposits is considered to be a measure of credit risk in
banking.
47. The interest rate spread between market yields on bank debt issues (such as capital notes and
CDs) and the market yields on government securities of the same maturity is considered to be a
measure of market risk in banking.
48. The ratio of a bank’s net operating income to the number of a bank’s full-time-equivalent
employees is called the employee productivity ratio.
49. Smaller banks usually have fewer liquid assets than larger banks.
50. The bank’s asset utilization ratio reflects the effectiveness of the bank’s expense management.
51. The FDIC is a private credit rating company which provides credit ratings on the short term and
long term securities issued by banks.
52. During the 1980’s the Comptroller of the Currency, the Federal Reserve and the FDIC created a
new tool to help them analyze the financial condition of banks. This new tool is called the
Uniform Bank Performance Report.
53. Liquidity risk for a bank examines the quality of the bank’s assets and, in particular, the quality of
the bank’s loans.
54. The bank’s degree of asset utilization (AU) or ratio of total operating revenue to total assets is a
measure of asset management efficiency, especially in terms of the mix and yield on assets.
55. According the case study of the failure of Superior Bank of Chicago and the FDIC’s takeover of
this institution in 2001, the main problem was attributed to misleading accounting practices of
inflating asset values and revenues deflating liabilities and expenses. The Sarbanes-Oxley
Accounting Standards Act of 2002 addresses this issue and expressly encourages combining
auditing and consulting relationships in order to promote efficiency and profitability of financial
institutions.
56. The ratio of a bank’s interest income from its loans and security investments less interest
expenses on debt issued divided by total earning assets measures a bank’s:
A) Net operating margin
B) Net return before special transactions
C) Net interest margin
D) Return on assets
E) None of the above
57. ROE for a bank is calculated by:
A) Dividing net after-tax income by total equity capital.
B) Dividing total operating revenue less operating expenses by total assets.
C) Deducting total interest expenses from total interest income and dividing by total equity
capital.
D) Noninterest income less noninterest expenses divided by total earning assets.
E) None of the above.
58. The difference between such sources of bank income as service charges on deposits and trust–
service fees and such sources of bank expenses as salaries and wages and overhead expenses
divided by total assets or total earning assets is called the:
A) Net profit margin
B) Net operating margin
C) Net noninterest margin
D) Net return on assets
E) None of the above
59. A bank’s ROE equals its ROA times its:
A) Net profit margin
B) Total assets divided by total equity capital
C) Total operating revenues divided by total assets
D) Ratio of net after-tax income to total operating revenues
E) None of the above.
60. The earnings spread for a bank is equal to:
A) Total interest income divided by total earning assets less total interest-expense divided by
total interest-bearing bank liabilities.
B) Total interest income less total interest expenses divided by earning assets.
C) Total operating revenues less total operating expenses divided by total assets.
D) Total cash and noncash expenses subtracted from interest and noninterest income divided by
total assets.
E) None of the above.
61. The so-called employee productivity ratio for a bank is equal to:
A) Net operating revenue less total interest expenses per employee.
B) Total interest and noninterest expense per employee
C) Net operating income per full-time-equivalent employee
D) Total operating earnings less salaries and wages expense per employee.
E) None of the above.
62. According to the textbook the most profitable banks in the United States in 2007 fell in the
asset size range of:
A) Under $25 million in total assets
B) Under $100 million in total assets
C) Between $100 million and $10 billion in total assets
D) Over $10 billion in total assets
E) None of the above.
63. A bank’s stock price will tend to rise if the:
A) Value of the stream of future stockholder dividends is expected to increase
B) The banking organization’s perceived level of risk has fallen
C) Expected dividends increase, while perceived level of risk declines
D) All of the above.
E) None of the above.
64. The ratio that equals total interest income divided by total earning assets less total interest
expense divided by total interest-bearing liabilities is known as the:
A) Earnings base
B) Earnings spread
C) Net income margin
D) Net return prior to special transactions
E) None of the above
65. What do loans and security investments represent for a bank?
A) Earning assets
B) Classified assets
C) Discretionary accounts
D) Market-valued assets
E) None of the above
66. The so-called tax-management efficiency ratio consists of:
A) Total tax liabilities over net income
B) Tax-exempt assets over taxable assets
C) Net income over pre-tax net operating income
D) Taxes owed over total liabilities of a bank
E) None of the above.
67. The ratio of net loans to total assets is considered to be a measure of what form of risk in
banking?
A) Credit risk
B) Liquidity risk
C) Market risk
D) Interest-rate risk
E) None of the above
68. OE for a bank reflects:
A) How well the assets of the bank are managed
B) The bank’s use of leverage
C) How well the bank controls expenses
D) All of the above
E) None of the above
69. A ratio that can be used to measure a bank’s credit risk would be:
A) Net loans/total assets
B) Interest sensitive assets/interest sensitive liabilities
C) Total assets/number of full time employees
D) Nonperforming loans/total loans
70. A bank that has a low profit margin most likely:
A) Is doing a poor job of controlling expenses
B) Has a small amount of financial leverage
C) Has a small amount of liquidity risk
D) Has assets that are not very productive
E) None of the above
71. A bank that has a high asset utilization (AU) ratio most likely:
A) Is doing a poor job of controlling expenses
B) Has a small amount of financial leverage
C) Has a small amount of liquidity risk
D) Is allocating assets to the most productive investments
E) None of the above
72. Which of the following would be the best example of a ratio used to examine the cost of one of
the bank’s liabilities?
A) Demand deposits/ total assets
B) Interest on time deposits/ total time deposits
C) Interest on real estate loans/ total real estate loans
D) Interest sensitive assets/ interest sensitive liabilities
73. Which of the following would be the best example of a ratio used to examine the return of one
of the bank’s assets?
A) Demand deposits/ total assets
B) Interest on time deposits/ total time deposits
C) Interest on real estate loans/ total real estate loans
D) Interest sensitive assets/ interest sensitive liabilities
74. Which of the following would be the best example of a ratio used to examine the bank’s
interest rate risk?
A) Demand deposits/ total assets
B) Interest on time deposits/ total time deposits
C) Interest on real estate loans/ total real estate loans
D) Interest sensitive assets/ interest sensitive liabilities
75. A bank expects to pay a dividend next year of $3.45 and also expects dividends to grow at a
rate of 7% from now on. If the appropriate discount rate is 15%, what should this bank’s stock
price be in the market?
A) $23.00
B) $43.13
C) $46.14
D) $49.29
E) $24.61
76. Using the information listed below for Carter State Bank, what is this bank’s ROE?
$55 million
$650 million
$4,055 million
$350 million
A) 8.46 percent
B) 16.03 percent
C) 15.71 percent
D) 1.36 percent
E) None of the above
77. Using the information listed below for Carter State Bank, what is this bank’s ROA?
$55 million
$650 million
$4,055 million
$350 million
A) 8.46 percent
B) 16.03 percent
C) 15.71 percent
D) 1.36 percent
E) None of the above
78. Using the information listed below for Carter State Bank, what is this bank’s net profit margin?
$55 million
$650 million
$4,055 million
$350 million
A) 8.46 percent
B) 16.03 percent
C) 15.71 percent
D) 1.36 percent
E) None of the above
79. Using the information listed below for Carter State Bank, what is this bank’s asset utilization
ratio?
$55 million
$650 million
$4,055 million
$350 million