Chapter 20—Bank Performance
1. A(n) ____ in interest rates could reduce a commercial bank’s expected cash flows because the interest
paid on deposits may ____ than the interest earned on loans and investments.
a.
increase; increase to a greater degree
b.
increase; increase to a lesser degree
c.
decrease; increase to a greater degree
d.
decrease; increase to a lesser degree
2. Even if other external forces (such as interest rates) are unchanged, a commercial bank’s expected cash
flows can change in response to a change in its management skills.
a. True
b. False
3. The risk premium on a commercial bank is ____ related to economic growth and ____ related to
management skills.
a.
positively; negatively
b.
positively; positively
c.
negatively; negatively
d.
negatively; positively
4. Interest income generated from all assets is called
a.
net interest margin.
b.
the spread.
c.
gross interest income.
d.
net interest income.
5. Interest paid on deposits and borrowed funds is called
a.
net interest expense.
b.
net interest margin.
c.
gross interest expense.
d.
net spread expense.
6. Net interest income is the difference between gross interest income and interest expenses and is
measured as a percentage of
a.
liabilities.
b.
shareholder’s equity.
c.
assets.
d.
revenues.
7. Fees charged by a bank on various services allow the bank to generate:
a.
noninterest income
b.
components of net interest margin
c.
components of net interest income
d.
components of gross interest income
8. The loan loss provision as a percentage of assets should increase during periods of high economic
growth.
a. True
b. False
9. A bank’s net interest margin represents the proportion of its investments that are financed with
borrowed funds.
a. True
b. False
10. 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.
11. For a given level of return on assets, a bank with a higher level of capital will have a lower
a.
return on equity.
b.
leverage measure.
c.
noninterest income.
d.
liquidity.
12. 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).
13. 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.
assets divided by equity.
14. 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
15. Gross interest income is affected by
a.
market interest rates.
b.
the composition of assets held by banks.
c.
interest expenses.
d.
non-interest expenses.
e.
A and B
16. 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
17. 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
18. Gross interest expense is affected by
a.
market interest rates.
b.
the composition of assets held by the bank.
c.
fee services provided by the bank.
d.
A and B
19. If a bank had long-term fixed-rate assets and short-term liabilities, and interest rates increased over
time, its net interest margin should
a.
decrease.
b.
increase.
c.
stay the same.
d.
either A or B, depending on whether the asset maturities exceed 10 years
20. The sum of net interest income, non-interest income, and securities gains, minus provision for loan
losses and non-interest expenses equals
a.
net interest margin.
b.
gross interest margin.
c.
net income.
d.
income before taxes.
21. Which of the following banks would likely have the highest return on equity?
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
22. 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
23. 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 beta is probably ____ than that of Bank H.
a.
less; lower
b.
less; higher
c.
more; higher
d.
more; lower
24. Bank K is conservatively managed. It benefits slightly when general economic conditions are very
favorable and is hurt slightly when general economic conditions are very unfavorable. Its beta would
likely be
a.
less than zero.
b.
zero.
c.
between zero and 1.00.
d.
greater than 1.00.
25. ____ results from a bank’s sale of securities.
a.
Noninterest income
b.
Loan loss provision
c.
Securities gains and losses
d.
Noninterest expenses
e.
none of the above
26. Bank X obtains most of its funds from NCDs, while Bank Y obtains much of its funds from passbook
savings and from demand deposit accounts. Given this information, the net interest margin of Bank X
would likely be ____ than that of Bank Y, and noninterest expenses would likely be ____ than that of
Bank Y.
a.
greater; greater
b.
greater; less
c.
less; less
d.
less; greater
27. A bank’s ROE ____ account for its financial leverage. A bank’s ROA ____ account for its financial
leverage.
a.
does; does
b.
does; does not
c.
does not; does not
d.
does not; does
28. A bank’s ROA ____ account for taxes on earnings. A bank’s ROE ____ account for taxes on earnings.
a.
does; does
b.
does; does not
c.
does not; does not
d.
does not; does
29. A bank’s ROA ____ account for loan losses. A bank’s ROE ____ account for loan losses.
a.
does; does
b.
does; does not
c.
does not; does not
d.
does not; does
30. A bank’s net interest margin includes
a.
noninterest expenses.
b.
noninterest income.
c.
loan losses.
d.
none of the above
31. 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
32. Bank T generally obtains a high percentage of its funds from wholesale CDs. Bank V which obtains
most of its funds from retail CDs. Bank Z obtains its funds from checking accounts. The bank that will
incur the highest interest expenses is ____.
a.
Bank T
b.
Bank V
c.
Bank Z
d.
all banks are the same
33. Which of the following is not a factor that affects cash flows of a commercial bank?
a.
changes in economic growth
b.
changes in the risk-free interest rate
c.
changes in industry conditions
d.
changes in management abilities
e.
all of the above are factors that affect cash flows of a commercial bank
34. The value of a commercial bank can be modeled as the present value of its future cash flows.
a. True
b. False
35. The level of competition is an industry characteristic that will favorably affect cash flows, because a
high level of competition may increase a bank’s volume of business or increase the prices it can charge
for its services.
a. True
b. False
36. If the risk premium on a commercial bank rises, so will the required rate of return by investors who
invest in the bank.
a. True
b. False
37. Gross interest expenses of banks are normally higher in periods when market interest rates are higher
a. True
b. False
38. If banks continue to offer new services (such as insurance or securities services), their noninterest
income will decrease over time.
a. True
b. False
39. The loan loss provision should increase during periods when loan losses are more likely, such as
during a recessionary period.
a. True
b. False
40. 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
41. 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
42. 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 provision
43. During periods of ____ economic growth, loan demand tends to be ____, allowing banks to provide
____ loans.
a.
strong; higher; more
b.
weak; higher; more
c.
weak; lower; more
d.
strong; lower; fewer
e.
none of the above
44. 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
c.
industry conditions
d.
management abilities
e.
none of the above
45. If a bank is too ____ in attempting to avoid loan losses, its net interest margin will be ____.
a.
conservative; high
b.
conservative; low
c.
aggressive; high
d.
aggressive; low
e.
none of the above
46. Banks offering ____ nontraditional services will incur ____ noninterest expenses and ____ noninterest
income.
a.
fewer; higher; higher
b.
more; lower; higher
c.
more; higher; higher
d.
fewer; lower; higher
e.
none of the above
47. 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
48. 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
49. Which of the following factors affecting a bank’s gross interest income is not influenced by the bank’s
policy 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
50. 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.