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 their international borrowers, is restricted.
Answer:
Points on a home mortgage loan results in a lender earning a higher effective interest
rate on the loan than just the loan rate quoted to the borrower.
Answer:
Despite the rapid growth of automation in U.S. banking, there are more full-service
branch banking offices than automated teller machines across the whole U.S.
Answer:
Syndicated loans are a type of working capital loan.
Answer:
If a bank’s interest-sensitive assets and liabilities are equal, then its interest revenues
from assets and funding costs from liabilities will change in the same proportion
relative to changes in market interest rates.
Answer:
If a bank with a higher stock price-to-earnings ratio acquires a bank with a lower
price-earnings ratio, earnings per share of the combined organization will increase, even
if combined earnings fall after the merger.
Answer:
Net cash flow from operations is a borrower’s net income expressed in cash rather than
on an accrual basis.
Answer:
A market area served by one bank which is the only provider of financial services in
that market would have an HHI of 100 percent.
Answer:
Recent research suggests that interest-rate contracts display considerably less risk
exposure than do foreign-currency contracts.
Answer:
Virtually all banks in the U.S. use derivative contracts to hedge their risks.
Answer:
Loans past due for 90 days or more are classified as nonperforming assets.
Answer:
In U.S. banking, securities gains are treated as an ordinary income.
Answer:
The availability of a large block of core deposits decreases the duration of a bank’s
liabilities.
Answer:
Interest rate risk is the risk financial institutions face due to changes in market interest
rates.
Answer:
The symbol “SN” assigned as a rating indicates that a bank has been judged to be an
outstanding performer under the terms of the Community Reinvestment Act.
Answer:
If one of the banks is in financial stress, a merger is not allowed to take place.
Answer:
A financial institution is liability sensitive, if its interest-sensitive liabilities are less than
its interest-sensitive assets.
Answer:
Bank executives identify the most important factor in choosing a merger target as the
ability of the merged bank to better accommodate their corporate customers.
Answer:
According to the textbook, a bank’s asset-utilization ratio reflects the mix and yield on a
bank’s portfolio of assets.
Answer:
A nonproprietary mutual fund is where the bank acts as a broker for a nonaffiliated
mutual fund but does not act as an investment advisor.
Answer:
Some central banks around the world impose reserve requirements on bank loans.
Answer:
More desirable office sites for new bank branches normally have residents who are
above-average in age.
Answer:
Banks with a positive cumulative interest-sensitive gap will benefit if interest rates rise,
but lose income if interest rates decline.
Answer:
Managing the financial affairs and property of individuals and business firms falls
under the type of banking service line known as cash management services.
Answer:
According to the textbook, the largest banks tend to offer the widest range of services of
any financial-service firm today.
Answer:
Investments in securities provide diversification for a bank’s assets because most loans
come from the local areas served by a bank’s offices.
Answer:
IRA and Keogh deposits have great appeal for bankers principally because they can be
sold bearing relatively low (often below-market) interest rates.
Answer:
In a participation loan, the purchaser is an outsider to the loan contract between the
financial institution selling the loan and the borrower.
Answer:
Money center banks appear to use option contracts to protect the value of a bond
portfolio or to hedge against interest-sensitive or duration gaps.
Answer:
The traditional and principal source of bank funds is deposits.
Answer:
Under the FDIC Improvement Act of 1991, a U.S. bank possessing a leverage ratio
greater than 4 percent would be considered well capitalized.
Answer:
Under the so-called funds management view, bank management’s control over assets
must be coordinated with its control over liabilities, so that asset and liability
management are internally consistent.
Answer:
An MMDA is a short-term deposit where the bank can offer a competitive interest rate
and which allows up to six preauthorized drafts per month.
Answer:
Bankers cannot determine the level or trend of market interest rates; instead, they can
only react to the level and trend of rates.
Answer:
Banks which operate entirely on the web are known as invisible banks.
Answer:
The equivalent of the Federal Reserve System in Europe is known as the:
A. European Union.
B. Bank of London.
C. European Council.
D. European Central Bank.
E. Swiss Bank Corporation.
Answer:
The Trust-worthy Bank had declared and paid a dividend of $2 last year. The dividend
amount to shareholders is expected to grow at the rate of 10 percent while the minimum
acceptable rate for the investors on the bank’s stock is 15 percent. What is the price at
which the stock of Trust-worthy bank must be valued at in the market?
A. $40
B. $44
C. $38
D. $22
E. $88
Answer:
Andover Bank is planning to purchase Berkley Bank. The current market value of
Andover’s stock is $55 per share while that of Berkley’s stock is $15 per share. Andover
plans to pay Berkley’s stockholders a $5 bonus per share. Currently, Andover has
100,000 shares outstanding and earnings per share of $12, while Berkley has 50,000
shares outstanding and earnings per share of $5. What is the exchange ratio for this
transaction?
A. 3:11
B. 4:3
C. 5:2
D. 4:11
E. None of the options is correct
Answer:
A bank has a limited geographic area of operations. It would like to diversify its loan
income with loans in other market areas but does not want to actually make loans in
those areas because of its limited experience in those areas. Which type of credit
derivative contract would you most recommend for this situation?
A. Credit-linked note
B. Credit option
C. Credit risk option
D. Total return swap
E. Credit swap
Answer:
A bank has total interest income of $67 million and total noninterest income of $14
million. This bank has total interest expenses of $35 million and total noninterest
expenses (excluding PLL) of $28 million. Its provision for loan losses is $6 million and
its taxes are $5. What is this bank’s net interest income?
A. $7
B. -$14
C. $18
D. $32
E. None of the options are correct.
Answer:
Standard Bank, a U.S. national bank, has $50 million in unimpaired capital and
surpluses and $86 million in total time and savings deposits. Average revenue for the
bank in the last three years is $12.5 million and a net interest income of $3.2 million.
Pluto Inc. has applied for an unsecured loan of $9 million to the bank. What is the
maximum amount of loan the bank can make to Pluto?
A. $9 million
B. $4.5 million
C. $7.5 million
D. $0.9 million
E. The bank cannot make unsecured loans
Answer:
David Ashby has just paid off the balance on his home mortgage with First American
Bank. What source of liquidity does this represent to the bank?
A. Incoming customer deposit
B. Revenues from the sale of nondeposit services
C. Customer loan repayment
D. Sale of an asset
E. Borrowings from the money market
Answer:
The Carter State Bank is planning on raising $600 million in a new offering of
commercial paper through its holding company. It plans on using $500 million of it to
fund new loans. The current interest rate for similar commercial paper is 4.85 percent
and it expects 0.3 percent in issuing costs. What is the effective rate of interest on this
issue of commercial paper?
A. 5.15 percent
B. 6.18 percent
C. 5.82 percent
D. 4.85 percent
E. None of the options is correct
Answer:
The following are the advantages of Basel II over Basel I except that:
A. it performs supervisory review of each bank’s risk-assessment procedures.
B. it provides for greater sensitivity to arbitrage and financial innovations.
C. it applies the same minimum capital requirements to all banks.
D. it broadens the types of risk considered.
E. All are advantages of using Basel II.
Answer:
A method whereby a loan officer focuses on why a borrower’s cash flows may change
over time is known as:
A. indirect cash flow.
B. direct cash flow.
C. pervasive cash flow.
D. variable cash flow.
E. total cash flow.
Answer:
According to the textbook, business (commercial) transaction accounts are generally
more profitable than personal checking accounts. Which of the following explains the
reason(s) behind this statement?
A. The average size of a business transaction is smaller than a personal transaction.
B. Interest expenses associated with a commercial deposit transaction are higher.
C. The bank receives less investable funds in the commercial deposit transactions.
D. The average size of a business transaction is smaller than a personal transaction and
interest expenses associated with commercial deposit transactions are higher.
E. Interest expenses associated with commercial deposit transactions are lower and a
bank receives more investable funds in the commercial deposits transactions.
Answer:
The Boyer Bank wants to add a new ATM machine in a busy mall. It knows the new
machine will cost $60,000 and another $30,000 is required to install it in the mall. It
expects to save $0.27 per transaction and generate 100,000 transactions per year. Also,
it expects the new machine to last 8 years. What is the expected rate of return or internal
rate or return of this project?
A. 25%
B. 3.3%
C. 30%
D. 12%
E. 2.4%
Answer:
A bank wants to examine how well a customer controls their expenses. They are most
likely to look at which of the following ratios?
A. Wages and salaries/Net sales
B. Accounts receivables/(Annual credit sales/360)
C. Net income after taxes/Net sales
D. Income before interest and taxes/Interest payments
E. (Current assets – Inventory)/Current liabilities
Answer:
A futures contract on a 30-day Eurodollar time deposit is currently selling at an IMM
index of 95.75 percent. The IMM index on a 30-day Eurodollar time deposit for
immediate delivery is 95.10 percent. What is the basis?
A. 65 basis points
B. -65 basis points
C. 650 basis points
D. 850 basis points
E. There is no basis risk on this contract
Answer:
A checking account price schedule characterized by absence of any monthly account
maintenance fee or per-transaction fee is called:
A. free pricing.
B. conditionally free pricing.
C. flat-rate pricing.
D. marginal cost pricing.
E. nonprice competition.
Answer:
According to recent studies cited in this chapter, in choosing a bank to hold their
savings deposits, which of the following factors do household customers rank first?
A. Familiarity
B. Interest rate paid
C. Transactional convenience
D. Location
E. Fees charged
Answer:
In theory, if an interstate organization can acquire banks in states where bank earnings
have a ______________ with bank earnings in those states where the interstate
company is already represented, a “portfolio effect” may occur.
A. perfectly positive correlation
B. negative correlation
C. zero correlation
D. zero covariance
E. positive covariance
Answer:
A bank plans on borrowing $450 million for 20 days through a RP transaction
collateralized by T-Bills. The current RP rate is 6.25 percent. What is the bank’s total
interest cost in dollars?
A. $28,125,000
B. $78,125
C. $1,406,250
D. $1,562,500
E. None of the options is correct
Answer:
Suppose Bank of America holds assets denominated in yen of 150 million and liabilities
denominated in yen of 90 million. They also have yen purchases of 70 million and yen
sales of 50 million. When would Bank of America experience a loss in the currency
market?
A. When the yen declines in value relative to U.S. dollars
B. When the yen increases in value relative to U.S. dollars
C. When U.S. dollar declines in value relative to the yen
D. When the euro declines in value
E. None of the options is correct.
Answer:
A bank feels that a firm has expenses that are too high. What ratio are they most likely
to examine to address this concern?
A. Selling and administrative expenses/Net sales
B. Net sales/Total assets
C. Current assets – Current liabilities
D. Net income/Total assets
E. Long-term debt/(Long-term debt + Net worth)
Answer:
Geoff Willis and Mary Williams, president and CEO respectively of the First National
Bank of Edmond, come from a background in retail banking. As a strategic initiative,
they have decided to focus their lending activities on consumer loans and loans to small
business. What factor determining the growth and mix of loans does this fact reflect?
A. Characteristics of the market area
B. Lender size
C. The experience and expertise of management
D. The written loan policy of the bank
E. Bank regulations
Answer:
A Fed Funds loan that is an unwritten agreement, negotiated via wire or telephone, and
with the borrowed funds returned the next day is known as a(n):
A. overnight loan.
B. continuing contract.
C. term loan.
D. daytime loan.
E. None of the options is correct.
Answer:
Which of the following makes the most amount of credit card loans in the United
States?
A. Thrifts
B. Insurance companies
C. Finance companies
D. Credit Unions
E. Commercial banks
Answer:
The Perdue Bank of Houston, has just hired a new manager who has a reputation of
anticipating potential problems and acting quickly to prevent those problems so that the
bank stays healthy and profitable. What defense against risk is this bank making?
A. Portfolio diversification
B. Geographic diversification
C. Quality management
D. Increasing owners’ capital
E. None of the options is correct.
Answer:
As part of the new regulations of the mortgage market, the Federal Reserve Board
moved to tighten the rules on mortgage lending in 2008. All of the following would
improve transparency of the market except for:
A. lenders must verify the borrower’s reported income.
B. lenders cannot rely on a home’s current market value to judge a borrower’s
creditworthiness.
C. lenders must rely on a borrower’s stated income.
D. lenders must disclose more about the actual terms of a home mortgage loan to a
borrower.
E. All of the options are included in the new rules.
Answer:
A loan or line of credit extended to a business by a group of lending institutions in order
to reduce the risk exposure is known as:
A. an LBO.
B. a revolving line of credit.
C. a working capital loan.
D. a syndicated loan.
E. None of the options is correct.
Answer:
How did the Tax Reform Act of 1986 increase the appeal of home equity loans? A. It
allowed customers to borrow up to 100 percent of the value of their home.
B. It eliminated bank income taxes from this type of loan.
C. It protected homes under Chapter 13 bankruptcy.
D. It allowed the difference between the market value and amount of loans against a
mortgage to be used as a borrowing base.
E. It required banks to lend on homes in the geographic area of their deposits.
Answer:
Loyola Bank classifies its assets and liabilities and the period (maturity buckets) within
which they are subject to repricing as on March 31, 2015 as follows:
What is the interest-sensitivity ratio of the bank for the 90 to 180 days maturity bucket?
A. 0.82
B. 0.88
C. 0.91
D. 0.92
E. 0.85
Answer:
Which of the following would be an example of a repriceable liability?
A. Money the bank has borrowed from the money market
B. Cash in the vault
C. Demand deposits that do not pay an interest rate
D. Short term securities issued by the government about to mature
E. All of the options are correct.
Answer:
A bank with a leverage-adjusted duration gap of 2 years and total assets of $100 million
uses a futures contract whose underlying’s duration is 5 years and has a price of
$100,000 to hedge its exposure. The number of contracts needed is:
A. 2,000
B. 4,000
C. 8,000
D. 10,000
E. 20,000
Answer:
In a securitization process, someone appointed to ensure that the issuer fulfills all the
requirements of transfer of loans to the pool, and provides all of the services promised
to investors in the securities is called:
A. the originator.
B. the special-purpose entity.
C. the trustee.
D. the servicer.
E. the credit enhancer.
Answer:
The largest expense item often observed in the financial statement of the banks is:
A. personnel cost.
B. premises and equipment cost.
C. interest on borrowed funds.
D. provision for loan loss.
E. employee benefits.
Answer:
A larger proportion of small and medium-size bank’s loans tend to be:
A. lower-interest-business loans.
B. higher-interest business loans.
C. lower-interest consumer loans.
D. higher-interest consumer loans.
E. None of the options is correct.
Answer:
________________ are accounts in domestic banking institutions where the U.S.
Treasury keeps most of their operating funds.
Answer:
Banks which underwrite issues of new securities on behalf their corporate customers
are known as ________ banks.
Answer:
Futures contracts are _________________________ daily, which means that futures
contracts are settled each day as their market value changes.
Answer:
Short-term credit to finance the building of homes or other dwellings is called a
_____________________.
Answer:
Many analysts believe there is only one ultimate sound method for assessing a financial
institution’s liquidity needs. This method centers on ___________.
Answer:
One of the six Cs of lending is ______________________ which looks at whether the
borrower has a well-defined purpose for the loan and a serious intent to repay the loan.
Answer:
The ______________________ is the internal rate of return that equates present value
of the payments with the amount of the loan. It is the rate required to be reported under
the Truth in Lending Act.
Answer:
Credit cards are the best example of ______________________ that offer consumers
convenience and flexibility. Consumers can access them whenever the need arises.
Answer:
When a local merchant sells the accounts receivables they hold against their customer
to a bank this generally known as _______.
Answer:
A(n) _________________________ is an agreement between two parties where they
agree to exchange, based on a predetermined agreement, amounts in different
currencies. It is designed to reduce exchange rate risks.
Answer:
SNCs are also known as _____________ loans.
Answer:
The relationship between a change in an asset’s price and an asset’s change in the yield
or interest rate is captured by _________________________.
Answer:
The Gramm-Leach-Bliley Act moved the U.S. banking industry closer to the concept of
___________ banking in which banks merge with security and insurance firms and
various other financial products.
Answer:
____________________________________________ allows customers to carry
pocket-sized terminals with them and pay for goods and services and transfer funds as
needed. These are already popular in Europe.
Answer:
The main regulators of insurance companies are ____________________________.
Answer:
A(n) ______________________ is a loan extended to a business firm by a group of
lenders in order to reduce the risk exposure to any one lending institution and to a earn
fee income.
Answer:
The buyer of a call option has the right to buy from the writer of the option contract,
securities at the ________.
Answer:
___________________ is a larger view of how modern corporations operate, and
analyzes the relationship between a firm’s owners and its managers.
Answer: