If a financial institution makes an offsetting sale and purchase of the same futures
contract, it has no obligation either to deliver or take delivery of the contract.
Answer:
Weighted interest-sensitive gap is less accurate than interest-sensitive gap in
determining the effect of changes in interest rates on net interest margin.
Answer:
The liquidity problem for banks is made easier because most of their liabilities are not
subject to immediate repayment.
Answer:
One of the principal goals of asset-liability management is to maximize or at least
stabilize a bank’s margin or spread.
Answer:
An ETC is a device which aids customers in selling goods abroad.
Answer:
The Basel Agreement, on international capital standards, does not cover Japanese banks
but does cover major banks in the U.S. and Western Europe.
Answer:
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.
Answer:
When a bank temporarily offers higher than average interest rates or lower than average
customer fees in order to attract new business, they are practicing conditional pricing.
Answer:
One argument frequently presented for regulation and control over bank chartering
activity is that banks can create money and chartering too many might result in
excessive money creation and inflation in the economy.
Answer:
The sum of the default-risk premium plus the term-risk premium on a business loan is
one of the elements of the cost-plus loan pricing method.
Answer:
A foreign currency swap fully removes the borrower’s currency risk exposure.
Answer:
Banks with a negative cumulative interest-sensitive gap will benefit if interest rates rise,
but lose income if interest rates decline.
Answer:
The merger of Bank of America and Security Pacific in 1992 resulted in an expansion
of branch offices for both banks.
Answer:
Short hedges in currency futures contracts are used to protect a bank or bank customer
against rising currency prices.
Answer:
The noninterest margin is generally positive for most banks.
Answer:
Financial institutions that disagree with an examiner’s classifications of their loans can
appeal against these ratings.
Answer:
The global financial crisis of 2007-2009 highlighted the importance of taking into
consideration a bank’s exposure to market risk that arise from changes in interest rates,
security prices, and currency.
Answer:
The loan from a Federal Reserve bank which normally lasts only a few days and is
designed to provide immediate aid in meeting a bank’s legal reserve requirement is
known as extended credit.
Answer:
One of the reasons to regulate the capital position of banks is to limit the risk of bank
failures, especially large bank failures.
Answer:
ADRs are issued by foreign banks operating outside the U.S. and sold to investors in
the Eurodollar market.
Answer:
The implicit interest rate on checkable deposits equals the difference between the cost
of supplying deposit services to a customer and the amount of the service charge
actually assessed to that customer.
Answer:
Core deposit ratio is used as one of the liquidity indicators for depository institutions
and is defined as ratio of the core deposits to total assets.
Answer:
The business loan pricing method that relies upon banks knowing their costs, is the
price leadership model.
Answer:
The tool used by the Federal Reserve System to influence the economy and behavior of
banks is known as moral hazard.
Answer:
Credit risk models measure the market risk of a portfolio whose value may decline due
to adverse movements in interest rates, stock prices, currency values, or commodity
prices.
Answer:
Charge-offs represent the securities a bank decides to sell because they have declined in
value.
Answer:
While the trust department performs a variety of roles, their activities center on
establishing a fiduciary relationship with the customer.
Answer:
Under the terms of the Bank Merger Act, each federal agency must give top priority to
the competitive effects of a proposed merger.
Answer:
The Office of the Comptroller of the Currency does not charter internet-only banks.
Answer:
Customers who apply for credit have the right to receive a written notice along with the
reasons for denial if their loan request is turned down by a bank.
Answer:
According to a recent survey, many European bank mergers in the 1980s and 1990s
were motivated by the desire to reduce operating costs(economies of scale).
Answer:
A liability-sensitive bank will experience an increase in its net interest margin if interest
rates rise.
Answer:
If an international bank has adopted a net short position in a particular currency, and
that currency’s exchange value increases, the bank will achieve a profit from trading the
currency.
Answer:
A financial institution with a positive interest-sensitive gap and anticipating falling
interest rates could protect against loss by covering the gap with a long hedge.
Answer:
The number one source of revenue for a bank based on dollar volume is loan income.
Answer:
One of the problems with liquidity management for a bank is that there is a trade-off
between liquidity and profitability.
Answer:
Retail credit in banking refers to such loans as residential mortgages and installment
loans to individuals.
Answer:
If a financial institution’s net interest margin is immune to interest-rate risk, then so is
its net worth.
Answer:
Trust services have no impact on the deposits of the bank.
Answer:
Excess legal reserves are the sources out of which new bank loans are created.
Answer:
The Harris State Bank has $2,000 in total assets (all of which are earning assets), $500
of which will be repriced in the next 90 days. This bank also has $1,600 in total
liabilities, $1,000 of which will be repriced in 90 days. The bank currently earns 9
percent on its assets and pays 4 percent on its liabilities.If interest rates on both assets
and liabilities rise by 2 percent in the next 90 days, what should happen to this bank’s
net interest margin? A. It should fall by 2 percent.
B. It should fall by 0.5 percent.
C. It should fall by 4 percent.
D. It should fall by 1 percent.
E. It should not record any fall.
Answer:
Standard Side 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 a loan of $9 million to the bank against which it is willing to
provide $1 million worth of ten-year treasury securities. 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. $8.5 million
E. $1 million
Answer:
The principal sellers of risk protection via credit derivatives include all of the following
except:
A. insurance companies.
B. securities dealers.
C. fund management firms.
D. banks.
E. None of the options is correct.
Answer:
A bank would offer insurance services in addition to traditional banking services if it
believed in the potential benefits of:
A. reputation.
B. economies of scale.
C. economies of scope.
D. investment services.
E. None of the options is correct.
Answer:
Noninterest revenue sources for a bank are called:
A. commitment fees on loans.
B. fee income.
C. supplemental income.
D. noninterest margin.
E. None of the options are correct.
Answer:
Which of the following most accurately describes the principal type(s) of bank
noninterest income?
A. Fees from fiduciary transactions
B. Fees from deposit transactions
C. Fees from securities transactions
D. Fees from additional noninterest income
E. All of the options are correct.
Answer:
The federal law that permits consumers to dispute billing errors with a merchant or
credit card company and receive a prompt investigation of any billing disputes is the:
A. Fair Credit Reporting Act.
B. Fair Credit Billing Act.
C. Fair Debt Collection Practices Act.
D. Truth in Lending Act.
E. None of the options is correct.
Answer:
Which of the following has been an important trend regarding consolidation and
geographic expansion in banks?
A. Increased bank branching activity
B. The formation of more holding companies to purchase smaller banks
C. Mergers among some of the largest banks in the industry
D. Significant rise in the average size of individual banks
E. All of the options are correct
Answer:
A bond has a duration of 7.5 years. Its current market price is $1,125. Interest rates in
the market are 7 percent today. It has been forecasted that interest rates will rise to 9
percent over the next couple of weeks. How will the bond’s price change in percentage
terms?
A. The bond’s price will rise by 2 percent.
B. The bond’s price will fall by 2 percent.
C. The bond’s price will fall by 14.02 percent.
D. The bond’s price will rise by 14.02 percent.
E. The bond’s price will not change.
Answer:
An investor takes a call option on euro futures contracts at strike price of $0.65. If the
market price of euro futures reduces to $0.62, the call option will:
A. be “in the money”.
B. be exercised before the option expires.
C. go unexercised.
D. increase upside profits.
E. increase downside risk.
Answer:
A bank has a listed prime rate of 7 percent. They have estimated that the marginal cost
of raising funds is 5 percent, their default risk premium on a loan is 1.5 percent and that
they want a profit margin of 2 percent. They have also estimated that the term risk
premium is 0.5 percent. What is the interest rate this bank will charge if they use the
price leadership model (and the prime rate is their base rate)?
A. 8.5 percent
B. 9 percent
C. 12 percent
D. 9.5 percent
E. None of the options is correct.
Answer:
A bank that is ‘well-capitalized’:
A. faces no significant regulatory restriction on its expansion.
B. cannot accept broker placed deposits without regulatory approval.
C. has limits on dividends and management fees it is allowed to pay and limits on the
maximum asset growth rate among other restrictions.
D. will be placed into conservatorship or receivership if its capital level is not
increased within a certain time limit.
E. None of the options is correct.
Answer:
What type of preferred stock has appeared recently that carry a lower cost?
A. Cumulative preferred stock
B. Noncumulative preferred stock
C. Convertible preferred stock
D. Trust preferred stock
E. None of the options is correct.
Answer:
The Gramm-Leach-Bliley Act (Financial Services Modernization Act) calls for linking
the government supervision of the financial-services firm to the types of activities that
the firm undertakes. For example, the insurance portion of the firm would be regulated
by state insurance commissions and the banking portion of the firm would be regulated
by banking regulators. This approach to government supervision of financial services is
known as:
A. consolidated regulation and supervision.
B. functional regulation.
C. government reregulation.
D. umbrella supervision and regulation.
E. None of the options are correct.
Answer:
The Edmond National Bank serves only the City of Edmond, Oklahoma and
concentrates on providing the best possible service to this city. What type of bank is this
most likely to be?
A. Virtual Bank
B. Mortgage Bank
C. Community Bank
D. Bankers’ banks
E. None of the options are correct.
Answer:
According to the textbook, one of the reasons why large banks in the recent years have
acquired many smaller banking firms is: A. to avoid stringent regulatory norms.
B. to gain access to more stable and less expensive deposits.
C. to increase their credit ratings.
D. to increase their geographical presence.
E. to diversify their customer base.
Answer:
One of the earliest theories regarding the impact of regulation on banks was developed
by George Stigler. He contends that:
A. firms in regulated industries actually seek out regulations because they bring
monopolistic rents.
B. regulations shelter firms from changes in demand and cost, lowering its risk.
C. regulations can increase consumer confidence which increases customer loyalty to
regulated firms.
D. depository institutions should be regulated no differently than any other corporation
with no subsidies or special privileges.
E. None of the options are correct.
Answer:
An investment maturity strategy which calls for a bank to put all of its investment assets
into very long-term securities is called the:
A. front-end loaded maturity policy.
B. back-end loaded maturity policy.
C. ladder or spaced maturity policy.
D. barbell investment portfolio strategy.
E. rate expectation approach.
Answer:
Trust department activities include all of the following except:
A. safeguarding customers’ assets.
B. generating earnings.
C. generating large deposits.
D. lending.
E. preparing wills.
Answer:
Which of the following is also referred to as a bank’s crossroads account?
A. Investments
B. Capital
C. Total assets
D. Total liabilities
E. Shareholders’ equity
Answer:
Norman Bank made a loan of $1,000,000 to Jarod LeFevre. Jarod has declared
bankruptcy and Norman Bank has just learned that the judge in the case has ruled that
Jarod does not have to pay any part of the loan back or forfeit any of his assets. Which
type of risk would this be an example of?
A. Operational risk
B. Legal risk
C. Compliance risk
D. Strategic risk
E. Reputation risk
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 merger premium that
Andover will end up paying on Berkley’s shares if the merger goes through?
A. 367 percent
B. 275 percent
C. 133 percent
D. 100 percent
E. None of the options is correct
Answer:
Suppose there are four banks in a local community. Each of these banks has 25 percent
of the deposits in this community. According to the Department of Justice guidelines,
this market is:
A. unconcentrated.
B. mildly concentrated.
C. moderately concentrated.
D. highly concentrated.
E. None of the options is correct
Answer:
Banks like the Medici Bank in Italy and the Hochstetter Bank in Germany were
successful because __________ and they responded well to these new needs.
A. the poor needed loans at high interest rates
B. primarily wealthy customers needed loans and deposits
C. the Industrial Revolution demanded new methods of making payments and
obtaining credit
D. people needed to protect their savings and wealth from the government
E. All of the options are correct.
Answer:
The Harris State Bank has $2,000 in total assets (all of which are earning assets), $500
of which will be repriced in the next 90 days. This bank also has $1,600 in total
liabilities, $1,000 of which will be repriced in 90 days. The bank currently earns 9
percent on its assets and pays 4 percent on its liabilities.If interest rates on both assets
and liabilities fall by 2 percent in the next 90 days, what would be this bank’s net
interest margin? A. 3.8 percent
B. 5.4 percent
C. 5.8 percent
D. 6.3 percent
E. 7.8 percent
Answer:
Maryellen Epplin notices that a particular T-Bill has a banker’s discount rate of 9
percent in the Wall Street Journal. She knows that this T-Bill has 20 days to maturity
and has a face value of $10,000.
What is the yield to maturity on this T-Bill?
A. 9 percent
B. 0.5 percent
C. 4.5 percent
D. 9.17 percent
E. None of the options is correct.
Answer:
The Charleston Southern Bank makes loans for families to purchase new and existing
homes but does not take deposits. What type of bank is this most likely to be?
A. Virtual Bank
B. Mortgage Bank
C. Community Bank
D. Merchant banks
E. None of the options are correct.
Answer:
A time deposit that has a denomination greater than $100,000 and is generally for
wealthy individuals and corporations is known as a:
A. negotiable CD.
B. bump-up CD.
C. step-up CD.
D. liquid CD.
E. None of the options is correct.
Answer:
Which of the following is an example of a source of funds?
A. A customer withdraws $1,000 from his account
B. A borrower repays $1,500 of a loan he had taken
C. A bank increases its Fed funds sold account by $1,000,000
D. A bank purchases $5,000,000 in T-Bills
E. None of the options is a source of funds
Answer:
A bank wants to estimate a firm’s future financial condition. Which of the following is
something that allows a bank to do this?
A. Statement of cash flows
B. Pro forma statement
C. Balance sheet
D. Income statement
E. None of the options is correct.
Answer:
The advent of inflation and more volatile interest rates gave rise to a(n) ____________,
tied to changes in important money market interest rates such as the 90-day commercial
paper rate.
Answer:
A(n) ______________________ is the most common organizational form for an
international bank. It offers the bank’s full range of services but is not a separate legal
entity from its parent bank.
Answer:
__________________________ is the risk that a financial institution may not be able to
meet the needs for cash of its depositors.
Answer:
_____________ represents funds set aside for contingencies, such as legal action
against the institution, as well as providing a reserve for dividends expected to be paid
but not yet declared, and a sinking fund to retire stock or debt in the future.
Answer:
_________ are debt securities repayable from the sale of stock.
Answer:
Answer:
_______________ are financial advisors to corporations, governments, and other large
institutions. They advise their clients on issues relating to raising new capital, entering
new market areas, etc.
Answer:
The bank’s __________________________ takes into account the idea that the speed
(sensitivity) of interest rate changes will differ for different types of assets and
liabilities.
Answer:
The central bank of the new European Union is known as the
______________________.
Answer:
The __________________________ is the interest rate that equalizes the current
market price of a bond with the present value of the future cash flows.
Answer:
The interest-rate risk which arises when a borrower has the right to pay off a loan early
reducing the lender’s expected rate of return is called ______________.
Answer:
Core capital such as common stock and surplus, undivided profits, qualifying
noncumulative perpetual preferred stock, etc. is referred to as __________________
capital, as defined by the Basel agreement.
Answer:
_______________________ refers to when a financial institution trades one form of
currency for another. An example of this would be when the bank trades dollars for
yen.
Answer:
A(n) ______________________ is generally used to support the construction of homes,
apartments, office buildings, and other permanent structures.
Answer:
A bank is __________________ against changes in its net worth if its duration gap is
equal to zero.
Answer: