In general, the longer the maturity of a deposit, the lower the yield a financial institution
must offer to its depositors because of the greater interest-rate risk the bank faces with
longer-term deposits.
Answer:
Liquid assets generally have a stable price but are not necessarily reversible.
Answer:
According to the textbook, personal loans tend to have lower interest rates than
automobile loans.
Answer:
Convergence refers to the fact that the number of bank mergers has increased in recent
years.
Answer:
Interest-sensitive gap and weighted interest-sensitive gap will always reach the same
conclusion as to whether a bank is asset sensitive or liability sensitive.
Answer:
Nonresidential consumer loans include credit to finance the purchase of home
appliances.
Answer:
Business risk is the risk that a bank may experience a cash shortage and will have to sell
some of its investments securities.
Answer:
Working capital loans are normally secured by a business firm’s plant and equipment.
Answer:
Eurocurrency deposits that some banks purchase as investments generally carry higher
market yields than domestic time deposits issued by comparable-size U.S. banks.
Answer:
Banks are the principal sellers of credit derivatives.
Answer:
If the expected stream of future dividends for a bank’s shareholder rises, the bank’s
stock price should also rise, other factors held constant.
Answer:
One way to determine the soundness of an international loan is to use the Delphi
method which uses the consensus opinion of a panel of experts to develop a measure of
a country’s risk exposure.
Answer:
One of the problems with liquidity management for a bank is that rarely does the
demand for funds equals the supply of funds at a given time.
Answer:
There are no restrictions on getting a Federal Reserve loan and because it is the
cheapest source of short-term funds, most banks use this source of funds exclusively.
Answer:
The largest component of capital among banks is retained earnings.
Answer:
Federal Reserve Act authorized the creation of the Federal Deposit Insurance
Corporation.
Answer:
Society pays a price if it restricts the number of bank charters below the number that the
private sector normally would generate due to lessened competition.
Answer:
Internet-based banks are not allowed in some countries such as Japan.
Answer:
Interest-bearing checking accounts, on average, tend to generate lower net returns for
banks than regular (non-interest-bearing) checking accounts.
Answer:
Under the purchase-of-stock method, the acquired bank ceases to exist as a separate
corporation.
Answer:
In the United States, fixed fees charged for deposit insurance, regardless of how risky a
bank is, led to a problem known as moral hazard.
Answer:
Research indicates that states with more liberal chartering standards experience a higher
rate of bank failures.
Answer:
Banks which offer virtually all financial services are known as universal banks.
Answer:
CDs sold by some of the largest foreign banks active in the United States through their
branches are called Yankee CDs.
Answer:
A well-capitalized institution has a ratio of capital to risk-weighted assets of at least 10
percent and faces no significant regulatory restrictions on its expansion.
Answer:
According to the textbook, banks making heavy use of borrowed sources of liquidity
must wrestle with the problem of interest cost uncertainty.
Answer:
Loans from the Fed funds market must be backed by collateral.
Answer:
Nondeposit borrowings are a financial input on a bank’s balance sheet or Report of
Condition.
Answer:
The amount of business lending tends to fall during recessionary periods.
Answer:
In a foreign currency swap, a customer who needs to borrow in foreign currency,
receives the domestic currency today and swaps it back for the foreign currency just in
time to repay the loan in the foreign currency.
Answer:
Repurchase Agreement (RPs) transactions are perceived to be less risky than equivalent
Federal funds transactions.
Answer:
According to FASB, goodwill must now be amortized over its useful life.
Answer:
Long-term interest rates tend to change very little with the cycle of economic activity.
Answer:
Recent research suggests that the relationship between bank size and the cost of
production per unit of output is roughly U shaped.
Answer:
A majority of installment and lump-sum payment loans to families and individuals are
made on floating interest rates.
Answer:
A bank that is adequately capitalized:
A. faces no significant regulatory restrictions.
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:
Which of the following tends to accurately predict the consensus opinion as to actions
expected to be taken by the Federal Open Market Committee in the future?
A. U.S. Treasury bond futures contract
B. Eurodollar time deposit futures contract
C. One month LIBOR futures contract
D. Federal Funds futures contract
E. All of the options are correct
Answer:
Jessica Simpson, a loan officer with First National Bank, visits the Tate Manufacturing
Company and talks to other lenders to see their experience with Tate Manufacturing.
What step in the lending process is Jessica performing?
A. Finding prospective customers
B. Evaluating a customer’s character and sincerity
C. Making a site visit and evaluating a customer’s credit history
D. Evaluating a prospective customer’s financial condition
E. Assessing possible collateral and signing the loan agreement
Answer:
Which of the following would be an example of Tier 2 capital?
A. Subordinated debt capital instruments
B. Undivided profits
C. Minority interest in the equity accounts of consolidated subsidiaries
D. Qualifying noncumulative preferred stock
E. All of the options are correct.
Answer:
A written document in which a lender promises to make credit available to a borrower,
over a designated future period, up to a maximum amount in return for a commitment
fee is known as a(n):
A. negative covenant.
B. loan guarantee agreement.
C. loan policy agreement.
D. loan commitment agreement.
E. affirmative covenant.
Answer:
Securitization is used by the banks to:
A. fund a portion of a loan portfolio.
B. allocate capital more efficiently.
C. diversify funds sources.
D. lower the cost of fund raising.
E. All the options are correct.
Answer:
A good collateral for the purpose of protecting a lender should be:
A. durable.
B. easy to identify.
C. marketable.
D. stable in value.
Answer:
The Treasury Direct system:
A. provides the owners of treasury securities with statement of holdings.
B. deposits any income earned directly into the owners’ accounts.
C. provides greater convenience to the investors.
D. provides increased protection against theft.
E. All the options are correct.
Answer:
Suppose Citibank holds assets denominated in euros of 120 million and liabilities
denominated in euros of 180 million. They also have euro purchases of 40 million and
euro sales of 70 million. What is Citibank’s net exposure to currency risk?
A. + 120 million euros
B. – 90 million euros
C. + 90 million euros
D. – 60 million euros
E. + 60 million euros
Answer:
According to recent studies cited in this book, in selecting a bank to hold their checking
accounts, which of the following factors do household customers rank first?
A. Safety.
B. High deposit interest rates.
C. Convenient location.
D. Availability of other services.
E. Low fees and low minimum balance.
Answer:
A trust department’s activities often center around establishing:
A. an independent relationship with the customer.
B. a partnership relationship with the customer.
C. a fiduciary relationship with the customer.
D. a subservient relationship with the customer.
E. None of the options is correct.
Answer:
Suppose South Korea limits the amount of deposits made in South Korea that can be
used to make loans in other countries. This would be in support of which reason for
regulating international banks?
A. Protecting the safety of depositor funds
B. Promoting stable growth in money and credit
C. Providing foreign currency controls
D. Protecting domestic financial institutions
E. Restricting the outflow of scarce capital
Answer:
The State Bank of Stillwater has had record profits this year. It is interested in
purchasing the National Bank of Durant because it has had losses this year. The State
Bank of Stillwater feels that it can turn around the National Bank of Durant and in the
meantime they can enjoy a reduced tax burden after this acquisition. What motive for a
merger does this most likely reflect?
A. Profit potential
B. Risk reduction
C. Rescue of failing institution
D. Tax and market positioning
E. Maximizing management welfare
Answer:
Chester National Bank is considering adding a new branch bank. It knows that it will
cost $2.5 million to build the branch and it believes that it will generate $214,526 per
year for the next 25 years. Chester National Bank requires a return of 10% on all new
projects it undertakes. What is this project’s net present value? (Round to the nearest
$100)
A. -$552,700
B. -$3,052,700
C. $1,947,300
D. $2,863,200
E. $5,363,200
Answer:
The business loan pricing method which starts with a base rate such as a bank’s prime
rate and adds a markup for default and term risk is known as:
A. the cost-plus loan pricing method.
B. the price leadership model.
C. the below-prime rate pricing model.
D. customer profitability analysis.
E. None of the options is correct.
Answer:
Suppose a Eurodollar time deposit futures contract whose underlying’s duration is 0.5
years and has a current market price of $950,000. Market interest rates are 8.5 percent
and are expected to fall to 7.5 percent. What is the expected change in this futures
contract’s market price as a result of this change in interest rates?
A. $4,378
B. -$4,378
C. $30,645
D. -$30,645
E. None 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.What is the dollar
interest-sensitive gap of this bank? A. $400
B. -$1,100
C. -$500
D. $1,000
E. None of the options is correct.
Answer:
The use of fixed assets, rather than financial assets, in order to increase the operating
earnings is known as:
A. plant and equipment investment.
B. financial leverage.
C. operating leverage.
D. nondeposit capital.
E. None of the options are correct.
Answer:
The Jones State Bank is planning to add a branch office on the west side of Edmond,
Oklahoma. Growth of new homes in the area has averaged 15% per year over the last
five years and is expected to continue at that rate in the future. Which factor would this
address when considering whether to add a new branch?
A. Traffic count
B. Number of retail shops
C. Average age of the local population
D. Population Density
E. Population Growth
Answer:
Basel II had a different set of capital rules for different banks, and the number of
categories is: A. two.
B. three
C. four.
D. five.
E. ten.
Answer:
The base amount of transaction deposits for a depository institution above which the
legal reserve requirement changes to ten percent is known as: A. reserve base.
B. reserve tranche.
C. base limit.
D. limit tranche.
E. cut-off tranche.
Answer:
There are three banks in East Panhandle. First State Bank which currently has 25
percent of the deposits, Second State Bank which currently has 40 percent of the
deposits and Third State Bank which has the rest. Compute the share of the Third State
Bank in the market. Suppose First State Bank and Third State Bank propose to merge in
order to compete with Second State Bank. According to the Department of Justice
Guidelines, would this merger be allowed?
A. Very likely
B. Likely, but with certain regulatory restrictions
C. Highly unlikely
D. Not enough information to make the determination
E. None of the options is correct
Answer:
___________ is calculated by deducting noninterest expense and provision for loan
losses from noninterest income.
A. Net profit margin
B. Net interest income
C. Net income after provision for possible loan losses
D. Income or loss before income taxes
E. Net noninterest income
Answer:
The Lawrence Bank of Cleveland is planning on issuing $60 million in negotiable CDs.
Currently other similar CDs bear an interest rate of 5.15 percent. The bank has
estimated that its noninterest costs of issuing these CDs will be 0.2 percent, and expects
to pay a deposit insurance premium of 0.0023 per dollar of insured funds. Due to other
immediate cash needs, only $50 million of the funds raised will be fully invested. What
is the effective cost rate for the Lawrence Bank of Cleveland to borrow in the CD
market? (Round your answer to the nearest .01 percent)
A. 6.70 percent
B. 6.42 percent
C. 5.58 percent
D. 5.15 percent
E. None of the options is correct
Answer:
In some instances, banks sell loans and agree to give the loan purchaser recourse to the
seller for all or a portion of those loans that become delinquent. In this case, the
purchaser, in effect, gets a:
A. call option.
B. put option.
C. forward contract.
D. futures contract.
E. None of the options is correct.
Answer:
The First State Bank of Summerville knows that, if it issues a large amount of the
negotiable CD, the interest cost on the CD may be very high due to tight money supply
conditions. As a result, it chooses to ration the credit and lend only to its most loyal
clients. What risk factor that affects a bank’s use of nondeposit sources of funds is the
concern here?
A. Interest rate changes
B. The length of time the funds will be required
C. The relative cost of raising the funds
D. Credit availability
E. Regulations
Answer:
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 options is correct.
Answer:
Which of the following is not a source of liquidity for financial institutions?
A. Deposits
B. Money market borrowings
C. Sale of marketable securities
D. Dividend payments to stockholders
E. All the options are correct.
Answer:
The risk that liquid funds will not be available in the volume needed by a bank is often
called:
A. market risk.
B. price risk.
C. availability risk.
D. interest-rate risk.
E. None of the options is correct.
Answer:
Which of the following is (are) the key component(s) included in the International
Banking Act (IBA) of 1978?
A. Foreign banks are required to follow the same branching laws as U.S. banks.
B. Legal reserves requirements determined by the Federal Reserve Board are
compulsory against deposits accepted by U.S. branch or agency offices of foreign banks
with consolidated assets of $1 billion or more.
C. U.S. branches of foreign banks are eligible for deposit insurance under stipulated
conditions.
D. U.S. branches of foreign banks have access to certain Federal Reserve services,
such as the ability to borrow from the Federal Reserve banks.
E. All of the options are correct.
Answer:
________________ are instruments that are closely related to CMOs that also partition
the cash flow from a pool of mortgage loans or mortgage-backed securities into
multiple maturity classes in order to reduce the cash-flow uncertainty of investors.
Answer:
A(n) _______________ is an over-the-counter agreement offering protection against
loss when default occurs on a loan or other debt instrument.
Answer:
The risk that has to do with banks trading in foreign currencies is called
________________________.
Answer:
______________ loans are ones that carry a strong probability of loss to the bank.
Answer:
Answer:
FNMA (Fannie Mae) and FHLMC (Freddie Mac) are examples of ____________. They
appear to have the unofficial backing of the federal government in the event of default.
Answer:
A(n) _________________________________________________________________
is a contractual agreement between two parties to exchange interest payments in order
to hedge against interest rate risk.
Answer:
A _________________________ is a temporary sale of high-quality, easily-liquidated
assets accompanied by an agreement to buy back those assets on a future specific date
at a predetermined price.
Answer:
The ______________________ approach to pricing a loan starts with a base interest
rate and adds a risk premium for default and for time to maturity.
Answer:
The first major federal banking law in the U.S. was the _________________________.
This law was passed during the Civil War and set up a system for chartering new
national banks through the OCC.
Answer:
______________________ is the average deposit balance by the customer minus the
average float adjusted for reserve requirements.
Answer:
When investors buy or sell a futures contract, they must deposit a(n) _________ when
they first enter into the contract.
Answer:
A(n) _____________________ is a special type of holding company that may offer the
broadest range of financial services, including dealing in and underwriting securities,
and selling and underwriting insurance.
Answer:
An interest rate most widely used to price large-denomination business loans extended
by banks operating in the U.S. is ________.
Answer:
A(n) __________________________ can invest in corporate stock as well as loan
money to help finance the start of new ventures or support the expansion of existing
businesses.
Answer: