A bank with a positive duration gap experiencing a rise in interest rates will experience
an increase in its net worth.
Answer:
Competition lowers the expected return to a bank from putting its deposits to work.
Answer:
Asset conversion is considered to be a costless approach to liquidity management.
Answer:
One principle of sound bank liquidity management is to be sure to first sell those assets
which have least profit potential.
Answer:
Banks attempting to compete with the growing commercial paper market developed the
cost-plus business loan pricing method.
Answer:
In recent years, financial services industry has consistently ranked in the top five of all
U.S. industries in the number or value of merger transactions every year.
Answer:
Funds raised by the use of liability management techniques are considered to be
flexible.
Answer:
The letter “C” in the CAMELS rating system for banks in the U.S. refers to the
“condition” of a bank.
Answer:
The 1994 Federal Interstate Banking bill does not limit the percentage of statewide or
nationwide deposits that an interstate banking firm is allowed to control.
Answer:
Securitization of loans can easily be applied to business loans since these loans tend to
have similar cash flow schedules and comparable risk structures.
Answer:
A market served by just two banks, equal to each other in size, would have an HHI of
5,000.
Answer:
Most consumer loans are priced off some base or cost rate.
Answer:
Bad loans normally do not affect a bank’s current income.
Answer:
Traditional brick-and-mortar bank branch offices are on the decline in the U.S. today.
Answer:
The ratio of non-performing assets to total loans and leases is a measure of credit risk in
banking industry.
Answer:
Most U.S. banks are chartered in urban areas.
Answer:
Bank holding companies are allowed to own nonbank businesses as long as those
businesses offer services closely related to banking.
Answer:
According to the textbook, the ratio of a bank’s pre-tax net operating income to total
operating revenues is a measure of expense-control efficiency.
Answer:
According to the textbook, traditional banking may be on the decline.
Answer:
The acquisition of First City Bancorporation of Texas by Chemical Bank of New York
was motivated by both banks seeking market-positioning benefits.
Answer:
The principal risk banks face from investing in structured notes is credit (default) risk.
Answer:
It is anticipated that Basel III may increase capital requirements for banks.
Answer:
The yield to maturity is the discount rate that equates a security’s purchase price with
the stream of income expected until it is sold to another investor.
Answer:
The ratio of nonperforming assets to total loans and leases is considered to be a measure
of a bank’s market risk.
Answer:
A currency swap is where two parties agree to exchange interest payments in order to
hedge against interest rate risk.
Answer:
There are no reserve requirements on Federal funds borrowings in the U.S.
Answer:
A loan workout is when a bank and its customer initially negotiate the terms of a loan.
Answer:
The most common type of Federal funds loans are term loans.
Answer:
The amount of business lending tends to rise during periods of expansion.
Answer:
Agriculture loans are ones that are made to individuals to finance vacations, purchase
durable goods, and other retail goods.
Answer:
The Financial Institutions Reform, Recovery, and Enforcement Act (1989) allowed
bank holding companies to acquire nonbank depository institutions and, if desired,
convert them into branch offices.
Answer:
The role performed by banks in which they guarantee to make payments on behalf of
their customers when those customers are unable to pay a debt obligation is known as
the guarantor role.
Answer:
Securities income is a financial output listed on a financial institution’s Report of
Condition.
Answer:
Most derivatives (measured by notional value) are traded on organized exchanges.
Answer:
The expensing of a worthless loan usually must occur in the year that troubled loans are
judged to be worthless.
Answer:
A futures hedge against interest-rate changes generally requires a bank to take an
opposite position in the futures market from its current position in the cash market.
Answer:
State Street Bank in Boston is a good example of a fee-focused banking company.
Answer:
According to the delegated monitoring theory, the bank serves as an agent on behalf of
its depositors, monitoring the financial condition of those customers who receive loans
from them.
Answer:
Which federal banking act extends deposit insurance coverage on qualified retirement
accounts from $100,000 to $250,000 and authorizes the FDIC to periodically increase
deposit insurance coverage to keep up with inflation?
A. The Sarbanes-Oxley Act
B. The Gramm-Leach-Bliley Act
C. The Check 21 Act
D. The Fair and Accurate Credit Transactions Act
E. The Federal Deposit Insurance Reform Act
Answer:
When the government collects taxes or sells Treasuries, it usually directs these funds
into TT&L deposits first:
A. as per the directions of the supreme court.
B. to repay for the money borrowed earlier.
C. to minimize the impact of operations on the financial system.
D. to decrease the money supply in the economy.
E. to neutralize the impact of operations on the financial system.
Answer:
Money market deposit accounts (MMDAs), offering flexible interest rates, accessible
for payments purposes, and designed to compete with share accounts offered by money
market mutual funds, were authorized by the:
A. Glass-Steagall Act.
B. Depository Institutions Deregulation and Monetary Control Act (DIDMCA).
C. Bank Holding Company Act.
D. Garn-St. Germain Depository Institutions Act.
E. None of the options is correct.
Answer:
A customer’s pro rata value of a share in a mutual fund, if the assets of the fund were
liquidated and liabilities paid off, is called:
A. a mutual fund.
B. an annuity.
C. the net asset value.
D. a hedge fund.
E. None of the options is correct.
Answer:
John Camey, the money manager of the First State Bank, has estimated that the bank
has a 20 percent chance of a liquidity deficit of $700 million, a 30 percent chance of a
liquidity deficit of $200 million, a 30 percent chance of a liquidity surplus of $400
million and a 20 percent chance of a liquidity surplus of $900 million over the next
week. What is the bank’s expected liquidity deficit or surplus over the next week?
A. $100 million liquidity surplus
B. $100 million liquidity deficit
C. $400 million liquidity surplus
D. $500 million liquidity surplus
E. $0 liquidity surplus
Answer:
The Equal Credit Opportunity Act requires that:
A. a bank make loans to all minority applicants.
B. a bank only make loans to people owning large businesses.
C. a bank give reasons in writing for denying the loan.
D. a bank deny loans if the borrower has only been employed for three months.
E. None of the options is correct
Answer:
Setting the Federal Reserve primary-credit discount rate above the Fed Funds rate
mirrors what credit facilities used by several European central banks?
A. The Vince credit facilities
B. The Adam Smith credit facilities
C. The Lombard credit facilities
D. The Lower Back credit facilities
E. None of the options is correct
Answer:
Which of the following is a risk evaluation system in international lending today?
A. The Seat-of-the-pants method
B. The Discrimination method
C. The Delphi method
D. The State-risk indicator method
E. None of the options is correct.
Answer:
The banking services that include marketing new securities to raise funds for
corporations and other institutions is referred to:
A. comprehensive packaging.
B. wrap-around accounts.
C. investment banking.
D. professional banking.
E. None of the options are correct.
Answer:
Which of the following is an example of a use of funds?
A. A customer withdraws $1,000 from their account
B. A borrower repays $1,500 of a loan they have received
C. A bank issues a $1,000,000 CD
D. A bank sells $5,000,000 of T-Bills
E. None of the options is a use of funds
Answer:
Which of these Acts is attempting to address the low savings rate of workers in the U.S.
by including an automatic enrollment (“default option”) in employees’ retirement
accounts?
A. The Economic Recovery Tax Act of 1981
B. The Tax Reform Act of 1986
C. The Tax Relief Act of 1997
D. The Pension Protection Act of 2006
E. None of the options is correct
Answer:
An investor can invest in either a tax-exempt security that pays 5%, or a taxable
corporate security of comparable risk and maturity that pays 8%. At what marginal tax
rate will the investor be indifferent between these two securities?
A. 25.0%
B. 32.5%
C. 37.5%
D. 57.5%
E. 62.5%
Answer:
A bank wants to examine whether the borrower can raise cash in a timely fashion to pay
bills that are coming due. This bank would most likely examine which of the following
categories of ratios?
A. Customer’s control over expenses
B. Customer’s liquidity
C. Customer’s operating efficiency
D. Customer’s profitability
E. None of the options is correct.
Answer:
You know the following information about the Webb State Bank:
Given this information, what is the value of this firm’s net premises?
A. $130
B. $1,000
C. $50
D. $200
E. $100
Answer:
The Tidewater State Bank has $1,000 in total assets (all of which are earning assets),
$700 of which will be repriced within the next 90 days. This bank also has $800 in total
liabilities, $400 of which will be repriced within the next 90 days. Currently, the bank is
earning 8 percent on its assets and is paying 5 percent on its liabilities.What is the dollar
interest-sensitive gap of this bank? A. -$200
B. -$100
C. $200
D. $300
E. $600
Answer:
Chandriga Suppiah has opened a Roth IRA with North Carolina State Bank and plans
on making regular contributions to this account until she retires. Which of the financial
services is Chandriga taking advantage of?
A. Getting a consumer loan
B. Getting financial advice
C. Managing cash
D. Getting venture capital services
E. Buying a retirement plan
Answer:
Investors in securitized loans normally receive added assurance that they will be repaid
in the form of guarantees against default issued by:
A. the originator.
B. the special-purpose entity.
C. the trustee.
D. the servicer.
E. a credit enhancer.
Answer:
Brendon Brothers Bank reports interest-sensitive assets at $35 million, interest-sensitive
liabilities at $60 million and total assets at $80 million. What is the relative IS GAP of
the bank?
A. -0.29
B. 0.29
C. -0.31
D. 0.31
E. -0.33
Answer:
The two most pressing demands for liquidity from a bank come from, first, customers
withdrawing their deposits and, second, from:
A. credit requests from customers the bank wishes to keep.
B. checks being cashed at local stores and directly from the bank.
C. demands for wired funds from correspondent banks.
D. legal reserve requirements set by the Federal Reserve Board.
E. None of the options is correct.
Answer:
Which of the following would be the best example of a ratio used to examine the return
on one of a 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
E. Interest on CDs/Total CDs issued
Answer:
The Johnson National Bank has purchased a bond that has a coupon rate of 5.5% and a
face value of $1000. It has 4 years to maturity and is currently selling in the market for
$917. The bond makes annual coupon payments. What is the duration of this bond?
A. 3.38 years
B. 3.6 years
C. 4.00 years
D. 5.50 years
E. None of the options is correct
Answer:
Which U.S. federal law required branches and agency offices of foreign banks to secure
federal licenses for their U.S. operations for the first time?
A. International Banking Act
B. International Lending and Supervision Act
C. Bank Holding Company Act
D. International Bank Supervision and Examination Procedures Act
E. None of options is correct.
Answer:
When analyzing the financial statements of a business, a credit analyst will look for
ratios in which of the following categories?
A. Profitability
B. Coverage
C. Operating efficiency
D. Liquidity
E. All are categories of ratios that bankers will look for.
Answer:
A ‘well capitalized’ bank in the United States must have a leverage ratio of at least:
A. 4 percent
B. 5 percent
C. 6 percent
D. 8 percent
E. None of the options is correct.
Answer:
The First State Bank of Wyoming wants to acquire the Second National Bank of South
Carolina. It wants to do this because the management feels that South Carolina faces
very different economic conditions than Wyoming and that this acquisition will reduce
variability in earnings in the future. What motive for a merger does this most likely
reflect?
A. Profit potential
B. Risk reduction
C. Rescue of failing institution
D. Cost savings
E. Maximizing management welfare
Answer:
Which of the following would be an example of operational risk? A. A robber steals
$250,000 from the bank locker.
B. An out-of-date computer system causes the bank to lose $750,000.
C. A bank is forced to sell $1,000,000 in loans, at a loss, in order to meet the needs of
depositors.
D. A $500,000 loan that the bank has made has been deemed uncollectible.
Answer:
Which of the following is a strength of the markup (or below-prime market) loan
pricing method?
A. It considers the competition from other lenders.
B. It allows the bank to compete more aggressively with the commercial paper market.
C. It considers the cost of loanable funds and the operating costs of running the bank.
D. It takes the whole customer relationship into account.
E. None of the options is correct.
Answer:
A manager that looks at loans and deposits increases and decreases among other things
to measure the bank’s liquidity position is using:
A. the sources and uses of funds approach
B. the structured funds approach
C. the liquidity indicator approach
D. signals from the marketplace
E. None of the options is correct.
Answer:
Recently, the regular collateralized debt obligations (CDO) market has been surpassed
by:
A. credit swaps.
B. credit options.
C. credit-default swaps.
D. total-return swaps.
E. synthetic collateralized debt obligations.
Answer:
A bank has placed 5,000 consumer loans in a package to be securitized. These loans
have an annual yield of 15.25 percent. The bank estimates that the securities on these
loans are priced to yield 10.95 percent. The bank’s default (charge-off) rate on the
pooled loans is expected to be 1.45 percent. Underwriting and advisory services will
cost 0.25 percent, and a credit guarantee, if more loans default than expected, will cost
0.35 percent. What is the residual income from this loan securitization?
A. 3.70 percent
B. 4.30 percent
C. 2.25 percent
D. 5.15 percent
E. None of the options is correct
Answer:
The Chahad Bank wants to open a new branch in a distant city with very different
economic conditions. Currently, the bank has an expected return of 15% with a standard
deviation of 7%. The new branch is expected to have a return of 20% with a standard
deviation of 10%. The correlation between the bank’s returns and the returns from the
new branch is -0.3. The new branch is expected to contribute 10% of the bank’s
revenues. What is the standard deviation of returns for the bank if they add the new
branch? (Round your answer to the nearest 0.1%)
A. 36.9%
B. 6.1%
C. 50.3%
D. 7.1%
E. 6.7%
Answer:
Operational risk includes which of the following?
A. Failure of bank’s computer system
B. Closure of a bank for three months due to flooding from a major hurricane
C. Embezzlement of funds of a bank by a teller of the bank
D. Closure of a bank for two weeks due to a fire from a lightning strike
E. All of the options are correct.
Answer:
Possible breakdowns in quality control, inefficiencies in producing and delivering
financial services, weather damage, aging or faulty computer systems, and errors in
judgment by bank management illustrate what form of risk faced by banks?
A. Credit risk
B. Liquidity risk
C. Interest-rate risk
D. Operational risk
E. None of the options is correct.
Answer:
The fundamental purposes of regulating bank capital cited in the textbook include
which of the following?
A. To reduce liquid funds held by the banks.
B. To preserve public confidence in banks.
C. To limit losses to the public arising from insurance claims.
D. To increase the risk taking ability of the banks.
E. To reduce liquid funds held by the banks and to increase the risk taking ability of the
banks.
Answer:
Carolina National Bank knows that the interest rate on its loans change faster and by a
larger amount than the interest rate on its deposits. What type of risk is this an example
of?
A. Default risk
B. Inflation risk
C. Liquidity risk
D. Call risk
E. Basis risk
Answer:
______________ is labeled “Accounting for Derivative Instruments and Hedging
Activities”.
Answer:
Originally, __________________ funds consisted exclusively of deposits held by U.S.
banks at the Federal Reserve banks which were loaned from one bank to another.
Answer:
________________________ are plastic cards that can be used to pay for goods and
services but where credit is not extended. They are a convenient way to make deposits
into and withdrawals from an ATM.
Answer:
__________________ is the risk that a company whose bonds a financial institution
owns, may retire the entire issue in advance of its maturity, leaving the bank with the
risk of earnings losses resulting from reinvesting the cash at lower interest rates.
Answer:
The risk of change in the quality of assets due to factors such as changes in the
economy, natural disasters, and regulations are referred to as __________ factors, while
management errors, illegal manipulation, and ineffective lending policies are
considered as ___________ factors.
Answer:
The law that limits how far a creditor or credit collection agency can go in pressing a
customer to pay a past due debt is the ______________________ Act. It does not allow
a debt collector to “harass” a debtor.
Answer:
A money market security which represents a bank’s commitment to pay a stipulated
amount of money, on a specific future date, under specific conditions, and which is
often used in international trade is known as a(n) ________________________.
Answer:
The loosening of government regulation and control of financial institutions is called
______________________.
Answer:
_________________________ is measured by the par value of the shares of common
equity outstanding.
Answer:
One defense against risk for a bank is to spread out its credit accounts and deposits
among a wide variety of customers, including large and small business accounts,
different industries, etc. This defense is known as ________________________.
Answer:
________________ is the value of a share in a mutual fund. It is the value of the assets
held by the mutual fund less any liabilities, divided by the number of mutual fund
shares outstanding.
Answer:
The ___________________________ System provides access to nondeposit
borrowings to depository institutions. These borrowings are fully collateralized by
home mortgages and have maturities ranging from overnight to 20 years.
Answer:
The __________________________ is equal to the duration of each individual type of
liability in the portfolio weighted by the market value of each type of liability in the
portfolio out of the total market value of all liabilities.
Answer:
When the first priority of a bank is to make loans to all good quality loan customers it is
following the _________________________ doctrine.
Answer:
One of the 6 Cs of lending is ______________ which suggests that the lender must look
at the position of the business firm in the industry and the outlook of the industry to
evaluate a loan.
Answer: