Recoveries on loans previously charged off are added to the Provision for Loan Losses
(PLL) account on a bank’s income statement.
Answer:
Current theory suggests that banks exist because of imperfections in our financial
system.
Answer:
The oldest approach to liquidity management is the asset liquidity management
approach.
Answer:
Longer-term federal funds contracts lasting several days, weeks, or months, often
accompanied by a written contract, are called continuing contracts.
Answer:
VaR models measure the market risk and indicate the potential for losses on a portfolio
of assets.
Answer:
The currency swap market is in decline following the introduction of the Euro.
Answer:
The loan-pricing method, that takes the whole customer relationship into account when
pricing each loan request, is known as the cost-benefit loan pricing method.
Answer:
When the Federal Reserve buys T-bills through its open market operations, it causes the
growth of bank deposits and loans to decrease.
Answer:
Negative correlation of returns of a proposed new branch with returns of the existing
branch offices and other assets can serve to lower the overall bank’s riskiness and is an
important justification for branch establishment. This is referred to as geographic
diversification effect.
Answer:
The process of loan review means that a loan committee must generally approve a loan
before the borrower is told the loan is approved.
Answer:
In the United States there are more one-bank holding companies than multi-bank
holding companies.
Answer:
Geographic diversification refers to the spreading out credit accounts and deposits
among a wide variety of customers within a country, including large and small business
accounts, different industries, and households with a variety of sources of income and
collateral.
Answer:
Loans to a bank’s officers, extended for purposes other than purchase of a home or
funding education and those that are not fully backed by government securities, cannot
exceed 2.5 percent of the bank’s capital and unimpaired surplus or $25,000 whichever is
larger but cannot exceed $100,000.
Answer:
Traditionally, the most profitable and best-known investment banking activity is
providing client advice.
Answer:
Volume of legal reserves held at the Federal Reserve by depository institutions has
declined sharply in recent years.
Answer:
Treasury notes and bonds are issued by the federal government and are coupon paying
instruments.
Answer:
Lower interest rates increase the present value of all projected cash flows from a
loan-backed security resulting in a rise in its market value.
Answer:
The main reason behind the failure of Superior Bank of Chicago and eventual FDIC’s
takeover of this institution in 2001 was attributed to misleading accounting practices of
inflating asset values and revenues deflating liabilities and expenses.
Answer:
The product-line diversification effect occurs when the revenues generated by
traditional banking service and a nontraditional banking service are not very correlated
with each other and reduce the overall risk of the bank.
Answer:
The last line of defense against bank failure is owner’s capital, according to the
textbook.
Answer:
A rating of “5” is the highest and the best rating that a U.S. bank can receive under the
CAMELS rating system.
Answer:
Smaller banks tend to emphasize wholesale banking services.
Answer:
A bank’s ROA equals its ROE times the ratio of total assets divided by total equity
capital.
Answer:
If the economy slows down, a bank should review its outstanding loans more
frequently.
Answer:
A loan sold by a bank to another investor with recourse means the bank has given the
investor a call option on the loan.
Answer:
Higher levels of savings deposits are usually found in those bank branch office
locations where there is a higher proportion of residents with above-average age and
residents who own their own homes.
Answer:
A bank with a negative duration gap experiencing a rise in interest rates will experience
an increase in its net worth.
Answer:
A written loan policy gives loan officers and the bank’s management specific guidelines
in making individual loan decisions and in forming the bank’s loan portfolio.
Answer:
Banks are generally writers (sellers) of put and call option contracts.
Answer:
The depository institutions which tend to have the highest deposit yields are credit
unions.
Answer:
Large U.S. banks must use which of the methods listed below to determine their
provision for loan loss expense?
A. Experience method
B. Reserve method
C. Specific charge-off method
D. Historical cost method
E. None of the options are correct.
Answer:
A financial institution that is concerned about the possibility that the purchasing power
of both the interest income and repaid principal on a loan will decline is concerned
about which of the following?
A. Business risk
B. Liquidity risk
C. Tax exposure
D. Credit risk
E. Inflation risk
Answer:
The fact that the rate of change in an asset’s price varies with the level of interest rates
is known as:
A. portfolio.
B. convexity.
C. maturity.
D. yield.
E. None of the options is correct.
Answer:
Jonathan Robbins has an account in a bank that does not have a physical branch.
Jonathan does all of his banking business over the Internet. What type of bank does
Jonathan have his account at?
A. Virtual Bank
B. Mortgage Bank
C. Community Bank
D. Minority banks
E. None of the options are correct.
Answer:
A lender reviews the partnership agreement of one of its small business customers.
Which of the 6 Cs of lending would this piece of information belong to?
A. Character
B. Capacity
C. Cash
D. Collateral
E. Conditions
Answer:
Longer-term federal funds contracts lasting several days, weeks, or months, often
accompanied by a written contract, are known as:
A. term loans.
B. continuing contracts.
C. rollover loans.
D. federal funds mutuality agreements.
E. None of the options is correct.
Answer:
The Bank of Boulder is planning on issuing $45 million in negotiable CDs. Currently
other similar CDs bear an interest rate of 4.75 percent. The bank has estimated that its
noninterest costs of issuing these CDs are 0.15 percent, and it expects to pay a deposit
insurance premium of 0.0023 per dollar of insured funds. Due to other immediate cash
needs, only $40 million of the funds raised will be fully invested. What is the effective
cost rate for the Bank of Boulder to borrow in the CD market? (Round your answer to
the nearest 0.01 percent)
A. 4.75 percent
B. 4.90 percent
C. 5.10 percent
D. 5.77 percent
E. None of the options is correct
Answer:
The Raymond Burr National Bank has $1,000 in assets with an average duration of 5
years. This bank has $800 in liabilities with an average duration of 6.25 years. Market
interest rates start at 6 percent and fall by 1 percent. What is the change in net worth of
this bank?
A. $11.29
B. -$11.29
C. $0
D. -$22.22
E. $22.22
Answer:
The First State Bank is located in Guyman which is in the middle of the wheat country
of Oklahoma and as a result many of its loans are agriculture loans. 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:
The TRC Bank is planning on raising $500 million in a new offering of commercial
paper through its holding company. It plans on using $475 million of it to fund new
loans. The current interest rate for similar commercial paper is 6.45 percent and it
expects 0.25 percent in issuing costs. What is the effective rate of interest on this issue
of commercial paper?
A. 6.65 percent
B. 6.45 percent
C. 7.05 percent
D. 6.79 percent
E. None of the options is correct
Answer:
The specialized firms that can be operated by U.S. banking companies and Edge Act
corporations are called:
A. international banking facilities (IBFs).
B. export trading companies (ETCs).
C. shell branches.
D. subsidiaries.
E. None of options is correct.
Answer:
Ford Motor Company needs to borrow $50 million. The First National Bank creates a
packaged loan with several other banks to lend to Ford Motor Company. This loan
package can be sold on the secondary market and carries a rate that is 400 basis points
above LIBOR. The First National Bank expects this loan package to ultimately be held
by a finance company looking for a good return on their money? What type of loan is
this most likely to be?
A. Term business loan
B. Revolving credit financing
C. Long-term project loan
D. Leveraged buyout
E. Syndicated loan
Answer:
Which of the following would be an example of exchange risk? A. A bank manager
embezzles $1,000,000 from the bank.
B. A bank that loses $500,000 from trading in foreign currencies.
C. A $1,000,000 loan given to a business, on which no interest or principal has been
collected in 2 years.
D. A bank manager predicts interest rates will rise. However, interest rates fall causing
the bank’s net income to fall by $250,000.
E. All of the options are examples of exchange risk.
Answer:
With liability management, institutions in need of more funds to cover expanding loan
commitments or deficiencies in the cash reserves can ______________________ to
reduce their volume of money market borrowings.
A. lower their offer rate
B. lower their bid rate
C. raise their bid rate
D. raise their offer rate
E. reduce cutoff for minimum credit score required to grant loans
Answer:
The First State Bank of Wyoming wants to acquire the First State Bank of Oklahoma.
The management of the bank feels that this will increase earnings as new markets will
be exploited and new services will be offered to all of their bank customers. Which
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:
The assets and liabilities of Finacle Bank as on December 31, 2015, are as follows:
$20,000 of short-term securities issued by governments and private borrowers (about to
mature), $12,000 of borrowings from the money market, $15,000 of short-term savings
accounts, $12,000 of variable-rate loans and securities, $18,000 of long-term loans
made at a fixed interest rate, $25,000 of long-term savings and retirement accounts,
$22,000 of deposits in the Central Bank (held as legal reserves), $550,000 of equity
capital provided by the bank’s owners, and $500,000 of building and equipment.
What is the total of repriceable assets held by the bank as on December 31, 2015?
A. $32,000
B. $50,000
C. $45,000
D. $55,000
E. $52,000
Answer:
Sources of liquidity for banks include:
A. deposit inflows.
B. money market borrowings.
C. sale of marketable securities.
D. repayments of loans disbursed.
E. All of the options are correct.
Answer:
According to the text, which of the following has been the fastest growing consumer
loan category in the last few decades inside the United States?
A. Credit card loans
B. Auto loans
C. Home mortgages
D. Personal loans
E. Education loans
Answer:
Which of the following activities of a bank falls under the insurance sales and
underwriting services?
A. Providing risk management services for persons and property.
B. Security underwriting.
C. Brokering securities for clients.
D. Providing credit guarantees.
E. Distributing new securities and interest.
Answer:
A company that offers shares in a pool of securities and the returns to the shareholders
flow through any earnings generated is called:
A. a mutual fund.
B. an annuity.
C. the net asset value.
D. a leveraged buyout.
E. None of the options is correct.
Answer:
Suppose the Bank of America provides a 5 year credit guarantee for Dillard’s
Department Stores. Dillard’s Department Stores periodically issues short term notes
with due dates of 90 days after they are issued in the international market. Bank of
American has most likely provided a(n):
A. Eurocommercial paper (ECP)
B. Depository receipt (DR)
C. Note issuance facility
D. Currency swap
E. None of the options is correct.
Answer:
According to the text, which of the following types of loan has the lowest interest rate?
A. New automobile loan
B. Used automobile loan
C. Personal loan
D. Credit card loan
E. All of the options have the same interest rate
Answer:
In the short-term, newly-chartered banks fail at:
A. a lower rate than established banks.
B. the same rate as established banks.
C. a higher rate than established banks.
D. a higher rate than non-chartered banks.
E. a lower rate than non-chartered banks.
Answer:
Suppose a business borrower is quoted a loan rate of two percentage points above the
prevailing prime interest rate posted by leading U.S. banks. This is an example of the:
A. times-prime pricing method.
B. market-based pricing method.
C. cost-plus loan pricing method.
D. prime-plus pricing method.
E. customer profitability analysis.
Answer:
Suppose Bank A’s stock price is $75 and Bank B’s stock price is $25. Bank A is
planning to purchase Bank B by paying Bank B’s shareholders a bonus of $10 per share.
What is the merger premium that Bank B’s shareholders will receive?
A. 110 percent
B. 46.6 percent
C. 200 percent
D. 140 percent
E. None of the options is correct
Answer:
Measured by dollar volume, the largest category of capital at U.S. banks is:
A. par value of common stock.
B. subordinated notes and debentures.
C. surplus.
D. undivided profits and capital reserves.
E. None of the options is correct.
Answer:
The Third National Bank of Edmond reports a net interest margin of 5.83 percent. It has
total interest revenues of $275 million and total interest expenses of $210 million. What
will be the bank’s earning assets total?
A. $4,717 million
B. $3,602 million
C. $1,115 million
D. $3,790 million
E. None of the options is correct.
Answer:
The amount of initial margin, the settlement price, and other rules regarding trading
futures contracts are determined by the:
A. SEC.
B. floor brokers.
C. dealers.
D. open interest.
E. clearinghouse.
Answer:
A bank is liability sensitive, if its:
A. deposits and non-deposit borrowings are not affected by changes in interest rates.
B. interest-sensitive assets exceed its interest-sensitive liabilities.
C. interest-sensitive liabilities exceed its interest-sensitive assets.
D. loans and securities are affected by changes in interest rates.
E. None of the options is correct.
Answer:
A $1,000 bond has three years to maturity and has a coupon rate of 15 percent. Coupon
payments are made annually. The bond is currently selling in the market for $1,072 and
has a yield-to-maturity of 12%. What is the duration of this bond?
A. 3 years
B. 1 year
C. 1.92 years
D. 2.45 years
E. 2.64 years
Answer:
A repurchase agreement (RP) in which the collateral is specifically identified is known
as a(n):
A. conventional RP.
B. General Collateral Finance RP.
C. specific RP.
D. general RP.
E. individual RP.
Answer:
Loans to finance one-to-four family homes fall under which loan category?
A. Commercial and industrial loans
B. Real estate loans
C. Loans to individuals
D. Single-payment loans
E. None of the options is correct.
Answer:
An organizational form used by international banks, that was created by U.S.
regulations and authorized by the Federal Reserve Board, consisting of computerized
account records is known as:
A. international banking facility (IBF).
B. export trading company (ETC).
C. Edge Acts.
D. agencies.
E. None of options is correct.
Answer:
Loans extended to farm and ranch operations to assist in planting and harvesting crops
and to support the feeding and care of livestock are known as:
A. real estate loans.
B. commercial and industrial loans.
C. land loans.
D. agricultural loans.
E. None of the options is correct.
Answer:
The act that allowed bank holding companies to acquire nonbank depository institutions
and convert them to branches is:
A. the National Banking Act.
B. the Garn-St Germain Act.
C. the Financial Institutions Reform, Recovery and Enforcement Act.
D. the Riegle-Neal Interstate Banking and Branching Efficiency Act.
E. None of the options are correct.
Answer:
A(n) _________________________ is a contract that promises to make a cash payment
to the beneficiary in the event of the death of the policy holder.
Answer:
_________________________ is a way of pricing deposit services in which the rate, or
return, or the fees charged on the deposit accounts are based on the cost of offering the
service plus a profit margin.
Answer:
The purchase of a house or a multifamily dwelling such as a duplex, triplex or
apartment building is usually financed through the use of a ______________________
loan.
Answer:
_________________________ are imposed by the federal, state, and local governments
to guarantee the safety of their deposits with banks.
Answer:
A(n) __________________ is an asset which can be converted into cash easily, which
has a relatively stable price, and is reversible so that the sellers can recover their
original investment with little risk of loss.
Answer:
The ________________________________ Act permits consumers to dispute billing
errors with a merchant or credit card company and receive a prompt investigation into
any such disputes.
Answer:
According to Congress, a ____________ is defined as any institution that can qualify
for deposit insurance administered by the FDIC.
Answer:
A(n) ___________________ is a machine located at the merchant’s place of business
which allows depositors to use their debit card to pay for purchases directly.
Answer:
In the price leadership model, the amount above the prime rate is often called the
____________.
Answer:
In securitization, a cash reserve which is created to give an impression to the buyers
that the investment carries low risk is an example of ____________.
Answer:
__________________________ is the difference between total interest income and
total interest expenses for a financial institution.
Answer:
Checking account maintenance fees and overdraft fees are included in the noninterest
income account under _________.
Answer:
A(n) _________________________ is an account many banks hold at the Federal
Reserve to cover any checks drawn against the bank.
Answer:
When a bank agrees to handle the cash collections and disbursements for a company
and invest any temporary cash surpluses in interest bearing assets, they are providing
________ services to their customers.
Answer:
Loans that have minor weaknesses because a bank has not followed its written loan
policy or which have missing documentation are called ______________ loans.
Answer:
The international treaty involving representatives from the U.S. and 12 other leading
industrialized countries to impose common capital requirements on all banks is known
as the ________________________.
Answer: