Under current federal law, commercial banks in the United States can issue commercial
paper as direct obligations of the banks.
Answer:
Foreign banks taking retail deposits in the U.S. can qualify for federal deposit
insurance.
Answer:
Lenders in the consumer loan field prefer to measure a borrowing customer’s income by
the amount of take-home pay.
Answer:
Cash is one of the six Cs of lending and refers to the fact that the lender wants to make
sure that the borrower has the ability to generate enough cash to repay the loan.
Answer:
Negative covenants require the borrower to take certain actions, such as periodically
filing of financial statements and maintaining insurance coverage.
Answer:
The Federal Reserve has been lowering deposit reserve requirements in recent years.
Answer:
One of the most common motives for large banks to acquire smaller banks is to gain
access to capable new management which is always in short supply at larger
institutions.
Answer:
Unlike futures contracts, interest rate swap agreements have no basis risk.
Answer:
Bankers’ acceptances are considered to be among the safest of all money market
instruments.
Answer:
Recently, the issue of public need has become an increasingly important factor in the
granting of bank charters.
Answer:
VaR models are most successful in assessing potential risk when the assets are
non-traded.
Answer:
Loans and leases are financial outputs on a financial institution’s balance sheet or
Report of Condition.
Answer:
Repriceable liabilities include long-term savings and retirement accounts.
Answer:
ROA measures how capably the management of a financial institution has been
converting the institution’s assets into net earnings.
Answer:
The short hedge would usually be the correct choice if a bank is concerned about
avoiding lower than expected yields from loans and security investments.
Answer:
Investment bankers are financial advisors to individuals and act as brokers and dealers
for those individuals.
Answer:
According to the textbook, the management of a bank expects to lose its “hot money”
liabilities during a period.
Answer:
Passed in 1977, the Equal Credit Opportunity Act prohibits banks from discriminating
against customers merely on the basis of the neighborhood in which they live.
Answer:
An auto loan usually carries with it a chattel mortgage, giving the bank a claim against
the property covered by the loan.
Answer:
Securitization tends to lengthen the maturity of a bank’s assets.
Answer:
The sensitivity of the market price of a financial futures contract depends partly upon
the duration of the security to be delivered under the futures contract.
Answer:
Investment securities are expected to “dress up” a bank’s balance sheet, according to the
textbook.
Answer:
Interest-sensitive gap techniques do not consider the impact of changing interest rates
on stockholders’ equity.
Answer:
The total dollar value of checks paid in the United States has grown modestly in recent
years.
Answer:
Some merger partners anticipate reduced earnings risk as a result of the merger. One
reason for this may be that the merger opens up new markets with different economic
characteristics.
Answer:
Equity notes are considered to be part of Tier 1 capital.
Answer:
An effective hedge is one where the positive or negative returns earned in the cash
market are approximately offset by the profit or loss from futures trading.
Answer:
The recent erosion of the banking market share relative to other financial institutions
means that banking is a dying industry.
Answer:
A majority of classified syndicated loans are held by banks.
Answer:
Off-balance-sheet commitments of banks carry capital requirements under the
international (Basel) capital standards.
Answer:
Interest-sensitive gap, relative interest-sensitive gap, and the interest-sensitivity ratio
will often reach different conclusions as to whether the bank is asset or liability
sensitive.
Answer:
A bank that is ‘critically undercapitalized’:
A. faces no significant regulatory restrictions.
B. can only grant loan to highly leveraged borrowers.
C. cannot avoid seizure in all circumstances.
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:
A bank has a 1-year $1,000,000 loan outstanding, payable in four equal quarterly
installments. What dollar amount of the loan would be considered rate sensitive in the
0-90 day bucket?
A. $0
B. $250,000
C. $500,000
D. $750,000
E. $1,000,000
Answer:
_____________ is the method by which banks can provide a safeguard for the deposits
of governmental units.
A. Hedging
B. Loan sale
C. Pledging
D. Securitization
E. Window dressing
Answer:
Which of the following is an internal assessment tool that is used by the participating
banks to ensure that they are prepared for the possibly damaging impact of ever
changing market conditions?
A. Backtesting
B. Risk aggregation
C. Stress testing
D. Systemic testing
E. Damage testing
Answer:
The First National Bank of Edmond had decided to purchase The First National Bank of
Plano in Texas. The bank is interested in this purchase because The First National Bank
of Plano is in financial distress and the First National Bank of Edmond thinks this is a
cheap way to get a start in the large Texas market. The FDIC supports this acquisition
because it won’t have to make any insurance payouts. 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:
The Jones State Bank is planning to add a branch office on the west side of Edmond,
Oklahoma. The bank has discovered that area surrounding the proposed site averages 4
houses per acre and has several subdivisions that each has 300 to 400 homes. 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:
The Kromwell Community Bank’s asset portfolio has an average duration of 6 years
and its liability portfolio has an average duration of 2.5 years. The bank has $500
million in total assets and $450 million in liabilities. The Kromwell Community Bank is
thinking about hedging its risk by using a Treasury Bond futures contract whose
underlying’s duration is 7.5 years and has a price of $98,000. How many futures
contracts will it need to hedge its risk?
A. 2,381 contracts
B. 2,551 contracts
C. 3,061 contracts
D. 4,464 contracts
E. 5,221 contracts
Answer:
The Second National Bank of Lincoln has decided that, to raise funds it is going to
issue new common equity through a pre-emptive rights offering, so that current owners
will not have that ownership diluted. What way of meeting their capital needs is the
bank taking?
A. Issuing common stock
B. Issuing preferred stock
C. Issuing subordinated notes and debentures
D. Selling assets and leasing facilities
E. Swapping stock for debt instruments
Answer:
Which of the following is true regarding regulatory rules for standby credit letters
issued by banks?
A. They must list the standby credit letter as a liability on their balance sheet
B. They do not have to list standby credit letters when assessing the risk exposure to a
single credit customer
C. They must apply the same credit standards for approving standby credit letters as
direct loans
D. They can apply lower capital standards to standby credit letters than loans
E. None of the options is true
Answer:
The Herfindahl-Hirschman Index is a measure of:
A. market concentration.
B. merger premium.
C. synergies gained from a merger.
D. employee strength of the combined firm after merger.
E. All of the options are correct.
Answer:
The First State Bank of Duncan buys railroad cars and rents them to the Santa Fe
Railroad Company. What type of loan has this bank made?
A. Financial institution loan
B. Commercial and industrial loan
C. Loan to an individual
D. Miscellaneous loan
E. Lease financing receivables
Answer:
Which of the following would be an example of liquidity risk? A. A bank teller
manages to steal $250,000 over a period of several months.
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 that loan the bank has made has been deemed uncollectible.
E. None of the examples are of liquidity risk.
Answer:
A bank wants to know whether a customer can raise cash in a timely fashion at a
reasonable cost. 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:
Over the last half-a-decade, the number of banks in the U.S. has __________ and the
number of branches has ________.
A. declined; increased
B. grown; increased
C. grown; decreased
D. declined; decreased
E. stabilized; stabilized
Answer:
A bank’s temporary lending of excess reserves to other banks is labeled on the balance
sheet as: A. fed funds purchased.
B. fed funds sold.
C. money market deposits.
D. securities purchased for resale.
E. None of the options are correct.
Answer:
Bankers’ acceptances:
A. can be sold in the open market.
B. are non-negotiable instruments.
C. are always sold at a price above par value.
D. if sold, erases the issuer’s obligation to pay off at maturity.
E. never qualify for discounting at the Federal Reserve Banks.
Answer:
Included among leading structural trends in the U.S. banking industry in recent years
are:
A. the number of independently owned banks has declined.
B. the average size of individual banking firms has increased.
C. entry across state lines from neighboring states has increased.
D. the mergers among some of the largest banks in the industry.
E. All of the options are correct.
Answer:
Which of the following is a reason for the rapid growth in branch banks?
A. Exodus of population from cities to suburban areas
B. Bank convergence
C. Business failures
D. Decreased costs of brick-and-mortar
E. All the options are correct
Answer:
Which of the following source of bank funding is considered a hybrid account because
though legally a deposit, it is considered as just another form of IOU?
A. Federal funds loan
B. Repurchase agreement
C. Negotiable CD
D. Eurodollar deposit
E. None of the options is correct
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
cost-plus pricing model?
A. 8.5 percent
B. 9.0 percent
C. 12.0 percent
D. 9.5 percent
E. None of the options is correct.
Answer:
The Arnold National Bank has a bond portfolio that consists of bonds with 5 years to
maturity and a 9 percent coupon rate having a face value of $1,000. These bonds are
selling in the market for $1,126. Coupon payments are made annually on this bond.
What is the yield to maturity on these bonds?
A. 3 percent
B. 6 percent
C. 9 percent
D. 12 percent
E. None of the options is correct.
Answer:
A group of six investors wants to open a new bank in the community of Edmond,
Oklahoma. It has submitted the application to the Comptroller of the Currency. Which
of the following would best describe the nature of the bank?
A. A state, member bank
B. A state, insured bank
C. A national bank
D. A national bank without FDIC insurance
E. None of the options are correct
Answer:
Following data pertains to Castle State Bank.
What is the bank’s earnings spread? A. 37.5%
B. 22.22%
C. 14.33%
D. 7.89%
E. 2.5%
Answer:
Which of the following is not a purpose of bank regulation?
A. Guarantee minimal profitability of the banking system
B. Provide monetary stability
C. Ensure safety and soundness of banks
D. Provide competitive financial system
E. Protect consumers from abuses of banks
Answer:
The market for banking in China exhibits all of the following except:
A. high savings rate.
B. a well-qualified management.
C. a large percentage of troubled loans.
D. a general lack of access from outside the country.
E. a growing economy.
Answer:
At least once in a year, banks in the United States are required to report the composition
of their loan portfolio by purpose of loan on a report form known as Schedule A.
Answer:
Which of the following is true concerning branch offices?
A. The number of full-service branch offices in the U.S. has shrunk in recent years.
B. An ideal location for a new branch bank is one with below average population
density.
C. Branch offices are generally cheaper to establish than chartering a whole new
banking corporation.
D. The decision about whether to establish a new branch is the sole prerogative of the
CFO.
E. All of the options are correct
Answer:
Which of the following is a key factor that organizers of a proposed new bank use in
evaluating their investment opportunity?
A. The level and growth of economic activity
B. The need for a new financial firm
C. Management quality
D. Pledging of capital required to cover all costs of getting started
E. All of the options are correct.
Answer:
A money center bank is typically owned by:
A. private equity companies.
B. bank holding companies.
C. foreign banks.
D. hedge funds.
E. mutual funds.
Answer:
The degree of risk exposure, based on which the amount of insurance premiums paid by
each FDIC-insured depository is determined, is an interplay of two factorsrisk class to
which the institution belongs to and:
A. capital adequacy
B. net non-performing assets
C. gross non-performing assets
D. percentage of total liabilities hedged
E. open swap exposures
Answer:
If writing off a large loan reduces the balance in the allowance for loan losses account
too much, the principal regulatory agency:
A. reduces the provision for loan loss expense.
B. transfers funds to the account from retained earnings.
C. reduces the number of loans being sanctioned.
D. increases the provision for loan loss deduction.
E. removes the reserve from the financial statement.
Answer:
If a bank’s management uses “the discipline of the financial marketplace” to gauge its
liquidity position, one of the indicators of this market test of adequacy of a bank’s
liquidity position is:
A. the bank’s return on equity capital.
B. the volume of bank stock outstanding.
C. the bank’s return on assets.
D. the size of risk premiums on CDs the bank issues.
E. None of the options is correct.
Answer:
Jerry McGuire uses his Visa card to buy a new washer and dryer and a new refrigerator
for his home. He plans on paying off the credit card over the next two years. How is
Jerry using his credit card?
A. As an installment loan
B. As a noninstallment loan
C. As a lump sum payer
D. As a debit card
E. None of the options is correct
Answer:
The Clearwater National Bank is planning to set up a new branch. This new branch is
anticipated to generate 5 percent of the total business of the bank after it is opened. The
bank also expects the return for this branch to be 15 percent with a standard deviation
of 5 percent. Currently the bank has a 10 percent rate of return with a standard deviation
of 5 percent. The correlation between the bank’s current return and returns on the new
branch is expected to be -0.3. In this problem, the proposed new branch _______
overall risk exposure due to ______ effect.
A. increases; economies of scale
B. increases; economies of scope
C. reduces; convergence
D. reduces; geographical diversification
E. none of the options are correct
Answer:
Which of the following would be an example of a nonrepriceable 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:
Answer:
___________________________, usually large banks, devote a bulk of their credit
portfolio to large-denomination loans directed towards corporations and other
businesses.
Answer:
__________________________ is the difference between the dollar-weighted duration
of the asset portfolio and the dollar-weighted duration of the liability portfolio.
Answer:
The combination of both a cap and floor is known as an interest-rate ________.
Answer:
One of the 6 Cs of lending is ______________ which suggests that a lender must
ensure that the borrower is legally entitled to sign a binding loan agreement. For an
individual this entails making sure the borrower is of a legal age to sign a contract.
Answer:
Long-term debt obligations of major corporations (with maturities beyond five years)
are known as _______________________.
Answer:
________________ is a process where merchants and utility companies take the
information from a check an individual has just written, and electronically debit the
individual’s account instead of sending the check through the regular check clearing
process.
Answer:
One part of interest-rate risk is _____________________. This part of interest-rate risk
reflects that as interest rates rise, prices of securities tend to fall.
Answer:
__________________________ is the coordinated management of both the bank’s
assets and its liabilities.
Answer:
___________________________ is an alternative to lending in which the financial
institution purchases the equipment and rents it to its customers.
Answer:
When a bank sets aside a group of income-earning assets and then sells securities based
upon those assets, it is ________________________ those assets.
Answer:
The McFadden Act and the Douglas amendment which prevented banks from crossing
state lines were later repealed by the _______________________________.
Answer:
The interest rate method which requires the interest amount on a loan to be paid upfront
is called the ______________________ method.
Answer:
A(n) ______________________________________________ is where computerized
records of transactions involving banks and their international customers are kept
separate from the rest of the domestic accounts. These are more lightly regulated than
regular bank offices.
Answer:
Interest sensitive assets divided by interest sensitive liabilities is known as:
____________________________.
Answer:
A large metropolitan or money center bank is often called a(n) ______________.
Answer: