The basic strength of the below-prime market pricing model is that it allows the bank to
lend at low money market interest rates plus a small margin to cover risk exposure and
provide a profit margin.
Answer:
FNMA purchases home mortgages only if the borrower’s monthly house payment does
not exceed 35 percent of his monthly gross income.
Answer:
The concentration of bank deposits at the local level (that is in urban communities and
rural counties) has displayed only moderate changes in recent years.
Answer:
There are only a very small number of unit banks in the U.S. today.
Answer:
The volume of core deposits at U.S. banks has been growing in recent years relative to
other categories of deposits.
Answer:
Basel II requires each bank to determine its own capital requirements based on its own
calculated risk exposure.
Answer:
Over half of all U.S. states today limit branching activity.
Answer:
The long hedge in financial futures contracts is most likely to be used in situations
where a bank would suffer losses due to rising interest rates.
Answer:
Trust services are a relatively new service for banks.
Answer:
Treasury bills are the long term debt obligations issued by the federal government.
Answer:
One of the key pillars for capital regulation in Basel II was to require banks to hold
capital against its own estimated risk exposure from operational risk.
Answer:
An installment loan is one where the customer repays the loan in two or more
consecutive payments. These payments are often made monthly or quarterly.
Answer:
Construction loans by a bank fall under the loan category known as commercial and
industrial loans.
Answer:
A bank’s profit margin or ratio of net after-tax income to total operating revenue is a
measure of financial leverage for a bank.
Answer:
If interest rates fall, a customer’s loan rate will decline more rapidly under the
times-prime method than under the prime-plus method of business loan pricing.
Answer:
According to the textbook, the most profitable U.S. banks in terms of both ROA and
ROE are medium-size institutions in the asset size range of $100 million to $10
billion.
Answer:
The International Banking Act of 1978, prohibited foreign-owned banks from crossing
state lines unless the state or states involved allow cross-border entry.
Answer:
The Sarbanes-Oxley Act allows banks, insurance companies, and securities firms to
form Financial Holding Companies (FHCs).
Answer:
Credit cards offer convenience to customers plus a revolving line of credit.
Answer:
Research evidence suggests that banks taken over by interstate banking organizations
have generally increased their market share over their competitors within the same state
and are generally more profitable than their competitors.
Answer:
The principal risk to a financial institution buying CMOs is market risk.
Answer:
Loan sales are generally viewed as a risk-reducing mechanism for the selling financial
institution.
Answer:
Off-balance-sheet items for a bank are fee generating transactions which are not
recorded on their balance sheet.
Answer:
There are very little economies of scale (cost savings) in the credit card business.
Answer:
The moral hazard problem of banks is caused by the fixed insurance premiums paid by
banks which make them accept greater risk.
Answer:
The loan-pricing technique known as CPA, can be used to identify the most profitable
types of bank customers, loans, and also the most successful loan officers.
Answer:
When the general credit conditions are tight, there is a possibility that not every
borrower will be accommodated by lenders. This chance of credit rationing is referred
to as credit availability risk.
Answer:
The Truth-in-Lending Act of 1968 gave consumers the right to access the information
from their credit files kept at local and regional credit bureaus.
Answer:
A U.S. bank can run up to a 5-percent deficit in its legal reserve requirement
unconditionally without incurring an interest penalty from the Federal Reserve
System.
Answer:
If an international bank has gone net long in a particular currency, it will score a
positive gain if the value of that currency declines.
Answer:
The price leadership model for long-term loan pricing includes a markup for default
risk, but not for term risk.
Answer:
The first ATM machine could only handle cash withdrawals.
Answer:
Under the FDIC Improvement Act of 1991, a bank whose leverage ratio drops to 2
percent or less is considered to be critically undercapitalized.
Answer:
Following the recent global credit crisis, regulators have begun to emphasize the need
for loan originators to know their borrowers better and retain some of the risk on loans
that they sell.
Answer:
There are some significant limitations to financial futures as interest-rate hedging
devices; among them is a special form of risk known as credit risk.
Answer:
A ‘Chinese wall’ is supposed to prevent the transfer of insider information about clients
between the investment banker’s security underwriting division and the internal unit
where proprietary trading of stocks and bonds takes place.
Answer:
Convexity is the idea that the rate of change of an asset’s price varies with the change in
interest rates depending on the prevailing interest rates.
Answer:
The Basel Agreement on new capital standards, as drafted in the 1980s, failed to deal
with market risk.
Answer:
Short-term interest rates tend to rise more slowly than long-term interest rates and to
fall more slowly when the long-term interest rates in the market are headed down.
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. Suppose the earnings of the combined
bank do not increase over the total earnings of the two banks before the merger. In
addition assume that the new bank will have 118,182 shares outstanding. What will be
the earnings per share for the new bank?
A. $17.00 per share
B. $13.54 per share
C. $9.67 per share
D. $12.27 per share
E. None of the options is correct
Answer:
According to the text, many European bank mergers in recent years is motivated by the
search of:
A. cost efficiency.
B. failing institutions.
C. cash-rich banks.
D. complementarity.
E. tax efficiency.
Answer:
A bank that is concerned that the economic conditions of the market area they serve
may take a downturn with falling demand for loans and higher bankruptcies in the
areas, is concerned about which of the following?
A. Business risk
B. Liquidity risk
C. Tax exposure
D. Credit risk
E. Inflation risk
Answer:
The revised Basel I rules imposed capital requirements for market risk on:
A. only the largest banks.
B. only the smallest banks.
C. only moderate size banks.
D. all banks.
E. no banks.
Answer:
If the yield curve is upward sloping:
A. investors expect the short-term interest rates to fall in the future.
B. investors often shift their investment holdings away from long-term securities.
C. investors often short sell short-term securities.
D. no portfolio management is required.
E. investors often shift their investment holdings away from short-term securities.
Answer:
The oldest federal bank agency is the:
A. Office of the Comptroller of the Currency.
B. Federal Deposit Insurance Corporation.
C. Federal Reserve System.
D. state banking commission.
E. state insurance commission.
Answer:
Following charter approval, a bank’s stock can be legally offered to the public through
a(n) ___________________ that describes the charter’s business plan and terms of
sale.
A. offering memorandum
B. offering article
C. underwriter’s commitment report
D. merchant banker’s report
E. None of the options are correct
Answer:
Each of the following typically falls into the category of loans except:
A. real estate.
B. consumer.
C. commercial and industrial (business).
D. agricultural.
E. municipal.
Answer:
A bank is concerned about excess volatility in its cash flows from some recent business
loans it has made. Many of these loans have a fixed rate of interest and the bank’s
economics department has forecast a sharp increase in interest rates. The bank wants
more stable cash flows. Which type of credit derivative contract would you most
recommend for this situation?
A. Credit-linked note
B. Credit option
C. Credit risk option
D. Total-return swap
E. Credit swap
Answer:
Amy Farmer is planning to invest in the stock of Guthrie National Bank. She is
examining ratios of the book value of the assets to the market value of the assets and the
market value of the bonds held by the bank to their recorded value. What type of risk is
Amy attempting to measure with these ratios?
A. Credit risk
B. Liquidity risk
C. Market risk
D. Legal risk
E. Operational risk
Answer:
According to the textbook, the most actively traded futures contract in the world is:
A. Federal Funds futures contracts.
B. Eurodollar time deposit futures contracts.
C. U.S. Treasury bond futures contract.
D. U.S. Treasury bills futures contract.
E. U.S. Treasury notes futures contract.
Answer:
Member banks are:
A. members of the FDIC.
B. national banks.
C. unit banks.
D. members of the Federal Reserve System in the U.S.
E. All the options are correct.
Answer:
Which of the following types of bank possesses its own charter and capital stock and is
legally incorporated under host-country rules?
A. A branch office
B. A joint venture
C. A representative office
D. A subsidiary
E. A shell branch
Answer:
Prior to Depository Institution Deregulation and Control Act (DIDMCA) being passed,
banks used ______________. This tended to distort the allocation of scarce resources.
A. free pricing
B. conditionally free pricing
C. flat-rate pricing
D. marginal cost pricing
E. nonprice competition
Answer:
_____ requires corporations controlling two or more banks to register with the Federal
Reserve Board and seek approval for any new business acquisitions.
A. The Glass-Steagall Act
B. The Federal Deposit Insurance Corporation Improvement Act
C. The National Bank Act
D. The Riegle-Neal Interstate Banking and Branching Efficiency Act
E. The Bank Holding Company Act
Answer:
The source of short-term funds for commercial banks that was developed to tap
temporary surplus funds held by large corporate and wealthy individual customers is:
A. Federal funds.
B. commercial paper.
C. Eurodollar deposits.
D. negotiable CDs.
E. None of the options is correct.
Answer:
The Dakota National Bank has purchased a security issued by the state of Tennessee
that has 20 years to maturity. What type of security has it purchased?
A. Commercial Paper
B. Banker’s Acceptance
C. Corporate Bond
D. Certificate of Deposit
E. Municipal Bond
Answer:
The Federal law that requires U.S. depository institutions to make greater disclosure of
the fees, interest rates, and other terms attached to the deposits they sell to the public is
called the:
A. Consumer Credit Protection Act.
B. Fair Pricing Act.
C. Consumer Full Disclosure Act.
D. Truth in Savings Act.
E. None of the options is correct.
Answer:
A bank whose interest-sensitive assets total $350 million and its interest-sensitive
liabilities amount to $175 million has:
A. an asset-sensitive gap of $525 million.
B. a liability-sensitive gap of $175 million.
C. an asset-sensitive gap of $175 million.
D. a liability-sensitive gap of $350 million.
E. None of the options is correct.
Answer:
According to the textbook, the lackadaisical profit performance surrounding a merger
may be explained by the:
A. tax inefficiencies due to a merger.
B. lenders cutting off credit lines due to the merger.
C. accounting irregularities when reporting earnings of the combined entity.
D. managerial hubris and sizeable merger premium that acquirers have to pay to
shareholders of the acquired firms.
E. All of the options are correct.
Answer:
The Norton Bank of Illinois, has just issued trust preferred stock. What defense against
risk is this bank making?
A. Portfolio diversification
B. Geographic diversification
C. Quality management
D. Increasing owners’ capital
E. None of the options is correct.
Answer:
An agreement where a party with a lower credit rating enters into an agreement to
exchange interest payments with a borrower having a higher credit rating is known as:
A. an interest rate swap.
B. a currency swap.
C. a swaption.
D. a quality swap.
E. None of the options are correct
Answer:
The First State Bank of Summerville needs to raise $500,000 in nondeposit sources of
funds. It knows that the Eurodollar market requires a minimum denomination of $1
million. What factor that affects a bank’s use of nondeposit sources of funds is this bank
concerned about?
A. The relative cost of raising the funds
B. The length of time the funds will be required
C. The risk associated with each source of funds
D. The size of the bank
E. Regulations
Answer:
Murphy National Bank is thinking about adding a new branch in a very different market
area. It estimates that the new office will have an expected return of 16% with a
standard deviation of 8%. Currently, it has an expected return of 12% with a standard
deviation of 4%. The correlation between the returns on the new branch and the bank’s
current returns is estimated to be 0.20. The bank estimates that the new branch will
represent 15 percent of the revenues of the bank. What is the expected return of the
bank with the new branch?
A. 12.6 percent
B. 15.4 percent
C. 4.6 percent
D. 7.4 percent
E. 8.2 percent
Answer:
A deposit which offers flexible money market interest rates but is accessible for
spending by writing a limited number of checks or executing preauthorized drafts is
known as a(n):
A. demand deposit.
B. NOW account.
C. MMDA.
D. time deposit.
E. None of the options is correct.
Answer:
A full-service facility operated by a bank away from its home office but is merely a
local office that represents a single large financial-service corporation is known as
a(n): A. branch office.
B. agency office.
C. subsidiary.
D. representative office.
E. None of the options is correct.
Answer:
A virtually regulated private investment pool, which primarily offers its wealthy
investors and large institutions, the possibility of higher investment returns by taking on
relatively risky assets 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:
A bank’s Report of Condition shows gross loans and leases or $1,500 million. The loan
loss allowance for the year is accumulated to $50 million and the bank reports an
unearned income amounting to $2 million. The net loans and leases accounted by the
banks would be:
A. $1,550 million
B. $1,450 million
C. $1,448 million
D. $1,452 million
E. $1,548 million
Answer:
Banks that emphasize on lending to commercial customers are categorized as:
A. wholesale banks.
B. retail banks.
C. personal banks.
D. investment banks.
E. regional banks.
Answer:
____________ offer savings deposit plans and housing related credit, predominantly to
individuals and families.
A. Insurance companies
B. Real estate companies
C. Trust companies
D. Factoring companies
E. Savings associations
Answer:
Banks need to be able to compare the firm they are examining to their industry. One
company that provides information to banks about the industries their customers are in
is:
A. Standard and Poors
B. Moody’s
C. Dun and Bradstreet
D. Morgan Stanley
E. None of the options is correct.
Answer:
An increasing number of nations are recognizing the need of coordinating the
regulatory activities so that all financial firms, serving international markets, operate
under similar rules. This is known as:
A. reconciliation
B. accord
C. consolidation
D. convergence
E. harmonization
Answer:
A customer has a savings account for one year. During the year he earns $65.50 in
interest. For 180 days he has $2,000 in the account and for another 180 days he has
$1,000 in the account. What is the annual percentage yield on this savings account?
A. 6.55%
B. 3.28%
C. 4.42%
D. 8.73%
E. None of the options is correct
Answer:
Organizational devices used by international banks to take deposits offshore and avoid
regulations (such as deposit insurance assessments) are known as:
A. international banking facilities (IBFs).
B. export trading companies (ETCs).
C. shell branches.
D. subsidiaries.
E. None of options is correct.
Answer:
When a bank expands the number of service options it offers after acquiring another
financial firm, they have practiced __________________ diversification.
Answer:
Answer:
Equifax, Transunion, and _________________ are the three biggest credit bureaus in
the United States.
Answer:
___________ loans represent the earliest form of lending that banks have carried out in
their more than 2,000-year history.
Answer:
The most risky of all business loans are __________. This is credit to finance the
construction of fixed assets designed to generate a flow or revenue in future periods.
This can include financing a new oil refinery, power plant, or other similar fixed assets.
Answer:
__________________________ assets, including loans, are those which are past due by
90 days or more.
Answer:
A(n) _________________________ guarantees the swap parties a specific rate of
return on their credit assets. Bank A may agree to pay the total return on the loan to
Bank B plus any appreciation in the market value of the loan. In return Bank A will
often get LIBOR plus a fixed spread plus any depreciation in the value of the loan.
Answer:
A(n) __________________ is the party, often a bank or a financial institution, which
guarantees the payment of the loan in a standby letter of credit.
Answer:
The _________________ requires selected financial institutions to report suspicious
activity in customer accounts to the Treasury Department.
Answer:
A(n) _____________________ is one which offers its full range of banking services
from several locations.
Answer:
A(n) _________________________ is where there is both a minimum and a maximum
interest rate set on a loan.
Answer:
For most of the history of financial service providers, ‘convenience’ has meant
____________.
Answer:
Dollar-denominated CDs issued outside the U.S. are called
______________________.
Answer:
_________________________ is the difference in interest rates (or prices) between the
cash market and the futures market on an underlying security.
Answer:
The _________________________ Act was passed in 1991 and specifies the
information that institutions must disclose to their customers about deposit accounts.
Answer:
A(n) ____________________________________________ mortgage is an agreement
drawn up by a bank that gives the bank control of the property if the loan cannot be
repaid as planned.
Answer:
Recent decades have ushered in dramatic changes in banking. The goal of
__________________ was simply to gain control of the bank’s sources of funds.
Answer:
The fastest rising financial crime against individuals today is __________________
theft. This is a deliberate attempt to take unauthorized use of someone else’s personal
information in order to fraudulently obtain money, credit, or other property.
Answer:
One of the three types of loans in the Fed Funds market, __________________
contracts are automatically renewed each day unless either the borrower or lender
decides to end this agreement.
Answer:
Most options today are traded on a(n) ________________________. These options are
standardized to make offsetting an existing position easier.
Answer: