To avoid environmental liability under recent EPA guidelines, a lender must hold a deed
of trust, lien, or mortgage.
Answer:
One of the significant disadvantages of using futures contracts to hedge against interest
rate risk is the high commissions that must be paid to brokers.
Answer:
A study by the Federal Reserve Board indicates that there are economies of scale (cost
savings) resulting from mergers among relatively smaller banks and insurance
companies.
Answer:
A majority of new banks do not become profitable for at least a decade.
Answer:
A bank displaying trading-account securities on its balance sheet is serving as a security
dealer and plans to sell those securities before they reach maturity.
Answer:
The International Lending and Supervision Act does not require federal regulators to
supervise the U.S. banks under their jurisdiction more closely but to give banks and the
private marketplace more freedom in deciding what their capital requirements should
be.
Answer:
A greater proportion of major corporations have deserted the banking system in recent
years to raise borrowed funds directly from the open market.
Answer:
The firm’s coverage ratios measure how carefully the firm’s management monitor and
control its expenses.
Answer:
The interest rate spread between market yields on bank debt issues (such as capital
notes and CDs) and the market yields on government securities of the same maturity is
considered to be a measure of market risk in banking.
Answer:
National banks cannot merge without the prior approval of the Comptroller of the
Currency.
Answer:
The financial futures markets are designed to shift the risk of interest rate fluctuations
from risk-averse investors to speculators who are willing to accept and possibly profit
from such risks.
Answer:
If interest rates fall when a bank is in an asset-sensitive position, its net interest margin
will rise.
Answer:
There is evidence that branch banks charge higher service fees for some banking
services than unit banks, which reflects greater knowledge on the part of larger banks
concerning true cost of service.
Answer:
The Equal Credit Opportunity Act authorizes individuals and families to review their
credit file for accuracy and to demand an investigation and correction of any apparent
inaccuracies.
Answer:
A sight draft is a payment for purchase of goods and services across national borders
which is payable only on a specific future date.
Answer:
The Pension Fund industry is now larger than the Mutual Fund industry.
Answer:
Loan-loss reserves set aside to cover a particular loan or loans expected to be a problem
or loans that represent above-average risk are known as specific reserves.
Answer:
A call option is often employed to protect a bank or bank customer against losses from
falling currency prices.
Answer:
Risk in banking tends to be concentrated in a bank’s loan portfolio.
Answer:
Lending institutions act as delegated monitors and can diversify and reduce their risk
exposure, resulting in increased safety for savers’ funds.
Answer:
Securitization has the added advantage of generating fee income for banks.
Answer:
Commercial paper is a short-term debt instrument issued by major banks.
Answer:
Deposits are usually priced separately from loans and other bank services.
Answer:
The APR is the internal rate of return on a loan that equates total payments with the
amount of the loan.
Answer:
An insurance product or annuity sold by a depository institution is not insured by the
FDIC.
Answer:
If a bank receives more checks deposited to the accounts it holds than checks drawn
against its deposit accounts, the bank’s legal reserves will tend to increase.
Answer:
An average U.S. bank is larger in size (in terms of number of branch offices) than an
average Canadian bank.
Answer:
Home mortgage real estate loans soared to record levels at the beginning of the 21st
century.
Answer:
Under an assignment ownership, a loan is transferred to the buyer, though the buyer still
holds only an indirect claim against the borrower.
Answer:
In a typical quality swap, a borrower with a positive duration gap is more likely to pay
all or part of the other swap party’s long-term interest rate.
Answer:
Financial statements issued by banks and by nonbank financial-service firms look
increasingly similar today.
Answer:
Securitized assets, as a source of bank funds, are subject to reserve requirements set by
the Federal Reserve Board.
Answer:
A bank expects to raise $30 million in new money if it pays a deposit rate of 7%, $60
million in new money if it pays a deposit rate of 7.5%, $80 million in new money if it
pays a deposit rate of 8%, and $100 million in new money if it pays a deposit rate of
8.5%. The bank expects to earn 9% on all money that it receives in new deposits. What
is the marginal cost of deposits if the bank raises its deposit rate from 7 to 7.5%?
A. 0.5%
B. 7.5%
C. 8.0%
D. 9.5%
E. 10.5%
Answer:
You know the following information about the Miller State Bank:
Given this information, what is the value of this firm’s total liabilities?
A. $390
B. $60
C. $450
D. $500
E. $50
Answer:
If P is the price of the standby, NL is the cost of a nonguaranteed loan, and GL is the
cost of a loan backed by a standby guarantee, then a borrower is likely to seek an SLC
if:
A. P < (NL – GL).
B. P > (NL – GL).
C. P = (NL – GL).
D. P < (NL + GL).
E. P > (NL + GL).
Answer:
The Ferson National Bank is thinking about purchasing a municipal bond that pays a
coupon of 5.5%. This bank has a marginal tax rate of 30%. What is the after-tax yield
on this bond?
A. 7.86%
B. 5.5%
C. 3.85%
D. 1.65%
E. None of the options is correct
Answer:
The largest unregulated financial market place in the world is the:
A. U.S. treasuries.
B. Eurocurrency market.
C. agro-commodities market.
D. inter-bank loan market.
E. Fed funds market.
Answer:
A firm submits their financial records to a bank. Upon examination, the bank discovers
that this firm has $500 in cash, $2,500 in accounts receivables, $1,000 in inventory,
$5,000 in plant and equipment and that their assets totaled $9,000. In addition this bank
discovered that the firm had $2,000 in current liabilities, $2,500 in long-term debt, and
$4,500 in net worth. Finally this bank discovered that this firm had $20,000 in net sales
and $2,000 in net income. What is this firm’s leverage ratio?
A. 22.50 percent
B. 44.44 percent
C. 50.00 percent
D. 88.89 percent
E. None of the options is correct.
Answer:
A financial institution that uses a long hedge is most likely:
A. trying to avoid higher borrowing costs.
B. trying to avoid declining asset values.
C. trying to avoid lower than expected yields from loans and securities.
D. trying to avoid higher borrowing costs or trying to avoid declining asset values.
E. trying to offset a positive duration gap.
Answer:
_____________________ permits a customer to preauthorize a depository institution to
move funds from a savings account to a transaction account in order to cover
overdrafts.
A. Automatic transfers (ATS)
B. Sweep account
C. NOW account
D. SNOW account
E. MMDA
Answer:
The Harmony Bank of the South has just increased its Federal Funds Purchases. What
source of liquidity does this represent to the bank?
A. Incoming customer deposit
B. Revenues from the sale of nondeposit services
C. Customer loan repayment
D. Sale of an asset
E. Borrowings from the money market
Answer:
Which of the following statements concerning a bank’s leverage-adjusted duration gap
is true? A. If it has a positive duration gap and interest rates rise, its net worth will
decline.
B. If it has a positive duration gap and interest rates fall, its net worth will decline.
C. If it has a negative duration gap and interest rates rise, its net worth will decline.
D. If it has a negative duration gap and interest rates fall, its net worth will increase.
E. All of the options are correct.
Answer:
A bond is selling in the market for $1,100 and has a duration of 4.5 years. Market
interest rates are 5 percent and are expected to increase to 7 percent in the near future.
What will this bond’s price be after the change in market interest rates?
A. $1,006
B. $1,194
C. $1,122
D. $1,078
E. $1,100
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. According to the Department of
Justice Guidelines, this market will be identified as:
A. unconcentrated.
B. mildly concentrated.
C. moderately concentrated.
D. highly concentrated.
E. monopoly.
Answer:
Which of the following is a challenge in making a consumer loan? A. Audited financial
statements are provided by consumers quarterly.
B. Consumers must disclose publicly any changes in their health that would affect the
loan.
C. Consumers can hide pertinent information more easily than corporations.
D. Consumers can adjust to financial setbacks more easily than businesses.
E. All of the options are challenges of making a consumer loan.
Answer:
The Fed funds rate usually hovers around the Fed’s: A. target rate.
B. set rate.
C. quoted rate.
D. limit rate.
E. average rate.
Answer:
Jonathan Wynn knows that if he wanted to purchase a Treasury Bill, the minimum
amount he would spend would be close to $10,000. He also knows that he could deposit
$1,000 in a money market deposit account at a bank and earn about the same rate of
interest. Jonathan does not have $10,000 to invest in a Treasury Bill. If Jonathan puts
his money in the bank, which service that a bank can provide, is he taking advantage
of?
A. Risky arbitrage services
B. Liquidity services
C. Delegated monitoring services
D. Divisibility of money services
E. Credit services
Answer:
You know the following information about the Webb State Bank:
Given this information, what is the value of this firm’s total nondeposit borrowings?
A. $1,000
B. $300
C. $800
D. $200
E. $500
Answer:
____________________ refers to a declining population of businesses in any one
industry.
A. Convergence
B. Consortium
C. Consolidation
D. Divergence
E. Expansion
Answer:
According to the textbook, large banks possess some potential advantages over small
and medium-size banks. Which of the following is not such an advantage?
A. Greater diversification, geographically and by product line
B. Availability of financial capital at lower cost
C. Greater professional expertise to allocate capital to the most promising products and
services
D. Better positioned to take advantage of the opportunities afforded by interstate
banking
E. All the options are advantages typically possessed by large banks
Answer:
ROE for a bank is calculated by:
A. dividing net after-tax income by total equity capital.
B. dividing total operating revenue less operating expenses by total assets.
C. dividing net pre-tax income by total equity capital.
D. noninterest income less noninterest expenses divided by total earning assets.
E. None of the options is correct.
Answer:
A bank is planning to set up a new branch. It expects the new branch to generate 20
percent of the total business of the bank after it is opened. The bank expects the returns
on this branch to be 15 percent with a standard deviation of 5 percent. Currently the
bank has a 12 percent rate of return with a standard deviation of 4 percent. The
correlation between the bank’s current returns and the returns on the new branch is
expected to be 0.25. What is the bank’s total expected return after adding this branch?
A. 15 percent
B. 12.6 percent
C. 12 percent
D. 14.4 percent
E. 15.5 percent
Answer:
A financial holding company may include all of the following services except:
A. corporate liquidation.
B. consumer lending.
C. trust services.
D. investment banking.
E. insurance.
Answer:
The risk of deterioration in the value of a financial firm’s assets as a result of fluctuating
currency prices is known as:
A. basis risk.
B. country risk.
C. political risk.
D. foreign-exchange risk.
E. economic risk.
Answer:
Which of the following would be an example of a repriceable asset?
A. Money the bank has borrowed from the money market
B. Cash in the vault
C. Demand deposits that do not pay interest
D. Short-term securities issued by the government about to mature
E. All of the options are correct.
Answer:
The Emergency Economic Stabilization Act passed in 2008 during the global credit
crisis, allowed for:
A. an emergency sale of “bad assets”.
B. a temporary increase of FDIC deposit insurance to $250,000 for all deposits.
C. injections of capital by the government into banks and other qualified lenders.
D. a closer surveillance of the mortgage market participants, such as brokers and
lenders.
E. All of the options are correct.
Answer:
From an analysis on its deposits, a bank determines that account processing and other
operating expenses cost the bank $4.45 per month. The bank has also determined that
non-operating expenses on its deposits are $1.15 per month. It has also decided that it
wants a profit of $0.45 on its deposits. What monthly fee should the bank charge on its
deposit accounts?
A. $6.05
B. $5.60
C. $5.15
D. $4.45
E. None of the options is correct
Answer:
When a bank holding company acquires a nonbank business it must be approved by
the:
A. FDIC.
B. Comptroller of the Currency.
C. Federal Reserve.
D. SEC.
E. All the options are correct
Answer:
A traditional savings account with transactions and balances evidenced by the entries
recorded in a booklet kept by the customer is called:
A. passbook savings account.
B. statement savings plan.
C. negotiable order of withdrawal.
D. money market mutual fund.
E. None of the options is correct.
Answer:
Which of the following is charged with setting policies and overseeing the performance
of a bank?
A. Stockholders
B. Board of directors
C. Regulators
D. Depositors
E. None of the options are correct
Answer:
According to the text, which of the following types of loan has the highest 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:
MyWebCast is a new company that makes it easy for individuals to create streaming
videos on the Internet to share with friends and family for a small fee. MyWebCast
wants to expand their offerings of video streaming services but needs cash to be able to
do this. The Second National Bank of Oklahoma City, through a subsidiary, gives them
the cash they need for an ownership share in the company. Which of the more recent
services that banks offer is MyWebCast 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:
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. What is this bank’s expected risk (measured by the
standard deviation) after adding this branch?
A. 21.91 percent
B. 12.84 percent
C. 4.68 percent
D. 3.02 percent
E. 8.2 percent
Answer:
A repurchase agreement (RP) whereby the collateral is specifically identified is known
as a conventional or ____________ RP.
Answer:
____________________________________________ is the risk that has to do with the
fluctuations in currency prices.
Answer:
When an international bank acquires majority ownership of a separate, legally
incorporated foreign bank under host-country rules, this foreign bank is called a(n)
______________________ of the international bank.
Answer:
_________ are a type of long-term debt capital whose claims legally follow after the
claims of depositors.
Answer:
The _________ largest U.S. FDIC-insured banking companies account for more than
90 percent of bank derivatives activity in the U.S.
Answer:
___________________________ is the phenomenon by which interest rates attached to
various assets often change by different amounts and at different speeds than interest
rates attached to various liabilities.
Answer:
An international loan risk evaluation system that lists economic and political factors
believed to be correlated with loan risk is called the ______________. It may apply
comparative weights to each factor or consider each factor equally.
Answer:
For several decades, the largest banks around the world have chosen _____________,
which calls for borrowing immediately spendable funds to cover all anticipated
demands for liquidity.
Answer:
One reason that banks use derivatives is to generate ________, the money that does not
come from interest earned on loans and securities.
Answer:
One of the government-created giant mortgage banking firm which has subsequently
been privatized is the ____________________________________.
Answer:
The type of discount window loan available at higher interest rates to depository
institutions not qualifying for primary credit is known as ___________ credit.
Answer:
______________________ is a method to evaluate a large volume of consumer loans
quickly with minimum labor. It is a statistical model which predicts whether the ability
of a consumer to repay the loan.
Answer:
Banks which serve primarily households and small firms are known as ____________
banks.
Answer:
_________________________ is the bringing together of two or more firms from
different industries in order to offer multiple services.
Answer:
______________ is one of the key features of any loan. This is one of the Cs of lending
that examines whether a borrower will be able to generate enough liquid assets to repay
the loan.
Answer:
One of the most widely consulted sources of data on business firms is ______________
which was founded in Philadelphia in 1914 to exchange credit information among
business lending institutions and to organize conferences and publish educational
materials to train loan officers and credit analysts.
Answer:
A(n) _________________________ allows the holder the right to either sell securities
to another investor (put) or buy securities from another investor (call) at a set price
before the expiration date.
Answer:
A bank that offers its services only over the Internet is known as a(n) _______.
Answer:
The ______________________ can be calculated when the present value of the future
net cash flows are set equal to the initial cash outflow. It is the interest rate that is
actually earned on a new project.
Answer:
_________________________ are the assets a bank must, by law, hold behind its
deposits. In the U.S., only vault cash and deposits held with the Federal Reserves can be
used to meet these requirements.
Answer: