The cost of nondeposit borrowings is a financial input on a bank’s income statement or
Report of Income.
Answer:
The ratio of cash and government securities to total assets is considered to be a measure
of liquidity risk in banking.
Answer:
Mutual funds were first set up in France.
Answer:
A customer can use a POS terminal at a store to pay for his purchases through a debit or
a credit card.
Answer:
Under the terms of Basel I, Tier 2 capital includes undivided profits.
Answer:
Most new banks are situated along major routes of travel for commuters going to work,
shopping areas, and schools.
Answer:
The buyer of a participation loan must watch both the borrower and the seller bank
closely.
Answer:
During the 1980s, the Comptroller of the Currency, the Federal Reserve and the FDIC
created a new tool called the Uniform Bank Performance Report to help them analyze
the financial condition of banks.
Answer:
A reverse swap is where the parties exchange the principal payments instead of the
interest payments on loans.
Answer:
According to the FDIC Improvement Act, undercapitalized U.S. banks cannot be
granted discount window loans for more than 60 days in each 120-day period.
Answer:
Real estate lending is popular with banks, in part, due to the growth of the secondary
mortgage market.
Answer:
China has the highest overall savings rate in the world.
Answer:
Under the discount rate method, interest amount is required to be paid upfront and the
customer receives the loan amount net of any interest owed.
Answer:
An annuity is a product that offers shares in a pool of securities (stocks, bonds, etc.) and
flows through any earnings generated to the shareholding customer.
Answer:
Urban markets are more responsive to deposit interest rates and fees than rural
markets.
Answer:
In a CMO, the buyers of different tiers (or tranches) of securities face the same degree
of prepayment risk.
Answer:
Net loans on a bank’s balance sheet are derived by deducting the allowance for loan
losses and unearned discounts from gross loans.
Answer:
When the Federal Reserve increases the discount rate, it generally causes other interest
rates to decrease.
Answer:
The short hedge in financial futures contracts is most likely to be used in situations
where a bank would suffer losses due to falling interest rates.
Answer:
A bank’s degree of asset utilization (AU) or the ratio of total operating revenues to total
assets is a measure of asset management efficiency, especially in terms of the mix and
yield on assets.
Answer:
One fundamental purpose for regulating capital is to limit losses to the government and
other institutions arising from deposit insurance claims.
Answer:
A bank has full control over its deposit prices in the long run.
Answer:
X-efficiency is a concept which measures the divergence between the actual operating
costs and the lowest possible operating costs of a financial services firm if it is
operating under maximum efficiency.
Answer:
The term “regulatory dialectic” refers to the dual system of banking regulation in the
United States and selected other countries where both the federal or central government
and local governments regulate banks.
Answer:
As a consequence of recent legislation, banks, securities firms, and insurance
companies have the right to apply to the Federal Reserve Board to become financial
holding companies.
Answer:
The volume of variable-rate CDs exceeds the volume of fixed-rate CDs among U.S.
banks.
Answer:
Recently, the daily rate at which robberies have occurred in the U.S. has continued to
climb.
Answer:
Bank organizational structure has become more complex in recent years.
Answer:
A bank’s money position manager is responsible for ensuring that the bank maintains an
adequate level of legal reserves.
Answer:
According to recent studies cited in this chapter, the number one factor that households
consider in selecting a bank to hold their checking account is low fees and low
minimum balance.
Answer:
One of the keys to branch office profitability is to apply the latest information
technology and thereby lower personnel costs.
Answer:
When considering possible location for new branches, expected rate of return is the
only criteria that a management should consider.
Answer:
Newly designed bank branch offices in recent years have emphasized more heavily on
effective communication of service options to the customers in an effort to promote
service sales.
Answer:
Floor planning agreements typically include a loan-loss reserve, built up from interest
earned as borrowers repay their installment loans.
Answer:
Households tend to be interest-inelastic borrowers.
Answer:
Under U.S. regulations, a U.S. international bank can invest more than 50 percent of its
consolidated capital and surplus in an export trading company.
Answer:
Nonprice competition for deposits has tended to distort the allocation of scarce
resources in the banking sector.
Answer:
The Boyer Bank wants to add a new ATM machine in a busy mall. It knows the new
machine will cost $60,000 and another $30,000 is required to install it in the mall. It
expects to save $0.27 per transaction and generate 100,000 transactions per year. Also,
it expects the new machine to last 8 years. If it needs to earn a 12% return, what is the
NPV of this project? (Round your answer to the nearest $1,000)
A. $126,000
B. $44,000
C. $134,000
D. $27,000
E. $117,000
Answer:
Jeremiah Uselton needs a loan to purchase a condo in Sarasota, Florida. Which of the
following categories will this loan fall into?
A. Residential mortgage loan
B. Home equity loan
C. Noninstallment loan
D. Revolving line of credit
E. None of the options is correct
Answer:
Of the following countries in Europe, which one has the largest number of banks?
A. Belgium
B. France
C. Germany
D. Great Britain
E. None of the options are correct
Answer:
A foreign currency contract that gives the holder of the contract the right to sell a
foreign currency at a specified price on or before the published expiration date is called
a:
A. call currency option.
B. put currency option.
C. long hedge currency futures contract.
D. short-hedge currency futures contract.
E. None of the options is correct.
Answer:
Which of the following short-term loans are traded in the secondary market and usually
carry an interest rate based upon the London Interbank Offered Rate (LIBOR) on
Eurocurrency deposits?
A. Asset-based financing
B. Retailer and equipment financing
C. Syndicated loans
D. Term business loans
E. Revolving credit financing
Answer:
Common minimum capital requirements on banks in leading industrialized nations that
are based on the riskiness of their assets is imposed by:
A. the National Banking Act.
B. the Financial Institutions Reform, Recovery and Enforcement Act.
C. the International Banking Act.
D. the Basel Agreement.
E. None of the options are correct.
Answer:
Customers purchasing nondeposit investment accounts sold by a bank operating in the
United States must be told in writing that:
A. investment accounts are not federally insured.
B. investment accounts are neither deposits nor guaranteed by a depository institution.
C. investment accounts could suffer loss of principal.
D. All of the options are correct.
E. None of the options is correct.
Answer:
The fact that a consumer who purchases a particular basket of goods for $100 today has
to pay $105 next year for the same basket of goods is an example of which of the
following risks?
A. Inflation risk
B. Default risk
C. Liquidity risk
D. Price risk
E. Maturity risk
Answer:
When a bank is expecting to be able to employ the same managers, employees, and
physical resources to offer multiple products and generate costs savings they are
expecting which of the following effects?
A. Product-line diversification effect
B. Economies of scope effect
C. Economies of scale effect
D. Geographic diversification effect
E. None of the options is correct.
Answer:
A bank is considering making a loan to Neville Langdon. Neville has bounced three
checks in the last year and already has $10,000 on a credit card and an automobile loan
with a large balance due. What aspect of evaluating a consumer loan application is this
fact concerned with?
A. Character and purpose
B. Income level
C. Deposit balance
D. Employment and residential stability
E. Pyramiding of debt
Answer:
The most popular domestic source of borrowed reserves for U.S. banks is:
A. Federal funds market.
B. money market negotiable CDs.
C. Eurodollar market.
D. borrowings from the Federal Reserve Banks.
E. commercial paper market.
Answer:
An abusive practice in which lenders grant loans to weak borrowers and charge them
high fees and interest rates, which may cause the borrower to default on the loan is
known as:
A. installment loaning.
B. credit card loaning.
C. predatory lending.
D. herbivore lending.
E. None of the options is correct.
Answer:
If a financial institution agrees to guarantee a swap agreement negotiated between two
of its customers, usually:
A. it will mark the transaction as a deferred asset.
B. it will mark the transaction as a deferred liability.
C. it will mark the transaction as a contingent asset.
D. it will mark the transaction as a contingent liability.
E. it does not record the transaction in its books.
Answer:
A savings account evidenced only by a computer entry for which the customer gets a
monthly printout is called:
A. passbook savings account.
B. statement savings deposits.
C. negotiable order of withdrawal.
D. money market mutual fund.
E. None of the options is correct.
Answer:
The Dillinger State Bank has purchased a bond issued by the Interstate Manufacturing
Company that has 15 years to maturity and has a coupon rate of 12.5%. Market interest
rates have recently declined to 8% and the Dillinger State Bank is worried that the
Interstate Manufacturing Company will retire the bond and issue new ones with a lower
coupon rate. What type of risk is the Dillinger State Bank worried about?
A. Credit risk
B. Interest-rate risk
C. Business risk
D. Call risk
E. Inflation risk
Answer:
Outside the United States, the holding company form:
A. is usually legal and very popular.
B. is usually legal but not often used.
C. is not legal.
D. is not legal yet popular.
E. is legal but never used.
Answer:
A bank plans to offer new subordinated notes in the open market next month but knows
that its credit rating is being reviewed by a credit rating agency. The bank wants to
avoid paying sharply higher credit costs. 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:
Which of the following would be the best example of a ratio used to examine a bank’s
interest rate risk?
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. Nonperforming assets/Total capital
Answer:
A stable and predictable base of deposited funds that is not highly sensitive to
movements in market interest rates and tend to remain with the bank is called:
A. TT&L deposits.
B. core deposits.
C. consumer CDs.
D. correspondent deposits.
E. None of the options is correct.
Answer:
The TRC Bank has a net profit margin of 7.5%, an asset utilization ratio of 18%, and an
equity multiplier of 20. What is the bank’s ROE?
A. 27.00 percent
B. 1.35 percent
C. 7.50 percent
D. 1.50 percent
E. 3.6 percent
Answer:
A financial institution that charges its customers based on the number of services they
use and grants lower deposit fees or waives some fees for a customer that purchases two
or more services is practicing:
A. marginal cost pricing.
B. conditional pricing.
C. relationship pricing.
D. upscale target pricing.
E. None of the options is correct.
Answer:
Julie Wells has found a Treasury Bond futures contract whose underlying’s duration is
8.5 years and is currently selling for $97,500. Interest rates are currently 8% and are
expected to rise by 1.5%. What is the expected change in the future contract’s price for
this change in interest rates?
A. $1,462.50
B. $12,431.25
C. -$11,510.42
D. -$1,462.50
E. -$12,431.25
Answer:
Forrest Fennell is planning to invest in Capital City Bank. He is examining the ratios of
nonperforming loans to total loans and leases and the provision for loan losses to total
loans and leases. What type of risk is Forrest attempting to measure with these ratios?
A. Credit risk
B. Liquidity risk
C. Market risk
D. Interest rate risk
E. Operational risk
Answer:
A lender that makes a loan to a minor would be violating which of the 6 Cs of lending?
A. Character
B. Capacity
C. Cash
D. Control
E. Collateral
Answer:
The State Bank of Virginia owns 55 percent of the shares of the Bank of Budapest.
What type of arrangement is this?
A. A representative office
B. An agency office
C. A branch office
D. A subsidiary
E. An export trading company
Answer:
The Farmer National Bank has purchased a bond that has a coupon rate of 11.5% and a
face value of $1000. It has 16 years to maturity and is currently selling in the market for
$1309.80. The bond makes annual coupon payments. The Farmer National Bank plans
on selling this bond at the end of 8 years for $1071 (ex-interest). What is the holding
period return on this bond?
A. 7%
B. 8%
C. 11.5%
D. 16%
E. None of the options is correct
Answer:
What is the objective of a fair value hedge?
A. To offset the losses due to changes in the value of an asset or liability
B. To reduce the risk associated with future cash flows
C. To predict future cash flows
D. To predict the value of an asset or minimize the value of a liability
E. None of the options are correct
Answer:
Terry May, a loan officer with First National Bank, calculates liquidity and debt ratios
for the Lava Lamp Company and also examines their cash flow statement. What step in
the lending process is Terry performing?
A. Finding prospective customers
B. Evaluating a customer’s character and sincerity
C. Making a site visit and evaluating a customer’s credit history
D. Evaluating a prospective customer’s financial condition
E. Assessing possible collateral and signing the loan agreement
Answer:
In a loan strip, the risk of the borrower default: A. is retained by the seller.
B. is transferred to an SPE.
C. is transferred to the buyer.
D. is negligible and therefore, a non-issue.
E. is very high and always secured by a credit-default swap.
Answer:
Using deposit fee schedules that vary deposit prices according to the number of
transactions, average balance in the deposit account, and maturity of the deposits
represents which of the deposit pricing method listed below?
A. Marginal cost pricing
B. Cost plus pricing
C. Conditional pricing
D. Upscale target pricing
E. None of the options is correct.
Answer:
Which of the following is an advantage of a General Collateral Finance RP?
A. The securities pledged in the first leg need not necessarily be the same to be
returned.
B. It can be settled on the books of the FICC which allows for netting of transactions.
C. It entails lower transaction costs.
D. It helps make RP market more liquid.
E. All of the options are correct.
Answer:
__________________ is the amount in excess of stock’s par value paid by the bank’s
shareholders.
Answer:
A(n) _________________________ is a security issued by the federal government
which has less than one year to maturity when it is issued.
Answer:
__________________________ risk is one that deals with the quality of the bank’s
assets and, in particular, the bank’s loans.
Answer:
Increase in earnings of a bank as a result of consolidation of operations and elimination
of unnecessary duplication usually exhibits improving ___________ efficiency.
Answer:
The financial futures markets are designed to shift the risk of interest rate fluctuations
from risk-averse investors to ________.
Answer:
A phenomenon wherein interest rates and security prices in the financial marketplace
move against a troubled firm, forcing it to make crucial adjustments in policies and
performance in order to calm investors’ worst fears is often referred to as
__________________ by economists.
Answer:
The trust department can be a significant source of ____________ for a bank or
financial holding company.
Answer:
Federal Credit Unions are regulated and examined by
_________________________________.
Answer:
The Financial Accounting Standards Board labels ____________ as the “intangible
synergies” of a combined firm resulting from a merger.
Answer:
______________________ refers to the borrowers’ use of debt in their firm.
Answer:
Banks may invest in municipal bonds issued by smaller local governments and claim 80
percent of deductions for tax purposes on the interest amount of funds borrowed to
purchase these securities. These bonds are known as ____________ bonds.
Answer:
A(n) __________________________ is a short term collateralized loan. The collateral
that is used generally consists of T-Bills.
Answer:
Wages and salaries to net sales, overhead expenses to net sales, and cost of goods sold
to net sales are all measures of ___________________________________________.
Answer:
The largest component of capital among thrift institutions is ____________.
Answer:
The _______________, which was created under Tax Relief Act of 1997, allows
individuals to make non-tax-deductible contributions to a retirement fund that can grow
tax free and also pay no taxes on their investment earnings when withdrawn.
Answer:
A(n) _________________________ is a new swap agreement which offsets the
original interest rate swap contract.
Answer: