Applying for a bank charter from the Comptroller of the Currency is simultaneously
followed by an application for FDIC insurance, to expedite the formation process and
save duplication of efforts.
Answer:
In a period of rising interest rates, the times-prime method causes the customer’s loan
rate to rise faster than the prime-plus method.
Answer:
In recent years, financial institutions have gotten better at managing interest rate risk.
Answer:
Stripped mortgage-backed securities make maturity matching of bank assets and
liabilities easier to accomplish than do most other investment securities that banks buy.
Answer:
Credit-scoring systems tend to be valid over long periods of time (usually several years)
and need not be periodically retested.
Answer:
Duration is a direct measure of the price risk but not the reinvestment risk of a bond.
Answer:
Although there is an active federal funds spot market, there is currently no associated
futures market for federal funds.
Answer:
Nonbank financial-service institutions can offer deposits to the public, but these
deposits are not eligible for insurance coverage by the FDIC.
Answer:
Loans to minors are not legally enforceable contracts in most states.
Answer:
A financial institution with a negative gap would like to receive the floating rate in an
interest-rate swap.
Answer:
Commercial and industrial loans are loans to businesses to cover such things as
purchasing inventory, paying taxes, and meeting payroll expenses.
Answer:
There are still a number of existing problems with online bill-paying services which has
limited its growth.
Answer:
The market value of a futures contract changes daily as the market price of the
underlying security price changes.
Answer:
In the United States, regulations require bank merger premiums to range between 150 to
250 percent.
Answer:
The sources and uses of funds method of estimating a bank’s liquidity requirements
divides the bank’s liabilities into three categorieshot money, vulnerable funds, and
stable fundsand estimates the probability of each being withdrawn from the bank.
Answer:
In most interest rate swaps, netting reduces the default risk because the parties actually
exchange only the difference in the interest payments.
Answer:
Asset management is regarded as an interest-sensitive approach to raising funds.
Answer:
Customers have no rights to opt out of having their private information collected by
banks and other financial-service firms and being shared with other financial-service
firms.
Answer:
Financial holding companies hold more than 90 percent of the industry’s assets in the
United States.
Answer:
Liability management is considered to be an interest-sensitive approach to raising bank
funds.
Answer:
In order to control the risk exposure on their business loans most banks use both price
and credit rationing to regulate the size and composition of their loan portfolios.
Answer:
Interest rates in the Repurchase Agreement (RP) market are quoted on a 360-day basis.
Answer:
U.S. banks having positive maturity gap positions tend to do better when the yield
curve is upward-sloping.
Answer:
There are three principal sources of cash to repay a loan. These are cash flows
generated from sales or income, funds generated from the liquidation of assets, and,
funds raised by selling debt or equity securities.
Answer:
Under recent EPA guidelines, if a lender forecloses on environmentally damaged
property, the lender must post that property for sale within 12 months after securing
marketable title.
Answer:
Large banks depend more on nondeposit borrowings than small banks.
Answer:
The Truth in Lending (or Consumer Credit Protection) Act was passed by the U.S.
Congress to outlaw discrimination in providing bank services to the public.
Answer:
A bank with a negative duration gap experiencing a decrease in interest rates will
experience an increase in its net worth.
Answer:
In recent years, the U.S. banking industry’s equity multiplier has generally risen in
response to regulatory pressure to raise more capital.
Answer:
According to the textbook, the U.S. Treasury keeps most of its operating funds in TT&L
deposits.
Answer:
If a bank adds more full-time employees and posts the same net operating income, its
employee productivity ratio, as defined in the text, must fall.
Answer:
Currency options give their buyer the right, but not the obligation, to deliver or take
delivery of a foreign currency or currency futures contract.
Answer:
Loan review is considered to be a luxury, not a necessity for most banks, especially
those with sound lending policies.
Answer:
International banking activities are regulated for many of the same reasons that shape
domestic banking regulation. These common reasons for regulation include:
A. restricting bank risk exposure.
B. protecting the safety of depositor funds.
C. promoting stable growth in money and credit.
D. avoiding massive threats to economic health in individual nations.
E. All of the options are correct.
Answer:
You know the following information about the Taylor National Bank:
Given this information, what is the value of this firm’s net income?
A. $150
B. $210
C. $400
D. ($250)
E. $750
Answer:
A bank wishes to sell $350 million in new 30-day time deposits next month. Today
interest rates are 7 percent. However, in the next month interest rates are expected to
rise to 7.75 percent. What is the potential loss in profit for the month from this increase
in interest rates? (Use a 360 day year)
A. $27.125 million
B. $24.500 million
C. $0.21875 million
D. $2.625 million
E. There is no potential loss from this increase
Answer:
Returns on certificates of deposits linked to performance of stock markets are known
as:
A. equity CDs.
B. stock CDs.
C. market CDs.
D. index CDs.
E. exchange CDs.
Answer:
Before offering any financial service to the public, a bank in the United States must
have a: A. certificate of deposit insurance.
B. charter of incorporation.
C. list of established customers.
D. new building constructed to be the bank’s permanent home.
E. None of the options are correct.
Answer:
The net effect of the new code under Bankruptcy Abuse Prevention and Consumer
Protection Act, 2005 has generally been to make filing for bankruptcy:
A. more expensive and time consuming.
B. less expensive and seamless.
C. easier for home owners.
D. paperless and completely online.
Answer:
A bank replaces 5-year corporate bonds with a coupon rate of 9.75 percent with 5-year
municipal bonds with a coupon rate of 7 percent. The bank is in the 35 percent tax
bracket and these bonds have the same default risk. What is the most likely reason the
bank changed from the corporate to the municipal bonds?
A. Liquidity risk
B. Business risk
C. Credit risk
D. Tax exposure
E. Interest rate risk
Answer:
A customer wants to borrow $1,200 from Edmond State Bank. Edmond State Bank has
an add-on loan with an interest rate of 12 percent and monthly payments for one year.
What are the monthly payments this customer will need to make on this loan?
A. $100 per month
B. $112 per month
C. $107 per month
D. $88 per month
E. None of the options is correct
Answer:
Smaller, locally focused commercial and savings banks that offer narrower but more
personalized menu of financial services are known as:
A. money-center banks.
B. community banks.
C. mutual funds.
D. state banks.
E. fringe banks.
Answer:
A depository institution’s _________________ normally determines its legal lending
limit to a single borrower.
A. volume of capital
B. number of customers
C. number of employees
D. number of offices
E. profitability
Answer:
The Third State Bank of Denton has decided to issue stock through a trust company and
borrow the funds from the trust company. This stock pays a fixed dividend and because
of the way the stock has been issued it is tax deductible. What way of meeting their
capital needs in 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:
A bank has total interest income of $67 million and total noninterest income of $14
million. This bank has total interest expenses of $35 million and total noninterest
expenses (excluding PLL) of $28 million. Its provision for loan losses is $6 million and
its taxes are $5. What is this bank’s net income?
A. $7
B. -$14
C. $18
D. $32
E. None of the options are correct.
Answer:
A bank customer is granted credit for a $2,000 loan at 10 percent to be repaid in 12
equal installments. If the loan quoted has an add-on rate, which of the following is the
approximate annual percentage rate (APR) on the loan?
A. 20 percent
B. 18 percent
C. 14 percent
D. 12 percent
E. 10 percent
Answer:
Which of the following would be an example of credit 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 credit risk.
Answer:
Short-dated pieces of a longer-term loan, usually maturing in a few days or weeks, are
called:
A. loan participations.
B. servicing rights.
C. loan strips.
D. shared credits.
E. None of the options is correct.
Answer:
The difference in interest rates between securitized loans themselves and the securities
issued against the loans is referred to as: A. the funding gap.
B. residual income.
C. service returns.
D. security income.
E. None of the options is correct.
Answer:
The most desirable sites for full-service branch bank offices usually have which of the
following characteristics?
A. Heavy traffic volume
B. Large numbers of retail shops and stores
C. Above-average age populations
D. All of the options are correct
E. None of the options are correct
Answer:
Empirical evidence suggests that earnings outcomes from mergers exhibit:
A. a symmetric distribution.
B. a positively skewed distribution.
C. a negatively skewed distribution.
D. a leptokurtic distribution.
E. no fixed pattern of distribution.
Answer:
Typically, loan examiners place adversely classified loans into three categories. Loans
in which the margin of protection is inadequate due to weaknesses in collateral or in the
borrower’s repayment abilities are categorized as:
A. substandard loans.
B. loss loans.
C. doubtful loans.
D. unproductive loans.
E. bad loans.
Answer:
What do loans and security investments represent for a bank?
A. Earning assets
B. Contra-assets
C. Discretionary accounts
D. Market-valued assets
E. None of the options is correct
Answer:
Depository institutions selling deposits to the public in the United States must quote the
rate of return pledged to the owner of the deposit, which reflects the customer’s average
daily balance kept in the deposit. This quoted rate of return is known as:
A. annual percentage rate (APR).
B. annual percentage yield (APY).
C. daily deposit yield (DDY).
D. daily average return (DAR).
E. None of the options is correct.
Answer:
A bank is considering adding life insurance underwriting to the services it offers. It has
estimated that the expected return and standard deviation of its traditional services are
12 percent and 6 percent respectively. It has also estimated that the expected return and
standard deviation of its new underwriting services are 18 percent and 10 percent
respectively. The correlation between these services has been estimated to be +0.10 and
the bank estimates that 90 percent of its business will be from traditional services and
10 percent from the new underwriting services. What is the expected return of the new
combination of services?
A. 17.40 percent
B. 12.60 percent
C. 5.59 percent
D. 15.00 percent
E. None of the options is correct.
Answer:
Which of the following is a concern regulators have about securitization?
A. The risk of being an underwriter for asset-backed securities that cannot be sold
B. The risk of acting as a credit enhancer and underestimating the need for loan-loss
reserves
C. The risk that unqualified trustees will fail to protect investors in asset-backed
instruments
D. The risk that loan servicers will be unable to satisfactorily monitor loan
performance
E. All of the options are concerns regulators have about securitization
Answer:
Majority of banks today are:
A. federally chartered.
B. uninsured.
C. state chartered.
D. national banks.
E. All the options are correct.
Answer:
Interest rate swaps: A. can change exposure to interest-rate fluctuations.
B. are one of the oldest interest rate hedging devices.
C. allows for the exchange of amounts in different currencies by two parties.
D. are rigid and inflexible.
E. None of the options are correct.
Answer:
A customer wants to borrower $25,000 for one year from TRC State Bank. The bank
offers a discount loan with an interest rate of 15 percent. How much of the loan will be
available to the customer?
A. $25,000
B. $28,750
C. $22,500
D. $21,250
E. None of the options is correct
Answer:
The business loan pricing method that estimates the before-tax yield expected from the
loan by considering the all revenues and expenses associated with a particular borrower
and the net amount of loanable funds that the bank must turn over to the borrower, is
called the:
A. the cost-plus loan pricing method.
B. the price leadership model.
C. the below-prime market pricing model.
D. customer profitability analysis.
E. None of the options is correct.
Answer:
The maturing of the liability management techniques, coupled with more volatile
interest rates, gave birth to the __________________ approach, which dominates
banking today.
A. liability management
B. asset management
C. risk management
D. funds management
E. None of the options is correct.
Answer:
Saleable loans appear to have several advantages over bonds for many investors due to:
A. strict loan covenants.
B. floating interest rates.
C. market for shorter maturity loans.
D. market for longer maturity bonds.
E. All the options are advantages of saleable loans over bonds.
Answer:
Some people feel that all individuals are entitled to some minimum level of financial
services, no matter what their income level is. This issue is often called:
A. lifeline banking.
B. preference banking.
C. nondiscriminatory banking.
D. lifeboat banking.
E. None of the options is correct.
Answer:
Due to the inherent risks in relying on borrowed liquidity and costs of storing liquid
assets, most financial firms compromise by using:
A. asset management.
B. liability management.
C. balanced liquidity management.
D. asset and liability management.
E. All the options are correct.
Answer:
The ratio that equals total interest income divided by total earning assets less total
interest expense divided by total interest-bearing liabilities is known as the:
A. earnings base.
B. earnings spread.
C. net income margin.
D. net return prior to special transactions.
E. None of the options is correct
Answer:
A bank customer is granted credit for a $2,000 loan at 10 percent to be repaid in 12
equal installments. If the loan quoted has an add-on rate, what are the net proceeds of
the loan?
A. $2,200
B. $2,100
C. $2,000
D. $1,800
E. Cannot be determined
Answer:
__________________________ is the risk that the value of the financial institution’s
asset portfolio will decline due to falling market prices.
Answer:
“Virtual” banks are found on the ____________________, and more and more banks
are using this medium to deliver selected services.
Answer:
A proposed loan is acceptable to the lender when the net rate of return from a customer
profitability analysis is _____________________.
Answer:
Many home mortgage agreements include an additional charge levied up front called
_____________________. Generally, each of these corresponds to one percent of the
face value of the amount borrowed.
Answer:
A(n) _________________________ promises a customer, who deposits a lump sum, a
guaranteed rate of return over the life of the contract.
Answer:
A(n) _________________________ is an interest-bearing receipt for the deposit of
funds in a bank for a stipulated time period. Ones that are oriented towards business
customers or institutions are known as jumbos.
Answer:
________________________ is one of the most widely respected private institutions
that rates the credit quality of financial institutions.
Answer:
_____________________________ is the granting of loans to borrowers with
below-average credit records. These loans tend to go to borrowers with a record of
delinquent payments, previously charged-off loans, bankruptcies or court judgments.
Answer:
A(n) ______________________________________ is a receipt issued by a U.S. bank
which makes it easier for a foreign business borrower to sell securities in the U.S.
Answer:
________________________ refers to variability in earnings resulting from actions
taken by the legal system including unenforceable contracts, lawsuits, and adverse
judgements.
Answer:
A(n) _________________________ combines a normal debt instrument with a credit
option. It allows the issuer of the debt instrument to lower its loan repayments if some
significant factor changes.
Answer:
The ____________________ Act restricts combined auditing and consulting
relationships in order to promote auditor independence and objectivity.
Answer:
A(n) ______________________ is a full service facility which offers many of the same
services as the home or main office of a bank.
Answer:
One reason banks pursue mergers is for _____________________. This allows the
bank to enter new markets and find new sources of revenue.
Answer:
When a national bank wants to acquire another bank, it must apply to the
__________________ for approval.
Answer:
A(n) ________________ is a picture of how market interest rates differ across loans
and securities of varying times to maturity.
Answer: