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Indicate whether the statement is true or false.
1. Return on assets (ROA) will usually reveal when a bank’s performance is not up to par, but it does not indicate the
reason for poor performance.
a. True
b. False
2. The loan loss provision as a percentage of assets should increase during periods of high economic growth.
a. True
b. False
3. The loan loss provision should increase during periods when loan losses are more likely, such as during a recessionary
period.
a. True
b. False
4. Access to a bank’s ROA without any other information reveals when its performance is not up to par and the reasons for
its poor performance.
a. True
b. False
5. Even if other external forces (such as interest rates) are unchanged, a commercial bank’s expected cash flows can
change in response to a change in its management skills.
a. True
b. False
6. Gross interest expenses of banks are normally higher in periods when market interest rates are higher.
a. True
b. False
7. If the risk premium on a commercial bank rises, so will the required rate of return by investors who invest in the bank.
a. True
b. False
8. The level of competition is an industry characteristic that will favorably affect cash flows, because a high level of
competition may increase a bank’s volume of business or increase the prices it can charge for its services.
a. True
b. False
9. A bank’s net interest margin represents the proportion of its investments that are financed with borrowed funds.
a. True
b. False
10. Any individual bank’s ROA depends on the bank’s policy decisions, but is not affected by uncontrollable factors
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a. True
b. False
11. The accounting process used by banks to determine their earnings is still based on subjective decisions, so the earnings
of a bank are partially influenced by the accounting decisions regarding loan losses.
a. True
b. False
12. Noninterest income is usually higher for small banks than for money center and large banks because small banks can
charge higher rates on loans to small local businesses.
a. True
b. False
13. Some banks that are experiencing serious financial problems may prefer to overstate their earnings in order to allow
more time to correct their operations before the regulators force them to close.
a. True
b. False
14. The value of a commercial bank can be modeled as the present value of its future cash flows.
a. True
b. False
15. If banks continue to offer new services (such as insurance or securities services), their noninterest income will
decrease over time.
a. True
b. False
16. Banks increase their loan loss reserves in order to boost their reported earnings.
a. True
b. False
17. When interest rates fall, the rates that a bank pays on deposits typically decline less than the interest rates that the bank
earns on its loans and investments.
a. True
b. False
18. Small banks tend to make more loans to small local businesses, and the rates on these loans are typically lower than
the rates that larger banks charge on the loans they provide to large businesses.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
19. Gross interest expense is affected by
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b. the composition of assets held by the bank.
c. fee services provided by the bank.
d. market interest rates AND the composition of assets held by the bank.
20. ____ result(s) from a bank’s sale of securities.
a. Noninterest income
b. Loan loss provision
c. Securities gains and losses
d. Noninterest expenses
e. None of these are correct.
21. During the credit crisis, the level of ____ was much higher than in other periods.
a. interest income
b. income expenses
c. noninterest expenses
d. loan loss provisions
22. Interest paid on deposits and borrowed funds is called
a. net interest expense.
b. net interest margin.
c. gross interest expense.
d. net spread expense.
23. Which of the following factors affecting a bank’s gross interest income is NOT influenced by the bank’s policy
decisions?
a. maturity and rate sensitivity of the bank’s assets
b. market interest rate movements
c. the bank’s loan rate
d. composition of the bank’s assets
24. Banks G and H are the same size and have similar operations. Bank G holds the minimum level of capital, and Bank H
holds a higher level of capital. Bank G’s return on equity is probably ____ volatile than that of Bank H. Bank G’s risk
premium is probably ____ than that of Bank H.
a. less; lower
b. less; higher
c. more; higher
d. more; lower
25. Bank T generally obtains a high percentage of its funds from negotiable certificates of deposit (NCDs). Bank V
obtains most of its funds from retail CDs. Bank Z obtains its funds from checking accounts. The bank that will likely incur
the highest interest expense is ____.
a. Bank T
b. Bank V
c. Bank Z
d. All three banks are the same
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26. If a bank increases its provisions for loan losses, its interest income is ____, and its noninterest income is ____.
a. reduced; not affected
b. reduced; reduced
c. not affected; reduced
d. not affected; not affected
27. Which of the following banks would likely have the highest return on equity?
a. high return on assets, high capital ratio
b. high return on assets, low capital ratio
c. low return on assets, low capital ratio
d. low return on assets, high capital ratio
28. Net income measured as a percentage of assets is
a. return on equity (ROE).
b. return on liabilities (ROL).
c. return on investment (ROI).
d. return on assets (ROA).
29. Interest income generated from all a bank’s assets is called
a. net interest margin.
b. the spread.
c. gross interest income.
d. net interest income.
30. When only equity counts as capital, the leverage measure is
a. equal to the capital ratio.
b. equal to return on assets.
c. the inverse of return on assets.
d. the inverse of the capital ratio.
31. A bank’s ROA ____ account for taxes on earnings. A bank’s ROE ____ account for taxes on earnings.
a. does; does
b. does; does not
c. does not; does not
d. does not; does
32. A bank’s ROE ____ account for its financial leverage. A bank’s ROA ____ account for its financial leverage.
a. does; does
b. does; does not
c. does not; does not
d. does not; does
33. Banks A and B have the same net income. Bank A has a higher capital ratio and more assets than B. Bank A’s return
on assets is ____ than Bank B’s. Bank A’s return on equity is ____ than Bank B’s.
a. higher; higher
b. higher; lower
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c. lower; higher
d. lower; lower
34. When only equity counts as capital, the higher the capital ratio, the
a. lower the leverage measure.
b. lower the degree of financial leverage.
c. higher the leverage measure.
d. lower the leverage measure AND lower the degree of financial leverage.
e. lower the degree of financial leverage AND higher the leverage measure.
35. If a bank has long-term fixed-rate assets and short-term liabilities, and interest rates increase over time, its net interest
margin should
a. decrease.
b. increase.
c. stay the same.
d. EITHER decrease OR increase, depending on whether the asset maturities exceed 10 years.
36. The sum of net interest income, noninterest income, and securities gains, minus the provision for loan losses and
noninterest expenses equals
a. net interest margin.
b. gross interest margin.
c. net income.
d. income before taxes.
37. A bank with ____ management may account for ____ loan losses, which _____ reported earnings now.
a. conservative; smaller; reduces
b. conservative; larger; reduces
c. aggressive; larger; increases
d. aggressive; smaller; has no effect on
38. If a bank has short-term deposits and provides long-term fixed-rate loans, and interest rates decline over time, its net
interest margin should be
a. declining over time.
b. rising over time.
c. constant over time.
d. consistently negative.
39. Changes in ____ are a factor affecting the value of a commercial bank over which the bank has some control.
a. economic growth
b. the risk-free interest rate
c. industry conditions
d. management abilities
e. None of these are correct.
40. A bank’s return on assets (ROA) could be lower than desired because of all of the following EXCEPT
a. the bank has experienced heavy loan losses.
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b. the bank was locked into fixed-rate loans prior to a rise in market interest rates.
c. the bank is receiving a relatively small amount of noninterest income.
d. the bank has reduced its noninterest expenses.
41. Banks with relatively ____ ROAs are possibly incurring ____ noninterest expenses.
a. low; low
b. low; high
c. high; high
d. None of these are correct.
42. A bank’s net interest margin includes
a. noninterest expenses.
b. noninterest income.
c. loan losses.
d. None of these are correct.
43. Fees charged by a bank on various services allow the bank to generate
a. noninterest income.
b. components of net interest margin.
c. components of net interest income.
d. components of gross interest income.
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Answer Key
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