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Indicate whether the statement is true or false.
1. Because credit unions are for-profit organizations, their income is taxable.
a. True
b. False
2. The objective of a credit union is to act as an intermediary for its members by using members’ deposited funds to
provide loans to other members who are in need of funds.
a. True
b. False
3. During the credit crisis of 2008–2009, some credit unions suffered losses on second mortgages and home-equity loans
that they had provided, and some credit unions experienced losses on mortgage-backed securities in which they had
invested.
a. True
b. False
4. Savings institutions do not really know the actual maturity of the mortgages they hold and cannot perfectly match the
interest rate sensitivity of their assets and liabilities.
a. True
b. False
5. In general, when interest rates fall, a savings institution’s cost of obtaining funds declines more than the decline in the
interest earned on its loans and investments.
a. True
b. False
6. Savings institutions commonly measure the gap between their rate-sensitive assets and rate-sensitive liabilities in order
to determine their exposure to credit risk.
a. True
b. False
7. The National Credit Union Administration (NCUA) is responsible for regulating savings institutions.
a. True
b. False
8. In general, savings institutions are larger than commercial banks.
a. True
b. False
9. Because savings institutions commonly use long-term liabilities to finance short-term assets, they depend on additional
deposits to accommodate withdrawal requests.
a. True
b. False
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10. Credit unions obtain most of their funds by borrowing from the U.S. government.
a. True
b. False
11. Under the Financial Reform Act (Dodd-Frank Act) of 2010, all federally chartered savings institutions are to be
regulated by the Federal Reserve.
a. True
b. False
12. An interest rate swap reduces the favorable impact of declining interest rates.
a. True
b. False
13. All federally chartered credit unions are required to obtain insurance from the National Credit Union Share Insurance
Fund (NCUSIF).
a. True
b. False
14. High economic growth results in more risk for a savings institution, since its consumer loans, mortgage loans, and
investments in debt securities are more likely to default.
a. True
b. False
15. Today, savings institutions are not permitted to invest in junk bonds.
a. True
b. False
16. Because credit unions do not issue stock, they are technically sole proprietorships.
a. True
b. False
17. The capital of savings institutions is primarily composed of retained earnings and funds obtained from issuing stock.
a. True
b. False
18. Credit unions are unregulated as to the types of services they offer.
a. True
b. False
19. Credit unions use the majority of their funds to invest in the stock market.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
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20. Adjustable-rate mortgages ____ the adverse impact of rising interest rates on a typical savings institution’s spread.
They ____ the favorable impact of declining interest rates on the spread.
a. reduce; reduce
b. reduce; increase
c. increase; increase
d. increase; reduce
21. Savings institutions commonly ____ to reduce their risk.
a. purchase futures contracts on stock indexes
b. purchase futures contracts on Treasury bonds
c. sell futures contracts on stock indexes
d. sell futures contracts on Treasury bonds
22. ____ are nonprofit organizations composed of members with a common bond.
a. Credit unions
b. Savings banks
c. Savings and loan associations
d. Commercial banks
23. The maximum insurance per depositor provided by the National Credit Union Share Insurance Fund is
a. $250,000.
b. $50,000.
c. $40,000.
d. $25,000.
24. Credit unions use the majority of their funds to
a. purchase investment securities.
b. provide commercial real estate loans.
c. provide small business loans to members.
d. provide consumer loans to members.
25. To manage interest rate risk, a savings institution could use
a. fixed-rate mortgages.
b. currency options.
c. interest rate futures contracts.
d. letters of credit.
26. The risk that a credit union will experience an unanticipated wave of withdrawals without an offsetting amount of new
deposits is ____ risk.
a. credit (default)
b. interest rate
c. liquidity
d. exchange rate
e. None of these are correct.
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27. Deposits at credit unions are called
a. NOW accounts.
b. money market deposit accounts.
c. shares.
d. credit union deposit accounts.
28. A savings institution owned by its depositors is a ____ savings institution.
a. mutual
b. stock
c. credit
d. closed-end
29. Which of the following are NOT an asset of savings institutions?
a. loans
b. mortgages
c. NOW accounts
d. mortgage-backed securities
30. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) prohibited savings institutions from
a. merging.
b. offering mortgage loans.
c. investing in junk bonds.
d. making loans to foreign governments.
31. The ____ acts as a temporary lender to credit unions.
a. World Bank
b. Central Liquidity Facility
c. Federal Home Loan Bank
d. National Credit Union Administration
32. Stock-owned savings institutions ____ susceptible to unfriendly takeovers. Mutual savings institutions ____
susceptible to unfriendly takeovers.
a. are; are not
b. are; are
c. are not; are
d. are not; are not
33. Savings institutions obtain most of their funds from
a. savings and time deposits.
b. loans.
c. mortgages.
d. repurchase agreements.
34. Savings institutions can obtain capital by
a. issuing stock.
b. repurchasing stock.
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c. borrowing from the Federal Reserve.
d. borrowing in the federal funds market.
35. Which of the following are NOT a deposit source of funds for savings institutions?
a. passbook savings accounts
b. retail CDs
c. money market funds
d. negotiable order of withdrawal (NOW) accounts
e. All of these are deposit sources of funds for savings institutions.
36. Because credit unions’ sources and uses of funds are generally interest rate ____, movements in interest revenues and
interest expenses of credit unions are ____.
a. sensitive; negatively correlated
b. insensitive; highly correlated
c. sensitive; uncorrelated
d. sensitive; highly correlated
e. insensitive; uncorrelated
37. If depositors move money from their checking accounts to short-term CDs, this would ____ the rate sensitivity of the
savings institution’s liabilities to interest rate movements.
a. increase
b. have no effect on
c. decrease
d. increase AND decrease are correct, depending on the size of the savings institution
38. If a credit union’s members are affiliated with a particular employer and large layoffs occur, the credit union’s
exposure to ____ risk may increase.
a. settlement
b. interest rate
c. credit
d. None of these are correct.
39. Most mortgages originated by savings institutions are for
a. commercial buildings.
b. land for commercial purposes.
c. single-family homes or multifamily dwellings.
d. None of these are correct.
40. Interest-paying checkable accounts offered by credit unions are called
a. NOW accounts.
b. money market deposit accounts.
c. share certificates.
d. share drafts.
41. Credit unions obtain most of their funds from
a. issuing common stock.
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b. retained earnings.
c. share deposits by members.
d. issuing long-term bonds.
42. Which of the following is true about credit unions versus commercial banks and savings institutions?
a. Credit unions are less able to quickly generate additional deposits.
b. Savings institutions and commercial banks can borrow from the Central Liquidity Facility, but credit unions
cannot.
c. Savings institutions and commercial banks are less able to quickly generate additional deposits.
d. Credit unions have more exposure to interest rate risk.
43. Because credit unions ____ stock, they are technically owned by the ____.
a. issue; depositors
b. do not issue; depositors
c. issue; stockholders
d. do not issue; management
44. ____ risk is probably the least concern for savings institutions.
a. Liquidity
b. Exchange rate
c. Credit
d. Interest rate
45. ____ is (are) not a main source of funds for savings institutions.
a. Deposits
b. Borrowed funds
c. Capital
d. Mortgages
46. The majority of maturities on consumer loans offered by credit unions are ____ term, causing income generated on
their asset portfolio to be ____ to interest rate movements.
a. long; insensitive
b. short or medium; sensitive
c. long; sensitive
d. short or medium; insensitive
47. Today, credit unions are regulated as to the
a. types of services they can offer.
b. rates they offer on deposits.
c. maturity of residential loans they can make.
d. size of residential mortgage loans they can make.
48. A savings institution’s cash flows are ____ interest rate movements.
a. positively related to
b. inversely related to
c. unrelated to
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d. None of these are correct.
49. ____ do NOT represent an asset of credit unions.
a. Mortgage-backed securities
b. Home-equity loans
c. Automobile loans
d. Stocks
50. When savings institutions are unable to attract sufficient deposits, they can
a. borrow in the federal funds market.
b. borrow from the Federal Reserve.
c. borrow through a repurchase agreement.
d. All of these are correct.
51. Which of the following is NOT an advantage of credit unions?
a. They can offer attractive rates to their members because they are nonprofit and therefore are not taxed.
b. Their noninterest expenses are relatively low, because their offices and furniture are often donated or provided at
a very low cost through the affiliation of their members.
c. Their large membership allows them to effectively diversify geographically.
d. All of these are advantages of credit unions.
52. The primary use of credit union funds is
a. loans to credit union members.
b. the purchase of government securities.
c. the purchase of agency securities.
d. the purchase of corporate bonds.
e. None of these are correct.
53. Which of the following statements is NOT correct?
a. A mutual-to-stock conversion allows savings institutions (SIs) to obtain additional capital by issuing stock.
b. Because of their ownership structure, mutual SIs are more susceptible to unfriendly takeovers.
c. When a mutual SI is involved in an acquisition, it first converts to a stock-owned SI.
d. Consolidation and acquisitions have caused the number of mutual and stock SIs to decline consistently over the
years.
54. To obtain short-term funds, savings institutions commonly borrow funds in the ____ market.
a. stock
b. bond
c. mortgage
d. federal funds
e. futures
55. ____ savings institutions hold the most assets in aggregate.
a. Stock-owned
b. Mutual
c. Closely held
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d. Privatized
56. To measure ____ risk, some savings institutions measure the duration of their respective assets and liabilities.
a. credit
b. interest rate
c. liquidity
d. None of these are correct.
57. Which of the following was NOT a major reason for the savings institution crisis in the late 1980s?
a. large losses on real estate loans
b. large losses on loans to less-developed countries
c. fraud
d. illiquidity
e. increased interest expenses
58. ____ is (are) not a main use of funds for savings institutions.
a. Capital
b. Mortgages
c. Consumer and commercial loans
d. Mortgage-backed securities
59. The Financial Reform Act of 2010 did all of the following EXCEPT
a. strengthened the standards required to obtain a mortgage.
b. required more disclosures by financial institutions regarding the quality of the underlying assets when they sell
mortgage-backed securities.
c. required savings institutions to sell off any holdings of junk bonds and prohibited them from investing in junk
bonds in the future.
d. established the Consumer Financial Protection Bureau.
60. Federally chartered savings institutions are regulated by the
a. Securities and Exchange Commission (SEC).
b. National Credit Union Administration.
c. Comptroller of the Currency and the Federal Reserve.
d. U.S. Treasury.
61. According to your text, about ____ percent of credit unions are insured by the National Credit Union Share Insurance
Fund.
a. 20
b. 40
c. 60
d. 90
62. ____ are the primary asset of savings institutions.
a. Mortgages
b. Cash balances
c. Investment securities
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d. Business loans
63. Money market deposit accounts (MMDAs) are
a. trust accounts managed by savings institutions.
b. checking accounts that do not pay interest.
c. accounts offered primarily by money market funds.
d. deposit accounts offering limited checking and close-to-market interest rates.
64. A contract that allows for the purchase of a specified debt security for a specified price at a future point in time is
known as a(n)
a. interest rate futures contract.
b. interest rate swap contract.
c. interest rate cap contract.
d. security swap contract.
65. The National Credit Union Share Insurance Fund (NCUSIF) requires all
a. federally chartered credit unions to obtain insurance from the NCUSIF.
b. state-chartered credit unions to obtain insurance from the NCUSIF.
c. credit unions to pay a supplemental insurance premium each year.
d. depository institutions to pay a supplemental insurance premium each year.
66. During the credit crisis of 2008–2009, savings institutions experienced all of the following EXCEPT
a. high default rates on loans to finance leveraged buyouts.
b. a decline in the level of mortgage originations.
c. high default rates on subprime mortgages.
d. losses on investments in mortgage-backed securities.
67. The sensitivity of the cost of funds to interest rate movements has generally been
a. greater for credit unions than for savings institutions.
b. greater for credit unions than for commercial banks.
c. lower for credit unions than for savings institutions or commercial banks.
d. similar for credit unions as for savings institutions and commercial banks.
68. If a savings institution’s assets have a considerably longer duration than its liabilities, it can reduce its exposure to
interest rate risk by
a. reducing its proportion of assets in the short duration categories.
b. increasing its proportion of liabilities in the short duration categories.
c. reducing its proportion of assets in the long duration categories.
d. reducing its proportion of assets in the short duration categories AND increasing its proportion of liabilities in the
short duration categories.
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Answer Key
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