FIN 350 Week 9 Quiz – Strayer
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Quiz
8 Chapter 18 and 19
Bank
Regulation
1. Deposit
insurance has a limit of:
|
a.
|
$10,000.
|
|
b.
|
$25,000.
|
|
c.
|
$100,000.
|
|
d.
|
$250,000.
|
2. The
opening of a commercial bank in the United States
|
a.
|
does not require a charter.
|
|
b.
|
always requires a charter from a state government.
|
|
c.
|
always requires a charter from the federal
government.
|
|
d.
|
requires a charter from a state or the federal
government.
|
|
e.
|
requires a charter from both the state and federal
government.
|
3. Commercial
banks that are not members of the Federal Reserve System ____ borrow from the
Fed, and ____ subject to the Fed's reserve requirements.
|
a.
|
may; are
|
|
b.
|
may; are not
|
|
c.
|
may not; are not
|
|
d.
|
may not; are
|
4. National
banks are regulated by ____, and state banks are regulated by ____.
|
a.
|
the Comptroller of the Currency; their state
agency
|
|
b.
|
the Comptroller of the Currency; the Comptroller
of the Currency
|
|
c.
|
their state agency; their state agency
|
|
d.
|
their state agency; the Comptroller of the
Currency
|
5. All
Fed member banks must hold
|
a.
|
private insurance on deposits.
|
|
b.
|
FDIC insurance on deposits.
|
|
c.
|
both FDIC and private insurance on deposits.
|
|
d.
|
none of the above
|
6. Commercial
banks ____ restricted to a maximum percentage of their capital to loan to a
single customer, and ____ allowed to use borrowed or deposited funds to
purchase common stock.
|
a.
|
are; are
|
|
b.
|
are; are not
|
|
c.
|
are not; are
|
|
d.
|
are not; are not
|
7. Banks
commonly use depositor funds to invest in stocks.
a.
True
b.
False
8. An
"off-balance-sheet commitment" that provides the bank's guarantee on
the financial obligations of a borrower to a specific party is a
|
a.
|
standby letter of credit.
|
|
b.
|
federal funds agreement.
|
|
c.
|
repurchase agreement.
|
|
d.
|
discount window agreement.
|
9. The
Depository Institutions Deregulation and Monetary Control Act of 1980 allowed
banks to set their own
|
a.
|
reserve requirements.
|
|
b.
|
capital ratios.
|
|
c.
|
interest rates on savings deposits.
|
|
d.
|
corporate loan interest rates.
|
10. The
Glass-Steagall Act of 1933 prevented
|
a.
|
any firm that accepts deposits from underwriting
stocks and bonds of corporations.
|
|
b.
|
any firm that accepts deposits from underwriting
general obligation bonds of states and municipalities.
|
|
c.
|
any firm that accepts deposits from holding any
corporate bonds in its asset portfolio.
|
|
d.
|
state-chartered banks from offering commercial
loans.
|
11. Which
of the following is not a main deregulatory provision of Depository Institutions
Deregulation and Monetary Control Act of 1980?
|
a.
|
phase-out of deposit rate ceilings
|
|
b.
|
allowance of checkable deposits for all depository
institutions
|
|
c.
|
new lending flexibility of depository institutions
|
|
d.
|
allowance of interstate banking for depository
institutions in most states
|
12. The
Financial Reform Act was intended to:
|
a.
|
prevent another credit crisis.
|
|
b.
|
reduce capital ratios.
|
|
c.
|
impose interest rate ceilings on deposits.
|
|
d.
|
prevent banks from offering securities services.
|
13. The
Garn-St. Germain Act of 1982
|
a.
|
permitted depository institutions to offer money
market deposit accounts.
|
|
b.
|
prevented depository institutions from acquiring
problem institutions across geographical boundaries.
|
|
c.
|
required the Fed to explicitly charge depository
institutions for its services.
|
|
d.
|
allowed the Fed to provide check clearing to
depository institutions at no charge.
|
14. Which
of the following is not a specific criterion the FDIC uses to monitor banks?
|
a.
|
capital adequacy
|
|
b.
|
dollar value of fixed assets
|
|
c.
|
asset quality
|
|
d.
|
earnings
|
|
e.
|
sensitivity to financial market conditions
|
15. The
potential risk that financial problems can spread through financial
institutions and the financial system is referred to as:
|
a.
|
systemic
|
|
b.
|
systematic
|
|
c.
|
unsystematic
|
|
d.
|
market
|
16. The
Basel framework recommends capital requirements in proportion to:
|
a.
|
mortgages
|
|
b.
|
commercial paper
|
|
c.
|
liabilities
|
|
d.
|
risk-weighted assets
|
17. The
Basel Accord
|
a.
|
forces banks with greater risk to maintain more
deposits.
|
|
b.
|
forces banks with greater risk to maintain more
capital.
|
|
c.
|
forces banks with greater risk to maintain less
capital.
|
|
d.
|
none of the above
|
18. In
general, a bank defines its value-at-risk as the estimated potential loss from
its traditional businesses that could result from adverse movements in market
prices.
a.
True
b.
False
19. Which
of the following statements is incorrect?
|
a.
|
The validity of a bank's estimated VAR is assessed
with backtests in which the actual daily trading gains or losses are compared
to the estimated VAR over a particular period.
|
|
b.
|
Some banks supplement the VAR estimate with stress
tests.
|
|
c.
|
In general, the VAR model does not lend itself to
determine capital requirements.
|
|
d.
|
All of the statements above are correct.
|
20. Which
of the following is an "off-balance-sheet commitment?"
|
a.
|
long-term debt
|
|
b.
|
additional paid-in capital
|
|
c.
|
notes payable
|
|
d.
|
guarantees backing commercial paper issued by
firms
|
21. The
liquidity component of the CAMELS rating refers to
|
a.
|
regulators' concern about how a bank's earnings
would change if economic conditions change.
|
|
b.
|
how well the bank's management would detect its
own financial problems.
|
|
c.
|
a bank's sensitivity to financial market
conditions.
|
|
d.
|
monitoring the type of loans that are given, the
bank's process for deciding whether to provide loans, and the credit rating
of debt securities that it purchases.
|
|
e.
|
excessive borrowing by banks from outside sources,
such as the discount window.
|
22. Which
of the following is not a corrective action taken by regulators when a bank is
identified as a problem bank?
|
a.
|
Regulators may examine such banks frequently and
thoroughly.
|
|
b.
|
Regulators may request that a bank boost its
capital level or delay its plans to expand.
|
|
c.
|
Regulators can require that additional financial
information be periodically updated to allow continued monitoring.
|
|
d.
|
Regulators have the authority to take legal action
against a problem bank if the bank does not comply with their suggested
remedies.
|
|
e.
|
All of the above are possible corrective actions
taken by bank regulators.
|
23. The
fee banks pay to the FDIC for deposit insurance is now
|
a.
|
a fixed dollar amount for all banks.
|
|
b.
|
a fixed percentage of the bank's deposit level for
all banks.
|
|
c.
|
a fixed percentage of the bank's loan volume for
all banks.
|
|
d.
|
based on the risk of the bank.
|
24. Generally,
the failure of small banks
|
a.
|
causes more widespread concern about the safety of
the banking system than the failure of large banks.
|
|
b.
|
causes equal concern about the safety of the
banking system as the failure of large banks.
|
|
c.
|
causes less concern about the safety of the
banking system than the failure of large banks.
|
|
d.
|
Either A or B can be true, depending on the type
of business cycle that exists while the failures occur.
|
25. The
Sarbanes-Oxley Act was enacted to make corporate managers, board members, and
auditors more accountable for the accuracy of the financial statements that
their respective firms provide.
a.
True
b.
False
26. Bank
A has a 10 percent capital ratio and uses a significant proportion of its
assets to invest in very highly-rated bonds. Bank B has an 12 percent capital
ratio and uses a significant proportion of its assets to invest in highly
leveraged transactions. How would Bank A rate versus Bank B using the capital
and asset quality criteria?
|
a.
|
Bank A is perceived as safer by both criteria.
|
|
b.
|
Bank B is perceived as safer by both criteria.
|
|
c.
|
Bank A is perceived as safer according to capital,
but more risky according to asset quality.
|
|
d.
|
Bank B is perceived as safer according to capital,
but more risky according to asset quality.
|
27. The
key reason for regulatory examinations (such as CAMELS ratings) is to
|
a.
|
rate past performance.
|
|
b.
|
detect problems of a bank in time to correct them.
|
|
c.
|
check for embezzlement.
|
|
d.
|
monitor reserve requirements.
|
28. Deposit
insurance now covers all bank deposits without imposing any limit.
a.
True
b.
False
29. Which
banking act allowed banks to cross state lines in order to acquire a failing
institution?
|
a.
|
McFadden Act
|
|
b.
|
Glass-Steagall Act
|
|
c.
|
DIDMCA
|
|
d.
|
Garn-St. Germain Act
|
30. Which
banking act allowed for the creation of NOW accounts?
|
a.
|
McFadden Act
|
|
b.
|
Glass-Steagall Act
|
|
c.
|
DIDMCA
|
|
d.
|
Garn-St. Germain Act
|
31. Which
banking act allowed interstate banking?
|
a.
|
Reigle-Neal Interstate Banking and Branching
Efficiency Act
|
|
b.
|
Glass-Steagall Act
|
|
c.
|
DIDMCA
|
|
d.
|
Sarbanes-Oxley Act
|
32. Which
banking act permanently increased FDIC insurance up to $250,000?
|
a.
|
DIDMCA
|
|
b.
|
Sarbanes-Oxley Act
|
|
c.
|
Financial Reform Act
|
|
d.
|
Garn-St. Germain Act
|
33. Which
banking act removed deposit rate ceilings?
|
a.
|
McFadden Act
|
|
b.
|
Glass-Steagall Act
|
|
c.
|
DIDMCA
|
|
d.
|
Garn-St. Germain Act
|
34. The
argument that interstate banking would allow banks to grow and more fully
achieve a reduction in operating costs per unit of output as output increases
is based on
|
a.
|
economies of scale.
|
|
b.
|
financial leverage.
|
|
c.
|
diseconomies of scale.
|
|
d.
|
capital adequacy theory.
|
35. Federal
deposit insurance
|
a.
|
existed since the 1800s.
|
|
b.
|
was created in 1933.
|
|
c.
|
was created after World War II.
|
|
d.
|
was created in 1960.
|
36. ____
is not a characteristics used by the Federal Deposit Insurance Corporation
(FDIC) to rate banks.
|
a.
|
Capital adequacy
|
|
b.
|
Current stock price
|
|
c.
|
Asset quality
|
|
d.
|
Management
|
|
e.
|
All of the above are used by the FDIC to rate
banks.
|
37. The
moral hazard problem is minimized when deposit insurance premiums are
|
a.
|
zero (not imposed by the FDIC).
|
|
b.
|
the same percentage of assets for all banks.
|
|
c.
|
set at a fixed percentage of assets for large
banks, and is zero for small banks.
|
|
d.
|
set at a percentage of assets that is based on the
bank's risk level.
|
38. Which
of the following statements is incorrect with respect to the Financial Services
Modernization Act of 1999?
|
a.
|
It complemented the Glass-Steagall Act.
|
|
b.
|
It enabled commercial banks to more easily pursue
securities and insurance activities.
|
|
c.
|
It gave securities firms and insurance companies
the right to acquire banks.
|
|
d.
|
The Act requires that commercial banks must have a
strong rating in community lending in order to pursue additional expansion in
securities and other nonbank activities.
|
|
e.
|
All of the above are true.
|
39. The
____ is the fund used to cover insured depositors.
|
a.
|
Bank Insurance Fund
|
|
b.
|
Federal Deposit Insurance Corporation (FDIC)
|
|
c.
|
money market mutual fund
|
|
d.
|
growth fund
|
|
e.
|
none of the above
|
40. ____
is not a rating criterion used by the FDIC.
|
a.
|
Capital adequacy
|
|
b.
|
Off-balance sheet financing
|
|
c.
|
Asset quality
|
|
d.
|
Management
|
|
e.
|
Liquidity
|
41. The
uniform global capital requirements mandated a minimum level of Tier 1 capital,
which primarily consists of funds obtained from
|
a.
|
issuing commercial paper and bonds.
|
|
b.
|
retaining earnings and issuing commercial paper.
|
|
c.
|
retaining earnings and issuing common stock.
|
|
d.
|
issuing bonds and common stock.
|
42. During
the 2008-2010 period, the ____ was implemented to alleviate the financial
problems experienced by banks and other financial institutions with excessive
exposure to mortgages or mortgage-backed securities.
|
a.
|
Riegle Program
|
|
b.
|
Sarbanes-Oxley Program
|
|
c.
|
FDIC Program
|
|
d.
|
Troubled Asset Relief Program (TARP)
|
43. The
act of taking a risk because of protection from adverse consequences due to the
risk is referred to as a moral hazard problem.
a.
True
b.
False
44. The
Sarbanes-Oxley Act (SOX) was enacted in 2002 in order to ensure a more
transparent process for reporting on productivity and the financial condition
of the firm.
a.
True
b.
False
45. The
Sarbanes-Oxley Act (2002) was enacted in response to some banks taking too much
risk.
a.
True
b.
False
46. Publicly-traded
banks have incurred larger reporting expenses to comply with the Sarbanes-Oxley
Act.
a.
True
b.
False
47. The
Financial Services Modernization Act of 1999
|
a.
|
gave banks and other financial service firms less
freedom to merge.
|
|
b.
|
allowed financial institutions to offer a
diversified set of financial services without being subjected to stringent
constraints.
|
|
c.
|
offers very few benefits to a financial
institution's clients.
|
|
d.
|
increased the reliance of financial institutions
on the demand for the single service they offer.
|
48. Which
of the following is not true regarding the Financial Services Modernization Act
of 1999?
|
a.
|
It provided more momentum for the consolidation of
financial services.
|
|
b.
|
Financial institutions were finally able to offer
a diversified set of financial services without being subjected to stringent
constraints on the form or amount of financial services that they could
offer.
|
|
c.
|
Banks and other financial service firms were given
more freedom to merge, but were forced to divest some of the financial
services that they acquired.
|
|
d.
|
Financial institutions no longer had to search for
loopholes or monitor their business to ensure that the degree of financial
services offered remained within the regulatory constraints that were
previously imposed.
|
|
e.
|
all of the above are true
|
49. All
state banks are required to be members of the Federal Reserve System.
a.
True
b.
False
50. State
banks are regulated by the Comptroller of the Currency.
a.
True
b.
False
51. Banks
that are insured by the Federal Deposit Insurance Corporation (FDIC) are also
regulated by the FDIC.
a.
True
b.
False
52. Commercial
banks are allowed to invest in junk bonds.
a.
True
b.
False
53. In
general, banks would prefer to maintain a high amount of capital to boost their
return on equity ratio, yet regulators have argued that banks need only a
sufficient amount of capital to absorb potential operating losses.
a.
True
b.
False
54. The
provision of a letter of credit by a bank to issue commercial paper issued by a
corporation is an example of an off-balance sheet commitment.
a.
True
b.
False
55. As
a result of the Reigle-Neal Act, bank customers have benefited because of lower
costs to banks and because of convenience.
a.
True
b.
False
56. There
is much emphasis by regulators on the bank's sensitivity to interest rate
movements, since many banks have liabilities that are repriced more frequently
than their assets and are adversely affected by rising interest rates.
a.
True
b.
False
57. If
regulators reduce bank failures by imposing regulations that reduce
competition, bank efficiency will be increased.
a.
True
b.
False
58. An
ideal solution to react to a large failing bank would prevent a run on deposits
of other large banks, yet not reward a poorly performing bank with a bailout.
a.
True
b.
False
59. ____
is not a rating criterion used by the Federal Deposit Insurance Corporation
(FDIC).
|
a.
|
Capital adequacy
|
|
b.
|
Off-balance sheet financing
|
|
c.
|
Asset quality
|
|
d.
|
Management
|
|
e.
|
Liquidity
|
60. A
federal bank charter is issued by the
|
a.
|
Comptroller of the Currency.
|
|
b.
|
Securities and Exchange Commission.
|
|
c.
|
U.S. Treasury.
|
|
d.
|
Federal Reserve.
|
|
e.
|
none of the above
|
61. Bank
regulations typically:
|
a.
|
involve a tradeoff between the safety of the
banking system and the efficiency of bank operations.
|
|
b.
|
impose restrictions on the types of assets in
which banks can invest.
|
|
c.
|
set requirements for the minimum amount of capital
that banks must hold.
|
|
d.
|
all of the above
|
62. When
a bank holds a lower level of capital, a given dollar level of profits
represents a lower return on equity.
a.
True
b.
False
63. Shareholders
and managers of banks may prefer that banks be required to hold higher levels
of capital because this would allow for higher share prices for the banks and
larger bonuses for bank managers.
a.
True
b.
False
64. A
bank can increase its capital ratio by:
|
a.
|
buying back shares of its stock from shareholders.
|
|
b.
|
selling assets.
|
|
c.
|
increasing its dividend to encourage more
investors to purchase its stock.
|
|
d.
|
increasing its off-balance sheet activities.
|
65. The
Basel III framework proposes:
|
a.
|
lower capital requirements for banks to enable
them to generate higher earnings to make up for their losses during the
credit crisis.
|
|
b.
|
relying on the rating agencies to assess the risk
of bank assets.
|
|
c.
|
increased capital requirements and liquidity
requirements for banks.
|
|
d.
|
using the gap ratio to set the capital ratio.
|
66. During
the credit crisis, all of the following occurred except:
|
a.
|
some securities firms were allowed to become bank
holding companies.
|
|
b.
|
the Federal Reserve rescued American International
Group, an insurance company.
|
|
c.
|
the Treasury injected funds into financial
institutions.
|
|
d.
|
the Supreme Court ruled that the Federal Reserve
had exceeded its authority by assisting Bear Stearns because Bear was a
securities firm and not a commercial bank.
|
67. The
Volcker rule, named for a former Fed chair:
|
a.
|
is intended to increase the powers of the Fed.
|
|
b.
|
states that the U.S. government will rescue
certain large banks if necessary to reduce systemic risk in the financial
system.
|
|
c.
|
sets limits on banks’ proprietary trading.
|
|
d.
|
requires all banks to undergo annual stress tests.
|
68. The
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) of 2010:
|
a.
|
ended the system of risk-based insurance premiums.
|
|
b.
|
set requirements for the Deposit Insurance Fund’s
reserves.
|
|
c.
|
raised the limit for insured deposits to $750,000
per depositor.
|
|
d.
|
allowed large insurance companies such as American
International Group to compete with the FDIC to insure bank deposits.
|
Chapter
19—Bank Management
1. Which
of the following statements is incorrect?
|
a.
|
Managers may be tempted to make decisions that are
in their own best interests rather than shareholder interests.
|
|
b.
|
Directors are responsible for making most of the
bank's decisions regarding loans to customers, which encourages a loan
department to extend loans with a very high concern for risk.
|
|
c.
|
To prevent agency problems, some banks provide
stock as compensation to managers.
|
|
d.
|
The underlying goal behind the managerial policies
of a bank is to maximize the wealth of the bank's shareholders.
|
2. When
cash outflows temporarily exceed cash inflows, banks are most likely to
experience
|
a.
|
higher dividend payments.
|
|
b.
|
illiquidity.
|
|
c.
|
a negative duration on its assets.
|
|
d.
|
an excess of capital.
|
3. Banks
can resolve cash deficiencies by
|
a.
|
creating additional liabilities.
|
|
b.
|
selling assets.
|
|
c.
|
buying back common stock.
|
|
d.
|
increasing dividend payouts.
|
|
e.
|
A or B
|
4. As
the secondary market for loans has become active, banks are more able to
satisfy their liquidity needs with a ____ proportion of loans while achieving
____ profitability.
|
a.
|
higher; higher
|
|
b.
|
lower; lower
|
|
c.
|
higher; lower
|
|
d.
|
lower; higher
|
5. Banks
are more liquid as a result of securitization because it allows them to request
repayment of the loan principal from the borrower upon demand.
a.
True
b.
False
6. If
a bank that relies heavily on short-term deposits expects interest rates to
consistently decrease over time, it would allocate most of its loans with ____
rates if it desires to maximize its expected returns. It could reduce its
exposure to interest rate risk by setting ____ rates on its loans.
|
a.
|
fixed; fixed
|
|
b.
|
variable; fixed
|
|
c.
|
variable; variable
|
|
d.
|
fixed; variable
|
7. During
a period of rising interest rates, a bank's net interest margin will likely
____ if its liabilities are ____ its assets.
|
a.
|
increase; more rate-sensitive than
|
|
b.
|
decrease; more rate-sensitive than
|
|
c.
|
increase; equally rate-sensitive as
|
|
d.
|
decrease; equally rate-sensitive as
|
8. If
a bank expected interest rates to consistently ____ over time, it will consider
allocating most funds to rate-____ assets.
|
a.
|
decrease; sensitive
|
|
b.
|
decrease; insensitive
|
|
c.
|
increase; insensitive
|
|
d.
|
none of the above
|
9. Petri
Bank had interest revenues of $70 million last year and $30 million in interest
expenses. About $300 million of Petri's $800 million in assets are
rate-sensitive, while $600 million of its liabilities are rate-sensitive. Petri
Bank's net interest margin is ____ percent.
|
a.
|
4.0
|
|
b.
|
3.6
|
|
c.
|
6.7
|
|
d.
|
5.0
|
10. Petri
Bank had interest revenues of $70 million last year and $30 million in interest
expenses. About $300 million of Petri's $800 million in assets are
rate-sensitive, while $600 million of its liabilities are rate-sensitive. Petri
Bank's gap is $____.
|
a.
|
−300 million
|
|
b.
|
300 million
|
|
c.
|
−500 million
|
|
d.
|
500 million
|
11. Petri
Bank had interest revenues of $70 million last year and $30 million in interest
expenses. About $300 million of Petri's $800 million in assets are
rate-sensitive, while $600 million of its liabilities are rate-sensitive. Petri
Bank's gap ratio is ____ percent.
|
a.
|
37.5
|
|
b.
|
50.0
|
|
c.
|
100.0
|
|
d.
|
40.0
|
12. The
measure of interest rate risk that uses the difference between rate-sensitive
assets and rate-sensitive liabilities is called
|
a.
|
gap measurement.
|
|
b.
|
duration measurement.
|
|
c.
|
duration ratio.
|
|
d.
|
gap ratio.
|
13. A
gap ratio of less than one suggests that
|
a.
|
rate-sensitive assets exceed rate-sensitive liabilities.
|
|
b.
|
an increase in interest rates would increase the
bank's net interest margin.
|
|
c.
|
rate-sensitive liabilities exceed rate-sensitive
assets.
|
|
d.
|
a decrease in interest rates would decrease the
bank's net interest margin.
|
|
e.
|
B and D
|
14. Each
bank may have its own classification system of interest rate sensitivity,
because there is no perfect measurement of the gap.
a.
True
b.
False
15. The
duration of zero-coupon bonds will be ____ the duration of coupon bonds with
the same maturity.
|
a.
|
lower than
|
|
b.
|
higher than
|
|
c.
|
the same as
|
|
d.
|
A or B, depending on the size of the coupon
payment
|
16. In
general, the duration of zero-coupon securities with short maturities is ____
than the duration of zero-coupon securities with long maturities.
|
a.
|
higher than
|
|
b.
|
lower than
|
|
c.
|
equal to
|
|
d.
|
A or B, depending on the issuer of the securities
|
17. Other
things equal, assets with shorter maturities have ____ durations. Assets that
generate more frequent coupon payments have ____ durations.
|
a.
|
shorter; longer
|
|
b.
|
shorter; shorter
|
|
c.
|
longer; shorter
|
|
d.
|
longer; longer
|
18. For
most banks, the average duration of assets ____ the average duration of
liabilities, so the duration gap is ____.
|
a.
|
exceeds; zero
|
|
b.
|
exceeds; negative
|
|
c.
|
exceeds; positive
|
|
d.
|
is less than; negative
|
19. Other
things being equal assets with ____ maturities and ____ frequent coupon
payments have shorter durations.
|
a.
|
shorter; more
|
|
b.
|
shorter; less
|
|
c.
|
longer; more
|
|
d.
|
longer; less
|
20. If
a bank attempts to reduce exposure to interest rate risk by replacing long-term
marketable securities with more floating-rate commercial loans, it is likely
that the bank's
|
a.
|
default risk would decrease.
|
|
b.
|
default risk would increase.
|
|
c.
|
liquidity risk would increase.
|
|
d.
|
liquidity risk would decrease.
|
|
e.
|
B and C
|
21. Which
of the following is not a likely method used by a bank to reduce interest rate
risk?
|
a.
|
maturity matching
|
|
b.
|
using fixed-rate loans
|
|
c.
|
using interest rate futures contracts
|
|
d.
|
using interest rate caps
|
22. Floating-rate
loans cannot completely eliminate interest rate risk; if the cost of funds is
changing more frequently than the rate on assets, the bank's net interest
margin is still affected by interest rate fluctuations.
a.
True
b.
False
23. The
____ of interest rate futures ____ the potential adverse effect of rising
interest rates on a bank's interest expenses.
|
a.
|
sale; increases
|
|
b.
|
sale; reduces
|
|
c.
|
purchase; reduces
|
|
d.
|
both A and C are correct
|
24. Which
of the following financial institutions would be most willing to swap
variable-rate payments for fixed-rate payments in order to reduce exposure to
interest rate risk?
|
a.
|
one whose assets and liabilities are equally
interest-rate sensitive
|
|
b.
|
one whose assets are more interest-rate sensitive
than its liabilities
|
|
c.
|
one whose liabilities are more interest-rate
sensitive than its assets
|
|
d.
|
one whose gap ratio is equal to 1.0
|
25. Banks
increase their risk by increasing their capital as a percentage of assets.
a.
True
b.
False
26. Banks
generally ____ loans and ____ their purchases of low-risk securities when the
economy is weak.
|
a.
|
increase; increase
|
|
b.
|
reduce; reduce
|
|
c.
|
increase; reduce
|
|
d.
|
reduce; increase
|
27. Banks
tend to focus their loans in one industry so that they can specialize on one
industry and reduce the credit risk of their loan portfolio.
a.
True
b.
False
28. Most
loan sales enable the bank originating the loan to continue servicing the loan.
a.
True
b.
False
29. ROE
is defined as
|
a.
|
.
|
|
b.
|
.
|
|
c.
|
.
|
|
d.
|
.
|
30. The
greater the ____, the greater the amount of assets per dollar's worth of
equity.
|
a.
|
leverage measure
|
|
b.
|
ratio of equity to debt
|
|
c.
|
capital ratio
|
|
d.
|
proportion of loans to securities in the asset
portfolio
|
31. A
bank has a return on assets of 2 percent, $40 million in assets, and $4 million
in equity. What is the return on equity?
|
a.
|
10 percent
|
|
b.
|
.2 percent
|
|
c.
|
2 percent
|
|
d.
|
20 percent
|
|
e.
|
none of the above
|
32. A
bank has the following asset and liability portfolios. What is the gap?
|
Rate-sensitive
|
Amount
|
|
Rate-sensitive
|
Amount
|
|
assets
|
(in millions)
|
|
liabilities
|
(in millions)
|
|
Floating-rate
|
|
|
|
|
|
loans
|
$4,000
|
|
NOW accounts
|
$1,750
|
|
|
|
|
|
|
|
Floating-rate
|
|
|
|
|
|
mortgages
|
1,000
|
|
MMDAs
|
4,500
|
|
|
|
|
|
|
|
Short-term
|
|
|
|
|
|
Treasury securities
|
1,500
|
|
Short-term CDs
|
1,000
|
|
|
|
|
|
|
|
|
$6,500
|
|
|
$7,250
|
|
a.
|
$750 million
|
|
b.
|
−$750 million
|
|
c.
|
1.12
|
|
d.
|
.896
|
|
e.
|
none of the above
|
33. A
bank has the following asset and liability portfolios. What is the gap ratio?
|
Rate-sensitive
|
Amount
|
|
Rate-sensitive
|
Amount
|
|
assets
|
(in millions)
|
|
liabilities
|
(in millions)
|
|
Floating-rate
|
|
|
|
|
|
loans
|
$4,000
|
|
NOW accounts
|
$1,750
|
|
|
|
|
|
|
|
Floating-rate
|
|
|
|
|
|
mortgages
|
1,000
|
|
MMDAs
|
4,500
|
|
|
|
|
|
|
|
Short-term
|
|
|
|
|
|
Treasury securities
|
1,500
|
|
Short-term CDs
|
1,000
|
|
|
|
|
|
|
|
|
$6,500
|
|
|
$7,250
|
|
a.
|
$750 million
|
|
b.
|
−$750 million
|
|
c.
|
1.12
|
|
d.
|
.896
|
|
e.
|
none of the above
|
34. If
Bank A has a negative gap and Bank B has a positive gap. Which of the following
is true?
|
a.
|
Bank A is more favorably affected by rising
interest rates.
|
|
b.
|
Bank B is more favorably affected by falling
interest rates.
|
|
c.
|
Bank A is adversely affected by falling interest
rates.
|
|
d.
|
none of the above
|
35. Which
of the following is a measure for banks to assess their exposure to interest
rate risk?
|
a.
|
capital ratio
|
|
b.
|
leverage measure
|
|
c.
|
duration measurement
|
|
d.
|
gap ratio
|
|
e.
|
C and D
|
36. If
a bank sells interest rate futures, it ____ of rising interest rates and ____
of declining interest rates on its interest expenses.
|
a.
|
reduces the potential adverse effect; reduces the
potential favorable effect
|
|
b.
|
increases the potential adverse effect; increases
the potential favorable effect
|
|
c.
|
decreases the potential adverse effect; increases
the potential favorable effect
|
|
d.
|
increases the potential adverse effect; decreases
the potential favorable effect
|
37. Which
of the following loan portfolios are best diversified against default risk?
|
a.
|
consumer loans to farmers and commercial loans to
farm equipment dealers in a local area
|
|
b.
|
commercial loans to the same industry
|
|
c.
|
commercial loans to various retail stores in the
same city
|
|
d.
|
consumer and commercial loans to different
industries in different cities
|
38. Banks
can increase their liquidity position by restructuring their asset portfolio to
contain less ____ and more ____.
|
a.
|
excess reserves; Treasury bills
|
|
b.
|
Treasury bonds; corporate bonds
|
|
c.
|
loans; Treasury bills
|
|
d.
|
none of the above
|
39. Banks
would reduce their liquidity position by restructuring their asset portfolio to
contain less ____ and more ____.
|
a.
|
Treasury securities; excess reserves
|
|
b.
|
loans; Treasury securities
|
|
c.
|
corporate bonds; Treasury securities
|
|
d.
|
none of the above
|
40. Banks
can reduce their default risk by restructuring their asset portfolio to contain
less ____ and more ____.
|
a.
|
Treasury bonds; corporate bonds
|
|
b.
|
Treasury bonds; municipal bonds
|
|
c.
|
Treasury bonds; commercial loans
|
|
d.
|
none of the above
|
41. Banks
can increase their potential interest revenues by restructuring their asset
portfolio to contain less ____ and more ____.
|
a.
|
Treasury bonds; commercial loans
|
|
b.
|
Treasury bonds; excess reserves
|
|
c.
|
consumer loans; Treasury bills
|
|
d.
|
none of the above
|
42. If
a bank desired to maximize its net interest margin, it would best achieve its
goal by attempting to obtain most of its funds through ____ and use most of its
funds for ____ (assuming that all loans will be repaid).
|
a.
|
traditional demand deposits; commercial loans
|
|
b.
|
traditional demand deposits; consumer loans
|
|
c.
|
NOW accounts; consumer loans
|
|
d.
|
NOW accounts; commercial loans
|
43. A
bank that holds a greater percentage of traditional demand deposits and loans
will likely incur ____ non-interest expenses and have a ____ net interest
margin than other banks of the same size (assuming that its loan losses are no
higher than those at other banks).
|
a.
|
greater; higher
|
|
b.
|
greater; lower
|
|
c.
|
less; higher
|
|
d.
|
less; lower
|
44. A
bank's net interest margin is commonly defined as
|
a.
|
interest revenues minus interest expenses.
|
|
b.
|
(interest revenues minus interest expenses)/total
assets.
|
|
c.
|
(interest revenues minus interest expenses)/total
liabilities.
|
|
d.
|
(interest revenues minus interest
expenses)/capital.
|
45. A
common method for banks to reduce their default risk is to
|
a.
|
specialize in loans to just one or a few
particular industries in which they have expertise in assessing
creditworthiness.
|
|
b.
|
specialize in loans of companies whose earnings
patterns are quite similar over time.
|
|
c.
|
A and B
|
|
d.
|
none of the above
|
46. International
diversification of loans can best reduce the bank's overall default risk if
|
a.
|
the countries where loans are given are clustered
together in a single continent.
|
|
b.
|
the countries where loans are given have economic
cycles that do not move together over time.
|
|
c.
|
A and B
|
|
d.
|
none of the above
|
47. A
bank's net interest margin will likely decline if it has a large amount of
|
a.
|
rate-sensitive assets and no rate-sensitive
liabilities.
|
|
b.
|
rate-sensitive liabilities and no rate-sensitive
assets.
|
|
c.
|
loans to technology firms.
|
|
d.
|
real estate loans.
|
48. Banks
can reduce their required capital levels by
|
a.
|
increasing their loans.
|
|
b.
|
reducing their loans.
|
|
c.
|
increasing their dividends.
|
|
d.
|
obtaining more deposits.
|
49. Terp
Bank obtains a relatively large portion of its funds from conventional demand
deposits as it creates many branches with many employees to attract demand
deposits. Its interest expenses should be relatively ____, while its
noninterest expenses should be relatively ____.
|
a.
|
high; low
|
|
b.
|
low; high
|
|
c.
|
high; high
|
|
d.
|
low; low
|
|
e.
|
none of the above
|
50. Bank
A has interest revenues of $4 million, interest expenses of $5 million, and
assets totaling $20 million. Bank A's net interest margin is
|
a.
|
$1 million.
|
|
b.
|
−$1 million.
|
|
c.
|
−5 percent.
|
|
d.
|
5 percent.
|
51. ____
is not a method used to assess interest rate risk.
|
a.
|
Efficiency analysis
|
|
b.
|
Gap analysis
|
|
c.
|
Duration analysis
|
|
d.
|
Regression analysis
|
52. Durango
Bank has $2 million in rate-sensitive liabilities and $3 million in rate
sensitive assets. Durango's gap is ____, and Durango is probably more concerned
about a(n) ____ in interest rates.
|
a.
|
−$1 million; increase
|
|
b.
|
−$1 million; decrease
|
|
c.
|
$1 million; increase
|
|
d.
|
$1 million; decrease
|
|
e.
|
none of the above
|
53. Leskar
Bank has $2 million in rate-sensitive liabilities and $3 million in rate
sensitive assets. Leskar's gap ratio is ____.
|
a.
|
1.5
|
|
b.
|
0.67
|
|
c.
|
$1 million
|
|
d.
|
none of the above
|
54. ____
is (are) least likely to be used as a method of reducing interest rate risk.
|
a.
|
Maturity matching
|
|
b.
|
Using floating-rate loans
|
|
c.
|
Stock options
|
|
d.
|
Using interest rate swaps
|
|
e.
|
Using interest rate caps
|
55. Ringo
Bank has a profit after taxes of $3.0 million, total assets of $300 million,
and shareholder's equity of $30 million. Ringo's return on equity (ROE) is ____
percent.
|
a.
|
1.0
|
|
b.
|
10.0
|
|
c.
|
3.0
|
|
d.
|
none of the above
|
56. For
a commercial bank, when the average duration of assets exceeds the average
duration of liabilities, the duration gap is
|
a.
|
zero.
|
|
b.
|
positive.
|
|
c.
|
negative.
|
|
d.
|
B or C
|
57. Assume
a bank accepts deposits on Australian dollars (A$) and makes some fixed-rate
loans in British pounds. Which of the following would reduce the bank's profit
margin?
|
a.
|
the A$ appreciates against the pound
|
|
b.
|
the A$ is stable against the pound
|
|
c.
|
the A$ depreciates against the pound
|
|
d.
|
the British interest rates increase
|
|
e.
|
C and D
|
58. The
performance of a bank that continually concentrates in short-term deposits in
euros and adjustable-rate dollar loans with equal rate-sensitivity is
|
a.
|
unaffected if European interest rates increase and
U.S. rates decrease.
|
|
b.
|
unaffected if U.S. interest rates increase and
European interest rates decrease.
|
|
c.
|
adversely affected if European interest rates
increase and U.S. rates decrease.
|
|
d.
|
adversely affected if U.S. interest rates increase
and European rates decrease.
|
|
e.
|
A and B
|
59. If
a bank has assets and liabilities in dollars and euros, its exposure to
interest rate risk can best be minimized if the
|
a.
|
currency mix of assets is similar to that of
liabilities.
|
|
b.
|
overall rate-sensitivity of assets and liabilities
are similar.
|
|
c.
|
rate sensitivity of assets and liabilities is
matched for each currency.
|
|
d.
|
A and B
|
60. The
risk of a loss due to closing out a transaction is referred to as ____ risk.
|
a.
|
credit
|
|
b.
|
settlement
|
|
c.
|
interest rate
|
|
d.
|
exchange rate
|
|
e.
|
none of the above
|
61. The
Sarbanes-Oxley Act has had little impact on the monitoring conducted by the
board members of commercial banks.
a.
True
b.
False
62. Whether
a bank has a temporary or a permanent need for funds, the decision should be to
borrow in the federal funds market.
a.
True
b.
False
63. A
positive gap (or gap ratio of more than 1.00) suggests that rate-sensitive liabilities
exceed rate-sensitive assets.
a.
True
b.
False
64. For
most banks, the average duration of liabilities exceeds the average duration of
assets, so the duration gap is positive.
a.
True
b.
False
65. Floating-rate
loans completely eliminate interest rate risk.
a.
True
b.
False
66. A
bank can usually simultaneously maximize its return on assets and minimize
credit risk.
a.
True
b.
False
67. If
the currency mix of a bank's assets is similar to that of its liabilities and
the overall rate sensitivity of its assets and liabilities is similar, interest
rate risk is completely nonexistent.
a.
True
b.
False
68. Macon
Bank has interest revenues of $4 million, interest expenses of $5 million, and assets
totaling $20 million. Macon Bank's net interest margin is
|
a.
|
$1 million.
|
|
b.
|
−1 million.
|
|
c.
|
5 percent.
|
|
d.
|
−5 percent.
|
69. ____
is not a method used to assess interest rate risk.
|
a.
|
Gap analysis
|
|
b.
|
Ratio analysis
|
|
c.
|
Duration analysis
|
|
d.
|
Regression analysis
|
|
e.
|
All of the above are methods to assess interest
rate risk.
|
70. ____
is (are) least likely to be used as a method of reducing interest rate risk.
|
a.
|
Maturity matching
|
|
b.
|
Floating-rate loans
|
|
c.
|
Stock options
|
|
d.
|
Interest rate swaps
|
|
e.
|
Interest rate caps
|
71. Crazer
Bank has a profit after taxes of $2 million, total assets of $100 million, and
shareholder's equity of $10 million. Crazer's return on equity (ROE) is ____
percent.
|
a.
|
18
|
|
b.
|
210
|
|
c.
|
15
|
|
d.
|
20
|
|
e.
|
none of the above
|
72. Parsons
Bank reported $3 million in interest revenues and $1 million in interest
expenses. Parsons has $20 million in assets and $8 million in liabilities.
Parsons net interest margin is ____ percent.
|
a.
|
10
|
|
b.
|
−10
|
|
c.
|
35
|
|
d.
|
25
|
|
e.
|
none of the above
|
73. If
a bank expects interest rates to consistently ____ over time, it will consider
allocating most of its funds to rate-____ assets.
|
a.
|
decrease; sensitive
|
|
b.
|
increase; insensitive
|
|
c.
|
increase; sensitive
|
|
d.
|
answers A and B are correct
|
|
e.
|
none of the above
|
74. During
a period of ____ interest rates, a bank's net interest margin will likely ____
if its liabilities are more rate sensitive than its assets.
|
a.
|
decreasing; decrease
|
|
b.
|
increasing; increase
|
|
c.
|
decreasing; increase
|
|
d.
|
increasing; decrease
|
|
e.
|
answers C and D are correct
|
75. If
interest rates ____, banks with ____ duration gaps will be ____ affected.
|
a.
|
rise; positive; positively
|
|
b.
|
rise; positive; adversely
|
|
c.
|
decrease; positive; adversely
|
|
d.
|
decrease; negative; positively
|
|
e.
|
none of the above
|
76. In
a regression of a bank's stock return on an interest rate proxy and market
returns, a ____ coefficient for the interest rate variable suggests that bank
performance is ____ affected by ____ interest rates.
|
a.
|
positive; adversely; rising
|
|
b.
|
positive; favorably; declining
|
|
c.
|
negative; adversely; rising
|
|
d.
|
negative; favorably; rising
|
|
e.
|
none of the above
|
77. If
a bank has a ____ duration gap, its average asset duration is probably ____
than its liability duration.
|
a.
|
negative; smaller
|
|
b.
|
positive; larger
|
|
c.
|
negative; larger
|
|
d.
|
none of the above
|
78. In
an interest rate swap, a bank whose liabilities are ____ rate sensitive than
its assets can swap payments with a ____ interest rate in exchange for payments
with a ____ interest rate.
|
a.
|
more; fixed; variable
|
|
b.
|
more; variable; fixed
|
|
c.
|
less; fixed; variable
|
|
d.
|
less; fixed; fixed
|
|
e.
|
none of the above
|
79. Because
riskier assets offer ____ returns, a bank's strategy to increase its return
will typically entail a(n) ____ in the overall credit risk of its asset
portfolio.
|
a.
|
lower; increase
|
|
b.
|
lower; decrease
|
|
c.
|
higher; increase
|
|
d.
|
higher; decrease
|
|
e.
|
none of the above
|
80. The
risk of a loss due to closing out a transaction is referred to as ____ risk.
|
a.
|
settlement
|
|
b.
|
credit
|
|
c.
|
interest rate
|
|
d.
|
exchange rate
|
|
e.
|
none of the above
|
81. An
effective way to align bank managers’ interests with shareholders’ goal of
higher returns is to compensate the managers with fixed salaries without a
bonus.
a.
True
b.
False
82. Which
of the following is not a function of a bank’s board of directors?
|
a.
|
overseeing acquisitions
|
|
b.
|
determining a compensation system for the bank’s
executives
|
|
c.
|
overseeing policies for changing the bank’s
capital structure
|
|
d.
|
pursuing a proxy contest to change the bank’s
dividend policy
|
83. As
part of its liquidity management, a bank might:
|
a.
|
purchase interest rate swaps.
|
|
b.
|
issue commercial paper.
|
|
c.
|
purchase long-term Treasury securities.
|
|
d.
|
A and C
|
84. A(n)
____________ is an agreement for a fee to receive payments when the interest
rate of a particular security rises above a specified level by a specified
date.
|
a.
|
interest rate cap
|
|
b.
|
interest rate futures contract
|
|
c.
|
interest rate swap
|
|
d.
|
maximum rate contract
|
85. Which
of the following is a method that a bank can use to reduce its credit risk?
|
a.
|
diversifying its loans across industries
|
|
b.
|
focusing on credit card loans
|
|
c.
|
focusing on consumer loans
|
|
d.
|
selling its holdings of Treasury securities
|
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