Fin 350 week 9 quiz strayer

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

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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. Trueb. 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.


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. Trueb. 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. Trueb. 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. Trueb. 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


c. DIDMCA


31. Which banking act allowed interstate banking?

a. Reigle-Neal Interstate Banking and Branching Efficiency 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


33. Which banking act removed deposit rate ceilings?

a. McFadden Act


c. DIDMCA


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. Trueb. 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. Trueb. False

45. The Sarbanes-Oxley Act (2002) was enacted in response to some banks taking too much

risk.a. Trueb. False

46. Publicly-traded banks have incurred larger reporting expenses to comply with the Sarbanes-Oxley Act.a. Trueb. 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. Trueb. False

50. State banks are regulated by the Comptroller of the Currency.a. Trueb. False

51. Banks that are insured by the Federal Deposit Insurance Corporation (FDIC) are also regulated by the FDIC.a. Trueb. False

52. Commercial banks are allowed to invest in junk bonds.a. Trueb. 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. Trueb. 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. Trueb. 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. Trueb. 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. Trueb. False

57. If regulators reduce bank failures by imposing regulations that reduce competition, bank efficiency will be increased.a. Trueb. 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. Trueb. 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.


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. Trueb. 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. Trueb. 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. Trueb. 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


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. Trueb. 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. Trueb. 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. Trueb. 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. Trueb. False

28. Most loan sales enable the bank originating the loan to continue servicing the loan.a. Trueb. 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


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


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


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.


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


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


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


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


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


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


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


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


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


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


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


61. The Sarbanes-Oxley Act has had little impact on the monitoring conducted by the board members of commercial banks.a. Trueb. 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. Trueb. False

63. A positive gap (or gap ratio of more than 1.00) suggests that rate-sensitive liabilities exceed rate-sensitive assets.a. Trueb. False

64. For most banks, the average duration of liabilities exceeds the average duration of assets, so the duration gap is positive.a. Trueb. False

65. Floating-rate loans completely eliminate interest rate risk.a. Trueb. False

66. A bank can usually simultaneously maximize its return on assets and minimize credit risk.a. Trueb. 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. Trueb. 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


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


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


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


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


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


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


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


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


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. Trueb. 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

Technology

Fin 350 week 9 quiz strayer