Advanced Bank Management
Pre-Test Questions
Course Introduction
Advanced Bank Management delves into the strategic, risk-related, and operational aspects of modern banking, equipping students with the knowledge to manage commercial banks in a complex and evolving financial landscape. The course covers topics such as asset-liability management, credit and market risk assessment, regulatory compliance, loan portfolio management, capital adequacy, and banking technology advancements. Students will analyze real-world case studies to understand decision-making processes, develop a keen insight into issues faced by bank managers, and gain practical skills in financial analysis, risk mitigation, and effective resource allocation within a banking environment.
Recommended Textbook
Financial Institutions Management A Risk Management Approach 8th Edition by Saunders
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Chapter 1: Why Are Financial Institutions Special
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Sample Questions
Q1) Regulation of FIs is an attempt to enhance the social welfare benefits and mitigate the social costs of providing FI services.
A)True
B)False
Answer: True
Q2) Investment companies are successful in attracting business away from banks and insurance companies primarily because they
A)guarantee higher rates of return on savers' funds.
B)remove interest rate risk for the saver.
C)have no liquidity risk.
D)give savers cheaper access to the direct securities markets.
E)offer lower loan rates.
Answer: D
Q3) When an FI functions as a broker, they are selling a financial asset that they have created and will continue to hold on their balance sheet.
A)True
B)False
Answer: False
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3
Chapter 2: Financial Services: Depository Institutions
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Sample Questions
Q1) Savings institutions enjoyed record profitability during the late 1990s and early 2000s.
A)True
B)False Answer: True
Q2) Lehman Brothers failed during the recent financial crisis despite having access to the low cost sources of funds offered by the Federal Reserve.
A)True
B)False Answer: False
Q3) Commercial banks have had limited power to underwrite corporate securities since 1987.
A)True
B)False Answer: True
Q4) Large money center banks are often primary dealers in the U.S. Treasury markets.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Financial Services: Finance Companies
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Sample Questions
Q1) As an industry, finance companies have escaped the merger and consolidation activity that has affected nearly every other sector of the financial services industry.
A)True
B)False
Answer: False
Q2) Personal credit institutions may be willing to approve of collateral that depository institutions do not find acceptable.
A)True
B)False
Answer: True
Q3) Traditionally, motor vehicle loans and leases are the largest category of consumer loans for finance companies.
A)True
B)False
Answer: True
Q4) General Electric Capital Corporation is considered a captive finance company. A)True
B)False Answer: True
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Chapter 4: Financial Services: Securities Brokerage and Investment Banking
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Sample Questions
Q1) Offering bank deposit-like accounts to individual customers by a securities firm involves
A)the function of investing.
B)the function of cash management.
C)the function of market making.
D)the function of trading.
E)the function of investment banking.
Q2) The dominant form of institutional venture capital firms operate as A)Corporation.
B)Subsidiary of a financial company.
C)Bank holding company.
D)Limited partnership.
E)General partnership.
Q3) What would be the profit to the investment banker it were able to sell all 10 million shares for $12.75 per share?
A)Profit of $2,250,000.
B)Loss of $7,500,000.
C)Profit of $7,500,000.
D)Loss of $3,000,000.
E)Profit of $3,750,000.
Page 6
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Chapter 5: Financial Services: Mutual Funds and Hedge Funds
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Sample Questions
Q1) As of 2012, Commercial banks are not allowed to own or invest in mutual funds.
A)True
B)False
Q2) The net asset value of a mutual fund is determined four times each business day.
A)True
B)False
Q3) It is estimated that 75 percent of all hedge funds are located in A)Bermuda.
B)Hong Kong.
C)Cayman Islands.
D)Luxembourg.
E)San Marino.
Q4) As a result of illegal and abusive activities in recent years, new rules and regulations were imposed on mutual fund companies in 2004. These rules were intended to A)close legal loopholes that some fund managers had abused.
B)improve fund governance.
C)give investors more information about conflicts of interest.
D)ensure the accuracy of information given to regulators.
E)All of the above.
7
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Chapter 6: Financial Services: Insurance
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Sample Questions
Q1) Although life insurance companies also provide health and accident insurance, they underwrite less than 35% of all health insurance policies.
A)True
B)False
Q2) The largest asset on property-casualty insurers' balance sheet as of 2012 was A)cash.
B)bonds.
C)common stock.
D)short-term securities.
E)mortgages and mortgage-backed investments.
Q3) Annuities offered by life insurance companies are a financial contract that A)is used to build up a fund.
B)pays only fixed returns to groups of employees.
C)is used to liquidate a fund.
D)pays only variable returns to individuals.
E)None of the above are correct.
Q4) As of 2011, ordinary life accounted for approximately 80% of policies in force.
A)True
B)False
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Chapter 7: Risks of Financial Institutions
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Sample Questions
Q1) Control of the future supply of funds available to a foreign country is one method to ensure the repayment of an existing debt.
A)True
B)False
Q2) Which of the following situations pose a refinancing risk for an FI?
A)An FI issues $10 million of liabilities of one-year maturity to finance the purchase of $10 million of assets with a two-year maturity.
B)An FI issues $10 million of liabilities of two-year maturity to finance the purchase of $10 million of assets with a two-year maturity.
C)An FI issues $10 million of liabilities of three-year maturity to finance the purchase of $10 million of assets with a two-year maturity.
D)An FI matches the maturity of its assets and liabilities.
E)All of the above.
Q3) During a liquidity crisis assets normally must be sold at a loss because of the rising interest rates caused by financial institutions attempting to raise funds.
A)True
B)False
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Chapter 8: Interest Rate Risk I
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Sample Questions
Q1) The economic insolvency of many thrift institutions during the 1980s was due, at least in part, to unexpected increases in interest rates.
A)True
B)False
Q2) Which theory of term structure posits that long-term rates are a geometric average of current and expected short-term interest rates?
A)The unbiased expectations theory.
B)The liquidity premium theory.
C)The loanable funds theory.
D)The market segmentation theory.
E)None of the above.
Q3) If interest rates increase 75 basis points for an FI that has a gap of -$15 million, the expected change in net interest income is
A)-$112,500.
B)+$112,500.
C)+$1,125,0000.
D)-$1,125,0000.
E)-$150,000.
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10
Chapter 9: Interest Rate Risk II
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Sample Questions
Q1) Calculate the duration of a two-year corporate loan paying 6 percent interest annually, selling at par. The $30,000,000 loan is 100 percent amortizing with annual payments.
A)2 years.
B)1.89 years.
C)1.94 years.
D)1.49 years.
E)1.73 years.
Q2) For a given maturity fixed-income asset, duration increases as the promised interest payment declines.
A)True
B)False
Q3) Convexity is a desirable effect to a portfolio manager because it is easy to measure and price.
A)True
B)False
Q4) In most countries FIs report their balance sheet using market value accounting.
A)True
B)False
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Chapter 10: Credit Risk: Individual Loan Risk
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Sample Questions
Q1) During the decade of the 1990s the asset quality of U.S. banks continued to improve.
A)True
B)False
Q2) The marginal mortality rate is the probability of a bond or loan defaulting in any given year after it is issued.
A)True
B)False
Q3) The mortality rate is the past default experience of all loans, regardless of quality.
A)True
B)False
Q4) Adjusting interest rates, fees, and other terms upward for increasing amounts of default risk is a way to attempt to realize the expected return on the loan.
A)True
B)False
Q5) RAROC is a measure of a firm's cost of debt. A)True
B)False
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Chapter 11: Credit Risk: Loan Portfolio and Concentration
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Sample Questions
Q1) On loans fully secured by physical, non-real estate loans, the Basel Committee has set a loss given defaults (LGD) rate of
A)15 percent
B)25 percent
C)40 percent
D)45 percent
E)60 percent
Q2) What is Bank A's standard deviation of its asset allocation proportions relative to the national banks average? Use the formula in the textbook.
A)7.23 percent.
B)10.89 percent.
C)18.71 percent.
D)19.15 percent.
E)27.36 percent.
Q3) Most portfolio managers will accept some level of risk above the minimum risk portfolio if they expect to receive higher returns.
A)True
B)False
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Chapter 12: Liquidity Risk
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Sample Questions
Q1) Even with liquidity planning, net deposit withdrawals and/or the exercise of loan commitments can pose significant liquidity problems for banks.
A)True
B)False
Q2) Insurance companies have had to deal with liability runs by policyholders.
A)True
B)False
Q3) What is the impact of a 50 basis point increase in interest rates on the net asset value of an open-end bond mutual fund holding a seven year, $100 million face value 7 percent annual coupon bond selling at par? The fund has 10 million shares.
A)An increase of $0.24 per share.
B)A decrease of $0.265 per share.
C)An increase of $0.05 per share.
D)A decrease of $0.05 per share.
E)An increase of $0.265 per sharE.
Q4) During the financial crisis of 2008, there were large deposit inflows to the banking system.
A)True
B)False
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Chapter 13: Foreign Exchange Risk
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Sample Questions
Q1) What is the end of year profit or loss on the bank's cash position if in one year both Canadian bond rates increase to 7.538 percent and the exchange rate falls to US $0.765 per Canadian dollar? (Assume no change in U.S. interest rates.)
A)Loss of US $12,000.
B)Loss of US $75,000.
C)Profit of C $9,000.
D)Profit of US $50,000.
E)Loss of C $119,800.
Q2) The greater the volatility of foreign exchange rates given any net exposure position, the greater the fluctuations in value of the foreign exchange portfolio.
A)True
B)False
Q3) Profits in foreign exchange trading have grown despite the decreased volatility in FX rates in European countries.
A)True
B)False
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15
Chapter 14: Sovereign Risk
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Sample Questions
Q1) As recent economic conditions improved, trading volumes in the secondary market for LCD and EM debt reached approximately $6.5 trillion in 2011.
A)True
B)False
Q2) Performing loans in the LDC debt market are loans on which the foreign country is making promised payments.
A)True
B)False
Q3) Buyers of LDC debt in secondary markets typically are large FIs who are willing to accept write-downs of loans on their balance sheets.
A)True
B)False
Q4) Sellers of LDC debt in secondary markets include small FIs wishing to disengage themselves from the LDC market.
A)True
B)False
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Page 16
Chapter 15: Market Risk
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Sample Questions
Q1) What is the one-day, 99% confidence level, value at risk (VAR) of securities Alpha and Beta, respectively (in millions)?
A)$3 and $25.50
B)$3 and $0.75
C)$248 and 248
D)$300 and $300
E)300 and 3,300
Q2) The use of expected shortfall (ES) to measure market risk of a portfolio assumes which of the following?
A)There is a very small sample size (<30 observations) used to estimate probability distributions.
B)That the probability distribution is skewed to the left.
C)That changes in asset prices are normally distributed but with fat tails.
D)That the probability distribution is skewed to the right.
E)That changes in asset prices follow a standard normal probability distribution.
Q3) The Volker Rule is intended to reduce market risk at depository institutions.
A)True
B)False
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Chapter 16: Off-Balance-Sheet Risk
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Sample Questions
Q1) The ability to form financial holding companies for the purpose of creating full-service financial institutions has caused an increase in affiliate risk.
A)True
B)False
Q2) Which of the following is true of the delta of an option?
A)It lies between 0 and 0.5.
B)It is always negative.
C)It lies between 0 and 1.
D)It is greater than 1.
E)It is always equal to 1.
Q3) Interest rate risk is part of the loan commitment contingent risk because of the uncertainty of changes in interest rates before the borrower exercises his option to borrow.
A)True
B)False
Q4) As compared to LCs, SLCs typically are used to cover contingencies that potentially are more severe and which may not be trade related.
A)True
B)False
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Chapter 17: Technology and Other Operational Risks
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Sample Questions
Q1) As of January 2012, which of the following represented the highest percent of the dollar value of noncash transactions worldwide?
A)Checks.
B)Card payments.
C)Debit transfers.
D)E-money payments.
E)Credit transfers.
Q2) As of 2012, the combined value of payments sent over Fedwire and CHIPS often exceeded $5.0 trillion a day.
A)True
B)False
Q3) Which is the most important banking area in which technology has had an impact?
A)Cash-management services.
B)Residential mortgage lending.
C)Issuance of certificates of deposit.
D)Credit approval.
E)None of the above.
Q4) Funds transferred on CHIPS are settled at the end of the day.
A)True
B)False
Page 19
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Chapter 18: Liability and Liquidity Management
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Sample Questions
Q1) The interbank funds market is a potential source for increasing reserves to meet required reserves.
A)True
B)False
Q2) Suppose the minimum balance to earn interest was lowered from $500 to $300 and she now pays a service charge of 5 cents per check. Note that it costs the bank 10 cents to process each check. What is her annual gross interest return?
A)$53.75.
B)$54.63.
C)$52.06.
D)$51.54.
E)$55.37.
Q3) What are the average daily demand deposit balances over the reserve computation period beginning the week of June 12?
A)$286 million.
B)$296 million.
C)$306 million.
D)$326 million.
E)$352 million.
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Page 20
Chapter 19: Deposit Insurance and Other Liability
Guarantees
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Sample Questions
Q1) What is the cost to the uninsured depositors if the insured depositor transfer resolution method is used by the regulators to resolve the bank failure?
A)$0.
B)$20 million.
C)$30 million.
D)$40 million.
E)$60 million.
Q2) Which of the following is a drawback of charging flat deposit insurance premiums?
A)The FDIC acts more like a private property-casualty insurer when charging flat premiums.
B)It discourages banks from taking risks.
C)Both high risk and low risk banks are charged the same premium rate.
D)High risk banks will be charged an unreasonably high premium rate.
E)Premiums reflect the expected private costs or losses to the insurer from the provision of deposit insurance.
Q3) The risk of moral hazard increases when capital levels are low.
A)True
B)False
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Chapter 20: Capital Adequacy
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Sample Questions
Q1) The determination of risk-adjusted on-balance-sheet assets under Basel III requires the segregation of assets into nine categories of credit risk exposure.
A)True
B)False
Q2) The concept of prompt corrective action refers to the requirement
A)that bank managers must address problems in the loan portfolio when they are first identified.
B)that regulators must take specific actions when bank capital levels fall outside the well-capitalized category.
C)that a receiver must be appointed when a bank's book value of capital to assets falls below 2 percent.
D)that b and c above are correct.
E)that all of the above are correct.
Q3) Basel I (1993) requires banks in the member countries of the Bank for International Settlements to utilize risk-based capital ratios.
A)True
B)False
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Page 22
Chapter 21: Product and Geographic Expansion
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Sample Questions
Q1) A value below 1,000 of the Herfindahl-Hirschman Index (HHI) is considered to reflect
A)a highly concentrated market.
B)an unconcentrated market.
C)a high growth market.
D)a moderately concentrated market.
E)an untapped market.
Q2) A disadvantage to international bank expansion is the potential increase in the monitoring and information collection costs in some overseas markets.
A)True
B)False
Q3) Economies of scope opportunities seem to be available in the financial services industry, but economies of scale opportunities do not seem to exist.
A)True
B)False
Q4) The Glass-Steagall Act allowed commercial banks to underwrite new issues of Treasury securities.
A)True
B)False
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Chapter 22: Futures and Forwards
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Sample Questions
Q1) Securities firms
A)Net buyer
B)Net seller
Q2) What does R<sup>2</sup> = 0 indicate?
A)Changes in the spot rate and changes in the futures price are perfectly correlated.
B)All observations between changes in spot rate and changes in futures price lie on a straight line.
C)The spot and future exchange rates are expected to move imperfectly together.
D)The FI must sell a greater number of futures to hedge the cash position.
E)There is no statistical association between changes in spot rates and changes in futures price.
Q3) Banks
A)Net buyer
B)Net seller
Q4) Hedging selectively only a portion of the balance sheet is an attempt to increase the return of the FI by accepting some level of interest rate risk.
A)True
B)False
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Chapter 23: Options, Caps, Floors, and Collars
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Sample Questions
Q1) What is the yield to maturity for the two-year bond if held to maturity?
A)11.00 percent.
B)10.00 percent.
C)13.54 percent.
D)11.60 percent.
E)10.40 percent.
Q2) Buying a floor means buying a put option on interest rates.
A)True
B)False
Q3) Giving the purchaser the right to buy the underlying security at a prespecified price is a
A)put option.
B)call option.
C)naked option.
D)futures option.
E)credit spread call option.
Q4) The payoff values on bond options are positively linked to the changes in interest rates.
A)True
B)False
Page 25
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Chapter 24: Swaps
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Q1) The fastest growing group of swaps in recent years has been those designed to help FIs manage interest rate risk.
A)True
B)False
Q2) The party in a swap that receives fixed-rate payments will always have zero basis risk since the fixed-rate swap payments can be structured to cover the fixed-rate liability payments.
A)True
B)False
Q3) The secondary market for the trading of swaps is second in liquidity to the U.S. T-bill market.
A)True
B)False
Q4) At the end of 2012, the world-wide notational value of swap agreements was less than $400 trillion.
A)True
B)False
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26
Chapter 25: Loan Sales
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Q1) Loan assignments make up more than 90 percent of the U.S. domestic loan sale market because
A)they have lower capital requirements than other types of loan sales.
B)they are riskier than are other types of loan sales.
C)monitoring costs are reduced since all rights are transferred upon sale.
D)regulators prefer these transactions to loan participations.
E)there is no secondary market in loan participations.
Q2) One way to boost the capital to assets ratio of an FI is through loan sales.
A)True
B)False
Q3) Which of the following is NOT a reason for FIs to sell loans?
A)Loan diversification.
B)To reduce required reserves.
C)To reduce required capital.
D)To reduce costs of credit risk assessment.
E)To provide liquidity.
Q4) Mutual funds are prohibited from purchasing/participating in the FI loan sales market by the SEC.
A)True
B)False
Page 27
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Chapter 26: Securitization
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Q1) Prepayment models are attempts by professional mortgage portfolio managers to estimate the rate of prepayment on given mortgage pools.
A)True
B)False
Q2) The characteristics of a Collateralized Mortgage Obligation (CMO) securities issue include all of the following EXCEPT
A)the tranches will have different coupon rates.
B)the CMO securities are insured separately from the GNMA pass-through securities. C)the principal payments are made totally to the earliest remaining tranche.
D)GNMA pass-through securities are used as collateral in a trust to support the CMOs. E)the CMO securities are split into different tranches or groupings.
Q3) At market rates substantially below the mortgage coupon rate of an interest-only (IO) mortgage-backed strip, the prepayment effect will dominate the discount effect resulting in a decrease in the price of the IO strip.
A)True
B)False
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