Bank Management Exam Questions
Course Introduction
Bank Management explores the principles, practices, and challenges involved in the effective operation and supervision of banks and financial institutions. The course covers key topics such as organizational structure, risk management, asset-liability management, regulatory compliance, and strategic planning within the banking sector. Students will learn about the roles of bank officers, credit operations, loan portfolio management, liquidity management, and the impact of economic factors on banking performance. Emphasis is placed on current trends and technologies affecting banking, ethical standards, and the global financial environment to prepare students for decision-making and leadership roles in the financial services industry.
Recommended Textbook
Financial Markets and Institutions 7th Edition by Frederic
S. Mishkin
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2183 Verified Questions
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Chapter 1: Why Study Financial Markets and Institutions
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Sample Questions
Q1) A security
A)is a claim or price of property that is subject to ownership.
B)promises that payments will be made periodically for a specified period of time.
C)is the price paid for the usage of funds.
D)is a claim on the issuer's future income.
Answer: D
Q2) The largest one-day drop in the history of the American stock markets occurred in A)1929.
B)1987.
C)2000.
D)2001.
Answer: B
Q3) Monetary policy affects interest rates but has little effect on inflation or business cycles.
A)True
B)False Answer: False
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Chapter 2: Overview of the Financial System
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Sample Questions
Q1) Bonds that are sold in a foreign country and are denominated in a currency other than that of the country in which they are sold are known as A)foreign bonds.
B)Eurobonds.
C)Eurocurrencies.
D)Eurodollars.
Answer: B
Q2) A financial intermediary's risk-sharing activities are also referred to as asset transformation.
A)True
B)False
Answer: True
Q3) American investors pay attention to only the Dow Jones Industrial Average. A)True
B)False
Answer: False
Q4) What are adverse selection and moral hazard?
Answer: not answered
Q5) Why are financial intermediaries so important to an economy?
Answer: not answered
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Chapter 3: What Do Interest Rates Mean and What Is Their
Role in Valuation
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Sample Questions
Q1) Changes in interest rates make investments in long-term bonds risky.
A)True
B)False
Answer: True
Q2) What is the return on a 5 percent coupon bond that initially sells for $1,000 and sells for $1,200 one year later?
A)5 percent
B)10 percent
C)-5 percent
D)25 percent
E)None of the above
Answer: D
Q3) In which of the following situations would you prefer to be making a loan?
A)The interest rate is 9 percent and the expected inflation rate is 7 percent.
B)The interest rate is 4 percent and the expected inflation rate is 1 percent.
C)The interest rate is 13 percent and the expected inflation rate is 15 percent.
D)The interest rate is 25 percent and the expected inflation rate is 50 percent.
Answer: B
Q4) Why may a bond's rate of return differ from its yield to maturity?
Answer: not answered
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Chapter 4: Why Do Interest Rates Change
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Sample Questions
Q1) An increase in the expected rate of inflation causes the demand for bonds to ________ and the supply for bonds to ________.
A)fall; fall
B)fall; rise
C)rise; fall
D)rise; rise
Q2) The loanable funds framework is easier to use when analyzing the effects of changes in ________, while the liquidity preference framework provides a simpler analysis of the effects from changes in income, the price level, and the supply of ________
A)expected inflation; bonds.
B)expected inflation; money.
C)government budget deficits; bonds.
D)the supply of money; bonds.
Q3) Use the bond demand and supply framework to explain the Fisher effect and why it occurs.
Q4) When interest rates decrease, the demand curve for bonds shifts to the left.
A)True
B)False
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Chapter 5: How Do Risk and Term Structure Affect Interest
Rates
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Q1) When the corporate bond market becomes more liquid, other things equal, the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________.
A)right; right
B)right; left
C)left; left
D)left; right
Q2) When the default risk on corporate bonds decreases, other things equal, the demand curve for corporate bonds shifts to the ________ and the demand curve for Treasury bonds shifts to the ________.
A)right; right
B)right; left
C)left; left
D)left; right
Q3) Which of the following long-term bonds should have the highest interest rate?
A)Corporate Baa bonds
B)U)S. Treasury bonds
C)Corporate Aaa bonds
D)Municipal bonds
Q4) How would a severe recession affect the risk premium on corporate bonds?
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Chapter 6: Are Financial Markets Efficient
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Sample Questions
Q1) A situation in which the price of an asset differs from its fundamental market value
A)indicates that unexploited profit opportunities exist.
B)indicates that unexploited profit opportunities do not exist.
C)need not indicate that unexploited profit opportunities exist.
D)indicates that the efficient market hypothesis is fundamentally flawed.
Q2) According to the efficient market hypothesis
A)one cannot expect to earn an abnormally high return by purchasing a security.
B)information in newspapers and in the published reports of financial analysts is already reflected in market prices.
C)unexploited profit opportunities abound, thereby explaining why so many people get rich by trading securities.
D)all of the above are true.
E)only A and B of the above are true.
Q3) To say that stock prices follow a "random walk" is to argue that
A)stock prices rise, then fall, then rise again.
B)stock prices rise, then fall in a predictable fashion.
C)stock prices tend to follow trends.
D)stock prices cannot be predicted based on past trends.
Q4) Give evidence both for and against market efficiency.
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Chapter 7: Why Do Financial Institutions Exist
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Sample Questions
Q1) The Sarbanes-Oxley Act of 2002 was passed in response to scandals in the investment banking industry.
A)True
B)False
Q2) Which of the following is not one of the eight basic facts about financial structure?
A)Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower.
B)Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance in which businesses raise funds directly from lenders in financial markets.
C)Collateral is a prevalent feature of debt contracts for both households and businesses. D)New security issues is the most important source of external funds to finance businesses.
Q3) American businesses get more funds from direct financing than from indirect financing.
A)True
B)False
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Chapter 8: Why Do Financial Crises Occur and Why Are
They so Damaging to the Economy
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Questions
Q1) Describe the sequence of events in a financial crisis in an emerging market economy and explain why they can cause economic activity to decline.
Q2) What is the problem with government safety nets, such as deposit insurance, during the formative stages of a financial crisis?
Q3) Because asset markets are relatively small in an emerging market, they play less of a prominent role in a financial crisis in those economies.
A)True
B)False
Q4) When we refer to the shadow banking system, what are we talking about?
A)hedge funds, investment banks, and other nonbank financial firms that supply liquidity
B)the "underground" banking system used for illegal activities
C)the subsidiaries of depository institutions
D)none of the above
Q5) In an emerging market economy, a lending boom and crash are not inevitable outcomes of financial liberalization and globalization. Discuss when a boom and crash will occur, and how it can be avoided.
Q6) What does the "twin crises" in an emerging economy financial crisis refer to?
Page 10
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Chapter 9: Central Banks and the Federal Reserve System
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Q1) The Washington, D.C. Fed bank, with over 30 percent of the system's assets, is the most important Federal Reserve Bank.
A)True
B)False
Q2) The Federal Advisory Council has ________ member(s)from each district.
A)one
B)two
C)three
D)can have any number of
Q3) The designers of the Federal Reserve Act meant to create a central bank characterized by its
A)system of checks and balances and decentralization of power.
B)strong concentration of power in the hands of a few people.
C)inability to function as a lender of last resort.
D)responsiveness to the electorate.
Q4) The ________ of the Board of Governors is the spokesperson for the Fed.
A)chairman
B)president
C)either of the above can be the spokesperson
D)neither of the above
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Chapter 10: Conduct of Monetary Policy: Tools, Goals, Strategy, and
Tactics
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Q1) An advantage of an intermediate targeting strategy is that it provides the Fed with A)more timely information regarding the effect of monetary policy.
B)a slow adjustment process.
C)a target that is precisely correlated with economic activity.
D)all of the above.
E)only A and B of the above.
Q2) The supply curve for reserves shifts to the left and the federal funds rate rises when the Fed
A)raises reserves requirements.
B)does an open market purchase.
C)does an open market sale.
D)raises the discount rate.
Q3) The monetary base consists of A)currency in circulation and reserves.
B)government securities held by the Fed and discount loans.
C)government securities held by the Fed and currency in circulation.
D)discount loans and reserves.
Q4) Discuss how the monetary policy of the European Central Bank is similar to the U.S. How are they different?
Page 12
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Chapter 11: The Money Markets
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Sample Questions
Q1) Asset-backed commercial paper differs from conventional commercial paper in that
A)it is backed (secured)by some bundle of assets.
B)its maturity usually extends well beyond 1 year.
C)both A and B of the above.
D)neither A nor B of the above.
Q2) If the Fed wants to lower the federal funds interest rate, it will ________ the banking system by ________ securities.
A)add reserves to; selling
B)add reserves to; buying
C)remove reserves from; selling
D)remove reserves from; buying
Q3) Activity in money markets increased significantly in the late 1970s and early 1980s because of
A)rising short-term interest rates.
B)regulations that limited what banks could pay for deposits.
C)both A and B of the above.
D)neither A nor B of the above.
Q4) Explain why money market interest rates move so closely together over time.
Q5) What are the main characteristics of money market securities?
Q6) Explain why the money markets are referred to as wholesale markets.
Page 13
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Chapter 12: The Bond Market
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Sample Questions
Q1) The current yield on a $5,000, 8 percent coupon bond selling for $4,000 is A)5%.
B)8%.
C)10%.
D)20%.
E)none of the above.
Q2) Governments never issue stock because they cannot sell ownership claims. A)True
B)False
Q3) What is a convertible bond? How does the convertibility feature affect the bond's price and interest rate?
Q4) The current yield on a $6,000, 10 percent coupon bond selling for $5,000 is A)5%.
B)10%.
C)12%.
D)15%.
Q5) Registered bonds have now been largely replaced by bearer bonds, which do not have coupons.
A)True
B)False
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Chapter 13: The Stock Market
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Sample Questions
Q1) Using the Gordon growth model, explain why the 2001 terrorist attacks and the Enron financial scandal caused stock prices to decline.
Q2) In the generalized dividend valuation model, a stock's value depends only on
A)its future dividend payments and its future price.
B)its future dividend payments and the required return on equity.
C)its future price and the required return on investments on equity.
D)its future dividend payments.
Q3) To list on the NYSE, a firm must
A)have earnings of at least $10 million per year.
B)have at least $500 million in outstanding debt.
C)have a total of $100 million in market value.
D)meet all of the above requirements.
E)meet A and C of the above requirements.
Q4) The Wall Street Journal reports on 23 different indexes in its "Markets Lineup" column.
A)True
B)False
Q5) About half of new equity issues are preferred stock.
A)True
B)False
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Chapter 14: The Mortgage Markets
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Sample Questions
Q1) Down payments are designed to reduce the likelihood of default on mortgage loans.
A)True
B)False
Q2) Which of the following reduces moral hazard for the mortgage borrower?
A)collateral
B)down payments
C)private mortgage insurance
D)borrower qualifications
Q3) Retired people can live on the equity they have in their homes by using a A)GEM.
B)GPM.
C)SAM.
D)RAM.
Q4) Many institutions that make mortgage loans do not want to hold large portfolios of long-term securities, because it would subject them to unacceptably high interest-rate risk.
A)True
B)False
Q5) How does an amortizing mortgage loan differ from a balloon mortgage loan?
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Chapter 15: The Foreign Exchange Market
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Sample Questions
Q1) The theory of purchasing power parity cannot fully explain exchange rate movements because fiscal policy differs across countries.
A)True
B)False
Q2) If the interest rate on foreign deposits increases, holding everything else constant,
A)the expected return on these deposits must also increase.
B)the expected return on domestic deposits must decrease.
C)the expected return on domestic deposits must increase.
D)both A and B of the above.
E)both A and C of the above.
Q3) The theory of purchasing power parity cannot fully explain exchange rate movements because
A)not all goods are identical in different countries.
B)monetary policy differs across countries.
C)some goods are not traded between countries.
D)both A and C of the above.
E)both B and C of the above.
Q4) Explain the logic underlying the law of one price and the theory of purchasing power parity.
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Chapter 16: The International Financial System
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Sample Questions
Q1) A Federal Reserve decision to sell dollars in order to buy foreign assets in the foreign exchange market has the same effect as an open market ________ of bonds to ________ the monetary base and the money supply.
A)sale; decrease
B)purchase; decrease
C)sale; increase
D)purchase; increase
Q2) Holding other factors constant, which of the following would increase the size of the U.S. current account deficit?
A)sales of U.S. farm products in Europe
B)visits by European tourists to the United States
C)increasing travel by American college students in Europe
D)both A and B of the above
Q3) The current account balance plus the capital account balance equals the net change in government international reserves.
A)True
B)False
Q4) What was the European Monetary System? How did its exchange rate mechanism work?
Q5) Describe the pros and cons for controls on capital inflows and outflows.
Page 18
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Chapter 17: Banking and the Management of Financial
Institutions
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Q1) Nontransaction deposits are the primary source of bank funds.
A)True
B)False
Q2) The ________ the costs associated with deposit outflows are, the ________ excess reserves banks will want to hold.
A)lower; more
B)higher; less
C)higher; more
D)none of the above, since deposit outflows cannot be anticipated
Q3) Which of the following bank assets are the least liquid?
A)reserves
B)mortgage loans
C)cash items in process of collection
D)deposits with other banks
Q4) Since their introduction in 1961, negotiable CDs have become an important source of bank funds.
A)True
B)False
Page 19
Q5) What costs do banks hope to avoid by holding excess reserves?
Q6) Discuss the recent trends in bank performance measures.
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Page 20
Chapter 18: Financial Regulation
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Sample Questions
Q1) Probably the most important feature of FDICIA is its prompt corrective action provisions which require the FDIC to intervene earlier and more vigorously when a bank gets into trouble.
A)True
B)False
Q2) Which of the following is least likely to accompany financial consolidation and the development of large, complex banking organizations?
A)More financial institutions will be considered too big to fail.
B)The government safety net will be extended to include nonbanking activities.
C)Moral hazard problems will become less important.
D)Banks will have greater incentives and opportunities to take on more risk.
Q3) To be classified as a well-capitalized bank, a bank's leverage ratio must exceed 8 percent.
A)True
B)False
Q4) Discuss some of the problems of Basel 2 that the 2007-2009 financial crisis revealed.
Q5) What do we learn about the causes of banking crises by comparing crises throughout the world to those that have occurred in the United States?
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Chapter 19: Banking Industry: Structure and Competition
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Sample Questions
Q1) Checking accounts that earn interest (such as NOW accounts)were not available until ________.
A)1962
B)1972
C)1982
D)1992
Q2) Adjustable-rate mortgages
A)protect households against higher mortgage payments when interest rates rise.
B)keep financial institutions' earnings high even when interest rates are falling.
C)have many attractive attributes, explaining why so few households now seek fixed-rate mortgages.
D)do only A and B of the above.
E)do none of the above.
Q3) A change in the financial environment will stimulate a search by financial institutions for innovations that are likely to be profitable.
A)True
B)False
Q4) Explain the innovations that have been created to lower interest-rate risk.
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Chapter 20: The Mutual Fund Industry
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Sample Questions
Q1) Capital appreciation funds select stocks of ________ and tend to be ________ risky than total return funds.
A)large, established companies that pay dividends regularly; more
B)large, established companies that pay dividends regularly; less
C)companies expected to grow rapidly; more
D)companies expected to grow rapidly; less
Q2) Conflicts arise in the mutual funds industry because ________ cannot effectively monitor ________.
A)investment advisers; directors
B)directors; shareholders
C)shareholders; investment advisers
D)investment advisers; stocks that will outperform the overall market
Q3) Mutual funds hold about ________ of financial intermediaries' total assets.
A)one-sixth
B)one-fourth
C)one-half
D)two-thirds
Q4) How did money market mutual funds originate and why did they become especially popular in the late 1970s and early 1980s?
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Chapter 21: Insurance Companies and Pension Funds
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Q1) Most private pension plans are insured by the Penny Benny, which pays benefits when a plan's sponsor goes bankrupt.
A)True
B)False
Q2) The Social Security system is an example of a pension plan that is fully funded.
A)True
B)False
Q3) Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices?
A)collection of information and screening of potential policyholders
B)risk-based premiums
C)deductibles and coinsurance
D)all of the above
E)only A and B of the above
Q4) What are the major differences between life insurance and property and casualty insurance?
Q5) Why will Social Security funding problems rise in the coming decades? Identify and evaluate the proposals that have been suggested to ease or reverse these problems.
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Chapter 22: Investment Banks, Security Brokers and
Dealers, and Venture Capital Firms
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Q1) The Glass-Steagall Act made it illegal for an investment bank to buy or sell securities on behalf of its customers.
A)True
B)False
Q2) Investment bankers have been active in the mergers and acquisitions market since the 1960s. Their contributions have included
A)helping firms that want to acquire another firm locate a firm to pursue.
B)helping would-be acquirers solicit shareholders through a tender offer.
C)helping target firms ward off undesired takeover attempts.
D)all of the above.
E)only A and B of the above.
Q3) SEC registration is
A)required for all securities.
B)required if less than $1.5 million in securities are issued per year.
C)not required for securities that are sold through a private placement.
D)required if the securities mature in less than one year.
E)not required if securities are underwritten by a reputable investment bank.
Q4) How do venture capital firms overcome the problem of information asymmetries that accompany start-up firms?
Page 25
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Chapter 23: Risk Management in Financial Institutions
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Sample Questions
Q1) Referring to Table 23.1, First National Bank has a gap of ________.
A)-30
B)+30
C)60
D)0
Q2) If a bank has more rate-sensitive assets than rate-sensitive liabilities, then a(n)________ in interest rates will ________ bank profits. A)increase; increase B)increase; reduce C)decline; increase D)decline; not affect
Q3) If a rise in interest rates causes the market value of a bank's net worth to rise, then the bank must have a ________.
A)negative duration gap
B)positive duration gap
C)negative gap
D)positive gap
Q4) How is credit risk related to the concepts of adverse selection and moral hazard?
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Chapter 24: Hedging With Financial Derivatives
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Q1) If you buy an option to buy Treasury futures at 110, and at expiration the market price is 115,
A)the call will be exercised.
B)the put will be exercised.
C)the call will not be exercised.
D)the put will not be exercised.
Q2) One problem with a futures contract is finding a counterparty.
A)True
B)False
Q3) If you buy a long contract on financial futures, you hope interest rates will
A)rise
B)fall
C)not change
D)fluctuate
Q4) Interest-rate swaps are more liquid than futures contracts.
A)True
B)False
Q5) Define and distinguish between call options and put options.
Q6) How would a firm use exchange rate futures to lock in current exchange rates?
Page 27
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Chapter 25: Savings Associations and Credit Unions
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Q1) Why have commercial banks gone to court in an effort to limit the activities of credit unions?
Q2) The Competitive Equality in Banking Act of 1987
A)provided insufficient funds to the FSLIC to close down insolvent S&Ls.
B)actually directed S&L regulators to continue to pursue regulatory forbearance, further delaying the closing of insolvent S&Ls.
C)created a new agency, the Resolution Trust Corporation, to manage insolvent thrifts.
D)did all of the above.
E)did only A and B of the above.
Q3) Regulatory forbearance reduces moral hazard because an operating but insolvent S&L will take fewer risks than healthy S&Ls that can take risks and still remain solvent.
A)True
B)False
Q4) The Competitive Equality in Banking Act of 1987 allowed the FSLIC to borrow all the funds it needed to close insolvent S&Ls and pay off depositors.
A)True
B)False
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Chapter 26: Finance Companies
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Sample Questions
Q1) Usury statutes limit the level of interest rates that finance companies can charge their customers.
A)True
B)False
Q2) Discuss the regulatory environment for finance companies relative to commercial banks.
Q3) Much like banking institutions, interest-rate risk is a big concern for finance companies.
A)True
B)False
Q4) Consumer finance companies typically make loans to consumers who
A)prefer to avoid the regulatory environment at a bank.
B)cannot obtain credit otherwise due to low income or poor credit.
C)Both A and B of the above are correct.
D)Neither A nor B of the above are correct.
Q5) Factoring refers to purchasing a firm's accounts receivables at a premium.
A)True
B)False
Q6) Describe the process of factoring? When and why is it used?
Q7) What are the various types of finance companies?
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