Bank Management Exam Review
Course Introduction
Bank Management explores the principles, strategies, and tools used in the effective administration of banking institutions. The course covers topics such as the structure and functions of banks, risk management techniques, banking regulations, asset and liability management, credit analysis, and financial performance evaluation. Students will examine the evolving landscape of the banking industry, technological innovations, and the impact of globalization. Through case studies and practical exercises, the course prepares students to address real-world challenges faced by banks and equips them with the analytical skills necessary for decision-making and strategic planning in the banking sector.
Recommended Textbook
Bank Management 7th Edition by Timothy W. Koch
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17 Chapters
910 Verified Questions
910 Flashcards
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Page 2
Chapter 1: Banking and the Financial Services Industry
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Sample Questions
Q1) Banks with less than _______ in assets are generally called community banks.
A)more than $1 billion
B)less than $1 billion
C)more than $5 million
D)less than $1 trillion
E)more than $1 trillion
Answer: B
Q2) At the end of 2008, which of the following investment banks remained independent?
A)Bear Stearns
B)Goldman Sachs
C)Lehman Brothers
D)Merrill Lynch
E)a.and b.
Answer: B
Q3) It is more difficult for multibank holding companies to realize economies of scale if they allow subsidiary banks to retain key decision-making authority.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Government Policies and Regulation
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Sample Questions
Q1) Which type of financial institution has seen the largest drop in their share of U.S.financial assets?
A)Depository institutions
B)Mutual funds
C)Insurance companies
D)Pension plans
E)Finance companies
Answer: A
Q2) The _________ created the Office of Thrift Supervision.
A)Depository Institutions Act (Garn-St.Germain)
B)Competitive Equality Banking Act
C)Financial Institutions Reform, Recovery and Enforcement Act
D)Federal Deposit Insurance Corporation Improvement Act
E)Depository Institutions Deregulation and Monetary Control Act
Answer: C
Q3) A function of investment banking is to facilitate corporate mergers and acquisitions.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Analyzing Bank Performance
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Sample Questions
Q1) What is the return on equity for a bank that has an equity multiplier of 12, an interest expense ratio of 5%, and a return on assets of 1.1%?
A)5.0%
B)13.2%
C)8.2%
D)26.4%
E)0.66%
Answer: B
Q2) Retail banks deal primarily with commercial customers.
A)True
B)False
Answer: False
Q3) What is the earnings base at 1st State?
A)12.5%
B)17.5%
C)58.5%
D)75.5%
E)82.5%
Answer: E
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Page 5
Chapter 4: Managing Noninterest Income and Noninterest
Expense
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Sample Questions
Q1) When two banks that merge have a significant duplication of bank offices such that the merger leads to the elimination of branches and personnel, this is known as a(n):
A)out-of-market merger.
B)in-market merger.
C)new-market merger.
D)reduced-branch merger.
E)goodwill merger.
Q2) Which of the following is not considered a non-interest expense?
A)Wages and salaries
B)Rent
C)Required reserves held at the Federal Reserve
D)Electricity
E)Employee benefits
Q3) Banks with the highest efficiency ratios are presumed to be the most efficient. A)True
B)False
Q4) Trading revenue for banks is highly cyclical.
A)True
B)False
6
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Chapter 5: The Performance of Nontraditional Banking Companies
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Sample Questions
Q1) On Goldman Sachs' balance sheet for 2007, ___________ consist of securities that Goldman Sachs has borrowed under an agreement to resell at a later date..
A)collateralized agreements
B)financial instruments
C)collateralized financings
D)receivables
E)payables
Q2) Investment banks generally engage in all of the following types of business activities except:
A)proprietary trading.
B)goodwill recovery.
C)market making.
D)securities underwriting..
E)advisory services
Q3) Discuss the four types of businesses that investment banks traditionally engage in.
Q4) "Hot money" represents Goldman Sachs' greatest credit risk..
A)True
B)False
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Chapter 6: Pricing Fixed-Income Securities
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Sample Questions
Q1) The duration of any security with interim cash flows will be less than the security's maturity.
A)True
B)False
Q2) Which of the following is false?
A)As interest rates rise, bond prices rise, everything else the same.
B)Given an absolute change in interest rates, the percentage increase in a bond's price will be greater than the percentage decrease, everything else the same.
C)Long-term bonds change proportionately more in price than short-term bonds for a given rate change, everything else the same.
D)A bond with a lower coupon will change more in price than a bond with a higher coupon, everything else the same.
E)A bond's duration is a measure of its price elasticity.
Q3) All other things the same, longer maturity bonds have greater relative price volatility than shorter maturity bonds.
A)True
B)False
Q4) Why is knowing a bond's duration useful?
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Chapter 7: Managing Interest Rate Risk: Gap and Earnings
Sensitivity
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Sample Questions
Q1) Which of the following does not affect net interest income?
A)Changes in the level of interest rates.
B)Changes in the volume of earning assets.
C)Changes in the portfolio mix of earning assets.
D)The yield curve changing from upward sloping to inverted.
E)All of the above affect net interest income.
Q2) Earnings sensitivity analysis does not consider:
A)changes in interest rates.
B)changes in the volume of rate-sensitive assets due to a change in interest rates.
C)changes in the volume of fixed-rate liabilities due to a change in interest rates.
D)mortgage prepayments.
E)Earnings sensitivity analysis considers all of the above.
Q3) Non-earning assets are classified as rate-sensitive assets for GAP analysis purposes.
A)True
B)False
Q4) Discuss the difference between a bank's periodic and cumulative GAP.
Q5) Discuss three factors that affect net interest income.
Page 9
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Chapter 8: Managing Interest Rate Risk: Economic Value of Equity
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Sample Questions
Q1) What is the strength of static GAP analysis relative to duration gap analysis?
A)Static GAP analysis recognizes the time value of money of each cash flow.
B)Static GAP analysis provides a measure of the total portfolio's interest rate risk.
C)Static GAP analysis is easier to understand.
D)Static GAP analysis takes the long-run view while duration gap analysis takes a shorter-run view.
E)The static GAP measure directly correlates with the risk of the bank, i.e., a bank with twice the static GAP is twice as risky.
Q2) What does a bank's duration gap measure?
A)The duration of short-term buckets minus the duration of long-term buckets.
B)The duration of the bank's assets minus the duration of its liabilities.
C)The duration of all rate-sensitive assets minus the duration of rate-sensitive liabilities.
D)The duration of the bank's liabilities minus the duration of its assets.
E)The duration of all rate-sensitive liabilities minus the duration of rate-sensitive assets.
Q3) How does effective duration differ from modified duration?
Q4) Why is it difficult to estimate the duration of demand deposits?
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Page 10
Chapter 9: Using Derivatives to Manage Interest Rate Risk
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Sample Questions
Q1) Which of the following is correct about futures contracts?
A)Buyers of futures contracts make a profit when prices fall.
B)Buyers of futures contracts make a profit when interest rates rise.
C)Sellers of futures contracts make a profit when prices fall.
D)Sellers of futures contracts make a profit when prices rise.
E)a.and d.
Q2) Every futures contract has a formal expiration date.
A)True
B)False
Q3) A bank anticipates it will need to borrow funds in the Eurodollar market in the future.It hedges by selling futures contracts.If rates decline, which of the following is true?
A)The bank will profit on the futures contract.
B)The bank will profit in the cash market.
C)The bank will have locked in a low cost of borrowing.
D)The bank will lose in the cash market.
E)a.and d.
Q4) Speculators focus on avoiding or reducing risk.
A)True
B)False
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Chapter 10: Funding the Bank
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Sample Questions
Q1) Interest costs do not equal the effective cost of bank liabilities because:
A)reserve requirements increase the effective cost.
B)there may be substantial processing costs.
C)service charges may offset a portion of non-interest expense.
D)all of the above.
E)a.and c.
Q2) A bank is going to issue $5,000,000 in 10-year par value bonds that pay a 6% annual coupon.The bank must pay .5% of the face value in floatation costs.What is the bank's effective cost of borrowing?
A)5.9%
B)6.1%
C)6.3%
D)6.5%
E)6.7%
Q3) An ACH transaction is a sale that uses a smart card.
A)True
B)False
Q4) Briefly explain two models used to estimate the cost of equity?
Q5) What is the purpose of having a correspondent bank relationship?
Q6) How has the use of "hot money" affected bank's liquidity risk?
Page 12
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Chapter 11: Managing Liquidity
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Sample Questions
Q1) The two-week period during which a bank must hold sufficient legal reserves is called the:
A)deposit computation period.
B)deposit maintenance period.
C)vault cash computation period.
D)base computation period.
E)maintenance period.
Q2) Why do banks prefer a lagged reserve accounting system to a contemporaneous reserve accounting system?
Q3) Which of the following could be used to identify a potential increase in borrowing by customers that might deplete a bank's cash reserves?
A)The amount of insured versus uninsured deposits
B)Large deposits held by a single entity
C)Volume of Fed Funds sold
D)The sensitivity of deposits to changes in the level of interest rates
E)Unused commercial credit lines outstanding
Q4) What is a "bankers' bank"?
Q5) Discuss the advantages and disadvantages of a bank holding less cash.
Q6) Discuss the major components of a bank's contingency funding plan.
Page 13
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Chapter 12: The Effective Use of Capital
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Sample Questions
Q1) How does bank capital reduce bank risk?
A)It provides a cushion for firms to absorb losses.
B)It creates unlimited growth opportunities.
C)It limits access to the financial markets.
D)All of the above.
E)a.and b.
Q2) Decreasing capital increases risk by decreasing financial leverage.
A)True
B)False
Q3) A bank that holds only U.S.Treasury securities is not required to hold any capital since all the assets are risk-less.
A)True
B)False
Q4) Why do banks generally prefer lower capital requirements?
A)To minimize the impact shareholders have on management decisions.
B)To increase the influence of bank regulators.
C)To increase a bank's return on equity.
D)To increase depositor protection.
E)To maximize operating leverage.
Q5) What is "moral hazard" and what is its impact on deposit insurance?
Page 14
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Chapter 13: Overview of Credit Policy and Loan
Characteristics
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Sample Questions
Q1) A loan where the entire principal is due at maturity is called a:
A)balloon payment loan.
B)sinking fund loan.
C)mezzanine loan.
D)bullet loan.
E)highly leverage transaction loan.
Q2) Loan covenants:
A)protect the borrower from lender interference in management.
B)are limited to "negative" provisions.
C)may limit discretionary cash outlays by borrowers.
D)are seldom enforced.
E)often result in the lender's bankruptcy.
Q3) Real estate lending is popular with bank, in part, due to the growth of the secondary mortgage market.
A)True
B)False
Q4) The Internet has led to larger spreads for more standardized loan products.
A)True
B)False
Q5) Discuss the five Cs of good credit and the five Cs of bad credit
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Chapter 14: Evaluating Commercial Loan Requests and Managing Credit Risk
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Q1) Every balance sheet and income statement item must be recognized on a cash-based income statement.
A)True
B)False
Q2) All of the following are sources of cash except:
A)an increase in long-term debt.
B)a decrease in inventory.
C)a new equity issue.
D)a decrease in notes payable.
E)an increase in accounts payable.
Q3) What are the five generally accepted credit events that can trigger a payment from the seller of a credit default swap to the buyer?
Q4) A firm has the following financial statement data: Sales = $2,000, COGS = $800, Operating Expenses = $600, and Taxes = $400.What is the firm's profit margin?
A)10%
B)20%
C)30% D)40%
E)60%
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Chapter 15: Evaluating Consumer Loans
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Sample Questions
Q1) Under current bankruptcy law, which of the following debts are not dischargeable under Chapter 7?
A)Past due child support
B)Past due mortgage payments
C)Past due credit card payments
D)Past due auto loan payments
E)All of the above are dischargeable under Chapter 7 bankruptcy law
Q2) Credit cards are profitable for banks because many customers are prince insensitive.
A)True
B)False
Q3) Losses on credit cards are among the highest of all consumer loan types.
A)True
B)False
Q4) Credit cards typically provide lower risk-adjusted returns than other types of consumer loans.
A)True
B)False
Q5) What are "high LTV" loans and why are they riskier than "low LTV" loans?
Q6) Discuss the major differences between consumer and commercial loans.
Page 17
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Chapter 16: Managing the Investment Portfolio
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Sample Questions
Q1) Dollar-denominated deposits issued by branches of foreign banks in the United States are known as:
A)Asian bonds.
B)Eurodollar bonds.
C)Foreign bonds.
D)Yankee bonds.
E)Domestic bonds.
Q2) Which of the following classes of securities are carried at market value on the balance sheet?
A)Held-to-maturity
B)Available-for-sale
C)Trading
D)all of the above
E)b.and c.only
Q3) The yield curve is generally inverted at the top of the business cycle.
A)True
B)False
Q4) Discuss how a basic collateralized mortgage works.
Q5) Explain the difference between a bond's duration and a bond's convexity.
Q6) How did the Tax Reform Act of 1986 impact the demand for municipal securities?
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Chapter 17: Global Banking Activities
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Sample Questions
Q1) Which of the following is not a member of the European Community (EC)?
A)France
B)Germany
C)Australia
D)Spain
E)United Kingdom
Q2) Which of the following is not true regarding Edge Act banks?
A)Edge Act banks may be owned by U.S.banks.
B)Edge Act banks may be owned by foreign banks.
C)Edge Act banks may be owned by bank holding companies.
D)Edge Act banks may be located outside the U.S.
E)Edge Act banks may be located in the U.S.
Q3) Foreign banks generally operate with higher capital ratios than U.S.banks.
A)True
B)False
Q4) Explain the impact of foreign exchange risk, economic risk, sovereign risk and political risk on the credit analysis of international loans.
Q5) Discuss the advantages and disadvantages of a universal banking model.
Q6) What is the difference between Edge Act corporations and foreign branches of U.S.banks?
Page 19
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