Bank Management
Midterm Exam
Course Introduction
Bank Management is a comprehensive course that explores the principles and practices essential to the effective operation of modern banking institutions. Students will examine the organizational structure of banks, the regulatory environment, risk management strategies, asset and liability management, and the development of banking products and services. The course also covers key topics such as credit evaluation, loan portfolio management, capital adequacy, and the impact of technological advancements on banking. By analyzing real-world case studies and current trends, students gain practical insights into decision-making processes and the dynamic challenges faced by bank managers in a competitive financial marketplace.
Recommended Textbook
Financial Markets and Institutions 11th Edition by Jeff Madura
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25 Chapters
1900 Verified Questions
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Page 2
Chapter 1: Role of Financial Markets and Institutions
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Sample Questions
Q1) When security prices fully reflect all available information, the markets for these securities are said to be efficient.
A)True
B)False
Answer: True
Q2) When a depository institution offers a loan, it is acting as a creditor.
A)True
B)False
Answer: True
Q3) Which of the following is a nondepository financial institution?
A)savings banks
B)commercial banks
C)savings and loan associations
D)mutual funds
Answer: D
Q4) The euro increased business between European countries and created a more competitive environment in Europe.
A)True
B)False
Answer: True
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Chapter 2: Determination of Interest Rates
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Sample Questions
Q1) If a strong economy allows for a large ____ in households income, the supply curve will shift ____.
A)decrease; outward
B)increase; inward
C)increase; outward
D)none of the above
Answer: C
Q2) The quantity of loanable funds supplied is normally
A)highly interest elastic.
B)more interest elastic than the demand for loanable funds.
C)less interest elastic than the demand for loanable funds.
D)equally interest elastic as the demand for loanable funds.
E)A and B
Answer: C
Q3) According to the loanable funds theory, market interest rates are determined by the factors that control the supply of and demand for loanable funds.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Structure of Interest Rates
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Sample Questions
Q1) If the liquidity premium theory completely describes the term structure of interest rates, then, on the average, the yield curve should be A)flat.
B)downward sloping.
C)upward sloping.
D)none of the above.
Answer: C
Q2) Within the category of capital market securities, municipal bonds have the ____ before-tax yield, and their after-tax yield is typically ____ of Treasury bonds from the perspective of investors in high tax brackets.
A)highest; below that B)lowest; above that C)highest; above that D)lowest; below that
Answer: B
Q3) The higher a bond rating, the lower the perceived default risk. A)True
B)False
Answer: True
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Chapter 4: Functions of the Fed
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Sample Questions
Q1) When open market operations are used to ____ bank funds, the yield on debt instruments ____.
A)reduce; decreases
B)reduce; increases
C)increase; increases
D)none of the above
Q2) Repurchase agreements are purchased by the Fed to
A)temporarily decrease the aggregate level of bank funds.
B)permanently increase the aggregate level of bank funds.
C)permanently decrease the aggregate level of bank funds.
D)temporarily increase the aggregate level of bank funds.
Q3) To increase the money supply, the Trading Desk would be instructed to sell government securities.
A)True
B)False
Q4) Members of the Board of Governors serve 14-year nonrenewable terms.
A)True
B)False
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Chapter 5: Monetary Policy
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Sample Questions
Q1) In the "operation twist" strategy used in 2011 and 2012, the Fed sold _______ Treasury securities and used the proceeds to purchase ________ Treasury securities.
A)long-term; short-term
B)short-term; long-term.
C)short-term; long-term
D)long-term; short-term.
Q2) The ____ lag represents the time from when an economic problem exists until it is recognized.
A)recognition
B)adjustment
C)implementation
D)none of the above
Q3) A loose money policy tends to ____ economic growth and ____ the inflation rate.
A)stimulate; place downward pressure on
B)stimulate; place upward pressure on C)dampen; place upward pressure on D)dampen; place downward pressure on
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Chapter 6: Money Markets
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Sample Questions
Q1) The so-called "flight to quality" causes the risk differential between risky and risk-free securities to be
A)eliminated.
B)reduced.
C)increased.
D)unchanged (there is no effect).
Q2) There is no limit to the amount of T-bills that can be purchased by noncompetitive bidders in a T-bill auction.
A)True
B)False
Q3) The yield on commercial paper is ____ the yield of Treasury bills of the same maturity. The difference between their yields would be especially large during a ____ period.
A)greater than; recessionary
B)greater than; boom economy
C)less than; boom economy
D)less than; recessionary
Q4) Junk commercial paper is commercial paper that is not rated or rated low.
A)True
B)False
Page 8
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Chapter 7: Bond Markets
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Sample Questions
Q1) Bonds that are not secured by specific property are called
A)a chattel mortgage.
B)open-end mortgage bonds.
C)debentures.
D)blanket mortgage bonds.
Q2) Devin is, a private investor, purchases $1,000 par value bonds with a 12 percent coupon rate and a 9 percent yield to maturity. Devin will hold the bonds until maturity. Thus, he will earn a return of ____ percent.
A)12
B)9
C)10.5
D)more information is needed to answer this question
Q3) Which of the following is not an example of a municipal bond?
A)general obligation bond
B)revenue bond
C)Treasury bond
D)All of the above are examples of municipal bonds.
Q4) High-risk bonds are called trash bonds.
A)True
B)False
Page 9
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Chapter 8: Bond Valuation and Risk
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Sample Questions
Q1) In a laddered strategy, investors create a bond portfolio that will generate periodic income that can match their expected periodic expenses.
A)True
B)False
Q2) The appropriate price of a bond is simply the sum of the cash flows to be received.
A)True
B)False
Q3) A bond with a 12 percent quarterly coupon rate has a yield to maturity of 16 percent. The bond has a par value of $1,000 and matures in 20 years. Based on this information, a fair price of this bond is $____.
A)1,302
B)763
C)761
D)1,299
Q4) The market price of a bond is partly determined by the timing of the payments made to bondholders.
A)True
B)False
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Chapter 9: Mortgage Markets
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Sample Questions
Q1) Use an amortization schedule. A 15-year $100,000 mortgage has a fixed mortgage rate of 9 percent. In the first month, the total mortgage payment is $____, and $____ of this amount represents payment of interest.
A)1,014; 264
B)1,241; 750
C)1,014; 750
D)none of the above
Q2) The ____ market accommodates originators of mortgages that desire to sell their mortgages prior to maturity.
A)primary
B)secondary
C)money
D)none of the above
Q3) The difference between the 30-year mortgages rate and the 30-year Treasury bond rate is primarily attributable to A)interest rate risk.
B)reinvestment rate risk.
C)credit risk.
D)insurance risk.
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Page 11
Chapter 10: Stock Offerings and Investor Monitoring
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Sample Questions
Q1) Shelf-registration allows firms quick access to funds without repeatedly being slowed by the registration process.
A)True
B)False
Q2) The purpose of a lockup provision is to
A)keep individual investors from buying and selling stock.
B)prevent downward pressure on the stock's price.
C)increase the number of outstanding shares.
D)allocate a larger proportion of stock to institutional investors.
Q3) The OTC market does not have a trading floor.
A)True
B)False
Q4) From a cost perspective, preferred stock is a less desirable source of capital for a firm than bonds.
A)True
B)False
Q5) IPOs tend to occur more primarily during recessions.
A)True
B)False
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Chapter 11: Stock Valuation and Risk
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Sample Questions
Q1) Kandle stock just paid a dividend of $4.76 per share and plans to pay a dividend of $5 per share next year, which is expected to increase by 3 percent per year subsequently. The required rate of return is 15 percent. The value of Kandle stock, according to the dividend discount model, is $____.
A)39.67
B)41.67
C)33.33
D)31.73
E)none of the above
Q2) A relatively simple method of valuing a stock is to apply the mean price-earnings (PE) ratio of all publicly traded competitors in the respective industry to the firm's expected earnings for the year.
A)True
B)False
Q3) The main source of uncertainty in computing the return of a stock is the dividend to be received next year.
A)True
B)False
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13
Chapter 12: Market Microstructure and Strategies
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Sample Questions
Q1) ____ facilitate transactions on a stock exchange by executing stock transactions for their clients.
A)Board members
B)Capstone members
C)Floor brokers
D)None of the above
Q2) Assume that a stock is priced at $50 and pays an annual dividend of $2 per share. An investor purchases the stock on margin, paying $25 per share and borrowing the remainder from the brokerage firm at 9 percent annual interest. If, after one year, the stock is sold at a price of $65.25 per share, the return on the stock is
A)60 percent.
B)44 percent.
C)30 percent.
D)69 percent.
Q3) The ____ the trading volume of a stock, the ____ the spread.
A)higher; wider
B)higher; narrower
C)lower; narrower
D)none of the above
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Page 14
Chapter 13: Financial Futures Markets
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Sample Questions
Q1) Assume that a stock mutual fund uses stock index futures as it conducts dynamic asset allocation. This means that the mutual fund
A)liquidates its stocks whenever it expects a market downturn.
B)maintains a constant buy position in stock index futures.
C)maintains a constant sell position in stock index futures.
D)none of the above
Q2) Financial futures contracts on U.S. securities are commonly traded by non-U.S. financial institutions that maintain holdings of U.S. securities.
A)True
B)False
Q3) Laura sells an S&P 500 futures contract with a September settlement date when the index is 1,750. By the settlement date, the S&P 500 index falls to 1,400. The return on Laura's position in the S&P 500 futures contract is ____ percent.
A)-20
B)-10
C)25
D)20
E)0
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15
Chapter 14: Options Markets
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Sample Questions
Q1) If a corporation hedges payables with currency call options, it will ____ if the value of the foreign currency is ____ than the exercise price when the payables are due.
A)exercise the option; greater
B)exercise the option; less
C)let the option expire; greater
D)let the option expire; less
E)A and D
Q2) A put option is "out of the money" when the
A)market price of the security exceeds the exercise price.
B)market price of the security equals the exercise price.
C)market price of the security is less than the exercise price.
D)premium on the option is less than the exercise price.
Q3) The premium on an existing put option should ____ when the underlying stock price increases.
A)be negative
B)decline
C)increase
D)be unaffected
E)A and B
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Page 16
Chapter 15: Swap Markets
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Sample Questions
Q1) A plain vanilla swap enables firms to exchange ____ for ____.
A)fixed rate payments; variable interest rate payments
B)a high interest rate foreign currency; a low interest rate foreign currency
C)a low interest rate foreign currency; a high interest rate foreign currency
D)bonds; stocks that pay dividends
Q2) A firm is involved in an agreement in which it makes payments in periods when a market interest rate falls below an interest rate level specified in the agreement. This means that the firm has
A)purchased an interest rate cap.
B)sold an interest rate cap.
C)purchased an interest rate floor.
D)sold an interest rate floor.
Q3) Which of the following is not a typical provision of an interest rate swap?
A)the notional principal value to which the interest rates are applied to determine the interest payments involved
B)the fixed interest rate
C)the floating interest rate
D)the underwriter of the bond
E)All of the above are provisions of an interest rate swap.
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Page 17
Chapter 16: Foreign Exchange Derivative Markets
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Sample Questions
Q1) If U.S. interest rates suddenly become much higher than European interest rates (and if it does not cause concern about higher inflation there), the U.S. demand for euros would ____, and the supply of euros to be exchanged for dollars would ____, other factors held constant.
A)increase; increase B)increase; decrease C)decrease; increase D)decrease; decrease
Q2) Direct intervention is always extremely effective.
A)True B)False
Q3) The forward rate premium is dictated by the national income differential of the two currencies.
A)True B)False
Q4) In reality, exchange rates do not always change as suggested by purchasing power parity.
A)True B)False
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Chapter 17: Commercial Bank Operations
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Sample Questions
Q1) A bank's sources of funds represent liabilities or equity of the bank.
A)True
B)False
Q2) ____ are the largest bank source of funds as a percentage of total liabilities.
A)Small-denomination time deposits
B)Money market deposit accounts (MMDAs)
C)Transaction deposits
D)Borrowed funds
E)Savings deposits (including MMDAs)
Q3) When a bank in need of funds for a few days sells some of its government securities to a corporation with a temporary excess of funds, then buys them back shortly thereafter, this is a
A)federal funds loan.
B)discount window loan.
C)repurchase agreement.
D)commercial paper transaction.
Q4) In a loan participation arrangement, normally all of the participating banks are exposed to credit (default) risk.
A)True
B)False
Page 19
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Chapter 18: Bank Regulation
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Sample Questions
Q1) 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.
Q2) ____ 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.
Q3) 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
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Chapter 19: Bank Management
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Sample Questions
Q1) Banks increase their risk by increasing their capital as a percentage of assets.
A)True
B)False
Q2) Durango Bank has $2 million in rate-sensitive liabilities and $3 million in rate sensitive assets. Durango's gap is ____, and Durango is probably more concerned about a(n) ____ in interest rates.
A)-$1 million; increase
B)-$1 million; decrease
C)$1 million; increase
D)$1 million; decrease E)none of the above
Q3) 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
Q4) Floating-rate loans completely eliminate interest rate risk.
A)True B)False
Page 21
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Chapter 20: Bank Performance
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Sample Questions
Q1) Net income measured as a percentage of assets is
A)return on equity (ROE).
B)return on liabilities (ROL).
C)return on investment (ROI).
D)return on assets (ROA).
Q2) When only equity counts as capital, the higher the capital ratio, the
A)lower the leverage measure.
B)lower the degree of financial leverage.
C)higher the leverage measure.
D)A and B
E)B and C
Q3) A bank's net interest margin includes
A)noninterest expenses.
B)noninterest income.
C)loan losses.
D)none of the above
Q4) The loan loss provision as a percentage of assets should increase during periods of high economic growth.
A)True
B)False
Page 22
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Chapter 21: Thrift Operations
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Sample Questions
Q1) A savings institution owned by its depositors is a ____ savings institution.
A)mutual
B)stock
C)credit
D)closed-end
Q2) Credit unions obtain most of their funds from
A)issuing common stock.
B)retained earnings.
C)share deposits by members.
D)issuing long-term bonds.
Q3) The ____ savings institutions hold the most assets in aggregate.
A)stock owned
B)mutual
C)closely-held
D)privatized
Q4) Savings institutions do not really know the actual maturity of the mortgages they hold and cannot perfectly match the interest rate sensitivity of their assets and liabilities.
A)True
B)False
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Chapter 22: Finance Company Operations
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Sample Questions
Q1) Many consumer finance companies also provide personal loans, directly to individuals to finance purchases of large household items.
A)True
B)False
Q2) Changes in economic growth are ____ related to a finance company's cash flows, and changes in the risk-free rate are ____ related to a finance company's cash flows.
A)positively; negatively
B)negatively; positively
C)negatively; negatively
D)positively; positively
Q3) Overall, the liquidity risk of finance companies is higher than that of other financial institutions.
A)True
B)False
Q4) Historically, captive finance subsidiaries were associated with:
A)the automobile industry.
B)the oil and gas industry.
C)the textile industry.
D)department stores.
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Chapter 23: Mutual Fund Operations
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Sample Questions
Q1) Investors who feel capable of making their own investment decisions often prefer to invest in load funds.
A)True B)False
Q2) Money market funds commonly invest in A)stocks.
B)real estate.
C)commercial paper.
D)U.S. Treasury bonds.
E)none of the above
Q3) Mutual funds
A)are unregulated.
B)are required to disclose the names of their portfolio managers in the prospectus.
C)are not required to disclose any information about their past performance.
D)are exempt from all taxes.
Q4) Many businesses that go public are partially backed by venture capital before the IPO.
A)True B)False
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Chapter 24: Securities Operations
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Q1) The ____ is not involved in the regulation of the securities industry.
A)Deposit Insurance Fund
B)National Association of Securities Dealers
C)Securities and Exchange Commission
D)Federal Reserve Board
E)All of the above are involved in the regulation of the securities industry.
Q2) All information relevant to the security, as well as the agreement between the issuer and the securities firm, must be provided in the A)origination.
B)registration statement.
C)best-efforts agreement.
D)none of the above
Q3) The one-day return to investors who purchase IPO shares at the IPO offer price are ____, and the returns to investors who purchase the shares a day after the IPO are generally ____.
A)high; high
B)high; low
C)low; high
D)low; low
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Page 26
Chapter 25: Insurance and Pension Fund Operations
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Q1) Taking speculative positions in stock options is generally not considered appropriate for retirement funds because of the high degree of risk involved.
A)True
B)False
Q2) Which of the following is not involved in the regulation of the insurance industry?
A)the National Association of Insurance Commissioners (NAIC)
B)the Insurance Regulatory Information System (IRIS)
C)the Federal Deposit Insurance Corporation (FDIC)
D)All of the above are involved in the regulation of the insurance industry.
Q3) Pension funds managed by life insurance companies are normally referred to as A)trust portfolios.
B)insured plans.
C)matched plans.
D)projective plans.
Q4) Policyholders who prefer to invest their savings themselves will likely opt for whole life insurance over term insurance.
A)True
B)False
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