Bank Management Practice Questions
Course Introduction
Bank Management provides a comprehensive overview of the principles and practices involved in managing commercial banks and financial institutions. The course covers key topics such as asset-liability management, risk assessment, regulatory frameworks, lending practices, investment strategies, and capital adequacy. Students will learn about the evolving landscape of banking in response to technological innovation, global finance, and changing regulatory requirements. By analyzing case studies and real-world scenarios, students will develop practical skills for effective decision-making and gain a deep understanding of the challenges and opportunities facing modern banks.
Recommended Textbook
Financial Institutions Management 5th Canadian Edition by Anthony Saunders
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Page 2
Chapter 1: Why Are Financial Institutions Special
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Sample Questions
Q1) When a DI makes a shift from an "originate-to-hold" banking model to an "originate-to-distribute" model, the change is likely to result in
A)increased operating costs.
B)increased interest rate risk.
C)increased liquidity risk.
D)decreased monitoring costs.
E)decreased fee income.
Answer: D
Q2) Firms in industries that have low costs of entry tend to enjoy larger profits than firms in industries with high costs of entry.
A)True
B)False
Answer: False
Q3) Pension and mutual funds have a lower correlation between the maturities of their assets and liabilities than do commercial banks and credit unions.
A)True
B)False
Answer: False
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3
Chapter 2: Deposit-Taking Institutions
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Sample Questions
Q1) Which of the following observations concerning credit unions is NOT true?
A)They invest heavily in corporate securities.
B)Member loans constitute a majority of their total assets.
C)They tend to invest more of their assets in Government of Canada securities than other DTIs.
D)They engage in off-balance-sheet activities.
E)They focus more on providing services and less on profitability.
Answer: A
Q2) The primary regulators of Canadian banks are
A)the Federal Reserve and CDIC.
B)OSFI and CDIC.
C)CDIC and the Bank of Canada.
D)the Bank of Canada and the Canadian Payments Association.
E)OSFI and the Bank of Canada.
Answer: B
Q3) Large Canadian banks are often primary dealers in the market for Canadian government securities.
A)True
B)False
Answer: True
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Chapter 3: Finance Companies
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Sample Questions
Q1) Securitized mortgage assets are used as collateral backing secondary market securities.
A)True
B)False
Answer: True
Q2) Which of the following is traditionally the major type of consumer loans for finance companies?
A)Revolving loans.
B)Motor vehicle loans and leases.
C)Wholesale loans.
D)Equipment leases.
E)Home equity loans.
Answer: B
Q3) Finance companies generally attract less risky customers than do commercial banks.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Securities, Brokerage, and Investment Banking
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Sample Questions
Q1) Which of the following two U.S. investment banks were granted approval to be chartered as commercial banks during the most recent financial crisis?
A)Merrill Lynch and Bear Stearns.
B)Goldman Sachs and Morgan Stanley.
C)Bear Stearns and Lehman Brothers.
D)Merrill Lynch and Morgan Stanley.
E)Lehman Brothers and Goldman Sachs.
Q2) Securities underwriting and trading is an activity that requires a considerable investment in long-term assets and relatively small investments in short-term assets.
A)True
B)False
Q3) A best-efforts offering of a security is more risky for an investment bank than a firm commitment offering.
A)True
B)False
Q4) As of 2012, equity capital in the securities industry measured over 12 percent.
A)True
B)False
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6
Chapter 5: Mutual Funds, Hedge Funds, and Pension Funds
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Sample Questions
Q1) Which of the following is true about the values of most money market mutual fund shares?
A)They fluctuate heavily.
B)Values are fixed at $1.
C)Values are fixed at $100.
D)They depend on market demand.
E)They are considered closed-end funds.
Q2) Mutual funds that are load funds use sales agents, and thus always have an up-front commission charge.
A)True
B)False
Q3) Closed-end investment companies
A)have a fixed number of shares.
B)can trade at a price that is greater than, equal to, or less than the NAV.
C)will trade at a different price as the number of shares of the fund changes.
D)have a fixed number of shares, and will trade at a different price as the number of shares in the fund changes.
E)have a fixed number of shares and can trade at a price that is greater than, equal to, or less than the NAV.
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Page 7
Chapter 6: Insurance Companies
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Sample
Questions
Q1) Which account refers to the reserve set-aside that contains the portion of a premium that has been paid before insurance coverage has been provided.
A)Unearned premiums.
B)Prepaid premiums.
C)Premium reserves.
D)Policy reserves.
E)Outstanding premiums.
Q2) Assuris is a corporation similar to CDIC for the purpose of compensating the policyholders of failed insurers.
A)True
B)False
Q3) In the case of an insurance company failure, policyholders immediately receive a payout of the cash surrender value of their policies.
A)True
B)False
Q4) Assuris is administered by CDIC.
A)True
B)False
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Page 8
Chapter 7: Risks of Financial Institutions
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Sample Questions
Q1) The asymmetric return distribution (relatively high probability of anticipated return; lower probability of default) on risky debt exposes the FI to
A)technology risk.
B)interest rate risk.
C)credit risk.
D)foreign exchange risk.
E)off-balance-sheet risk.
Q2) The risk that a foreign government may devalue the currency relates to A)credit risk.
B)sovereign risk.
C)foreign exchange risk.
D)liquidity risk.
E)interest rate risk.
Q3) The major source of risk exposure resulting from issuance of standby letters of credit is
A)technology risk.
B)interest rate risk.
C)credit risk.
D)foreign exchange risk.
E)off-balance-sheet risk.
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Chapter 8: Interest Rate Risk I
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Sample Questions
Q1) The market segmentation theory of the term structure of interest rates
A)assumes that investors will hold long-term maturity assets if there is a sufficient premium to compensate for the uncertainty of the long-term.
B)assumes that the yield curve reflects the market's current expectations of future short-term interest rates.
C)assumes that market rates are determined by supply and demand conditions within fairly distinct time or maturity buckets.
D)fails to recognize that forward rates are not perfect predictors of future interest rates.
E)assumes that both investors and borrowers are willing to shift from one maturity sector to another to take advantage of opportunities arising from changing yields.
Q2) An FI's net interest income reflects
A)its asset-liability structure.
B)rates of interest when the assets and liabilities were put on the books.
C)the riskiness of its loans and investments.
D)the cost of its deposit and non-deposit sources of funds.
E)All of these.
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Chapter 9: Interest Rate Risk II
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Sample Questions
Q1) Which of the following statements about leverage adjusted duration gap is true?
A)It is equal to the duration of the assets minus the duration of the liabilities.
B)Larger the gap in absolute terms, the more exposed the FI is to interest rate shocks.
C)It reflects the degree of maturity mismatch in an FI's balance sheet.
D)It indicates the dollar size of the potential net worth.
E)Its value is equal to duration divided by (1 + R).
Q2) Consider a five-year, 8 percent annual coupon bond selling at par of $1,000. If interest rates increase by 20 basis points, what is the approximate change in the market price using the duration approximation?
A)-$7.985
B)-$7.941
C)-$3.990
D)+$3.990
E)+$7.949
Q3) All fixed-income assets exhibit convexity in their price-yield relationships.
A)True
B)False
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11
Chapter 10: Credit Risk: Individual Loans
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Sample Questions
Q1) The amount of security or collateral on a loan and the interest rate or risk premium on a loan normally are negatively related.
A)True
B)False
Q2) Which of the following is the major weakness of the linear probability model?
A)The model is based on past data of the borrower.
B)Measurement of the loan risk is difficult.
C)Estimated probabilities of default may lie outside the interval 0 to 1.
D)Neither the market value of a firm's assets nor the volatility of the firm's assets is directly observed.
E)None of these is a weakness of the linear probability model.
Q3) Simulations by Moody's Analytics have shown which of the following models to be relatively better predictors of corporate failure and distress?
A)Z score-type models.
B)S&P rating changes.
C)Expected Default Frequency (EDF) models.
D)Linear probability models.
E)Logit models.
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Chapter 11: Credit Risk: Loan Portfolio and Concentration
Risk
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Sample Questions
Q1) Banks whose loan portfolio composition deviates from the national benchmark should immediately implement policies to move toward benchmark alignment.
A)True B)False
Q2) In the Moody's Analytics portfolio model, the expected loss on a loan is
A)the product of the estimated loss given default and risk-free rate on a security of equivalent maturity.
B)annual all-in-spread minus the loss given default.
C)annual all-in-spread minus the expected default frequency.
D)the product of the expected default frequency and the estimated loss given default.
E)the volatility of the loan's default rate around its expected value.
Q3) Concentration limits are used to either reduce or increase exposure to specific industries.
A)True B)False
Q4) Included in the Moody's Analytics model are recovery rates on defaulted loans. A)True B)False
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Chapter 12: Liquidity Risk
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Sample Questions
Q1) Which of the following is NOT a potential causes of liquidity risk for a DTI?
A)A decrease in the DTI's stock price caused by market factors.
B)An increase in requests to fund large amounts of loan commitments.
C)A decrease in the availability of short-term borrowed funds.
D)An increase in requests by depositors to withdrawal large amounts of deposits.
E)A decrease in asset prices of securities held in the investment portfolio.
Q2) Which of the following is a measure of the potential losses an FI could suffer as the result of fire-sale disposal of assets?
A)Quick ratio.
B)Liquidity index.
C)Financing gap and financing requirement.
D)Peer group ratio.
E)Current ratio.
Q3) Core deposits represent a relatively short-term source of funds.
A)True
B)False
Q4) Hedge funds are not susceptible to liquidity risk or a liquidity crisis.
A)True
B)False
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Chapter 13: Foreign Exchange Risk
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Sample Questions
Q1) In which of the following FX trading activities does the FI not assume FX risk?
A)The purchase and sale of foreign currencies for the purpose of profiting from forecasting or anticipating future movements in FX rates.
B)The purchase and sale of foreign currencies to allow customers to partake in and complete international commercial trade transactions.
C)The purchase and sale of foreign currencies for the purpose of offsetting customer exposure in any given currency.
D)The purchase and sale of foreign currencies to allow customers to take positions in foreign real and financial investments.
E)In both the purchase and sale of foreign currencies to allow customers to partake in and complete international commercial trade transactions, and the purchase and sale of foreign currencies to allow customers to take positions in foreign and real and financial investments.
Q2) During the late 2000's financial crisis, global stock market return correlations decreased relative to the decade before the crisis.
A)True
B)False
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15
Chapter 14: Sovereign Risk
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Sample Questions
Q1) The following is an example of a credit scoring model to estimate the probability of debt rescheduling for country I: P<sub>i</sub> = 0.25 DSR<sub>i</sub> + 0.17 IR<sub>i</sub> - 0.03 INVR<sub>i</sub> + 0.84 VAREX<sub>i</sub> + 0.93 MG<sub>i</sub>
Where P<sub>i</sub>is the probability of rescheduling country I's debt; DSR is the country's debt service ratio; IR is the country's import ratio; INVR is the country's investment ratio; VAREX is the country's variance of export revenue; and MG is the country's rate of growth of the domestic money supply.
What is an important determinant of rescheduling probability if the country is providing several incentives to increase domestic savings?
A)The debt service ratio.
B)The import ratio.
C)The investment ratio.
D)The variance of export revenue.
E)The rate of growth of the domestic money supply.
Q2) Sovereign country risk is largely independent of the credit standing of the foreign borrower.
A)True
B)False
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Page 16
Chapter 15: Market Risk
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Sample Questions
Q1) The use of expected shortfall (ES) is most appropriate when
A)there is a small sample size used to estimate probability distributions.
B)the VaR indicates there is no possibility of losses so another method must be used to determine market risk.
C)the probability distribution is skewed to the right.
D)a continuous probability distribution cannot be constructed
E)The probability distribution indicates there is a possibility of a "fat tail" loss.
Q2) The Risk Metrics model generally prefers using the present value of cash flow changes as the price-sensitivity weights.
A)True
B)False
Q3) In the Risk Metrics model, value at risk (VAR) is calculated as
A)the price sensitivity times an adverse daily yield move.
B)the dollar value of a position times the price volatility.
C)the dollar value of a position times the potential adverse yield move.
D)the price volatility times the ÖN.
E)VaR times the ÖN.
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Chapter 16: Off-Balance-Sheet Risk
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Sample Questions
Q1) Loans sold without recourse have contingent liability off-balance-sheet implications for the FI that sells the loan.
A)True
B)False
Q2) Which of the following is true of the market price of an options contract over time?
A)It is set at time 0.
B)It is fixed over the life of the contract.
C)It changes based on the market value of the underlying asset.
D)It increases with time to expiration.
E)It is based on supply and demand.
Q3) In Canada, commercial banks are the only issuers of standby letters of credit.
A)True
B)False
Q4) The Clearing House Interbank Payments System (CHIPS) is an international wire transfer system owned by the participating banks in the countries in which it is used.
A)True
B)False
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18
Chapter 17: Technology and Other Operational Risks
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Sample Questions
Q1) Which of the following implies that small FIs are more cost efficient than large FIs, and that in a freely competitive environment for financial services, small FIs may outperform their larger counterparts?
A)Economies of scale.
B)Diseconomies of scale.
C)Economies of scope.
D)Diseconomies of scope.
E)Constant returns to scale.
Q2) A new computer system is expected to cost $40 million and generate annual savings of $12 million over the next five years. What is the IRR for this investment?
A)11.18 percent.
B)12.98 percent.
C)15.24 percent.
D)12.00 percent.
E)18.00 percent.
Q3) A centralized collection service where the payments are received on-line for corporate customers.
Q4) The transmission of payments and payment messages by LVTS, CHIPS, SWIFT, Fedwire, etc.
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Chapter 18: Liability and Liquidity Management
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Sample Questions
Q1) Savings accounts normally receive a lower interest rate than chequing accounts.
A)True
B)False
Q2) One reason FIs such as deposit-taking institutions and life insurance companies are exposed to liquidity risk is the relatively illiquid nature of their liabilities.
A)True
B)False
Q3) Banks often convert on-balance-sheet bankers acceptances into off-balance-sheet letters of credit for the purpose of minimizing total assets and thus improving performance ratios such as ROA.
A)True
B)False
Q4) The increased securitization of bank loans has reduced the liquidity of bank assets. A)True
B)False
Q5) Savings accounts are less liquid than demand deposit accounts. A)True B)False
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Chapter 19: Deposit Insurance and Other Liability
Guarantees
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Sample Questions
Q1) One of the overall objectives in using subordinated debt in addition to common stock for a DTI's capital base is to improve market discipline of a DTI's risk structure.
A)True
B)False
Q2) The Canadian safety net to protect the integrity of the payments system consists of deposit insurance and social welfare.
A)True
B)False
Q3) The insured depositor transfer method of failure resolution
A)results in the closure of the failed bank.
B)results in the merger of the failed bank into a stronger entity.
C)keeps the failed bank operating for a short period of time.
D)minimizes the deposit insurers' out of pocket costs of resolving a failed DTI.
E)forces insured depositors to bear some losses.
Q4) Explicit deposit insurance premiums applied by regulators can involve restricting and more closely monitoring the risky activities of banks.
A)True
B)False
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Chapter 20: Capital Adequacy
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Sample Questions
Q1) Market value accounting often is criticized because the error in market valuation of nontraded assets likely will be greater than the error using the original book valuation.
A)True
B)False
Q2) The potential exposure component of the credit equivalent amount of OBS derivative items reflects
A)the probability of an adverse price movement in contracts.
B)the cost of replacing a contract if a counterparty defaults today.
C)the probability today of a counterparty contract default in the future.
D)the maximum price loss for any given position.
E)the probability of an adverse price movement in contracts, and the maximum price loss for any given position.
Q3) The market value of capital is equal to market value of assets minus the market value of liabilities.
A)True
B)False
Q4) The four (five) risk weight categories in Basel I (Basel II) may not reflect the true credit risk.
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Chapter 21: Product and Geographic Expansion
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Sample Questions
Q1) The safety and soundness of a holding company that has both a bank subsidiary and a securities affiliate can be enhanced over time by the product diversification benefits of a more stable earnings stream caused by having well-diversified financial services.
A)True B)False
Q2) In order to achieve a more stable revenue stream in a merger, the asset and liability portfolios of the two institutions should have similar credit, interest rate, and liquidity characteristics.
A)True B)False
Q3) Identify a condition under which conflicts of interest are exploitable.
A)Market for bank service is very competitive.
B)Banks have monopoly power over their customers.
C)Information flows between the customer and the bank are symmetric.
D)Bank does not possess any information advantage over its customers.
E)Bank places a relatively high value on its reputation.
Q4) In late 2012, shadow banking activities came under OSFI'S regulation.
A)True
B)False
Page 23
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Chapter 22: Futures and Forwards
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Sample Questions
Q1) Routine hedging
A)is a hedging strategy that occurs on a set, predetermined basis by the FI.
B)always results in excess returns.
C)is a strategy to follow when interest rates are abnormally low.
D)is a strategy used when interest rates are extremely unpredictable.
E)is a strategy to follow when interest rates are abnormally high.
Q2) Which of the following identifies the largest group of derivative contracts as of June 2012?
A)Futures.
B)Forwards.
C)Options.
D)Swaps.
E)Credit derivatives.
Q3) Securities firms
A)Net buyer (typically)
B)Net seller (typically)
Q4) Banks
A)Net buyer (typically)
B)Net seller (typically)
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Chapter 23: Options, Caps, Floors, and Collars
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Q1) The gain to the writer of a bond option is unlimited.
A)True
B)False
Q2) The payoff values on bond options are positively linked to the changes in interest rates.
A)True
B)False
Q3) Identify a problem associated with using the Black-Scholes model to value bond options.
A)It assumes short-term interest rates are constant.
B)It assumes that commissions are charged.
C)It assumes fluctuating variance of returns on the underlying asset.
D)It assumes that the variance of bond prices is constant over time.
E)All of these.
Q4) As interest rates increase, the writer of a bond call option stands to make A)limited gains.
B)limited losses.
C)unlimited losses.
D)unlimited gains.
E)limited gains, and limited losses.
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Chapter 24: Swaps
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Q1) One reason for the rapid growth of the OTC interest rate and foreign exchange swap markets is that banks are not required to allocate any capital toward their usage.
A)True
B)False
Q2) A pure credit swap is similar to buying credit insurance.
A)True
B)False
Q3) The U.S. Commodity Futures Trading Commission (CFTC) has jurisdiction over swaps in the United States.
A)True
B)False
Q4) In a conventional interest rate swap agreement, the fixed-rate payer is attempting to transform the variable-rate nature of its liabilities into fixed-rate liabilities.
A)True
B)False
Q5) A pure credit swap will reduce interest rate risk.
A)True B)False
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Chapter 25: Loan Sales
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Sample Questions
Q1) The buyer of a loan participation bears double monitoring costs.
A)True
B)False
Q2) The implementation of BIS capital requirements may be expected to
A)increase the downward trend in loan sales because of higher required capital levels.
B)increase the downward trend in loan sales because of the use of risk adjusted assets.
C)decrease the downward trend in loan sales because of the use of risk adjusted assets.
D)decrease the downward trend in loan sales because of higher required capital levels.
E)decrease the downward trend in loan sales because of the use of risk adjusted assets, and decrease the downward trend in loan sales because of higher required capital levels.
Q3) One way to boost the assets to capital ratio of an FI is through loan sales.
A)True
B)False
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Chapter 26: Securitization Index
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Sample Questions
Q1) The underlying NHA MBS 15-year mortgage pool has a principal amount of $50 million and an annual yield of 6 percent (paid monthly). Assume that there are no prepayments. What is the first monthly payment on the Interest Only (IO) strip?
A)$3,000,000.
B)$421,928.
C)$250,000.
D)$299,775.
E)$171,928.
Q2) The creation and sale of CMOs is based, at least in part, on the ability to segment the market for pass-through security products.
A)True
B)False
Q3) A principal only (PO) mortgage-backed strip is attractive to investors who wish to speculate about decreasing interest rates.
A)True
B)False
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