Bank Management
Question Bank
Course Introduction
Bank Management explores the principles and practices involved in efficiently operating and overseeing financial institutions, with a particular focus on commercial banks. The course covers key topics such as asset-liability management, risk management, interest rate policies, regulatory frameworks, banking technology, credit analysis, financial statement interpretation, and strategic planning in a competitive environment. Students will learn how banks make lending decisions, manage liquidity and capital, maintain regulatory compliance, evaluate and mitigate various types of banking risks, and develop strategies for product and service innovation. Through real-world case studies and practical exercises, participants gain the skills necessary to manage bank operations in a dynamic and evolving financial landscape.
Recommended Textbook
Money Banking and the Financial System 1st Edition by R. Glenn Hubbard
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Chapter 1: Introducing Money and the Financial System
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Sample Questions
Q1) Economists define risk as
A) the difference between the interest rate borrowers pay and the interest rate lenders receive.
B) the chance that the value of financial assets will change from what you expect.
C) the ease with which an asset can be exchanged for other assets or for goods and services.
D) the difference between the return on common stock and the return on corporate bonds.
Answer: B
Q2) Funds flow from lenders to borrowers
A) indirectly through financial markets.
B) directly through financial intermediaries.
C) indirectly through financial intermediaries.
D) primarily through government agencies.
Answer: C
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Chapter 2: Money and the Payments System
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Q1) The problem of a double coincidence of wants refers to
A) the insatiability of wants in a free market economy.
B) poorly-managed companies producing what consumers want only by coincidence.
C) the necessity in a barter system of each trading partner wanting what the other has to trade.
D) the likelihood that needs will not be the same as wants.
Answer: C
Q2) What determines the acceptability of dollar bills as a medium of exchange?
A) Our society's willingness to use green paper notes issued by the Federal Reserve as money.
B) The willingness of the Federal Reserve to redeem dollar bills for gold.
C) The willingness of the U.S. Treasury to redeem dollar bills for gold.
D) The public's fear that failing to accept dollar bills will trigger a hyperinflation.
Answer: A
Q3) In what way are other assets less liquid than money?
Answer: You incur transactions costs when you exchange other assets for money.
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Chapter 3: Interest Rates and Rates of Return
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Sample Questions
Q1) Which of the following is the correct expression for the approximate expected real interest rate?
A) r = i +p<sup>e</sup>
B) r = i - p<sup>e</sup>
C) r = i/p<sup>e</sup>
D) r = ip<sup>e</sup>
Answer: B
Q2) Suppose you have a fixed-rate mortgage with a nominal interest rate of 6% and the expected annual inflation rate over the life of the mortgage is 2%.What is the expected real interest rate?
A) 3%
B) 4%
C) 8%
D) 12%
Answer: B
Q3) What is the yield to maturity of a perpetuity with a coupon of $40 and a price of $800?
Answer: The yield to maturity equals $40/$800 = 5%.
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Chapter 4: Determining Interest Rates
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Sample Questions
Q1) If a government's income tax receipts exceed its expenditures,the government is running a
A) surplus and is a net borrower of funds.
B) surplus and is a net saver of funds.
C) deficit and is a net borrower of funds.
D) deficit and is a net saver of funds.
Q2) The bond demand curve slopes down because
A) interest rates decline as bond prices decline.
B) when bond prices are low, inflation is low.
C) the lender is willing and able to purchase more bonds when the price of the bond is low.
D) the borrower is willing and able to purchase more bonds when the price of the bond is low.
Q3) The supply curve for bonds would be shifted to the right by
A) a decrease in expected profitability.
B) a decrease in the corporate tax on profits.
C) a decrease in tax subsidies for investment.
D) a decrease in government borrowing.
Q4) How can diversification reduce idiosyncratic risk but not systematic risk?
Q5) What is a black swan event?
Page 6
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Chapter 5: The Risk Structure and Term Structure of Interest
Rates
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Q1) According to the expectations theory,which of the following is false?
A) It assumes that instruments with different maturities are perfect substitutes.
B) It implies that a long-term bond rate equals the average of short-term rates covering the same investment period.
C) It implies that the yield curve will usually slope upward.
D) It implies that the shape of the yield curve depends on the expected pattern of future short-term rates.
Q2) Default risk
A) is the probability that a borrower will not pay in full the promised coupon or principal. B) exists only for the bonds of small corporations.
C) is also known as market risk.
D) is zero for bonds issued by cities and states.
Q3) Suppose the private bond rating agencies ceased to exist.What would be the impact on the bond market?
Q4) Why does the segmented markets theory suggest think that bonds of different maturities are not perfect substitutes for each other?
Q5) What are the economic implications of an inverted yield curve?
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Chapter 6: The Stock Market, information, and Financial
Market Efficiency
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Q1) In comparing actively managed mutual funds with those funds that simply buy and hold a large market portfolio (index funds),we would expect that
A) the actively managed funds provide a higher return than the index funds.
B) the index funds provide a higher return after expenses than the actively managed funds.
C) actively managed funds and index funds provide the same returns.
D) index funds provide a lower return than actively managed funds only if taxes are taken into consideration.
Q2) In Wall Street Jargon,a "Bear Market" typically means
A) stock prices have declined by at least 20%.
B) stock prices have declined by at least 50%.
C) stock prices have risen by at least 20%.
D) stock prices have risen by at least 50%.
Q3) Noise traders involves investors who
A) overreact to good and bad news.
B) strictly follow the efficient markets hypothesis.
C) filter out the noise involved in following their stocks.
D) ignore new information about stocks.
Q4) How can stock prices affect spending by businesses and households?
Page 8
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Chapter 7: Derivatives and Derivative Markets
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Sample Questions
Q1) Spot transactions
A) involve immediate settlement.
B) may only take place in face-to-face trading.
C) take place on-the-spot, rather than on an organized exchange.
D) are relatively unimportant in financial markets.
Q2) The role of the Commodity Futures Trading Commission is to
A) set the prices of futures contracts.
B) operate the Chicago Mercantile Exchange.
C) operate the Chicago Board of Trade.
D) monitor potential price manipulation in futures trading.
Q3) The period over which a call or put option exists is
A) determined by its delivery date.
B) determined by its expiration date.
C) determined by whether the contract is written for a commodity or for a financial instrument.
D) indeterminate; options contracts continue in existence until either the buyer or the seller desires to discontinue it.
Q4) Suppose you purchase a call option with a strike price of $85 for an options price of $10 How much profit will you earn if you exercise it when the price is $100?
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Chapter 8: The Market for Foreign Exchange
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Q1) If the British pound depreciates against the U.S.dollar,
A) British businesses gain by an increase in the dollar price of exports to the United States.
B) British consumers gain by a decrease in the pound price of U.S. exports to Britain.
C) British consumers lose by an increase in the pound price of U.S. exports Britain.
D) U.S. consumers lose by an increase in the dollar price of British exports to the United States.
Q2) Under the theory of purchasing power parity,an increase in the U.S.price level of 10% relative to the Japanese price level will result in
A) a 10% appreciation of the yen.
B) a 10% appreciation of the dollar.
C) an appreciation of the yen by an amount that depends upon what happens to the real exchange rate.
D) an appreciation of the dollar by an amount that depends upon what happens to the real exchange rate.
Q3) What is a dollar liquidity swap line?
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Chapter 9: Transactions Costs, asymmetric Information, and the Structure of the Financial System
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Sample Questions
Q1) How does adverse selection affect the willingness of corporations to issue stock?
Q2) Which of the following is NOT true of adverse selection?
A) It would not exist in a world of perfect information.
B) It arises because borrowers typically know more than lenders.
C) It describes a lender's problem of distinguishing the good-risk applicants from the bad-risk applicants.
D) It describes a lender's problem in verifying borrowers are using their funds as intended.
Q3) Private information-collection firms fail to eliminate the adverse selection problem because
A) the law does not allow them to disclose private information about the creditworthiness of firms.
B) they do not monitor borrowers after loans have been made.
C) some investors who do not pay for their services will still profit from them.
D) most companies refuse to provide them with any information.
Q4) How does adverse selection affect the economic efficiency of the used car market?
Q5) How can restrictive covenants help to reduce moral hazard in bond markets?
Page 11
Q6) How does the principal-agent problem increase the possibility of moral hazard?
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Chapter 10: The Economics of Banking
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Sample Questions
Q1) Bank capital is equal to
A) the value of the capital originally invested in the bank by its owners.
B) the value of everything the bank owns.
C) the difference between the value of the bank's assets and the value of its liabilities.
D) the value of the buildings and other physical assets the bank owns.
Q2) A cash item in the process of collection is
A) a U.S. Treasury bill that has matured, but for which the bank has not yet received payment.
B) a car loan payment that is due but not yet received by the bank.
C) a check drawn against another bank, from whom the funds have not yet been collected.
D) currency that has been deposited in the bank, but not yet formally counted and entered into the bank's balance sheet.
Q3) All of the following are examples of borrowings by a bank EXCEPT
A) federal funds.
B) repurchase agreements.
C) discount loans.
D) commercial loans.
Q4) In what ways does a certificate of deposit (CD)differ from a savings deposit?
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Chapter 11: Investment Banks, mutual Funds, hedge Funds, and the Shadow Banking System
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Sample Questions
Q1) Investment banks are vulnerable because
A) the maturity of their liabilities is less than the maturity of their assets.
B) the maturity of their assets is less than the maturity of their liabilities.
C) they tend to be underleveraged.
D) they tend to primarily hold short-term assets.
Q2) An insurance premium is a
A) payment made by an insurance company to a policyholder after the occurrence of an insurable event.
B) payment made by an insurance company to a policyholder following a period in which the policyholder has filed no claims against the company.
C) fee paid by policyholders to insurance companies as payment for coverage.
D) fee paid by policyholders to insurance companies in exchange for special considerations, such as a particularly large policy.
Q3) How do defined-contribution plans differ from defined-benefit plans?
Q4) In what year did the mutual fund industry in the United States begin?
A) 1812
B) 1924
C) 1974
D) 1990
Page 13
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Chapter 12: Financial Crises and Financial Regulation
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Sample Questions
Q1) The primary motive for financial innovation during the regulatory process is A) profit.
B) adherence to the new regulations.
C) return to the way business was conducted prior to the new regulations.
D) increase coordination with other financial institutions.
Q2) The recession that became the Great Depression began
A) two months prior to the stock market crash of 1929.
B) with the stock market crash of 1929.
C) one year after the stock market crash of 1929.
D) with the banking panics of the early 1930s.
Q3) The original intention of the Fed's role as lender of last resort was to make loans to banks that were
A) not illiquid nor insolvent.
B) illiquid, but not insolvent.
C) insolvent, but not illiquid.
D) both illiquid and insolvent.
Q4) What are the likely effects of a sovereign debt crisis in terms of the government's ability to finance its debt?
Q5) Why do governments want to maintain the health of the banking system?
Q6) What are the two most common reasons for a sovereign debt crisis?
Page 14
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Chapter 13: The Federal Reserve and Central Banking
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Q1) Which of the following statements about the Depository Institutions Deregulation and Monetary Control Act of 1980 is NOT correct?
A) It required all banks to maintain reserve deposits with the Fed.
B) It gave member and nonmember banks equivalent access to discount loans.
C) It halted the decline in Fed membership.
D) It eliminated restrictions on interstate banking for member banks.
Q2) Federal Reserve district banks perform all of the following roles EXCEPT
A) managing checking clearing in the payments system.
B) performing regulatory functions.
C) setting the federal funds rate.
D) managing currency in circulation by issuing new Federal Reserve Notes.
Q3) In 2010,doubts were raised about the debt of all of the following countries EXCEPT A) Ireland. B) Greece.
C) Poland.
D) Portugal.
Q4) What is included in the public statement released by the FOMC following the conclusion of its meeting?
Q5) What are the limitations to the Fed's independence?
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Chapter 14: The Federal Reserves Balance Sheet and the
Money Supply Process
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Sample Questions
Q1) Which of the following equations is correct?
A) B = B<sub>non</sub> + BR
B) B = B<sub>non</sub> + ER
C) B = ER + BR
D) B = C + D
Q2) If the Fed purchases securities worth $10 million from a commercial bank,the banking system's balance sheet will show
A) an increase in securities held of $10 million and an increase in bank reserves of $10 million.
B) an increase in securities held of $10 million and a decrease in bank reserves of $10 million.
C) a decrease in securities held of $10 million and an increase in bank reserves of $10 million.
D) a decrease in securities held of $10 million and a decrease in bank reserves of $10 million.
Q3) Suppose the required reserve ratio is 8% and banks do not hold excess reserves.Illustrate on a bank's balance sheet what happens if the Fed buys $250,000 worth of securities from a bank.
Q4) Briefly explain the process of multiple deposit creation.
Page 16
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Chapter 15: Monetary Policy
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Q1) How does the interest paid on reserves set a floor for the federal funds rate?
Q2) The Fed has attempted to solve the problems of being unable to directly control the variables that determine economic performance and the timing lags in observing and reacting to economic fluctuations by
A) pressing Congress for legislation which would expand its powers.
B) using targets to meet its goals.
C) abandoning some goals in order to achieve others.
D) devising new monetary policy tools.
Q3) The policy directive from the FOMC is carried out by
A) the presidents of the district banks.
B) the presidents of commercial banks that are members of the Federal Reserve System.
C) the account manager at the Federal Reserve Bank of New York.
D) private dealers in the bond market.
Q4) In 2006,the Bank of Japan adopted a policy framework focusing on
A) expected inflation one to two years in the future.
B) current inflation.
C) maintaining a fixed exchange rate.
D) the growth in the money supply.
Q5) What has been the approach of the European Central Bank to monetary targeting?
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Chapter 16: The International Financial System and Monetary Policy
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Q1) When the Fed sells foreign assets and buy domestic assets at the same time,
A) its assets and liabilities rise by the same amount.
B) its assets and liabilities fall by the same amount.
C) the composition of its assets changes, but its liabilities are unaffected.
D) the composition of its liabilities changes, but its assets are unaffected.
Q2) Which of the following will NOT result from an unsterilized intervention in which the central bank sells foreign assets to purchase domestic currency?
A) Domestic interest rates will rise.
B) The foreign-exchange value of the domestic currency will rise.
C) The central bank will experience a decrease in international reserves.
D) The domestic money supply will rise.
Q3) If the U.S.current account balance is positive,
A) U.S. citizens must have purchased more merchandise abroad than they sold abroad.
B) the foreign-exchange value of the dollar must be rising.
C) the foreign-exchange value of the dollar must be falling.
D) U.S. citizens have funds to lend to foreigners.
Q4) How did maintaining the gold standard deepen the severity of the Great Depression?
Q5) Discuss the problems associated with the imposition of capital controls.
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Chapter 17: Monetary Theory I: the Aggregate Demand and Aggregate Supply Model
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Q1) Which of the following statements concerning stabilization policy is correct?
A) Increasing government spending during an economic boom would be an example of a stabilization policy.
B) Increasing taxes during a recession would be an example of a stabilization policy.
C) New Keynesian economists are skeptical of the value of stabilization policies.
D) Increasing the money supply during a recession is an example of a stabilization policy.
Q2) Make use of the misperceptions theory to explain why the short-run aggregate supply curve is upward sloping.
Q3) If the expected price level increases at the same time that the federal government cuts taxes,in the short run
A) aggregate output and the price level will both increase.
B) aggregate output will increase, but the price level will fall.
C) aggregate output and the price level will both fall.
D) the price level will increase, but aggregate output may either increase or decrease.
Q4) How does an increase in interest rates affect net exports?
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Page 19
Chapter 18: Monetary Theory Ii: the Is-Mp Model
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Q1) What unusual measures did the Fed take in trying to reduce the risk premium during the Financial Crisis of 2007-2009?
A) buying mortgage-backed securities issued by Fannie Mae and Freddie Mac
B) reducing the federal funds rate multiple times
C) issuing its own securities
D) eliminating the discount rate on loans to member banks
Q2) If a $10 billion increase in investment leads to a $20 billion increase in GDP,the multiplier is
A) 0.5
B) 2
C) 10
D) 30
Q3) In a closed economy,national saving equals
A) C + I + G.
B) Y - C - G.
C) Y - C - I.
D) Y - G - I.
Q4) What is the inflation gap? What is the output gap?
Q5) Explain how does an increase in real interest rates affect the components of AE.
Page 20
Q6) How does the goods market return to equilibrium if AE is less than production?
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