Bank Management
Textbook Exam Questions
Course Introduction
Bank Management explores the principles, practices, and techniques involved in managing financial institutions, particularly banks. This course covers key topics such as asset and liability management, risk assessment, regulatory compliance, lending practices, investment strategies, and the impact of technological advancements on banking operations. Students will gain an understanding of financial statements, capital adequacy, liquidity management, and the decision-making processes that underpin effective management in both retail and commercial banking environments. Through case studies and real-world examples, the course prepares students to analyze banking operations, mitigate risk, and adapt to the dynamic landscape of the financial services industry.
Recommended Textbook
Money Banking and Financial Markets 5th Edition by Stephen Cecchetti
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Page 2
Chapter 1: An Introduction to Money and the Financial System
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Sample Questions
Q1) The New York Stock Exchange is an example of a:
A) financial instrument.
B) financial institution.
C) financial market.
D) bank.
Answer: C
Q2) Identify which of the following is not one of the five core principles of money and banking.
A) Risk requires compensation
B) Time has value
C) Information is the basis for decisions
D) Stability creates risk
Answer: D
Q3) What is the primary function of U.S. regulatory agencies in the U.S. financial system?
Answer: To provide wide-ranging financial regulation-rules for the operation of financial institutions and markets-and supervision -oversight through examination and enforcement.
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Page 3
Chapter 2: Money and the Payments System
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Sample Questions
Q1) Carlos pays his cable bill using his bank's internet banking web site to withdraw funds from his checking account. This transaction is a(n):
A) automated clearinghouse transaction (ACH).
B) digitized-check transaction.
C) e-money transaction.
D) Fedwire transaction.
Answer: A
Q2) A cross-country analysis of money growth supports the conclusion that:
A) there is no correlation between the growth rate of the quantity of money and the rate of inflation.
B) the correlation between the money growth rate and inflation in most countries was positive but very small.
C) the correlation between inflation and money growth in most industrialized countries was actually negative.
D) the correlation between inflation and the money growth rate was positive and relatively strong.
Answer: D
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Chapter 3: Financial Instruments, Financial Markets, and Financial Institutions
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Sample Questions
Q1) What is meant by the "paradox of leverage?"
Answer: The paradox of leverage occurs when all financial institutions try to deleverage at once.
This will prove counterproductive as falling asset prices will mean more losses, diminishing their net worth still more, raising leverage and making the assets they hold seem riskier, compelling further sales, and so on.
Q2) The primary use of derivative contracts is:
A) for IRA and other pension plans since they only have value well into the future.
B) to shift risk among investors.
C) for investors seeking a greater return by taking greater risk.
D) to add to the profits an investor obtains through information asymmetry.
Answer: B
Q3) Loans made between borrowers and lenders are:
A) usually not taxable at the federal level.
B) legal only in the state of origination.
C) assets of the lenders.
D) assets of the borrowers.
Answer: C
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Chapter 4: Future Value, Present Value and Interest Rates
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Sample Questions
Q1) Using the rule of 72, determine the approximate time it will take $1,000 to double given the following interest rates.
a) 5.5%
b) 10.0%
c) 30.0%
d) 2.0%
e) 4.5%
Q2) Usually an investment will be profitable if:
A) the internal rate of return is less than the cost of borrowing.
B) the cost of borrowing is equal to the internal rate of return.
C) it is financed with retained earnings.
D) the cost of borrowing is less than the internal rate of return.
Q3) Explain why countries that have volatile inflation rates are likely to have high nominal interest rates.
Q4) Which investment plan will provide the highest future value: $500 invested at 5 percent annually for four years and then that balance invested at 7 percent annually for an additional three years, or $500 invested at 6 percent annually for seven years?
Q5) How has Islamic banking redefined lending to deal with Islam's prohibition of usury?
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Chapter 5: Understanding Risk
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Sample Questions
Q1) An investment will pay $2,000 half of the time and $1,400 half of the time. The standard deviation for this investment is:
A) $90,000.
B) $300.
C) $1,700.
D) $30.
Q2) Which of the following individuals is least likely to use value at risk as an important factor in his/her investment decision?
A) An individual considering a mortgage to buy his first home.
B) A family considering purchasing health insurance.
C) A policy maker considering regulation of depository institutions.
D) A mutual fund manager choosing the allocation of investments in the fund's portfolio.
Q3) Which of the following statements is true?
A) Leverage increases expected return and increases risk.
B) Leverage increases expected return and reduces risk.
C) Leverage decreases expected return but has no effect on risk.
D) Leverage decreases expected return and increases risk.
Q4) Explain the rapid rise in popularity of mutual funds.
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Page 7
Chapter 6: Bonds, Bond Prices, and the Determination of Interest Rates
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Sample Questions
Q1) A zero-coupon bond refers to a bond which:
A) does not pay any coupon payments because the issuer is in default.
B) promises a single future payment.
C) pays coupons only once a year.
D) pays coupons only if the bond price is above face value.
Q2) The larger the bond dealer's spread the:
A) less liquid is the market for that bond.
B) greater is the coupon rate for that bond.
C) more liquid is the market for that bond.
D) less risk there is for the dealer to hold that bond.
Q3) A 10-year Treasury note as a face value of $1,000, price of $1,200, and a 7.5% coupon rate. Based on this information, we know the:
A) present value is greater than its price.
B) current yield is equal to 8.33%.
C) coupon payment on this bond is equal to $75.
D) coupon payment on this bond is equal to $90.
Q4) Explain why the bid-ask spread on most municipal bonds would be greater than the spread on U.S. Treasury bonds.
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Chapter 7: The Risk and Term Structure of Interest Rates
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Sample Questions
Q1) According to the expectations hypothesis, if investors believed that, for a given holding period, the average of the expected future short-term yields was greater than the long-term yield for the holding period, they would act so as to drive:
A) down the price of the short-term bond and drive up the price of the long-term bond.
B) up the price of the short-term bond and drive down the price of the long-term bond. C) up the prices of both the short- and long-term bonds.
D) down the prices of both the short- and long-term bonds.
Q2) How did asset backed commercial paper (ABCP) rollover risk contribute to the financial crisis of 2007-2009?
Q3) What is the effective after-tax yield to an investor from a bond paying $70 per $1,000 annually, if the investor is in a 25% marginal tax bracket? Explain.
Q4) Explain why an inverted yield curve is a valuable forecasting tool?
Q5) Describe the concept of flight to quality in terms of the Russian government default of August 1998.
Q6) What is the main purpose (function) of bond rating services?
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Chapter 8: Stocks, Stock Markets and Market Efficiency
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Sample Questions
Q1) Discuss the inefficiencies that can be caused by stock market bubbles, especially focusing on firms and consumers.
Q2) If each company that made up the Dow Jones Industrial Average increased the number of their shares outstanding by 10%, but the share prices did not change, the value of the index would:
A) not change.
B) increase by 10%.
C) increase, but by less than 10%.
D) decrease since there are more shares outstanding.
Q3) Which of the following statements is not true?
A) A value-weighted index is a better index to use to reflect changes in the economy's overall wealth.
B) A price-weighted index is a better index to use to reflect the average change in the price of a typical share of stock.
C) The Dow Jones Industrial Average is a price-weighted index.
D) The S&P 500 is a price-weighted index.
Q4) Considering the return an investor requires from a stock, what are the two components that make up that return? Briefly explain each of these components.
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Page 10
Chapter 9: Derivatives: Futures, Options, and Swaps
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Sample Questions
Q1) Why does the time value of the option tend to vary directly with the time to expiration?
Q2) Explain why a forward contract may actually carry more risk than a futures contract.
Q3) Suppose you purchase a put option to sell General Motors common stock at $80 per share in March. The current price of GM stock is $83 and the time value of the option is $1. What is the intrinsic value of the option?
Q4) What would be the value of an option on a stock that sells at a fixed price with a standard deviation of zero? Explain.
Q5) There is a futures contract for the purchase of 1,000 bushels of corn at $3.00 per bushel. At the end of the day when the market price of corn falls to $2.50:
A) the buyer (long position) needs to transfer $500 to the seller (short position).
B) the seller (long position) needs to transfer $500 to the buyer (short position).
C) nothing happens since marked to market adjustments only occur if the market price rises above the contract price.
D) nothing happened since no funds are transferred until the settlement date.
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Chapter 10: Foreign Exchange
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Sample Questions
Q1) A foreign exchange intervention is:
A) synonymous with a fixed exchange rate.
B) the use of public statements by government officials to influence inflation expectations.
C) only used in crisis situations.
D) the buying/selling of currencies to affect supply or demand which impacts the exchange rate.
Q2) Considering the foreign exchange market, identify at least four causes for a decrease in the demand for dollars.
Q3) Ignoring risk differences, if we observe American investors purchasing foreign bonds when the U.S. interest rate is above the foreign interest rate, we could assume that:
A) American investors lack good information.
B) these investors expect the dollar to appreciate over the life of their investment.
C) these investors expect the dollar to depreciate over the life of their investment.
D) these investors expect that U.S. inflation will slow.
Q4) Explain why an appreciating U.S. dollar does not benefit everyone in the U.S.
Q5) Briefly describe the foreign exchange market.
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Page 12
Chapter 11: The Economics of Financial Intermediation
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Sample Questions
Q1) Explain how Federal Deposit Insurance (FDIC) could potentially create a moral hazard for the managers of deposit institutions.
Q2) Which of the following is a problem of moral hazard?
A) A lender cannot distinguish good risk from bad risk borrowers.
B) An individual who purchases auto insurance begins to leave his or her keys in the car while running into a store.
C) Life insurance companies offer an average premium to smokers and non-smokers so they do not have to have two different premiums.
D) An auto insurance company charges higher premiums to younger drivers than what they charge to older drivers.
Q3) Financial intermediaries, through their ability to lower transaction costs:
A) allow for people to be more self-sufficient.
B) increase the amount of trading that occurs in an economy.
C) take people away from their comparative advantage.
D) reduce the number of financial transactions that occur.
Q4) Explain how the threat of a leveraged buyout or a takeover can actually address the problem of moral hazard.
Q5) Explain why deflation can be so troubling to borrowers and lenders.
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Chapter 12:Depository Institutions: Banks and Bank Management
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Sample Questions
Q1) A bank's return on equity (ROE) is calculated by:
A) dividing the bank's net profit after taxes by the bank's capital.
B) dividing the banks liabilities by the bank's capital.
C) taking the bank's assets plus the net profit after taxes and dividing this sum by the bank's capital.
D) dividing the bank's net profit after taxes by the sum of the bank's assets and its liabilities.
Q2) Money center banks differ from community banks in all of the following ways except: A) they are usually much smaller.
B) they obtain their funds primarily through borrowing and not by deposits.
C) they are a much smaller percentage of the total number of banks.
D) they are actively engaged in the money market.
Q3) If you focus on interest-rate risk, can you explain why banks offer higher interest rates on longer-term CDs than they do on short-term CDs?
Q4) Why would a bank usually want to minimize the amount of excess reserves it has on hand?
Q5) What is the equation that reflects a bank's balance sheet?
Page 14
Q6) Why are U.S. banks prohibited from owning stocks?
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Chapter 13:Financial Industry Structure
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Sample Questions
Q1) Considering the government-sponsored enterprises like Freddie Mac, Fannie Mae, and others, do you see any indication that the managers of these agencies are creating a moral hazard? Explain.
Q2) A homeowner discovers that a large tree in his yard is diseased and may fall in a bad windstorm and if it falls, it will likely destroy the garage. The cost to have the tree cut down is significant but the homeowner has an insurance policy and figures that if the tree falls and destroys the garage, the insurance company will pay, and the deductible is less than the cost to have the tree removed. This is an example of:
A) information symmetry.
B) adverse selection.
C) moral hazard.
D) screening.
Q3) The reinsurance market is characterized as having:
A) a few buyers and many sellers.
B) many buyers and sellers.
C) few buyers and sellers.
D) many buyers and a few sellers.
Q4) Evaluate the pros and cons of the repeal of the Glass-Steagall Act of 1933.
Q5) In what way(s) can a pension plan be seen as the opposite of life insurance?
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Chapter 14: Regulating the Financial System
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Sample Questions
Q1) You have savings accounts at two separately FDIC insured banks. At one of the banks your account has a balance of $200,000. At the other bank the account balance is $60,000. You find out the banks are going to merge. If you are concerned about the possibility of the new bank failing, you should:
A) do nothing; you are still insured up $250,000 per account.
B) consider moving $10,000 to another account at the same bank.
C) consider moving $10,000 to another account at a different bank.
D) do nothing; as an individual you are only insured up $250,000 no matter where the accounts are.
Q2) What potential problems are created by regulatory competition?
Q3) The need for a lender of last resort was identified as far back as:
A) the start of the Great Depression in 1929.
B) 1913, when the Federal Reserve was created.
C) 1873, by British economist Walter Bagehot.
D) 1776, by the first U.S. Secretary of the Treasury, Alexander Hamilton.
Q4) Credit Unions are regulated by a combination of agencies which includes:
A) state authorities.
B) The Federal Reserve.
C) The Federal Deposit Insurance Corporation.
D) The Office of the Comptroller of the Currency.
Page 16
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Chapter 15: Central Banks in the World Today
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Sample Questions
Q1) The idea that central banks should be independent of political pressure is an idea that:
A) has been around since there were central banks.
B) is relatively new.
C) every central bank was founded upon.
D) became quite popular in the early 1900s.
Q2) The Federal Reserve's Fedwire system is used mainly to provide:
A) a means for foreign banks to transfer funds to U.S. banks.
B) an inexpensive and reliable way for financial institutions to transfer funds to one another.
C) an inexpensive way for individuals to pay their bills on-line.
D) a means for the Treasury to collect tax payments.
Q3) Which of the following statements is not true?
A) The potential growth rate in the U.S. economy may have fallen following the financial crisis of 2007-2009.
B) Periods of growth below the potential level are periods of low unemployment.
C) Periods of growth above the potential level are periods of low employment.
D) Periods of growth below the potential level are periods of high unemployment.
Q4) What are the operational components of central bank independence?
Q5) What do modern central bankers not do?
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Chapter 16: The Structure of Central Banks: The Federal
Reserve and the European Central Bank
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Q1) Which of the books used at the FOMC meetings is/are treated as secret documents and not released to the public until after a number of years have passed?
A) The Bluebook and the Beigebook
B) The Beigebook and the Greenbook
C) The Tealbook
D) The Bluebook and the Greenbook
Q2) Which statement best completes the following sentence; "The U.S. dollar is to the fifty states as the euro is to "?
A) The European Central Bank
B) The states of the European Monetary Union
C) The National Central Banks
D) The European System of Central Banks
Q3) The FOMC controls the real interest rate:
A) if inflation changes quickly.
B) if inflation doesn't change quickly.
C) only if it adjusts the federal funds rate to match the changes in the rate of inflation.
D) only on an annual basis.
Q4) In what ways do the regional Federal Reserve Banks influence monetary policy?
Page 18
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Chapter 17: The Central Bank Balance Sheet and the Money Supply Process
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Sample Questions
Q1) Gold is:
A) the most important asset on the Fed's balance sheet.
B) extremely important as an asset for the Fed.
C) a small portion of the Fed's assets.
D) very important for monetary policy in the U.S.
Q2) The collapse of the Thai currency, the baht, was partially due to:
A) inaction by the Federal Reserve.
B) the European Central Bank.
C) information provided by the central bank of Thailand.
D) information not provided by the central bank of Thailand.
Q3) Most responsible central banks publish their balance sheet:
A) at least once a year.
B) quarterly.
C) at least monthly.
D) semi-annually.
Q4) Explain the impact on the Fed's balance sheet from a $10 million open market purchase of U.S. Treasury Securities. Be sure to identify which categories of assets and liabilities change and by what amounts.
Page 19
Q5) What was the main reason the Fed stopped announcing growth targets for money aggregates in the early 2000s?
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Chapter 18:Monetary Policy: Stabilizing the Domestic Economy
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Sample Questions
Q1) If reserve demand is volatile, in order for the central bank to keep interest rates from being volatile, it must:
A) target the quantity of reserves.?
B) set targets for both interest rates and the quantity of reserves.?
C) not target the interest rates.?
D) let the quantity of reserves fluctuate.
Q2) From 1979 to 1982, the Fed targeted bank reserves as the monetary policy tool. One side effect of this strategy was: ?
A) the inflation rate increased to over 18 percent in 1983.?
B) many banks failed that otherwise may not have.?
C) interest rates rose very high.?
D) inflation remained high for most of the 1980's.
Q3) The types of loans the Fed makes consist of each of the following, except: ?
A) primary credit.?
B) conditional credit.?
C) seasonal credit.?
D) secondary credit.
Q4) What is the difference between primary and secondary credit offered by the Fed and who would use secondary credit?
Page 20
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Chapter 19:Exchange Rate Policy and the Central Bank
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Q1) What were the contributing factors that led to Argentina's initial adoption of a currency board and then its subsequent failure?
Q2) Capital flows freely between two countries and the countries have fixed exchange rates. The treasury bonds of each country have similar maturities but different expected returns. What can you deduce from this information?
Q3) International capital mobility:
A) contributes to the rigidity of exchange rates.
B) contributes to the equalization of expected returns across countries.
C) eliminates arbitrage opportunities.
D) makes interest rates equal across countries.
Q4) One reason a country would be better off fixing its exchange rate is if:
A) it has a strong reputation for controlling inflation on its own.
B) it lacks ample foreign exchange reserves.
C) it is well-integrated with the economy of the country to whose currency its currency is fixed.
D) its own macroeconomic characteristics are inversely correlated with the macroeconomic characteristics of the country to whose currency its currency is fixed.
Q5) Is the European Monetary Union a form of dollarization? Explain.
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Chapter 20:Money Growth, Money Demand and Modern Monetary Policy
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Q1) Is it a necessary condition that velocity is constant and that real output growth is assumed to be zero to have Milton Friedman's assertion that inflation is a monetary phenomenon be true?
Q2) Professor Milton Friedman stated that "inflation is a monetary phenomenon." What did he mean by this statement and what is the basis for this assertion?
Q3) Economic researchers have found:
A) no examples of countries with high rates of money growth and low inflation rates.
B) many examples of countries with low rates of money growth and high inflation rates.
C) many examples of countries with high rates of money growth and low inflation rates.
D) no relationship between rates of money growth and inflation rates.
Q4) Control of money growth to stabilize inflation only works if velocity were constant. In practice, changes in velocity:
A) can safely be ignored in countries with relatively low inflation rates.
B) are important when inflation is low.
C) must be taken into account no matter what the inflation rate.
D) can always safely be ignored.
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Page 22
Chapter 21:Output, Inflation, and Monetary Policy
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Q1) Can central bankers set short-term interest rate targets and still control inflation in the long run or are these goals mutually impossible? Explain.
Q2) If the slope of the monetary policy reaction curve is relatively flat, it means that central bankers are:
A) very concerned about keeping inflation close to the target rate.
B) not concerned at all about inflation.
C) less concerned about keeping inflation close to its short-run target.
D) not going to let inflation deviate from its target at all.
Q3) The aggregate demand curve shows the quantity of:
A) nominal output demanded at each level of inflation.
B) real output demanded at each level of inflation.
C) output made available at each level of inflation.
D) real output demanded at each level of real interest rate.
Q4) If a recession were the result of monetary policy, we should observe:
A) inflation increasing as output decreases.
B) potential output decreasing.
C) inflation slowing as output falls.
D) a high rate of money growth.
Q5) Explain why the short-run aggregate supply curve has a positive slope.
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Chapter 22:Understanding Business Cycle Fluctuations
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Q1) Higher potential output levels:
A) put upward pressure on real interest rates.
B) put downward pressure on real interest rates and upward pressure on inflation rates.
C) put upward pressure on real interest rates and downward pressure on inflation rates.
D) none of the answers given is correct.
Q2) Why can monetary policymakers neutralize demand shocks but not supply shocks?
Q3) Permanent declines in inflation such as those seen in Chile and Sweden must have been a result of:
A) an increase in the central bank's inflation target.
B) a decrease in the central bank's inflation target.
C) less independence for their central banks.
D) a change to targeting interest rates instead of inflation rates.
Q4) Explain why real business cycle theory renders the short-run aggregate supply curve irrelevant.
Q5) What explanations have been offered to account for the Great Moderation?
Q6) Does an increase in the rate of inflation always imply that aggregate demand is increasing? Explain.
Q7) Explain the view called real business cycle theory.
Page 24
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Chapter 23: Modern Monetary Policy and the Challenges
Facing Central Bankers
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Q1) The direct impact on spending of short-term interest rate changes by central banks is:
A) definitely the strongest of all transmission mechanisms.
B) not that powerful.
C) only effective for consumption but not investment.
D) only effective for net exports but not for investment and consumption.
Q2) The relationship between real estate markets and interest rates is:
A) nonexistent.
B) inverse; higher interest rates drive down real estate prices and vice versa.
C) complex; cuts in the short-term interest rate lead to increases in long-term rates and higher real estate prices.
D) direct; high interest rates lead to high real estate values as people abandon other financial assets.
Q3) Why are policymakers reluctant to make unconventional tools part of their regular arsenal of policy tools?
Q4) Why is deflation, combined with a recessionary gap, and a nominal interest rate that cannot be reduced a monetary policymaker's nightmare?
Q5) How did financial regulation affect bank lending in the 1980s?
Q6) What are the pros and cons of a policy of "leaning against bubbles?"
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