Bank Operations and Management
Exam Questions
Course Introduction
This course provides an in-depth exploration of the fundamental principles and contemporary practices in bank operations and management. Students will gain a comprehensive understanding of the structure and functions of banking institutions, including asset-liability management, credit analysis, risk management, and regulatory compliance. The course also covers topics such as the role of technology in banking, customer relationship management, and the impact of globalization on financial services. Case studies and real-life examples are utilized to illustrate challenges faced by banks and the strategies used by managers to achieve operational efficiency, profitability, and regulatory adherence, preparing students for careers in the banking sector.
Recommended Textbook
Bank Management 7th Edition by Timothy W. Koch
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Page 2
Chapter 1: Banking and the Financial Services Industry
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Q1) Universal banks were originally centered in Western Europe.
A)True
B)False
Answer: True
Q2) Bank holding companies and financial holding companies generally do not pay income tax because:
A)they are always chartered as non-profit corporations.
B)most of their income is subsidiary paid dividends, of which 80% is tax-exempt.
C)the subsidiaries always operate at a net loss.
D)bank holding companies must carry deposit insurance.
E)bank holding companies are not subject to Internal Revenue Service regulations.
Answer: B
Q3) Super-regional banks typically have limited global operations.
A)True
B)False
Answer: True
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Chapter 2: Government Policies and Regulation
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Q1) Discuss two of the shortcomings of restrictive bank regulation. Answer: One of the shortcomings of restrictive bank regulation is that it can stifle innovation and competition within the banking industry. When regulations are too strict, it can create barriers for new banks to enter the market and for existing banks to offer new products and services. This can limit consumer choice and lead to a lack of innovation in the industry.
Another shortcoming is that restrictive bank regulation can lead to a decrease in access to credit for individuals and businesses. When banks are heavily regulated, they may become more cautious in their lending practices, making it harder for individuals and businesses to obtain loans and credit. This can have a negative impact on economic growth and development, as access to credit is essential for investment and expansion.
Overall, while bank regulation is important for maintaining stability and protecting consumers, overly restrictive regulations can have negative consequences for innovation, competition, and access to credit. It is important for regulators to strike a balance between ensuring the safety and soundness of the banking system and allowing for innovation and access to credit.
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Page 4
Chapter 3: Analyzing Bank Performance
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Q1) hat is the equity multiplier for a bank where equity is equal to 10% of total assets?
A)90.00
B)10.00
C)1.10
D)110.00
E)1.00
Answer: B
Q2) A bank that deals primarily with commercial customers is called:
A)an Edge Act bank.
B)a retail bank.
C)a wholesale bank.
D)a uniform bank.
E)a liability bank.
Answer: C
Q3) Regarding interest expense, volume effects suggest that the mix of liabilities among banks may differ.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Managing Noninterest Income and Noninterest Expense
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Q1) Mortgage origination is countercyclical to a bank's net interest margin business.
A)True
B)False
Q2) Trading revenue for banks is highly cyclical.
A)True
B)False
Q3) Deposit service charges are a stable source of bank revenue.
A)True
B)False
Q4) Discuss two ways that a bank can decrease its non-interest expense.
Q5) The operating risk ratio measures:
A)cost controls versus fee generation.
B)fee income versus net interest margin.
C)non-interest expense versus non-interest income.
D)depositors versus employees.
E)depreciation versus required reserves.
Q6) Banks with the highest efficiency ratios are presumed to be the most efficient. A)True
B)False
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Chapter 5: The Performance of Nontraditional Banking Companies
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Q1) Today, most industrial loan companies are located in Indiana .
A)True
B)False
Q2) Investment banks generally engage in all of the following types of business activities except:
A)proprietary trading.
B)goodwill recovery.
C)market making.
D)securities underwriting..
E)advisory services
Q3) ______________ represent amounts owed by Goldman Sachs to brokers, the firm's customers, and counter-parties to derivative contracts.
A)collateralized agreements
B)financial instruments
C)collateralized financings
D)receivables
E)payables
Q4) Mutual of Omaha's business model is to combine insurance and banking activities.
A)True
B)False
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Chapter 6: Pricing Fixed-Income Securities
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Q1) A 90-day Treasury bill is quoted as having a price of $987.50.What is its bond equivalent yield?
A)5.00%
B)5.13%
C)5.23%
D)5.62%
E)5.79%
Q2) In January, you purchased a 14% semi-annual coupon bond ($1,0000 par) that had a remaining maturity of five years for $827.95.Six months later, immediately following an interest payment, you sold the bond.At the time of the sale, interest rates were 10%.What was your return?
A)7.1%
B)38.2%
C)46.4%
D)146.4%
E)296.3%
Q3) What are some of the problems with the discount yield?
Q4) Why is knowing a bond's duration useful?
Q5) Discuss why the effective annual rate will never be less than the simple interest rate.
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Chapter 7: Managing Interest Rate Risk: Gap and Earnings
Sensitivity
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Q1) What type of GAP analysis directly measures a bank's net interest sensitivity through the last day of the analysis period?
A)Earnings
B)Net Income
C)Maturity
D)Periodic
E)Cumulative
Q2) Keeping all other factors constant, banks can reduce the volatility of net interest income by:
A)adjusting the dollar amount of rate-sensitive assets.
B)adjusting the dollar amount of fixed-rate liabilities.
C)using interest rate swaps.
D)Bank can reduce volatility of net interest income by doing all of the above.
E)a.and c.only
Q3) Static GAP analysis focuses on managing net interest income in the short-run.
A)True
B)False
Q4) Discuss three factors that affect net interest income.
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Q5) Discuss the statement "The relationship between GAP and net interest income is too simplistic."
Chapter 8: Managing Interest Rate Risk: Economic Value of Equity
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Q1) What is the bank's expected economic net interest income?
A)$14.75
B)$32.25
C)$44.00
D)$76.25
E)$120.25
Q2) Which of the following is true regarding duration gap analysis?
A)The magnitude of the duration gap is related to the amount of interest rate risk a bank is subject to.
B)Management can adjust the duration gap to speculate on future interest rate changes.
C)A positive duration gap means a bank's market value of equity will decrease with an increase in interest rates.
D)All of the above are true.
E)a.and c.
Q3) Discuss the differences between assets and liabilities that are price sensitive and those that are rate sensitive.
Q4) What are the strengths and weaknesses of duration gap analysis?
Q5) How does effective duration differ from modified duration?
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Chapter 9: Using Derivatives to Manage Interest Rate Risk
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Q1) A zero cost collar:
A)is risk-free.
B)is designed to offset margin requirements.
C)has a larger premium than a reverse collar.
D)designed so the buyer has no net premium payment.
E)None of the above.
Q2) When futures prices falls, buyers gain at the expense of sellers.
A)True
B)False
Q3) Financial futures are:
A)a commitment between two parties to trade a financial instrument at a certain rate at a specified time in the future.
B)A call option on a standardized asset at a certain price at a specified time in the future.
C)A put option on a standardized asset at a certain price at a specified time in the future.
D)a commitment between two parties on the price of a standardized financial asset with the final settlement specified time in the future.
E)b.and c.
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11
Chapter 10: Funding the Bank
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Q1) What is the net cost of an average demand deposit?
A)3.0%
B)3.3%
C)3.6%
D)3.9%
E)4.2%
Q2) ___________ includes transaction accounts, MMDAs, savings accounts and small time deposits.
A)Retail funding
B)Wholesale funding
C)Borrowed funding
D)Equity funding
E)Lockbox funding
Q3) The least expensive source of funds for a typical bank is:
A)certificates of deposit.
B)negotiable order of withdrawal accounts.
C)savings accounts.
D)demand deposit accounts.
E)federal funds purchased.
Q4) How has the use of "hot money" affected bank's liquidity risk?
Page 12
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Chapter 11: Managing Liquidity
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Q1) More liquid assets tend to earn lower returns, everything else the same.
A)True
B)False
Q2) The two-week period during which a bank must hold sufficient legal reserves is called the:
A)deposit computation period.
B)deposit maintenance period.
C)vault cash computation period.
D)base computation period.
E)maintenance period.
Q3) When increasing liabilities to meet liquidity needs, a bank should consider all of the following except:
A)brokerage fees.
B)required reserves.
C)FDIC insurance premiums.
D)lost interest income.
E)A bank should consider all of the above when increasing liabilities to meet liquidity needs.
Q4) Why do banks prefer a lagged reserve accounting system to a contemporaneous reserve accounting system?
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Chapter 12: The Effective Use of Capital
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Q1) Under the current risk-based capital requirements, banks must hold capital against standby letters of credit they have issued as guarantees.
A)True
B)False
Q2) What is the amount of risk-adjusted assets for the bank?
A)$7,700
B)$8,700
C)$9,700
D)$14,700
E)$15,700
Q3) Under the current capital requirements, assets in Category 2, such as repurchase agreements, have an effective total capital-to-total-assets ratio of:
A)1.6%.
B)2.0%.
C)4.0%.
D)8.0%.
E)8.6%.
Q4) Discuss the rationale behind risk-based capital requirements.
Q5) What are some of the weaknesses behind risk-based capital standards?
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Chapter 13: Overview of Credit Policy and Loan
Characteristics
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Q1) Loans that finance the construction of roads and public utilities in new subdivisions are labeled:
A)public work loans.
B)take-out loans.
C)domestic loans.
D)land development loans.
E)working capital loans.
Q2) The risk of potential loss of interest and principal on international loans due to borrowers in a country refusing to make timely payments, as per the loan agreement is known as what type of risk?
A)International risk
B)Foreign risk
C)Continent risk
D)Country risk
E)Government risk
Q3) Discuss how seasonal working capital needs differ from permanent working capital needs.
Q4) The Internet has led to larger spreads for more standardized loan products.
A)True
B)False
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Chapter 14: Evaluating Commercial Loan Requests and Managing Credit Risk
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Q1) Financial statements that have been audited are guaranteed to be 100% accurate.
A)True
B)False
Q2) Short-term working capital loans are generally repaid with funds from:
A)investing cash flows.
B)issuing new debt.
C)reductions in inventory and receivables.
D)issuing new equity
E)redeeming marketable securities.
Q3) In loan participations, the _____ makes the original loan and sells participations.
A)lead bank
B)interbank
C)loan production office
D)holding firm
E)originate bank
Q4) Many bankers focus on eliminating the error of denying a loan to a customer who ultimately would repay the debt.
A)True
B)False
Page 16
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Chapter 15: Evaluating Consumer Loans
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Q1) If the loan is a discount loan, what are the net proceeds of the loan?
A)$2,200
B)$2,100
C)$2,000
D)$1,800
E)Cannot be determined
Q2) Which is more expensive for a bank: 1.Making a loan to a customer that does not pay the loan back or 2.Denying a loan to someone who would have paid the bank? Explain your answer.
Q3) Most consumer loans are secured.
A)True
B)False
Q4) Which of the following is an example of a non-installment loan?
A)Credit card
B)30-year mortgage
C)Bridge loan
D)5-year auto loan
E)Home equity line of credit
Q5) Discuss why some are concerned at the recent increase in both credit card debt and personal bankruptcies.
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Chapter 16: Managing the Investment Portfolio
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Q1) A security might exhibit negative convexity because:
A)its duration is greater than its maturity.
B)it has a fixed interest rate below current market rates.
C)a bank has a negative GAP.
D)it has embedded options.
E)markets are not efficient.
Q2) Which of the following U.S.government agency securities are backed by the full faith and credit of the U.S.Government?
A)Government National Mortgage Association (Ginnie Mae)
B)Student Loan Marketing Association (Sallie Mae)
C)Small Business Administration (SBA)
D)all of the above
E)a.and c.only
Q3) Under a passive investment strategy, secondary reserves are invested in short-term securities.
A)True
B)False
Q4) Most long-term municipal bonds are serial bonds.
A)True
B)False
Page 18
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Chapter 17: Global Banking Activities
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Q1) Foreign banks generally pay higher deposit rates than U.S.banks.
A)True
B)False
Q2) A forward market exchange in foreign currencies is an agreement to exchange:
A)currencies in the future at an unspecified time at an exchange rate determined at the time the contract is agreed to.
B)currencies in the future at a specified time at an unknown exchange rate.
C)currencies in the future at an unspecified time at an unknown exchange rate.
D)a product for a foreign currency in the future at a specified time.
E)currencies in the future at a specified time at an exchange rate determined at the time the contract is signed.
Q3) Historically, what has prevented universal banks from operating in the United States?
A)The Universal Bank Prohibition Act
B)The Glass-Stegall Act
C)U.S.banks have no desire to become universal banks.
D)Universal banks have less risk diversification capabilities than traditional U.S.based banks.
E)a.and c.only
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