Bank Operations and Management Exam Solutions
Course Introduction
This course provides an in-depth understanding of the principles, functions, and operations within modern banking institutions. Students will explore the organizational structure of banks, the regulatory environment, asset and liability management, lending processes, risk management, and the impact of technology on banking services. The course also examines the strategic decision-making processes in bank management, including product and service development, customer relationship management, and the role of banks in the financial system. Case studies and practical examples will be used to illustrate contemporary challenges and best practices in bank operations and management.
Recommended Textbook
Bank Management 7th Edition by Timothy W. Koch
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17 Chapters
910 Verified Questions
910 Flashcards
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Page 2
Chapter 1: Banking and the Financial Services Industry
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Sample Questions
Q1) Mortgage defaults were greatest in geographic markets that had experienced the greatest run-up in real estate prices.
A)True
B)False
Answer: True
Q2) Which of the following mortgage types were offered to "subprime" borrowers?
A)Interest Only
B)Option Adjustable-Rate
C)Principal Only
D)All of the above
E)a.and b.only
Answer: E
Q3) Which of the following is not a channel for delivering banking services?
A)Mobile banking.
B)Online banking.
C)Automated Teller Machines.
D)Branch banking.
E)Retail banking.
Answer: E
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Page 3
Chapter 2: Government Policies and Regulation
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Sample Questions
Q1) The primary federal regulator of state banks that are members of the Fed is the: A)Resolution Trust Corporation
B)Federal Reserve
C)Office of the Comptroller of the Currency
D)State Banking Authorities.
E)Federal Deposit Insurance Corporation.
Answer: B
Q2) The primary federal regulator of state banks that are not members of the Fed is the: A)FDIC.
B)Office of the Comptroller of the Currency.
C)Office of Thrift Supervision.
D)state banking department.
E)National Credit Union Administration.
Answer: A
Q3) The FDIC insures credit union accounts up to $250,000.
A)True
B)False
Answer: False
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Chapter 3: Analyzing Bank Performance
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Sample Questions
Q1) Which of the following would be the least sensitive to changes in interest rates?
A)Demand deposits
B)Repurchase agreements
C)Federal funds purchased
D)Eurodollar liabilities
E)Jumbo CDs
Answer: A
Q2) The risk that a bank cannot meet payment obligations in a timely and cost-effective manner is known as:
A)credit risk.
B)capital risk.
C)market risk.
D)operating risk.
E)liquidity risk.
Answer: E
Q3) Retail banks deal primarily with commercial customers.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Managing Noninterest Income and Noninterest Expense
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Sample Questions
Q1) Mortgage origination is countercyclical to a bank's net interest margin business.
A)True
B)False
Q2) When two banks that merge have a significant duplication of bank offices such that the merger leads to the elimination of branches and personnel, this is known as a(n):
A)out-of-market merger.
B)in-market merger.
C)new-market merger.
D)reduced-branch merger.
E)goodwill merger.
Q3) Which of the following is not considered a non-interest expense?
A)Wages and salaries
B)Rent
C)Required reserves held at the Federal Reserve
D)Electricity
E)Employee benefits
Q4) Discuss two ways that a bank can decrease its non-interest expense.
Q5) Discuss how bank's can reduce the number of unprofitable customers.
Page 6
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Chapter 5: The Performance of Nontraditional Banking Companies
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Sample Questions
Q1) Discuss the four types of businesses that investment banks traditionally engage in.
Q2) A __________ is an investment fund that is limited to a small number of sophisticated investors.
A)money market mutual fund
B)private equity fund
C)risk management fund
D)hedge fund
E)market development fund
Q3) On Goldman Sachs' balance sheet for 2007, ___________ consist of securities that Goldman Sachs has borrowed under an agreement to resell at a later date..
A)collateralized agreements
B)financial instruments
C)collateralized financings
D)receivables
E)payables
Q4) Discuss why community banks might oppose Wal-Mart from being granted a charter for an industrial loan company.
Q5) Explain how Mutual of Omaha Bank "fits into" Mutual of Omaha's business model.
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Chapter 6: Pricing Fixed-Income Securities
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Sample Questions
Q1) If a bond is selling at par value, then:
A)the yield to maturity is less than the coupon rate.
B)the yield to maturity is greater than the coupon rate.
C)the yield to maturity is equal to the coupon rate.
D)its duration must be greater than its maturity.
E)its duration must be equal to its maturity.
Q2) What is the Macaulay's duration of a 10 year zero-coupon bond with a face value of $1,000 and a market rate of 8%, compounded annually is:
A)10 years
B)11 years
C)12 years
D)13 years
E)None of the above
Q3) How long will it take you to double your money if you can invest at 7.2% per year?
A)9.97 years
B)9.28 years
C)8.62 years
D)7.21 years
E)6.98 years
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Page 8
Chapter 7: Managing Interest Rate Risk: Gap and Earnings
Sensitivity
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Sample Questions
Q1) Which of the following will cause a bank's 1-year cumulative GAP to decrease, everything else the same.
A)An increase in 3-month loans and an offsetting increase in 9-month loans.
B)A decrease in 6-month loans and an offsetting increase in 2-year CDs.
C)An increase in 9-month CD's and an offsetting increase in 5-year CDs.
D)a.and c.
E)b.and c.
Q2) Interest rate risk:
A)varies inversely with a bank's GAP.
B)can be measured by the volatility of a bank's net interest income given changes in the level of interest rates.
C)can be eliminated by matching fixed rate assets with variable rate liabilities.
D)rarely has an impact on bank earnings.
E)All of the above
Q3) Income statement GAP is also known as Omega GAP..
A)True
B)False
Q4) Discuss the statement "The relationship between GAP and net interest income is too simplistic."
Page 9
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Chapter 8: Managing Interest Rate Risk: Economic Value of Equity
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Sample Questions
Q1) Discuss why a bank may have to sacrifice yield to vary its duration gap.
Q2) Macaulay's duration:
A)is a weighted average of the time until cash flows are received.
B)is always greater than maturity.
C)is never equal to maturity.
D)directly indicates how much the price of a security will change given a change in interest rates.
E)estimates when embedded options will be used.
Q3) To perfectly immunize a bank's economic value of equity from changes in interest rate risk, it should:
A)adjust assets and liabilities such that its duration gap is equal to one.
B)adjust assets and liabilities such that its duration gap is greater than zero.
C)adjust assets and liabilities such that its duration gap is equal to zero.
D)adjust assets and liabilities such that its GAP is equal to zero.
E)adjust assets and liabilities such that its GAP is less than one.
Q4) The yield curve is typically inverted at the peak of the business cycle.
A)True
B)False
Page 10
Q5) What are the strengths and weaknesses of duration gap analysis?
Q6) 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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Sample Questions
Q1) Which of the following is not an advantage of the swap market over the futures market for managing interest rate risk?
A)Getting out of a contract is easier in the swap market.
B)With a swap contract, you can hedge away longer-term risks than with futures contracts.
C)The notional amount of the swap can be set to any value acceptable to both trading parties.
D)All of the above are advantages of the swap market over the futures market.
E)a.and c.are not advantages of the swap market over the futures market.
Q2) When you buy a futures contract, your futures position is:
A)flat.
B)long.
C)short.
D)the same as the cash position.
E)a.and d.
Q3) Speculators focus on avoiding or reducing risk.
A)True
B)False
Q4) Discuss the difference between speculating and hedging.
Q5) Give an example where an interest rate swap would benefit both counterparties.
Page 12
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Chapter 10: Funding the Bank
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Sample Questions
Q1) A brokered deposit would most likely take which of the following forms?
A)Demand deposit
B)NOW account
C)Jumbo CDs
D)Savings account
E)Small time deposit
Q2) Banks prefer money market deposit accounts to demand deposits for all of the following reasons except:
A)required reserves on money market deposit accounts are lower.
B)money market deposit accounts are less interest rate sensitive than demand deposit accounts.
C)demand deposit accounts have fewer checks written each month.
D)average demand deposit balances are higher than money market deposit account balances.
E)money market deposits accounts are not limited to the $100,000 deposit insurance limit like demand deposit accounts.
Q3) Discuss the process of estimating the cost of deposit accounts.
Q4) When calculating its cost of funds, should a bank use average or marginal costs? Why?
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Chapter 11: Managing Liquidity
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Sample Questions
Q1) A bank is currently exactly meeting its reserve requirements of 10%.If the bank has a deposit inflow of $10,000,000, what is the impact on its required reserve position?
A)It now has excess reserves in the amount of $9,000,000.
B)It now has excess reserves in the amount of $10,000,000.
C)It is now deficient $1,000,000 in required reserves.
D)It is now deficient $9,000,000 in required reserves.
E)There would be no impact on the bank's required reserves.
Q2) Which of the following is not an advantage of larger cash balances for a bank?
A)Larger cash balances reduce the need to borrow at the discount window.
B)Larger cash balances reduce the risk of bank runs.
C)Larger cash balances reduce the risk of paying penalties to the Federal Reserve.
D)Larger cash balances increase reserve balances.
E)Larger cash balances reduce a bank's interest expense.
Q3) Why do banks prefer a lagged reserve accounting system to a contemporaneous reserve accounting system?
Q4) More liquid assets tend to earn lower returns, everything else the same.
A)True
B)False
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Page 14
Chapter 12: The Effective Use of Capital
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Sample Questions
Q1) Which of the following is true regarding subordinated debt?
A)Subordinated debt claims come before the claims of depositors.
B)Principal payments are not mandatory.
C)Transaction costs on issuing new debt are lower than when issuing new equity.
D)Interest payments on subordinated debt are tax-deductible.
E)New subordinated debt dilutes existing shareholder equity.
Q2) The Basel Committee defines operational risk as the risk of loss resulting from:
A)changes in interest rates.
B)changes in inflation.
C)inadequate internal processes.
D)excessive default risk.
E)inadequate capital.
Q3) Why do regulators prefer higher capital requirements?
A)It justifies the existence of regulatory agencies.
B)It better protects the deposit insurance fund.
C)It enhances bank asset quality.
D)It decreases bank profitability.
E)It increases bank leverage.
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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Sample Questions
Q1) National banks can directly take equity positions in real estate projects.
A)True
B)False
Q2) What is the firm's cash-to-cash asset cycle?
A)30 days
B)59 days
C)65 days
D)95 days
E)113 days
Q3) To be classified as a non-current loan, payments must be past due a minimum of how many days?
A)30 days
B)60 days
C)90 days
D)120 days
E)158 days
Q4) As more lenders securitize loans, the supply of credit falls.
A)True
B)False
Q5) Discuss the five Cs of good credit and the five Cs of bad credit
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Chapter 14: Evaluating Commercial Loan Requests and Managing Credit Risk
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Sample Questions
Q1) What are the five generally accepted credit events that can trigger a payment from the seller of a credit default swap to the buyer?
Q2) The change in Net Fixed Assets equals:
A)capital expenditures minus depreciation.
B)capital expenditures plus depreciation.
C)capital expenditures minus cash flow from operations.
D)Gross fixed assets minus depreciation.
E)Gross fixed assets minus cash purchases.
Q3) A firm generally should not count on collateral as the primary source of payment.
A)True
B)False
Q4) What is Dylan's equity multiplier for the current year? A)0.30
Q5) Explain how sensitivity analysis assists in evaluating commercial loan requests.
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Chapter 15: Evaluating Consumer Loans
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Sample Questions
Q1) Consumer loans differ from commercial loans in all of the following ways except:
A)consumer loans are generally smaller than commercial loans.
B)consumer loans are generally for longer terms than commercial loans.
C)consumer loans are generally less expensive to administer on a unit basis than commercial loans.
D)individuals are more likely to default than businesses.
E)consumer loans in some states are still covered by usury laws.
Q2) Which regulation requires out-of-state-banks that acquire local banks to commit to continued lending in the area and not use the acquired banks simply as deposit gatherers?
A)Equal Credit Opportunity Act
B)National Bank Act
C)Federal Lending Act
D)Fair Credit Reporting Act
E)Community Reinvestment Act
Q3) 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.
Q4) Discuss why some are concerned at the recent increase in both credit card debt and personal bankruptcies.
Page 18
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Chapter 16: Managing the Investment Portfolio
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Sample Questions
Q1) A bond that has positive convexity:
A)is more price sensitive when rates fall then when rates rise.
B)is more price sensitive when rates rise then when rates fall.
C)has a negative duration.
D)has a duration greater than maturity.
E)a.and d.
Q2) Municipal bonds whose primary source of repayment are the revenues from the underlying financed project are known as:
A)general obligation bonds.
B)credit free bonds.
C)revenue bonds.
D)exempt bonds.
E)liquidity bonds.
Q3) Which of the following is not true regarding collateralized mortgage obligations (CMOs)?
A)Interest earned on CMOs is exempt from state income taxes.
B)CMO yields are generally higher than comparable Treasury yields.
C)CMOs exhibit little default risk.
D)All of the above are true.
E)Only a.and c.are true.
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Chapter 17: Global Banking Activities
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Sample Questions
Q1) Which of the following is not true regarding Edge Act banks?
A)Edge Act banks may be owned by U.S.banks.
B)Edge Act banks may be owned by foreign banks.
C)Edge Act banks may be owned by bank holding companies.
D)Edge Act banks may be located outside the U.S.
E)Edge Act banks may be located in the U.S.
Q2) If the spot rate changes to $1.50/£, what will be the firm's gain or loss?
A)$10.42 gain
B)£10.42 gain
C)$10.42 loss
D)£10.42 loss
E)cannot be determined
Q3) The most dominant type of Eurocurrency deposits are:
A)Euroyens.
B)Eurodollars.
C)Eurosterlings.
D)Eurofrancs.
E)Euromarks.
Q4) Explain how and why bankers' acceptances are used in international trade.
Q5) Discuss the advantages and disadvantages of a universal banking model.
Page 20
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