Bank Operations and Management Review Questions
Course Introduction
This course offers a comprehensive exploration of the principles and practices governing modern bank operations and management. Students will learn about the organizational structure of banks, key operational processes, risk management techniques, regulatory compliance, and the evolving role of technology in banking. The course also delves into asset-liability management, loan and investment operations, customer service strategies, and performance measurement. Through case studies and practical examples, students will gain insights into effective decision-making and problem-solving in the banking sector, preparing them for roles in commercial and retail banking environments.
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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Sample Questions
Q1) Securitization refers to the process of splitting a single loan into several smaller loans.
A)True
B)False
Answer: False
Q2) In 2008, the U.S.Treasury committed over $50 trillion dollars in financial support for financial institutions.
A)True
B)False
Answer: False
Q3) Controlling interest in a bank is defined as ownership or indirect control of ____ of the voting shares in the bank.
A)15%
B)20%
C)25%
D)30%
E)51%
Answer: C
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Chapter 2: Government Policies and Regulation
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Sample Questions
Q1) The Federal Deposit Insurance Reform Act of 2005 created which of the following?
A)Bank Insurance Fund
B)Deposit Insurance Fund
C)Savings Association Insurance Fund
D)National Credit Union Shares Insurance Fund
E)Federal Savings and Loan Insurance Fund
Answer: B
Q2) Which type of financial institution has seen the largest drop in their share of U.S.financial assets?
A)Depository institutions
B)Mutual funds
C)Insurance companies
D)Pension plans
E)Finance companies
Answer: A
Q3) The McFadden Act of 1927 forbids national banks from underwriting equities.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Analyzing Bank Performance
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Sample Questions
Q1) All other things constant, securities that are extremely liquid:
A)earn higher rates of return than securities that are less liquid.
B)have a longer maturity than less liquid securities.
C)have lower risk than less liquid securities.
D)a.and b.
E)b.and c.
Answer: C
Q2) What is the return on equity for a bank that has an equity multiplier of 14, an interest expense ratio of 4%, and a return on assets of .9%?
A)1.3%
B)4.0%
C)9.0%
D)12.6%
E)8.6%
Answer: D
Q3) When constructing ratios, average balance sheet data should be used.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Managing Noninterest Income and Noninterest
Expense
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Sample Questions
Q1) Discuss why non-interest income has become more important to a bank's profitability since deregulation in the 1980's.
Q2) ______________ transactions are the highest-cost type of transaction for a bank.
A)Web-based
B)ATM
C)Work station
D)Live teller
E)After-hours
Q3) 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.
Q4) Discuss two ways that a bank can decrease its non-interest expense.
Q5) Larger banks have lower efficiency ratios, on average, than smaller banks.
A)True
B)False
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Chapter 5: The Performance of Nontraditional Banking Companies
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Q1) When an investment bank commits its own funds to take a risk position in an underlying security, it is known as:
A)underwriting.
B)market making.
C)proprietary trading.
D)organizing a market.
E)brokering.
Q2) On Goldman Sachs' balance sheet for 2007, ___________ consist of securities that Goldman Sachs has loaned under an agreement to repurchase at a later date.
A)collateralized agreements
B)financial instruments
C)collateralized financings
D)receivables
E)payables
Q3) When an investment bank acts as a broker, it does not take ownership of the underlying security.
A)True
B)False
Q4) 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) Using a 360-day year results in higher returns than using a 365-day year.
A)True
B)False
Q2) A bank buys a $10,000 Treasury bill with a maturity of 1 year.Current market rates are 8%.If interest rates rise to 8.25%, what is the approximate change in the price of the T-bill?
A)-0.02%
B)-0.23%
C)-2.31%
D)-23.15%
E)-231.15%
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
Q4) Why is knowing a bond's duration useful?
Q5) What are some of the problems with the discount yield?
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Chapter 7: Managing Interest Rate Risk: Gap and Earnings
Sensitivity
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Sample Questions
Q1) GAP is defined as the difference between fixed-rate assets and fixed-rate liabilities.
A)True
B)False
Q2) Income statement GAP considers:
A)changes in interest rates.
B)changes in the volume of rate-sensitive assets due to a change in interest rates.
C)changes in the volume of fix-rate liabilities due to a change in interest rates.
D)mortgage prepayments.
E)Income statement GAP considers all of the above.
Q3) Which of the following are likely to occur when interest rates rise sharply?
A)Fixed-rate loans are pre-paid.
B)Bonds are called.
C)Deposits are withdrawn early.
D)All of the above occur when interest rates rise sharply.
E)a.and b.
Q4) Discuss three factors that affect net interest income.
Q5) What are the advantages and disadvantages of static GAP analysis?
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Chapter 8: Managing Interest Rate Risk: Economic Value of Equity
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Sample Questions
Q1) Which of the following allows a security's cash flows to change when interest rates change?
A)Modified duration
B)Macaulay's duration
C)Effective duration
D)Balance sheet duration
E)Income statement duration
Q2) Which of the following is likely to have a negative effective duration?
A)A high coupon, interest only mortgage-backed security that is pre-paying at a high rate.
B)A low coupon U.S.Treasury bond.
C)Fed Funds purchased.
D)Demand deposits
E)None of the above can have a negative effective duration.
Q3) Economic value of equity analysis focuses on net interest income.
A)True
B)False
Q4) Banks should never assume any interest rate risk.
A)True
B)False
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Chapter 9: Using Derivatives to Manage Interest Rate Risk
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Sample Questions
Q1) Which of the following would generally not be considered a speculator?
A)Local
B)Day trader
C)Scalper
D)Position trader
E)Commission broker
Q2) When you own the underlying security, your spot position is _______.
A)flat.
B)long.
C)short.
D)is also known as your cash position.
E)b.and d.
Q3) Speculators take a position to reduce their risk profile.
A)True
B)False
Q4) Forward contracts rarely require a performance guarantee or collateral.
A)True
B)False
Q5) Your bank has a positive GAP and wants to hedge against changes in interest rates.Would a collar or reverse collar serve as a better hedge? Why?
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Chapter 10: Funding the Bank
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Sample Questions
Q1) Which of the following is not a characteristic of jumbo CDs?
A)They have a minimum maturity of 7 days.
B)Interest rates are quoted on a 365-day year.
C)They are generally issued at face value.
D)They are only insured up to $100,000 per individual per institution.
E)All of the above are characteristics of jumbo CDs
Q2) Which of the following is primarily used as collateral for borrowings from the Federal Home Loan Bank Board?
A)Real estate loans
B)Treasury securities
C)Negotiable CDs
D)Credit card receivables
E)Repurchase agreement
Q3) Briefly explain two models used to estimate the cost of equity?
Q4) What is the net cost of an average demand deposit?
A)4.5% B)4.8%
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Chapter 11: Managing Liquidity
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Sample Questions
Q1) Collateral is required against each of the following liabilities except ________.
A)securities sold under agreement to repurchase
B)borrowings from the Federal Reserve discount window
C)U.S.Treasury securities
D)public deposits owned by the U.S.Treasury
E)Federal Home Loan Bank advances
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) Which of the following is not a measure of liability liquidity?
A)Total loans to total assets
B)Total deposits to total assets
C)Total equity to total assets
D)Loan losses to net loans
E)Core deposits to total assets
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Page 13
Chapter 12: The Effective Use of Capital
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Sample Questions
Q1) Why do banks generally prefer lower capital requirements?
A)To minimize the impact shareholders have on management decisions.
B)To increase the influence of bank regulators.
C)To increase a bank's return on equity.
D)To increase depositor protection.
E)To maximize operating leverage.
Q2) How much Tier 1 capital does the bank have?
A)$100
B)$450
C)$700
D)$750
E)$1000
Q3) What constitutes Tier 2 capital varies substantially between countries.
A)True
B)False
Q4) Regulatory capital ratios focus on the book value of equity.
A)True
B)False
Q5) Discuss the "three-pillars" in Basel II.
Q6) What are some of the weaknesses behind risk-based capital standards?
Page 14
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Chapter 13: Overview of Credit Policy and Loan
Characteristics
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Sample Questions
Q1) 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
Q2) How does a firm's seasonal working capital needs differ from its permanent working capital needs?
Q3) The most prominent risk banks assume in making loans is interest rate risk.
A)True
B)False
Q4) In the credit process, which of the following activities falls under Credit Execution and Administration?
A)Financial statement analysis
B)Evaluate collateral
C)Officer call programs
D)Review loan documentation
E)Monitor compliance with loan agreement
Page 15
Q5) Discuss the five Cs of good credit and the five Cs of bad credit
Q6) Discuss how banks benefit from the creation of the secondary mortgage market.
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Page 16
Chapter 14: Evaluating Commercial Loan Requests and Managing Credit Risk
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Sample Questions
Q1) Explain how sensitivity analysis assists in evaluating commercial loan requests.
Q2) A firm's borrowing base is:
A)based on cash flow from operations.
B)a measure of long-term profit potential.
C)the amount of the firm's unused credit.
D)an estimate of the available collateral on a company's current assets.
E)a measure of net fixed assets.
Q3) On the cash-based income statement, depreciation is a source of funds.
A)True
B)False
Q4) Under which category are dividends classified on the statement of cash flows?
A)Cash From Investing Activities
B)Cash From Operating Activities
C)Cash From Financing Activities
D)Cash From Profit Activities
E)None of the above
Q5) Pro forma analysis is a form of sensitivity analysis.
A)True
B)False
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Chapter 15: Evaluating Consumer Loans
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Sample Questions
Q1) The vast majority of credit card revenues comes from:
A)merchant discounts.
B)net credit gains.
C)advertising revenue.
D)interest income and annual fees.
E)interchange fees.
Q2) Credit cards are profitable for banks because many customers are prince insensitive.
A)True
B)False
Q3) 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
Q4) Today, many banks target individuals as the primary source of growth in attracting new business.
A)True
B)False
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Chapter 16: Managing the Investment Portfolio
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Sample Questions
Q1) When loan demand is weak, a bank will often lengthen the maturity of their investment portfolio.Why does this often cause problems for the bank?
Q2) Which passive investment strategy differentiates between bonds that have been purchased for liquidity versus income purposes?
A)Barbell maturity strategy
B)Riding the yield curve
C)Laddered maturity strategy
D)Timing maturity strategy
E)Cycle maturity strategy
Q3) Securities with embedded options:
A)often have higher yields than comparable Treasury securities.
B)generally have no prepayment risk.
C)are always free of default risk.
D)all of the above.
E)a.and b.only
Q4) Most long-term municipal bonds are serial bonds.
A)True
B)False
Q5) Explain the difference between a bond's duration and a bond's convexity.
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Chapter 17: Global Banking Activities
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Sample Questions
Q1) 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.
Q2) Covered interest rate arbitrage is possible when:
A)both currencies are appreciating.
B)the actual inflation rates are identical in both countries.
C)the difference in the interest rates in two countries exactly equals the spot-to-forward exchange rate differential.
D)the difference in interest rates in two countries is out of line with the spot-to-forward exchange rate differential.
E)none of the above
Q3) What is the difference between Edge Act corporations and foreign branches of U.S.banks?
Q4) Explain how and why bankers' acceptances are used in international trade.
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