Banking and Finance
Exam Answer Key
Course Introduction
Banking and Finance provides a comprehensive overview of the structure and functioning of financial institutions, markets, and instruments that play a critical role in the global economy. The course explores the principles and operations of commercial and investment banks, the roles of central banks, and the regulatory environment governing financial services. Students will examine topics such as money creation, risk management, financial intermediation, the impact of monetary policy, and the evolution of digital banking. The course also introduces the fundamentals of financial analysis, lending, capital markets, and the ethical considerations professionals face in the banking and finance sectors.
Recommended Textbook
Bank Management 7th Edition by Timothy W. Koch
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Chapter 1: Banking and the Financial Services Industry
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Q1) Describe three of the various channels for delivering bank products.
Answer: 1. In-branch banking: This traditional channel involves customers visiting a physical bank branch to access and purchase bank products. This can include opening accounts, applying for loans, and speaking with bank representatives for personalized assistance.
2. Online banking: With the rise of technology, many banks offer their products and services through online platforms. Customers can access their accounts, apply for products, and conduct transactions through a bank's website or mobile app. This channel provides convenience and accessibility for customers who prefer to manage their finances digitally.
3. ATMs: Automated Teller Machines (ATMs) provide a channel for customers to access basic banking services such as withdrawing cash, depositing funds, and transferring money between accounts. ATMs are available 24/7 and are often located in various convenient locations, providing customers with flexibility and accessibility to their bank products.
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Chapter 2: Government Policies and Regulation
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Sample Questions
Q1) Savings and loans have historically specialized in:
A)commercial loans.
B)auto loans.
C)mutual loan.
D)real estate loans.
E)demand deposit accounts.
Answer: D
Q2) 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
Q3) A bank holding company is a shell organization that owns subsidiary firm.
A)True
B)False
Answer: True
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Chapter 3: Analyzing Bank Performance
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Sample Questions
Q1) 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
Q2) What is the equity multiplier for a bank where equity is equal to 12% of total assets?
A)83.33
B)1.12
C)0.88
D)12.00
E)8.33
Answer: E
Q3) Subordinated bank debt is federally insured.
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) In general, _______________ are the major non-credit cost for commercial customers.
A)personnel expenses
B)check-processing costs
C)loan administration expenses
D)fraud costs
E)default costs
Q2) There is no systematic link between a bank's market value of equity and reported expenses.
A)True
B)False
Q3) All of the following are components of a bank's non-interest expense except:.
A)deposit service fees.
B)occupancy expense.
C)goodwill impairment.
D)personnel expense.
E)other intangible amortization.
Q4) Deposit service charges are a stable source of bank revenue.
A)True B)False
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Chapter 5: The Performance of Nontraditional Banking Companies
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Q1) The underwriting process involves all of the following except:
A)helping a firm design a security to meet all legal requirements.
B)identifying potential buyers.
C)pricing the security.
D)selling the security to the market place.
E)All of the above are part of the underwriting process.
Q2) Under FASB 157, the valuation of Level 1 assets is labeled:
A)marking to market.
B)marking to matrix.
C)marking to myth.
D)marking to major.
E)marking to minor.
Q3) Historically, most industrial loan companies have operated to:
A)accept deposits.
B)assist their parent company in some facet of the firm's core business.
C)exclusively make commercial loans.
D)increase the safety and soundness of the parent company.
E)purchase municipal securities.
Q4) Discuss why community banks might oppose Wal-Mart from being granted a charter for an industrial loan company.
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Chapter 6: Pricing Fixed-Income Securities
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Q1) Assuming all other factors are held constant, discuss how changes in each of the following impact a bond's duration.
-Maturity
-Coupon Rate
-Market Rate
Q2) A bond's Macaulay duration is 7.95 years.If the current annual interest rate is 7%, what is the modified duration of this bond?
A)7.00 years
B)7.88 years
C)7.43 years
D)7.95 years
E)8.51 years
Q3) A bond that has an annual coupon rate of 11% has three years to maturity.If the current discount rate is 16%, what is the bond's Macaulay's duration?
A)3.00 years
B)2.991.years
C)2.89 years
D)2.79 years
E)2.69 years
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Chapter 7: Managing Interest Rate Risk: Gap and Earnings Sensitivity
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Sample Questions
Q1) If rate-sensitive assets equal $600 million and rate-sensitive liabilities equals $800 million, what is the expected change in net interest income if rates increase by 1%?
A)Net interest income will increase by $2 million.
B)Net interest income will fall by $2 million.
C)Net interest income will increase by $20 million.
D)Net interest income will fall by $20 million.
E)Net interest income will be unchanged.
Q2) A bank has a 1-year $1,000,000 loan outstanding, payable in four equal quarterly installments.What dollar amount of the loan would be considered rate sensitive in the 090 day bucket?
A)$0
B)$250,000
C)$500,000
D)$750,000
E)$1,000,000
Q3) Discuss three factors that affect net interest income.
Q4) Discuss the statement "The relationship between GAP and net interest income is too simplistic."
Q5) Discuss the difference between a bank's periodic and cumulative GAP.
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Chapter 8: Managing Interest Rate Risk: Economic Value of Equity
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Sample Questions
Q1) A bond has a Macaulay's duration of 21 years.If rates rise from 5% to 5.5%, the bonds price will:
A)increase by approximately 1%.
B)decrease by approximately 1%.
C)increase by approximately 10%.
D)decrease by approximately 10%.
E)Not enough information is given to answer the question.
Q2) Discuss why a bank may have to sacrifice yield to vary its duration gap.
Q3) What is the bank's expected economic net interest income?
A)$34.5
B)$32.3
C)$39.5
D)$44.0
E)$120.5
Q4) A bank with a duration gap of 1 is more sensitive to changes in the economic value of equity than a bank with a duration gap of -1.5.
A)True
B)False
Page 10
Q5) How does effective duration differ from modified duration?
Q6) Why is it difficult to estimate the duration of demand deposits?
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Chapter 9: Using Derivatives to Manage Interest Rate Risk
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Sample Questions
Q1) A reverse collar consists of:
A)buying an interest rate floor and an interest rate cap.
B)buying an interest rate floor and selling an interest rate cap.
C)selling an interest rate floor and buying an interest rate cap.
D)buying a call option and selling a futures contract.
E)selling a put option and buying a futures contract.
Q2) Discuss the difference between speculating and hedging.
Q3) The daily change in the value due to the marking-to-market process is know as the:
A)maintenance margin.
B)variation margin.
C)market margin.
D)initial margin.
E)marked margin.
Q4) A bank can establish a floor on interest rate costs by:
A)buying a call option on Eurodollar futures.
B)selling Eurodollar futures contracts.
C)selling a call option on Eurodollar futures.
D)a.and b.
E)b.and c.
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Chapter 10: Funding the Bank
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Sample Questions
Q1) 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
Q2) An online debit payment is:
A)a signature-based transaction.
B)a PIN-based transaction.
C)an ACH transaction.
D)a CHIPS transaction.
E)a Fed Wire transaction.
Q3) Which of the following would not be considered "hot money"?
A)Jumbo CDs
B)Fed funds purchased
C)Eurodollar time deposits
D)Retail demand deposits
E)Repurchase agreements
Q4) Briefly explain two models used to estimate the cost of equity?
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Chapter 11: Managing Liquidity
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Sample Questions
Q1) How can pledging requirements make bank assets less liquid?
Q2) The ease of converting an asset to cash with a minimum of loss is known as:
A)asset liquidity.
B)volatile liquidity.
C)core liquidity.
D)liability liquidity.
E)non-core liquidity.
Q3) Correspondent banking services would include which of the following?
A)Check collection
B)Data processing services
C)Federal funds trading
D)all of the above
E)a.& c.only
Q4) Which of the following indicates the potential for deposits leaving a bank?
A)High business activity and growth
B)Deposits that are inelastic to changes in interest rates
C)An aggressive bank loan officer
D)Large deposits held by a single customer
E)Small unused commercial credit lines outstanding
Q5) Discuss the major components of a bank's contingency funding plan.
Page 14
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Chapter 12: The Effective Use of Capital
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Q1) Discuss the rationale behind risk-based capital requirements.
Q2) Which of the following was not part of the Basle Agreement?
A)Bank's required capital was linked to its composition of assets.
B)Banks are required to operate with a minimum level of equity.
C)The ownership of equity by banks was prohibited.
D)Capital requirements across countries were standardized.
E)The minimum total capital requirements were set to 8% of risk-adjusted assets.
Q3) Decreasing capital increases risk by decreasing financial leverage.
A)True
B)False
Q4) What is the required ROA to support the growth in assets?
A)0.62%
B)0.65%
C)0.68%
D)0.72%
E)0.75%
Q5) In general, bank capital ratios have increased over the last 100 years.
A)True
B)False
Q6) What is "moral hazard" and what is its impact on deposit insurance?
Page 15
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Chapter 13: Overview of Credit Policy and Loan
Characteristics
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Q1) As more lenders securitize loans, the supply of credit falls.
A)True
B)False
Q2) In the credit process, which of the following activities falls under Business Development and Credit Analysis?
A)Loan committee reviews
B)Loan documentation review
C)Officer call programs
D)Perfect security interest
E)Process loan payments
Q3) Businesses can obtain funds from which of the following?
A)Loans from life insurance companies
B)Issuing commercial paper
C)Issuing junk bonds
D)Loans from commercial banks
E)All of the above
Q4) The quality of bank loans varies with the business cycle.
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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Q1) 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
Q2) Financial statements that have been audited are guaranteed to be 100% accurate.
A)True
B)False
Q3) A low days inventory on hand and a high inventory turnover relative to industry norms indicates less efficient inventory management and/or more liquidity.
A)True
B)False
Q4) Cash flows from a firm's normal business activities are reflected in:
A)cash flows from investing.
B)cash flows from financing.
C)cash flows from operations.
D)cash flows from income.
E)cash flows from budgeting.
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Q5) Explain how sensitivity analysis assists in evaluating commercial loan requests.
Chapter 15: Evaluating Consumer Loans
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Q1) What are "high LTV" loans and why are they riskier than "low LTV" loans?
Q2) The lowest rating category for a subprime loan is:
A)A
B)B
C)C
D)D
E)E
Q3) A FICO score summarizes an individual's credit history in one number.
A)True
B)False
Q4) The only quantitative measure of a consumer loan applicant's character is their:
A)down payment.
B)home equity.
C)time on the job.
D)credit report.
E)credit card balance.
Q5) Discuss the major differences between consumer and commercial loans.
Q6) 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) Bank managers are often reluctant to sell securities when the market value falls below the book value.Why? Is this behavior in the long-term best interest of the bank? Why or why not?
Q2) Fixed-rate mortgages and adjustable-rate mortgages prepay at different rates.
A)True
B)False
Q3) If interest rates fall, a callable bond at par has the potential for large increases in price.
A)True
B)False
Q4) Which of the following classes of securities are carried at market value on the balance sheet?
A)Held-to-maturity
B)Available-for-sale
C)Trading
D)all of the above
E)b.and c.only
Q5) What are STRIPS and what do banks find advantageous about them?
Q6) Discuss the liquidity risk of investing in the municipal securities market.
Q7) Discuss how a basic collateralized mortgage works.
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Chapter 17: Global Banking Activities
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Q1) Eurobonds are subject to fewer regulations than U.S.issued bonds.
A)True
B)False
Q2) If the spot rate is 1.67CAN$/US$ and the 1-month forward rate is 1.70CAN$/US$:
A)the Canadian dollar is selling at a premium.
B)the Canadian dollar is selling at a discount.
C)the U.S.dollar is selling at a discount.
D)the U.S.dollar is selling at par.
E)none of the above
Q3) The risk that a foreign government will suspend debt service payments is known as:
A)LC risk.
B)foreign exchange risk.
C)euro risk.
D)sovereign risk.
E)country risk.
Q4) Explain how and why bankers' acceptances are used in international trade.
Q5) Foreign banks generally operate with higher capital ratios than U.S.banks.
A)True
B)False
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