Banking and Financial Institutions
Exam Practice Tests
Course Introduction
This course provides a comprehensive overview of the roles, operations, and regulatory frameworks of banking and financial institutions in modern economies. Students will explore the structure and functions of commercial banks, investment banks, credit unions, savings institutions, and other non-bank financial intermediaries. Key topics include the management of financial assets and liabilities, risk assessment, financial products and services, the impact of central banking, and regulatory policies. Emphasis is placed on how these institutions contribute to economic growth, facilitate financial transactions, manage risk, and respond to changes in the financial environment.
Recommended Textbook
Financial Markets and Institutions 12th Edition by Jeff Madura
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26 Chapters
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Page 2
Chapter 1: Role of Financial Markets and Institutions
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Sample Questions
Q1) Money market securities are commonly issued to finance the purchase of assets such as buildings, equipment, or machinery.
A)True
B)False
Answer: False
Q2) Debt securities issued by a small firm may be ________, meaning that _______ investors want to invest in those securities.
A) liquid; many
B) liquid; not many
C) illiquid; not many
D) illiquid; many
Answer: C
Q3) If markets are ____, investors could use available information ignored by the market to earn abnormally high returns.
A) perfect
B) active
C) inefficient
D) in equilibrium
Answer: C
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Page 3
Chapter 2: Determination of Interest Rates
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Sample Questions
Q1) When there are expectations of higher inflation in the future, we would typically expect the supply of loanable funds to ____ and the demand for loanable funds to
A) increase; decrease
B) increase; increase
C) decrease; increase
D) decrease; decrease
Answer: C
Q2) If economic expansion is expected to decrease, the demand for loanable funds should ____ and interest rates should ____.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
Answer: C
Q3) If foreign interest rates fall, foreign firms and governments would likely reduce their demand for U.S. funds.
A)True
B)False Answer: True
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Chapter 3: Structure of Interest Rates
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Sample Questions
Q1) If the Treasury uses a relatively large proportion of ____ debt to finance a budget deficit, this would place ____ pressure on long-term yields.
A) short-term; downward
B) long-term; downward
C) short-term; upward
D) long-term; upward
Answer: D
Q2) If a yield curve is upward sloping, the investment strategy of buying long-term securities, then selling them after a short period (say, one year) is called
A) riding the yield curve.
B) liquidating the yield curve.
C) segmenting the yield curve.
D) a forward roll.
E) none of the above
Answer: A
Q3) The yields of securities commonly move in the same direction over time.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Functions of the Fed
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Sample Questions
Q1) The purchase of government securities by someone other than the Fed results in A) an overall increase in funds among commercial banks.
B) an overall decrease in funds among commercial banks. C) offsetting changes in funds at commercial banks.
D) an increase in securities maintained by the Fed.
Q2) ____ in Federal Reserve float causes a(n) ____ in bank funds.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) A and C
Q3) When the Fed sells securities, the total funds of commercial banks ____ by the market value of the securities sold by the Fed. This activity initiated by the FOMC's policy directive is referredto as a ____ of money supply growth.
A) increase; loosening
B) decrease; loosening C) increase; tightening D) decrease; tightening
E) none of the above
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6
Chapter 5: Monetary Policy
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Sample Questions
Q1) Inflation is commonly the result of a
A) large budget deficit.
B) high level of interest rates.
C) high level of unemployment.
D) high level of aggregate demand.
Q2) An attempt by the Fed to stimulate the economy by reducing short-term interest rates may have a limited effect if long-term interest rates remain unaffected.
A)True
B)False
Q3) Which of the following best describes the relationship between the Fed and the presidential administration?
A) The Fed must receive approval by the administration before conducting monetary policy.
B) The Fed must implement a monetary policy specifically to the support the administration's policy.
C) The administration must receive approval from the Fed before implementing fiscal policy.
D) A and C
E) none of the above
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Page 7
Chapter 6: Money Markets
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Sample Questions
Q1) In general, the money markets are widely perceived to be efficient in the sense that the prices reflect all available public information.
A)True
B)False
Q2) When a firm sells its commercial paper at a ____ price than projected, its cost of raising funds will be ____ than what it initially anticipated.
A) higher; higher B) lower; lower C) higher; lower
D) lower; higher
E) Answers C and D are correct.
Q3) Money market securities are must have a maturity of three months or less.
A)True
B)False
Q4) Commercial paper has a maximum maturity of ____ days. A) 45 B) 270
C) 360
D) none of the above
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Chapter 7: Bond Markets
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Sample Questions
Q1) Bonds issued by ____ are backed by the federal government.
A) the Treasury
B) AAA-rated corporations
C) state governments
D) city governments
Q2) Treasury bond dealers
A) quote an ask price for customers who want to sell existing Treasury bonds to the dealers.
B) profit from a very wide spread between bid and ask prices in the Treasury securities market.
C) may trade Treasury bonds among themselves.
D) make a primary market for Treasury bonds.
Q3) Assume U.S. interest rates are significantly higher than German rates. A U.S. firm with a German subsidiary could achieve a lower financing rate without exchange rate risk by denominating thebonds in
A) dollars.
B) euros and making payments from U.S. headquarters.
C) euros and making payments from its German subsidiary.
D) dollars and making payments from its German subsidiary.
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Page 9
Chapter 8: Bond Valuation and Risk
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Sample Questions
Q1) Julia just purchased a $1,000 par value bond with a 10 percent annual coupon rate and a life of 20 years. The bond has four years remaining until maturity, and the yield to maturity is 12 percent. How much did Julia pay for the bond?
A) $1,063.40
B) $1,000
C) $939.25
D) none of the above
Q2) In a laddered strategy, investors create a bond portfolio that will generate periodic income that can match their expected periodic expenses.
A)True
B)False
Q3) International diversification of bonds reduces the sensitivity of a bond portfolio to any single country's interest rate movements.
A)True
B)False
Q4) Bonds that sell below their par value are called premium bonds.
A)True
B)False
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Chapter 9: Mortgage Markets
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Sample Questions
Q1) In the earlier years of a mortgage,
A) most of the monthly payment reflects principal reduction.
B) most of the monthly payment reflects interest.
C) about half of the monthly payment reflects interest.
D) all of the monthly payment reflects principal reduction.
Q2) An investor in interest-only collateralized mortgage obligations (CMOs) would not be concerned that homeowners will prepay the underlying mortgages.
A)True
B)False
Q3) At a given point in time, the interest rate offered on a new fixed-rate mortgage is typically ____ the initial interest rate offered on a new adjustable-rate mortgage.
A) below
B) above
C) equal to
D) all of the above are very common
Q4) Mortgages are rarely sold in the secondary market.
A)True
B)False
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Chapter 10: Stock Offerings and Investor Monitoring
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Sample Questions
Q1) Firms listed on the "pink sheets" of the OTC market
A) are typically very large.
B) satisfy the Nasdaq's listing requirements.
C) are typically owned by various institutional and individual investors.
D) none of the above
Q2) ____ are not barriers to corporate control to eliminate agency problems.
A) Leveraged buyouts
B) Antitakeover amendments
C) Poison pills
D) Golden parachutes
Q3) Assume that a firm is valued at $800 million and has 6 million shares of stock outstanding. This firm's stock should have a price of $____ per share.
A) 6
B) 80
C) 133.33
D) none of the above
Q4) The government enforcement of securities laws varies among countries.
A)True
B)False
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Chapter 11: Stock Valuation and Risk
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Sample Questions
Q1) The ____ is often used to estimate the required rate of return for any firm with public traded stock.
A) capital asset pricing model
B) Treynor index
C) Sharpe index
D) B and C
Q2) The "January effect" refers to a large
A) rise in the price of small stocks in January.
B) decline in the price of small stocks in January.
C) decline in the price of large stocks in January
D) rise in the price of large stocks in January.
Q3) The beta of a stock portfolio is equal to a weighted average of the
A) betas of stocks in the portfolio.
B) betas of stocks in the portfolio, plus their correlation coefficients.
C) standard deviations of stocks in the portfolio.
D) correlation coefficients between stocks in the portfolio.
Q4) The capital asset pricing model (CAPM) is based on the premise that the only important risk of a firm is unsystematic risk.
A)True
B)False
Page 13
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Chapter 12: Market Microstructure and Strategies
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Sample Questions
Q1) The exchange rate risk associated with international trading of stock has been reduced by
A) information available on the Internet.
B) extensive computerization of stock exchanges.
C) the conversion of many European countries to a single currency.
D) the Eurolist system.
Q2) A trading halt prevents a stock from experiencing a loss in response to news.
A)True
B)False
Q3) ______________ represents the use of electronic platforms to execute orders based on an algorithm with programmed instructions.
A) High frequency trading
B) Mechanical analysis
C) Liquidity trading
D) Technical analysis
Q4) The bid-ask spread is negatively related to
A) order costs
B) inventory costs.
C) Risk
D) trading volume
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Chapter 13: Financial Futures Markets
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Sample Questions
Q1) According to the text, when a financial institution sells futures contracts on debt securities in order to hedge against an increase in interest rates, this is referred to as
A) a long hedge.
B) a short hedge.
C) a closed out position.
D) basis trading.
Q2) Trading restrictions imposed on specific stocks or stock indexes are referred to as A) index busters.
B) index options.
C) circuit breakers.
D) protective covenants.
Q3) ___________ involves the buying or selling of stock index futures with a simultaneous opposite position in the stocks that the index comprises.
A) Dynamic asset allocation
B) Cross-hedging
C) Index arbitrage
D) Net hedging
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Chapter 14: Options Markets
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Sample Questions
Q1) A ____ grants the owner the right to purchase a specified financial instrument for a specified price within a specified period of time.
A) call option
B) put option
C) sale of a futures contract
D) purchase of a futures contract
Q2) If a corporation hedges payables with currency call options, it will ____ if the value of the foreign currency is ____ than the exercise price when the payables are due.
A) exercise the option; greater
B) exercise the option; less
C) let the option expire; greater
D) let the option expire; less
E) A and D
Q3) Speculators purchase currency ____ on currencies they expect to ____ against the dollar.
A) call options; weaken
B) put options; strengthen
C) futures; weaken
D) put options; weaken
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Page 16
Chapter 15: Swap Markets
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Sample Questions
Q1) In a swap arrangement, the most common index used for floating-rate payments is the
A) coupon rate on existing bonds.
B) stock dividend rate based on a U.S. stock index.
C) London Interbank Offer Rate (LIBOR).
D) Treasury bond yield.
Q2) An interest rate cap offers payments in periods when a specified interest rate index exceeds a specified floor interest rate.
A)True
B)False
Q3) ____ swap provides the party making the floating-rate payments with a right to terminate the swap.
A) callable
B) extendable
C) plain vanilla
D) putable
E) none of the above
Q4) Interest rate floors are commonly used to hedge against lower interest rates.
A)True
B)False
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Chapter 16: Foreign Exchange Derivative Markets
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Sample Questions
Q1) If European inflation suddenly becomes much higher than U.S. inflation, the U.S. demand for European goods will ____. In addition, the supply of euros to be sold for dollars will ____; both forces will place ____ pressure on the value of the euro.
A) increase; decline; upward
B) increase; decline; downward
C) decrease; increase; upward
D) decrease; increase; downward
E) none of the above
Q2) The European Central Bank is responsible for setting fiscal policy for all countries in the eurozone.
A)True
B)False
Q3) Which of the following is not a method of forecasting exchange rate volatility?
A) using the volatility of historical exchange rate movements
B) using a time series of volatility patterns in previous periods
C) using the volatility of future exchange rate movements
D) using the exchange rate's implied standard deviation
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18
Chapter 17: Commercial Bank Operations
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Sample Questions
Q1) For any given bank, federal funds ____ represent a(n) ____.
A) purchased; asset
B) sold; liability
C) purchased; liability
D) A and B
Q2) Which of the following types of deposits does not allow any check-writing privileges?
A) NOW accounts
B) money market deposit accounts (MMDAs)
C) retail CDs
D) All of the above allow checks to be written.
Q3) Banks sometimes need funds and sometimes have excess funds available. Which of the following is commonly a source of bank funds and a use of bank funds?
A) MMDAs
B) federal funds
C) the discount window
D) retail CDs
Q4) A bank's uses of funds represent liabilities of a bank.
A)True
B)False
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Chapter 18: Bank Regulation
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Sample Questions
Q1) The Sarbanes-Oxley Act was enacted to make corporate managers, board members, and auditors more accountable for the accuracy of the financial statements that their respective firms provide.
A)True
B)False
Q2) The Basel framework recommends that banks maintain capital in proportion to their:
A) mortgages
B) commercial paper
C) liabilities
D) risk-weighted assets
Q3) In general, a bank defines its value-at-risk as the estimated potential loss from its trading businesses that could result from adverse movements in market prices.
A)True
B)False
Q4) Commercial banks are allowed to invest in junk bonds.
A)True
B)False
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Chapter 19: Bank Management
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Sample Questions
Q1) During a period of rising interest rates, a bank's net interest margin will likely ____ if its liabilities are ____ its assets.
A) increase; more rate sensitive than B) decrease; more rate sensitive than C) increase; equally rate sensitive as D) decrease; equally rate sensitive as
Q2) The ____ of interest rate futures ____ the potential adverse effect of rising interest rates on a bank's interest expenses.
A) sale; increases B) sale; reduces C) purchase; reduces D) both A and C are correct
Q3) An effective way to align bank managers' interests with shareholders' goal of higher returns is to compensate the managers with fixed salaries without a bonus. A)True B)False
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Chapter 20: Bank Performance
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Sample Questions
Q1) Banks with relatively ____ ROAs often incur ____ noninterest expenses.
A) low; very low
B) low; very high
C) high; very high
D) none of the above
Q2) Net income measured as a percentage of assets is
A) return on equity (ROE).
B) return on liabilities (ROL).
C) return on investment (ROI).
D) return on assets (ROA).
Q3) If a bank increases its provisions for loan losses, its interest income is ____, and its noninterest income is ____.
A) reduced; not affected
B) reduced; reduced
C) not affected; reduced
D) not affected; not affected
Q4) If the risk premium on a commercial bank rises, so will the required rate of return by investors who invest in the bank.
A)True
B)False
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Chapter 21: Thrift Operations
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Sample Questions
Q1) The ____ acts as a temporary lender to credit unions
A) World Bank
B) Central Liquidity Facility
C) Federal Home Loan Bank
D) National Credit Union Administration
Q2) The primary use of credit union funds is
A) loans to credit union members.
B) the purchase of government securities.
C) the purchase of agency securities.
D) the purchase of corporate bonds.
E) none of the above
Q3) The capital of savings institutions is primarily composed of retained earnings and funds obtained from issuing stock.
A)True
B)False
Q4) Most mortgages originated by savings institutions are for A) commercial buildings.
B) land for commercial purposes.
C) single-family homes or multifamily dwellings.
D) none of the above.
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Chapter 22: Finance Company Operations
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Sample Questions
Q1) Consumer finance companies primarily focus on
A) consumer loans.
B) consumer advising.
C) consumer regulation.
D) none of the above
Q2) The main competition for finance companies in the consumer loan market comes from pension funds and insurance companies.
A)True
B)False
Q3) Finance companies would prefer to increase their long-term debt when interest rates
A) are relatively low and are expected to increase.
B) have increased.
C) have been stable for several years.
D) are projected to decrease.
Q4) The most important risk for finance companies is ____ risk.
A) settlement
B) accounting
C) credit
D) exchange rate
Page 24
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Chapter 23: Mutual Fund Operations
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Sample Questions
Q1) If investors sell their mutual fund shares after the net asset value of the fund increases, the return is called
A) share price appreciation.
B) capital gains distribution.
C) dividends.
D) split net asset value.
Q2) The composition of asset allocation funds
A) is focused completely on one type of security as specified by the particular mutual fund.
B) is fixed and not altered by the mutual fund managers.
C) A and B
D) none of the above
Q3) To cover managerial and other expenses, mutual funds typically charge
A) management fees of less than 2 percent of total assets per year.
B) commissions of typically 8 to 10 percent on purchases or sales of securities.
C) management fees of typically more than 10 percent of total assets per year.
D) a one-time load of 5% upon the initial investment in the mutual fund.
Q4) Closed-end fund managers must hold more cash than open-end mutual fund managers.
A)True
B)False
Page 25
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Chapter 24: Securities Operations
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Q1) The ____ is not involved in the regulation of the securities industry.
A) Deposit Insurance Fund
B) Financial Industry Regulatory Authority
C) Securities and Exchange Commission
D) Federal Reserve Board
E) All of the above are involved in the regulation of the securities industry.
Q2) When an IPO is planned, all information relevant to the security, as well as the agreement between the issuer and the securities firm, must be included in the ___________ that is submitted totheSecurities and Exchange Commission.
A) origination
B) registration statement
C) best-efforts agreement
D) none of the above
Q3) The ____ regulates the issuance of securities.
A) Securities and Exchange Commission
B) National Association of Securities Dealers
C) Federal Reserve Board
D) Securities Investor Protection Corporation
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Chapter 25: Insurance Operations
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Sample Questions
Q1) The most common type of mortgage held by life insurance companies are ____ mortgages.
A) commercial
B) residential
C) farm
D) none of the above
Q2) Which of the following is a difference in characteristics between life insurance companies and property and casualty insurance companies?
A) Property and casualty policies are longer term.
B) The type of policies offered by life insurance companies are less focused.
C) Future compensation amounts paid on property and casualty policies are more difficult to forecast.
D) Life insurance companies need to maintain a more liquid asset portfolio.
Q3) Policyholders who prefer to invest their savings themselves will likely opt for whole life insurance over term insurance.
A)True
B)False
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Chapter 26: Pension Fund Operations
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Q1) Taking speculative positions in stock options is generally not considered appropriate for retirement funds because of the high degree of risk involved.
A)True
B)False
Q2) Public pension funds can be classified by the manner in which contributions are received and benefits are paid.
A)True
B)False
Q3) The composition of the stocks in a pension fund's portfolio is determined by the fund's portfolio managers.
A)True
B)False
Q4) With a ____ funding strategy, investment decisions are made with the objective of generating cash flows that match planned outflow payments.
A) matched
B) mixed
C) projective
D) none of the above
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Page 28