Banking Operations and Management Exam
Bank
Course Introduction
Banking Operations and Management explores the fundamental principles, structures, and practices that underpin modern banking institutions. This course examines the various types of banking services, operational procedures, regulatory frameworks, risk management strategies, and the use of technology in banking. Students gain insight into topics such as payment systems, loan processing, customer relationship management, asset and liability management, compliance protocols, and the role of central banks. Through real-world case studies and practical examples, learners develop a comprehensive understanding of how banks operate, how they balance profitability with regulatory requirements, and the evolving nature of the banking sector in the face of digital transformation.
Recommended Textbook
Financial Institutions Management A Risk Management Approach 7th Edition by Anthony Saunders
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Chapter 1: Why Are Financial Institutions Special
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Q1) 1-93 When a DI makes a shift from an "originate-to-hold" banking model to an "originate-to-sell" model,the change is likely to result in
A)increased operating costs.
B)increased interest rate risk.
C)increased liquidity risk.
D)decreased monitoring costs.
E)decreased fee income.
Answer: D
Q2) 1-47 Savers increasingly favor investments that closely imitate diversified investments in the direct securities markets over the transformed financial claims offered by traditional FIs.
A)True
B)False
Answer: True
Q3) 1-26 The qualified thrift lender test is utilized to determine whether an institution can serve as an FI.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Financial Services: Depository Institutions
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Q1) 2-28 Commercial banks in the U.S.often are subject to several of the four regulatory agencies.
A)True
B)False
Answer: True
Q2) 2-10 All banks with assets greater than $10 billion are considered money center banks.
A)True
B)False
Answer: False
Q3) 2-22 The maturity structure of the assets of commercial banks tends to be shorter than the maturity structure of liabilities.
A)True
B)False
Answer: False
Q4) 2-31 All commercial banks must be members of the Federal Reserve System. A)True
B)False Answer: False
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Chapter 3: Financial Services: Insurance
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Sample Questions
Q1) 3-71 Property-casualty insurance involves
A)insurance coverage related to the loss of real and personal property.
B)insurance protection against legal liability exposure.
C)insurance protection against injuries in employment related work.
D)Answers A and B only.
E)Answers A and C only.
Answer: D
Q2) 3-83 Calculate the annual cash flows of a $2 million,10-year fixed-payment annuity earning a guaranteed 8 percent annually if the payments are to begin at the end of the year.
A)$137,990.27.
B)$275,980.53.
C)$298,058.98.
D)$149,029.49.
E)$220,000.00.
Answer: C
Q3) 3-9 The policyholder can vary the premium payments on an endowment life policy.
A)True
B)False
Answer: False
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Chapter 4: Financial Services: Securities Brokerage and Investment Banking
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Sample Questions
Q1) 4-9 As of the first half of 2009,income generated by securities brokerage accounted for over 65% of commercial bank holding company fee income.
A)True
B)False
Q2) 4-96 How much money does NetChoice,Inc.receive?
A)$ 139,500,500.
B)$ 137,812,500.
C)$ 155,000,000.
D)$ 153,125,000.
E)$ 105,000,000.
Q3) 4-37 By mid-year 2009,there were approximately ________ securities firms and investment banks operating.
A)9,100
B)7,600
C)5,200
D)4,800
E)2,200
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Page 6
Chapter 5: Financial Services: Mutual Funds and Hedge Funds
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Q1) 5-57 12b-1 fees
A)are determined as a small percentage of the fund's investable assets.
B)are annual fees to cover distribution and marketing costs of the fund.
C)have been approved by the SEC.
D)are capped at a maximum 0.25 percent for no-load funds.
E)All of the above.
Q2) 5-87 Which of the following observations concerning hedge funds is NOT true?
A)They are pooled investment vehicles.
B)They are not required to register with the SEC.
C)They are subject to virtually no regulatory oversight.
D)They usually take significant risk.
E)They have to disclose their activities to third parties.
Q3) 5-92 Which of the following hedge fund objectives would be classified under the "moderate risk" category?
A)Distressed securities funds.
B)Market neutral-arbitrage funds.
C)Value funds.
D)Short selling funds.
E)Market timing funds.
Page 7
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Chapter 6: Financial Services: Finance Companies
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Sample Questions
Q1) 6-32 The FDIC allows its member banks to participate in payday lending.
A)True
B)False
Q2) 6-45 Which of the following is the type of loan that Ford Motor Credit Corporation provides to Ford dealers to finance the cars that the dealer has for sale?
A)Inventory loan.
B)Wholesale loan.
C)Automobile lease.
D)Factoring.
E)Equipment loan.
Q3) 6-29 As an industry,finance companies have escaped the merger and consolidation activity that has affected nearly every other sector of the financial services industry.
A)True
B)False
Q4) 6-11 Finance companies generally attract less risky customers than do commercial banks.
A)True
B)False
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Chapter 7: Risks of Financial Institutions
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Q1) 7-4 An FI is exposed to reinvestment risk by holding longer-term assets relative to liabilities.
A)True B)False
Q2) 7-16 In the case where a borrower defaults on a loan,the FI may lose only a portion of the interest payments and a portion of the principal that was loaned.
A)True
B)False
Q3) 7-12 FIs that make loans or buy bonds with long maturity liabilities are more exposed to interest rate risk than FIs that make loans or buy bonds with short maturity liabilities. A)True B)False
Q4) 7-6 Exactly matching the maturities of assets and liabilities will provide a perfect hedge against interest rate risk for an FI.
A)True B)False
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Chapter 8: Interest Rate Risk I
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Sample Questions
Q1) 8-38 When repricing all interest sensitive assets and all interest sensitive liabilities in a balance sheet,the cumulative gap will be A)zero.
B)one.
C)greater than one.
D)a negative value. E)infinity.
Q2) 8-88 What is market value of the ten-year loan if all market interest rates increase by 2 percent?
A)$40.000 million.
B)$44.916 million.
C)$37.830 million.
D)$42.356 million.
E)$35.827 million.
Q3) 8-85 What is the weighted average maturity of liabilities?
A)5.50 years.
B)6.40 years.
C)1.44 years.
D)1.30 years.
E)1.10 years.
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Chapter 9: Interest Rate Risk Ii
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Q1) 9-41 Attempts to satisfy the objectives of shareholders and regulators requires the bank to use the same duration match in the protection of net worth from interest rate risk.
A)True
B)False
Q2) 9-73 Calculating modified duration involves
A)dividing the value of duration by the change in the market interest rate.
B)dividing the value of duration by 1 plus the interest rate.
C)dividing the value of duration by discounted change in interest rates.
D)multiplying the value of duration by discounted change in interest rates.
E)dividing the value of duration by the curvature effect.
Q3) 9-104 Calculate the percentage change in this bond's price if interest rates on comparable risk securities increase to 11 percent.Use the duration valuation equation.
A)+4.25 percent.
B)-4.25 percent.
C)+8.58 percent.
D)-3.93 percent.
E)-3.84 percent.
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11
Chapter 10: Market Risk
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Q1) 10-57 Which of the following items is not considered to be an advantage of using back simulation over the RiskMetrics approach in developing market risk models?
A)Back simulation is less complex.
B)Back simulation creates a higher degree of confidence in the estimates.
C)Asset returns do not need to be normally distributed.
D)The correlation matrix does not need to be calculated.
E)A worst-case scenario value is determined by back simulation.
Q2) 10-19 Calculating the risk of a multi-asset trading portfolio requires the consideration of the correlations of returns between the different assets.
A)True
B)False
Q3) 10-5 Losses among FIs that actively traded mortgage-backed securities reached over $3 trillion world-wide by mid-2009.
A)True
B)False
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Chapter 11: Credit Risk: Individual Loan Risk
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Sample Questions
Q1) 11-12 Long-term loans are more likely to be made under a loan commitment agreement than short-term loans.
A)True
B)False
Q2) 11-67 Which of the following refers to restrictions in loan and bond agreements that encourage or forbid certain actions by the borrower?
A)Mortality rates.
B)RAROC.
C)Implicit contracts.
D)Covenants.
E)Credit rationing.
Q3) 11-96 What is the implied probability of repayment on one-year B?rated debt?
A)95.00 percent.
B)97.17 percent.
C)94.00 percent.
D)97.00 percent.
E)97.09 percent.
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Chapter 12: Credit Risk: Loan Portfolio and Concentration
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Q1) 12-43 In applying the loan loss ratio models,the loss rate "\(\beta\)" for the whole loan portfolio is
A)0.
B)0.5.
C)1.
D)2.
E)negative.
Q2) 12-60 What is the expected return on the loan using the KMV model?
A)6.50 percent.
B)5.50 percent.
C)6.00 percent.
D)14.0 percent.
E)13.5 percent.
Q3) 12-45 A Hypothetical Rating Migration,or Transition Matrix,reflects all of the following EXCEPT
A)rating at which the portfolio ended the year.
B)transition probabilities.
C)rating at which the portfolio of loans began the year.
D)current ratings of portfolio.
E)the average proportions of loans that began the year.
Page 14
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Chapter 13: Off-Balance-Sheet Risk
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Q1) 13-79 Which of the following is true of the market price of a futures contract over time?
A)It is set at time 0.
B)It is fixed over the life of the contract.
C)It changes based on the market value of the underlying asset.
D)It decreases with time to expiration.
E)It is based on supply and demand.
Q2) 13-10 The delta of an option is the sensitivity of an option's value to a unit change in the value of the underlying asset.
A)True
B)False
Q3) 13-25 Loan commitment activities increase the insolvency exposure of FIs that engage in such activities.
A)True
B)False
Q4) 13-12 The present value of an off-balance-sheet item is its notional value.
A)True
B)False
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Chapter 14: Foreign Exchange Risk
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Q1) 14-66 How would you characterize the FI's risk exposure to fluctuations in the Euro to dollar exchange rate?
A)The FI is net short in the Euro and therefore faces the risk that the Euro will rise in value against the U.S.dollar.
B)The FI is net short in the Euro and therefore faces the risk that the Euro will fall in value against the U.S.dollar.
C)The FI is net long in the Euro and therefore faces the risk that the Euro will fall in value against the U.S.dollar.
D)The FI is net long in the Euro and therefore faces the risk that the Euro will rise in value against the U.S.dollar.
E)The FI has a balanced position in the Euro.
Q2) 14-30 The use of an exchange rate forward contract assures the FI of the opportunity to buy (or sell)the foreign currency at a future time at a known price.
A)True B)False
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Chapter 15: Sovereign Risk
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Sample Questions
Q1) 15-46 Performing loans in the LDC debt market are loans on which the foreign country is making promised payments.
A)True
B)False
Q2) 15-47 Which of the following describes debt moratoria?
A)Delay in repaying interest and/or principal on debt because of government prohibition of such action.
B)Special reserves created on the balance sheet against which to write off bad loans.
C)The official terminology for a sovereign loan rescheduling.
D)Debt issued by an LDC that is swapped for an outstanding loan to that LDC.
E)Changing the contractual terms of a loan,such as its maturity and interest payments.
Q3) 15-15 The larger is the import ratio of a country; the higher is the probability that the country will have to schedule its debt payments.
A)True
B)False
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Chapter 16: Technology and Other Operational Risks
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Q1) 16-16 New retail products and services based heavily on technology often are risky because of the high usage rate necessary to make them positive net present value projects.
A)True
B)False
Q2) 16-29 As of August 2009,credit cards used in either a credit or debit function accounted for over 50 percent of the number of payments made in the U.S.
A)True
B)False
Q3) 16-64 Large-scale investment projects that lead to excess capacity and integration problems that create cost overruns and control problems are examples of
A)diseconomies of scale.
B)economies of scale.
C)economies of scope.
D)diseconomies of scope.
E)constant returns to scale.
Q4) 16-12 Appropriate technology may allow an FI to achieve lower-cost funding.
A)True
B)False
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Chapter 17: Liquidity Risk
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Q1) 17-75 What does a high ratio of loans to deposits indicate?
A)DI relies heavily on the short-term money market to fund loans.
B)High degree of loan commitments.
C)DI has large amounts of asset-side liquidity.
D)Liquidity concerns are at a bare minimum for the FI.
E)DI relies heavily on core deposits to fund loans.
Q2) 17-49 Which type of financial intermediary is more highly exposed to liquidity risk?
A)Property-casualty insurance companies.
B)Life insurance companies.
C)Mutual funds.
D)Depository institutions.
E)Pension funds.
Q3) 17-6 An FI's most liquid asset is cash.
A)True
B)False
Q4) 17-2 Depository institutions generally rely on each other for cash and to meet their daily liquidity needs.
A)True
B)False
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Chapter 18: Liability and Liquidity Management
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Q1) 18-58 In the U.S.,a subsidiary bank can issue commercial paper to meet short-term liquidity needs,but the bank's parent holding company cannot.
A)True
B)False
Q2) 18-87 Another method that may be employed by banks to lower required reserves is to
A)transfer deposits to another domestic bank on Friday and transfer them back on the following Monday.
B)sweep demand deposits into higher interest-bearing accounts on Friday with a return sweep the following Monday.
C)rely more heavily on zero explicit interest-rate deposits.
D)delay posting deposits made on Friday until the following Monday.
E)do nothing,because reserve requirements cannot be avoided.
Q3) 18-36 One cost of demand deposits to DIs is the reserve requirement placed on the bank by the Federal Reserve.
A)True
B)False
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Chapter 19: Deposit Insurance and Other Liability
Guarantees
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Q1) 19-85 The federal safety net to minimize bank failures includes all of the following EXCEPT
A)deposit insurance.
B)reserve requirements.
C)contagious runs.
D)minimum capital requirements.
E)the discount window of the Federal Reserve Bank.
Q2) 19-21 Because deposit insurance premiums were not priced in an actuarially fair manner during the period from 1933-1980s,instability was created in the credit and monetary system.
A)True
B)False
Q3) 19-73 Bank risk taking can be controlled by increasing
A)stockholder discipline by charging stockholders a surcharge.
B)stockholder discipline by setting risk adjusted deposit insurance premiums.
C)depositor discipline by increasing the ceiling for deposit insurance coverage.
D)regulatory discipline by increasing the budgets of the regulatory agencies.
E)depositor discipline by expanding the doctrine of "too big to fail."
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Chapter 20: Capital Adequacy
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Q1) 20-26 Market value accounting often is said to be difficult to implement because of the amounts of nontraded assets.
A)True
B)False
Q2) 20-38 Under Basel II,total capital is equal to Tier I capital plus Tier II capital.
A)True
B)False
Q3) 20-70 The risk-based capital model in the life insurance industry includes asset risk,business risk,insurance risk,and interest rate risk.
A)True
B)False
Q4) 20-137 If the bank has capital of $50 million,what is the leverage ratio?
A)5.00 percent.
B)8.33 percent.
C)25.0 percent.
D)50.0 percent.
E)None of the above.
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Page 22
Chapter 21: Product and Geographic Expansion
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Q1) 21-105 An organization form that limits business transactions to a single location is A)an unit bank.
B)a multibank holding company.
C)a one-bank holding company.
D)an interstate bank.
E)a fully integrated universal bank.
Q2) 21-84 Which action of the holding company to help its securities affiliate can damage the financial health of its banking subsidiary?
A)Downstreaming funds from the subsidiary and then upstreaming it to the securities affiliate.
B)Upstreaming funds from the securities affiliate and then downstreaming it to the bank subsidiary.
C)Indulging in product diversification.
D)Upstreaming funds from the bank subsidiary and then downstreaming it to the securities affiliate.
E)Diversifying the earnings stream of a banking company geographically.
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Chapter 22: Futures and Forwards
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Q1) 22-2 Derivative contracts allow an FI to manage interest rate and foreign exchange risk.
A)True
B)False
Q2) 22-126 What is the end-of-year profit or loss on the bank's cash position if in one year Canadian bond rates increase to 7.5 percent? Assume no change in either current U.S.interest rates or current exchange rates.
A)Loss of US$5,000.
B)Profit of US$15,000.
C)Loss of C$119,000.
D)Profit of C$50,000.
E)Loss of C$50,000.
Q3) 22-9 Commercial banks,investment banks,and broker-dealers are the major forward market participants.
A)True
B)False
Q4) 22-8 Forward contracts are individually negotiated and,therefore,can be unique.
A)True
B)False
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Chapter 23: Options,caps,floors,and Collars
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Q1) 23-43 An FI buys a collar by buying a floor and selling a cap.
A)True
B)False
Q2) 23-17 Hedging the FI's interest rate risk by buying a put option on a bond is an attractive alternative to a manager.
A)True
B)False
Q3) 23-89 Given the exercise price of the option,what premium should be paid for this option?
A)$0.2143 per $100 of bond option purchased.
B)$0.4420 per $100 of bond option purchased.
C)$1.2768 per $100 of bond option purchased.
D)$0.2321 per $100 of bond option purchased.
E)$1.1652 per $100 of bond option purchased.
Q4) 23-21 A hedge with a futures contract reduces volatility in payoff gains on both the upside and downside of interest rate movements.
A)True
B)False
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Chapter 24: Swaps
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Q1) 24-55 What is the special feature of an off-market swap arrangement?
A)It involves special nonstandard considerations that must be negotiated between the parties.
B)The swap is used to hedge against exchange rate risk from mismatched currencies on assets and liabilities.
C)It involves additional financing costs resulting from the fixed-fixed currency swap.
D)It involves an obligation to pay interest at a fixed or floating rate for payments representing the total return on a specified amount.
E)FI receives the par value of the loan on default in return for paying a periodic swap fee.
Q2) 24-81 What will be the net after-swap yield on assets for the bank?
A)Variable-rate at LIBOR.
B)Fixed-rate at 8 percent.
C)Fixed-rate at 1 percent.
D)Fixed-rate at 2 percent.
E)None of the above.
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Chapter 25: Loan Sales
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Q1) 25-45 Which of the following refers to a period when a borrower is unable to meet a payment obligation to lenders and other creditors?
A)Window.
B)Financial distress.
C)Foreclosure.
D)Recession.
E)Basis.
Q2) 25-39 Which of the following is NOT a contractual mechanism used by FIs to control credit risks?
A)Diversifying across different types of risky borrowers.
B)Requiring higher interest rate spreads for higher risk borrowers.
C)Requiring more collateral for the bank over the assets of more risky borrowers.
D)Making lending decisions only in centralized locations.
E)Placing more restrictive covenants on the actions of more risky borrowers.
Q3) 25-3 Historically,correspondent banking relationships have been important in the sale of bank loans.
A)True
B)False
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Chapter 26: Securitization
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Q1) 26-28 The ability to refinance a mortgage with no prepayment penalty gives the borrower a long-term put option on interest rates.
A)True
B)False
Q2) 26-32 It is advantageous for the residential mortgage holder to refinance because market interest rates on new mortgages are less than interest rates on existing mortgages.
A)True
B)False
Q3) 26-2 The availability of a liquid secondary market for asset-backed securities provided an incentive for FIs to follow an originate-to-lend strategy of loan origination.
A)True
B)False
Q4) 26-11 FNMA supports only those pools of mortgages that comprise mortgage loans whose default or credit risk is insured by one of three government agencies.
A)True
B)False
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