Banking Theory and Practice
Test Preparation
Course Introduction
Banking Theory and Practice provides a comprehensive overview of the fundamental principles and operational aspects of the banking sector. The course explores the structure and functions of banks, money creation, credit allocation, and the regulatory environment governing banking activities. Students will examine the evolution of banking systems, types of banking institutions, risk management, and key financial products and services. Theoretical concepts are integrated with contemporary practices, including electronic banking and fintech innovations. Case studies and practical examples illustrate the challenges and strategies in modern banking operations, preparing students for professional roles in financial services and banking 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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Chapter 1: Banking and the Financial Services Industry
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Sample Questions
Q1) The U.S.government took all of the following actions to address the credit crisis in 2008 except:
A)putting Fannie Mae into conservatorship.
B)passed the Troubled Asset Relief Program (TARP).
C)created the Keep Banks Solvent (KBS) agency.
D)authorized large non-financial firms to sell bonds that were FDIC-insured.
E)temporarily increased FDIC domestic deposit coverage to $250,000.
Answer: C
Q2) Which act separated commercial banking, investment banking and insurance into three separate industries?
A)Glass-Steagall Act
B)Bank Holding Company Act
C)McFadden Act
D)Federal Reserve Act
E)Competitive Equality Banking Act
Answer: A
Q3) Smaller banks tended to have more subprime mortgage defaults than larger banks.
A)True
B)False
Answer: False
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Chapter 2: Government Policies and Regulation
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Sample Questions
Q1) State-chartered banks must be members of the Federal Reserve System.
A)True
B)False
Answer: False
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) National and state charters are available for all of the following except:
A)credit unions.
B)commercial banks.
C)savings associations.
D)Federal Reserve banks.
E)National and state charters are available for all of the above.
Answer: D
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Chapter 3: Analyzing Bank Performance
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Sample Questions
Q1) What is 1st State's efficiency ratio?
A)2.5%
B)17.5%
C)25.0%
D)74.5%
E)82.5%
Answer: D
Q2) Banks generate their largest portion of income from:
A)loans.
B)short-term investment.
C)demand deposits.
D)long-term investments.
E)certificates of deposit.
Answer: A
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) Profitable bank customers:
A)make up a small fraction of all bank customers.
B)generally shop for the bank with the lowest price.
C)have small loan balances.
D)always avoid service charges.
E)are the most sensitive to changes in price.
Q2) There is no systematic link between a bank's market value of equity and reported expenses.
A)True
B)False
Q3) For most banks, which of the following is the largest component of non-interest expense?
A)Personnel expenses
B)Rent
C)Required reserves held at the Federal Reserve
D)Electricity
E)Depreciation on buildings and equipment
Q4) Discuss why the net interest margin for banks has generally been declining for the past several years.
Q5) Discuss two ways that a bank can increase its non-interest income.
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Chapter 5: The Performance of Nontraditional Banking Companies
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Sample Questions
Q1) Today, most industrial loan companies are located in Indiana .
A)True
B)False
Q2) Which of the following is not a criticism against granting commerce companies industrial loan company charters?
A)There should be a separation between commerce and banking to protect customers from potential conflicts of interest.
B)Firms could become so large and powerful that they might dominate business in many communities.
C)Industrial loan companies are not subject to the same regulations as commercial banks.
D)All of the above are criticisms against granting commerce companies industrial loan company charters
E)a.and b.only
Q3) BMW bank has more financial leverage than its peers. A)True
B)False
Q4) Discuss the four types of businesses that investment banks traditionally engage in.
Page 7
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Chapter 6: Pricing Fixed-Income Securities
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Sample Questions
Q1) 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
Q2) Duration:
A)is always greater than maturity.
B)rises as the coupon payment rises.
C)measures how bond prices change with changes in maturity.
D)is a measure of total return.
E)is a measure of how price sensitive a bond is to a change in interest rates.
Q3) A bank quotes you an effective annual rate of 10% on a semi-annual investment.What is the annual simple interest rate?
A)9.76%
B)10.00%
C)10.25%
D)10.79%
E)10.96%
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Chapter 7: Managing Interest Rate Risk: Gap and Earnings
Sensitivity
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Sample Questions
Q1) Static GAP analysis focuses on managing net interest income in the short-run.
A)True
B)False
Q2) There is a constant relationship between changes in a bank's portfolio mix and net interest income.
A)True
B)False
Q3) Discuss the difference between a bank's periodic and cumulative GAP.
Q4) Static GAP analysis focuses on the market value of stockholder's equity.
A)True
B)False
Q5) 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.
Q6) Discuss three factors that affect net interest income.
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Chapter 8: Managing Interest Rate Risk: Economic Value of Equity
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Sample Questions
Q1) Economic value of equity analysis focuses on net interest income.
A)True
B)False
Q2) What is the weighted average duration of assets?
A)2.56 years
B)3.75 years
C)4.85 years
D)5.00 years
E)7.5 years
Q3) Effective duration considers a security's embedded options.
A)True
B)False
Q4) What does a bank's duration gap measure?
A)The duration of short-term buckets minus the duration of long-term buckets.
B)The duration of the bank's assets minus the duration of its liabilities.
C)The duration of all rate-sensitive assets minus the duration of rate-sensitive liabilities.
D)The duration of the bank's liabilities minus the duration of its assets.
E)The duration of all rate-sensitive liabilities minus the duration of rate-sensitive assets.
10
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Chapter 9: Using Derivatives to Manage Interest Rate Risk
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Sample Questions
Q1) To buy a futures contract, one must post a(n):
A)maintenance margin.
B)variation margin.
C)market margin.
D)initial margin.
E)marked margin.
Q2) Which of the following is not a difference between futures and forward contracts?
A)Futures contracts are marked-to-market daily, while futures contracts are not.
B)Buyers and sellers deal directly with each other on forward contracts but go through and exchange with futures contracts.
C)Futures contracts are standardized, forward contracts generally are not.
D)Delivery rarely occurs on futures contracts but generally occurs with forward contracts.
E)All of the above are differences between futures and forward contracts.
Q3) 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?
Q4) Give an example where an interest rate swap would benefit both counterparties.
Q5) Discuss the difference between speculating and hedging.
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Chapter 10: Funding the Bank
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Sample Questions
Q1) ___________ includes transaction accounts, MMDAs, savings accounts and small time deposits.
A)Retail funding
B)Wholesale funding
C)Borrowed funding
D)Equity funding
E)Lockbox funding
Q2) Which of the following is true regarding money market deposit accounts (MMDAs)?
A)A maximum of three checks per month may be written on a MMDA account.
B)The average check size on an MMDA account is smaller than the average demand deposit check size.
C)MMDAs are formally transaction accounts.
D)Required reserves on MMDAs are higher than on demand deposit accounts.
E)Rates paid on MMDAs are generally higher than rates on money market mutual funds.
Q3) Today, most demand deposit accounts are owned by individuals.
A)True
B)False
Q4) Discuss the process of estimating the cost of deposit accounts.
Q5) What is the purpose of having a correspondent bank relationship?
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Chapter 11: Managing Liquidity
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Sample Questions
Q1) Discuss the major components of a bank's contingency funding plan.
Q2) In determining reserves, the banks and the Federal Reserve currently use:
A)a leading reserve accounting system.
B)a contemporaneous reserve accounting system.
C)a lagging reserve accounting system.
D)an actual reserve accounting system.
E)a holding reserve accounting system.
Q3) When increasing liabilities to meet liquidity needs, a bank should consider all of the following except:
A)brokerage fees.
B)required reserves.
C)FDIC insurance premiums.
D)lost interest income.
E)A bank should consider all of the above when increasing liabilities to meet liquidity needs.
Q4) The best measure of bank asset liquidity is the core deposits to total asset ratio.
A)True
B)False
Q5) How can pledging requirements make bank assets less liquid?
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Chapter 12: The Effective Use of Capital
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Sample Questions
Q1) How do capital requirements constrain bank growth?
A)By discouraging investments in Treasury securities.
B)By disallowing the ownership of mortgage loans.
C)By decreasing a bank's net interest margin.
D)By limiting the amount of new assets that a bank can acquire through debt financing.
E)By reducing a bank's CAMELS ratings.
Q2) 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.
Q3) 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.
Q4) Discuss the "three-pillars" in Basel II.
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Chapter 13: Overview of Credit Policy and Loan
Characteristics
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Sample Questions
Q1) Discuss how banks benefit from the creation of the secondary mortgage market.
Q2) The Internet has led to larger spreads for more standardized loan products.
A)True
B)False
Q3) The risk of potential loss of interest and principal on international loans due to borrowers in a country refusing to make timely payments, as per the loan agreement is known as what type of risk?
A)International risk
B)Foreign risk
C)Continent risk
D)Country risk
E)Government risk
Q4) The quality of bank loans varies with the business cycle.
A)True
B)False
Q5) The primary focus of a values driven bank is on the bank's annual profit plan. A)True
B)False
Page 15
Q6) What are the major differences between a values-driven credit culture and a market-share driven credit culture?
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Page 16
Chapter 14: Evaluating Commercial Loan Requests and Managing Credit Risk
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Q1) A firm generally should not count on collateral as the primary source of payment.
A)True
B)False
Q2) Which financial ratio measures a firm's ability to pay current interest and lease payments with current earnings?
A)Fixed charge coverage ratio
B)Return on equity
C)Current ratio
D)Inventory turnover
E)Debt to total assets ratio
Q3) Which of the following would cause a firm's ROE to be high, but its ROA to be low?
A)A low gross profit margin but a high net profit margin.
B)Financing a relatively large proportion of assets with equity.
C)Paying very low interest rates on the firm's debts.
D)Leasing a large amount of equipment.
E)Financing a relatively large proportion of assets with debt.
Q4) 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) 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.
Q2) If the loan quoted has an add-on rate, what is the approximate annual percentage rate (APR) on the loan?
A)20%
B)18%
C)14%
D)12%
E)10%
Q3) Consumer loans are typically very similar such that a comprehensive analytical format can be used for all loans.
A)True
B)False
Q4) Losses on credit cards are among the highest of all consumer loan types.
A)True
B)False
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Chapter 16: Managing the Investment Portfolio
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Sample Questions
Q1) Which of the following U.S.government agency securities are backed by the full faith and credit of the U.S.Government?
A)Government National Mortgage Association (Ginnie Mae)
B)Student Loan Marketing Association (Sallie Mae)
C)Small Business Administration (SBA)
D)all of the above
E)a.and c.only
Q2) How did the Tax Reform Act of 1986 impact the demand for municipal securities?
Q3) Which of the following U.S.government agencies can borrow directly from the U.S.Treasury?
A)Government National Mortgage Association (Ginnie Mae)
B)Student Loan Marketing Association (Sallie Mae)
C)Small Business Administration (SBA)
D)all of the above
E)a.and c.only
Q4) Explain the difference between a bond's duration and a bond's convexity.
Q5) When loan demand is weak, banks should keep investments short-term.
A)True
B)False
Q6) What are STRIPS and what do banks find advantageous about them?
Page 19
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Chapter 17: Global Banking Activities
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Sample Questions
Q1) The European Community is currently made up of how many member countries?
A)7
B)10
C)17
D)20
E)27
Q2) Explain the impact of foreign exchange risk, economic risk, sovereign risk and political risk on the credit analysis of international loans.
Q3) 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.
Q4) Eurobonds are subject to fewer regulations than U.S.issued bonds.
A)True
B)False
Q5) How has the creation of the European Community impacted the banking industry in the U.S.and in Western Europe?
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