Commercial Bank Management Final Exam
Course Introduction
Commercial Bank Management explores the foundational principles and contemporary practices of managing commercial banks. The course covers key topics such as the organizational structure and regulatory environment of banks, risk management strategies, asset-liability management, lending and investment policies, and the evaluation of bank performance. Students will analyze the impact of economic and financial trends on banking operations, learn about credit assessment processes, and understand the influence of monetary policy. Through case studies and practical examples, the course prepares students to make informed decisions in bank management while addressing challenges in an increasingly dynamic financial services industry.
Recommended Textbook
Financial Institutions Management A Risk Management Approach 9th Edition by Anthony Saunders
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Page 2
Chapter 1: Why Are Financial Institutions Special
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Q1) Investment companies are successful in attracting business away from banks and insurance companies primarily because they
A) guarantee higher rates of return on savers' funds.
B) remove interest rate risk for the saver.
C) have no liquidity risk.
D) give savers cheaper access to the direct securities markets.
E) offer lower loan rates.
Answer: D
Q2) The recent financial crisis highlighted, in retrospect, how heavily households and businesses had come to rely on FIs to act as specialists in A) generating profits and lowering costs.
B) risk measurement and management.
C) investment advice and brokerage services.
D) time intermediation and denomination mediation.
E) derivative securities and interbank borrowing.
Answer: B
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Chapter 2: Financial Services: Depository Institutions
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Q1) Commercial banks and finance companies have traditionally served the needs of the residential real estate market.
A)True
B)False
Answer: False
Q2) Depository institutions (DIs)play an important role in the transmission of monetary policy from the Federal Reserve to the rest of the economy primarily because A)loans to corporations are part of the money supply.
B)bank loans are highly regulated.
C)savings institutions provide a large amount of credit to finance residential real estate.
D)DI deposits are a major portion of the money supply.
Answer: D
Q3) An FI is exposed to liquidity risk because the average maturity of assets and the average maturity of liabilities are often different on the FIs balance sheet.
A)True
B)False
Answer: False
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Chapter 3: Financial Services: Finance Companies
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Q1) The typical customer of a payday lender has income of between $25,000 and $50,000 per year.
A)True
B)False
Answer: True
Q2) As a percent of assets,finance companies currently rely more heavily on commercial paper as a source of financing than in 1977.
A)True
B)False
Answer: False
Q3) Finance companies are subject to regulations that restrict the types of products and services they can offer to small business customers.
A)True
B)False
Answer: False
Q4) General Electric Capital Corporation is considered a captive finance company.
A)True
B)False Answer: True
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Chapter 4: Financial Services: Securities Firms and Investment Banks
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Q1) Securities trading and underwriting is a profit generating activity that requires FIs to hold an inventory of securities they trade.
A)True
B)False
Q2) The value of assets is the traditional measure of size in the securities brokerage and investment banking industry.
A)True
B)False
Q3) As of 2015,approximately ________ of the industry total brokerage fee income was generated by firms operating as subsidiaries of commercial bank holding companies.
A)$12.1 billion
B)$10.3 billion
C)$16.5 billion
D)$32.4 billion
Q4) Recently (2013-2015),pre-tax profits at securities firms and investment banks have been declining because of new regulation.
A)True
B)False
Page 6
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Chapter 5: Financial Services: Mutual Fund and Hedge Fund Companies
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Q1) Mutual fund share distributions and transactions are supervised and cleared by the National Mutual Fund Association (NMFA).
A)True
B)False
Q2) These "more risky" hedge funds aim to profit from changes in global economies,typically brought about by shifts in government policy that impact interest rates.
A)Distressed securities funds.
B)Macro funds.
C)Value funds.
D)Opportunistic funds.
Q3) Regulates the activities of mutual fund advisors.
A)Securities Act of 1933
B)Securities Exchange Act of 1934
C)Investment Advisers Act of 1940
D)Investment Company Act of 1940
E)Insider Trading and Securities Fraud Enforcement Act of 1988
F)Market Reform Act of 1990
G)National Securities Markets Improvement Act of 1996
Page 7
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Chapter 6: Financial Services: Insurance Companies
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Q1) As with the life insurance industry,property-casualty firms tend to invest the majority of their assets and long-term investments.
A)True
B)False
Q2) The problem of adverse selection
A)implies that many people who do not need insurance coverage have it through group plans.
B)means that those people who apply for insurance are the least likely to need insurance coverage.
C)causes insurance underwriters to alter the health statistics of the general population when determining appropriate premiums.
D)creates a savings element along with the insurance component of the premium and policy.
Q3) Automobile liability insurance provides protection against theft or damage to the vehicle.
A)True B)False
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Chapter 7: Risks of Financial Institutions
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Q1) An FI that finances long-term fixed rate mortgages with short-term deposits is exposed to
A)increases in net interest income and decreases in the market value of equity when interest rates fall.
B)decreases in net interest income and decreases in the market value of equity when interest rates fall.
C)decreases in net interest income and decreases in the market value of equity when interest rates rise.
D)increases in net interest income and decreases in the market value of equity when interest rates rise.
Q2) Foreign exchange risk includes interest rate risk and credit risk as well as changes in the foreign exchange rate between two countries.
A)True
B)False
Q3) Control of the future supply of funds available to a foreign country is one method to ensure the repayment of an existing debt.
A)True
B)False
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Chapter 8: Interest Rate Risk I
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Q1) Because of its complexity,small depository institutions rarely use the repricing,or funding gap,model.
A)True
B)False
Q2) What is market value of the one-year bond if all market interest rates increase by 2 percent?
A)$60.000 million.
B)$60.566 million.
C)$59.444 million.
D)$58.899 million.
Q3) Because the increased level of financial market integration has increased the speed with which interest rate changes are transmitted among countries,control of U.S.interest rates by the Federal Reserve is more difficult and less certain.
A)True
B)False
Q4) Large banks have adopted interest rate risk measurement models based on market value accounting and duration.
A)True
B)False
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Chapter 9: Interest Rate Risk II
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Q1) All else equal,as compared to an annual payment fixed income security,a semi-annual payment security has a
A)lower duration value and lower market value.
B)higher duration but lower price sensitivity.
C)lower duration and more cash flows.
D)higher duration and more cash flows.
Q2) In most countries FIs report their balance sheet using market value accounting. A)True
B)False
Q3) Dollar duration of a fixed-income security is defined as
A)the dollar value change in the price of a security to a one-percent change in the return on the security.
B)the dollar value change in the price of a security to a change in the Macaulay's duration of the security.
C)the market price of a security following a one-percent change in the return on the security.
D)Macaulay's duration divided by one plus the interest rate times the market price of the security.
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Chapter 10: Credit Risk: Individual Loan Risk
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Q1) Long-term loans are more likely to be made under a loan commitment agreement than short-term loans.
A)True
B)False
Q2) The duration of a soon to be approved loan of $10 million is four years.The 99<sup>th</sup> percentile increase in risk premium for bonds belonging to the same risk category of the loan has been estimated to be 5.5 percent. If the fee income on this loan is 0.4 percent and the spread over the cost of funds to the bank is 1 percent,what is the expected income on this loan for the current year?
A)$40,000.
B)$100,000.
C)$140,000.
D)$180,000.
Q3) Equity holders of a levered corporation have no incentive to invest the borrowed funds in risky capital investments.
A)True
B)False
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Chapter 11: Credit Risk: Loan Portfolio and Concentration
Risk
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Q1) If Bank A's average return on its loan portfolio is lower than that of Bank B's,
A)its risk-adjusted return is higher than Bank B's.
B)its risk-adjusted return is lower than Bank B's.
C)its standard deviation is lower than Bank B's.
D)its standard deviation is higher than Bank B's.
E)its risk-adjusted return is lower than Bank B's and its standard deviation is higher than Bank B's.
Q2) In the Moody's Analytics portfolio model,the expected loss on a loan is
A)the product of the estimated loss given default and risk-free rate on a security of equivalent maturity.
B)annual all-in-spread minus the loss given default.
C)annual all-in-spread minus the expected default frequency.
D)the product of the expected default frequency and the estimated loss given default.
Q3) Using migration analysis,a loan officer tracks credit rating agencies as well as their own internal models to help determine appropriate amounts to lend to certain sectors or classes.
A)True
B)False
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Chapter 12: Liquidity Risk
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Q1) Net asset value is the current value of a mutual fund's assets divided by the number of shares outstanding.
A)True
B)False
Q2) The greater the difference between fair market prices and fire-sale prices for assets,the less liquid the DI's portfolio of assets.
A)True
B)False
Q3) Liquid funds can be obtained by a DI through unlimited borrowing in the money or purchased funds markets.
A)True
B)False
Q4) The surrender value of an insurance policy is A)its promised payoff.
B)normally a portion of the contract's face value.
C)its value upon bankruptcy.
D)the value of the junk bonds in the insurance company's portfolio.
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Chapter 13: Foreign Exchange Risk
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Q1) Suppose that the current spot exchange rate of U.S.dollars for Russian rubles is $0.15/1ruble.The price of Russian-produced goods increases by 8 percent,and the U.S.price index increases by 3 percent.
According to PPP,the 8 percent rise in the price of Russian goods relative to the 3 percent rise in the price of U.S.goods results in a(n)
A)depreciation of the Russian ruble by 5 percent.
B)depreciation of the Russian ruble by 6 percent.
C)appreciation of the Russian ruble by 5 percent.
D)appreciation of the Russian ruble by 6 percent.
Q2) A negative net exposure position in FX implies that the FI is
A)net long in a currency and exposed to depreciation of the foreign currency.
B)net short in a currency and exposed to depreciation of the foreign currency.
C)net long in a currency and exposed to appreciation of the foreign currency.
D)net short in a currency and exposed to appreciation of the foreign currency.
Q3) Most profits and losses in foreign currency markets come from taking an open position or speculating in currencies.
A)True
B)False
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Chapter 14: Sovereign Risk
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Q1) In international finance,the investment ratio is determined by dividing the value of real investment by the
A)total foreign exchange reserves.
B)real investment.
C)gross national product.
D)value of exports.
Q2) In exchange for the loss of some present value of the interest and principal on a loan after a rescheduling,the lender avoids the permanent loss that would result from a default.
A)True
B)False
Q3) The export revenue variance (VAREX)ratio tends to have high systematic risk elements in a country risk analysis (CRA).
A)True
B)False
Q4) The debt service ratio of a country should be negatively related to the probability of rescheduling.
A)True B)False
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Chapter 15: Market Risk
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Q1) The partial risk factor approach incorporates the return correlations between assets held in the trading portfolio.
A)True B)False
Q2) If a trader in charge of an investment portfolio of an FI generates returns that are higher than other traders at the FI,she should be rewarded with higher compensation.
A)True B)False
Q3) The DEAR of a bank's trading portfolio has been estimated at $5,000.It is assumed that the daily earnings are independently and normally distributed. What is the 20-day VAR?
A)$5,000.
B)$10,000.
C)$15,811.
D)$22,361.
Q4) The DEAR of a portfolio of assets is simply the weighted average of each individual assets' DEAR.
A)True B)False
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Chapter 16: Off-Balance-Sheet Risk
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Q1) One way to completely protect the lender against interest rate risk on a loan commitment is for the lender to price the loan at a variable rate against some index.
A)True
B)False
Q2) Loan loss reserves are classified as
A)on-balance-sheet assets.
B)off-balance-sheet assets.
C)off-balance-sheet liabilities.
D)on-balance-sheet liabilities.
E)equity capital.
Q3) If an option's price increases 1.4 percent for every 2 percent change in the price of the underlying security,what is the value of the option's delta?
A)0.60.
B)1.40.
C)0.70.
D)2.00.
Q4) Settlement risk on wire transfers involves intraday credit risk.
A)True
B)False
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Chapter 17: Technology and Other Operational Risks
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Q1) A new computer system is expected to cost $40 million and generate annual savings of $12 million over the next five years.
What is the IRR for this investment?
A)11.18 percent.
B)12.98 percent.
C)15.24 percent.
D)12.00 percent.
Q2) Technological advances and the ability to access a nationwide market from one location allowed the growth of Industrial Loan Corporations (ILCs)during the 1990s and illustrate competitive risks of other FIs.Which of the following is true of ILCs?
A)They can only operate within the state where they are established.
B)They are regulated by the Federal Reserve.
C)The deposits of ILCs are insured by the FDIC.
D)ILCs are subsidiaries of traditional commercial banks.
Q3) The Fed now charges 20 basis points annually for daylight overdrafts.
A)True
B)False
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Chapter 18: Liability and Liquidity Management
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Q1) Under the lagged reserve accounting system,the
A)reserve maintenance period is two days longer than the reserve computation period.
B)reserve maintenance period starts two days after the start of the reserve computation period.
C)reserve maintenance period does not begin until seventeen days after the end of the computation period.
D)reserve computation period starts on the same date as the reserve maintenance period.
Q2) In the U.S. ,banks can hold cash and government securities to meet reserve requirements.
A)True
B)False
Q3) Because retail CDs have fixed maturities,FI managers always should have perfect information regarding the scheduling of interest and principal payments.
A)True
B)False
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Chapter 19: Deposit Insurance and Other Liability
Guarantees
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Q1) The introduction of prompt corrective action capital zones by FDICIA was an attempt to place greater decision-making power at the discretion of regulators rather than on objective,measurable rules.
A)True
B)False
Q2) The following table shows the market value balance sheet of a failed bank ($ millions):
\(\begin{array}{lccc}
\text { Assets } & \text {400 Insured Deposits }& \$200\\ & \text { Urinsured Deposits} & \$400 \end{array}\)
If the insured depositor transfer resolution method is utilized,what is the cost to uninsured depositors of bank failure resolution?
A)$0.
B)-$200 million.
C)$67 million.
D)$133 million.
E)$200 million.
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Chapter 20: Capital Adequacy
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Q1) Under Basel II (2006),operational risk can be measured by four different approaches.
A)True
B)False
Q2) Broker-dealers must ensure that aggregated indebtedness is not less than
A)15 times larger than liquid assets.
B)15 times larger than equity.
C)25 percent of net worth.
D)2 percent of equity.
Q3) The purpose of the countercyclical buffer proposed by Basel III is to
A)expose those banks with inadequate capital to survive economic downturns.
B)assist insolvent banks build capital during economic expansions.
C)protect the banking system and reduce systematic exposures to economic downturns.
D)enhance global movement of funds to those countries experiencing excess aggregate credit growth.
Q4) Basel III capital ratios were enacted due to Basel II weaknesses exposed during the financial crisis of 2008-2009.
A)True
B)False
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Chapter 21: Product and Geographic Expansion
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Q1) The Financial Services Modernization Act of 1999 has provided for more standardized relationships among financial service sectors and commerce.
A)True
B)False
Q2) An underwriter is quoting the following rates for the issue of new securities on behalf of a firm on a firm commitment basis: $64.00-64.25.2,000,000 shares are being offered.
A)The maximum amount that can be earned by the underwriter (ignoring other costs)$1,000,000.
B)The maximum amount that can be earned by the underwriter (ignoring other costs)is $500,000.
C)The minimum amount that can be earned (ignoring other costs)by the underwriter is $0.
D)The minimum amount that can be earned (ignoring other costs)by the underwriter is -$500,000.
Q3) International expansion often produces revenue-risk diversification benefits for U.S.banks.
A)True
B)False
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Chapter 22: Futures and Forwards
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Q1) Conyers Bank holds U.S.Treasury bonds with a book value of $30 million.However,the U.S.Treasury bonds currently are worth $28,387,500.
Assume that the portfolio manager sells the bonds at a price of 87-05/32,and that she closes out the futures hedge position at a price of 81-17/32.What will be the net gain or loss on the entire bond transaction from the time that the hedge was placed?
A)Gain of $2,583,125.
B)Loss of $93,750.
C)Loss of $2,583,125.
D)Gain of $93,750.
Q2) Forward contracts are individually negotiated and,therefore,can be unique.
A)True
B)False
Q3) Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities.
Pension funds
A)Net buyer (typically)
B)Net seller (typically)
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Chapter 23: Options, Caps, Floors, and Collars
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Q1) In April 2016,an FI bought a one-month sterling T-bill paying £100 million in May 2016.The FI's liabilities are in dollars,and current exchange rate is $1.6401/£1.The bank can buy one-month options on sterling at an exercise price of $1.60/£1.Each contract has a size of £31,250,and the contracts currently have a premium of $0.014 per £.Alternatively,options on foreign currency futures contracts,which have a size of £62,500,are available for $0.0106 per £.
If the exchange rate in one month is $1.55/£1,what action should the FI take in regards to the hedge?
A)Call the £100 million proceeds of the T-bill from the option writer for $160 million.
B)Put the £100 million proceeds from the T-bill to the option writer for $160 million.
C)Put the £100 million proceeds from the T-bill to the option writer for $155 million.
D)Call the £100 million proceeds of the T-bill from the option writer for $155 million.
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Chapter 24: Swaps
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Q1) When a bank enters into a fixed-floating currency swap,it is exposed to
A)both interest rate and currency exposures.
B)only interest rate exposures.
C)only exchange rate exposure.
D)zero interest rate exposure over the life of the swap.
Q2) An existing swap can be effectively hedged against interest rate risk by
A)selling out to another party.
B)entering into another swap agreement that is the mirror image of the original swap.
C)setting interest sensitive assets equal to interest sensitive liabilities.
D)setting asset duration equal to liability duration.
Q3) Which of the following is NOT a reason that a swap may have less credit risk than an individual loan?
A)Netting of payments.
B)Payment flows are interest and not principal.
C)Standby letters of credit are available.
D)Swaps can be cancelled,individual loans cannot.
Q4) A pure credit swap will reduce interest rate risk.
A)True
B)False
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Chapter 25: Loan Sales
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Q1) Which of the following is NOT a key characteristic of loans sold in the short-term loan sale market?
A)Issued as a secured loan.
B)Loans to investment grade borrowers or better.
C)Issued with a fixed rate.
D)Sold in units of $1 million and up.
Q2) The primary sellers of domestic loans are medium-sized regional banks.
A)True
B)False
Q3) Loan sales by foreign banks
A)are forbidden in the U.S.domestic market.
B)must be of a certain size to be purchased by a domestic FI.
C)are allowed to be purchased by domestic FIs if the loan is to a highly-rated company.
D)must be of a certain duration,and be sold without recourse in order to be purchased by a domestic FI.
Q4) Most loans originated and sold in the short-term market are secured loans to below investment grade entities.
A)True
B)False
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Chapter 26: Securitization
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Q1) The securities that form a GNMA pass-through are U.S.Treasury bonds,bills,and notes.
A)True
B)False
Q2) All else equal,once a mortgage pool has aged,prior prepayments of mortgages in the pool have no bearing on the current value of the pool or the future prepayment rates of mortgages left in the pool.
A)True
B)False
Q3) Mortgage-backed bonds are a form of on-balance-sheet securitization.
A)True
B)False
Q4) Why are the regular GNMA pass-through not very attractive to insurance companies and pension funds seeking long-term duration assets to match their long-term duration liabilities?
A)Because of their short expected duration.
B)Because these bonds have the shortest average life with a maximum of prepayment protection.
C)Because they are zero coupon bonds and hence carry maximum amount of risk.
D)Because of their failures to offer prepayment protection.
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