Commercial Banking
Exam Answer Key
Course Introduction
Commercial Banking explores the fundamental principles, operations, and functions of banks within the broader financial system. The course covers topics such as bank management, lending practices, risk assessment, regulatory compliance, and the role of commercial banks in economic development. Students will learn about the structure and types of financial products offered by banks, asset-liability management, and modern challenges such as technological innovation and cybersecurity. Emphasis is placed on analyzing bank performance, understanding credit markets, and assessing the impact of monetary policy and regulation on banking operations.
Recommended Textbook
Financial Institutions Management A Risk Management Approach 7th Edition by
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Page 2
Anthony Saunders
Chapter 1: Why Are Financial Institutions Special
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Q1) 1-13 Financial institutions are subject to economies of scale in the collection of information.
A)True
B)False
Answer: True
Q2) 1-11 When an FI functions as a broker,they are selling a financial asset that they have created and will continue to hold on their balance sheet.
A)True
B)False
Answer: False
Q3) 1-92 A significant recent trend in the provision of financial services is that households increasingly prefer denomination intermediation and information services provided by A)mutual funds.
B)commercial banks.
C)insurance companies.
D)hedge funds.
E)investment banks
Answer: A
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Chapter 2: Financial Services: Depository Institutions
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Q1) 2-32 Small banks make proportionately larger amounts of real estate loans than large banks.
A)True
B)False
Answer: True
Q2) 2-66 By late 2009,the number of branches of existing commercial banks in the U.S.approximated ________,which was a (an)_________ from 1985.
A)88,000; increase B)43,000; increase C)68,000; decrease D)103,000; decrease E)72,000; increase
Answer: A
Q3) 2-10 All banks with assets greater than $10 billion are considered money center banks.
A)True
B)False
Answer: False
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4
Chapter 3: Financial Services: Insurance
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Q1) 3-29 A permanent guarantee fund for the insurance industry does not exist.
A)True
B)False
Answer: True
Q2) 3-92 What does the loss ratio measure in any particular year?
A)Payouts on policies to premiums earned.
B)Amount of premiums earned relative to the payout on policies.
C)Overall underwriting profitability of a line.
D)Loss adjustment expenses to premiums earned.
E)Commission and other acquisition costs to premiums written.
Answer: A
Q3) 3-32 In the case of an insurance company failure,policyholders immediately receive a payout of the cash surrender value of their policies.
A)True
B)False
Answer: False
Q4) 3-28 Insurance guarantee funds are administered by federal insurance regulators.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Financial Services: Securities Brokerage and Investment Banking
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Q1) 4-24 The change to decimalization of stock market transactions has lead to an increase in income from the market making activity of investment banks and securities firms.
A)True
B)False
Q2) 4-97 What is the profit to the investment banker if it is able to sell 4.5 million shares for $31 per share?
A)Profit of $1,875,000.
B)Loss of $1,875,000.
C)Profit of $1,687,500.
D)Loss of $3,125,000.
E)Profit of $3,125,500.
Q3) 4-1 Investment banks specialize in the origination,underwriting,and distribution of securities issues.
A)True
B)False
Q4) 4-27 Cash management accounts did not exist before 1999.
A)True
B)False
6
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Chapter 5: Financial Services: Mutual Funds and Hedge Funds
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Q1) 5-69 Duties of the newly required chief compliance officers include
A)policing the trading by non-fund managers.
B)ensuring the accuracy of information provided to fund managers.
C)reviewing fund business practices such as marketing and administration.
D)reporting any wrongdoing directly to fund directors.
E)All of the above.
Q2) 5-7 Equity mutual funds may contain common stock,but not preferred stock.
A)True
B)False
Q3) 5-10 Most individuals who invest in mutual funds for the first time realize that mutual fund investment carries some risk.
A)True
B)False
Q4) 5-41 Worldwide investments in mutual funds have grown at a rate faster than in the United States over the last decade.
A)True
B)False
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Chapter 6: Financial Services: Finance Companies
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Q1) 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.
Q2) 6-16 When a finance company pools mortgages with similar characteristics and securitizes the pool,the new mortgage-backed security is removed from the balance sheet of the finance company.
A)True
B)False
Q3) 6-2 Finance companies have been among the slowest growing FI groups in recent years.
A)True
B)False
Q4) 6-19 Finance companies generally have higher overhead than do commercial banks.
A)True
B)False
Page 8
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Chapter 7: Risks of Financial Institutions
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Q1) 7-13 The relationship of a limited or fixed upside return with a high probability and the potential large downside loss with a small probability is an example of an asset's credit risk to an FI.
A)True
B)False
Q2) 7-90 Which of the following situations pose a refinancing risk for an FI?
A)An FI issues $10 million of liabilities of one-year maturity to finance the purchase of $10 million of assets with a two-year maturity.
B)An FI issues $10 million of liabilities of two-year maturity to finance the purchase of $10 million of assets with a two-year maturity.
C)An FI issues $10 million of liabilities of three-year maturity to finance the purchase of $10 million of assets with a two-year maturity.
D)An FI matches the maturity of its assets and liabilities.
E)All of the above.
Q3) 7-9 Active trading of assets and liabilities creates market risk.
A)True
B)False
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Chapter 8: Interest Rate Risk I
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Q1) 8-33 The maturity gap for a bank is the average maturity of the assets minus the average maturity of the liabilities.
A)True
B)False
Q2) 8-36 The repricing gap approach calculates the gaps in each maturity bucket by subtracting the
A)current assets from the current liabilities.
B)long term liabilities from the fixed assets.
C)rate sensitive assets from the total assets.
D)rate sensitive liabilities from the rate sensitive assets.
E)current liabilities from tangible assets.
Q3) 8-42 If interest rates decrease 50 basis points for an FI that has a gap of +$5 million,the expected change in net interest income is
A)+ $2,500.
B)+ $25,000.
C)+ $250,000.
D)- $250,000.
E)- $25,000.
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Chapter 9: Interest Rate Risk Ii
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Q1) 9-98 What is the duration of the bank's Treasury note portfolio?
A)1.07 years.
B)1.00 year.
C)0.98 years.
D)0.92 years.
E)Insufficient information.
Q2) 9-58 Managers can achieve the results of duration matching by using these to hedge interest rate risk.
A)Rate sensitive assets.
B)Rate sensitive liabilities.
C)Coupon bonds.
D)Consol bonds.
E)Derivatives.
Q3) 9-12 Duration of a fixed-rate coupon bond will always be greater than one-half of the maturity.
A)True
B)False
Q4) 9-15 Duration of a zero coupon bond is equal to the bond's maturity.
A)True
B)False
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Chapter 10: Market Risk
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Q1) 10-2 As securitization of assets continues to expand,the management of market risk will become more important to FIs.
A)True
B)False
Q2) 10-70 What is the maximum yield change expected if a 95 percent confidence (one-tailed)limit is used?
A)3.30%.
B)20.0%.
C)33.0%.
D)39.2%.
E)46.6%.
Q3) 10-15 Price volatility is the price sensitivity times the potential adverse move in yield.
A)True
B)False
Q4) 10-13 Daily earnings at risk is defined as the dollar value of a position times price sensitivity.
A)True
B)False
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Chapter 11: Credit Risk: Individual Loan Risk
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Q1) 11-113 What is the required yield on this risky loan?
A)6.165 percent.
B)6.00 percent.
C)0.165 percent.
D)5.835 percent.
E)None of the above.
Q2) 11-38 In terms of rating agencies such as S&P,investment grade companies are those whose bond ratings are grade B or above.
A)True
B)False
Q3) 11-77 What is the most important factor determining bankruptcy,according to the Altman Z?score model?
A)Working capital to assets ratio.
B)Retained earnings to assets ratio.
C)Earnings before interest and taxes to assets ratio.
D)Market value of equity to book value of long-term debt ratio.
E)Sales to assets ratio.
Q4) 11-8 Unsecured debt is considered to be senior to secured debt.
A)True
B)False
Page 13
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Chapter 12: Credit Risk: Loan Portfolio and Concentration
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Sample Questions
Q1) 12-49 What is Bank A's standard deviation of its asset allocation proportions relative to the national banks average? Use the formula in the textbook.
A)7.23 percent.
B)10.89 percent.
C)18.71 percent.
D)19.15 percent.
E)27.36 percent.
Q2) 12-47 What is the FI's expected return on its loan portfolio?
A)15.00 percent.
B)18.00 percent.
C)12.00 percent.
D)14.67 percent.
E)13.33 percent.
Q3) 12-4 Migration analysis is not appropriate for an FI to use in the analysis of credit risk of consumer loans and credit card portfolios.
A)True B)False
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Chapter 13: Off-Balance-Sheet Risk
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Sample Questions
Q1) 13-31 As compared to LCs,SLCs typically are used to cover contingencies that potentially are more severe and which may not be trade related.
A)True
B)False
Q2) 13-57 Standby letters of credit 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) 13-104 Assume 50 percent of the loan is drawn and that there are reserve requirements of 10 percent on demand deposits.What should the bank charge as back-end fees if they require an expected return of 13.63 percent? Do not take future values of fees or interest income received.
A)5 basis points.
B)10 basis points.
C)15 basis points.
D)20 basis points.
E)25 basis points.
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Chapter 14: Foreign Exchange Risk
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Q1) 14-7 The market in which foreign currency is traded for future delivery is the forward foreign exchange market.
A)True
B)False
Q2) 14-29 Directly matching foreign asset and liability books in the same FX currency will allow an FI to hedge or lock in a profit spread regardless of future changes in exchange rates.
A)True
B)False
Q3) 14-16 A positive net exposure position in FX implies the FI is net short in a currency.
A)True
B)False
Q4) 14-15 A positive net exposure position in FX implies an FI has purchased more foreign currency than it has sold.
A)True
B)False
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Chapter 15: Sovereign Risk
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Q1) 15-63 Lenders may find it costly to reschedule non-accruing sovereign country debt because
A)it is politically embarrassing.
B)of tax reasons.
C)they might be subject to greater regulatory attention.
D)it is detrimental to maintaining good customer relations.
E)bankruptcy costs are high.
Q2) 15-19 Export revenue may be highly variable due to the quantity of exports and the prices that may be realized on the exported products.
A)True
B)False
Q3) 15-60 The relationship of this variable with the probability of rescheduling is often disputed.
A)The debt service ratio.
B)The import ratio.
C)The variance of export revenue.
D)The investment ratio.
E)Domestic money supply growth.
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Chapter 16: Technology and Other Operational Risks
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Q1) 16-26 Banks in given size classes tend to have very little difference in cost structures.
A)True
B)False
Q2) 16-80 Which of the following observations is NOT true?
A)The use of electronic methods of payment is far higher in major developed countries other than the United States.
B)E-money payments are virtually nonexistent in the United States.
C)Money stored in e-money accounts and cards is covered by deposit insurance.
D)U.S.FIs have been slow in adopting and using online banking and electronic payment methods extensively.
E)All of the above.
Q3) 16-51 How can interest income of an FI be increased by improved technological efficiency?
A)By improving the efficiency of management of information flows.
B)By obtaining access to low cost sources of funds.
C)By linking services to the quality of the FI's technology.
D)By innovating new interest earning products.
E)By complying with all government regulations.
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Chapter 17: Liquidity Risk
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Q1) 17-25 Liquidity planning primarily is designed to assist management in dealing with relatively predictable events.
A)True B)False
Q2) 17-14 Purchased liquidity risk management usually involves purchased funds such as fed funds,repurchase agreements and CDs.
A)True B)False
Q3) 17-20 The liquidity index should be a number that is either greater than one or less than zero.
A)True
B)False
Q4) 17-19 High loan commitment banks face less liquidity risk exposure than low commitment banks.
A)True B)False
Q5) 17-11 Asset-side liquidity risk may be a result of OBS lending commitments. A)True B)False
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Chapter 18: Liability and Liquidity Management
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Q1) 18-23 The penalty for undershooting the minimum reserve requirements may include explicit interest rate charges as well as implicit costs in the form of more frequent monitoring and examinations.
A)True
B)False
Q2) 18-38 The DI can influence the withdrawal rates of NOW accounts through explicit interest payments,implicit interest payments,or minimum balance requirements.
A)True
B)False
Q3) 18-3 One reason FIs such as depository institutions and life insurance companies are exposed to liquidity risk is the relatively illiquid nature of their liabilities.
A)True
B)False
Q4) 18-33 Deposits with low withdrawal risk typically are the lowest cost deposits for a DI. A)True
B)False
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Chapter 19: Deposit Insurance and Other Liability
Guarantees
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Q1) 19-76 Subordinate debt (SD)has been proposed as a means of increasing the degree of overall market discipline at a depository institution.Which of the following objectives is considered to be achievable when attempting to increase market discipline?
A)Issuing SD might increase the size of the DI's capital cushion.
B)The expected cost of issuing SD should decrease as the risk of the DI increased.
C)Mandatory SD would reduce transparency at DIs.
D)SD would further emphasize the use of capital forbearance.
E)Secondary market yields on the SD would be inversely related to an increase in the risk of the DI.
Q2) 19-61 All of the following are associated with contagious runs EXCEPT
A)liability holders not distinguishing between good and bad FIs.
B)liability holders seeking to quickly turn their liabilities into cash or safe securities.
C)a contractionary effect on the supply of credit.
D)negative social welfare effects.
E)an expansionary effect on the regional money supply.
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Page 21
Chapter 20: Capital Adequacy
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Q1) 20-100 The Basel I capital requirements as currently implemented include
A)different credit risks of on-balance-sheet assets.
B)different credit risks of off-balance-sheet assets.
C)the consideration of market risk in 1998.
D)All of the above.
E)Only two of the above.
Q2) 20-99 The Basle capital requirements are based upon the premise that
A)banks with riskier assets should have higher capital ratios.
B)banks with riskier assets should have lower capital ratios.
C)banks with riskier assets should have lower absolute amounts of capital.
D)banks with riskier assets should have higher absolute amounts of capital.
E)there is no relationship between asset risk and capital.
Q3) 20-54 Under Basel II,OBS contingent guaranty contracts are assigned the same risk weights as on-balance-sheet principal items to determine their risk-adjusted asset values.
A)True B)False
Q4) 20-13 The book value of equity is seldom equal to the market value of equity. A)True B)False
Page 22
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Chapter 21: Product and Geographic Expansion
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Q1) 21-30 Historically regulations have encouraged the expansion of bank offices domestically.
A)True
B)False
Q2) 21-133 Which of the following is an advantage to an FI of expanding globally?
A)Exposure to nationalization or expropriation.
B)Economies of scale.
C)High fixed costs.
D)Costs of complying with different regulatory requirements.
E)Information and monitoring costs.
Q3) 21-48 The NAFTA agreement and other agreements reached through the help of the World Trade Organization should reduce some of the restrictions that have face U.S.banks in attempts to enter emerging market countries.
A)True
B)False
Q4) 21-4 In the U.S.,the Glass-Steagall Act limited the integration of commercial banking and securities activities.
A)True
B)False
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Chapter 22: Futures and Forwards
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Q1) 22-47 A futures contract
A)is tailor-made to fit the needs of the buyer and the seller.
B)has more credit risk than a forward contract.
C)is marked to market more frequently than a forward contract.
D)has a shorter time to delivery than a forward contract.
E)has more price risk than a forward contract.
Q2) 22-67 How is a hedge ratio commonly determined?
A)By discounting the optimal number of futures to sell per $1 of cash position using the yield involved.
B)By using the ratio of the most recent spot and futures price changes.
C)By running an ordinary least squares regression of changes in spot prices on changes in futures prices.
D)By using the conversion factor.
E)By squaring the correlation between past changes in spot asset prices and futures prices.
Q3) 22-25 Macrohedging uses a derivative contract,such as a futures or forward contract,to hedge a particular asset or liability risk.
A)True
B)False
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Page 24
Chapter 23: Options,caps,floors,and Collars
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Q1) 23-61 Which of the following observations is NOT true?
A)Variance of bond prices is nonconstant over time
B)Variance of bond prices rises at first and then falls as the bond approaches maturity.
C)As the bond approaches maturity,all price paths must lead to 100 percent of the face value of the bond.
D)As the bond approaches maturity,all price paths must lead to the principal paid by the issuer on maturity.
E)Variance of a bond's price or return increases as maturity approaches.
Q2) 23-48 As of June 2009,commercial banks had listed for sale option contracts with a notational value of approximately
A)$16.2 trillion.
B)$29.7 trillion.
C)$ 8.1 trillion.
D)$51.0 trillion.
E)$36.9 trillion.
Q3) 23-43 An FI buys a collar by buying a floor and selling a cap.
A)True
B)False
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Chapter 24: Swaps
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Q1) 24-24 By 2008,the insurance company AIG had more than $440 billion in credit default swaps outstanding.
A)True B)False
Q2) 24-32 Policies established by The International Swaps and Derivatives Association (ISDA)forbid swap contracts to be made between parties of different credit standing.
A)True B)False
Q3) 24-7 Both parties in an interest rate swap normally are fully hedged against interest rate risk on the notional amount of the swap.
A)True B)False
Q4) 24-6 A plain vanilla fixed-floating interest rate swap may involve a third party that acts as a broker,but is not likely to have any sophisticated special features. A)True B)False
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Chapter 25: Loan Sales
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Q1) 25-67 The traditional interbank loan sale market has been shrinking for which of the following reasons?
A)The barriers to nationwide banking have been largely removed through legislation.
B)Concerns about counterparty risk and moral hazard have increased.
C)The traditional correspondent banking relationships are slowly breaking down.
D)All of the above.
E)Only two of the above.
Q2) 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.
Q3) 25-22 Closed-end bank loan mutual funds are restricted to investing in loans only through the loan resale or secondary market.
A)True
B)False
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Chapter 26: Securitization
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Q1) 26-62 Which of the following government agencies or government-sponsored enterprises are NOT directly involved in the creation of mortgage-backed pass-through securities?
A)Government National Mortgage Association.
B)Farmers Home Administration.
C)Federal National Mortgage Association.
D)Federal Home Loan Mortgage Corporation.
E)All of the above are directly involved.
Q2) 26-67 Which of the following are functions of GNMA?
A)Engaging in swap transactions where it swaps mortgage-backed securities with an FI for original mortgages.
B)Sponsors mortgage-backed securities programs by FIs such as banks,thrifts,and mortgage bankers.
C)Acts as a guarantor to investors in mortgage-backed securities regarding the timely pass-through of principal and interest payments on their sponsored bonds.
D)All of the above.
E)Answers B and C only.
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