Commercial Banking
Final Test Solutions
Course Introduction
This course explores the fundamental principles and operations of commercial banking, focusing on the role of banks within the financial system. Topics include asset and liability management, loan and investment strategies, risk management, regulatory frameworks, and the evaluation of bank performance. Students will also examine the impact of technological advancements, globalization, and changing economic conditions on commercial banking operations. Through case studies and practical applications, the course equips students with analytical skills essential for careers in the banking sector and broader financial services industry.
Recommended Textbook
Financial Institutions Management A Risk Management Approach 8th Edition by Saunders
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26 Chapters
2787 Verified Questions
2787 Flashcards
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Page 2
Chapter 1: Why Are Financial Institutions Special
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Sample Questions
Q1) The goal of credit allocation is the encouragement of FIs to diversity the composition of their assets.
A)True
B)False
Answer: False
Q2) Services provided by depository institutions have become relatively less significant as a portion of all services provided by FIs.
A)True
B)False
Answer: True
Q3) Commercial banks and finance companies have traditionally served the needs of the residential real estate market.
A)True
B)False Answer: False
Q4) As a delegated monitor, an FI's actions reduce agency costs.
A)True
B)False Answer: True
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Chapter 2: Financial Services: Depository Institutions
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Sample Questions
Q1) This legislation limited thrift investments in non-residential real estate.
A)The McFadden Act of 1927
B)The Glass-Steagall Act of 1933
C)The Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of 1980
D)The Garn-St Germain Depository Institutions Act of 1982
E)The Competitive Equality in Banking Act of 1987
F)The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
G)The Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991
H)The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
I)Financial Services Modernization Act of 1999
Answer: F
Q2) In general, the banking industry performed at higher levels of profitability in the decade of the 1990s than the decade of the 1980s.
A)True
B)False
Answer: True
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Chapter 3: Financial Services: Finance Companies
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Sample Questions
Q1) A major role of the captive finance company is to provide financing for the purchase of products manufactured or sold by the parent company.
A)True
B)False
Answer: True
Q2) Personal credit institutions specialize in making equipment leases to consumers.
A)True
B)False
Answer: False
Q3) Prior to the financial crisis that began in 2007, finance companies
A)had experienced slow asset growth because of the upcoming economic slowdown.
B)had found subprime lending to be a risk-free method to achieve growth.
C)had experienced strong profit and loan growth, especially those companies that lend to less risky customers.
D)had experienced strong success in the area of electronic lending.
E)had avoided takeover attempts by other financial institutions.
Answer: C
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Chapter 4: Financial Services: Securities Brokerage and Investment Banking
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Sample Questions
Q1) How much money does TWResearch receive?
A)$105,000,000.
B)$150,000,000.
C)$112,000,000.
D)$125,000,000.
E)$110,000,000.
Q2) One of the primary reasons that investment banks were allowed to convert to bank holding companies during the recent financial crisis was recognition that A)their operating activities were too risky and they needed the cushion of bank deposits to alleviate funding risks.
B)the industry had acquired too much capital during the previous decade. C)bank holding companies needed the ability to underwrite new issues of corporate securities.
D)it was the only way an investment bank could qualify for federal bailout funds. E)the Federal Reserve was unable to purchase troubled assets from investment banks, but they could from bank holding companies.
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6
Chapter 5: Financial Services: Mutual Funds and Hedge Funds
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Sample Questions
Q1) Short-term mutual funds invest solely in tax-exempt securities.
A)True
B)False
Q2) In total, about the percentage of all retirement plan investments are in institutional funds.
A)20 percent
B)40 percent
C)6.0 percent
D)80 percent
E)Zero percent
Q3) It is estimated that 75 percent of all hedge funds are located in A)Bermuda.
B)Hong Kong.
C)Cayman Islands.
D)Luxembourg.
E)San Marino.
Q4) Most individuals who invest in mutual funds for the first time realize that mutual fund investments carries some risk.
A)True
B)False
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Chapter 6: Financial Services: Insurance
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Sample Questions
Q1) As currently structured, contributions to a state-sponsored guarantee fund are collected only after the actual failure of an insurance company.
A)True
B)False
Q2) If losses on a particular line of medical malpractice insurance were $650 million and premiums earned were $575 million, the loss ratio would be
A)1.13 implying that this line of insurance is profitable.
B)1.13 implying that this line of insurance is unprofitable.
C)0.88 implying that this line of insurance is profitable.
D)0.88 implying that this line of insurance is unprofitable.
E)-$75 million implying that this line of insurance is unprofitablE.
Q3) If losses on a particular line of fire insurance were $430 million, premiums earned were $595 million, and loss adjustment expenses were $95 million, the combined ratio would be
A)0.88 implying that this line of insurance is profitable.
B)0.88 implying that this line of insurance is unprofitable.
C)1.13 implying that this line of insurance is profitable.
D)1.13 implying that this line of insurance is unprofitable.
E)0.22 implying that this line of insurance is profitablE.
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Page 8
Chapter 7: Risks of Financial Institutions
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Sample Questions
Q1) A lower level of equity capital increases the risk of insolvency to a financial institution.
A)True
B)False
Q2) For an FI to exactly hedge the foreign investment risk, the foreign currency assets must equal the foreign currency liabilities.
A)True
B)False
Q3) Individuals have an advantage over FIs in that individuals more easily can diversify away some of the credit risk of their asset portfolios.
A)True
B)False
Q4) Because the economies of the U.S. and other overseas countries have become more integrated, the risks of financial intermediation have decreased.
A)True
B)False
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Page 9
Chapter 8: Interest Rate Risk I
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Sample Questions
Q1) When the Fed finds it necessary to slow economic activity, it allows interest rates to fall.
A)True
B)False
Q2) The cumulative repricing gap position of an FI for a given extended time period is the sum of the repricing gap values for the individual time periods that make up the extended time period.
A)True
B)False
Q3) An FI finances a $250,000 2-year fixed-rate loan with a $200,000 1-year fixed-rate
CD. Use the repricing model to determine (a) the FI's repricing (or funding) gap using a 1-year maturity bucket, and (b) the impact of a 100 basis point (0.01) decrease in interest rates on the FI's annual net interest income?
A)$0; $0.
B)-$200,000; +$2,000.
C)-$200,000; -$2,000.
D)+$50,000; -$500.
E)-$200,000; -$1,000.
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Chapter 9: Interest Rate Risk II
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Sample Questions
Q1) Immunizing the net worth ratio requires that the duration of the assets be set equal to the duration of the liabilities.
A)True
B)False
Q2) The leverage adjusted duration of a typical depository institution is positive.
A)True
B)False
Q3) Setting the duration of the assets higher than the duration of the liabilities will exactly immunize the net worth of an FI from interest rate shocks.
A)True
B)False
Q4) Calculate the percentage change in this bond's price if interest rates on comparable risk securities decline to 7 percent. Use the duration valuation equation.
A)+8.58 percent
B)+12.76 percent
C)-12.75 percent
D)+11.80 percent
E)+11.52 percent
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11
Chapter 10: Credit Risk: Individual Loan Risk
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Sample Questions
Q1) The exact interest rate to be charged on a fixed-rate loan is agreed upon by all parties at the time the commitment is negotiated.
A)True
B)False
Q2) The payoff function of a loan to a debt holder is similar to writing a call option on the value of the borrower's assets with the face value of the debt as the exercise price.
A)True
B)False
Q3) Confidence Bank has made a loan to Risky Corporation. The loan terms include a default risk-free borrowing rate of 8 percent, a risk premium of 3 percent, an origination fee of 0.1875 percent, and a 9 percent compensating balance requirement. Required reserves at the Fed are 6 percent. What is the expected or promised gross return on the loan?
A)11.19 percent.
B)11.90 percent.
C)12.29 percent.
D)12.02 percent.
E)12.22 percent.
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Chapter 11: Credit Risk: Loan Portfolio and Concentration
Risk
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Sample Questions
Q1) Which of the following is the legislation that required bank regulators to incorporate credit concentration risk into their evaluation of bank insolvency risk.
A)The Bank Holding Company Act (1956).
B)FDIC Improvement Act (1991).
C)Depository Institutions Deregulation and Monetary Control Act (1980).
D)Garn-St.Germain Depository Institutions Act (1982).
E)Financial Institutions Reform Recovery and Enforcement Act (1989).
Q2) Portfolio risk can be reduced through diversification only if the returns of the loans in the portfolio are negatively correlated.
A)True
B)False
Q3) In the use of modern portfolio theory (MPT), the sum of the credit risks of loans under estimates the risk of the whole portfolio.
A)True
B)False
Q4) Included in the Moody's Analytics model are recovery rates on defaulted loans.
A)True
B)False
Page 13
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Chapter 12: Liquidity Risk
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Sample Questions
Q1) During the financial crisis of 2008, liquidity problems were avoided as banks continued to provide lending to each other.
A)True
B)False
Q2) In general, money center banks are exposed to less liquidity risk than smaller, regional banks.
A)True
B)False
Q3) What is the net liquidity of the bank?
A)$7 million.
B)$12 million.
C)$17 million.
D)$21 million.
E)$22 million.
Q4) Which of the following is NOT used as a method of measuring liquidity risk?
A)Liquidity coverage ratio.
B)Liquidity index.
C)Financing gap and financing requirement.
D)Peer group ratio comparison.
E)Current ratio.
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Chapter 13: Foreign Exchange Risk
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Sample Questions
Q1) Off-balance-sheet hedging involves taking a position in FX forward or other derivative securities even though no FX assets or liabilities are on the balance sheet.
A)True
B)False
Q2) If the exchange rate had fallen from $1.60/ 1 at the beginning of the year to $1.50/ 1 at the end of the year when the FI needed to repatriate the principal and interest on the loan. What would be the dollar loan amount repatriated at the end of the year?
A)$6.25 million.
B)$11.6 million.
C)$7.25 million.
D)$6.625 million.
E)$10.875 million.
Q3) 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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15
Chapter 14: Sovereign Risk
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Sample
Questions
Q1) The allocation of country resources between present and future consumption is measured by which of the following variables of the credit scoring model of sovereign country risk exposure?
A)The debt service ratio.
B)The import ratio.
C)The variance of export revenue.
D)The investment ratio.
E)Domestic money supply growth.
Q2) Which of the following describes debt rescheduling?
A)Outright cancellation of all current and future debt obligations.
B)Changing the contractual terms of a loan, such as its maturity and interest payments.
C)Direct nationalization of private sector assets.
D)Automatic default of all international loans upon default of any one loan.
E)Debt conversion schemes of debtor countries that signal creditworthiness.
Q3) The export revenue variance (VAREX) should be negatively related to the probability of debt rescheduling.
A)True
B)False
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16
Chapter 15: Market Risk
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Sample Questions
Q1) Market risk is the potential gain caused by an adverse movement in market conditions.
A)True
B)False
Q2) A charge reflecting the risk of the decline in the liquidity or credit risk quality of the trading portfolio is the general market risk charge in the BIS framework.
A)True
B)False
Q3) Which term defines the risk related to the uncertainty of an FI's earnings on its trading portfolio caused by changes, and particularly extreme changes in market conditions?
A)Interest rate risk.
B)Credit risk.
C)Sovereign risk.
D)Market risk.
E)Default risk.
Q4) The Volker Rule became effective in early 2013.
A)True
B)False
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Chapter 16: Off-Balance-Sheet Risk
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Sample Questions
Q1) What is the balance sheet capital?
A)-$60 million.
B)$60 million.
C)$740 million.
D)$800 million.
E)This question cannot be answered without information about off-balance sheet assets and liabilities.
Q2) Interest rate risk is part of the loan commitment contingent risk because of the uncertainty of changes in interest rates before the borrower exercises his option to borrow.
A)True
B)False
Q3) As of 2012, the top 25 U.S. commercial banks accounted for ________ percent of OBS derivative contracts among FDIC-insured institutions.
A)100
B)99.8
C)92.6
D)81.9
E)60.7
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Page 18
Chapter 17: Technology and Other Operational Risks
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Sample Questions
Q1) Which of the following occur when managers undertake growth-oriented investments to increase an FI's size that may be inconsistent with stockholders' value-maximizing objectives?
A)Technology risk.
B)Operational efficiency.
C)Agency conflicts.
D)Diseconomies of scale.
E)Diseconomies of scope.
Q2) Technological efficiency focuses exclusively on the cost side of financial intermediation.
A)True
B)False
Q3) Which of the following observations concerning e-money is NOT true?
A)Check writing lays the foundation of e-money.
B)E-money removes the middleman from a transaction.
C)The e-money user transfers the money from his or her bank account to the account of the funds' receiver.
D)The primary function of e-money is to facilitate transactions on the Internet.
E)E-money is not a cost efficient way of managing transactions that are small in value.
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Page 19
Chapter 18: Liability and Liquidity Management
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Sample Questions
Q1) The Fed discount window is an appropriate place to borrow reserve shortfalls because of its lower than market rates.
A)True
B)False
Q2) 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
Q3) Medium term notes issued by a U.S. DI
A)generally have a maturity of five to seven years.
B)are a stable source of funds with low withdrawal risk.
C)are not subject to reserve requirements.
D)are not subject to deposit insurance.
E)All of the abovE.
Q4) 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
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Chapter 19: Deposit Insurance and Other Liability
Guarantees
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Sample Questions
Q1) The changes implemented by the Fed in January 2003 to its discount window lending
A)decreased the cost of borrowing.
B)eased the terms of borrowing.
C)terms of borrowing became less flexible.
D)resulted in reduction of outstanding discount loan volumes.
E)None of the above.
Q2) Which of the following is not a Least-Cost Resolution (LCR) requirement under FDICIA?
A)Consider and evaluate all possible resolution alternatives by computing and comparing their costs on a present value basis, using realistic discount rates.
B)Place a bank or thrift into receivership as soon as its capital falls below some positive book value level.
C)Document the evaluation and the assumption on which it is based.
D)Retain documentation for at least five years.
E)Select the least costly alternative based on the evaluation.
Q3) A run on a bank is not necessarily a bad occurrence.
A)True
B)False
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Chapter 20: Capital Adequacy
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Sample Questions
Q1) Under FDICIA, the ability for regulators to show forbearance is limited by a set of mandatory actions for each level of capital that an FI achieved.
A)True
B)False
Q2) In calculating the net capital for a securities firms, which of the following is NOT an adjustment to the book value of net worth?
A)The market value of net worth is calculated on a day-to-day basis.
B)A series of adjustments are made to reflect unrealized profits and losses, subordinated liabilities, deferred taxes, options, and futures.
C)The amount of securities that cannot be publicly sold are subtracted.
D)All assets not readily converted into cash are subtracted.
E)Haircuts to reflect potential market value fluctuations in asset values are deducted.
Q3) 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
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Chapter 21: Product and Geographic Expansion
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Sample Questions
Q1) Which of the following is NOT a potential conflict of interest identified by regulators and academics?
A)Salesperson's stake.
B)Stuffing fiduciary accounts.
C)Bankruptcy risk transference.
D)Procompetitive effects.
E)Third-party loans.
Q2) The establishment of a presence in local markets by insurance companies is reasonably inexpensive because of low capital requirements established by state regulators.
A)True
B)False
Q3) The Financial Services Modernization Act repealed the Glass-Steagall barriers between commercial banking and investment banking.
A)True
B)False
Q4) Banks have been permitted to acquire existing investment banks since 1997.
A)True
B)False
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Chapter 22: Futures and Forwards
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Sample Questions
Q1) An FI with a positive duration gap is exposed to interest rate declines and could hedge its interest rate risk by buying forward contracts.
A)True
B)False
Q2) If a 12-year, 6.5 percent semi-annual $100,000 T-bond, currently yielding 4.10 percent, is used to deliver against a 6-year, 5 percent T-bond at 110-17/32, what is the conversion factor? What would the buyer have to pay the seller?
A)1.1027; $110,531.
B)1.2257; $135,478.
C)1.8370; $253,830.
D)1.3622; $163,339.
E)1.7263; $141,788.
Q3) In a forward contract agreement, the quantity of product to be traded, the time of the actual trade and the price are determined at the time of the agreement.
A)True
B)False
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Chapter 23: Options, Caps, Floors, and Collars
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Sample Questions
Q1) The buyer of a bond call option stands to make a positive payoff if changes in market interest rates cause the bond price to rise above the exercise price.
A)True
B)False
Q2) How many options should the FI purchase, and what will be the cost?
A)1,600 contracts for $16.96.
B)1,600 contracts for $1,060,000.
C)3,200 contracts for $44.80.
D)3,200 contracts for $1,400,000.
E)3,200 contracts for $2,800,000.
Q3) In addition to purchasing the cap, if the bank also sells a 3-year 6 percent floor and interest rates are 5 percent and 7 percent in years 2 and 3, respectively, what are the payoffs to the bank? Specifically, the bank
A)receive $50,000 at the end of year 2 and receive $50,000 at the end of year 3.
B)pay $50,000 at the end of year 2 and receive $50,000 at the end of year 3.
C)receive $0 at the end of year 2 and pay $50,000 at the end of year 3.
D)receive $0 at the end of year 2 and $50,000 at the end of year 3.
E)receive $50,000 at the end of year 2 and pay $0 at the end of year 3.
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Chapter 24: Swaps
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Sample Questions
Q1) The vast majority of credit derivative contracts held by commercial banks consist of credit
A)forward contracts.
B)futures contracts.
C)options.
D)swaps.
E)currency contracts.
Q2) In terms of valuation, a 12-year interest rate swap can be can be considered in terms of
A)a series of option contracts.
B)a zero-coupon bond.
C)a U.S.Treasury STRIP.
D)bond-equivalent valuation.
E)securitization of a derivative contract.
Q3) The Wall Street Reform and Consumer Protection Act of 2010 established comprehensive regulation of over-the-counter (OTC) derivatives including swaps.
A)True
B)False
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26
Chapter 25: Loan Sales
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Sample Questions
Q1) One way to boost the capital to assets ratio of an FI is through loan sales.
A)True
B)False
Q2) The growth of the commercial paper market as well as the increased ability of banks to underwrite commercial paper has reduced the importance of short-term segment of the loan sales market.
A)True
B)False
Q3) The move by regulators toward market value accounting of the loan portfolios will likely encourage sales of loans in the secondary markets.
A)True
B)False
Q4) The growth of the commercial paper market has hurt the market for loan sales by
A)offering some borrowers alternatives to bank loans.
B)underpricing the banks that sell loans.
C)fostering the credit crunch.
D)adding another regulatory layer since the SEC requires shelf registration of new issues.
E)increasing moral hazard concerns in the market.
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Chapter 26: Securitization
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Sample Questions
Q1) One cause of residential mortgage prepayment risk is the sale of the mortgaged property.
A)True
B)False
Q2) CMOs are typically created from existing GNMA pass-through securities that are held in trust.
A)True B)False
Q3) Unlike GNMA, FNMA will securitize conventional mortgages issued by depository institutions.
A)True
B)False
Q4) If at the end of the first year, the CMO trustee receives total cash flows of $15 million, how are they distributed?
A) $7.5 million to Tranche A and $7.5 million to Tranche B.
B) $15 million to Tranche A and nothing to Tranche B.
C) $5.5 million to Tranche A and $9.5 million to Tranche B.
D) $8.7 million to Tranche A and $6.3 million to Tranche B.
E) $7.1 million to Tranche A and $7.9 million to Tranche B.
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