Commercial Banking Study
Guide Questions
Course Introduction
Commercial Banking explores the fundamental principles, practices, and regulations guiding the operation of commercial banks in the modern financial system. The course examines core topics such as bank management, asset and liability strategies, risk assessment, lending practices, regulatory compliance, and financial services provided to businesses and individuals. Students will analyze the role of commercial banks in economic development, their involvement in credit creation, and the evolving landscape shaped by technology and competition. Case studies and real-world scenarios enhance understanding of how commercial banks operate, adapt to market challenges, and support the broader financial industry.
Recommended Textbook
Financial Institutions Management A Risk Management Approach 7th Edition by Anthony Saunders
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26 Chapters
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2651 Flashcards
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Page 2
Chapter 1: Why Are Financial Institutions Special
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Sample Questions
Q1) 1-15 The asset transformation function of an FI is to issue primary financial claims to corporations while purchasing primary claims issued by households and other investors.
A)True
B)False
Answer: False
Q2) 1-37 Small investors in mutual funds are often able to realize larger returns than they would receive from bank deposits.
A)True
B)False
Answer: True
Q3) 1-40 The passage of legislation to prevent discrimination in lending is an example of regulation to protect investors.
A)True
B)False
Answer: False
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Chapter 2: Financial Services: Depository Institutions
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Q1) 2-9 Large banks tend to make business decisions based on personal knowledge of customers creditworthiness and business conditions in the local communities.
A)True
B)False
Answer: False
Q2) 2-6 Prior to the financial crisis of 2008,the return on equity for small community banks had been larger than for large money center banks.
A)True
B)False
Answer: False
Q3) 2-43 The primary reason for the decline of the S&L industry was the passage of legislation that gave commercial lending powers to the S&L industry.
A)True
B)False
Answer: False
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4
Chapter 3: Financial Services: Insurance
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Sample Questions
Q1) 3-81 An insurance company collected $31.0 million in premiums and disbursed $28 million in losses.Loss adjustment expenses amounted to $5.0 million.The firm is profitable
A)if dividends paid to policyholders is $4 million and income generated on investments is $4 million.
B)if dividends paid to policyholders is $10 million and income generated on investments is $14 million.
C)if dividends paid to policyholders is $6 million and income generated on investments is $2 million.
D)if dividends paid to policyholders is $10 million and income generated on investments is $4 million.
E)if dividends paid to policyholders is $4 million and income generated on investments is $2 million.
Answer: B
Q2) 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) 4-47 What term refers to the process in which an IPO share allocation is used for the purpose of enticing future investment banking business from customers?
A)Dumping.
B)Redlining.
C)Intermediation.
D)Externalization.
E)Spinning.
Q2) 4-2 Investment banks engage in activities such as advising on mergers,acquisitions,and corporate restructuring.
A)True
B)False
Q3) 4-78 Which of the following two investment banks were granted approval to be chartered as commercial banks during the most recent financial crisis?
A)Merrill Lynch and Bear Stearns.
B)Goldman Sachs and Morgan Stanley.
C)Bear Stearns and Lehman Brothers.
D)Merrill Lynch and Morgan Stanley.
E)Lehman Brothers and Goldman Sachs.
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Chapter 5: Financial Services: Mutual Funds and Hedge Funds
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Q1) 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.
Q2) 5-85 An investor purchases fund shares with a 3 percent front-end load and expects to hold the shares for 10 years.The fund has a total fund expense ratio (including 12b-1 fees)of 1 percent per year.The annual total shareholder cost for this fund is _______ per year.
A)3 percent
B)30 percent
C)0.3 percent
D)1.3 percent
E)1 percent
Q3) 5-15 The return from investing in mutual funds can include dividends,gains from the sale of the mutual fund assets,and gains from the sale of the mutual fund shares.
A)True
B)False
Page 7
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Chapter 6: Financial Services: Finance Companies
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Q1) 6-60 Which of the following is traditionally the major type of consumer loans for finance companies?
A)Revolving loans.
B)Motor vehicle loans and leases.
C)Wholesale loans.
D)Equipment leases.
E)Home equity loans.
Q2) 6-53 Finance companies that prey on desperate higher-risk customers charging unfairly exorbitant interest rates are referred to as
A)refinancing companies.
B)captive companies.
C)business credit companies.
D)loan shark companies.
E)personal credit companies.
Q3) 6-17 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
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Chapter 7: Risks of Financial Institutions
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Sample Questions
Q1) 7-36 Direct foreign investment and foreign portfolio investment both can be beneficial to an FI because of imperfectly correlated returns with domestic investments.
A)True
B)False
Q2) 7-85 A U.S.bank has 40 million in assets and 50 million in CDs.All other assets and liabilities are in U.S.dollars.This bank is
A)net long 10 million.
B)net short 10 million.
C)neither short nor long in .
D)net long - 10 million.
E)net short - 10 million.
Q3) 7-34 Employee fraud is a type of operational risk to a financial institution.
A)True B)False
Q4) 7-15 Credit risk exposes the lender to the uncertainty that only interest payments may not be received.
A)True
B)False
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Chapter 8: Interest Rate Risk I
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Sample Questions
Q1) 8-73 How will a decrease of 25 basis points in all interest rates affect Gotbuck's net interest income over a planning period of 91 days?
A)+$0.1875 million.
B)+$0.1250 million.
C)-$0.1375 million.
D)+$0.0625 million.
E)0
Q2) 8-19 Defining buckets of time over a range of maturities assures the capture of all relevant information necessary to accurately assess the interest rate risk exposure of an FI.
A)True
B)False
Q3) 8-1 The economic insolvency of many thrift institutions during the 1980s was due,at least in part,to unexpected increases in interest rates.
A)True
B)False
Q4) 8-3 The repricing gap model is a book value accounting based model.
A)True
B)False
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Chapter 9: Interest Rate Risk Ii
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Sample Questions
Q1) 9-103 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.
Q2) 9-92 What is the duration of the assets?
A)0.708 years.
B)0.354 years.
C)0.350 years.
D)0.955 years.
E)0.519 years.
Q3) 9-95 What is the duration of this bond?
A)5 years.
B)4.31 years.
C)3.96 years.
D)5.07 years.
E)Not enough information to answer.
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Chapter 10: Market Risk
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Q1) 10-15 Price volatility is the price sensitivity times the potential adverse move in yield.
A)True
B)False
Q2) 10-18 The JPM RiskMetrics model generally prefers using the present value of cash flow changes as the price-sensitivity weights.
A)True
B)False
Q3) 10-45 A reason for the use of MRM for the purpose of identifying potential misallocations of resources caused by prudential regulation is which of the following?
A)Regulation.
B)Resource allocation.
C)Management information.
D)Setting limits.
E)Performance evaluation.
Q4) 10-11 Market risk is the potential gain caused by an adverse movement in market conditions.
A)True
B)False
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Page 12
Chapter 11: Credit Risk: Individual Loan Risk
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Q1) 11-23 LIBOR,the London Interbank Offered Rate,is the rate for short-term interbank dollar loans in the domestic money-center bank market.
A)True
B)False
Q2) 11-72 Which of the following is true of the prime lending rate?
A)It is most commonly used in pricing longer-term loans.
B)It is the lending rate charged to the FI's lowest-risk customers.
C)It is also known as LIBOR.
D)It is the rate for interbank dollar loans of a given maturity in the Eurodollar market.
E)The best and largest borrowers commonly pay above this lending rate.
Q3) 11-74 Which of the following is the major weakness of the linear probability model?
A)Based on market expectations.
B)Measurement of the loan risk is difficult.
C)Estimated probabilities of default may lie outside the interval 0 to 1.
D)Neither the market value of a firm's assets nor the volatility of the firm's assets is directly observed.
E)Answers A and D only.
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Page 13
Chapter 12: Credit Risk: Loan Portfolio and Concentration
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Sample Questions
Q1) 12-58 Estimate the standard deviation of Bank B's asset allocation proportions relative to the national benchmark.
A)40.44 percent.
B)34.32 percent.
C)29.89 percent.
D)21.21 percent.
E)15.00 percent.
Q2) 12-41 Which of the following is a measure of the sensitivity of loan losses in a particular business sector relative to the losses in an FI's loan portfolio?
A)Loss rate.
B)Systematic loan loss risk.
C)Concentration limit.
D)Loss given default.
E)Expected default frequency.
Q3) 12-16 The all-in-spread (AIS)used in the KMV model is the difference between the interest rate on a loan and the prime lending rate at the time the loan was originated.
A)True
B)False
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Chapter 13: Off-Balance-Sheet Risk
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Q1) 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.
Q2) 13-105 What are the savings to the corporation if it obtains a standby letter of credit to back its $10 million issue of commercial paper?
A)$1,250.
B)$2,500.
C)$3,750.
D)$5,000.
E)$6,250.
Q3) 13-50 The source of strength doctrine involving failed FIs in multibank holding company corporate structures has been widely accepted by the courts.
A)True
B)False
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15
Chapter 14: Foreign Exchange Risk
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Q1) 14-37 The FI is acting as a FX market agent for its customers when it
A)buys or sells currency to balance the FI's net exposure.
B)takes a nonzero net position in a particular currency.
C)processes an exporter's transaction in a foreign currency.
D)makes a market in a currency.
E)advises customers on their international business.
Q2) 14-22 FX trading income is derived only from profit (or loss)on the FI's speculative currency positions.
A)True
B)False
Q3) 14-24 Profits in foreign exchange trading have grown despite the decreased volatility in FX rates in European countries.
A)True
B)False
Q4) 14-16 A positive net exposure position in FX implies the FI is net short in a currency. A)True
B)False
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16
Chapter 15: Sovereign Risk
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Sample Questions
Q1) 15-69 What is the approximate yield on a 20-year 10 percent annual coupon LDC bond selling at 25 cents on the dollar?
A)10 percent.
B)40 percent.
C)14 percent.
D)25 percent.
E)Cannot be determined.
Q2) 15-39 The advantage to the lender of a Brady bond versus a loan to a foreign country is the much longer maturity and thus the lower payment schedule of a Brady bond.
A)True
B)False
Q3) 15-62 Lenders may find it beneficial to reschedule sovereign country debt
A)to avoid political embarrassment.
B)for tax reasons.
C)to avoid marking the balance sheet to market.
D)to maintain good customer relations.
E)to keep from going bankrupt.
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Chapter 16: Technology and Other Operational Risks
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Sample Questions
Q1) 16-31 Fedwire is a wire transfer network operated through the Federal Reserve System to assist banks in making financial transactions among themselves,on behalf of themselves and customers.
A)True
B)False
Q2) 16-62 Which of the following implies reduced unit costs as size or volume of assets increases?
A)Diseconomies of scale.
B)Economies of scale.
C)Economies of scope.
D)Diseconomies of scope.
E)Constant returns to scale
Q3) 16-13 Cash management services include the collection,disbursement,and transfer of funds.
A)True
B)False
Q4) 16-9 The initial steps of cross selling financial products can easily occur with computer technology.
A)True
B)False
Page 18
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Chapter 17: Liquidity Risk
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Q1) 17-20 The liquidity index should be a number that is either greater than one or less than zero.
A)True
B)False
Q2) 17-90 What are the possible ways that the bank can meet an expected net deposit drain of +4 percent using stored liquidity management techniques?
A)Liquidate all cash holdings.
B)Utilize further the Fed funds market.
C)Liquidate some securities and/or loans.
D)Liquidate all cash and use more Fed funds.
E)All of the above are suitable techniques.
Q3) 17-70 Which of the following is NOT a primary source of liquidity?
A)Excess cash reserves over and above regulatory reserve requirements.
B)Borrowings in the money market.
C)Borrowings in the purchased funds market.
D)Capital notes and other long-term financing alternatives.
E)Cash-type assets that can be sold with little price risk and low transaction costs.
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Page 19
Chapter 18: Liability and Liquidity Management
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Q1) 18-80 For reserve calculation purposes,the period that begins on a Tuesday and ends on a Monday 14 days later is known as
A)the reserve maintenance period.
B)the reserve allocation period.
C)the reserve computation period.
D)the contemporaneous accounting period.
E)None of the above.
Q2) 18-10 In the U.S.,excess reserves held at the central bank pay interest to the DI. A)True
B)False
Q3) 18-1 To reduce liquidity risk an FI can efficiently manage the liability structure of its portfolio.
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) 19-65 Which of the following contributed the least to the collapse of the FSLIC/FDIC deposit insurance funds?
A)An increase in interest rate volatility.
B)Enhanced investment powers granted to thrifts.
C)Fraudulent behavior induced by the greed of the decade of the 80s.
D)Fraudulent behavior induced by ineffective regulatory incentives.
E)The extension of deposit insurance to uninsured depositors.
Q2) 19-86 The insolvency of the FSLIC occurred because of
A)declining real estate values.
B)risky lending.
C)asset liability mismatch.
D)insider lending.
E)All of the above.
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."
Page 21
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Chapter 20: Capital Adequacy
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Q1) 20-107 Which of the following is NOT a criticism of the Basel I risk-based capital ratio?
A)All commercial loans are given equal weight regardless of the credit risk of the borrower.
B)The ratio incorporates off-balance-sheet risk exposures.
C)Grouping assets into different risk categories may encourage balance sheet asset allocation games.
D)The treatment does not include interest rate or foreign exchange risk.
E)The weights in the four risk categories imply a cardinal measurement of relevant risk between each category.
Q2) 20-51 Similar to Basel I,Basel II will require banks to assign on-balance-sheet assets to one of four categories of credit risk exposure.
A)True
B)False
Q3) 20-67 The risk-based capital ratio does account for loans made to companies with different credit ratings.
A)True
B)False
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22
Chapter 21: Product and Geographic Expansion
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Questions
Q1) 21-89 Concern about the improper transfer of inside information has been used to justify product segmentation on the grounds of
A)safety and soundness issues.
B)economy of scale and scope issues.
C)conflict of interest issues.
D)deposit insurance issues.
E)regulatory oversight issues.
Q2) 21-57 One result of the FBSEA was the increase in the regulatory burden of foreign banks in the U.S.
A)True
B)False
Q3) 21-146 If Bank 1 is acquired by Bank 2,what is the impact on the market's HHI?
A)An increase in the HHI of 1600.
B)An increase in the HHI of 625.
C)An increase in the HHI of 1563.
D)A decrease in the HHI of 222.
E)A decrease in the HHI of 360.
Q4) 21-24 Tie-ins and third-party loans are prohibited by current bank regulations.
A)True
B)False
Page 23
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Chapter 22: Futures and Forwards
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Q1) 22-15 As of June 2009,commercial banks held more forward contracts than futures contracts for trading.
A)True
B)False
Q2) 22-81 Catastrophe futures contracts
A)are designed to protect life insurance companies from the effects of natural disasters in which large numbers of lives are lost.
B)are designed to protect property-casualty insurers against the extreme losses that can occur in hurricanes.
C)are designed to hedge insurance companies from liability law suits.
D)provide a payoff when the actual loss ratio is less than the expected loss ratio.
E)provide a payoff to the seller of the contract that is equal to the loss ratio times the nominal value of the contract.
Q3) 22-37 Tailing-the-hedge normally requires an FI manager to utilize more futures contracts to hedge a cash position than are warranted by the initial analysis.
A)True
B)False
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24
Chapter 23: Options,caps,floors,and Collars
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Q1) 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.
Q2) 23-12 The trading process of options is the same as that of futures contracts.
A)True
B)False
Q3) 23-47 Managing interest rate risk for less creditworthy FI's by running a cap/floor book may require the backing of external guarantees such as standby letters of credit because of the nature of the options.
A)True
B)False
Q4) 23-32 Exercise of a put option on futures by the buyer of the option will occur if interest rates have increased.
A)True
B)False
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Chapter 24: Swaps
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Q1) 24-43 In the derivatives markets,the instrument with the longest potential maturity is A)options.
B)futures.
C)forwards.
D)swaps.
E)currencies.
Q2) 24-56 Why were the inverse floaters developed?
A)To exchange specified periodic cash flows in the future based on some underlying instrument.
B)To better manage their interest rate,foreign exchange,and credit risks of corporate enterprises.
C)To lower the cost of financing for government agencies.
D)To determine payments and timing of payments when there is no standardized contract.
E)To keep the swap market liquid by locating or matching counterparties.
Q3) 24-18 A pure credit swap is similar to buying credit insurance.
A)True
B)False
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Chapter 25: Loan Sales
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Q1) 25-74 Which legislation authorizes federal agencies to sell delinquent and defaulted loan assets?
A)Federal Debt Collection Improvements Act.
B)Financial Services Modernization Act.
C)The Bank Holding Company Act.
D)Depository Institutions Deregulation and Monetary Control Act.
E)Financial Institutions Reform Recovery and Enforcement Act.
Q2) 25-56 Why do spreads on HLT loans behave more like investment-grade bonds than like high- yield bonds?
A)They tend to be more junior in bankruptcy.
B)They tend to have greater collateral backing than do high-yield bonds.
C)Because no bank makes a market in this debt.
D)Because securities firms do not make a market in this debt.
E)They tend to have no covenant protection.
Q3) 25-23 The primary sellers of domestic loans are medium-sized regional banks.
A)True
B)False
Q4) 25-19 Loans originated by domestic U.S.banks cannot be sold to foreign banks.
A)True
B)False
Page 27
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Chapter 26: Securitization
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Q1) 26-22 GNMA pass-throughs can assist an FI in resolving duration mismatch and illiquidity risk problems.
A)True
B)False
Q2) 26-73 Which of the following good news and bad news effect is NOT true when mortgage interest rates decline,resulting in faster repayments?
A)Lower market yields reduce the discount rates on any mortgage cash flows and increase the present value of any given stream of cash flows (good news effect).
B)Low yields lead to faster prepayment of the mortgage pool's principal (good news effect).
C)With early prepayments comes fewer interest payments in absolute terms (bad news effect).
D)Faster cash flows due to prepayments can only be reinvested at lower interest rates (bad news effect).
E)Faster cash flows due to prepayments can be reinvested at higher interest rates (good news effect).
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