Commercial Banking
Test Bank
Course Introduction
Commercial Banking provides students with a comprehensive understanding of the functions, services, and management practices of commercial banks within the financial system. The course explores the role of commercial banks in credit creation, risk assessment, loan management, and regulatory compliance. Topics include asset and liability management, bank performance analysis, lending practices, interest rate risk, and recent technological advancements impacting the banking sector. Through case studies and real-world examples, students will gain insights into the challenges and opportunities in commercial banking, equipping them with practical knowledge for careers in banking and financial services.
Recommended Textbook
Financial Institutions Management 5th Canadian Edition by Anthony Saunders
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26 Chapters
2430 Verified Questions
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Page 2
Chapter 1: Why Are Financial Institutions Special
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Sample Questions
Q1) Financial institutions are subject to economies of scale in the collection of information.
A)True
B)False
Answer: True
Q2) Deposit-taking institutions serve as the primary conduit through which monetary policy actions impact the economy.
A)True
B)False
Answer: True
Q3) FIs are independent market entities that create financial assets whose value is the transformation of financial risk.
A)True
B)False
Answer: True
Q4) In most countries, cash is required to be held in reserve against deposits.
A)True
B)False Answer: True
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Chapter 2: Deposit-Taking Institutions
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Sample Questions
Q1) Customer deposits are classified on a DTI's balance sheet as A)assets, because the DTI uses deposit funds to earn profits.
B)liabilities, because the DTI uses deposits as a source of funds. C)assets, because customers view deposits as assets.
D)liabilities, because the DTI must meet reserve requirements on customer deposits. E)liabilities, because DTIs are required to serve depositors.
Answer: B
Q2) As with other DTIs, profits or return on assets (ROA) is the primary goal of credit union management.
A)True
B)False
Answer: False
Q3) The growth in off-balance-sheet activities during the decade of the 1990s was due, in large part, to the use of derivative contracts.
A)True
B)False
Answer: True
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Chapter 3: Finance Companies
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Sample Questions
Q1) Finance companies have enjoyed very high rates of growth because they
A)are willing to lend to riskier customers than commercial banks.
B)charge higher rates on lower risk loans.
C)do not have ties or affiliations with manufacturing firms.
D)face very high levels of regulation, which assures their success.
E)do not sell the loans that they originate.
Answer: A
Q2) Finance companies often prefer to lease equipment to customers because
A)repossession in the event of default is easier.
B)a lease with little or no down payment is more attractive to business customers.
C)the finance company receives the benefit of depreciation expense.
D)All of these.
E)repossession in the event of default is easier and the finance company receives the benefit of a depreciation expense.
Answer: D
Q3) As of March 2012, the payday loan industry was regulated by OSFI.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Securities, Brokerage, and Investment Banking
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Sample Questions
Q1) The concentration of business among the largest firms in the securities firm/investment banking business has increased significantly since the stock market crash of 1987.
A)True
B)False
Q2) Soft dollars is a term often used in reference to the portion of a fee or commission that is allocated to
A)research and other advisory services.
B)custody and escrow services.
C)clearance and settlement services.
D)banking services.
E)back office services.
Q3) Participation in the activities relating to the underwriting and distribution of new issues of debt and equity by a securities firm involves the function of A)investing.
B)merger and acquisitions.
C)market making.
D)investment banking.
E)trading.
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Page 6
Chapter 5: Mutual Funds, Hedge Funds, and Pension Funds
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Sample Questions
Q1) Eveningstar open-end fund has 1,000 shares outstanding and has the following assets in its portfolio: 100 shares of Procter & Gamble (P&G) priced at $30.00, 300 shares of Intel priced at $50.00 and 200 shares of Microsoft priced at $60.00. The Morningstar closed-end fund has the following stocks in its portfolio: 300 shares of P&G and 300 shares of Microsoft. It has a total of 500 shares outstanding. What is the NAV of both funds?
A)$30.33 and $13.50.
B)$60.00 and $27.00.
C)$30.00 and $54.00.
D)$46.67 and $45.00.
E)$15.00 and $54.00.
Q2) Historical evidence indicates that the benefits of greater management attention in load funds do not outweigh the disadvantages of the load fee.
A)True
B)False
Q3) Short-term mutual funds invest solely in tax-exempt securities.
A)True
B)False
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Chapter 6: Insurance Companies
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Sample Questions
Q1) The operating ratio for a P&C insurer equals
A)loss ratio plus the ratios of loss adjustment expenses to premiums earned.
B)loss ratio plus expense ratio plus dividend ratio.
C)combined ratio minus dividends paid to policyholders.
D)acquisition costs plus dividends paid as a proportion of premiums earned.
E)combined ratio after dividends minus the investment yield.
Q2) Pension fund management is a relatively small portion of the life insurance industry. A)True B)False
Q3) Property & casualty insurance involves
A)insurance coverage related to the loss of real and personal property.
B)insurance protection against legal liability exposure.
C)insurance protection against injuries in employment related work.
D)insurance coverage related to the loss of real and personal property, and insurance protection against legal liability exposure.
E)insurance coverage related to the loss of real and personal property, and insurance protection against injuries in employment related work.
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Chapter 7: Risks of Financial Institutions
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Sample Questions
Q1) The risk that an FI may not have enough capital to offset a sudden decline in the value of its assets relative to its liabilities is referred to as
A)currency risk.
B)sovereign risk.
C)insolvency risk.
D)liquidity risk.
E)interest rate risk.
Q2) The risk that borrowers are unable to repay their loans on time is A)credit risk.
B)sovereign risk.
C)currency risk.
D)liquidity risk.
E)interest rate risk.
Q3) Sovereign risk involves the inability of a foreign corporation to repay the principal or interest on a loan because of stipulations by the foreign government that are out of the control of the foreign corporation.
A)True
B)False
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Chapter 8: Interest Rate Risk I
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Sample Questions
Q1) Retail savings accounts are considered as part of rate sensitive liabilities because the rates on these accounts rarely change.
A)True
B)False
Q2) The liquidity premium theory of the term structure of interest rates
A)assumes that investors will hold long-term maturity assets if there is a sufficient premium to compensate for the uncertainty of the long-term.
B)assumes that long-term interest rates are an arithmetic average of short-term rates plus a liquidity premium.
C)recognizes that forward rates are perfect predictors of future interest rates.
D)assumes that risk premiums increase uniformly with maturity.
E)None of these.
Q3) Defining buckets of time over wider intervals creates greater accuracy in the use of the repricing model because fewer calculations are required.
A)True
B)False
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Chapter 9: Interest Rate Risk II
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Sample Questions
Q1) The fact that the capital gain effect for rate decreases is greater than the capital loss effect for rate increases is caused by convexity in the yield-price relationship.
A)True
B)False
Q2) Marking-to-market accounting is a market value accounting method that reflects the purchase prices of assets and liabilities.
A)True B)False
Q3) The smaller the leverage adjusted duration gap, the more exposed the FI is to interest rate shocks.
A)True
B)False
Q4) Deep discount bonds are semi-annual fixed-rate coupon bonds that sell at a market price that is less than par value.
A)True
B)False
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11
Chapter 10: Credit Risk: Individual Loans
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Sample Questions
Q1) 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 minimum RAROC acceptable to the bank is 8 percent, what should be its expected percentage fee income in order for it to approve the loan?
A).157 percent.
B).331 percent.
C).471 percent.
D).531 percent.
E).571 percent.
Q2) Which of the following factors may affect the promised return an FI receives on a loan?
A)The collateral backing of the loan.
B)Fees relating to the loan.
C)The interest rate on the loan.
D)The credit risk premium on the loan.
E)All of these.
Q3) Sustained credit quality problems can drain an FI's capital and net worth.
A)True
B)False
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Chapter 11: Credit Risk: Loan Portfolio and Concentration
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Sample Questions
Q1) Regina Bank has a policy of limiting their loans to any single customer so that the maximum loss as a percent of capital will not exceed 20 percent for both secured and unsecured loans. The limit has been adopted under the assumption that if the unsecured loan is defaulted, there will be no recovery of interest or principal payments. For loans that are secured (collateralized), it is expected that 40 percent of interest and principal will be collected. What is the concentration limit (as a % of capital) for secured loans made by this bank?
A)10 percent.
B)20 percent.
C)33 percent.
D)40 percent.
E)50 percent.
Q2) The concentration limit method of managing credit risk concentration involves estimating the minimum loan amount to a single customer as a percent of capital.
A)True
B)False
Q3) 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) 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.
Q2) Government securities represent the reserve asset fund for life insurance companies.
A)True
B)False
Q3) During the financial crisis of 2008, there were large deposit inflows to the banking system.
A)True
B)False
Q4) Core deposits represent a relatively short-term source of funds.
A)True
B)False
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Chapter 13: Foreign Exchange Risk
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Sample Questions
Q1) 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.
E)neither long nor short in a currency.
Q2) The market in which foreign currency is traded for future delivery is the forward foreign exchange market.
A)True
B)False
Q3) The underlying cause of foreign exchange volatility reflects fluctuations in the demand and supply of a country's currency.
A)True
B)False
Q4) The exposure to foreign exchange risk by Canadian FIs has decreased with the growth of the various derivative markets.
A)True
B)False
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Chapter 14: Sovereign Risk
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Sample Questions
Q1) International loan contracts that contain cross-default provisions allow the country to select specific lenders for special default treatment.
A)True
B)False
Q2) Sometimes banks received criticism because domestic governments take special political steps to reduce the probability that foreign borrowers will default or repudiate their debt contracts, an occurrence that could cause financial harm to the domestic banks.
A)True
B)False
Q3) The Institutional Investor Index is based on A)spread of the required interest rate on a country's debt over LIBOR.
B)a number of economic and political factors weighted according to their relative importance in determining country risk problems.
C)surveys of the loan officers of major multinational banks.
D)combined economic and political risk on a 10-point (maximum) scale.
E)key economic ratios for each regional grouping.
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Page 16
Chapter 15: Market Risk
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Sample Questions
Q1) Which benefit of market risk measurement (MRM) provides senior management with information on the risk exposure taken by FI traders?
A)Regulation.
B)Resource allocation.
C)Management information.
D)Setting limits.
E)Performance evaluation.
Q2) The portfolio of a bank that contains assets and liabilities that are relatively illiquid and held for longer holding periods
A)is the trading portfolio.
B)is the investment portfolio.
C)contains only long term derivatives.
D)is subject to regulatory risk.
E)cannot be differentiated on the basis of time horizon and liquidity.
Q3) As securitization of assets continues to expand, the management of market risk will become more important to FIs.
A)True
B)False
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17
Chapter 16: Off-Balance-Sheet Risk
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Sample Questions
Q1) In economic terms, the letters of credit (LCs) and stand-by letters of credit SLCs sold by an FI
A)are contractual commitments to make a loan up to a stated amount at a given interest rate in the future.
B)are insurance against the frequency or severity of some particular future occurrence. C)are nonstandard contracts between two parties to deliver and pay for an asset in the future.
D)are standardized contract guaranteed by organized exchanges to deliver and pay for an asset in the future.
E)are nonstandard contracts between two parties to deliver and pay for an asset in the future, and are standardized contract guaranteed by organized exchanges to deliver and pay for an asset in the future.
Q2) Off-balance-sheet items often are called contingent assets and liabilities because they may, or may not, affect the balance sheet in the future.
A)True
B)False
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Chapter 17: Technology and Other Operational Risks
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Sample Questions
Q1) Cross-market selling of financial products requires production of the products within the same branch or bank office.
A)True
B)False
Q2) Which of the following best describes economies of scale?
A)The average cost of production decreases as the level of output increases.
B)The effects on costs related to managerial ability and other hard-to-quantify factors.
C)Cost savings are realized from using many of the same inputs to produce multiple products.
D)The average cost of production increases as the level of output increases.
E)Cost increases are realized from using many of the same inputs to produce multiple products.
Q3) Which of the following is NOT a wholesale banking service?
A)Controlled disbursement accounts.
B)Account reconciliation.
C)Electronic funds transfer.
D)Electronic initiation of letters of credit.
E)Automated teller machines.
Q4) A feature that records which checks have been paid by the FI.
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Chapter 18: Liability and Liquidity Management
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Sample Questions
Q1) One reason FIs such as deposit-taking institutions and life insurance companies are exposed to liquidity risk is the relatively illiquid nature of their liabilities.
A)True
B)False
Q2) Which of the following is an outcome of an increase in the reserve requirement ratio?
A)DTIs may hold fewer reserves against their transaction accounts.
B)DTIs are able to lend out a greater percentage of their deposits.
C)Increased credit availability in the economy.
D)DTIs are only able to lend a smaller percentage of their deposits than before.
E)A multiplier effect on the supply of DTI deposits and thus the money supply.
Q3) A liquid asset can be converted to cash quickly, but will require a discount from market value.
A)True
B)False
Q4) In the U.S. excess reserves held at the central bank pay interest to the DTI.
A)True
B)False
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Chapter 19: Deposit Insurance and Other Liability
Guarantees
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Sample Questions
Q1) The policy of forbearance practiced by regulators would allow many banks to remain open even in the face of continuing losses and insolvency.
A)True
B)False
Q2) Moral hazard at FIs may
A)result when actions and consequences are separated.
B)occur when interest rates are very high and volatile.
C)occur when commodity prices are very high and volatile.
D)be a consequence of strict regulatory supervision.
E)be a consequence of an erosion of family values.
Q3) Which of the following is a drawback of charging flat deposit insurance premiums?
A)The deposit insurer acts more like a private property & casualty insurer when charging flat premiums.
B)It discourages banks from taking risks.
C)Both high risk and low risk banks are charged the same premium rate.
D)High risk banks will be charged an unreasonably high premium rate.
E)Premiums reflect the expected private costs or losses to the insurer from the provision of deposit insurance.
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Chapter 20: Capital Adequacy
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Sample Questions
Q1) The difference between the market value of assets and liabilities is the definition of the
A)accounting value of capital.
B)regulatory value of capital.
C)economic value of capital.
D)book value of net worth.
E)adjusted book value of net worth.
Q2) A criticism of the Basel I risk-based capital ratio is
A)the incorporation of off-balance-sheet risk exposures.
B)the application of a similar capital requirement across major banks in international banking centers across the world.
C)the more systematic accounting of credit risk differences.
D)the lack of appropriate consideration of the portfolio diversification effects of credit risk.
E)the application of a similar capital requirement across major banks in international banking centres across the world, and the more systematic accounting of credit risk differences.
Q3) Banks likely would need additional capital to meet the new minimum standards.
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22
Chapter 21: Product and Geographic Expansion
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Sample Questions
Q1) Banks typically have faced few restrictions in expanding their businesses, while securities firms and insurance companies have faced complex rules regarding expansion.
A)True
B)False
Q2) Chinese Walls are
A)internally imposed barriers that limits the flow of confidential client information among departments or areas.
B)regulatory barriers that are introduced to insulate the bank against losses.
C)regulations that prohibit a bank from lending anything at all to its securities affiliates.
D)restrictions on a bank holding company that prevents the use of subsidiary funds to support ailing affiliates.
E)hurdles created by excessive drain in the form of dividends and fees from a bank.
Q3) The emergence of the Euro as a uniform medium of exchange is expected to cause the importance of the dollar to increase among major European countries.
A)True
B)False
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Chapter 22: Futures and Forwards
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Sample Questions
Q1) Which of the following measures the dollar value of futures contracts that should be sold per dollar of cash position exposure?
A)Hedge ratio.
B)Open position.
C)Implied volatility.
D)Payoff.
E)Risk ratio.
Q2) An FI has a 1-year 8-percent US$160 million loan financed with a 1-year 7-percent UK£100 million CD. The current exchange rate is $1.60/£. If the current (spot) rate for one-year British pound futures is currently at $1.58/£ and each contract size is £62,500, how many contracts are required to be purchased or sold in order to fully hedge against the pound exposure? (Assume no basis risk).
A)Sell 1,600 BP futures.
B)Buy 1,600 BP futures.
C)Sell 1,712 BP futures.
D)Buy 2,560 BP futures.
E)Buy 1,712 BP futures.
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Page 24
Chapter 23: Options, Caps, Floors, and Collars
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Q1) What is the advantage of a futures hedge over an options hedge?
A)The futures hedge has lower credit risk exposure.
B)The futures hedge reduces volatility in profit gains on both sides.
C)The futures hedge is marked to market less frequently.
D)The futures hedge offers the least downside risk protection.
E)The futures hedge completely offsets losses but only partly offsets gains.
Q2) Futures options on bonds have interest rate futures contracts as the underlying asset.
A)True
B)False
Q3) Open interest refers to the dollar amount of outstanding option contracts. A)True
B)False
Q4) The profit on bond call options moves asymmetrically with interest rates.
A)True
B)False
Q5) When interest rates rise, writing a bond call option may cause profits to offset the loss on an FI's bonds.
A)True
B)False
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Chapter 24: Swaps
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Sample Questions
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.
E)zero interest rate and currency exposure over the life of the swap.
Q2) 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
Q3) An interest rate swap is essentially a series of forward contracts on interest rates.
A)True
B)False
Q4) A pure credit swap
A)is like buying credit insurance.
B)is like buying a multi-period credit option.
C)eliminates the interest rate risk contained in a total return swap.
D)All of these.
E)None of these.
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Chapter 25: Loan Sales
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Q1) 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.
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) Which of the following observations is NOT correct?
A)Most loans are sold with recourse.
B)Loan sales are a primitive substitute for securitization.
C)Selling of a loan creates a secondary market for loans.
D)Ownership of the loan is always transferred to the loan purchaser.
E)Loan sales do not involve the creation of new types of securities.
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Chapter 26: Securitization Index
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Q1) The value of an interest-only (IO) mortgage-backed strip is not sensitive to changes in current market interest rates.
A)True
B)False
Q2) The underlying NHA MBS 15-year mortgage pool has a principal amount of $50 million and an annual yield of 6 percent (paid monthly). Assume that there are no prepayments. What is the first monthly payment on the Principal Only (PO) strip?
A)$3 million.
B)$421,928.
C)$250,000.
D)$299,775.
E)$171,928.
Q3) Mortgage-backed bonds are a form of on-balance-sheet securitization.
A)True
B)False
Q4) CMHC is a privately-owned entity.
A)True
B)False
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