Financial Management
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Course Introduction
Financial Management is a course designed to introduce students to the fundamental principles and practices of managing an organizations financial resources. The course covers core topics such as financial analysis, budgeting, capital structure, investment decision-making, risk management, and the valuation of assets. Students will learn how to interpret financial statements, make strategic financing decisions, evaluate investment alternatives, and apply financial tools to maximize shareholder value. Emphasis is placed on both theoretical frameworks and real-world applications, equipping students with the skills necessary for effective financial planning and analysis in diverse business environments.
Recommended Textbook Bank Management 7th Edition by Timothy W. Koch
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Page 2
Chapter 1: Banking and the Financial Services Industry
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Sample Questions
Q1) Which of the following is not a channel for delivering banking services?
A)Mobile banking.
B)Online banking.
C)Automated Teller Machines.
D)Branch banking.
E)Retail banking.
Answer: E
Q2) The Federal Reserve may prevent the formation of a financial holding company if one of its insured depository institution subsidiaries:
A)received an unsatisfactory in its most recent Community Reinvestment Act exam.
B)has branches across state lines.
C)is part of a bank holding company.
D)makes subprime loans.
E)is well capitalized.
Answer: A
Q3) Transaction banking emphasizes the personal relationship between the banker and customer.
A)True
B)False
Answer: False
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Chapter 2: Government Policies and Regulation
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Sample Questions
Q1) The Federal Deposit Insurance Reform Act of 2005 created which of the following?
A)Bank Insurance Fund
B)Deposit Insurance Fund
C)Savings Association Insurance Fund
D)National Credit Union Shares Insurance Fund
E)Federal Savings and Loan Insurance Fund
Answer: B
Q2) Which of the following is not one of the Fed's monetary policy tools?
A)Open market operations
B)Changes in the fed funds rate
C)Changes in the discount rate
D)Changes in the required reserve ratio
E)All of the above are monetary policy tools of the Fed Answer: B
Q3) A function of investment banking is to facilitate corporate mergers and acquisitions.
A)True
B)False
Answer: True
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Chapter 3: Analyzing Bank Performance
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Sample Questions
Q1) What is 1st State's efficiency ratio?
A)2.5%
B)17.5%
C)25.0%
D)74.5%
E)82.5%
Answer: D
Q2) Which of the following bank assets is the most liquid?
A)Long-term investments
B)Short-term investments
C)Loans
D)Demand deposits
E)Unearned income
Answer: B
Q3) When constructing ratios, average balance sheet data should be used.
A)True
B)False
Answer: True
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Chapter 4: Managing Noninterest Income and Noninterest
Expense
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Sample Questions
Q1) Discuss two ways that a bank can increase its non-interest income.
Q2) Discuss why non-interest income has become more important to a bank's profitability since deregulation in the 1980's.
Q3) Trading revenue for banks is highly cyclical.
A)True
B)False
Q4) Banks experience diseconomies of scale when:
A)marginal costs increase as total costs decrease.
B)total costs decrease as output decreases.
C)total costs increase as output increases.
D)average unit costs increase as output increases.
E)average unit costs decrease as output increases.
Q5) Increased competition, following deregulation, has lead to an increase in bank's net interest margin.
A)True B)False
Q6) Larger banks have lower efficiency ratios, on average, than smaller banks.
A)True
B)False
Q7) Discuss how bank's can reduce the number of unprofitable customers. Page 6
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Page 7
Chapter 5: The Performance of Nontraditional Banking Companies
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Sample Questions
Q1) "Hot money" represents Goldman Sachs' greatest credit risk..
A)True
B)False
Q2) Discuss the benefits to BMW North America of owning BMW Bank .
Q3) If a security is a first-time placement for a firm, it is called a(n):
A)initial public offering.
B)first time equity offering.
C)primary offering.
D)secondary offering.
E)seasoned offering.
Q4) Historically, most industrial loan companies have operated to:
A)accept deposits.
B)assist their parent company in some facet of the firm's core business.
C)exclusively make commercial loans.
D)increase the safety and soundness of the parent company.
E)purchase municipal securities.
Q5) BMW bank has more financial leverage than its peers.
A)True
B)False
Q6) Discuss the risks faced by Goldman Sachs. Page 8
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Page 9
Chapter 6: Pricing Fixed-Income Securities
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Sample Questions
Q1) Which of the following is false?
A)As interest rates rise, bond prices rise, everything else the same.
B)Given an absolute change in interest rates, the percentage increase in a bond's price will be greater than the percentage decrease, everything else the same.
C)Long-term bonds change proportionately more in price than short-term bonds for a given rate change, everything else the same.
D)A bond with a lower coupon will change more in price than a bond with a higher coupon, everything else the same.
E)A bond's duration is a measure of its price elasticity.
Q2) Everything else the same, if the yield to maturity decreased 1 percentage point, which of the following bonds would have the largest percentage increase in value?
A)A 25-year 11% coupon bond.
B)A 25-year 7.5% coupon bond.
C)A 25-year zero-coupon bond.
D)A 3-year zero coupon bond.
E)A 3-year bond with a 7.5% coupon.
Q3) Why might a security be worth more if its cash flows are "stripped "?
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Chapter 7: Managing Interest Rate Risk: Gap and Earnings
Sensitivity
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Sample Questions
Q1) A bank's cumulative GAP will always be:
A)greater than the periodic GAP.
B)less than the periodic GAP.
C)positive.
D)negative.
E)the sum of the interim periodic GAPs.
Q2) Income statement GAP considers:
A)changes in interest rates.
B)changes in the volume of rate-sensitive assets due to a change in interest rates.
C)changes in the volume of fix-rate liabilities due to a change in interest rates.
D)mortgage prepayments.
E)Income statement GAP considers all of the above.
Q3) Which of the following does not affect net interest income?
A)Changes in the level of interest rates.
B)Changes in the volume of earning assets.
C)Changes in the portfolio mix of earning assets.
D)The yield curve changing from upward sloping to inverted.
E)All of the above affect net interest income.
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Chapter 8: Managing Interest Rate Risk: Economic Value of Equity
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Sample Questions
Q1) The yield curve is typically inverted at the peak of the business cycle.
A)True
B)False
Q2) For a bank that has a negative duration gap, a decrease in interest rates will cause a(n) _______ in the economic value of assets, a(n) _______ in the economic value of liabilities, and a(n) _______ in the economic value of equity.
A)increase, decrease, increase
B)increase, increase, decrease
C)increase, increase, increase
D)decrease, decrease, increase
E)decrease, increase, decrease
Q3) A liability sensitive bank decides to reduce risk by marketing 2-year CDs paying 5% instead of NOW accounts that pay 4%.The bank will benefit if:
A)the 2-year rate in one year is less than 5%.
B)the 1-year rate in one year is less than 6%.
C)the 1-year rate in one year is greater than 6%.
D)the 2-year rate in one year is greater than 6%.
E)Not enough information is given to determine the correct answer.
Q4) Discuss why a bank may have to sacrifice yield to vary its duration gap.
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Chapter 9: Using Derivatives to Manage Interest Rate Risk
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Sample Questions
Q1) Your bank has a positive GAP and wants to hedge against changes in interest rates.Would a collar or reverse collar serve as a better hedge? Why?
Q2) When you wish to own the underlying security, your spot position is _______.
A)fat.
B)long.
C)short.
D)skinny.
E)a.and c.
Q3) A long hedge would be appropriate for a bank that wants to reduce its cash market risk associated with .a decline in interest rates.
A)True
B)False
Q4) Forward contracts rarely require a performance guarantee or collateral. A)True
B)False
Q5) Every futures contract has a formal expiration date. A)True B)False
Q6) Give an example where an interest rate swap would benefit both counterparties.
Page 13
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Chapter 10: Funding the Bank
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Sample Questions
Q1) Which of the following are sold at a deep discount to par?
A)Trust CD
B)Zero coupon CD
C)Bump-up CD
D)Federal funds CD
E)Fixed-rate CD
Q2) A jump rate CD is also known as a(n):
A)trust CD.
B)zero coupon CD.
C)bump-up CD.
D)federal funds CD.
E)fixed-rate CD.
Q3) Briefly explain two models used to estimate the cost of equity?
Q4) Which of the following Federal Reserve loans is to help with systematic new loan demand?
A)Extended credit loans
B)Seasonal borrowing loans
C)Fed funds loans
D)Deposit insurance loans
E)Short-term adjustment loans
Page 14
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Chapter 11: Managing Liquidity
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Sample Questions
Q1) The section of a contingency plan that assesses the impact of potential adverse events on the bank's balance sheet is known as the _________ section?
A)narrative
B)qualitative
C)quantitative
D)summary
E)descriptive
Q2) Which of the following is not a measure of liability liquidity?
A)Total equity to total assets
B)Core deposits to total assets
C)Total deposits to total assets
D)Federal funds sold to total assets
E)Loan losses to deposits.
Q3) Vault cash generally satisfies a bank's liquidity needs.
A)True
B)False
Q4) Why do banks prefer a lagged reserve accounting system to a contemporaneous reserve accounting system?
Q5) How can pledging requirements make bank assets less liquid?
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Chapter 12: The Effective Use of Capital
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Q1) What constitutes Tier 2 capital varies substantially between countries.
A)True
B)False
Q2) Regulatory capital ratios focus on the book value of equity.
A)True
B)False
Q3) Prior to the Basle Agreement, secondary capital included which of the following?
A)The allowance for loan losses
B)Limited-life preferred stock
C)Long-term subordinated debt
D)All of the above
E)b.and c.
Q4) Smaller banks rely more heavily on internally generated capital than larger banks.
A)True
B)False
Q5) Under the current risk-based capital requirements, banks must hold capital against standby letters of credit they have issued as guarantees.
A)True
B)False
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Chapter 13: Overview of Credit Policy and Loan
Characteristics
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Sample Questions
Q1) Which of the following would be considered a "positive" loan covenant?
A)Days receivables outstanding cannot exceed 30 days
B)No change in senior management
C)Capital outlays cannot exceed $1,000,000 per year
D)No additional liens may be placed on the collateral
E)The bank must approve any firm mergers or acquisitions
Q2) A security interest in a loan is said to be perfected if the:
A)bank holds the collateral.
B)loan has no protective covenants.
C)borrower is a low credit risk.
D)government guarantees the loan.
E)bank has never lent to the customer before.
Q3) To be classified as a non-current loan, payments must be past due a minimum of how many days?
A)30 days
B)60 days
C)90 days
D)120 days
E)158 days
Q4) Discuss the five Cs of good credit and the five Cs of bad credit
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Chapter 14: Evaluating Commercial Loan Requests and Managing Credit Risk
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Q1) Short-term working capital loans are generally repaid with funds from:
A)investing cash flows.
B)issuing new debt.
C)reductions in inventory and receivables.
D)issuing new equity
E)redeeming marketable securities.
Q2) Every balance sheet and income statement item must be recognized on a cash-based income statement.
A)True
B)False
Q3) What is Dylan's cash flow from operations?
A)-$2,874,000
B)$8,126,000
C)$12,210,000
D)$19,126,000
E)$23,210,000
Q4) Negative cash flow will automatically eliminate the possibility that a bank will loan a firm funds.
A)True B)False
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Chapter 15: Evaluating Consumer Loans
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Sample Questions
Q1) Credit cards are profitable for banks because many customers are prince insensitive.
A)True
B)False
Q2) If the loan quoted has an add-on rate, what are the net proceeds of the loan?
A)$2,200
B)$2,100
C)$2,000
D)$1.800
E)Cannot be determined
Q3) Banks labeled "consumer lenders" have the heaviest concentration of loans in credit cards.
A)True
B)False
Q4) The lowest rating category for a subprime loan is:
A)A
B)B
C)C
D)D
E)E
Page 19
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Chapter 16: Managing the Investment Portfolio
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Sample Questions
Q1) What should a bank consider when establishing an investment policy?
Q2) When loan demand is weak, a bank will often lengthen the maturity of their investment portfolio.Why does this often cause problems for the bank?
Q3) A security's bid price will be greater than its ask price.
A)True
B)False
Q4) An investor can invest in either a tax-exempt security that pays 5% or a taxable corporate security of comparable risk and maturity that pays 8%.At what marginal tax rate will the investor be indifferent between these two securities?
A)25.0%
B)32.5%
C)37.5%
D)57.5%
E)62.5%
Q5) The security activities of large banks and small banks are fundamentally different. A)True
B)False
Q6) What are STRIPS and what do banks find advantageous about them?
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Chapter 17: Global Banking Activities
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Sample Questions
Q1) Non-performing international loans do not completely reflect potential losses because:
A)foreign governments have never defaulted on their debts.
B)banks often loan borrowers funds to make payments on existing loans.
C)U.S.banks can easily recover the funds in foreign courts.
D)the U.S.government has strongly discouraged U.S.banks from making international loans.
E)all of the above
Q2) Discuss the advantages and disadvantages of a universal banking model.
Q3) Which of the following is not a member of the European Community (EC)?
A)France
B)Germany
C)Australia
D)Spain
E)United Kingdom
Q4) Foreign branches of U.S.banks are subject to U.S.reserve requirements.
A)True
B)False
Q5) Explain the impact of foreign exchange risk, economic risk, sovereign risk and political risk on the credit analysis of international loans.
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