Money and Banking
Final Test Solutions
Course Introduction
Money and Banking explores the fundamental roles that money, financial institutions, and markets play in the modern economy. The course covers the nature and functions of money, how central banks and commercial banks operate, the process of money creation, and the tools of monetary policy. Students examine topics such as interest rates, the structure of the banking system, regulation, and the impact of monetary policy on inflation, unemployment, and economic growth. The interplay between global banking systems and financial stability is also addressed, providing a comprehensive understanding of how the flow of money influences both national and international economies.
Recommended Textbook
Bank Management 7th Edition by Timothy W. Koch
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Chapter 1: Banking and the Financial Services Industry
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Q1) Which of the following is false regarding community banks?
A)They typically have assets in excess of $1 billion.
B)They typically operate in a limited geographic area.
C)Community banks often focus on lending to small businesses.
D)A bulk of their funding comes from deposits.
E)They tend to grow at a modest rate.
Answer: A
Q2) The _______________ repealed the restriction son banks affiliating with securities firms under the Glass-Steagall Act.
A)Sarbanes-Oxley Act
B)Bank Holding Company Act
C)Competitive Equality Banking Act
D)Gramm-Leach-Bliley Act
E)Financial Institutions Reform, Recovery and Enforcement Act
Answer: D
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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Q1) Federal Reserve Reg.____ requires disclosure of as to why a costumer was denied credit.
A)AA
B)BB
C)Z
D)C
E)B
Answer: C
Q2) The _________ established to Public Company Oversight Board to regulate public accounting firms that audit publicly-traded companies.
A)Riegle-Neal Interstate Banking and Branching Efficiency Act
B)Competitive Equality Banking Act
C)Financial Institutions Reform, Recovery and Enforcement Act
D)Sarbanes-Oxley Act
E)Depository Institutions Deregulation and Monetary Control Act
Answer: D
Q3) State-chartered banks must be members of the Federal Reserve System.
A)True
B)False
Answer: False
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Chapter 3: Analyzing Bank Performance
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Sample Questions
Q1) Typically, "Call loans" are:
A)residential mortgages.
B)farm loans.
C)demand deposits.
D)payable on demand.
E)automobile loans.
Answer: D
Q2) In the CAMELS ratings, which reflects the bank's off-balance sheet activities?
A)Capital adequacy
B)Asset quality
C)Earnings quality
D)Liquidity
E)Sensitivity to market risk
Answer: B
Q3) Smaller banks generally employee fewer people per dollar of assets than larger banks.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Managing Noninterest Income and Noninterest
Expense
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Sample Questions
Q1) Banks with the highest efficiency ratios are presumed to be the most efficient.
A)True
B)False
Q2) Discuss why the net interest margin for banks has generally been declining for the past several years.
Q3) Relative to larger banks, smaller banks rely more on non-interest income as a source of revenue.
A)True
B)False
Q4) When two banks that merge have a significant duplication of bank offices such that the merger leads to the elimination of branches and personnel, this is known as a(n):
A)out-of-market merger.
B)in-market merger.
C)new-market merger.
D)reduced-branch merger.
E)goodwill merger.
Q5) Discuss why non-interest income has become more important to a bank's profitability since deregulation in the 1980's.
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Chapter 5: The Performance of Nontraditional Banking Companies
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Sample Questions
Q1) Discuss the benefits to BMW North America of owning BMW Bank .
Q2) ______________ represent amounts owed to Goldman Sachs by brokers, the firm's customers, and counter-parties to derivative contracts.
A)collateralized agreements
B)financial instruments
C)collateralized financings
D)receivables
E)payables
Q3) Explain how Mutual of Omaha Bank "fits into" Mutual of Omaha's business model.
Q4) BMW Bank is chartered by the:
A)state of Utah.
B)FDIC.
C)Federal Reserve.
D)Office of the Comptroller of the Currency.
E)National Credit Union Administration.
Q5) Discuss the risks faced by Goldman Sachs.
Q6) Goldman Sachs has converted from an investment bank to a bank holding company.
A)True
B)False Page 7
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Page 8
Chapter 6: Pricing Fixed-Income Securities
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Q1) The duration of any security with interim cash flows will be less than the security's maturity.
A)True
B)False
Q2) A bond with a par value of $1,000 and a 13% semi-annual coupon rate has 20 years to maturity.Assuming it is priced to yield 10%, compounded semi-annually, what is the market value of the bond, to the nearest dollar?
A)$1,187
B)$1,107
C)$1,257
D)$2,373
E)None of the above
Q3) The greater the compounding frequency, the higher the present value, everything else the same.
A)True
B)False
Q4) Why might a security be worth more if its cash flows are "stripped "?
Q5) Discuss why the effective annual rate will never be less than the simple interest rate.
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Page 9
Chapter 7: Managing Interest Rate Risk: Gap and Earnings
Sensitivity
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Sample Questions
Q1) Which of the following does not have an embedded option?
A)A callable Federal Home Loan Bank bond.
B)Demand deposit accounts.
C)A home mortgage loan.
D)An auto loan.
E)All of the above have embedded options.
Q2) A bank has $100 million in earning assets, a net interest margin of 5%, and a 1-year cumulative GAP of $10 million.Interest rates are expected to increase by 2%.If the bank does not want net interest income to fall by more than 25% during the next year, how large can the cumulative GAP be to achieve the allowable change in net interest income.
A)$2 million
B)$12 million
C)$15 million
D)$50 million
E)$62.5 million
Q3) Static GAP analysis focuses on managing net interest income in the short-run.
A)True
B)False
Q4) What are the advantages and disadvantages of static GAP analysis?
Page 10
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Chapter 8: Managing Interest Rate Risk: Economic Value of Equity
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Q1) Which of the following will not affect a bank's duration estimate for the year?
A)Prepayments on loans that exceed expectations.
B)A 20-year corporate bond that is unexpectedly called in 6 months.
C)Certificates of deposit that are withdrawn early.
D)Holding a 30-year Treasury bond until maturity.
E)All of the above will affect a bank's estimated duration for the year.
Q2) Effective duration considers a security's embedded options.
A)True
B)False
Q3) A 20-year annual coupon bond is currently selling for its par value of $10,000 with an annual yield of 7%.If the bond is callable at par, what is the effective duration of the bond, assuming rates change by 2%?
A)25.00 years
B)20.00 years
C)5.52 years
D)4.56 years
E)3.68 years
Q4) How does effective duration differ from modified duration?
Page 11
Q5) What are the strengths and weaknesses of duration gap analysis?
Q6) 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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Q1) A zero cost collar:
A)is risk-free.
B)is designed to offset margin requirements.
C)has a larger premium than a reverse collar.
D)designed so the buyer has no net premium payment.
E)None of the above.
Q2) Financial futures are:
A)a commitment between two parties to trade a financial instrument at a certain rate at a specified time in the future.
B)A call option on a standardized asset at a certain price at a specified time in the future.
C)A put option on a standardized asset at a certain price at a specified time in the future.
D)a commitment between two parties on the price of a standardized financial asset with the final settlement specified time in the future.
E)b.and c.
Q3) Explain the concepts of cross hedging and basis risk.
Q4) Discuss the difference between speculating and hedging.
Q5) Give an example where an interest rate swap would benefit both counterparties.
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Chapter 10: Funding the Bank
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Sample Questions
Q1) Which of the following is not a characteristic of jumbo CDs?
A)They have a minimum maturity of 7 days.
B)Interest rates are quoted on a 365-day year.
C)They are generally issued at face value.
D)They are only insured up to $100,000 per individual per institution.
E)All of the above are characteristics of jumbo CDs
Q2) The Expedited Funds Availability Act stipulates that local checks typically must be cleared in no more than _____ business days.
A)1
B)2
C)3
D)4
E)5
Q3) 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.
Q4) What is the purpose of having a correspondent bank relationship?
Page 14
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Chapter 11: Managing Liquidity
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Q1) More liquid assets tend to earn lower returns, everything else the same.
A)True
B)False
Q2) Which of the following is a discretionary factor that will decrease a bank's daily reserves held at the Federal Reserve?
A)Remittances charged
B)Federal funds purchased
C)The previous day's immediate cash letter
D)Currency received from the Federal Reserve
E)Deficits at the local clearinghouse
Q3) Vault cash generally satisfies a bank's liquidity needs.
A)True
B)False
Q4) How can pledging requirements make bank assets less liquid?
Q5) Correspondent banking services would include which of the following?
A)Check collection
B)Data processing services
C)Federal funds trading
D)all of the above
E)a.& c.only
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Chapter 12: The Effective Use of Capital
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Sample Questions
Q1) How much Tier 1 capital does the bank have?
A)$100
B)$450
C)$700
D)$750
E)$1000
Q2) An adequately capitalized bank may obtain brokered deposits without FDIC approval.
A)True
B)False
Q3) If the bank expects its ROA to be .45%, what is the maximum dividend payout ratio to support the increase in assets?
A)11.1%
B)22.2%
C)33.3%
D)44.4%
E)89.9%
Q4) What are some of the weaknesses behind risk-based capital standards?
Q5) Why do smaller banks often have a more difficult time raising new capital compared to larger banks?
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Chapter 13: Overview of Credit Policy and Loan
Characteristics
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Q1) What is the firm's liability cycle?
A)21 days
B)31 days
C)65 days
D)75 days
E)121 days
Q2) The most prominent risk banks assume in making loans is interest rate risk.
A)True
B)False
Q3) Discuss the five Cs of good credit and the five Cs of bad credit
Q4) Discuss how seasonal working capital needs differ from permanent working capital needs.
Q5) How does a firm's seasonal working capital needs differ from its permanent working capital needs?
Q6) The quality of bank loans varies with the business cycle. A)True
B)False
B)False Page 17
Q7) The primary focus of a values driven bank is on the bank's annual profit plan. A)True
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Page 18
Chapter 14: Evaluating Commercial Loan Requests and Managing Credit Risk
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Q1) Discuss which is more expensive for a bank: Extending credit to a customer who ultimately defaults, or denying credit to a customer who would have paid the bank back.
Q2) A borrower making a changing their accountant could be viewed as a negative signal regarding the borrower's condition.
A)True
B)False
Q3) Explain how an increase in days inventory on hand and an increase in days accounts payable outstanding would impact a firm's operating cash flow.
Q4) Cash flows from a firm's normal business activities are reflected in:
A)cash flows from investing.
B)cash flows from financing.
C)cash flows from operations.
D)cash flows from income.
E)cash flows from budgeting.
Q5) Pro forma analysis is a form of sensitivity analysis. A)True B)False
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Q6) Explain how sensitivity analysis assists in evaluating commercial loan requests.
Chapter 15: Evaluating Consumer Loans
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Q1) Under the Equal Credit Opportunity Act, for which of the following is it illegal for a bank to discriminate against borrowers?
A)The applicant's income
B)The applicant's credit history
C)The applicant's national origin
D)The applicant's job history
E)A civil judgement against the applicant
Q2) Discuss why some are concerned at the recent increase in both credit card debt and personal bankruptcies.
Q3) Which of the following are lenders prohibited from asking on a credit application?
A)The applicant's income
B)If the applicant has a telephone
C)If the applicant has declared bankruptcy in the past
D)How long the applicant has been on the job
E)Lenders are not prohibited from asking any of the above
Q4) Losses on credit cards are among the highest of all consumer loan types.
A)True
B)False
Q5) Discuss the major differences between consumer and commercial loans.
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Chapter 16: Managing the Investment Portfolio
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Q1) Municipal bonds whose primary source of repayment are the revenues from the underlying financed project are known as:
A)general obligation bonds.
B)credit free bonds.
C)revenue bonds.
D)exempt bonds.
E)liquidity bonds.
Q2) Which of the following U.S.government agencies can borrow directly from the U.S.Treasury?
A)Government National Mortgage Association (Ginnie Mae)
B)Student Loan Marketing Association (Sallie Mae)
C)Small Business Administration (SBA)
D)all of the above
E)a.and c.only
Q3) Discuss the liquidity risk of investing in the municipal securities market.
Q4) Under a passive investment strategy, secondary reserves are invested in short-term securities.
A)True
B)False
Q5) What are STRIPS and what do banks find advantageous about them?
Page 21
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Chapter 17: Global Banking Activities
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Q1) A universal bank can engage in:
A)making commercial loans.
B)making consumer loans.
C)selling insurance.
D)all of the above
E)a.and b.only
Q2) Foreign branches of U.S.banks are subject to U.S.reserve requirements.
A)True
B)False
Q3) The world's largest financial company (as of January 2008) is:
A)ING Group
B)Fortis
C)Citigroup
D)HSBC Holdings
E)Bank of America
Q4) Eurobonds are subject to fewer regulations than U.S.issued bonds.
A)True
B)False
Q5) What is the difference between Edge Act corporations and foreign branches of U.S.banks?
22
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