Principles of Banking Exam Practice Tests
Course Introduction
Principles of Banking provides a comprehensive overview of the fundamental concepts, functions, and operations of modern banking institutions. The course explores the role of banks within the financial system, examining topics such as the creation and management of money, types of banking services and products, regulatory frameworks, risk management, lending and investment processes, and emerging trends in banking technology. Emphasis is placed on understanding the relationship between banks, customers, and regulatory bodies, as well as the ethical and economic considerations underpinning banking practices. This foundation prepares students for further study or careers in finance and banking sectors.
Recommended Textbook
Financial Markets and Institutions 9th Edition by Jeff Madura
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Chapter 1: Role of Financial Markets and Institutions
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Sample Questions
Q1) The euro increased business between European countries and created a more competitive environment in Europe.
A)True
B)False
Answer: True
Q2) ____ maintain a larger amount of assets in aggregate than the other types of depository institutions.
A)Credit unions
B)Commercial banks
C)Life insurance companies
D)Savings institutions
Answer: B
Q3) ____ concentrate on mortgage loans.
A)Finance companies
B)Commercial banks
C)Savings institutions
D)Credit unions
Answer: C
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Page 3
Chapter 2: Determination of Interest Rates
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Sample Questions
Q1) The ____ sector is the largest supplier of loanable funds.
A)household
B)government
C)business
D)none of the above
Answer: A
Q2) A ____ federal government deficit increases the quantity of loanable funds demanded at any prevailing interest rate, causing an ____ shift in the demand schedule.
A)higher; inward
B)higher; outward
C)lower; outward
D)none of the above
Answer: B
Q3) The supply of loanable funds in the U.S.is partly determined by the monetary policy implemented by the Federal Reserve System.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Structure of Interest Rates
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Sample Questions
Q1) Vaughn Corporation is considering the issue of commercial paper and would like to know the yield it should offer on its commercial paper.The corporation believes that a 0.2 percent default risk premium, a 0.1 percent liquidity premium, and a 0.3 percent tax adjustment are necessary to sell its commercial paper to investors.Furthermore, annualized T-bill rates are 7 percent.Based on this information, Vaughn should offer ____ percent on its commercial paper.
A)8.0
B)7.6
C)7.5
D)7.9
E)none of the above
Answer: B
Q2) If the liquidity premium theory completely describes the term structure of interest rates, then, on the average, the yield curve should be A)flat.
B)downward sloping.
C)upward sloping.
D)none of the above.
Answer: C
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5
Chapter 4: Functions of the Fed
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Sample Questions
Q1) The advisory committee making recommendations to the Fed about economic and banking related issues is the
A)Consumer Advisory Council.
B)Thrift Institutions Advisory Council.
C)Federal Advisory Council.
D)none of the above
Q2) The main monetary policy goal of most central banks is to stabilize the value of the local currency against foreign currencies.
A)True
B)False
Q3) The federal funds rate is the rate at which the Fed lends money directly to member banks.
A)True
B)False
Q4) The Monetary Control Act of 1980 subjected
A)only member banks to the reserve requirements set by the Fed.
B)only S&Ls to the reserve requirements set by the Fed.
C)all depository institutions to the reserve requirements set by the Fed.
D)only national banks to reserve requirements set by the Fed.
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Chapter 5: Monetary Policy
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Sample Questions
Q1) The Fed can affect the interaction between the demand for money and the supply of money to influence interest rates, the aggregate level of spending, and therefore economic growth.
A)True
B)False
Q2) Economists who work at the Fed recognize that a stimulative monetary policy will not always cure a high unemployment rate and could even ignite inflation.
A)True
B)False
Q3) International flows of funds can affect the Fed's monetary policy.For example, if there is downward pressure on U.S.interest rates that can be offset by foreign ____ of funds, the Fed may not feel compelled to use a ____ monetary policy.
A)inflows; loose
B)inflows; tight
C)outflows; loose
D)outflows; tight
E)none of the above
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Chapter 6: Money Markets
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Sample Questions
Q1) The federal funds market allows depository institutions to borrow
A)short-term funds from each other.
B)short-term funds from the Treasury.
C)long-term funds from each other.
D)long-term funds from the Federal Reserve.
E)B and D
Q2) Which of the following statements is incorrect with respect to the federal funds rate?
A)It is the rate charged by financial institutions on loans they extend to each other.
B)It is not influenced by the supply and demand for funds in the federal funds market.
C)The federal funds rate is closely monitored by all types of firms.
D)Many market participants view changes in the federal funds rate to be an indicator of potential changes in other money market rates.
E)The Federal Reserve adjusts the amount of funds in depository institutions in order to influence the federal funds rate.
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8
Chapter 7: Bond Markets
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Sample Questions
Q1) Investors in Treasury notes and bonds receive ____ interest payments from the Treasury.
A)annual
B)semiannual
C)quarterly
D)monthly
Q2) Many bonds are listed on the New York Stock Exchange (NYSE).
A)True
B)False
Q3) Everything else being equal, which of the following bond ratings is associated with the highest yield?
A)Baa
B)A
C)Aa
D)Aaa
Q4) Bonds issued by ____ are backed by the federal government.
A)the Treasury
B)AAA-rated corporations
C)state governments
D)city governments
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Chapter 8: Bond Valuation and Risk
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Sample Questions
Q1) An economic announcement signaling ____ economic growth in the future will probably cause bond prices to ____.
A)weak; decrease
B)strong; increase
C)weak; increase
D)strong; decrease
E)Answers C and D are correct.
Q2) If the level of inflation is expected to ____, there will be ____ pressure on interest rates and ____ pressure on the required rate of return on bonds.
A)increase; upward; downward
B)decrease; upward; downward
C)decrease; upward; upward
D)increase; upward; upward
E)increase; downward; upward
Q3) Duration is a measure of bond price sensitivity.
A)True
B)False
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10
Chapter 9: Mortgage Markets
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Sample Questions
Q1) A balloon-payment mortgage requires interest payments for a 10- to 20-year period, at the end of which the borrower must pay the full amount of the principal.
A)True
B)False
Q2) ____ economic growth will probably ____ the risk premium on mortgages and ____ the price of mortgages.
A)Strong; decrease; decrease
B)Strong; increase; increase
C)Weak; increase; increase
D)Weak; decrease; increase
E)Weak; decrease; decrease
Q3) An institution that originates and holds a fixed-rate mortgage is adversely affected by ____ interest rates; the borrower who was provided the mortgage is adversely affected by ____ interest rates.
A)stable; decreasing
B)increasing; stable
C)increasing; decreasing
D)decreasing; increasing
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11
Chapter 10: Stock Offerings and Investor Monitoring
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Sample Questions
Q1) A(n) ____ is a certificate which represents ownership of a foreign stock.
A)ADR
B)SEAQ
C)Nasdaq
D)AMEX
Q2) An example of shareholder activism is
A)communication with the firm.
B)engaging in a proxy contest.
C)filing a lawsuit against the board.
D)all of the above
Q3) The phrase "leaving money on the table" refers to investors who pay more for a stock in the secondary market than was paid by those investors who were able to buy shares at the initial (offer) price on the IPO date.
A)True
B)False
Q4) As a result of the Sarbanes-Oxley Act, firms were able to reduce their costs of compiling and reporting financial information.
A)True
B)False
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Chapter 11: Stock Valuation and Risk
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Sample Questions
Q1) A stock has a standard deviation of daily returns of 3 percent.It wants to determine the lower boundary of its probability distribution of returns, based on 1.65 standard deviations from the expected outcome.The stock's expected daily return is .1 percent.The lower boundary is
A)F1F1F1S1 F1F1F101.65 percent.
B)F1F1F1S1 F1F1F103.00 percent.
C)F1F1F1S1 F1F1F104.85 percent.
D)F1F1F1S1 F1F1F105.05 percent.
Q2) Tarzak Inc.has earnings of $10 per share, and investors expect that the earnings per share will grow by 3 percent per year.Furthermore, the mean PE ratio of all other firms in the same industry as Tarzak is 15.Tarzak is expected to pay a dividend of $3 per share over the next four years, and an investor in Tarzak requires a return of 12 percent.The estimated stock price of Tarzak today should be ____ using the adjusted dividend discount model.
A)$116.41
B)$104.91
C)$161.15
D)none of the above
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Chapter 12: Market Microstructure and Strategies
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Sample Questions
Q1) The Division of ____ of the SEC assesses possible violations of regulations imposed by the SEC, and can take action against individuals or firms.
A)Corporate Finance
B)Enforcement
C)Administration
D)Market Regulation
Q2) The SEC's ____ reviews the registration statement files when a firm goes public, corporate filings for annual and quarterly reports, and proxy statements that involve voting for board members or other corporate issues.
A)Division of Corporate Finance
B)Division of Market Regulation
C)Division of Enforcement
D)none of the above
Q3) ____ are enforced to restrict the amount of credit extended to customers by stockbrokers.
A)Limit orders
B)Margin requirements
C)Maintenance margins
D)Initial margins
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Page 14
Chapter 13: Financial Futures Markets
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Sample Questions
Q1) According to the text, when a financial institution sells futures contracts on securities in order to hedge against a change in interest rates, this is referred to as
A)a long hedge.
B)a short hedge.
C)a closed out position.
D)basis trading.
Q2) Assume a corporation is receiving a large amount of funds in the near future.The company plans to use the funds to purchase municipal bonds.Also assume that the company is concerned that interest rates decrease before the purchase date, which would make the municipal bonds more expensive.In order to hedge against this possibility, the company should ____ MBI futures contracts.If interest rates decrease, the futures contract will generate a ____.
A)sell; loss
B)purchase; gain
C)purchase; loss
D)sell; gain
E)none of the above
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15
Chapter 14: Options Markets
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Sample Questions
Q1) Speculators sell call options on currencies that they expect to strengthen against the dollar.
A)True
B)False
Q2) When stock portfolio managers use dynamic asset allocation by writing call options on a stock index, they ____ their exposure to stock market conditions.
A)reduce
B)completely eliminate C)have no effect on D)increase
Q3) When investors purchase an option that does not hedge their existing investments, the option can be referred to as "naked."
A)True
B)False
Q4) Stock options can be used by speculators to benefit from their expectations and by financial institutions to reduce their risk.
A)True
B)False
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Page 16
Chapter 15: Swap Markets
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Sample Questions
Q1) Financial institutions with ____ interest rate-sensitive liabilities than assets are ____ affected by rising interest rates.
A)more; adversely
B)fewer; adversely
C)more; favorably
D)none of the above
Q2) In a period when interest rates are expected to rise, ____ institutions will want a fixed-for-floating swap, and the fixed rate specified on interest rate swaps will be ____ under these conditions.
A)many; lower B)many; higher
C)few; lower
D)few; higher
Q3) A putable swap gives the party making the fixed-rate payments the right to terminate the swap.
A)True
B)False
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17
Chapter 16: Foreign Exchange Derivative Markets
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Sample Questions
Q1) Exchange rates usually change precisely as suggested by the purchasing power parity (PPP) theory.
A)True
B)False
Q2) A country that pegs its exchange rate to another exchange rate does not have complete control over its interest rates.
A)True
B)False
Q3) Bank A asks $.555 for Swiss francs and Banks B and C are willing to pay $.557 for francs.An institution could capitalize on these differences by engaging in A)covered interest arbitrage.
B)triangular arbitrage.
C)locational arbitrage.
D)witching hour arbitrage.
Q4) Fundamental forecasting has been found to be consistently superior to the other forecasting techniques.
A)True
B)False
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Chapter 17: Commercial Bank Operations
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Sample Questions
Q1) Which type of savings account transfers funds to a checking account when checks are written?
A)ATS
B)passbook savings
C)CDs
D)MMDAs
Q2) When a bank obtains funds through a ____, the provider of the funds receives collateral.
A)retail CD
B)NOW account
C)repurchase agreement
D)money market deposit account
Q3) Commercial banks have expanded in recent years not only by acquiring other banks but also by acquiring other types of financial service firms.
A)True
B)False
Q4) A bank's uses of funds represent liabilities of a bank.
A)True
B)False
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Chapter 18: Bank Regulation
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Sample Questions
Q1) Which of the following is an "off-balance-sheet commitment?"
A)long-term debt
B)additional paid-in capital
C)notes payable
D)guarantees on interest rate swaps
Q2) The Sarbanes-Oxley Act (2002) was enacted in response to some banks taking too much risk.
A)True
B)False
Q3) Bank A has a 10 percent capital ratio and uses a significant proportion of its assets to invest in very highly-rated bonds.Bank B has an 12 percent capital ratio and uses a significant proportion of its assets to invest in highly leveraged transactions.How would Bank A be rated versus Bank B using the capital and asset quality criteria?
A)Bank A is perceived as safer by both criteria.
B)Bank B is perceived as safer by both criteria.
C)Bank A is perceived as safer according to capital, but more risky according to asset quality.
D)Bank B is perceived as safer according to capital, but more risky according to asset quality.
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Page 20
Chapter 19: Bank Management
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Q1) Each bank may have its own classification system of interest rate sensitivity, because there is no perfect measurement of the gap.
A)True
B)False
Q2) Banks would reduce their liquidity position by restructuring their asset portfolio to contain less ____ and more ____.
A)Treasury securities; excess reserves
B)loans; Treasury securities
C)corporate bonds; Treasury securities
D)none of the above
Q3) Which of the following is not a likely method used by a bank to reduce interest rate risk?
A)maturity matching
B)using fixed-rate loans
C)using interest rate futures contracts
D)using interest rate caps
Q4) Floating-rate loans completely eliminate interest rate risk.
A)True
B)False
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Chapter 20: Bank Performance
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Sample Questions
Q1) Fees charged by a bank on various services allow the bank to generate:
A)noninterest income
B)components of net interest margin
C)components of net interest income
D)components of gross interest income
Q2) Net interest income is the difference between gross interest income and interest expenses and is measured as a percentage of A)liabilities.
B)shareholder's equity.
C)assets.
D)revenues.
Q3) The loan loss provision should increase during periods when loan losses are more likely, such as during a recessionary period.
A)True
B)False
Q4) ROA reveals when a bank's performance is not up to par and the reasons for its poor performance.
A)True
B)False
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Chapter 21: Thrift Operations
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Sample Questions
Q1) Most of the assets of savings institutions (SIs) are owned by SIs in the ____ asset size category.
A)less than $100 million
B)more than $1 billion
C)between $100 million and $300 million
D)between $300 million and $1 billion
Q2) A contract that allows for the purchase of a specified debt security for a specified price at a future point in time is known as a(n)
A)interest rate futures contract.
B)interest rate swap contract.
C)interest cap contract.
D)security swap contract.
Q3) Credit unions use the majority of their funds to
A)purchase investment securities.
B)provide commercial real estate loans.
C)provide small business loans to members.
D)provide consumer loans to members.
Q4) Because credit unions are for-profit organizations, their income is taxable.
A)True
B)False
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Chapter 22: Finance Operations
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Sample Questions
Q1) Finance companies are not subject to state regulations on intrastate business.
A)True
B)False
Q2) Consumer finance companies sometimes provide personal loans directly to individuals.
A)True
B)False
Q3) When finance companies purchase a firm's receivables at a discount, and are responsible for processing and collecting the balances of these accounts, they act as a A)leasing agent.
B)lessor.
C)lessee.
D)factor.
Q4) If finance companies with a greater rate-sensitivity of liabilities than assets wanted to reduce interest-rate risk, they could
A)shorten their average asset life.
B)lengthen their average asset life.
C)shorten the maturity of debt that they issue.
D)make greater use of fixed-rate loans.
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Chapter 23: Mutual Fund Operations
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Q1) The net asset value (NAV) is estimated each day by first determining the market value of all securities comprising the mutual fund.
A)True
B)False
Q2) Exchange traded funds can be
A)traded throughout the day.
B)purchased on margin.
C)sold short.
D)all of the above
Q3) Which of the following statements is incorrect?
A)A mutual fund is usually run by an investment company.
B)Although many mutual funds have grown substantially over time, their expense ratios have generally increased over time.
C)For each mutual fund, all expenses charged and reflected in the expense ratio are always valid.
D)The SEC requires that a majority of the directors of a mutual fund board be independent.
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25
Chapter 24: Securities Operations
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Q1) The ____ regulates the issuance of securities.
A)Securities and Exchange Commission
B)National Association of Securities Dealers
C)Federal Reserve Board
D)Securities Investor Protection Corporation
Q2) The ____ can liquidate failing brokerage firms.
A)Securities and Exchange Commission
B)National Association of Securities Dealers
C)Federal Reserve Board
D)Securities Investor Protection Corporation
Q3) The ____ is not involved in the regulation of the securities industry.
A)Financial Accounting Standards Board
B)National Association of Securities Dealers
C)Securities and Exchange Commission
D)Federal Reserve Board
E)All of the above are involved in the regulation of the securities industry.
Q4) Even after new stock is issued, a securities firm may continue to provide advice on the timing, amount, and terms of future financing.
A)True
B)False
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Chapter 25: Insurance and Pension Fund Operations
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Q1) ____ insurance protects the policyholders until death or as long as premiums are promptly paid.
A)Whole life
B)Variable life
C)Term life
D)Annuity life
E)None of the above
Q2) Because life insurance companies carry a large amount of ____ securities, the market value of their asset portfolio can be ____ to interest rate fluctuations.
A)short-term; insensitive
B)short-term; very sensitive
C)long-term; insensitive
D)long-term; very sensitive
Q3) There are more defined ____ pension plans; there are more participants in defined ____ plans.
A)benefit; contribution
B)contribution; benefit
C)contribution; contribution
D)benefit; benefit
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