Principles of Banking Test Questions
Course Introduction
Principles of Banking introduces students to the fundamental concepts, roles, and functions of banking institutions within the financial system. The course covers topics such as the structure and types of banks, the creation of money, the regulatory environment, risk management, and the range of banking products and services offered to individuals, businesses, and governments. Students will gain an understanding of how banks operate, the importance of sound banking practices, and the critical role banks play in economic development and financial stability.
Recommended Textbook
Bank Management 7th Edition by Timothy W. Koch
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17 Chapters
910 Verified Questions
910 Flashcards
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2
Chapter 1: Banking and the Financial Services Industry
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Sample Questions
Q1) Many insurance companies have formed __________ to operate banks as part of their financial services efforts.
A)one-bank holding companies
B)multibank holding companies
C)retail subsidiaries
D)finance companies
E)financial holding companies
Answer: A
Q2) Smaller banks tended to have more subprime mortgage defaults than larger banks.
A)True
B)False
Answer: False
Q3) Controlling interest in a bank is defined as ownership or indirect control of ____ of the voting shares in the bank.
A)15%
B)20%
C)25%
D)30%
E)51%
Answer: C
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Chapter 2: Government Policies and Regulation
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Sample Questions
Q1) Historically, a commercial bank was defined as a firm that:
A)accepted NOW accounts and made consumer loans.
B)accepted demand deposits and made business loans.
C)accepted government deposits and made public loans.
D)accepted demand deposits and made consumer loans.
E)is regulated by the Federal Reserve.
Answer: B
Q2) The _________ authorized money market deposit accounts.
A)Depository Institutions Act (Garn-St.Germain)
B)Competitive Equality Banking Act
C)Financial Institutions Reform, Recovery and Enforcement Act
D)Federal Deposit Insurance Corporation Improvement Act
E)Depository Institutions Deregulation and Monetary Control Act
Answer: A
Q3) The annual number of bank failures since 2007 has increased dramatically.
A)True
B)False
Answer: True
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4
Chapter 3: Analyzing Bank Performance
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Sample Questions
Q1) 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
Q2) Return on equity can be decomposed into:
A)the sum of return on assets and the equity multiplier.
B)the product of return on assets and the equity multiplier.
C)the product of the profit margin and the equity multiplier.
D)the sum of the profit margin and the equity multiplier.
E)the sum of the profit margin, equity multiplier, and the interest ratio.
Answer: B
Q3) Regarding interest expense, volume effects suggest that the mix of liabilities among banks may differ.
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) ______________ is/are the primary revenue source for a majority of banks.
A)Check-processing fees
B)Investment income from deposit balances
C)Loan interest
D)Earnings credits
E)Swaps
Q2) The operating risk ratio measures:
A)cost controls versus fee generation.
B)fee income versus net interest margin.
C)non-interest expense versus non-interest income.
D)depositors versus employees.
E)depreciation versus required reserves.
Q3) Which of the following is considered a measure of bank productivity?
A)Return on assets
B)Return on equity
C)Assets per depositor
D)Assets per employee
E)All of the above are measures of bank productivity
Q4) Discuss why the net interest margin for banks has generally been declining for the past several years.
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Chapter 5: The Performance of Nontraditional Banking Companies
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Sample Questions
Q1) Mutual of Omaha's business model is to combine insurance and banking activities. A)True
B)False
Q2) Today, most industrial loan companies are located in Indiana .
A)True
B)False
Q3) Discuss why community banks might oppose Wal-Mart from being granted a charter for an industrial loan company.
Q4) Under FASB 157, Level _______ assets valuation are based on observable market prices for the identical instrument.
Q5) BMW bank has more financial leverage than its peers. A)True
B)False
Q7) Discuss the benefits to BMW North America of owning BMW Bank . Page 7
Q6) Explain how Mutual of Omaha Bank "fits into" Mutual of Omaha's business model.
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Page 8
Chapter 6: Pricing Fixed-Income Securities
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Sample Questions
Q1) The duration of any security with interim cash flows will be less than the security's maturity.
A)True
B)False
Q2) A stripped security:
A)pays no interest.
B)has no par value.
C)is easier to value than a traditional bond.
D)should sell as a package of zero coupon bonds.
E)None of the above
Q3) What is the market value of a zero coupon bond with a face value of $1,000 and 20 years to maturity, assuming an annual discount rate of 7%?
A)$100.00
B)$258.42
C)$502.57
D)$1,000.00
E)None of the above
Q4) Why might a security be worth more if its cash flows are "stripped "?
Q5) Why is knowing a bond's duration useful?
Q6) What are some of the problems with the discount yield?
Page 9
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Chapter 7: Managing Interest Rate Risk: Gap and Earnings
Sensitivity
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Sample Questions
Q1) If rate-sensitive assets equal $600 million and rate-sensitive liabilities equals $800 million, what is the expected change in net interest income if rates increase by 1%?
A)Net interest income will increase by $2 million.
B)Net interest income will fall by $2 million.
C)Net interest income will increase by $20 million.
D)Net interest income will fall by $20 million.
E)Net interest income will be unchanged.
Q2) A shift from core deposits to non-core deposits will:
A)always increase the amount of fixed rate assets.
B)always increase the amount of rate-sensitive assets.
C)generally increase the amount of non-earning assets.
D)generally reduce net interest income.
E)b.and d.
Q3) A bank with a negative GAP is said to be liability sensitive.
A)True
B)False
Q4) Discuss how changes in each of the following affect net interest income:
a.Rate
b.Volume
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Chapter 8: Managing Interest Rate Risk: Economic Value of Equity
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Sample Questions
Q1) What is the bank's weighted average cost of liabilities?
A)$24.9
B)$34.5
C)$80.0
D)$94.3
E)$102.1
Q2) What is the bank's expected economic net interest income?
A)$34.5
B)$32.3
C)$39.5
D)$44.0
E)$120.5
Q3) How does effective duration differ from modified duration?
Q4) What is the weighted average duration of assets?
A)2.56 years
B)3.75 years
C)4.85 years
D)5.00 years
E)7.5 years
11
Q5) 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) When you sell a futures contract, your futures position is:
A)flat.
B)long.
C)short.
D)the same as the cash position.
E)b.and d.
Q2) When futures prices falls, buyers gain at the expense of sellers. A)True
B)False
Q3) When you buy a futures contract, your futures position is: A)flat.
B)long.
C)short.
D)the same as the cash position.
E)a.and d.
Q4) Forward contracts rarely require a performance guarantee or collateral. A)True
B)False
Q5) Discuss the relative advantages and disadvantages of using futures versus forward contracts.
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Chapter 10: Funding the Bank
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Sample Questions
Q1) On-us checks cashed are:
A)checks drawn on any bank other than the bank into which it was deposited.
B)the accounting transaction for selling fed funds.
C)discount window loans.
D)illegal.
E)checks drawn on a bank's own customer's account.
Q2) If the bank can invest the deposit balance (after adjusting for reserve requirements) at 7%, what is the break-even deposit balance?
A)$3,777
B)$3,500
C)$2,500
D)$1,825
E)$1,479
Q3) Which of the following would be an example of a Eurodollar account?
A)A U.S.dollar denominated deposit held at a Japanese bank.
B)A British pound denominated deposit held at a New York bank.
C)A French franc denominated deposit held at a Toronto bank.
D)A U.S.dollar denominated deposit held at a Chicago bank.
E)A EMU euro denominated deposit held at a London bank.
Q4) How has the use of "hot money" affected bank's liquidity risk?
Page 13
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Chapter 11: Managing Liquidity
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Sample Questions
Q1) Which of the following could be used to identify a potential increase in borrowing by customers that might deplete a bank's cash reserves?
A)The amount of insured versus uninsured deposits
B)Large deposits held by a single entity
C)Volume of Fed Funds sold
D)The sensitivity of deposits to changes in the level of interest rates
E)Unused commercial credit lines outstanding
Q2) Discuss the advantages and disadvantages of a bank holding less cash.
Q3) The best measure of bank asset liquidity is the core deposits to total asset ratio.
A)True
B)False
Q4) Discuss the major components of a bank's contingency funding plan.
Q5) Volatile deposits:
A)are the largest source of funds for smaller banks.
B)equal the difference between actual current deposits and the base estimate of core deposits.
C)reduce reserve requirements.
D)are a low cost source of funds.
E)all of the above
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Chapter 12: The Effective Use of Capital
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Sample Questions
Q1) Under current capital requirements, Tier 1 Capital takes of all of the following into account except:
A)common stockholder's equity.
B)equity in subsidiaries.
C)goodwill.
D)mandatory convertible debt.
E)non-cumulative perpetual preferred stock.
Q2) The minimum Tier 1 capital for this bank is:
A)$348
B)$450
C)$509
D)$581
E)$696
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%
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Chapter 13: Overview of Credit Policy and Loan
Characteristics
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Sample Questions
Q1) Which of the following refers to the principles that drive a bank's lending activity?
A)Loan policy
B)Credit culture
C)Credit analysis
D)Credit review
E)Loan documentation
Q2) In the credit process, which of the following activities falls under Credit Review?
A)Loan committee reviews
B)Perfecting the security interest
C)Market research
D)Review loan documentation
E)Market research.
Q3) The vast majority of FDIC-insured institutions are classified as:
A)credit card banks.
B)agricultural banks.
C)consumer lenders.
D)commercial lenders.
E)mortgage lenders.
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Chapter 14: Evaluating Commercial Loan Requests and Managing Credit Risk
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Sample Questions
Q1) At a minimum, cash flow from operations should cover:
A)interest on long-term debt.
B)dividends plus mandatory principal payments on debt.
C)capital expenditures plus dividends.
D)the change in marketable securities.
E)dividends plus interest.
Q2) Pro forma analysis is a form of sensitivity analysis.
A)True
B)False
Q3) Explain how sensitivity analysis assists in evaluating commercial loan requests.
Q4) Next year, sales at Dylan are expected to increase by 10%.Also next year, the dividend payout ratio will not change, while gross profit, operating profit, net income, current assets and current liabilities will be the same percentage of sales as the current year.If the firm issues no new common stock, what will be the addition to retained earnings next year?
A)$1,112,000
B)$2,746,200
C)$3,200,000
D)$4,884,000
E)$5,372,400
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Chapter 15: Evaluating Consumer Loans
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Sample Questions
Q1) Individuals work out a court supervised repayment plan under:
A)Chapter 7
B)Chapter 9
C)Chapter 13
D)Chapter 17
E)Chapter 21
Q2) Discuss why some are concerned at the recent increase in both credit card debt and personal bankruptcies.
Q3) The purpose of the Truth in Lending Act of 1968 is to require lenders to quote:
A)home mortgage finance charges in a standardized manner.
B)rates on all certificates of deposit in a standardized manner.
C)payments with and without credit life insurance.
D)consumer loan finance charges in a standardized manner.
E)finance charges on loans over $100,000 in a standardized manner.
Q4) Credit cards are profitable for banks because many customers are prince insensitive.
A)True
B)False
Q5) Discuss the major differences between consumer and commercial loans.
Q6) What are "high LTV" loans and why are they riskier than "low LTV" loans?
Page 18
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Chapter 16: Managing the Investment Portfolio
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Sample Questions
Q1) 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
Q2) The security activities of large banks and small banks are fundamentally different.
A)True
B)False
Q3) Which of the following is not true regarding prepayments?
A)The greater the prepayments, the shorter the security's duration.
B)Prepayments are relatively low during the first two years of a mortgage.
C)Mortgages to older people tend to have more prepayments than mortgages to younger people.
D)Prepayments increase as interest rates fall.
E)all of the above are true
Q4) What is the fundamental difference between an active versus passive investment strategy? Why might a bank choose one over the other?
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Chapter 17: Global Banking Activities
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Sample Questions
Q1) Put the following steps of the creation of a banker's acceptance in order.
I.Shipping documents delivered
II.Letter of credit is issued
III.Bankers' acceptance presented at maturity
IV.Goods are shipped
A)I, IV, II, III
B)II, IV, III, I
C)II, IV, I, III
D)I, IV, III, II
E)I, II, III, IV
Q2) The default risk associated with loans made to borrowers outside a bank's home country is called:
A)foreign exchange risk.
B)sovereign risk.
C)euro risk.
D)country risk.
E)LC risk.
Q3) Foreign banks generally pay higher deposit rates than U.S.banks.
A)True
B)False
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