Principles of Banking
Textbook Exam Questions
Course Introduction
Principles of Banking introduces students to the foundational concepts, functions, and operations of modern banking institutions. The course covers the historical development of banks, the roles they play within the financial system, various types of banking services, and the regulatory environment in which banks operate. Students will learn about the management of deposits, loans, and other financial products, as well as risk management, interest rate mechanisms, and the importance of sound banking practices. The course also explores current issues and trends impacting the banking sector, including technological innovation and globalization.
Recommended Textbook
Financial Institutions Management A Risk Management Approach 7th Edition by
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Page 2
Anthony Saunders
Chapter 1: Why Are Financial Institutions Special
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Q1) 1-72 Why do households prefer to use FIs as intermediaries to invest their surplus funds?
A)Transaction costs are low to the household since FIs are more efficient in monitoring and gathering investment information.
B)To receive the benefits of diversification that households may not be able to achieve on their own.
C)The FI has can benefit from combining funds and negotiating lower asset prices and transactions costs.
D)The FI can provide insurance at relatively low cost that will protect funds under management.
E)All of the above.
Answer: E
Q2) 1-47 Savers increasingly favor investments that closely imitate diversified investments in the direct securities markets over the transformed financial claims offered by traditional FIs.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Financial Services: Depository Institutions
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Q1) 2-42 Regulator forbearance is a policy of allowing economically insolvent FIs to continue in operation.
A)True
B)False
Answer: True
Q2) 2-56 According to the American Bankers Association,the tax-exempt status of credit unions is the equivalent of a $1 billion per-year subsidy to the industry.
A)True
B)False
Answer: True
Q3) 2-45 The savings association industry continues to be the primary lender of residential mortgages.
A)True
B)False
Answer: False
Q4) 2-47 The number of savings associations has been declining since 1990.
A)True
B)False
Answer: True
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Chapter 3: Financial Services: Insurance
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Sample Questions
Q1) 3-21 Although life insurance companies also provide health and accident insurance,they underwrite less than 35% of all health insurance policies.
A)True
B)False
Answer: False
Q2) 3-1 In recent years,the total assets of insurance companies in the U.S.have been decreasing.
A)True
B)False
Answer: False
Q3) 3-24 Because of the large amounts of policy reserves that life insurance companies carry as liabilities,they are rarely surprised by unexpected fluctuations in expected future payouts.
A)True
B)False
Answer: False
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Chapter 4: Financial Services: Securities Brokerage and Investment Banking
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Sample Questions
Q1) 4-84 If the investment bank can sell the shares for $9.75 per share,how much money does TWResearch receive?
A)$ 105,000,000.
B)$ 150,000,000.
C)$ 112,000,000.
D)$ 125,000,000.
E)$ 110,000,000.
Q2) 4-96 How much money does NetChoice,Inc.receive?
A)$ 139,500,500.
B)$ 137,812,500.
C)$ 155,000,000.
D)$ 153,125,000.
E)$ 105,000,000.
Q3) 4-52 In comparison to a typical commercial bank,an investment bank is likely to have
A)lower levels of capital.
B)higher reliance on long-term debt.
C)lower levels of repurchase agreements.
D)higher levels of net interest margin.
E)higher levels of loans to customers.
Page 6
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Chapter 5: Financial Services: Mutual Funds and Hedge Funds
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Q1) 5-49 Regarding the relative asset size and asset growth rate of mutual fund sectors,
A)long-term funds had more assets at the end of 2009,but short-term funds had grown at a faster rate since 1980.
B)long-term funds had more assets at the end of 2009,and long-term funds had grown at a faster rate since 1980.
C)short-term funds had more assets at the end of 2009,but long-term funds had grown at a faster rate since 1980.
D)short-term funds had more assets at the end of 2009,and short-term funds had grown at a faster rate since 1980.
E)More than one of the above is correct.
Q2) 5-91 Which of the following hedge fund objectives would be classified under the "more risky" category?
A)Distressed securities funds.
B)Fund of funds.
C)Opportunistic funds.
D)Emerging markets funds.
E)Special situations funds.
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Page 7
Chapter 6: Financial Services: Finance Companies
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Q1) 6-55 Which of the following is NOT a type of consumer loan?
A)Personal cash loan.
B)Mobile home loan.
C)Private- label credit card loan.
D)Equipment loan.
E)Motor vehicle loan.
Q2) 6-4 Personal credit institutions specialize in making equipment leases to consumers.
A)True
B)False
Q3) 6-3 Sales finance institutions provide financing to customers of specific retailers.
A)True
B)False
Q4) 6-8 Sales finance institutions compete directly with depository institutions for consumer loans.
A)True
B)False
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Page 8
Chapter 7: Risks of Financial Institutions
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Q1) 7-75 The major source of risk exposure resulting from issuance of standby letters of credit is
A)technology risk.
B)interest rate risk.
C)credit risk.
D)foreign exchange risk.
E)off?balance-sheet risk.
Q2) 7-90 Which of the following situations pose a refinancing risk for an FI?
A)An FI issues $10 million of liabilities of one-year maturity to finance the purchase of $10 million of assets with a two-year maturity.
B)An FI issues $10 million of liabilities of two-year maturity to finance the purchase of $10 million of assets with a two-year maturity.
C)An FI issues $10 million of liabilities of three-year maturity to finance the purchase of $10 million of assets with a two-year maturity.
D)An FI matches the maturity of its assets and liabilities.
E)All of the above.
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Chapter 8: Interest Rate Risk I
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Q1) 8-40 An FI's net interest income reflects
A)its asset?liability structure.
B)market rates of interest.
C)the riskiness of its loans and investments.
D)the cost of its deposit and non?deposit sources of funds.
E)All of the above.
Q2) 8-32 If the average maturity of assets is 5 years and the average maturity of liabilities is 7 years,then the FI has no interest rate risk exposure.
A)True
B)False
Q3) 8-100 What is the effect on the value of the FI's equity if interest rates decrease by 1 percent?
A)Gain of $0.6968 million.
B)Gain of $0.30 million.
C)Loss of $1.6212 million.
D)No change in equity.
E)Loss of $0.6048 million.
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Chapter 9: Interest Rate Risk Ii
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Q1) 9-35 The smaller the leverage adjusted duration gap,the more exposed the FI is to interest rate shocks.
A)True
B)False
Q2) 9-65 Calculate the duration of a two-year corporate loan paying 6 percent interest annually,selling at par.The $30,000,000 loan is 100 percent amortizing.
A)2 years.
B)1.89 years.
C)1.94 years.
D)1.49 years.
E)1.73 years.
Q3) 9-34 Immunizing the balance sheet of an FI against interest rate risk requires that the leverage adjusted duration gap (DA-kDL)should be set to zero.
A)True
B)False
Q4) 9-4 Duration measures the average life of a financial asset.
A)True
B)False
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11
Chapter 10: Market Risk
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Q1) 10-35 In the early 2000s the market risk capital requirement uniformly was a large proportion of the total risk capital requirements for the largest US banks.
A)True
B)False
Q2) 10-74 What is the daily earnings at risk (DEAR)of this bond portfolio?
A)-$246,110.63.
B)-$123,055.32.
C)-$135,473.74.
D)-$149,021.12.
E)-$225,789.57.
Q3) 10-5 Losses among FIs that actively traded mortgage-backed securities reached over $3 trillion world-wide by mid-2009.
A)True
B)False
Q4) 10-20 The dollar value of a foreign exchange portfolio equals the FX position times the spot exchange rate.
A)True
B)False
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Chapter 11: Credit Risk: Individual Loan Risk
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Q1) 11-1 Default by a large corporation is seldom a problem for FIs since these corporations have many different sources of borrowed funds.
A)True B)False
Q2) 11-30 Covenants are restrictions in loan and bond agreements that encourage or forbid certain actions by the borrower.
A)True B)False
Q3) 11-27 Credit rationing is a form of managing credit risk.
A)True B)False
Q4) 11-24 Because a compensating balance is the proportion of a loan that must be kept on deposit at the lending institution,the actual interest rate on the usable portion of these loans is higher.
A)True B)False
Q5) 11-48 A major problem in estimating RAROC is the measurement of loan risk. A)True B)False
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Chapter 12: Credit Risk: Loan Portfolio and Concentration
Risk
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Q1) 12-24 A weakness of migration analysis to evaluate credit concentration risk is that the
A)information obtained for this analysis is usually ex-post (i.e.after the fact).
B)information obtained for this analysis is ex-ante (i.e.before the fact).
C)analysis makes use of historical data classified only by industries.
D)analysis makes use of historical data classified by individual firms.
E)migration of firms may only be temporary.
Q2) 12-42 Which model involves estimating the systematic loan loss risk of a particular sector or industry relative to the loan loss risk of an FI's total loan portfolio?
A)CreditMetrics.
B)Credit Risk +.
C)Loan loss ratio-based model.
D)KMV portfolio manager model.
E)Loan volume-based model.
Q3) 12-7 The expected return of a portfolio of loans is equal to the weighted average of the expected returns of the individual loans.
A)True
B)False
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Chapter 13: Off-Balance-Sheet Risk
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Q1) 13-79 Which of the following is true of the market price of a futures contract over time?
A)It is set at time 0.
B)It is fixed over the life of the contract.
C)It changes based on the market value of the underlying asset.
D)It decreases with time to expiration.
E)It is based on supply and demand.
Q2) 13-23 Basis risk occurs on a loan commitment because the spread of a pricing index over the cost of funds may vary.
A)True B)False
Q3) 13-56 Loan commitments are classified as
A)on?balance-sheet assets.
B)off?balance-sheet assets.
C)off?balance-sheet liabilities.
D)on?balance-sheet liabilities.
E)equity capital.
Q4) 13-46 Funds transferred on Fedwire are settled at the end of the day.
A)True
B)False
Page 15
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Chapter 14: Foreign Exchange Risk
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Q1) 14-64 How would you characterize the FI's risk exposure to fluctuations in the Swiss franc/dollar exchange rate?
A)The FI is net short in the franc and therefore faces the risk that the franc will rise in value against the U.S.dollar.
B)The FI is net short in the franc and therefore faces the risk that the franc will fall in value against the U.S.dollar.
C)The FI is net long in the franc and therefore faces the risk that the franc will fall in value against the U.S.dollar.
D)The FI is net long in the franc and therefore faces the risk that the franc will rise in value against the U.S.dollar.
E)The FI has a balanced position in the Swiss franc.
Q2) 14-9 The greater the volatility of foreign exchange rates given any net exposure position,the greater the fluctuations in value of the foreign exchange portfolio. A)True B)False
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Chapter 15: Sovereign Risk
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Q1) 15-69 What is the approximate yield on a 20-year 10 percent annual coupon LDC bond selling at 25 cents on the dollar?
A)10 percent.
B)40 percent.
C)14 percent.
D)25 percent.
E)Cannot be determined.
Q2) 15-42 One advantage of swapping a sovereign loan for a bond is the capability to sell the bond in the secondary market.
A)True
B)False
Q3) 15-53 The Euromoney Index for a given country currently is based on the A)spread of the required interest rate on that 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)combined economic and political risk on a 100-point scale.
D)surveys of the loan officers of major multinational banks.
E)historical default rates of that country's loans.
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Chapter 16: Technology and Other Operational Risks
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Q1) 16-43 Delaware and South Dakota have become leading states in the distribution of some financial services because of liberal regulations.
A)True
B)False
Q2) 16-5 Noninterest expense has increased faster than interest expense for all U.S.insured commercial banks in recent years.
A)True
B)False
Q3) 16-53 Which of the following are potential benefits of technology for an FI?
A)Service quality,especially for customers of large banks.
B)The rate of innovation of new products has increased.
C)FIs can more easily cross-market new and existing products to customers.
D)Only two of the above are benefits.
E)All of the above.
Q4) 16-32 Fedwire is a wire transfer network of over 6,300 international FIs with the Federal Reserve System.
A)True
B)False
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Chapter 17: Liquidity Risk
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Q1) 17-26 Abnormally large and unexpected deposit withdrawals can occur because of concerns by depositors about a bank's solvency relative to other banks.
A)True
B)False
Q2) 17-37 For life insurance companies,the distribution of premium income minus policyholder liquidations normally is predictable.
A)True
B)False
Q3) 17-15 Purchased liquidity management carries the potential risk of significant increases in the cost of funds during periods of high interest rate volatility.
A)True
B)False
Q4) 17-20 The liquidity index should be a number that is either greater than one or less than zero.
A)True B)False
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Chapter 18: Liability and Liquidity Management
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Q1) 18-57 Because of the collateral feature,RPs typically have a higher interest rate than fed funds.
A)True
B)False
Q2) 18-30 Managing liabilities as a means of managing liquidity risk involves the tradeoff between lower funding cost and higher risk of withdrawals.
A)True
B)False
Q3) 18-82 Under the lagged reserve accounting system,the
A)reserve maintenance period is two days longer than the reserve computation period.
B)reserve maintenance period starts two days after the start of the reserve computation period.
C)reserve maintenance period does not begin until seventeen days after the end of the computation period.
D)reserve computation period starts on the same date as the reserve maintenance period.
E)reserve computation period is two days longer than the reserve maintenance period.
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Chapter 19: Deposit Insurance and Other Liability
Guarantees
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Q1) 19-26 The cost of insolvency of an FI to the FDIC is offset in part by the deposit insurance premiums paid by the bank.
A)True
B)False
Q2) 19-35 Risk-based capital supports risk-based deposit insurance premiums by increasing the cost risk taking for DI stockholders.
A)True
B)False
Q3) 19-10 The Financial Institutions Reform,Recovery,and Enforcement Act (FIRREA)restructured the savings association deposit insurance fund and transferred its management to the FDIC.
A)True
B)False
Q4) 19-38 The use of subordinated debt as a replacement for common stock has been proposed as a method of increasing stockholder discipline.
A)True
B)False
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Chapter 20: Capital Adequacy
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Q1) 20-126 The benefits may not support the significant cost of developing and implementing new risk management systems.
A)Competition
B)DI specialness
C)Excessive complexity
D)Impact on capital requirements
E)Other risks
F)Pillar 2 may ask too much of regulators
G)Portfolio aspects
H)Risk weights
I)Risk weights based on external credit rating agencies
Q2) 20-44 Under Basel II,operational risk can be measured by four different approaches.
A)True
B)False
Q3) 20-5 The book value of bank equity is the present value of assets minus the present value of liabilities.
A)True
B)False
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Chapter 21: Product and Geographic Expansion
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Q1) 21-19 Research suggests that the total risk exposure of a financial services organization could actually increase if there is excessive product expansion in some nonbank lines.
A)True
B)False
Q2) 21-115 The argument that mergers are valuable because they create revenue synergies is based on
A)the opportunity to expand into less than fully competitive markets.
B)the diversification affects of combining dissimilar asset and liability portfolios.
C)realizable economies of scope.
D)the enhancement of revenues by acquiring a bank in a growing market.
E)Answers A,B,and D only.
Q3) 21-114 Which of the following is true of X efficiencies?
A)They result from diseconomies of scope.
B)They are difficult to pin down in a quantitative fashion
C)They result from diseconomies of scale.
D)They are a direct result of significant economies of scope.
E)They are a direct result of significant economies of scale.
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Chapter 22: Futures and Forwards
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Q1) 22-54 The primary benefit of a futures exchange is
A)always knowing its exact location.
B)indemnifying counterparties against credit or default risk.
C)guarantee of trading volume.
D)intervention on the trader's behalf with government regulators.
E)availability of free legal services.
Q2) 22-33 A conversion factor often is to figure the invoice price on a futures contract when a bond other than the benchmark bond is delivered to the buyer.
A)True
B)False
Q3) 22-42 Catastrophe futures are designed to hedge extreme losses of natural disasters for property-casualty insurance companies.
A)True
B)False
Q4) 22-15 As of June 2009,commercial banks held more forward contracts than futures contracts for trading.
A)True
B)False
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Chapter 23: Options,caps,floors,and Collars
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Q1) 23-39 A digital default option pays a stated amount in the event that a portion of the loan is not paid.
A)True
B)False
Q2) 23-44 An FI would normally purchase a cap if it was funding fixed-rate assets with variable-rate liabilities.
A)True B)False
Q3) 23-9 The loss to a buyer of bond put options is limited to the premium paid.
A)True
B)False
Q4) 23-36 The premium on a credit spread call option is the maximum loss attainable to the buyer of the option in situations where the credit spread increases.
A)True
B)False
Q5) 23-1 The payoff values on bond options are positively linked to the changes in interest rates.
A)True
B)False
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Chapter 24: Swaps
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Q1) 24-87 At the end of the year,the exchange rate is 2/$.What are the losses and gains to each bank as a result of this swap compared to the scenario without the swap.
A)With the agreement,Bank Dresdner pays 2.5 million less while Bank USA pays $1.25 million more.
B)With the agreement,Bank Dresdner pays 2.5 million more while Bank USA pays $1.25 million less.
C)With the agreement,Bank USA pays $3.75 million less while Bank Dresdner pays 7.5 million more.
D)With the agreement,Bank USA pays $3.75 million more while Bank Dresdner pays 7.5 million less.
E)Each bank pays the same because the exchange rate affects both parties equally.
Q2) 24-20 One reason for the rapid growth of the OTC interest rate and foreign exchange swap markets is that banks are not required to allocate any capital toward their usage. A)True B)False
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Chapter 25: Loan Sales
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Q1) 25-11 Highly leveraged transaction (HLT)loans are typically unsecured,short term and have fixed rates.
A)True
B)False
Q2) 25-16 Assignments of fixed-rate loans typically do not have difficulties in the calculation and transfer of accrued interest.
A)True
B)False
Q3) 25-62 A type of FI company that predominantly buys HLT loans because these loans require the kinds of investment analysis skills used in other parts of the FI's business is
A)a bank loan mutual fund.
B)a domestic bank.
C)a foreign bank.
D)an investment bank.
E)a vulture fund.
Q4) 25-23 The primary sellers of domestic loans are medium-sized regional banks. A)True
B)False
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Chapter 26: Securitization
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Q1) 26-59 Which of the following assets have not been securitized by FIs?
A)Mortgages.
B)Credit card receivables.
C)Auto loans.
D)Debts of Lesser Developed Countries (LCD debt).
E)Student loans.
Q2) 26-106 What is the monthly payment on the mortgage pass-throughs?
A)$37,500.
B)$45,231.
C)$45,309.
D)$50,713.
E)$55,256.
Q3) 26-28 The ability to refinance a mortgage with no prepayment penalty gives the borrower a long-term put option on interest rates.
A)True
B)False
Q4) 26-20 The securities that form a GNMA pass?through are U.S.Treasury bonds,bills,and notes.
A)True
B)False
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