FIN 350 Week 10 Quiz – Strayer

FIN/350 Week 10 Quiz – Strayer

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Chapter 20—Bank Performance

1. A(n) ____ in interest rates could reduce a commercial bank’s expected cash flows because the interest paid on deposits may ____ than the interest earned on loans and investments.
a. increase; increase to a greater degree
b. increase; increase to a lesser degree
c. decrease; increase to a greater degree
d. decrease; increase to a lesser degree

2. Even if other external forces (such as interest rates) are unchanged, a commercial bank’s expected cash flows can change in response to a change in its management skills.
a. True
b. False

3. The risk premium on a commercial bank is ____ related to economic growth and ____ related to management skills.
a. positively; negatively
b. positively; positively
c. negatively; negatively
d. negatively; positively

4. Interest income generated from all assets is called
a. net interest margin.
b. the spread.
c. gross interest income.
d. net interest income.

5. Interest paid on deposits and borrowed funds is called
a. net interest expense.
b. net interest margin.
c. gross interest expense.
d. net spread expense.

6. 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.

7. 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

8. The loan loss provision as a percentage of assets should increase during periods of high economic growth.
a. True
b. False

9. A bank’s net interest margin represents the proportion of its investments that are financed with borrowed funds.
a. True
b. False

10. If a bank has short-term deposits and provides long-term fixed rate loans, and interest rates decline over time, its net interest margin should be:
a. declining over time.
b. rising over time.
c. constant over time.
d. consistently negative.

11. For a given level of return on assets, a bank with a higher level of capital will have a lower
a. return on equity.
b. leverage measure.
c. noninterest income.
d. liquidity.

12. Net income measured as a percentage of assets is
a. return on equity (ROE).
b. return on liabilities (ROL).
c. return on investment (ROI).
d. return on assets (ROA).

13. When only equity counts as capital, the leverage measure is
a. equal to the capital ratio.
b. equal to return on assets.
c. the inverse of return on assets.
d. assets divided by equity.

14. When only equity counts as capital, the higher the capital ratio, the
a. lower the leverage measure.
b. lower the degree of financial leverage.
c. higher the leverage measure.
d. A and B
e. B and C

15. Gross interest income is affected by
a. market interest rates.
b. the composition of assets held by banks.
c. interest expenses.
d. non-interest expenses.
e. A and B

16. If a bank increases its provisions for loan losses, its interest income is ____, and its noninterest income is ____.
a. reduced; not affected
b. reduced; reduced
c. not affected; reduced
d. not affected; not affected

17. Return on assets (ROA) will usually reveal when a bank’s performance is not up to par, but it does not indicate the reason for poor performance.
a. True
b. False

18. Gross interest expense is affected by
a. market interest rates.
b. the composition of assets held by the bank.
c. fee services provided by the bank.
d. A and B

19. If a bank had long-term fixed-rate assets and short-term liabilities, and interest rates increased over time, its net interest margin should
a. decrease.
b. increase.
c. stay the same.
d. either A or B, depending on whether the asset maturities exceed 10 years

20. The sum of net interest income, non-interest income, and securities gains, minus provision for loan losses and non-interest expenses equals
a. net interest margin.
b. gross interest margin.
c. net income.
d. income before taxes.

21. Which of the following banks would likely have the highest return on equity?
a. high return on assets, high capital ratio
b. high return on assets, low capital ratio
c. low return on assets, low capital ratio
d. low return on assets, high capital ratio

22. Banks A and B have the same net income. Bank A has a higher capital ratio and more assets than B. Bank A’s return on assets is ____ than Bank B’s. Bank A’s return on equity is ____ than Bank B’s.
a. higher; higher
b. higher; lower
c. lower; higher
d. lower; lower

23. Banks G and H are the same size and have similar operations. Bank G holds the minimum level of capital and Bank H holds a higher level of capital. Bank G’s return on equity is probably ____ volatile than that of Bank H. Bank G’s beta is probably ____ than that of Bank H.
a. less; lower
b. less; higher
c. more; higher
d. more; lower

24. Bank K is conservatively managed. It benefits slightly when general economic conditions are very favorable and is hurt slightly when general economic conditions are very unfavorable. Its beta would likely be
a. less than zero.
b. zero.
c. between zero and 1.00.
d. greater than 1.00.

25. ____ results from a bank’s sale of securities.
a. Noninterest income
b. Loan loss provision
c. Securities gains and losses
d. Noninterest expenses
e. none of the above

26. Bank X obtains most of its funds from NCDs, while Bank Y obtains much of its funds from passbook savings and from demand deposit accounts. Given this information, the net interest margin of Bank X would likely be ____ than that of Bank Y, and noninterest expenses would likely be ____ than that of Bank Y.
a. greater; greater
b. greater; less
c. less; less
d. less; greater

27. A bank’s ROE ____ account for its financial leverage. A bank’s ROA ____ account for its financial leverage.
a. does; does
b. does; does not
c. does not; does not
d. does not; does

28. A bank’s ROA ____ account for taxes on earnings. A bank’s ROE ____ account for taxes on earnings.
a. does; does
b. does; does not
c. does not; does not
d. does not; does

29. A bank’s ROA ____ account for loan losses. A bank’s ROE ____ account for loan losses.
a. does; does
b. does; does not
c. does not; does not
d. does not; does

30. A bank’s net interest margin includes
a. noninterest expenses.
b. noninterest income.
c. loan losses.
d. none of the above

31. Banks with relatively ____ ROAs often incur ____ noninterest expenses.
a. low; very low
b. low; very high
c. high; very high
d. none of the above

32. Bank T generally obtains a high percentage of its funds from wholesale CDs. Bank V which obtains most of its funds from retail CDs. Bank Z obtains its funds from checking accounts. The bank that will incur the highest interest expenses is ____.
a. Bank T
b. Bank V
c. Bank Z
d. all banks are the same

33. Which of the following is not a factor that affects cash flows of a commercial bank?
a. changes in economic growth
b. changes in the risk-free interest rate
c. changes in industry conditions
d. changes in management abilities
e. all of the above are factors that affect cash flows of a commercial bank

34. The value of a commercial bank can be modeled as the present value of its future cash flows.
a. True
b. False

35. The level of competition is an industry characteristic that will favorably affect cash flows, because a high level of competition may increase a bank’s volume of business or increase the prices it can charge for its services.
a. True
b. False

36. If the risk premium on a commercial bank rises, so will the required rate of return by investors who invest in the bank.
a. True
b. False

37. Gross interest expenses of banks are normally higher in periods when market interest rates are higher
a. True
b. False

38. If banks continue to offer new services (such as insurance or securities services), their noninterest income will decrease over time.
a. True
b. False

39. The loan loss provision should increase during periods when loan losses are more likely, such as during a recessionary period.
a. True
b. False

40. Any individual bank’s ROA depends on the bank’s policy decisions, but not on uncontrollable factors relating to the economy and government regulations.
a. True
b. False

41. Access to a bank’s ROA without any other information reveals when its performance is not up to par and the reasons for its poor performance.
a. True
b. False

42. During the credit crisis, the level of ____ was much higher than in other periods.
a. interest income
b. income expenses
c. noninterest expenses
d. loan loss provision

43. During periods of ____ economic growth, loan demand tends to be ____, allowing banks to provide ____ loans.
a. strong; higher; more
b. weak; higher; more
c. weak; lower; more
d. strong; lower; fewer
e. none of the above

44. Changes in ____ are a factor affecting the value of a commercial bank over which the bank has some control.
a. economic growth
b. the risk-free interest rate
c. industry conditions
d. management abilities
e. none of the above

45. If a bank is too ____ in attempting to avoid loan losses, its net interest margin will be ____.
a. conservative; high
b. conservative; low
c. aggressive; high
d. aggressive; low
e. none of the above

46. Banks offering ____ nontraditional services will incur ____ noninterest expenses and ____ noninterest income.
a. fewer; higher; higher
b. more; lower; higher
c. more; higher; higher
d. fewer; lower; higher
e. none of the above

47. When interest rates fall, the rates that a bank pays on deposits typically decline less than the interest rates that the bank earns on its loans and investments.
a. True
b. False

48. Small banks tend to make more loans to small local businesses, and the rates on these loans are typically lower than the rates that larger banks charge on the loans they provide to large businesses.
a. True
b. False

49. Which of the following factors affecting a bank’s gross interest income is not influenced by the bank’s policy decisions?
a. maturity and rate sensitivity of the bank’s assets
b. market interest rate movements
c. the bank’s loan rate
d. composition of the bank’s assets

50. A bank’s return on assets (ROA) could be lower than desired because of all of the following except:
a. the bank has experienced heavy loan losses.
b. the bank was locked into fixed-rate loans prior to a rise in market interest rates.
c. the bank is receiving a relatively small amount of noninterest income.
d. the bank has reduced its noninterest expenses.

Chapter 21—Thrift Operations

1. The insuring agency for savings institutions is the
a. Securities and Exchange Commission (SEC).
b. Federal Deposit Insurance Corporation (FDIC).
c. U.S. Treasury.
d. Federal Reserve

2. The ____ savings institutions hold the most assets in aggregate.
a. stock owned
b. mutual
c. closely-held
d. privatized

3. Which of the following statements is incorrect?
a. A mutual-to-stock conversion allows savings institutions to obtain additional capital by issuing stock.
b. Because of the difference in owner control, mutual savings institutions are more susceptible to unfriendly takeovers.
c. When a mutual savings institution is involved in an acquisition, it first converts to a stock-owned savings institution.
d. Consolidation and acquisitions have caused the number of mutual and stock savings institutions to decline consistently over the years.

4. Savings institutions use most of their funds for ____. Commercial banks use most of their funds for ____.
a. mortgages; mortgages
b. mortgages; business loans and commercial real estate loans
c. business loans; commercial real estate loans and mortgages
d. commercial real estate loans and mortgages; business loans

5. Federally-chartered savings institutions are regulated by the
a. Securities and Exchange Commission (SEC).
b. National Credit Union Administration.
c. Federal Reserve.
d. U.S. Treasury.

6. Savings institutions obtain most of their funds from
a. savings and time deposits.
b. loans.
c. mortgages.
d. repurchase agreements.

7. When savings institutions are unable to attract sufficient deposits, they can
a. borrow in the federal funds market.
b. borrow from the Federal Reserve.
c. borrow through a repurchase agreement.
d. all of the above

8. The capital of savings institutions is primarily composed of retained earnings and funds obtained from issuing stock.
a. True
b. False

9. If depositors move money from their checking account to short-term CDs, this would ____ the rate-sensitivity of the savings institution’s liabilities to interest rate movements.
a. increase
b. have no effect on
c. decrease
d. A or C, depending on the size of the savings institution

10. ____ are the primary asset of savings institutions.
a. Mortgages
b. Cash balances
c. Investment securities
d. Business loans

11. Savings institutions that reduce their amount of ____ will best reduce their exposure to interest rate risk.
a. fixed-rate mortgages
b. consumer loans
c. commercial loans
d. short-term securities

12. ____ do not represent an asset of credit unions.
a. Mortgage-backed securities
b. Home equity loans
c. Automobile loans
d. Stocks

13. Which of the following is not an asset of savings institutions?
a. loans
b. mortgages
c. NOW accounts
d. mortgage-backed securities

14. Most mortgages originated by savings institutions are for
a. commercial buildings.
b. land for commercial purposes.
c. single-family homes or multifamily dwellings.
d. none of the above.

15. If a savings institutions’ assets have considerably longer duration than its liabilities, it can reduce its exposure to interest rate risk by
a. reducing its proportion of assets in the short duration categories.
b. increasing its proportion of liabilities in the short duration categories.
c. increasing its proportion of liabilities in the long duration category.
d. A and B

16. Adjustable-rate mortgages ____ of rising interest rates on a typical savings institution’s spread. They ____ of declining interest rates on the spread.
a. reduce the adverse impact; reduce the favorable impact
b. reduce the adverse impact; increase the favorable impact
c. increase the adverse impact; increase the favorable impact
d. increase the adverse impact; reduce the favorable impact

17. To measure ____ risk, some savings institutions measure the duration of their respective assets and liabilities.
a. credit
b. interest rate
c. liquidity
d. none of the above

18. 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.

19. When a savings institution uses interest rate swaps to hedge interest rate risk, it would likely exchange ____ outflows for ____ inflows.
a. variable-rate; fixed-rate
b. variable-rate; variable-rate
c. fixed-rate; variable-rate
d. fixed-rate; fixed-rate

20. An interest rate swap reduces the favorable impact of declining interest rates.
a. True
b. False

21. A savings institution owned by its depositors is a ____ savings institution.
a. mutual
b. stock
c. credit
d. closed-end

22. Which of the following was not a major reason for the savings institution crisis in the late 1980s?
a. a large proportion of loan losses on real estate loans
b. a large proportion of loan losses on loans by savings institutions to less-developed countries
c. fraud
d. illiquidity
e. increased interest expenses

23. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) prohibited
a. savings institutions from merging.
b. commercial banks from acquiring savings institutions.
c. savings institutions.
d. savings institutions from making loans to foreign governments.

24. The risk that a credit union will experience an unanticipated wave of withdrawals without an offsetting amount of new deposits is ____ risk.
a. credit (default)
b. interest rate
c. liquidity
d. exchange rate
e. none of the above

25. Money market deposit accounts (MMDAs) represent
a. trust accounts managed by savings institutions.
b. checking accounts that do not pay interest.
c. accounts offered primarily by money market funds.
d. deposit accounts offering limited checking and close-to-market interest rates.

26. Savings institutions ____ allowed to borrow funds in the federal funds market; savings institutions ____ allowed to borrow funds from the Federal Reserve.
a. are; are
b. are; are not
c. are not; are not
d. are not; are

27. Savings institutions commonly ____ to reduce their risk.
a. purchase futures contracts on stock indexes
b. purchase futures contracts on treasury bonds
c. sell futures contracts on stock indexes
d. sell futures contracts on treasury bonds

28. Stock-owned savings institutions ____ susceptible to unfriendly takeovers. Mutual savings institutions ____ susceptible to unfriendly takeovers.
a. are; are not
b. are; are
c. are not; are
d. are not; are not

29. Savings institutions can obtain capital by:
a. issuing stock.
b. repurchasing stock.
c. borrowing from the Federal Reserve.
d. borrowing in the federal funds market.

30. To obtain short-term funds, savings institutions commonly borrow funds in the ____ market.
a. stock
b. bond
c. mortgage
d. federal funds
e. futures

31. ____ risk is probably the least concern for savings institutions.
a. Liquidity
b. Exchange rate
c. Credit
d. Interest rate

32. Which of the following is not an advantage of credit unions?
a. They can offer attractive rates to their member savers and borrowers because they are nonprofit and therefore are not taxed.
b. Their noninterest expenses are relatively low, because their labor, office, and furniture are often donated or provided at a very low cost through the affiliation of their members.
c. Their large membership allows them to effectively diversify geographically.
d. All of the above are advantages of credit unions.

33. A savings institution’s cash flows are ____ related to interest rate movements.
a. positively related to
b. negatively related to
c. unrelated to
d. none of the above

34. The primary use of credit union funds is
a. loans to credit union members.
b. the purchase of government securities.
c. the purchase of agency securities.
d. the purchase of corporate bonds.
e. none of the above

35. ____ are non-profit organizations composed of members with a common bond.
a. Credit unions
b. Savings banks
c. Savings and loan associations
d. Commercial banks

36. Because credit unions ____ stock, they are technically owned by the ____.
a. issue; depositors
b. do not issue; depositors
c. issue; stockholders
d. do not issue; management

37. Credit unions obtain most of their funds from
a. issuing common stock.
b. retained earnings.
c. share deposits by members.
d. issuing long-term bonds.

38. Checkable accounts offered by credit unions are called
a. NOW accounts.
b. money market deposit accounts.
c. share certificates.
d. share drafts.

39. The ____ acts as a temporary lender to credit unions.
a. World Bank
b. Central Liquidity Facility
c. Federal Home Loan Bank
d. National Credit Union Administration

40. The sensitivity of cost of funds to interest rate movements has been
a. greater for credit unions than savings institutions.
b. greater for credit unions than commercial banks.
c. lower for credit unions than for savings institutions or commercial banks.
d. similar for credit unions as savings institutions and commercial banks.

41. 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.

42. If credit union members have a particular affiliation with their employers and large layoffs occur, the credit union’s exposure to ____ risk may increase.
a. settlement
b. interest rate
c. credit
d. none of the above

43. The maximum insurance per depositor by the National Credit Union Insurance Fund is
a. $250,000.
b. $50,000.
c. $40,000.
d. $25,000.

44. Comparing credit unions with commercial banks and savings institutions
a. credit unions are less able to quickly generate additional deposits.
b. savings institutions and commercial banks can borrow from the Central Liquidity Facility, but credit unions cannot.
c. savings institutions and commercial banks are less able to quickly generate additional deposits.
d. credit unions have less exposure to liquidity risk.

45. The majority of maturities on consumer loans offered by credit unions are ____ term, causing income generated on their asset portfolio to be ____ to interest rate movements.
a. long; insensitive
b. short or medium; sensitive
c. long; sensitive
d. short or medium; insensitive

46. Because credit unions’ sources and uses of funds are generally interest rate ____, movements in interest revenues and interest expenses of credit unions are ____.
a. sensitive; negatively correlated
b. insensitive; highly correlated
c. sensitive; uncorrelated
d. sensitive; highly correlated
e. insensitive; uncorrelated

47. Deposits at credit unions are called
a. NOW accounts.
b. money market deposit accounts.
c. shares.
d. credit union deposit accounts.

48. Credit unions differ from savings institutions in that they use a ____ proportion of their funds for mortgages and are ____ institutions.
a. smaller; non-profit
b. larger; non-profit
c. smaller; for-profit
d. larger; for-profit

49. Today, credit unions are regulated as to the
a. types of services they can offer.
b. rates they offer on deposits.
c. maturity of residential loans they make.
d. size of residential mortgage loans.

50. The National Credit Union Share Insurance Fund (NCUSIF) requires all
a. federal-chartered credit unions to obtain insurance from the NCUSIF.
b. state-chartered credit unions to obtain insurance from the NCUSIF.
c. credit unions to pay an annual supplemental insurance premium each year.
d. depository institutions to pay a supplemental insurance premium each year.

51. Federal credit unions are regulated and supervised by the
a. Central Liquidity Facility.
b. National Credit Union Administration.
c. Securities and Exchange Commission.
d. Corporate Credit Union Network.
e. none of the above

52. According to your text, about ____ percent of credit unions are insured by the National Credit Union Share Insurance Fund.
a. 20
b. 40
c. 60
d. 90

53. In general, savings institutions are larger than commercial banks.
a. True
b. False

54. Today, savings institutions are not permitted to invest in junk bonds.
a. True
b. False

55. Because savings institutions commonly use long-term liabilities to finance short-term assets, they depend on additional deposits to accommodate withdrawal requests.
a. True
b. False

56. Savings institutions commonly measure the gap between their rate-sensitive assets and rate-sensitive liabilities in order to determine their exposure to credit risk.
a. True
b. False

57. Savings institutions do not really know the actual maturity of the mortgages they hold and cannot perfectly match the interest rate sensitivity of their assets and liabilities.
a. True
b. False

58. In general, when interest rates fall, a savings institution’s cost of obtaining funds declines more than the decline in the interest earned on its loans and investments.
a. True
b. False

59. High economic growth results in more risk for a savings institution, since its consumer loans, mortgage loans, and investments in debt securities are more likely to default.
a. True
b. False

60. Because credit unions do not issue stock, they are technically sole proprietorships.
a. True
b. False

61. Because credit unions are for-profit organizations, their income is taxable.
a. True
b. False

62. Credit unions obtain most of their funds by borrowing from the U.S. government.
a. True
b. False

63. Credit unions use the majority of their funds to invest in the stock market.
a. True
b. False

64. The National Credit Union Administration (NCUA) is responsible for regulating savings institutions.
a. True
b. False

65. Credit unions are unregulated as to the types of services they offer.
a. True
b. False

66. All federally chartered credit unions are required to obtain insurance from the National Credit Union Share Insurance Fund (NCUSIF).
a. True
b. False

67. The primary source of funds for credit unions is
a. share certificates.
b. share deposits.
c. share drafts.
d. borrowed funds from the Central Liquidity Facility (CLF).
e. none of the above

68. Which of the following is not an objective of a credit union?
a. to satisfy credit union members
b. to act as an intermediary for members by repackaging deposits
c. to provide loans to members who are in need of funds
d. all of the above are objectives of credit unions.

69. ____ are not a main source of funds for savings institutions.
a. Deposits
b. Borrowed funds
c. Capital
d. Mortgages

70. Which of the following is not a deposit source of funds for savings institutions?
a. passbook savings
b. retail CDs
c. money market deposit accounts
d. negotiable order of withdrawal (NOW) accounts
e. All of the above are deposit sources of funds for savings institutions.

71. ____ is not a main use of funds for savings institutions.
a. Capital
b. Mortgages
c. Consumer and commercial loans
d. Mortgage-backed securities

72. Savings institutions were adversely affected by the credit crisis because of their exposure to ____.
a. deposits
b. mortgages
c. commercial loans
d. loans from the Federal Reserve

73. To manage interest rate risk, a savings institution could use
a. fixed-rate mortgages.
b. currency options.
c. interest rate futures contracts.
d. letters of credit.

74. Under the Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), all federally chartered savings institutions are to be regulated by the Federal Reserve, so these savings institutions no longer have an incentive to go regulator shopping.
a. True
b. False

75. During the credit crisis of 2008–2009, some credit unions suffered losses on second mortgages and home-equity loans that they had provided, and some credit unions experienced losses on mortgage-backed securities in which they had invested.
a. True
b. False

76. During the credit crisis of 2008–2009:
a. the Resolution Trust Corporation was formed to deal with insolvent savings institutions.
b. several large savings institutions failed, including Countrywide Financial and Washington Mutual.
c. savings institutions were insulated because their regulator subsidized any of them that experienced large loan defaults.
d. the main problem for savings institutions was exposure to interest rate risk.

77. During the credit crisis of 2008–2009, savings institutions experienced all of the following except:
a. high default rates on loans to finance leveraged buyouts.
b. a decline in the level of mortgage originations.
c. high default rates on subprime mortgages.
d. losses on investments in mortgage-backed securities.

78. The Financial Reform Act of 2010 did all of the following except:
a. strengthened the standards required to obtain a mortgage.
b. required more disclosures by financial institutions regarding the quality of the underlying assets when they sell mortgage-backed securities.
c. required savings institutions to sell off any holdings of junk bonds and prohibited them from investing in junk bonds in the future.
d. established the Consumer Financial Protection Bureau.