商业银行管理彼得S.罗斯英文原书第8版-英语试题库Chap001

Chapter 10The Investment Function in Banking and Financial-Services ManagementFill in the Blank Questions1. A(n) _________________________ is a security issued by the federal government which has lessthan one year to maturity when it is issued.Answer: Treasury bill2. Debt instruments issued by cities, states and other political entities and which are exempt fromfederal taxes are collectively known as _________________________ .Answer: municipal securities3. The investment maturity strategy which calls for the bank to have one half of its investmentportfolio in very short term assets and one half of its investment portfolio in long term assets isknown as the _________________________ .Answer: barbell strategy4. A(n) _________________________ is a security where the interest portion of the security is soldseparately from the principal portion of the security.Answer: stripped security5. _________________________ are the way the federal, state and local governments guarantee thesafety of their deposits with banks.Answer: Pledging requirements6. The most aggressive investment maturity strategy calls for the bank to continually shift thematurities of its securities in responses to changes in interest rates and is called the__________________.Answer: rate expectation strategy7. _________________________ is the risk that the bank will have to sell part of its investmentportfolio before their maturity for a capital loss.Answer: Liquidity risk8. _________________________ is the risk that the economy of the market area they service maytake a down turn in the future.Answer: Business risk9. __________________ is the risk that the company whose bonds the financial institution owns mayretire the entire issue of corporate bonds in advance of their maturity leaving the bank with the risk of earnings losses resulting from reinvesting the cash at lower interest rates.Answer: Call risk10. A security issued by the federal government with 1 to 10 years to maturity when it is issued is calleda(n) _________________________ .Answer: Treasury note11. A short term debt security issued by major corporations is known as __________________.Answer: commercial paper12. The investment maturity strategy which calls for the bank to have all of their investment assets invery short term maturities is called the _________________________.Answer: front-end-loaded policy13. A money market security which represents a bank's commitment to pay a stipulated amount ofmoney on a specific future date under specific conditions and which is often used in international trade is known as a(n) _________________________.Answer: bankers' acceptance14. A(n) _________________________ is an interest-bearing receipt for the deposit of funds in a bankfor a stipulated time period. Ones that are oriented towards business customers or institutions are known as jumbos.Answer: certificate of deposit15. _________________________ are any securities which reach maturity in under one year.Answer: Money market securities16. _________________________ are any securities whose original maturity exceeds one year.Answer: Capital market securities17. Securities sold by Fannie Mae, Freddie Mac and others are known as_________________________.Answer: federal agency securities18. Claims against the expected income and principal generated by a pool of similar-type loans areknown as _________________________.Answer: securitized assets19. The long term debt obligations of major corporations are known as ________________________.Answer: corporate bonds20. The investment maturity strategy which calls for the bank to have all of their investment assets invery long term maturities is known as the _________________________.Answer: back-end-loaded policy21. Financial Institutions may invest in municipal bonds issued by smaller local governments. Thesebonds are known as ____________ bonds.Answer: bank qualified22.Marketable notes and bonds sold by agencies owned by the government or sponsored by thegovernment are known as .Answer: government agency securities23. A security issued by the federal government with greater than 10 years to maturity when it is issuedis called a(n) .Answer: Treasury Bond24.are time deposits of fixed maturity issued by the world’s larges banksheadquartered in financial centers around the globe. The heart of this market is centered in London.Answer: Eurocurrency deposits25. are a type of municipal bond that are backed by the full faith andcredit of the issuing government.Answer: General obligation bonds26. are a type of municipal bond that are paid only from certainstipulated source of funds.Answer: Revenue bonds27. are closely related to CMOs and partition the cash flow from a poolof mortgage loans or mortgage backed securities into multiple maturity classes in order to reduce the cash-flow uncertainty of investors.Answer: Real Estate Mortgage Investment Conduits (REMICs)28. is the risk that loans will be terminated or paid off ahead of schedule.This is a particular problem with residential home mortgages and other consumer loans that are pooled and used as collateral in securitized assets.Answer: Prepayment risk29. A lending institution that sells lower-yielding securities at a loss in order to reduce current taxableincome while simultaneously purchasing higher-yielding new securities in order to boost futurereturns is doing a(n) .Answer: tax swap30.A(n) is a picture of how market interest rates differ across loans securitiesof varying times to maturity.Answer: yield curveTrue/False QuestionsT F 31. Investments in securities provide diversification for a bank's assets because most loans come from the local areas served by a bank's offices.Answer: TrueT F 32. Bank income from loans is fully taxable.Answer: TrueT F 33. Investment securities are expected to "dress up" a bank's balance sheet, according to the textbook.Answer: TrueT F 34. Investment securities are expected to help stabilize a financial institutions's income.Answer: TrueT F 35. A short-term IOU offered by major corporations that is of short maturity (most of these lOUs mature in 90 days or less) is known as a CMO.Answer: FalseT F 36. Prepayment risk on securitized assets generally increases when interest rates rise.Answer: FalseT F 37. Stripping a security eliminates prepayment risk.Answer: FalseT F 38. According to the textbook the dominant security held in U.S. bank investment portfolios is state and local government bonds.Answer: FalseT F 39. Interest income and capital gains from a bank's portfolio of investment securities is taxed in the United States as ordinary income.Answer: TrueT F 40. Eurocurrency deposits that some banks purchase as investments generally carry higher market yields than domestic time deposits issued by comparable-size U.S. banks.Answer: TrueT F 41. Bankers' acceptances are considered to be among the safest of all money market instruments.Answer: TrueT F 42. An eligible acceptance is one that can be used as collateral for borrowing from a Federal Reserve bank.Answer: TrueT F 43. When a bank irrevocably guarantees a commercial paper issue, the bank's credit rating substitutes for the borrower's credit rating.Answer: TrueT F 44. The principal risk banks face from investing in structured notes is credit (default) risk.Answer: FalseT F 45. The principal risk to a financial institution buying CMOs is market risk.Answer: FalseT F 46. Stripped mortgage-backed securities fully protect investors from having to reinvest their income at lower and lower interest rates.Answer: FalseT F 47. Stripped mortgage-backed securities make maturity matching of bank assets and liabilities easier to accomplish than do most other investment securities that banks buy.Answer: FalseT F 48. Lower interest rates increase the present value of all projected cash flows from a loan-backed security so that its market value could rise.Answer: TrueT F 49. Treasury bills are the long term debt obligations issued by the federal government.Answer: FalseT F 50. Commercial paper is the short term debt instrument issued by major banks.Answer: FalseT F 51. Treasury notes and bonds are issued by the federal government and are coupon instruments.Answer: TrueT F 52. Interest rate risk is the risk financial institutions face due to changes in market interest rates.Answer: TrueT F 53. One investment maturity strategy popular among smaller institutions is the ladder or spaced maturity policy. It is popular because it does not take much expertise to implement.Answer: TrueT F 54. One investment maturity strategy, called the front end loaded policy, requires that the bank put all of its investment portfolio in long term securities.Answer: FalseT F 55. Business risk is the risk that the bank will experience a cash shortage and will have to sell some of its investments securities.Answer: FalseT F 56. Inflation risk is the possibility that the purchasing power of interest income and repaid principal from a security or loan will be eroded by rising prices for goods and services.Answer: TrueT F 57. Call risk refers to the right of debt collectors to call in the loans in advance of maturity and get an early repayment.Answer: FalseT F 58. If interest rates fall, a callable bond at par has the potential for large increases in price.Answer: FalseT F 59. The yield to maturity is the discount rate that equates a security’s purchase price with the stream of income expected until it is sold to another investor.Answer: FalseMultiple Choice Questions60.An important investment security popular with banks that must by law mature within one year fromthe date of issue and which has a high degree of safety and marketability is the:A) Treasury billB) Treasury noteC) FNMA noteD) Bankers' acceptanceE) Eurodollar CDAnswer: A61.A bank's promise to pay the holder a designated amount of money on a designated future date and isoften used in international trade is known as a (or an):A) Promissory guaranteeB) Discount securityC) Bankers' acceptanceD) In the money optionE) Accretion noteAnswer: C62.Pools of mortgages put together either by a government agency or by a private investment bankingcorporation to raise more loanable funds for the issuer are known as a (or an):A) Accretion bondB) Participation certificateC) CMOD) Stripped securityE) Commercial paperAnswer: C63.Fluctuations in the timing of cash payments flowing from an underlying pool of securitized assetsis referred to as:A) Income riskB) Prepayment riskC) Liquidity riskD) Capital riskE) None of the aboveAnswer: B64.Principal roles that a financial institution's investment portfolio play include which of thefollowing?A) Income stabilityB) Geographic diversificationC) Hedging interest rate riskD) Backup liquidityE) All of the aboveAnswer: E65._____________ is the method by which banks can provide a safeguard for the deposits ofgovernmental units.A) HedgingB) CollateralizationC) PledgingD) SecuritizationE) Window dressingAnswer: C66.The most aggressive investment maturity strategy that calls for the bank to continually shift thematurities of its securities in response to changes in interest rates and other economic conditions is theA) Barbell strategyB) Rate expectations approachC) Front-end-loaded policyD) Ladder approachE) None of the aboveAnswer: B67.Which of the following statements is (are) correct regarding duration?A) In comparing two bonds with the same yield to maturity and the same maturity, a bond with ahigher coupon rate will have a longer duration.B) In comparing two loans with the same maturity and the same interest rate, a fully amortizedloan will have a shorter duration than a loan with a balloon payment.C) The duration will always be shorter than the maturity for all debt instruments.D) All of the aboveE) B and CAnswer: B68.Which of the following is not one of the Capital Market instruments in which banks invest?A) U.S. Treasury notesB) Corporate notes and bondsC) U.S. Treasury bondsD) Municipal bondsE) Commercial paperAnswer: E69.Which of the following is true of Treasury bills?A)Interest on Treasury bills is exempt from state income taxes.B)Interest on Treasury bills is exempt from federal income taxes.C)Treasury bills pay a lower pretax yield than comparable corporate securities.D)All of the above are true.E) A and C onlyAnswer: E70.In recent years security dealers have assembled pools of federal agency securities whose principalinterest yield may be periodically reset based on what happens to a stated interest rate or may carry multiple coupon rates that are periodically adjusted; the foregoing describes a:A) Financial futures contractB) Revenue-anticipation noteC) Zero coupon instrumentD) Structured noteE) None of the aboveAnswer: D71.Banks are generally not allowed to invest in speculative grade bonds. What kind of risk is thisdesigned to limit?A) Liquidity riskB) Business riskC) Credit riskD) Tax exposureE) Interest rate riskAnswer: C72. A security where the interest payments and the principal payments are sold separately is called:A) A Treasury noteB) An accretionC) A structured noteD) A stripped securityE) None of the aboveAnswer: D73.Which of the following is true? Mortgage prepayment risk:A) Is higher on high interest rate mortgagesB) Is felt most dramatically when interest rates riseC) Is eliminated by the use of mortgage backed securitiesD) Is eliminated by the purchase of a stripped mortgage obligationE) All of the above are trueAnswer: A74. A bank replaces 5-year corporate bonds with a yield to maturity of 9.75 percent with 5-yearmunicipal bonds with a yield to maturity of 7 percent. This bank is in the 35 percent tax bracket and these bonds have the same default risk. What is the most likely reason this bank changed from the corporate to the municipal bonds?A) Liquidity riskB) Business riskC) Credit riskD) Tax exposureE) Interest rate riskAnswer: D75.Suppose a bank has found bank qualified municipal bonds which have a nominal gross rate ofreturn of 8 percent and that it can borrow funds needed for this purchase at a rate of 6.25 percent.This bond is in the 35 percent tax bracket. What is the net after-tax return on this bond?A) 5.20 percentB) 3.5 percentC) 1.75 percentD) 0 percentE) None of the aboveAnswer: B76.An investor can invest in either a tax-exempt security that pays 5% or a taxable corporate securityof comparable risk and maturity that pays 8%. At what marginal tax rate will the investor beindifferent between these two securities?A)25.0%B)32.5%C)37.5%D)57.5%E)62.5%Answer: C77.Which of the following would not be considered a bank qualified municipal security?A) A Columbia County general obligation bond to modernize the county fire department.B) A Bucks County general obligation bond to build a new sewer plant.C) A City of San Marcos general obligation bond to pay for street repairs.D) A City of Chicopee general obligation bond to pay for a new city jail.E) A Treasury bond to finance government debt.Answer: E78. A bond has three years to maturity and has a coupon rate of 15 percent. This bond is selling in themarket for $1072 and has a yield to maturity of 12%. What is the duration of this bond?A) 3 yearsB) 1 yearC) 1.92 yearsD) 2.45 yearsE) 2.64 yearsAnswer: E79. A bond has six years to maturity and has a coupon rate of 7.5 percent. Coupon payments are madeannually and this bond has a face value of $1000. This bond is selling in the market for $1127.What is the yield to maturity on this bond?A) 7.5 percentB) 5 percentC) 11.5 percentD) 2.5 percentE) None of the aboveAnswer: B80. A bond has eight years to maturity and a coupon rate of 6.5 percent. Coupon payments are madeannually and this bond has a face value of $1000. This bond is selling in the market for $862. What is the yield to maturity on this bond?A) 6.5 percentB) 10 percentC) 8.5 percentD) 9 percentE) None of the aboveAnswer: D81. A bond has eight years to maturity and a coupon rate of 6.5 percent. Coupon payments are madeannually and this bond has a face value of $1000. This bond is selling in the market for $862. If this bond is sold at the end of four years for $1046, what is the holding period return on this bond?A) 6.5 percentB) 12 percentC) 9 percentD) 6 percentE) None of the aboveAnswer: B82. A security which was created by the Treasury to protect against inflation risk is called a(n):A) CMOB) FNMAC) GNMAD) TIPSE) CDAnswer: D83. A financial institution that is concerned about the possibility that the purchasing power of both theinterest income and principal income will decline on a loan is concerned about which of thefollowing things?A) Business riskB) Liquidity riskC) Tax exposureD) Credit riskE) Inflation riskAnswer: E84. A bank that is concerned that the economic conditions of the market area they serve may take adownturn with falling demand for loans and higher bankruptcies in the areas is concerned about which of the following things?A) Business riskB) Liquidity riskC) Tax exposureD) Credit riskE) Inflation riskAnswer: A85.Which of the following is a characteristic of Treasury bills?A) They are coupon instrumentsB) They are the short term debt instruments issued by major corporationsC) They are discount securitiesD) They have more risk than other money market securitiesE) All of the above are characteristics of Treasury billsAnswer: C86.The investment maturity strategy which calls for the bank to put all of their investment assets intovery long term securities is called the:A) Front-end-loaded maturity policyB) Back-end-loaded maturity policyC) Ladder or spaced maturity policyD) Barbell investment portfolio strategyE) Rate expectation approachAnswer: B87. The Lancaster State Bank is thinking about purchasing a corporate bond that has a yield of 8.5%.This bank has a marginal tax rate of 25%. What is the after-tax yield on this bond?A) 11.33%B) 8.5%C) 6.375%D) 2.125%E) None of the aboveAnswer: C88.The Ferson National Bank is thinking about purchasing a municipal bond that has a yield of 5.5%.This bank has a marginal tax rate of 30%. What is the after-tax yield on this bond?A) 7.86%B) 5.5%C) 3.85%D) 1.65%E) None of the aboveAnswer: B89.The Stumbaugh State Bank is thinking about purchasing a corporate bond that has a yield of 9%.This bank has a marginal tax rate of 40%. What is the after-tax yield on this bond?A) 15%B) 9%C) 5.4%D) 3.6%E) None of the above90.The Price Perpetual Bank has purchased a bond that has a coupon rate of 5.5% and a face value of$1000. It has 11 years to maturity and is selling in the market for $887.52. The bond makes annual coupon payments. What is the yield to maturity on this bond?A) 7%B) 5.5%C) 11%D) 4.70%E) None of the aboveAnswer: A91.The Price Perpetual Bank has purchased a bond that has a coupon rate of 5.5% and a face value of$1000. It has 11 years to maturity and is selling in the market for $887.52. The bond makes annual coupon payments. The Price Perpetual Bank is planning on selling this bond at the end of 5 years for $1036.50. What is the holding period return on this bond?A) 5.5%B) 7%C) 11%D) 9%E) None of the aboveAnswer: D92.The Farmer National Bank has purchased a bond that has a coupon rate of 11.5% and a face valueof $1000. It has 16 years to maturity and is selling in the market for $1309.80. The bond makes annual coupon payments. What is the yield to maturity on this bond?A) 11.5%B) 16%C) 8%D) 12.21%E) None of the aboveAnswer: C93.The Farmer National Bank has purchased a bond that has a coupon rate of 11.5% and a face valueof $1000. It has 16 years to maturity and is selling in the market for $1309.80. The bond makes annual coupon payments. The Farmer National Bank plans on selling this bond at the end of 8 years for $1071. What is the holding period return on this bond?A) 7%B) 8%C) 11.5%D) 16%E) None of the aboveAnswer: A94.The Johnson National Bank has purchased a bond that has a coupon rate of 5.5% and a face value of$1000. It has 4 years to maturity and is selling in the market for $917. The bond makes annual coupon payments. What is the yield to maturity on this bond?A) 5.5%B) 4.0%C) 1.5%D) 8%E) None of the above95.The Johnson National Bank has purchased a bond that has a coupon rate of 5.5% and a face value of$1000. It has 4 years to maturity and is selling in the market for $917. The bond makes annual coupon payments. What is the duration of this bond?A) 3.38 yearsB) 3.68 yearsC) 4.00 yearsD) 5.50 yearsE) None of the aboveAnswer: B96.The Sheets Savings and Loan Association has purchased a bond that has a coupon rate of 7.5% anda face value of $1000. It has 5 years to maturity and is selling in the market for $1063. The bondmakes annual coupon payments. What is the duration of this bond?A) 7.50 yearsB) 5.00 yearsC) 4.65 yearsD) 4.37 yearsE) None of the aboveAnswer: D97.The Dillinger State Bank has purchased a bond from the Interstate Manufacturing Company thathas 15 years to maturity and has a coupon rate of 12.5%. Market interest rates have recentlydeclined to 8% and the Dillinger State Bank is worried that the Interstate Manufacturing Company will retire the bond and issue new ones with a lower coupon rate. What type of risk is the Dillinger State Bank worried about?A) Credit riskB) Interest-rate riskC) Business- riskD) Call riskE) Prepayment riskAnswer: E98.The Terrell State Bank is a small bank located in Guyman, Oklahoma. All of their loans areagriculture and small business loans in Guyman. They want to buy a municipal bond from the state of South Carolina. What type of risk are they likely trying to reduce with this purchase?A) Credit riskB) Interest-rate riskC) Business riskD) Call riskE) Prepayment riskAnswer: C99.The Caldwell National Bank has purchased a bond that pays a coupon rate of 10.5%. They are alittle concerned because they believe rates will decrease in the future and they will not be able to reinvest the coupon payments at the same rate. What type of risk are they concerned about?A) Credit riskB) Interest rate riskC) Business riskD) Call riskE) Prepayment riskAnswer: B100.Moody’s Investor Service has added the numbers 1, 2 and 3 to some of their ratings. What type of risk are these ratings attempting to measure?A) Credit riskB) Interest rate riskC) Business riskD) Call riskE) Prepayment riskAnswer: A101.The Roy State Bank has just purchase a portfolio of asset backed securities. What type of risk do these securities have that other securities do not have?A) Credit riskB) Interest rate riskC) Business riskD) Call riskE) Prepayment riskAnswer: E102.The Carey State Bank has purchased a bank-qualified municipal bond with a yield of 6%. This bank has had to borrow funds to make this purchase at a cost of 5.25%. This bank is in the 40% tax bracket. What is the net after-tax return on this bank-qualified municipal bond?A) 6.00%B) .75%C) 2.85%D) 2.43%E) None of the aboveAnswer: D103.The Wesson Wisconsin State Bank has purchased a bank-qualified municipal bond with a yield of7.5%. This bank had to borrow funds to make this purchase at a cost of 6%. This bank is in the 25%tax bracket. What is the net after-tax return on this bank-qualified municipal bond?A) 7.5%B) 2.7%C) 3.0%D) 1.5%E) None of the aboveAnswer: B104.The Goodknight Company has issued securities with 45 days to maturity. What type of security have they issued?A) Commercial PaperB) Banker’s AcceptanceC) Corporate BondD) Certificate of DepositE) Municipal BondAnswer: A105.The Dakota National Bank has purchased a security issued by the state of Tennessee that has 20 years to maturity. What type of security have they purchased?A) Commercial PaperB) Banker’s AcceptanceC) Corporate BondD) Certificate of DepositE) Municipal BondAnswer: E。

Chapter 10The Investment Function in Banking and Financial-Services ManagementFill in the Blank Questions1. A(n) _________________________ is a security issued by the federal government which has lessthan one year to maturity when it is issued.Answer: Treasury bill2. Debt instruments issued by cities, states and other political entities and which are exempt fromfederal taxes are collectively known as _________________________ .Answer: municipal securities3. The investment maturity strategy which calls for the bank to have one half of its investmentportfolio in very short term assets and one half of its investment portfolio in long term assets isknown as the _________________________ .Answer: barbell strategy4. A(n) _________________________ is a security where the interest portion of the security is soldseparately from the principal portion of the security.Answer: stripped security5. _________________________ are the way the federal, state and local governments guarantee thesafety of their deposits with banks.Answer: Pledging requirements6. The most aggressive investment maturity strategy calls for the bank to continually shift thematurities of its securities in responses to changes in interest rates and is called the__________________.Answer: rate expectation strategy7. _________________________ is the risk that the bank will have to sell part of its investmentportfolio before their maturity for a capital loss.Answer: Liquidity risk8. _________________________ is the risk that the economy of the market area they service maytake a down turn in the future.Answer: Business risk9. __________________ is the risk that the company whose bonds the financial institution owns mayretire the entire issue of corporate bonds in advance of their maturity leaving the bank with the risk of earnings losses resulting from reinvesting the cash at lower interest rates.Answer: Call risk10. A security issued by the federal government with 1 to 10 years to maturity when it is issued is calleda(n) _________________________ .Answer: Treasury note11. A short term debt security issued by major corporations is known as __________________.Answer: commercial paper12. The investment maturity strategy which calls for the bank to have all of their investment assets invery short term maturities is called the _________________________.Answer: front-end-loaded policy13. A money market security which represents a bank's commitment to pay a stipulated amount ofmoney on a specific future date under specific conditions and which is often used in international trade is known as a(n) _________________________.Answer: bankers' acceptance14. A(n) _________________________ is an interest-bearing receipt for the deposit of funds in a bankfor a stipulated time period. Ones that are oriented towards business customers or institutions are known as jumbos.Answer: certificate of deposit15. _________________________ are any securities which reach maturity in under one year.Answer: Money market securities16. _________________________ are any securities whose original maturity exceeds one year.Answer: Capital market securities17. Securities sold by Fannie Mae, Freddie Mac and others are known as_________________________.Answer: federal agency securities18. Claims against the expected income and principal generated by a pool of similar-type loans areknown as _________________________.Answer: securitized assets19. The long term debt obligations of major corporations are known as ________________________.Answer: corporate bonds20. The investment maturity strategy which calls for the bank to have all of their investment assets invery long term maturities is known as the _________________________.Answer: back-end-loaded policy21. Financial Institutions may invest in municipal bonds issued by smaller local governments. Thesebonds are known as ____________ bonds.Answer: bank qualified22.Marketable notes and bonds sold by agencies owned by the government or sponsored by thegovernment are known as .Answer: government agency securities23. A security issued by the federal government with greater than 10 years to maturity when it is issuedis called a(n) .Answer: Treasury Bond24.are time deposits of fixed maturity issued by the world’s larges banksheadquartered in financial centers around the globe. The heart of this market is centered in London.Answer: Eurocurrency deposits25. are a type of municipal bond that are backed by the full faith andcredit of the issuing government.Answer: General obligation bonds26. are a type of municipal bond that are paid only from certainstipulated source of funds.Answer: Revenue bonds27. are closely related to CMOs and partition the cash flow from a poolof mortgage loans or mortgage backed securities into multiple maturity classes in order to reduce the cash-flow uncertainty of investors.Answer: Real Estate Mortgage Investment Conduits (REMICs)28. is the risk that loans will be terminated or paid off ahead of schedule.This is a particular problem with residential home mortgages and other consumer loans that are pooled and used as collateral in securitized assets.Answer: Prepayment risk29. A lending institution that sells lower-yielding securities at a loss in order to reduce current taxableincome while simultaneously purchasing higher-yielding new securities in order to boost futurereturns is doing a(n) .Answer: tax swap30.A(n) is a picture of how market interest rates differ across loans securitiesof varying times to maturity.Answer: yield curveTrue/False QuestionsT F 31. Investments in securities provide diversification for a bank's assets because most loans come from the local areas served by a bank's offices.Answer: TrueT F 32. Bank income from loans is fully taxable.Answer: TrueT F 33. Investment securities are expected to "dress up" a bank's balance sheet, according to the textbook.Answer: TrueT F 34. Investment securities are expected to help stabilize a financial institutions's income.Answer: TrueT F 35. A short-term IOU offered by major corporations that is of short maturity (most of these lOUs mature in 90 days or less) is known as a CMO.Answer: FalseT F 36. Prepayment risk on securitized assets generally increases when interest rates rise.Answer: FalseT F 37. Stripping a security eliminates prepayment risk.Answer: FalseT F 38. According to the textbook the dominant security held in U.S. bank investment portfolios is state and local government bonds.Answer: FalseT F 39. Interest income and capital gains from a bank's portfolio of investment securities is taxed in the United States as ordinary income.Answer: TrueT F 40. Eurocurrency deposits that some banks purchase as investments generally carry higher market yields than domestic time deposits issued by comparable-size U.S. banks.Answer: TrueT F 41. Bankers' acceptances are considered to be among the safest of all money market instruments.Answer: TrueT F 42. An eligible acceptance is one that can be used as collateral for borrowing from a Federal Reserve bank.Answer: TrueT F 43. When a bank irrevocably guarantees a commercial paper issue, the bank's credit rating substitutes for the borrower's credit rating.Answer: TrueT F 44. The principal risk banks face from investing in structured notes is credit (default) risk.Answer: FalseT F 45. The principal risk to a financial institution buying CMOs is market risk.Answer: FalseT F 46. Stripped mortgage-backed securities fully protect investors from having to reinvest their income at lower and lower interest rates.Answer: FalseT F 47. Stripped mortgage-backed securities make maturity matching of bank assets and liabilities easier to accomplish than do most other investment securities that banks buy.Answer: FalseT F 48. Lower interest rates increase the present value of all projected cash flows from a loan-backed security so that its market value could rise.Answer: TrueT F 49. Treasury bills are the long term debt obligations issued by the federal government.Answer: FalseT F 50. Commercial paper is the short term debt instrument issued by major banks.Answer: FalseT F 51. Treasury notes and bonds are issued by the federal government and are coupon instruments.Answer: TrueT F 52. Interest rate risk is the risk financial institutions face due to changes in market interest rates.Answer: TrueT F 53. One investment maturity strategy popular among smaller institutions is the ladder or spaced maturity policy. It is popular because it does not take much expertise to implement.Answer: TrueT F 54. One investment maturity strategy, called the front end loaded policy, requires that the bank put all of its investment portfolio in long term securities.Answer: FalseT F 55. Business risk is the risk that the bank will experience a cash shortage and will have to sell some of its investments securities.Answer: FalseT F 56. Inflation risk is the possibility that the purchasing power of interest income and repaid principal from a security or loan will be eroded by rising prices for goods and services.Answer: TrueT F 57. Call risk refers to the right of debt collectors to call in the loans in advance of maturity and get an early repayment.Answer: FalseT F 58. If interest rates fall, a callable bond at par has the potential for large increases in price.Answer: FalseT F 59. The yield to maturity is the discount rate that equates a security’s purchase price with the stream of income expected until it is sold to another investor.Answer: FalseMultiple Choice Questions60.An important investment security popular with banks that must by law mature within one year fromthe date of issue and which has a high degree of safety and marketability is the:A) Treasury billB) Treasury noteC) FNMA noteD) Bankers' acceptanceE) Eurodollar CDAnswer: A61.A bank's promise to pay the holder a designated amount of money on a designated future date and isoften used in international trade is known as a (or an):A) Promissory guaranteeB) Discount securityC) Bankers' acceptanceD) In the money optionE) Accretion noteAnswer: C62.Pools of mortgages put together either by a government agency or by a private investment bankingcorporation to raise more loanable funds for the issuer are known as a (or an):A) Accretion bondB) Participation certificateC) CMOD) Stripped securityE) Commercial paperAnswer: C63.Fluctuations in the timing of cash payments flowing from an underlying pool of securitized assetsis referred to as:A) Income riskB) Prepayment riskC) Liquidity riskD) Capital riskE) None of the aboveAnswer: B64.Principal roles that a financial institution's investment portfolio play include which of thefollowing?A) Income stabilityB) Geographic diversificationC) Hedging interest rate riskD) Backup liquidityE) All of the aboveAnswer: E65._____________ is the method by which banks can provide a safeguard for the deposits ofgovernmental units.A) HedgingB) CollateralizationC) PledgingD) SecuritizationE) Window dressingAnswer: C66.The most aggressive investment maturity strategy that calls for the bank to continually shift thematurities of its securities in response to changes in interest rates and other economic conditions is theA) Barbell strategyB) Rate expectations approachC) Front-end-loaded policyD) Ladder approachE) None of the aboveAnswer: B67.Which of the following statements is (are) correct regarding duration?A) In comparing two bonds with the same yield to maturity and the same maturity, a bond with ahigher coupon rate will have a longer duration.B) In comparing two loans with the same maturity and the same interest rate, a fully amortizedloan will have a shorter duration than a loan with a balloon payment.C) The duration will always be shorter than the maturity for all debt instruments.D) All of the aboveE) B and CAnswer: B68.Which of the following is not one of the Capital Market instruments in which banks invest?A) U.S. Treasury notesB) Corporate notes and bondsC) U.S. Treasury bondsD) Municipal bondsE) Commercial paperAnswer: E69.Which of the following is true of Treasury bills?A)Interest on Treasury bills is exempt from state income taxes.B)Interest on Treasury bills is exempt from federal income taxes.C)Treasury bills pay a lower pretax yield than comparable corporate securities.D)All of the above are true.E) A and C onlyAnswer: E70.In recent years security dealers have assembled pools of federal agency securities whose principalinterest yield may be periodically reset based on what happens to a stated interest rate or may carry multiple coupon rates that are periodically adjusted; the foregoing describes a:A) Financial futures contractB) Revenue-anticipation noteC) Zero coupon instrumentD) Structured noteE) None of the aboveAnswer: D71.Banks are generally not allowed to invest in speculative grade bonds. What kind of risk is thisdesigned to limit?A) Liquidity riskB) Business riskC) Credit riskD) Tax exposureE) Interest rate riskAnswer: C72. A security where the interest payments and the principal payments are sold separately is called:A) A Treasury noteB) An accretionC) A structured noteD) A stripped securityE) None of the aboveAnswer: D73.Which of the following is true? Mortgage prepayment risk:A) Is higher on high interest rate mortgagesB) Is felt most dramatically when interest rates riseC) Is eliminated by the use of mortgage backed securitiesD) Is eliminated by the purchase of a stripped mortgage obligationE) All of the above are trueAnswer: A74. A bank replaces 5-year corporate bonds with a yield to maturity of 9.75 percent with 5-yearmunicipal bonds with a yield to maturity of 7 percent. This bank is in the 35 percent tax bracket and these bonds have the same default risk. What is the most likely reason this bank changed from the corporate to the municipal bonds?A) Liquidity riskB) Business riskC) Credit riskD) Tax exposureE) Interest rate riskAnswer: D75.Suppose a bank has found bank qualified municipal bonds which have a nominal gross rate ofreturn of 8 percent and that it can borrow funds needed for this purchase at a rate of 6.25 percent.This bond is in the 35 percent tax bracket. What is the net after-tax return on this bond?A) 5.20 percentB) 3.5 percentC) 1.75 percentD) 0 percentE) None of the aboveAnswer: B76.An investor can invest in either a tax-exempt security that pays 5% or a taxable corporate securityof comparable risk and maturity that pays 8%. At what marginal tax rate will the investor beindifferent between these two securities?A)25.0%B)32.5%C)37.5%D)57.5%E)62.5%Answer: C77.Which of the following would not be considered a bank qualified municipal security?A) A Columbia County general obligation bond to modernize the county fire department.B) A Bucks County general obligation bond to build a new sewer plant.C) A City of San Marcos general obligation bond to pay for street repairs.D) A City of Chicopee general obligation bond to pay for a new city jail.E) A Treasury bond to finance government debt.Answer: E78. A bond has three years to maturity and has a coupon rate of 15 percent. This bond is selling in themarket for $1072 and has a yield to maturity of 12%. What is the duration of this bond?A) 3 yearsB) 1 yearC) 1.92 yearsD) 2.45 yearsE) 2.64 yearsAnswer: E79. A bond has six years to maturity and has a coupon rate of 7.5 percent. Coupon payments are madeannually and this bond has a face value of $1000. This bond is selling in the market for $1127.What is the yield to maturity on this bond?A) 7.5 percentB) 5 percentC) 11.5 percentD) 2.5 percentE) None of the aboveAnswer: B80. A bond has eight years to maturity and a coupon rate of 6.5 percent. Coupon payments are madeannually and this bond has a face value of $1000. This bond is selling in the market for $862. What is the yield to maturity on this bond?A) 6.5 percentB) 10 percentC) 8.5 percentD) 9 percentE) None of the aboveAnswer: D81. A bond has eight years to maturity and a coupon rate of 6.5 percent. Coupon payments are madeannually and this bond has a face value of $1000. This bond is selling in the market for $862. If this bond is sold at the end of four years for $1046, what is the holding period return on this bond?A) 6.5 percentB) 12 percentC) 9 percentD) 6 percentE) None of the aboveAnswer: B82. A security which was created by the Treasury to protect against inflation risk is called a(n):A) CMOB) FNMAC) GNMAD) TIPSE) CDAnswer: D83. A financial institution that is concerned about the possibility that the purchasing power of both theinterest income and principal income will decline on a loan is concerned about which of thefollowing things?A) Business riskB) Liquidity riskC) Tax exposureD) Credit riskE) Inflation riskAnswer: E84. A bank that is concerned that the economic conditions of the market area they serve may take adownturn with falling demand for loans and higher bankruptcies in the areas is concerned about which of the following things?A) Business riskB) Liquidity riskC) Tax exposureD) Credit riskE) Inflation riskAnswer: A85.Which of the following is a characteristic of Treasury bills?A) They are coupon instrumentsB) They are the short term debt instruments issued by major corporationsC) They are discount securitiesD) They have more risk than other money market securitiesE) All of the above are characteristics of Treasury billsAnswer: C86.The investment maturity strategy which calls for the bank to put all of their investment assets intovery long term securities is called the:A) Front-end-loaded maturity policyB) Back-end-loaded maturity policyC) Ladder or spaced maturity policyD) Barbell investment portfolio strategyE) Rate expectation approachAnswer: B87. The Lancaster State Bank is thinking about purchasing a corporate bond that has a yield of 8.5%.This bank has a marginal tax rate of 25%. What is the after-tax yield on this bond?A) 11.33%B) 8.5%C) 6.375%D) 2.125%E) None of the aboveAnswer: C88.The Ferson National Bank is thinking about purchasing a municipal bond that has a yield of 5.5%.This bank has a marginal tax rate of 30%. What is the after-tax yield on this bond?A) 7.86%B) 5.5%C) 3.85%D) 1.65%E) None of the aboveAnswer: B89.The Stumbaugh State Bank is thinking about purchasing a corporate bond that has a yield of 9%.This bank has a marginal tax rate of 40%. What is the after-tax yield on this bond?A) 15%B) 9%C) 5.4%D) 3.6%E) None of the above90.The Price Perpetual Bank has purchased a bond that has a coupon rate of 5.5% and a face value of$1000. It has 11 years to maturity and is selling in the market for $887.52. The bond makes annual coupon payments. What is the yield to maturity on this bond?A) 7%B) 5.5%C) 11%D) 4.70%E) None of the aboveAnswer: A91.The Price Perpetual Bank has purchased a bond that has a coupon rate of 5.5% and a face value of$1000. It has 11 years to maturity and is selling in the market for $887.52. The bond makes annual coupon payments. The Price Perpetual Bank is planning on selling this bond at the end of 5 years for $1036.50. What is the holding period return on this bond?A) 5.5%B) 7%C) 11%D) 9%E) None of the aboveAnswer: D92.The Farmer National Bank has purchased a bond that has a coupon rate of 11.5% and a face valueof $1000. It has 16 years to maturity and is selling in the market for $1309.80. The bond makes annual coupon payments. What is the yield to maturity on this bond?A) 11.5%B) 16%C) 8%D) 12.21%E) None of the aboveAnswer: C93.The Farmer National Bank has purchased a bond that has a coupon rate of 11.5% and a face valueof $1000. It has 16 years to maturity and is selling in the market for $1309.80. The bond makes annual coupon payments. The Farmer National Bank plans on selling this bond at the end of 8 years for $1071. What is the holding period return on this bond?A) 7%B) 8%C) 11.5%D) 16%E) None of the aboveAnswer: A94.The Johnson National Bank has purchased a bond that has a coupon rate of 5.5% and a face value of$1000. It has 4 years to maturity and is selling in the market for $917. The bond makes annual coupon payments. What is the yield to maturity on this bond?A) 5.5%B) 4.0%C) 1.5%D) 8%E) None of the above95.The Johnson National Bank has purchased a bond that has a coupon rate of 5.5% and a face value of$1000. It has 4 years to maturity and is selling in the market for $917. The bond makes annual coupon payments. What is the duration of this bond?A) 3.38 yearsB) 3.68 yearsC) 4.00 yearsD) 5.50 yearsE) None of the aboveAnswer: B96.The Sheets Savings and Loan Association has purchased a bond that has a coupon rate of 7.5% anda face value of $1000. It has 5 years to maturity and is selling in the market for $1063. The bondmakes annual coupon payments. What is the duration of this bond?A) 7.50 yearsB) 5.00 yearsC) 4.65 yearsD) 4.37 yearsE) None of the aboveAnswer: D97.The Dillinger State Bank has purchased a bond from the Interstate Manufacturing Company thathas 15 years to maturity and has a coupon rate of 12.5%. Market interest rates have recentlydeclined to 8% and the Dillinger State Bank is worried that the Interstate Manufacturing Company will retire the bond and issue new ones with a lower coupon rate. What type of risk is the Dillinger State Bank worried about?A) Credit riskB) Interest-rate riskC) Business- riskD) Call riskE) Prepayment riskAnswer: E98.The Terrell State Bank is a small bank located in Guyman, Oklahoma. All of their loans areagriculture and small business loans in Guyman. They want to buy a municipal bond from the state of South Carolina. What type of risk are they likely trying to reduce with this purchase?A) Credit riskB) Interest-rate riskC) Business riskD) Call riskE) Prepayment riskAnswer: C99.The Caldwell National Bank has purchased a bond that pays a coupon rate of 10.5%. They are alittle concerned because they believe rates will decrease in the future and they will not be able to reinvest the coupon payments at the same rate. What type of risk are they concerned about?A) Credit riskB) Interest rate riskC) Business riskD) Call riskE) Prepayment riskAnswer: B100.Moody’s Investor Service has added the numbers 1, 2 and 3 to some of their ratings. What type of risk are these ratings attempting to measure?A) Credit riskB) Interest rate riskC) Business riskD) Call riskE) Prepayment riskAnswer: A101.The Roy State Bank has just purchase a portfolio of asset backed securities. What type of risk do these securities have that other securities do not have?A) Credit riskB) Interest rate riskC) Business riskD) Call riskE) Prepayment riskAnswer: E102.The Carey State Bank has purchased a bank-qualified municipal bond with a yield of 6%. This bank has had to borrow funds to make this purchase at a cost of 5.25%. This bank is in the 40% tax bracket. What is the net after-tax return on this bank-qualified municipal bond?A) 6.00%B) .75%C) 2.85%D) 2.43%E) None of the aboveAnswer: D103.The Wesson Wisconsin State Bank has purchased a bank-qualified municipal bond with a yield of7.5%. This bank had to borrow funds to make this purchase at a cost of 6%. This bank is in the 25%tax bracket. What is the net after-tax return on this bank-qualified municipal bond?A) 7.5%B) 2.7%C) 3.0%D) 1.5%E) None of the aboveAnswer: B104.The Goodknight Company has issued securities with 45 days to maturity. What type of security have they issued?A) Commercial PaperB) Banker’s AcceptanceC) Corporate BondD) Certificate of DepositE) Municipal BondAnswer: A105.The Dakota National Bank has purchased a security issued by the state of Tennessee that has 20 years to maturity. What type of security have they purchased?A) Commercial PaperB) Banker’s AcceptanceC) Corporate BondD) Certificate of DepositE) Municipal BondAnswer: E。

CHAPTER 1AN OVERVIEW OF BANKS AND THE FINANCIAL-SERVICES SECTORGoal of This Chapter: In this chapter you will learn about the many roles financial service providers play in the economy today. You will examine how and why the banking industry and the financial services marketplace as a whole is rapidly changing, becoming new and different as we move forward into the future. You will also learn about new and old services offered to the public.Key Topics in This Chapter•Powerful Forces Reshaping the Industry•What is a Bank?•The Financial System and Competing Financial-Service Institutions•Old and New Services Offered to the Public•Key Trends Affecting All Financial-Service Firms•Appendix: Career Opportunities in Financial ServicesChapter OutlineI. I ntroduction: P owerful Forces Reshaping the IndustryII. W hat Is a Bank?A. D efined by the Functions It Serves and the Roles It Play:B. B anks and their Principal CompetitorsC. Legal Basis of a BankD. D efined by the Government Agency That Insures Its DepositsIII.The Financial System and Competing Financial-Service InstitutionsA.Savings AssociationsB.Credit UnionsC.Money Market FundsD.Mutual FundsE.Hedge FundsF.Security Brokers and DealersG.Investment BankersH.Finance CompaniesI.Financial Holding CompaniesJ.Life and Property/Casualty Insurance CompaniesIV. T he Services Banks and Many of Their Closest Competitors Offer the PublicA. S ervices Banks Have Offered Throughout History1.Carrying Out Currency Exchanges2.Discounting Commercial Notes and Making Business Loans3.Offering Savings Deposits4.Safekeeping of Valuables and Certification of Value5.Supporting Government Activities with Credit6.Offering Checking Accounts (Demand Deposits)7.Offering Trust ServicesB. S ervices Banks and Many of Their Financial-Service Competitors HaveOffered More Recently1.Granting Consumer Loans2.Financial Advising3.Managing Cash4.Offering Equipment Leasing5.Making Venture Capital Loans6.Selling Insurance Policies7.Selling Retirement PlansC. Dealing in Securities: Offering Security Brokerage and Investment Banking Services1. Offering Security Underwriting2. Offering Mutual Funds and Annuities3. Offering Merchant Banking Services4. Offering Risk Management and Hedging ServicesV. Key Trends Affecting All Financial-Service FirmsA. S ervice ProliferationB. R ising CompetitionC. G overnment DeregulationD. A n Increasingly Interest-Sensitive Mix of FundsE. T echnological Change and AutomationF. C onsolidation and Geographic ExpansionG. C onvergenceH. G lobalizationVI. T he Plan of This BookVII. S ummaryConcept Checks1-1. What is a bank? How does a bank differ from most other financial-service providers?A bank should be defined by what it does; in this case, banks are generally those financial institutions offering the widest range of financial services. Other financial service providers offer some of the financial services offered by a bank, but not all of them within one institution.1-2. Under U.S. law what must a corporation do to qualify and be regulated as a commercial bank?Under U.S. law, commercial banks must offer two essential services to qualify as banks for purposes of regulation and taxation, demand (checkable) deposits and commercial loans. More recently, Congress defined a bank as any institution that could qualify for deposit insurance administered by the FDIC.1-3.Why are some banks reaching out to become one-stop financial service conglomerates? Is this a good idea in your opinion?There are two reasons that banks are increasingly becoming one-stop financial service conglomerates. The first reason is the increased competition from other types of financial institution s and the erosion of banks’ traditional service areas. The second reason is the Financial Services Modernization Act which has allowed banks to expand their role to be full service providers.1-4. Which businesses are banking’s closest and toughest com petitors? What services do they offer that compete directly with banks’ services?Among a bank’s closest competitors are savings associations, credit unions, money market funds, mutual funds, hedge funds, security brokers and dealers, investment banks, finance companies, financial holding companies, and life andproperty-casualty insurance companies. All of these financial service providers are converging and embracing each other’s innovations. The Financial Services Modernization Act has allowed many of these financial service providers to offer the public one-stop shopping for financial services.1-5. What is happening to banking’s share of the financial mark etplace and why? What kind of banking and financial system do you foresee for the future if present trends continue?The Financial Services Modernization Act of 1999 allowed many of the banks’ closest competitors to offer a wide array of financial services thereby taking away market share from “traditional” banks. Banks and their closest competitors are converging into one-stop shopping for financial services and this trend should continue in the future1-6. What different kinds of services do banks offer the public today? What services do their closest competitors offer?Banks offer the widest range of services of any financial institution. They offer thrift deposits to encourage saving and checkable (demand) deposits to provide a means of payment for purchases of goods and services. They also provide credit through direct loans, by discounting the notes that business customers hold, and by issuing credit guarantees. Additionally, they make loans to consumers for purchases of durable goods, such as automobiles, and for home improvements, etc. Banks also manage the property of customers under trust agreements and manage the cash positions of their business customers. They purchase and lease equipment to customers as an alternative to direct loans. Many banks also assist their customers with buying and selling securities through discount brokerage subsidiaries, the acquisition and sale of foreign currencies, the supplying of venture capital to start new businesses, and the purchase of annuities to supply future funding at retirement or for other long-term projects such as supporting a college education. All of these services are also offered by their closest competitors. Banks and their closest competitors are converging and becoming the financial department stores of the modern era.1-7. What is a financial department store? A universal bank? Why do you think these institutions have become so important in the modern financial system? Financial department store and universal bank refer to the same concept. A financial department store is an institution where banking, fiduciary, insurance, and security brokerage services are unified under one roof. A bank that offers all these services is normally referred to as a universal bank. These have become important because of convergence and changes in regulations that have allowed financial service providers to offer all services under one roof1-8. Why do banks and other financial intermediaries exist in modern society, according to the theory of finance?There are multiple approaches to answering this question. The traditional view of banks as financial intermediaries sees them as simultaneously fulfilling the financial-service needs of savers (surplus-spending units) and borrowers(deficit-spending units), providing both a supply of credit and a supply of liquid assets. A newer view sees banks as delegated monitors who assess and evaluate borrowers on behalf of their depositors and earn fees for supplying monitoring services. Banks also have been viewed in recent theory as suppliers of liquidity andtransactions services that reduce costs for their customers and, through diversification, reduce risk. Banks are also critical in the payment system for goods and services and have played an increasingly important role as a guarantor and a risk management role for customers.1-9. How have banking and the financial services market changed in recent years? What powerful forces are shaping financial markets and institutions today? Which of these forces do you think will continue into the future?Banking is becoming a more volatile industry due, in part, to deregulation which has opened up individual banks to the full force of the financial marketplace. At the same time the number and variety of banking services has increased greatly due to the pressure of intensifying competition from nonbank financial-service providers and changing public demand for more conveniently and reliably provided services. Adding to the intensity of competition, foreign banks have enjoyed success in their efforts to enter countries overseas and attract away profitable domestic business and household accounts.1-10. Can you explain why many of the forces you named in the answer to the previous question have led to significant problems for the management of banks and other financial firms and their stockholders?The net result of recent changes in banking and the financial services market has been to put greater pressure upon their earnings, resulting in more volatile returns to stockholders and an increased bank failure rates. Some experts see banks' role and market share shrinking due to restrictive government regulations and intensifying competition. Institutions have also become more innovative in their service offerings and in finding new sources of funding, such as off-balance-sheet transactions. The increased risk faced by institutions today, therefore, has forced managers to more aggressively utilize a wide array of tools and techniques to improve and stabilize their earnings streams and manage the various risks they face. 1-11. What do you think the financial services industry will look like 20 years from now? What are the implications of your projections for its management today? There appears to be a trend toward continuing consolidation and convergence. There are likely to be fewer financial service providers in the future and many of these will be very large and provide a broad range of financial services under one roof. In addition, global expansion will continue and will be critical to the survival of many financial service providers. Management of financial service providers willhave to be more technologically astute and be able to make a more diverse set of decisions including decisions about mergers, acquisitions and global expansion as well as new services to add to the firm.Problems and Projects1. You have just been hired as the marketing officer for the new First National Bank of Vincent, a suburban banking institution that will soon be serving a local community of 120,000 people. The town is adjacent to a major metropolitan area with a total population of well over 1 million. Opening day for the newly chartered bank is just two months away, and the president and the board of directors are concerned that the new bank may not be able to attract enough depositors and good-quality loan customers to meet its growth and profit projections. There are 18 other financial-service competitors in town, including two credit unions, three finance companies, four insurance agencies, and two security broker offices. Your task is to recommend the various services the bank should offer initially to build up an adequate customer base. You are asked to do the following:a.Make a list of all the services the new bank could offer, according to current regulations.b.List the type of information you will need about the local community tohelp you decide which of the possible services are likely to have sufficientdemand to make them profitable.c.Divide the possible services into two groups--those you think are essentialto customers and should be offered beginning with opening day, and thosethat can be offered later as the bank grows.d. Briefly describe the kind of advertising campaign you would like to run tohelp the public see how your bank is different from all the other financialservice providers in the local area. Which services offered by the nonblankservice providers would be of most concern to the new bank’smanagement?Banks can offer, if they choose, a wide variety of financial services today. These services are listed below. However, unless they are affiliated with a larger bank holding company and can offer some of these services through that company, it may be more limited in what it can offer.Regular Checking Accounts Management Consulting Services NOW Accounts Letters of CreditPassbook Savings Deposits Business Inventory Loans Certificates of Deposit Asset-Based Commercial Loans Money Market Deposits Discounting of Commercial Paper Automobile Loans Plant and Equipment Loans Retirement Savings Plans Venture Capital LoansNonauto Installment Loans to IndividualsResidential Real Estate Loans Leasing Plans for Business Property and EquipmentHome Improvement Loans Security Dealing and Underwriting Personal Trust Management Services Discount Security BrokerageCommercial Trust Services Institutional Trust Services Foreign Currency Trading and ExchangePersonal Financial Advising Personal Cash-Management ServicesInsurance Policy Sales (Mainly Credit-Life)Insurance Today (Except in Some States)) Standby Credit Guarantees Acceptance FinancingTo help the new bank decide which services to offer it would be helpful to gather information about some of the following items in the local community:School Enrollments and Growth in School EnrollmentsEstimated Value of Residential and Commercial PropertyRetail SalesPercentage of Home Ownership Among Residents in the AreaNumber and Size (in Sales and Work Force) of Local Business Establishments Major Population Locations (i.e., Major Subdivisions, etc.) and Any Projected Growth AreasPopulation Demographics (i.e., Age Distribution of the Area)Projected Growth Areas of Industries in the AreaEssential services the bank would probably want to offer right from the beginning includes:Regular Checking Accounts Home Improvement Loans Automobile and other Consumer-type Money Market Deposit Accounts Installment Loans Retirement Savings PlansNOW Accounts Business Inventory LoansPassbook Savings Deposits Discounting of High-QualityCommercial NotesResidential Real Estate LoansCertificates of DepositAs the bank grows, opportunities for the profitable sale of additional services usually increase, especially for trust services for individuals and smaller businesses and personal financial advising as well as some commercial (plant and equipment) loans and leases. Further growth may result in the expansion of commercial trust services as well as a widening variety of commercial loans and credit guarantees.The bank would want to develop an advertising campaign that sends a message to potential customers that the new bank is, indeed, different from its competitors. Small banks often have the advantage of offering highly personalized services in which their customers are known and recognized and services are tailored to each individual customer's special financial needs. Quality and reliability of banking service are often more important to individual customers than is price. A new bank must try to sell prospective customers, most of who will come from other banks in the area, on personalized services, quality, and reliability - all three of which should be emphasized in its advertising program.2. Leading money center banks in the United States have accelerated their investment banking activities all over the globe in recent years, purchasing corporate debt securities and stock from their business customers and reselling those securities to investors in the open market. Is this a desirable move by these banking organizations from a profit standpoint? From a risk standpoint? From the public interest point of view? How would you research their question? If you were managing a corporation that had placed large deposits with a bank engaged in such activities, would you be concerned about the risk to your company's funds? What could you do to better safeguard those funds?In the 1970's and early 1980's investment banking was so profitable that commercial bankers were lured into the investment banking business largely because of its greater profit potential than possessed by more traditional commercial banking activities. Later foreign banks, particularly the British and Japanese banking firms, began to attract away large corporate customers from U.S. banks, who were restrained by regulation from offering many investment banking services. Thus, U.S. banks ran into severe difficulty in simply trying to hold onto their traditional corporate credit and deposit accounts because they could not compete service-wise in the investment banking field. Today, banks are allowed to underwrite securities through either a subsidiary or through a holding company structure. This change occurred as part of the Gramm-Leach-Bliley Act (Financial Services Modernization Act).Unfortunately, if investment banking is more profitable than traditional banking product lines, it is also more risky, consistent with the basic tenet of finance that risk and return are directly related. That is why the Federal Reserve Board has placed such strict limits on the type of organization that can offer these services. Currently, the underwriting of most corporate securities must be done through a subsidiary or as a separate part of the holding company so that, in theory at least, the bank is not responsible for any losses incurred. For this reason there may be little reason for depositors (including large corporate depositors) to be concerned about risk exposure from investment banking. Moreover, the ability to offer such services may make U.S. banks more viable in the long run which helps their corporate customers who depend upon them for credit.On the other hand, opponents of investment banking powers for bank operations inside the U.S. have some reasonable concerns that must be addressed. There are, for example, possible conflicts of interest. Information gathered in the investment banking division could be used to the detriment of customers purchasing other bank services. For example, a customer seeking a loan may be told that he or she must buy securities from the bank's investment banking division in order to receive a loan. Moreover, banks could gain effective control over some nonblank industrial corporations which might subject them to added risk exposure and place industrial firms not allied with banks at a competitive disadvantage. As a result theGramm-Leach-Bliley Act has built in some protections to prevent this from happening.3. The term bank has been applied broadly over the years to include a diverse set of financial-service institutions, which offer different financial service packages.Identify as many o f the different kinds of “banks” as you can. How do the “banks” you have identified compare to the largest banking group of all – the commercial banks? Why do you think so many different financial firms have been called banks? How might this terminological confusion affect financial-service customers?The general public tends to classify anything as a bank that offers some sort of financial service, especially deposit and loan services. Other institutions that are often referred to as a bank without being one are savings associations, credit unions, money market funds, mutual funds, hedge funds, security brokers and dealers, investment banks, finance companies, financial holding companies and life and property/casualty insurance companies. All of these institutions offer some of the services that a commercial bank offers, but generally not the entire scope of services. Since providers of financial services are normally called banks by the general public they are able to take away business from traditional banks and it is of utmost importance for commercial banks to clarify their unique position among financial services providers.4. What advantages can you see to banks affiliating with insurance companies? How might such an affiliation benefit a bank? An insurer? Can you identify any possible disadvantages to such an affiliation? Can you cite any real world examples of bank-insurer affiliations? How well do they appear to have worked out in practice?Before Glass-Steagall banks used to sell insurance services to their customers on a regular basis. in particular, banks would sell life insurance companies to loan customers to ensure repayment of the loan in case of death or disablement. These reasons still exist today and the right to sell insurances to customers again benefits banks in allowing them to offer their customers complete financial packages from financing the home or car to insure it, from giving investment advice to selling life insurance policies and annuities for retirement planning. Generally, a bank customer who is already purchasing a service from a bank might feel compelled to purchase an insurance product, as well. On the other hand, insurance companies sometimes have a negative image, which makes it more difficult to sell certain insurance products. Combining their products with the trust that people generally have in banks will make it easier for them to sell their products. The most prominent example of a bank-insurer affiliation is the merger of Citicorp and Traveler’s Insurance to Citigroup. However, given that Citigroup has sold Traveler’s Insurance indicates that the anticipated synergy effects did not materialize.5. Explain the difference between consolidation and convergence. Are these trends in banking and financial services related? Do they influence each other? How? Consolidation refers to increase in the size of financial institutions and the decline in the number of small independently owned banks and financial service providers. Convergence is the bringing together of firms from different industries to createconglomerate firms offering multiple services. Clearly, these two trends are related. In their effort to compete with each other, banks and their closest competitors have acquired other firms in their industry as well across industries to provide multiple financial services in multiple markets.6. What is a financial intermediary? What are their key characteristics? Is a bank a type of financial intermediary? Why? What other financial-services companies are financial intermediaries? What important role within the financial system do financial intermediaries play?A financial intermediary is a business that interacts with deficit spending individuals and institutions and surplus spending individuals and institutions. For that reason any financial service provider (including banks) is considered a financial intermediary. In their function as intermediaries they act as a bridge between the deficit and surplus spending units by offering financial services to the surplus spending individuals and then loaning those funds to the deficit spending individuals. Financial intermediaries accelerate economic growth by increasing the pool of available funds and lowering the risk of investments through diversification.。

Chapter 2The Impact of Government Policy and Regulation on the Financial-Services IndustryFill in the Blank Questions1. The _____________________ was created as part of the Glass Steagall Act. In the beginning itinsured deposits up to $2,500.Answer: FDIC2.The________________________ is the law that states that a bank must get approved fromtheir regulatory body in order to combine with another bank.Answer: Bank Merger Act3. One tool that the Federal Reserve uses to control the money supply is. TheFederal Reserve will buy and sell T-bills when they are using this tool of monetary policy.Answer: open market operations4.The__________________________ was created in 1913 in response to a series of economicdepressions and failures. Its principal role is to serve as the lender of last resort and to stabilize the financial markets.Answer: Federal Reserve5.The __________________________ prevented banks from crossing state lines and madenational banks subject to the branching laws of their state. This act was later repealed by theRiegle Neal Interstate Banking law.Answer: McFadden-Pepper Act6.Because the FDIC levies fixed insurance premiums regardless of risk, this leads to a problem calledthe ____________________ among banks. The fixed premiums encourage all banks to accept greater risk.Answer: moral hazard7.In 1980, __________________________ was passed and lifted government ceilings on depositinterest rates in favor of free market interest rates.Answer: DIDMCA158. One tool that the Federal Reserve uses to control the money supply is . The Federal Reserve willchange the interest rate they charge for short term loans when they are using this tool of monetary policy.Answer: changing the discount rate9.The first major federal banking law in the U.S. was the __________________________. This lawwas passed during the Civil War and set up a system for chartering national banks and createdthe OCC.Answer: National Banking Act10.The_________________________ was passed during the Great Depression. It separatedinvestment and commercial banks and created the FDIC.Answer: Glass-Steagall Act11.The__________________________ brought bank holding companies under the jurisdiction ofthe Federal Reserve.Answer: Bank Holding Company Act12.The__________________________ allows bank holding companies to acquire banks anywherein the United States. However, no one bank can control more than 30 percent of the deposits inany one state or more than 10 percent of the deposits across the country.Answer: Riegle-Neal Interstate Banking Act13. The allows banks to affiliate with insurance companies and securities firms either through a holdingcompany or as a subsidiary.Answer: Gramm-Leach-Bliley Act (Financial Services Modernization Act)14.Customers of financial-service companies may _____________________ of having their privateinformation shared with a third party such as a telemarketer. However, in order to do this they must tell the financial-services company in writing that they do not want their personal information shared with outside parties.Answer: opt out15.The federal bank regulatory agency which examines the most banks is the ______________.Answer: FDIC16.The _________________ requires financial service companies to report suspicious activityin customer accounts to the Treasury Department.Answer: U.S. Patriot Act16Test Bank, Chapter 217.The central bank of the new European Union is known as the _______________________.Answer: European Central Bank or ECB18.The _____________________ Act prohibits banks and other publicly owned firmsfrom publishing false or misleading financial performance information.Answer: Sarbanes-Oxley19. One of the main roles of the Federal Reserve today is . They have three tools that they use today tocarry out this role; open market operations, the discount rate and legal reserve requirements.Answer: monetary policy20. The is the center of authority and decision making within the Federal Reserve. It consists of sevenmembers appointed by the president for terms not exceeding 14 years. Answer: Board of Governors21. The main regulators of insurance companies are.Answer: state insurance commissions22. Federal Credit Unions are regulated and examined by.Answer: the National Credit Union Administration.23. The makes it easier for victims of identity theft to file fraud alerts and allows the public to applyfor a free credit report once a year.Answer: Fair and Accurate Credit Transactions Act (FACT Act)24. The makes it faster and less costly for banks to clear checks. It allows for banks to electronicallysend check images instead of shipping paper checks across the country.Answer: Check 21 Act25. The was created by the National Banking Act and is part of the Treasury Department. It is theprimary regulator of National Banks.Answer: Office of the Comptroller of the Currency (OCC)26.The _________________________ proposes various regulations applying to the financialmarkets to combat the recent credit crisis. This “ bail-out ” bill granted the US Treasury the meansto purchase troubled loans, allowed the FDIC to temporarily increase deposit insurance, andpermitted the government to inject additional capital into the banking system.Answer: The Emergency Economic Stabilization Act of 2008True/False Questions17T F 27. Federal Reserve Act authorized the creation of the Federal Deposit Insurance Corporation.Answer: FalseT F 28. In the United States, fixed fees charged for deposit insurance, regardless of how risky abank is, led to a problem known as moral hazard.Answer: TrueT F 28. Government-sponsored deposit insurance typically encourages individual depositors tomonitor their banks' behavior in accepting risk.Answer: FalseT F 29. The Federal Reserve changes reserve requirements frequently because the affect of these changes is so small.Answer: FalseT F 30. The Bank Merger Act and its amendments requires that Bank Holding Companies be under the jurisdiction of the Federal Reserve.Answer: FalseT F 31. National banks cannot merge without the prior approval of the Comptroller of theCurrency.Answer: TrueT F 32. The Truth in Lending (or Consumer Credit Protection) Act was passed by the U.S.Congress to outlaw discrimination in providing bank services to the public.Answer: FalseT F 33. The federal law that states individuals and families cannot be denied a loan merely because of their age, sex, race, national origin or religious affiliation is known as the CompetitiveEquality in Banking Act.Answer: FalseT F 34. Under the terms of the 1994 Riegle-Neal Interstate Banking law bank holding companies can acquire a bank anywhere inside the United States, subject to Federal Reserve Boardapproval.Answer: TrueT F 35. The 1994 federal interstate banking bill does not limit the percentage of statewide ornationwide deposits that an interstate banking firm is allowed to control.18Test Bank, Chapter 2Answer: FalseT F 36. The term "regulatory dialectic" refers to the dual system of banking regulation in the United States and selected other countries where both the federal or central government andlocal governments regulate banks.Answer: FalseT F 37. The moral hazard problem of banks is caused by the fixed insurance premiums paid bybanks and causes banks to accept greater risk.Answer: TrueT F 38. When the Federal Reserve buys T-bills through its open market operations, it causes thegrowth of bank deposits and loans to decrease.Answer: FalseT F 39. When the Federal Reserve increases the discount rate it generally causes other interest rates to decrease.Answer: FalseT F 40. The National Bank Act (1863) created the Federal Reserve which acts as the lender of last resort.Answer: FalseT F 41. FIRREA (1989) allowed bank holding companies to acquire nonblank depositoryinstitutions and, if desired, convert them into branch offices.Answer: TrueT F 42. The Sarbanes-Oxley Act allows banks, insurance companies, and securities firms to form Financial Holding Companies (FHCs).Answer: FalseT F 43. The Gramm-Leach-Bliley Act of 1999 essentially repeals the Glass-Steagall Act passed in the 1930s.Answer: TrueT F 44. Passed in 1977, the Equal Credit Opportunity Act prohibits banks from discriminating against customers merely on the basis of the neighborhood in which they live.Answer: FalseT F 45. The tool used by the Federal Reserve System to influence the economy and behavior of19banks is known as moral hazard.Answer: FalseT F 46. One of the principal reasons for government regulation of financial firms is to protect the safety and soundness of the financial system.Answer: TrueMultiple Choice Questions47.Banks are regulated for which of the reasons listed below?A)Banks are leading repositories of the public's savings.B)Banks have the power to create money.C)Banks provide businesses and individuals with loans that support consumption and investmentspending.D)Banks assist governments in conducting economic policy, collecting taxes anddispensing government payments.E)All of the above.Answer: E48.An institutional arrangement in which federal and state authorities both have significant bankregulatory powers is referred to as:A)Balance of PowerB)FederalismC)Dual Banking SystemD)Cooperative RegulationE)Coordinated ControlAnswer: C49.The law that set up the federal banking system and provided for the chartering of national bankswas the:A)National Bank ActB)McFadden-Pepper ActC)Glass-Steagall ActD)Bank Merger ActE)Federal Reserve ActAnswer: A50.The federal law that prohibited federally supervised commercial banks from offeringinvestment banking services on privately issued securities is known as:A)The Glass-Steagall ActB)The Bank Merger ActC)The Depository Institutions Deregulation and Monetary Control ActD)The Federal Reserve ActE)None of the AboveAnswer: A20Test Bank, Chapter 251.The Gramm-Leach-Bliley Act (Financial Services Modernization Act) calls for linkinggovernment supervision of the financial-services firm to the types of activities that the firmundertakes. For example the insurance portion of the firm would be regulated by state insurance commissions and the banking portion of the firm would be regulated by banking regulators. This approach to government supervision of financial services is known as:A)Consolidated regulation and supervision.B)Functional regulation.C)Services oversight.D)Umbrella supervision and regulation.E)None of the above.Answer: B52.The Federal Reserve policy tool under which the Fed attempts to bring psychological pressure tobear on individuals and institutions to conform to the Fed's policies, using letters, phone calls,and speeches, is known as:A)Margin requirementsB)Moral suasionC)Discount window supervisionD)Conference and compromiseE)None of the above.Answer: B53.The 1994 law that allowed bank holding companies to acquire banks anywhere in the U.S. is:A)The Glass-Steagall ActB)The Federal Deposit Insurance Corporation Improvement ActC)The National Bank ActD)The Riegle-Neal Interstate Banking and Branching Efficiency Act.E)None of the above.Answer: D54.The federal law that allowed the Federal Reserve to set margin requirements is:A)The National Banking Act.B)The McFadden-Pepper Act.C)The Glass Steagall Act.D)The Federal Reserve Act.E)None of the above.Answer: C55.Of the principal reasons for regulating banks, what was the primary purpose of the NationalBanking Act (1863)?A)Protection of the public's savingsB)Control of the money supplyC)Providing support for government activitiesD)Maintaining confidence in the banking systemE)Preventing banks from realizing monopoly powers2156.Of the principal reasons for regulating banks, what was the primary purpose of the FederalReserve Act of 1913?A)Protection of the public's savingsB)Control of the money supplyC)Preventing banks from realizing monopoly powersD)Ensuring an adequate and fair supply of loansE)None of the above.Answer: B57.The law that allows lifted government deposit interest ceilings and allowed them to paya competitive interest rate is:A)The National Banking Act.B)The Glass Steagall Act.C)The Bank Merger Act.D)DIDMCAE)None of the above.Answer: D58.The law that allows banks to affiliate with insurance companies and security brokerage firms toform financial services conglomerates isA)The National Banking ActB)The Glass Steagall ActC)The Garn St. Germain ActD)The Riegle Neal Interstate Banking ActE)The Gramm-Leach-Bliley Act (Financial Services Modernization Act)Answer: E59.Of the principal reasons for regulating banks, what was the primary purpose of the Truthin Lending Law?A)Protection of the public's savingsB)Control of the money supplyC)Preventing banks from realizing monopoly powersD)Ensuring an adequate and fair supply of loansE)None of the above.Answer: D60.Which of the following is an unresolved issue in the new century?A)What should be done about the regulatory safety net set up to protect small depositors?B)If financial institutions are allowed to take on more risk, how can taxpayers be protectedfrom paying the bill when more institutions fail?C)Does functional regulation actually work?D)Should regulators allow the mixing of banking and commerce?E)All of the above are unresolved issues22Test Bank, Chapter 261.The law that made bank and nonbank depository institutions more alike in the services they couldoffer and allowed banks and thrifts to more fully compete with other financial institutions is:A)The National Banking ActB)The Federal Reserve ActC)The Garn-St. Germain ActD)The Riegle-Neal Interstate Banking and Branching Efficiency ActE)The Gramm-Leach-Bliley Act (Financial Services Modernization Act)Answer: C62.The law that allowed bank holding companies to acquire nonbank depository institutions andconvert them to branches is:A)The National Banking ActB)The Garn-St. Germain ActC)FIRREAD)The Riegle-Neal Interstate Banking and Branching Efficiency ActE)None of the AboveAnswer: C63.The equivalent of the Federal Reserve System in Europe is known as the:A)European UnionB)Bank of LondonC)Basle GroupD)European Central BankE)Swiss Bank CorporationAnswer: D64.The new financial organization created by Gramm-Leach-Bliley is theA)Financial Holding CompanyB)Bank Holding CompanyC)European Central BankD)Financial Service CorporationE)Financial Modernization OrganizationAnswer: A65.The act which requires financial institutions to share information about customer identitieswith government agencies is:A)The Sarbanes-Oxley ActB)The U.S. Treasury Department ActC)The 9/11 ActD)The USA Patriot ActE)The Gramm-Leach-Bliley ActAnswer: D2366. The 1977 law that prevents banks from“ redliningrtainneighborhoods,”ce refusing to serve thoseareas is:A)The National Banking ActB)The Garn-St. Germain ActC)FIRREAD)The Riegle-Neal Interstate Banking and Branching Efficiency ActE)Community Reinvestment Act (CRA)Answer: Emon minimum capital requirements on banks in leading industrialized nations that are basedon the riskiness of their assets is imposed by:A)The National Banking ActB)FIRREAC)The International Banking ActD)The Basel AgreementE)None of the AboveAnswer: D68.The fastest growing crime in the U.S. is:A)Financial statement misrepresentationB)Bank robberiesC)Individual privacy violationsD)Credit card fraudE)Identity theftAnswer: E69.The oldest federal bank agency is the:A)OCCB)FDICC)FRSD)FHCE)BHCAnswer: A70.The federal agency that regulates the most banks is the:A)OCCB)FDICC)FRSD)FHCE)BHCAnswer: B71.Which federal banking act requires that financial service providers establish the identity ofany customers opening new accounts?A)Sarbanes-Oxley ActB)USA Patriot Act24Test Bank, Chapter 2C)Check 21 ActD)The FACT ActE)Bankruptcy Abuse Prevention and Consumer ProtectionAct Answer: B72.Which federal banking act prohibits publishing false or misleading information about the financialperformance of a public company and requires top corporate officers to vouch for the accuracy of their company ’ s financial statements?A)Sarbanes-Oxley ActB)USA Patriot ActC)Check 21 ActD)The FACT ActE)Bankruptcy Abuse Prevention and Consumer Protection ActAnswer: A73.Which federal banking act reduces the need for banks to transport paper checks across the country?A)Sarbanes-Oxley ActB)USA Patriot ActC)Check 21 ActD)The FACT ActE)Bankruptcy Abuse Prevention and Consumer Protection ActAnswer: C74. Which federal banking act forces more individuals to repay at least part of what they owe and willpush higher-income borrowers into more costly forms of bankruptcy?A)Sarbanes-Oxley ActB)USA Patriot ActC)Check 21 ActD)The FACT ActE)Bankruptcy Abuse Prevention and Consumer ProtectionAct Answer: E75.Which federal banking act requires the Federal Trade Commission to make it easier for victimsof identity theft to make theft reports and requires credit bureaus to help victims resolve theproblem?A)Sarbanes-Oxley ActB)USA Patriot ActC)Check 21 ActD)The FACT ActE)Bankruptcy Abuse Prevention and Consumer Protection ActAnswer: D76.The _________ allows adequately capitalized bank holding companies to acquire banks in anystate.A)Riegle-Neal Interstate Banking and Branching Efficiency ActB)Competitive Equality Banking Act25C)Financial Institutions Reform, Recovery and Enforcement ActD)Federal Deposit Insurance Corporation Improvement ActE)Depository Institutions Deregulation and Monetary ControlAct Answer: A77.One of the earliest theories regarding the impact of regulation on banks was developed by GeorgeStigler. He contends that:A)Firms in regulated industries actually seek out regulations because they bringmonopolistic rents.B)Regulations shelter firms from changes in demand and cost, lowering its risk.C)Regulations can increase consumer confidence which increases customer loyalty toregulated firms.D)Depository institutions should be regulated no differently than any other corporation with nosubsidies or special privileges.E)None of the aboveAnswer: A78.Samual Peltzman had an opposing view to George Stigler on the impact of regulation on banks. Hecontends that:A)Firms in regulated industries actually seek out regulations because they bringmonopolistic rents.B)Regulations shelter firms from changes in demand and cost, lowering its risk.C)Regulations can increase consumer confidence which increases customer loyalty toregulated firms.D)Depository institutions should be regulated no differently than any other corporation with nosubsidies or special privileges.E)None of the aboveAnswer: B79.There is an important debate raging today regarding whether banks should be regulated at all.George Benston contends that:A)Firms in regulated industries actually seek out regulations because they bringmonopolistic rents.B)Regulations shelter firms from changes in demand and cost, lowering its risk.C)Regulations can increase consumer confidence which increases customer loyalty toregulated firms.D)Depository institutions should be regulated no differently than any other corporation with nosubsidies or special privileges.E)None of the aboveAnswer: D80.The European Central Bank has the main goal of:A)Ensuring the economy grows at an adequate rate.B)Keeping unemployment low.C)Ensuring price stability.D)Ensuring an adequate and fair supply of loans.E)All of the aboveAnswer: C26Test Bank, Chapter 281.Which of the following has become the principal tool of central bank monetary policy today?A)Open market operationsB)Changing the discount rateC)Changing reserve requirementsD)Using moral suasionE)None of the aboveAnswer: A82.The Federal Reserve buys Treasury Bills in the open market. This will tend to:A)Cause interest rates in the market to riseB)Cause interest rates in the market to fallC)Cause reserves held at the Federal Reserve to decreaseD)Cause a decrease in the growth of deposits and loansE)All of the aboveAnswer: B83.Which federal banking act extends deposit insurance coverage on qualified retirement accountsfrom $100,000 to $250,000 and authorizes the FDIC to periodically increase depositinsurance coverage to keep up with inflation?A)Sarbanes-Oxley ActB)The Gramm-Leach-Bliley ActC)Check 21 ActD)The FACT ActE)Federal Deposit Insurance Reform ActAnswer: E84.The Financial Services Regulatory Relief Act of 2006 does the following:A)Adds selected new service powers to depository institutionsB)Loosens regulations on depository institutionsC) Grants the Federal Reserve authority to pay interest on depository institutions’D)All of the aboveE)None of the aboveAnswer: D85.The Emergency Economic Stabilization Act passed in 2008 during the global credit crisis allowedthe following:A) An emergency sale of“ bad assets”B)Temporary increase of FDIC deposit insurance to $250,000 for all depositsC)Injections of capital by the government into banks and other qualified lendersD)Closer surveillance of the mortgage market participants, such as brokers and lendersE)All of the aboveAnswer: E27。

Chapter 2The Impact of Government Policy and Regulation on theFinancial-Services IndustryFill in the Blank Questions1. The _____________________ was created as part of the Glass Steagall Act. In the beginning it insured deposits up to $2,500.Answer: FDIC2. The________________________ is the law that states that a bank must get approved from their regulatory body in order to combine with another bank.Answer: Bank Merger Act3. One tool that the Federal Reserve uses to control the money supply is_________________. The Federal Reserve will buy and sell T-bills when they are using this tool of monetary policy.Answer: open market operations4. The__________________________ was created in 1913 in response to a series of economic depressions and failures. Its principal role is to serve as the lender of last resort and to stabilize the financial markets.Answer: Federal Reserve5. The __________________________ prevented banks from crossing state lines and made national banks subject to the branching laws of their state. This act was later repealed by the Riegle Neal Interstate Banking law.Answer: McFadden-Pepper Act6. Because the FDIC levies fixed insurance premiums regardless of risk, this leads to a problem called the ____________________ among banks. The fixed premiums encourage all banks to accept greater risk.Answer: moral hazard7. In 1980, __________________________ was passed and lifted government ceilings on deposit interest rates in favor of free market interest rates.Answer: DIDMCA8. One tool that the Federal Reserve uses to control the money supply is_________________. The Federal Reserve will change the interest rate they charge for short term loans when they are using this tool of monetary policy.Answer: changing the discount rate9. The first major federal banking law in the U.S. was the __________________________. This law was passed during the Civil War and set up a system for chartering national banks and created the OCC.Answer: National Banking Act10. The_________________________ was passed during the Great Depression. It separated investment and commercial banks and created the FDIC.Answer: Glass-Steagall Act11. The__________________________ brought bank holding companies under the jurisdiction of the Federal Reserve.Answer: Bank Holding Company Act12. The__________________________ allows bank holding companies to acquire banks anywhere in the United States. However, no one bank can control more than 30 percent of the deposits in any one state or more than 10 percent of the deposits across the country.Answer: Riegle-Neal Interstate Banking Act13. Theallows banks to affiliate with insurance companies and securities firms either through a holding company or as a subsidiary.Answer: Gramm-Leach-Bliley Act (Financial Services Modernization Act)14. Customers of financial-service companies may _____________________ of having their private information shared with a third party such as a telemarketer. However, in order to do this they must tell the financial-services company in writing that they do not want their personal information shared with outside parties.Answer: opt out15. The federal bank regulatory agency which examines the most banks is the______________.Answer: FDIC16. The _________________ requires financial service companies to report suspicious activity in customer accounts to the Treasury Department.Answer: U.S. Patriot Act17. The central bank of the new European Union is known as the _______________________.Answer: European Central Bank or ECB18. The _____________________ Act prohibits banks and other publicly owned firms from publishing false or misleading financial performance information.Answer: Sarbanes-Oxley19.One of the main roles of the Federal Reserve today is . They have three tools that they use today to carry out this role; open market operations, the discount rate and legal reserve requirements.Answer: monetary policy20.The is the center of authority and decision making within the Federal Reserve. It consists of seven members appointed by the president for terms not exceeding 14 years.Answer: Board of Governors21.The main regulators of insurance companies are .Answer: state insurance commissions22.Federal Credit Unions are regulated and examined by .Answer: the National Credit Union Administration.23.The makes it easier for victims of identity theft to alerts and allows the public to apply fora free credit report once a year.Answer: Fair and Accurate Credit Transactions Act (FACT Act)24.The makes it faster and less costly for banks to clear checks. It allows for banks to electronically send check images instead of shipping paper checks across the country.Answer: Check 21 Act25.The was created by the National Banking Act and is part of the Treasury Department. It is the primary regulator of National Banks.Answer: Office of the Comptroller of the Currency (OCC)26.The _________________________ proposes various regulations applying to the financial markets to combat the recent credit crisis. This “bail-out” bill granted the US Treasury the means to purchase troubled loans, allowed the FDIC to temporarily increase deposit insurance, and permitted the government to inject additional capital into the banking system.Answer: The Emergency Economic Stabilization Act of 2008True/False QuestionsTF 27. Federal Reserve Act authorized the creation of the Federal Deposit Insurance Corporation.Answer: FalseT F 28. In the United States, fixed fees charged for deposit insurance, regardless of how risky a bank is, led to a problem known as moralhazard.Answer: TrueT F 28. Government-sponsored deposit insurance typically encourages individual depositors to monitor their banks' behavior in accepting risk.Answer: FalseT F 29. The Federal Reserve changes reserve requirements frequently because the affect of these changes is so small.Answer: FalseT F 30. The Bank Merger Act and its amendments requires that Bank Holding Companies be under the jurisdiction of the Federal Reserve.Answer: FalseT F 31. National banks cannot merge without the prior approval of the Comptroller of the Currency.Answer: TrueT F 32. The Truth in Lending (or Consumer Credit Protection) Act was passed by the U.S. Congress to outlaw discrimination in providing bank services to the public.Answer: FalseT F 33. The federal law that states individuals and families cannot be denied a loan merely because of their age, sex, race, national origin or religious affiliation is known as the Competitive Equality in Banking Act.Answer: FalseT F 34. Under the terms of the 1994 Riegle-Neal Interstate Banking law bank holding companies can acquire a bank anywhere inside the United States, subject to Federal Reserve Board approval.Answer: TrueT F 35. The 1994 federal interstate banking bill does not limit the percentage of statewide or nationwide deposits that an interstate banking firm is allowed to control.Answer: FalseT F 36. The term "regulatory dialectic" refers to the dual system of banking regulation in the United States and selected other countries where both the federal or central government and local governments regulate banks.Answer: FalseT F 37. The moral hazard problem of banks is caused by the fixed insurance premiums paid by banks and causes banks to accept greater risk.Answer: TrueT F 38. When the Federal Reserve buys T-bills through its open market operations, it causes the growth of bank deposits and loans to decrease.Answer: FalseT F 39. When the Federal Reserve increases the discount rate it generally causes other interest rates to decrease.Answer: FalseT F 40. The National Bank Act (1863) created the Federal Reserve which acts as the lender of last resort.Answer: FalseT F 41. FIRREA (1989) allowed bank holding companies to acquire nonblank depository institutions and, if desired, convert them into branch offices.Answer: TrueT F 42. The Sarbanes-Oxley Act allows banks, insurance companies, and securities firms to form Financial Holding Companies (FHCs).Answer: FalseT F 43. The Gramm-Leach-Bliley Act of 1999 essentially repeals the Glass-Steagall Act passed in the 1930s.Answer: TrueT F 44. Passed in 1977, the Equal Credit Opportunity Act prohibits banks from discriminating against customers merely on the basis of the neighborhood in which they live.Answer: FalseT F 45. The tool used by the Federal Reserve System to influence the economy and behavior of banks is known as moral hazard.Answer: FalseT F 46. One of the principal reasons for government regulation of financial firms is to protect the safety and soundness of the financial system.Answer: TrueMultiple Choice Questions47.Banks are regulated for which of the reasons listed belowA) Banks are leading repositories of the public's savings.B) Banks have the power to create money.C) Banks provide businesses and individuals with loans that support consumption and investment spending.D) Banks assist governments in conducting economic policy, collecting taxes and dispensing government payments.E) All of the above.Answer: E48.An institutional arrangement in which federal and state authorities both have significant bank regulatory powers is referred to as:A) Balance of PowerB) FederalismC) Dual Banking SystemD) Cooperative RegulationE) Coordinated ControlAnswer: C49.The law that set up the federal banking system and provided for the chartering of national bankswas the:A) National Bank ActB) McFadden-Pepper ActC) Glass-Steagall ActD) Bank Merger ActE) Federal Reserve ActAnswer: A50.The federal law that prohibited federally supervised commercial banks from offering investmentbanking services on privately issued securities is known as:A) The Glass-Steagall ActB) The Bank Merger ActC) The Depository Institutions Deregulation and Monetary Control ActD) The Federal Reserve ActE) None of the AboveAnswer: A51.The Gramm-Leach-Bliley Act (Financial Services Modernization Act) calls for linking government supervision of the financial-services firm to the types of activities that the firm undertakes. For example the insurance portion of the firm would be regulated by state insurance commissions and the banking portion of the firm would be regulated by banking regulators. This approach to government supervision of financial services is known as:A) Consolidated regulation and supervision.B) Functional regulation.C) Services oversight.D) Umbrella supervision and regulation.E) None of the above.Answer: B52.The Federal Reserve policy tool under which the Fed attempts to bring psychological pressure to bear on individuals and institutions to conform to the Fed's policies, using letters, phone calls, and speeches, is known as:A) Margin requirementsB) Moral suasionC) Discount window supervisionD) Conference and compromiseE) None of the above.Answer: B53.The 1994 law that allowed bank holding companies to acquire banks anywhere in the U.S. is:A) The Glass-Steagall ActB) The Federal Deposit Insurance Corporation Improvement ActC) The National Bank ActD) The Riegle-Neal Interstate Banking and Branching Efficiency Act.E) None of the above.Answer: D54.The federal law that allowed the Federal Reserve to set margin requirements is:A) The National Banking Act.B) The McFadden-Pepper Act.C) The Glass Steagall Act.D) The Federal Reserve Act.E) None of the above.Answer: C55.Of the principal reasons for regulating banks, what was the primary purpose of the National Banking Act (1863)A) Protection of the public's savingsB) Control of the money supplyC) Providing support for government activitiesD) Maintaining confidence in the banking systemE) Preventing banks from realizing monopoly powersAnswer: C56.Of the principal reasons for regulating banks, what was the primary purpose of the Federal Reserve Act of 1913A) Protection of the public's savingsB) Control of the money supplyC) Preventing banks from realizing monopoly powersD) Ensuring an adequate and fair supply of loansE) None of the above.Answer: B57.The law that allows lifted government deposit interest ceilings and allowed them to pay a competitive interest rate is:A) The National Banking Act.B) The Glass Steagall Act.C) The Bank Merger Act.D) DIDMCAE) None of the above.Answer: D58.The law that allows banks to affiliate with insurance companies and security brokerage firms to form financial services conglomerates isA) The National Banking ActB) The Glass Steagall ActC) The Garn St. Germain ActD) The Riegle Neal Interstate Banking ActE) The Gramm-Leach-Bliley Act (Financial Services Modernization Act)Answer: E59.Of the principal reasons for regulating banks, what was the primary purpose of the Truth in Lending LawA) Protection of the public's savingsB) Control of the money supplyC) Preventing banks from realizing monopoly powersD) Ensuring an adequate and fair supply of loansE) None of the above.Answer: D60.Which of the following is an unresolved issue in the new centuryA) What should be done about the regulatory safety net set up to protect small depositorsB) If financial institutions are allowed to take on more risk, how can taxpayers be protected from paying the bill when more institutions failC) Does functional regulation actually workD) Should regulators allow the mixing of banking and commerceE) All of the above are unresolved issuesAnswer: E61.The law that made bank and nonbank depository institutions more alike in the services they could offer and allowed banks and thrifts to more fully compete with other financial institutions is:A) The National Banking ActB) The Federal Reserve ActC) The Garn-St. Germain ActD) The Riegle-Neal Interstate Banking and Branching Efficiency ActE) The Gramm-Leach-Bliley Act (Financial Services Modernization Act)Answer: C62.The law that allowed bank holding companies to acquire nonbank depository institutions and convert them to branches is:A) The National Banking ActB) The Garn-St. Germain ActC) FIRREAD) The Riegle-Neal Interstate Banking and Branching Efficiency ActE) None of the AboveAnswer: C63.The equivalent of the Federal Reserve System in Europe is known as the:A) European UnionB) Bank of LondonC) Basle GroupD) European Central BankE) Swiss Bank CorporationAnswer: D64.The new financial organization created by Gramm-Leach-Bliley is theA) Financial Holding CompanyB) Bank Holding CompanyC) European Central BankD) Financial Service CorporationE) Financial Modernization OrganizationAnswer: A65.The act which requires financial institutions to share information about customer identities with government agencies is:A) The Sarbanes-Oxley ActB) The U.S. Treasury Department ActC) The 9/11 ActD) The USA Patriot ActE) The Gramm-Leach-Bliley ActAnswer: D66.The 1977 law that prevents banks from “redlining” certain neighborhoods, refusing to serve those areas is:A) The National Banking ActB) The Garn-St. Germain ActC) FIRREAD) The Riegle-Neal Interstate Banking and Branching Efficiency ActE) Community Reinvestment Act (CRA)Answer: Emon minimum capital requirements on banks in leading industrialized nations that are based on the riskiness of their assets is imposed by:A) The National Banking ActB) FIRREAC) The International Banking ActD) The Basel AgreementE) None of the AboveAnswer: D68.The fastest growing crime in the U.S. is:A) Financial statement misrepresentationB) Bank robberiesC) Individual privacy violationsD) Credit card fraudE) Identity theftAnswer: E69.The oldest federal bank agency is the:A) OCCB) FDICC) FRSD) FHCE) BHCAnswer: A70.The federal agency that regulates the most banks is the:A) OCCB) FDICC) FRSD) FHCE) BHCAnswer: B71.Which federal banking act requires that financial service providers establish the identity of any customers opening new accountsA) Sarbanes-Oxley ActB) USA Patriot ActC) Check 21 ActD) The FACT ActE) Bankruptcy Abuse Prevention and Consumer Protection ActAnswer: B72.Which federal banking act prohibits publishing false or misleading information about the financial performance of a public company and requires top corporate officers to vouch for the accuracy of their company’s financial statementsA) Sarbanes-Oxley ActB) USA Patriot ActC) Check 21 ActD) The FACT ActE) Bankruptcy Abuse Prevention and Consumer Protection ActAnswer: A73.Which federal banking act reduces the need for banks to transport paper checks across the countryA) Sarbanes-Oxley ActB) USA Patriot ActC) Check 21 ActD) The FACT ActE) Bankruptcy Abuse Prevention and Consumer Protection ActAnswer: C74.Which federal banking act forces more individuals to repay at least part of what they owe and will push higher-income borrowers into more costly forms of bankruptcyA) Sarbanes-Oxley ActB) USA Patriot ActC) Check 21 ActD) The FACT ActE) Bankruptcy Abuse Prevention and Consumer Protection ActAnswer: E75.Which federal banking act requires the Federal Trade Commission to make it easier for victims of identity theft to make theft reports and requires credit bureaus to help victims resolve the problemA) Sarbanes-Oxley ActB) USA Patriot ActC) Check 21 ActD) The FACT ActE) Bankruptcy Abuse Prevention and Consumer Protection ActAnswer: D76.The _________ allows adequately capitalized bank holding companies to acquire banks in any state.A)Riegle-Neal Interstate Banking and Branching Efficiency ActB)Competitive Equality Banking ActC)Financial Institutions Reform, Recovery and Enforcement ActD)Federal Deposit Insurance Corporation Improvement ActE)Depository Institutions Deregulation and Monetary Control ActAnswer: A77.One of the earliest theories regarding the impact of regulation on banks was developed by George Stigler. He contends that:A) Firms in regulated industries actually seek out regulations because they bring monopolistic rents.B) Regulations shelter firms from changes in demand and cost, lowering its risk.C) Regulations can increase consumer confidence which increases customer loyalty to regulated firms.D) Depository institutions should be regulated no differently than any other corporation with no subsidies or special privileges.E) None of the aboveAnswer: A78.Samual Peltzman had an opposing view to George Stigler on the impact of regulation on banks. He contends that:A) Firms in regulated industries actually seek out regulations because they bring monopolistic rents.B) Regulations shelter firms from changes in demand and cost, lowering its risk.C) Regulations can increase consumer confidence which increases customer loyalty to regulated firms.D) Depository institutions should be regulated no differently than any other corporation with no subsidies or special privileges.E) None of the aboveAnswer: B79.There is an important debate raging today regarding whether banks should be regulated at all. George Benston contends that:A) Firms in regulated industries actually seek out regulations because they bring monopolistic rents.B) Regulations shelter firms from changes in demand and cost, lowering its risk.C) Regulations can increase consumer confidence which increases customer loyalty to regulated firms.D) Depository institutions should be regulated no differently than any other corporation with no subsidies or special privileges.E) None of the aboveAnswer: D80.The European Central Bank has the main goal of:A) Ensuring the economy grows at an adequate rate.B) Keeping unemployment low.C) Ensuring price stability.D) Ensuring an adequate and fair supply of loans.E) All of the aboveAnswer: C81.Which of the following has become the principal tool of central bank monetary policy todayA) Open market operationsB) Changing the discount rateC) Changing reserve requirementsD) Using moral suasionE) None of the aboveAnswer: A82.The Federal Reserve buys Treasury Bills in the open market. This will tend to:A) Cause interest rates in the market to riseB) Cause interest rates in the market to fallC) Cause reserves held at the Federal Reserve to decreaseD) Cause a decrease in the growth of deposits and loansE) All of the aboveAnswer: B83.Which federal banking act extends deposit insurance coverage on qualified retirement accounts from $100,000 to $250,000 and authorizes the FDIC to periodically increase deposit insurance coverage to keep up with inflationA) Sarbanes-Oxley ActB) The Gramm-Leach-Bliley ActC) Check 21 ActD) The FACT ActE) Federal Deposit Insurance Reform ActAnswer: E84.The Financial Services Regulatory Relief Act of 2006 does the following:A) Adds selected new service powers to depository institutionsB) Loosens regulations on depository institutionsC) Grants the Federal Reserve authority to pay interest on depository institutions’ legal reservesD) All of the aboveE) None of the aboveAnswer: D85.The Emergency Economic Stabilization Act passed in 2008 during the global credit crisis allowed the following:A) An emergency sale of “bad assets”B) Temporary increase of FDIC deposit insurance to $250,000 for all depositsC) Injections of capital by the government into banks and other qualified lendersD) Closer surveillance of the mortgage market participants, such as brokers and lendersE) All of the aboveAnswer: E。

Chapter 7Risk Management for Changing Interest Rates: Asset-Liability Management and Duration TechniquesFill in the Blank Questions1. The ___________________ view of assets and liabilities held that the amount andtypes of deposits was primarily determined by customers and hence the key decisiona bank needed to make was with the assets.Answer: asset management2. Recent decades have ushered in dramatic changes in banking. The goal of__________________ was simply to gain control of the bank's sources of funds.Answer: liability management3. The__________________________ is the interest rate that equalizes the currentmarket price of a bond with the present value of the future cash flows.Answer: yield to maturity (YTM)4. The __________________ risk premium on a bond allows the investor to be compensatedfor their projected loss in purchasing power from the increase in the prices of goods and services in the future.Answer: inflation5. The __________________ shows the relationship between the time to maturity and theyield to maturity of a bond. It is usually constructed using treasury securities since they are assumed to have no default risk.Answer: yield curve6. The __________________ risk premium on a bond reflects the differences in the easeand ability to sell the bond in the secondary market at a favorable price.Answer: liquidity7. __________________________ are those assets which mature or must be repriced withinthe planning period.Answer: Interest-sensitive assets8. __________________________ is the difference between interest-sensitive assets andinterest-sensitive liabilities.Answer: Dollar interest-sensitive gap9. A(n)__________________________ means that the bank has more interest-sensitiveliabilities than interest-sensitive assets.Answer: negative interest-sensitive gap (liability sensitive)10. The bank's__________________________ takes into account the idea that the speed(sensitivity) of interest rate changes will differ for different types of assets and liabilities.Answer: weighted interest-sensitive gap11. __________________________ is the coordinated management of both the bank's assetsand its liabilities.Answer: Funds management12. __________________________ is the risk due to changes in market interest rates whichcan adversely affect the bank's net interest margin, assets and equity.Answer: Interest rate risk13. The__________________________ is the rate of return on a financial instrument usinga 360 day year relative to the instrument's face value.Answer: bank discount rate14. The __________________________ component of interest rates is the risk premium dueto the probability that the borrower will miss some payments or will not repay the loan.Answer: default risk premium15. __________________ is the weighted average maturity for a stream of future cashflows. It is a direct measure of price risk.Answer: Duration16. __________________________ is the difference between the dollar-weighted durationof the asset portfolio and the dollar-weighted duration of the liability portfolio.Answer: Duration gap17. A(n)__________________________ duration gap means that for a parallel increase inall interest rates the market value of net worth will tend to decline.Answer: positive18. A(n)__________________________ duration gap means that for a parallel increasein all interest rates the market value of net worth will tend to increase.Answer: negative19. The __________________ refers to the periodic fluctuations in the scale of economicactivity.Answer: business cycle20. The__________________________ is equal to the duration of each individual type ofasset weighted by the dollar amount of each type of asset out of the total dollar amount of assets.Answer: duration of the asset portfolio21. The__________________________ is equal to the duration of each individual type ofliability weighted by the dollar amount of each type of asset out of the total dollar amount of assets.Answer: duration of the liability portfolio22. A bank is __________________ against changes in its net worth if its duration gapis equal to zero.Answer: immunized (insulated or protected)23. The relationship between a change in an asset's price and an asset’s change inthe yield or interest rate is captured by __________________________.Answer: convexity24. The change in a financial institution's __________________ is equal to differencein the duration of the assets and liabilities times the change in the interest rate divided by the starting interest rate times the dollar amount of the assets and liabilities.Answer: net worth25. When a bank has a positive duration gap a parallel increase in the interest rateson the assets and liabilities of the bank will lead to a(n) __________________ in the bank's net worth.Answer: decrease26. When a bank has a negative duration gap a parallel decrease in the interest rateson the assets and liabilities of the bank will lead to a(n)_________________________ in the bank's net worth.Answer: decrease27. U.S. banks tend to do better when the yield curve is upward-sloping because theytend to have ____________ maturity gap positions.Answer: positive28.One government-created giant mortgage banking firms which have subsequently beenprivatized is the .Answer: FNMA or Fannie Mae (or FHLMC or Freddie Mac)29.One part of interest rate risk is .This part of interest rate risk reflects that as interest rates rise, prices ofsecurities tend to fall.Answer: price risk30.One part of interest rate risk is .This part of interest rate risk reflects that as interest rates fall, any cash flowsthat are received before maturity are invested at a lower interest rate.Answer: reinvestment risk31.When a borrower has the right to pay off a loan early which reduced the lender’sexpected rate of return it is called .Answer: call risk32.In recent decades, banks have aggressively sought to insulate their assets andliability portfolios and profits from the ravages if interest rate changes. Manybanks now conduct their asset-liability management strategy with the help of an which often meets daily.Answer: asset-liability committee33. is interest income from loans andinvestments less interest expenses on deposits and borrowed funds divided by totalearning assets.Answer: Net interest margin (NIM)34. are those liabilities thatwhich mature or must be repriced within the planning period.Answer: Interest-sensitive liabilities35.Variable rate loans and securities are included as part offor banks.Answer: repriceable assets36.Money market deposits are included as part of forbanks.Answer: repriceable liabilities37.Interest sensitive assets less interest sensitive liabilities divided by totalassets of the bank is known as .Answer: relative interest sensitive gap38.Interest sensitive assets divided by interest sensitive liabilities is knownas .Answer: Interest sensitivity ratio39. is a measure of interest rateexposure which is the total difference in dollars between those assets andliabilities that can be repriced over a designated time period.Answer: Cumulative gap40. is the phenomenon that interest ratesattached to various assets often change by different amounts and at different speedsthan interest rates attached to various liabilities,Answer: basis riskTrue/False QuestionsT F 41. Usually the principal goal of asset-liability management is to maximize orat least stabilize a bank's margin or spread.Answer: TrueT F 42. Asset management strategy in banking assumes that the amount and kinds ofdeposits and other borrowed funds a bank attracts are determined largely byits management.Answer: FalseT F 43. The ultimate goal of liability management is to gain control over a financial institution's sources of funds.Answer: TrueT F 44. If interest rates fall when a bank is in an asset-sensitive position its net interest margin will rise.Answer: FalseT F 45. A liability-sensitive bank will experience an increase in its net interest margin if interest rates rise.Answer: FalseT F 46. Under the so-called liability management view in banking the key control lever banks possess over the volume and mix of their liabilities is price.Answer: TrueT F 47. Under the so-called funds management view bank management's control over assets must be coordinated with its control over liabilities so that assetand liability management are internally consistent.Answer: TrueT F 48. Bankers cannot determine the level or trend of market interest rates; instead, they can only react to the level and trend of rates.Answer: TrueT F 49. Short-term interest rates tend to rise more slowly than long-term interest rates and to fall more slowly when all interest rates in the market are headeddown.Answer: FalseT F 50. A financial institution is liability sensitive if its interest-sensitive liabilities are less than its interest-sensitive assets.Answer: FalseT F 51. If a bank's interest-sensitive assets and liabilities are equal than its interest revenues from assets and funding costs from liabilities will changeat the same rate.Answer: TrueT F 52. Banks with a positive cumulative interest-sensitive gap will benefit if interest rates rise, but lose income if interest rates decline.Answer: TrueT F 53. Banks with a negative cumulative interest-sensitive gap will benefit if interest rates rise, but lose income if interest rates decline.Answer: FalseT F 54. For most banks interest rates paid on liabilities tend to move more slowly than interest rates earned on assets.Answer: FalseT F 55. Interest-sensitive gap techniques do not consider the impact of changing interest rates on stockholders equity.Answer: TrueT F 56. Interest-sensitive gap, relative interest-sensitive gap and the interest-sensitivity ratio will often reach different conclusions as towhether the bank is asset or liability sensitive.Answer: FalseT F 57. The yield curve is constructed using corporate bonds with different default risks so the bank can determine the risk/return tradeoff for default risk.Answer: FalseT F 58. Financial securities that are the same in all other ways may have differences in interest rates that reflect the differences in the ease of selling thesecurity in the secondary market at a favorable price.Answer: TrueT F 59. Financial institutions face two major kinds of interest rate risk. These risks include price risk and reinvestment risk.Answer: TrueT F 60. Interest-sensitive gap and weighted interest-sensitive gap will always reach the same conclusion as to whether a bank is asset sensitive or liabilitysensitive.Answer: FalseT F 61. Weighted interest-sensitive gap is less accurate than interest-sensitive gap in determining the affect of changes in interest rates on net interest margin.Answer: FalseT F 62. A bank with a positive duration gap experiencing a rise in interest rates will experience an increase in its net worth.Answer: FalseT F 63. A bank with a negative duration gap experiencing a rise in interest rates will experience an increase in its net worth.Answer: TrueT F 64. Duration is a direct measure of the reinvestment risk of a bond.Answer: FalseT F 65. A bank with a positive duration gap experiencing a decrease in interest rates will experience an increase in its net worth.Answer: TrueT F 66. A bank with a negative duration gap experiencing a decrease in interest rates will experience an increase in its net worth.Answer: FalseT F 67. Duration is the weighted average maturity of a promised stream of future cash flows.Answer: TrueT F 68. Duration is a direct measure of the price risk of a bond.Answer: TrueT F 69. A bond with a greater duration will have a smaller price change in percentage terms when interest rates change.Answer: FalseT F 70. Long-term interest rates tend to change very little with the cycle of economic activity.Answer: TrueT F 71. A bank with a duration gap of zero is immunized against changes in the value of net worth due to changes in interest rates in the market.Answer: TrueT F 72. Convexity is the idea that the rate of change of an asset's price varies with the level of interest rates.Answer: TrueT F 73. The change in the market price of an asset's price from a change in market interest rates is roughly equal to the asset's duration times the change theinterest rate divided by the original interest rate.Answer: TrueT F 74. U.S. banks tend to do better when the yield curve is upward-sloping.Answer: TrueT F 75. Net interest margin tends to rise for U.S. banks when the yield curve is upward-sloping.Answer: TrueT F 76. Financial institutions laden with home mortgages tend be immune to interest-rate risk.Answer: FalseT F 77. If a Financial Institution's net interest margin is immune to interest-rate risk then so is its net worth.Answer: FalseMultiple Choice Questions78.When is interest rate risk for a bank greatest?A)When interest rates are volatile.B)When interest rates are stable.C)When inflation is high.D)When inflation is low.E)When loan defaults are high.Answer: A79. A bank’s IS GAP is defined as:A)The dollar amount of rate-sensitive assets divided by the dollar amount ofrate-sensitive liabilities.B)The dollar amount of earning assets divided by the dollar amount of totalliabilities.C)The dollar amount of rate-sensitive assets minus the dollar amount ofrate-sensitive liabilities.D)The dollar amount of rate-sensitive liabilities minus the dollar amount ofrate-sensitive assets.E)The dollar amount of earning assets times the average liability interest rate.Answer: C80.According to the textbook, the maturing of the liability management techniques,coupled with more volatile interest rates, gave birth to the __________________ approach which dominates banking today. The term that correctly fills in the blank in the preceding sentence is:A) Liability managementB) Asset managementC) Risk managementD) Funds managementE) None of the above.Answer: D81.The principal goal of interest-rate hedging strategy is to hold fixed a bank's:A) Net interest marginB) Net income before taxesC) Value of loans and securitiesD) Noninterest spreadE) None of the above.Answer: A82. A bank is asset sensitive if its:A) Loans and securities are affected by changes in interest rates.B) Interest-sensitive assets exceed its interest-sensitive liabilities.C) Interest-sensitive liabilities exceed its interest-sensitive assets.D) Deposits and borrowings are affected by changes in interest rates.E) None of the above.Answer: B83.The change in a bank's net income that occurs due to changes in interest rates equalsthe overall change in market interest rates (in percentage points) times_____________. The choice below that correctly fills in the blank in the preceding sentence is:A) Volume of interest-sensitive assetsB) Price risk of the bank's assetsC) Price risk of the bank's liabilitiesD) Size of the bank's cumulative gapE) None of the above.Answer: D84. A bank with a negative interest-sensitive GAP:A) Has a greater dollar volume of interest-sensitive liabilities thaninterest-sensitive assets.B) Will generate a higher interest margin if interest rates rise.C) Will generate a higher interest margin if interest rates fall.D) A and B.E) A and C.Answer: E85.The net interest margin of a bank is influenced by:A) Changes in the level of interest rates.B) Changes in the volume of interest-bearing assets and interest-bearingliabilities.C) Changes in the mix of assets and liabilities in the bank's portfolio.D) All of the above.E) A and B only.Answer: D86.The discount rate that equalizes the current market value of a loan or securitywith the expected stream of future income payments from that loan or security is known as the:A) Bank discount rateB) Yield to maturityC) Annual percentage rate (APR)D) Add-on interest rateE) None of the above.Answer: B87.The interest-rate measure often quoted on short-term loans and money marketsecurities such as U.S. Treasury bills is the:A) Bank discount rateB) Yield to maturityC) Annual percentage rate (APR)D) Add-on interest rateE) None of the aboveAnswer: A88. A bank whose interest-sensitive assets total $350 million and itsinterest-sensitive liabilities amount to $175 million has:A) An asset-sensitive gap of 525 millionB) A liability-sensitive gap of $175 millionC) An asset-sensitive gap of $175 millionD) A liability-sensitive gap of $350 millionE) None of the above.Answer: C89. A bank has a 1-year $1,000,000 loan outstanding, payable in four equal quarterlyinstallments. What dollar amount of the loan would be considered rate sensitive in the 0 – 90 day bucket?A)$0B)$250,000C)$500,000D)$750,000E)$1,000,000Answer: B90. A bank has Federal funds totaling $25 million with an interest rate sensitivityweight of 1.0. This bank also has loans of $105 million and investments of $65 million with interest rate sensitivity weights of 1.40 and 1.15 respectively. This bank also has $135 million in interest-bearing deposits with an interest rate sensitivity weight of .90 and other money market borrowings of $75 million with an interest rate sensitivity weight of 1.0. What is the weighted interest-sensitive gap for this bank?B) $-15C) -$50.25D) $34.25E) None of the aboveAnswer: A91. A bond has a face value of $1000 and five years to maturity. This bond has a couponrate of 13 percent and is selling in the market today for $902. Coupon payments are made annually on this bond. What is the yield to maturity (YTM) for this bond?A) 13%B) 12.75%C) 16%D) 11.45%E) Cannot be calculated from the information givenAnswer: C92. A treasury bill currently sells for $9,845, has a face value of $10,000 and has46 days to maturity. What is the bank discount rate on this security?A) 12.49%B) 12.13%C) 12.30%D) 2%E) None of the aboveAnswer: B93.The _______________ is determined by the demand and supply for loanable fundsin the market. The term that correctly fills in the blank in the preceding sentence is:A) The yield to maturityB) The banker's discount rateC) The holding period returnD) The risk-free real rate of interestE) The market rate of interest on a risky loanAnswer: D94. A bank with a positive interest-sensitive gap will have a decrease in net interestincome when interest rates in the market:B) FallC) Stay the sameD) A bank with a positive interest-sensitive gap will never have a decrease in netinterest incomeAnswer: B95.The fact that a consumer who purchases a particular basket of goods for $100 todayhas to pay $105 next year for the same basket of goods is an example of which of the following risks:A) Inflation riskB) Default riskC) Liquidity riskD) Price riskE) Maturity riskAnswer: A96. A bank has Federal Funds totaling $25 million with an interest rate sensitivityweight of 1.0. This bank also has loans of $105 million and investments of $65 million with interest rate sensitivity weights of 1.40 and 1.15 respectively. This bank also has $135 million in interest-bearing deposits with an interest rate sensitivity weight of .90 and other money market borrowings of $75 million with an interest rate sensitivity weight of 1.0. What is the dollar interest-sensitive gap for this bank?A) $50.25B) $-15C) -$50.25D) $34.25E) None of the aboveAnswer: B97.If a bank has a positive GAP, an increase in interest rates will cause interestincome to __________, interest expense to__________, and net interest income to __________.A)Increase, increase, increaseB)Increase, decrease, increaseC)Increase, increase, decreaseD)Decrease, decrease, decreaseE)Decrease, increase, increaseAnswer: A98.If a bank has a negative GAP, a decrease in interest rates will cause interest incometo __________, interest expense to__________, and net interest income to__________.A)Increase, increase, increaseB)Increase, decrease, increaseC)Increase, increase, decreaseD)Decrease, decrease, decreaseE)Decrease, decrease, increaseAnswer: E99. A treasury bill currently sells for $9,845, has a face value of $10,000 and has46 days to maturity. What is the yield to maturity on this security?A) 12.49%B) 12.13%C) 12.30%D) 2%E) None of the aboveAnswer: A100.The Third National Bank of Edmond reports a net interest margin of 5.83%. It has total interest revenues of $275 million and total interest expenses of $210 million.What does this bank's earnings assets have to be?A) $4717 millionB) $3602 millionC) $1115 millionD) $3.790 millionE) None of the aboveAnswer: C101.The Third National Bank of Edmond reports a net interest margin of 5.83%. It has total interest revenues of $275 million and total interest expenses of $210 million.This bank has earnings assets of $1115. Suppose this bank's interest revenues rise by 8 percent and its interest expenses and earnings assets rise by 10 percent next year. What is this bank's new net interest margin?A) 5.83%B) 7.09%C) 3.59%D) 5.38%E) 7.80%Answer: D102. Which of the following is part of funds management?A) The goal of funds management is simply to gain control over the bank's fundssources.B) Since the amount of deposits a bank holds is determined largely by its customers,the focus of the bank should be on managing the assets of the bank.C) Management of the bank's assets must be coordinated with management of the bank'sliabilities.D) The spread between interest revenues and interest expenses is unimportant.E) None of the aboveAnswer: C103. If Fifth National Bank's asset duration exceeds its liability duration and interest rates rise, this will tend to __________________ the market value of the bank's net worth.A) LowerB) RaiseC) StabilizeD) Not affectE) None of the aboveAnswer: A104.If Main Street Bank has $100 million in commercial loans with an average duration of 0.40 years; $40 million in consumer loans with an average duration of 1.75 years;and $30 million in U.S. Treasury bonds with an average duration of 6 years, what is Main Street's asset portfolio duration?A) 0.4 yearsB) 1.7 yearsC) 2.7 yearsD) 4.1 yearsE) None of the aboveAnswer: B105. A bank has an average asset duration of 4.7 years and an average liability duration of 3.3 years. This bank has $750 million in total assets and $500 million in total liabilities. This bank has:A) A positive duration gap of 8.0 years.B) A negative duration gap of 2.5 years.C) A positive duration gap of 1.4 years.D) A positive duration gap of 2.5 years.E) None of the above.Answer: D106. A bank has an average asset duration of 1.15 years and an average liability duration of 2.70 years. This bank has $250 million in total assets and $225 million in total liabilities. This bank has:A) A negative duration gap of 1.55 years.B) A positive duration gap of 1.28 years.C) A negative duration gap of 3.85 years.D) A negative duration gap of 1.28 years.E) None of the above.Answer: D107.The duration of a bond is the weighted average maturity of the future cash flows expected to be received on a bond. Which of the following is a true statement concerning duration?A) The longer the time to maturity, the greater the durationB) The higher the coupon rate, the higher the durationC) The shorter the duration, the greater the price volatilityD) All of the above are trueE) None of the above are trueAnswer: A108. A bond has a duration of 7.5 years. Its current market price is $1125. Interest rates in the market are 7% today. It has been forecasted that interest rates will rise to 9% over the next couple of weeks. How will this bank's price change in percentage terms?A) This bond's price will rise by 2 percent.B) This bond's price will fall by 2 percent.C) This bond's price will fall by 14 .02 percentD) This bond's price will rise by 14.02 percentE) This bond's price will not changeAnswer: C109. A bank has an average asset duration of 5 years and an average liability duration of 3 years. This bank has total assets of $500 million and total liabilities of $250 million. Currently, market interest rates are 10 percent. If interest rates fall by 2 percent (to 8 percent), what is this bank's change in net worth?A) Net worth will decrease by $31.81 millionB) Net worth will increase by $31.81 millionC) Net worth will increase by $27.27 millionD) Net worth will decrease by $27.27 millionE) Net worth will not change at allAnswer: B110. A bank has an average asset duration of 5 years and an average liability duration of 3 years. This bank has total assets of $500 million and total liabilities of $250 million. Currently, market interest rates are 10 percent. If interest rates fall by 2 percent (to 8 percent), what is this bank's duration gap?A) 2 yearsB) –2 yearsC) 3.5 yearsD) –3.5 yearsE) None of the aboveAnswer: C111. A bank has an average asset duration of 5 years and an average liability duration of 9 years. This bank has total assets of $1000 million and total liabilities of $850 million. Currently, market interest rates are 5 percent. If interest rates rise by 2 percent (to 7 percent), what is this bank's change in net worth?A) Net worth will decrease by $50.47 millionB) Net worth will increase by $50.47 millionC) Net worth will decrease by $240.95 millionD) Net worth will increase by $240.95 millionE) Net worth will not change at allAnswer: B112. A bank has an average asset duration of 5 years and an average liability duration of 9 years. This bank has total assets of $1000 million and total liabilities of $850 million. Currently, market interest rates are 5 percent. If interest rates rise by 2 percent (to 7 percent), what is this bank's duration gap?A) –4 yearsB) 4 yearsC) 2.65 yearsD) –2.65 yearsE) 12.65 yearsAnswer: D113. A bank has $100 million of investment grade bonds with a duration of 9.0 years.This bank also has $500 million of commercial loans with a duration of 5.0 years.This bank has $300 million of consumer loans with a duration of 2.0 years. This bank has deposits of $600 million with a duration of 1.0 years and nondeposit borrowings of $100 million with an average duration of .25 years. What is this bank's duration gap? These are all of the assets and liabilities this bank has.A) This bank has a duration gap of 14.75 yearsB) This bank has a duration gap of 15.03 yearsC) This bank has a duration gap of 3.55 yearsD) This bank has a duration gap of 3.75 yearsE) This bank has a duration gap of 5.15 yearsAnswer: D114. Which of the following statements is true concerning a bank's duration gap?A) If a bank has a positive duration gap and interest rates rise, the bank's networth will declineB) A bank with a positive duration gap has a longer average duration for its assetsthan for its liabilitiesC) If a bank has a zero duration gap and interest rates rise, the bank's net worthwill not changeD) If a bank has a negative duration gap and interest rates rise, the bank's networth will increaseE) All of the above are true statementsAnswer: E115. A bank has an average duration for its asset portfolio of 5.5 years. This bank has total assets of $1000 million and total liabilities of $750 million. If this bank has a zero duration gap, what must the duration of its liabilities portfolio be?A) 7.33 yearsB) 4.125 yearsC) 7.5 yearsD) 5.5 yearsE) None of the aboveAnswer: A116. A bond has a face value of $1000 and coupon payments of $80 annually. This bond matures in three years and is selling for $1000 in the market. Market interest rates are 8%. What is this bond's duration?A) 3 yearsB) 2.78 years。

商业银行管理彼得S罗斯英文原书第8版英语试题库Chap001商业银行管理彼得S罗斯英文原书第8版英语试题库Chap001是一本经典的商业银行管理教材，该教材共分为八个章节，本文将为大家概述第一章的主要内容和考点。

第一章：商业银行与金融体系商业银行作为金融体系的核心组成部分，扮演着促进经济发展、风险管理和金融中介等多重角色。

在这一章中，我们将深入探讨商业银行的定义、功能以及与其他金融机构的关系。

1.1 商业银行简介商业银行是指一种以盈利为目的并且经营存款、贷款和其他金融服务的金融机构。

商业银行的主要特点包括：接受存款、发放贷款、支付结算、信用创造和风险管理等方面。

1.2 商业银行的功能商业银行的主要功能包括：存款业务、贷款业务、国际业务、信用业务、投资业务以及其他金融衍生品业务。

商业银行通过这些功能为个人、家庭和企业提供全方位的金融服务。

1.3 商业银行与其他金融机构的关系商业银行与其他金融机构如证券公司、保险公司和投资基金公司等之间存在紧密的联系和合作关系。

商业银行提供资金支持和资金流动性，为其他金融机构的运营提供必要的支持。

1.4 商业银行管理的挑战商业银行管理面临着多方面的挑战，包括竞争压力、市场风险、信用风险、资产负债管理等。

商业银行需要有效的管理措施和风险管理工具来应对这些挑战。

1.5 商业银行监管商业银行是金融体系中最重要的组成部分之一，其监管对于金融稳定和社会经济的发展至关重要。

监管机构通过制定监管规定、开展监督检查和提供政策指导等方式来确保商业银行行为的合规性和稳健性。

1.6 商业银行的未来发展随着科技的进步和金融创新的不断涌现，商业银行面临着新的发展机遇和挑战。

商业银行需要积极应对市场变化和技术革新，加强内部管理和业务转型，以适应金融行业的发展趋势。

总结：本章主要介绍了商业银行作为金融体系核心的定义、功能、与其他金融机构的关系，以及管理中面临的挑战和监管情况。

商业银行作为重要的金融服务提供者，在经济发展和金融稳定中发挥着重要作用。

Chapter 15The Management of CapitalFill in the Blank Questions1. The risk that has to do with banks trading in foreign currencies is called_________________________.Answer: exchange risk2. The risk that has to do with fraud, embezzlement and bank robberies is called__________________.Answer: crime risk3. _________________________ is measured by the par value of the shares of commonequity outstanding.Answer: Common stock4. __________________ is the amount in excess of par value paid by the bank'sshareholders.Answer: Surplus5. _________________________ are the net earnings of the bank which have been keptby the bank rather than distributed as dividends to stockholders.Answer: Undivided Profits (or retained earnings)6. Core capital such as common stock, surplus, undivided profits, qualifyingnoncumulative preferred stock, etc. is referred to as __________________ capital as defined by the Basel agreement.Answer: Tier 17. The international treaty involving the . and 11 other leading industrializedcountries to impose common capital requirements on all banks is known as the_________________________.Answer: Basel Agreement8. Supplemental capital such as the allowance for loan losses, subordinated debt,mandatory convertible debt, intermediate-term preferred stock, cumulativepreferred perpetual stock and equity notes is more commonly known as _________________________.Answer: Tier 2 capital9. When items on a bank's balance sheet are multiplied by the appropriaterisk-weighting factor they are often called _________________________.Answer: risk-weighted assets10. The fact that a bank may suffer deficiencies in quality control, inefficienciesin producing and delivering of services, weather damage, aging or faulty computer systems, errors in judgment by management and fluctuations in economy that could adversely affect the bank's performance is known as _________________________ risk.Answer: operational11. One defense against risk for the bank is to spread out a bank's credit accountsand deposits among a wide variety of customers, including large and small accounts different industries, etc. This defense is known as _________________________.Answer: portfolio diversification12. One defense against risk is for the bank to seek out customers located in differentcommunities or in different countries. This defense is known as_________________________.Answer: geographic diversification13. When all else fails, the ultimate defense against risk in banking is_________________________.Answer: owners' capital (net worth)14. The largest component of capital among thrift institutions is _____________.Answer: retained earnings15. The largest component of capital among banks is ____________.Answer: surplus16. ____________ models attempt to measure price or market risk of a portfolio of assetsand attempt to determine the maximum loss they might sustain over a designated period of time.Answer: Value at risk (VaR)17. The latest revision to the Basel accord is known as __________ and will affect onlyabout 20 of the largest . banks and a handful of leading foreign banks.Answer: Basel II18. ____________ models measure lender exposure to defaults or credit downgrades.Answer: Credit Risk19. Credit risk models will be ________ widely used when Basel II takes effect.Answer: more20.At the center of the debate of the Basel Agreement is the ,headquartered in Basel Switzerland , which assists central banks in theirtransactions with each other and serves as a forum for international financial issues.Answer: Bank for International Settlements (BIS)21. represents funds set aside forcontingencies such as legal action against the institution as well as providinga reserve for dividends expected to be paid but not yet declared and a sinkingfund to retire stock or debt in the future.Answer: Equity reserves22. are debtsecurities repayable from the sale of stock.Answer: Equity commitment notes23. is a hybrid form ofequity capital issued to investors through a trust company, The funds raise are loaned to the financial firm. Dividends paid to stockholders on this time of capital are tax deductible.Answer: Trust preferred stock24. is long-term debtcapital whose claims legally follow claims of depositors.Answer: Subordinated notes and debentures25. for banksinclude mortgage servicing rights and purchased credit card relationships and can be counted as part of bank capital.Answer: Identifiable intangible assetsTrue/False QuestionsT F 26. In the field of banking, capital refers principally to those funds contributed by a bank's owners.Answer: TrueT F 27. According to the textbook capital and risk are intimately related to each other.Answer: TrueT F 28. One fundamental purpose for regulating capital is to limit losses to the federal government arising from deposit insurance claims.Answer: TrueT F 29. Deposit insurance subsidized by government encourages banks to increase their ratios of capital to deposits.Answer: FalseT F 30. Tier 2 includes undivided profits.Answer: FalseT F 31. Core capital includes the surplus account for stock.Answer: TrueT F 32. Under the international capital (Basel) agreement Tier 2 capital must be raised to a minimum of 4 percent of risk-weighted assets.Answer: FalseT F 33. Off-balance-sheet commitments of banks carry capital requirements under the international (Basel) capital requirements.Answer: TrueT F 34. Portfolio diversification refers to seeking out customers located in different communities or countries, which presumably will experiencedifferent economic conditions.Answer: FalseT F 35. Geographic diversification refers to the spreading out credit accounts and deposits among a wide variety of customers, including large and smallbusiness accounts, different industries, and households with a variety ofsources of income and collateral.Answer: FalseT F 36. The last line of defense against bank failure is owner's capital, according to the textbook.Answer: TrueT F 37. Under the FDIC Improvement Act of 1991 a . bank possessing a leverage ratio greater than 4 percent would be considered well capitalized.Answer: FalseT F 38. Under the FDIC Improvement Act of 1991 a bank whose leverage ratio drops to2 percent or less is considered to be critically undercapitalized.Answer: TrueT F 39. Recent research suggests that interest-rate contracts display considerably less risk exposure than do foreign-currency contracts.Answer: TrueT F 40. The Basel Agreement on capital as drafted in the 1980s failed to deal with market risk.Answer: TrueT F 41. If a bank benefits when the value of a foreign currency rises, the bank is said to be in a short position.Answer: FalseT F 42. If a bank benefits when a foreign currency declines in value, then the bank is in a long position.Answer: FalseT F 43. If the ratio of tangible equity capital to total assets is 2 percent or less it is subject to being placed in conservatorship or receivership if itscapital ratios are not increased within a prescribed period of time even ifits net worth is still positive.Answer: TrueT F 44. According to recent research, bank stock prices usually drop within a week after a dividend cut is announced.Answer: TrueT F 45. Equity notes are considered to be part of Tier 1 capital.Answer: FalseT F 46. The most important source of thrift capital in terms of dollar volume is common stock (par value).Answer: FalseT F 47. The daily rate at which robberies have occurred in the . has continued to climb in the 1990s.Answer: FalseT F 48. One of the reasons to regulate the capital position of banks is to limit the risk of bank failures, especially large bank failures.Answer: TrueT F 49. Deposits with the Federal Reserve banks are considered to have moderate credit risk and are therefore placed in the 50 percent risk weight category.Answer: FalseT F 50. The largest component of capital among banks is retained earnings.Answer: FalseT F 51. VaR models provide a single number which indicates the potential for losses on a portfolio of assets.Answer: TrueT F 52. VaR models are most successful in assessing potential risk when the assets are non-traded.Answer: FalseT F 53. Credit risk models will probably not be needed when Basel II takes effect.Answer: FalseT F 54. One of the key innovations which have been proposed in Basel II is to require banks to hold capital against operational risk.Answer: TrueT F 55. Basel II will require each bank to determine its own capital requirements based on its own calculated risk exposure.Answer: TrueT F 56. It is anticipated that Basel II may lower capital requirements for the largest banks.Answer: TrueT F 57. The global financial crisis of 2007-2009 highlighted the importance of taking into consideration a bank’s exposure to market risk that arise from changesin interest rates, security prices, and currency.Answer: TrueT F 58. Smaller banks rely more heavily on internally generated capital than larger banks.Answer: TrueT F 59. A well-capitalized institution has a ratio of capital to risk-weighted assets of at least 10 percent and faces no significant regulatory restrictions onits expansion.Answer: TrueT F 60. Regulatory capital focus on the market value of equity.Answer: FalseMultiple Choice Questions61.According to the textbook the role of capital is to:A) Provide a cushion against failure risk.B) Provide funds needed to organize, open, and operate a bank.C) Promote public confidenceD) Support growth and the development of new servicesE) All of the above.Answer: E62.The textbook discusses several alternative defenses banks have against risk. Thesedefenses include:A) Quality managementB) Portfolio diversificationC) Geographic diversificationD) Deposit insuranceE) All of the above.Answer: E63.Measured by dollar volume the largest category of capital at . banks is:A) Par value of common stockB) Subordinated notes and debenturesC) SurplusD) Undivided profits and capital reservesE) None of the above.Answer: C64.The fundamental purposes of regulating bank capital cited in the textbook includewhich of the following?A) To limit the risk of bank failures.B) To preserve public confidence in banks.C) To limit losses to the federal government arising from insurance claims.D) All of the above.E) A and B only.Answer: D65.The Internal Capital Growth Rate for a bank is a function of which of the followingfactors?A) Profit margin.B) Asset utilization.C) Equity multiplier.D) Earnings retention ratio.E) All of the above.Answer: E66.Second National Bank is forecasting a return on equity of 15 percent for this year.The board of directors wants to maintain its current policy of paying the bank's stockholders 40 percent of any net earnings the bank will earn. How fast can the bank's assets grow this year without jeopardizing its ratio of capital to assets?A) 15 percent.B) 9 percent.C) 8 percent.D) 6 percent.E) None of the aboveAnswer: B67.Possible breakdowns in quality control, inefficiencies in producing and deliveringfinancial services, weather damage, aging or faulty computer systems and simple errors in judgment by bank management illustrate what form of risk faced by banks?A) Credit riskB) Liquidity riskC) Interest-rate riskD) Operational riskE) None of the aboveAnswer: D68.The ratio of core capital to average assets is called the:A) Supplemental Capital ratioB) Leverage ratioC) Long-term capital ratioD) GAAP capital ratioE) None of the above.Answer: B69.The risk that a customer the bank has entered into a contract with will fail topay or to perform, forcing the bank to find a replacement contract that may be less satisfactory is what form of risk listed below?A) Counterparty riskB) Interest-rate riskC) Operating riskD) Credit riskE) Liquidity riskAnswer: A70.If a bank benefits when a foreign currency declines in value, then the bank mustbe in a __________ position. The term below that correctly fills in the blank in the preceding sentence is:A) LongB) ShortC) NegativeD) Credit riskE) None of the aboveAnswer: B71.In the United States a 'well capitalized' bank must have a ratio of capital torisk-weighted assets of at least:A) 6 percentB) 8 percentC) 10 percent.D) 5 percent.E) None of the aboveAnswer: C72.In the United States a bank to be considered 'adequately capitalized' must havea ratio of Tier 1 (or core) capital to risk-weighted assets of at least:A) 8 percentB) 6 percentC) 10 percentD) 4 percentE) None of the aboveAnswer: D73. A "well capitalized" bank in the United States must have a leverage ratio of atleast:A) 5 percentB) 4 percentC) 6 percentD) 8 percentE) None of the aboveAnswer: B74. A bank has $100 million in assets in the 0 percent risk weight category, $200 millionin assets in the 20 percent risk weight category, $500 million in assets in the50 percent risk weight category and $750 million in assets in the 100 percent riskweight category. This bank has $57 million in core (Tier 1) capital. What is this bank's ratio of Tier 1 capital to risk-weighted assets?A) percentB) percentC) percentD) percentE) None of the aboveAnswer: D75. A bank has a profit margin of 5 percent, an asset utilization ratio of 11 percent ,an equity multiplier of 12 and a retention ratio of 60 percent. What is this bank's ICGR?A) percentB) percentC) percentD) .33 percentE) None of the aboveAnswer: B76.Which of the following would be an example of Tier 1 capital?A) Subordinated debt capital instruments with an original maturity of at least 5yearsB) Allowance for loan and lease lossesC) Minority interest in the equity accounts of consolidated subsidiariesD) Intermediate term preferred stockE) All of the aboveAnswer: C77.Which of the following would be an example of Tier 2 capital?A) Subordinated debt capital instruments with an original maturity of at least 5yearsB) Undivided profitsC) Minority interest in the equity accounts of consolidated subsidiariesD) Qualifying noncumulative preferred stockE) All of the aboveAnswer: A78.Which of the following would be an example of crime risk?A) A bank manager that embezzles $1,000,000 from the bankB) A bank that loses $500,000 from trading in foreign currenciesC) A $1,000,000 loan to a business on which no interest and principal has beencollected in 2 yearsD) A bank manager predicts that interest rates will rise. However interest ratesfall causing the bank 's net income to fall by $250,000E) All of the above are examples of crime riskAnswer: A79.Which of the following assets fits into the 0 percent risk weight category?A) CashB) Deposits at the Federal ReserveC) Treasury BillsD) GNMA mortgage-backed securitiesE) All of the above fit into the 0 percent risk weight categoryAnswer: E80. A bank that is 'well-capitalized':A) Faces no significant regulatory restrictionsB) Cannot accept broker placed deposits without regulatory approvalC) Has limits on dividends and management fees it is allowed to pay and limits onthe maximum asset growth rate among other restrictionsD) Will be placed into conservatorship or receivership if it its capital level isnot increased within a certain time limit.E) None of the aboveAnswer: A81. A bank that is 'critically undercapitalized':A) Faces no significant regulatory restrictionsB) Cannot accept broker-placed deposits without regulatory approvalC) Has limits on dividends and management fees it is allowed to pay and limits onthe maximum asset growth rate among other restrictionsD) Will be placed into conservatorship or receivership if it its capital level isnot increased within a certain time limit.E) None of the aboveAnswer: D82. A bank that is adequately capitalized:A) Faces no significant regulatory restrictionsB) Cannot accept broker-placed deposits without regulatory approvalC) Has limits on dividends and management fees it is allowed to pay and limits onthe maximum asset growth rate among other restrictionsD) Will be placed into conservatorship or receivership if it its capital level isnot increased within a certain time limit.E) None of the aboveAnswer: B83.Which of the following is in the 100 percent risk-weight category?A) CashB) General obligation municipal bondsC) Residential mortgage loansD) Credit card loansE) None of the aboveAnswer: D84.Which of the following is in the 50 percent risk-weight (moderate) category?A) CashB) General Obligation Municipal BondsC) Residential Mortgage LoansD) Credit Card LoansE) None of the aboveAnswer: C85.Which of the following is in the 20 percent risk-weight (low) category?A) CashB) General obligation municipal bondsC) Residential mortgage loansD) Credit card loansE) None of the aboveAnswer: B86. A bank has a ROE of 14 percent and a ROA of 2 percent. What is this bank's equitycapital to total assets ratio?A) percentB) percentC) percentD) 16 percentE) None of the aboveAnswer: B87. A bank has $200 million in assets in the 0 percent risk-weight category. It has$400 million in assets in the 20 percent risk-weight category. It has $1000 million in assets in the 50 percent risk-weight category and has $1000 million in assets in the 100 percent risk-weight category. This bank has $96 million in Tier 1 capitaland $48 million in Tier 2 capital. What is this bank's ratio of Tier 1 capital to risk assets?A) percentB) percentC) percentD) percentE) None of the aboveAnswer: A88. A bank has $200 million in assets in the 0 percent risk-weight category. It has$400 million in assets in the 20 percent risk-weight category. It has $1000 million in assets in the 50 percent risk-weight category and has $1000 million in assets in the 100 percent risk-weight category. This bank has $96 million in Tier 1 capital and $48 million in Tier 2 capital. What is this bank's ratio of Tier 2 capital to risk assets?A) percentB) percentC) percentD) percentE) None of the aboveAnswer: B89. A bank has $200 million in assets in the 0 percent risk-weight category. It has$400 million in assets in the 20 percent risk-weight category. It has $1000 million in assets in the 50 percent risk-weight category and has $1000 million in assets in the 100 percent risk-weight category. This bank has $96 million in Tier 1 capital and $48 million in Tier 2 capital. What is this bank's ratio of total capital to risk assets?A) percentB) percentC) percentD) percentE) None of the aboveAnswer: C90. A bank has a net profit margin of percent. It has an asset utilization ratio of45 percent and has an equity multiplier of 12. It retains 40 percent of its earningseach year. What is this bank's internal capital growth rate?A) percentB) percentC) percentD) percentE) None of the aboveAnswer: C91.The revised Basel I rules impose capital requirements for market risk on:A) Only the largest banksB) Only the smallest banksC) Only moderate size banksD) All banksE) No banksAnswer: A92.Bank debt which appears to be highly sensitive to the market perception of the bank'srisk is which of the following?A) DepositsB) Fed fundsC) ReposD) Subordinated debt capitalE) Preferred stockAnswer: D93.Bank operational risk includes:A) Employee fraudB) Account errorsC) Computer breakdownsD) Natural disastersE) All of the aboveAnswer: E94.The issue of correctly adding up all of the different types of bank risk exposureis known as:A) Risk tallyingB) Summing riskC) Risk aggregationD) Risk accumulationE) Risk totalityAnswer: C95.For a bank with deficient capital ratios, which of the following actions could berequired by regulators to increase the capital ratios, all else constant?A)Cut the bank's dividend paymentB)Increase the bank's leverageC)Reduce the bank’s holdings of cashD)Increase the bank's growth rate by making additional commercial loans.E)Reduce the bank's holdings of Treasury securities.Answer: A96.Basel II has a different set of rules for different bank size categories and thenumber of categories is:A) twoB) threeC) fourD) fiveE) tenAnswer: A97.Which of the following would be an example of exchange risk?A) A bank manager embezzles $1,000,000 from the bankB) A bank that loses $500,000 from trading in foreign currenciesC) A $1,000,000 loan to a business on which no interest or principal has beencollected in 2 yearsD) A bank manager predicts interest rates will rise. However interest rates fallcausi ng the bank’s net income to fall by $250,000E) All of the above are examples of exchange riskAnswer: B98.Which of the following would be an example of credit risk?A) A bank manager embezzles $1,000,000 from the bankB) A bank that loses $500,000 from trading in foreign currenciesC) A $1,000,000 loan to a business on which no interest or principal has beencollected in 2 yearsD) A bank manager predicts interest rates will rise. However interest rates fallcausing the bank’s net income to fall by $250,000E) All of the above are examples of credit riskAnswer: C99.Which of the following would be an example of interest rate risk?A) A bank manager embezzles $1,000,000 from the bankB) A bank that loses $500,000 from trading in foreign currenciesC) A $1,000,000 loan to a business on which no interest or principal has beencollected in 2 yearsD) A bank manager predicts interest rates will rise. However interest rates fallcausing the bank’s net income to fall by $250,000E) All of the above are examples of interest rate risk?Answer: D100.Which of the following would be an example of operational risk?A) A bank teller manages to steal $250,000 over a period of several monthsB) An out of date computer system causes the bank to lose $750,000C) A bank is forced to sell $1,000,000 in loans at a loss in order to meet theneeds of depositorsD) A $500,000 loan the bank has made has been deemed uncollectableE) None of the above are examples of operational riskAnswer: B101.Which of the following would be an example of liquidity risk?A) A bank teller manages to steal $250,000 over a period of several monthsB) An out of date computer system causes the bank to lose $750,000C) A bank is forced to sell $1,000,000 in loans at a loss in order to meet theneeds of depositorsD) A $500,000 loan the bank has made has been deemed uncollectableE) None of the above are examples of liquidity riskAnswer: C102.Which of the following would not be an example of operational risk?A) A bank on the coast of Louisiana is hit by a hurricane and is flooded for 6weeksB) A bank employee acting as a derivatives trader is also the one who writes thereports on profits and losses in derivatives trading at the end of each dayC) The banks older computer system breaks down causing a loss of service to customersfor 2 weeksD) A bank robber robs a teller at gun point and gets away before police can getto the bankE) All of the above are examples of operational riskAnswer: D103.The Jennings Bank of Texas wants to protect itself from credit risk by making large loans to corporate customers, by making residential mortgages to families, by making agriculture loans to farmers and ranchers in the area, by making small business loans to business along main street and by making automobile loans for the car dealership across the street from the bank. What defense against risk is this bank making?A) Portfolio diversificationB) Geographic diversificationC) Quality managementD) Increasing owners’ capitalE) All of the aboveAnswer: A104.The Michelson Bank of Stetson wants to protect itself from risk. It decides to make loans in Florida, Georgia, Texas and Oklahoma as well as invest in municipal bonds from California and Oregon. What defense against risk is this bank making?A) Portfolio diversificationB) Geographic diversificationC) Quality managementD) Increasing owners’ capitalE) All of the aboveAnswer: B105.The Perdue Bank of Houston has just hired a new manager who has a reputation of anticipating potential problems and acting quickly to prevent those problems so that the bank stays healthy and profitable. What defense against risk is this bank making?A) Portfolio diversificationB) Geographic diversificationC) Quality managementD) Increasing o wners’ capitalE) All of the aboveAnswer: C106.The Norton Bank of Illinois has just issued trust preferred stock. What defense against risk is this bank making?A) Portfolio diversificationB) Geographic diversificationC) Quality managementD) Incr easing owners’ capitalE) All of the aboveAnswer: D107.What type of preferred stock has become popular among large banks in recent years, partly because dividends paid are tax deductible for the issuing institution?A) Cumulative preferred stockB) Noncumulative preferred stockC) Convertible preferred stockD) Trust preferred stockE) All of the aboveAnswer: D108.Even if individual banks are good at forecasting risk using VAR models there may still be problems because losses may occur at several banks at the same time due to the interdependency of the financial system, magnifying each bank’s risk exposure and possibly causing a major problem for regulators. The book calls this:A) Systematic riskB) Operational riskC) Credit riskD) Market riskE) Liquidity riskAnswer: A109.There are three pillars of Basel II. One of them wants to make market disciplinea powerful force compelling risky banks to lower their risk exposure. What doesBasel II want to do to make this happen?A) Require minim um capital requirement based on the bank’s own evaluation of itsriskB) Require greater public disclosure of each bank’s true financial conditionC) Expand the risks to be evaluated to include credit risk, market risk andoperational riskD) Require su pervisory review of each bank’s risk evaluation proceduresE) All of the aboveAnswer: B110.A bank has capital to risk weighted assets of %, Tier 1 capital to risk weighted assets of % and a leverage ratio of %. What type of bank is this?A) Well capitalizedB) Adequately capitalizedC) UndercapitalizedD) Significantly undercapitalizedE) Critically undercapitalizedAnswer: A111.A bank has capital to risk weighted assets of %, Tier 1 capital to risk weighted assets of 5% and a leverage ratio of %. What type of bank is this?A) Well capitalizedB) Adequately capitalizedC) UndercapitalizedD) Significantly undercapitalizedE) Critically undercapitalized。

商业银行管理彼得S.罗斯第八版课后答案chapter_01CHAPTER 1AN OVERVIEW OF BANKS AND THE FINANCIAL-SERVICES SECTORGoal of This Chapter: In this chapter you will learn about the many roles financial service providers play in the economy today. You will examine how and why the banking industry and the financial services marketplace as a whole is rapidly changing, becoming new and different as we move forward into the future. You will also learn about new and old services offered to the public.Key Topics in This ChapterPowerful Forces Reshaping the IndustryWhat is a Bank?The Financial System and Competing Financial-Service InstitutionsOld and New Services Offered to the PublicKey Trends Affecting All Financial-Service FirmsAppendix: Career Opportunities in Financial ServicesChapter OutlineI. I ntroduction: P owerful Forces Reshaping the IndustryII. W hat Is a Bank?A. D efined by the Functions It Serves and the Roles It Play:B. B anks and their Principal CompetitorsC. Legal Basis of a BankD. D efined by the Government Agency That Insures Its DepositsIII.The Financial System and Competing Financial-Service InstitutionsA.Savings AssociationsB.Credit UnionsC.Money Market FundsD.Mutual FundsE.Hedge FundsF.Security Brokers and DealersG.Investment BankersH.Finance CompaniesI.Financial Holding CompaniesJ.Life and Property/Casualty Insurance CompaniesIV. T he Services Banks and Many of Their Closest Competitors Offer the PublicA. S ervices Banks Have Offered Throughout History1.Carrying Out Currency Exchanges2.Discounting Commercial Notes and Making Business Loans3.Offering Savings Deposits4.Safekeeping of Valuables and Certification of Value5.Supporting Government Activities with Credit6.Offering Checking Accounts (Demand Deposits)7.Offering Trust ServicesB. S ervices Banks and Many of Their Financial-Service Competitors HaveOffered More Recently1.Granting Consumer Loans2.Financial Advising3.Managing Cash4.Offering Equipment Leasing5.Making Venture Capital Loans6.Selling Insurance Policies7.Selling Retirement PlansC. Dealing in Securities: Offering Security Brokerage and Investment Banking Services1. Offering Security Underwriting2. Offering Mutual Funds and Annuities3. Offering Merchant Banking Services4. Offering Risk Management and Hedging ServicesV. Key Trends Affecting All Financial-Service FirmsA. S ervice ProliferationB. R ising CompetitionC. G overnment DeregulationD. A n Increasingly Interest-Sensitive Mix of FundsE. T echnological Change and AutomationF. C onsolidation and Geographic ExpansionG. C onvergenceH. G lobalizationVI. T he Plan of This BookVII. S ummaryConcept Checks1-1. What is a bank? How does a bank differ from most other financial-service providers?A bank should be defined by what it does; in this case, banks are generally those financial institutions offering the widest range of financial services. Other financial service providers offer some of the financial services offered by a bank, but not all of them within one institution.1-2. Under U.S. law what must a corporation do to qualify and be regulated as a commercial bank?Under U.S. law, commercial banks must offer two essential services to qualify as banks for purposes of regulation and taxation, demand (checkable) deposits and commercial loans.More recently, Congress defined a bank as any institution that could qualify for deposit insurance administered by the FDIC.1-3.Why are some banks reaching out to become one-stop financial service conglomerates? Is this a good idea in your opinion?There are two reasons that banks are increasingly becoming one-stop financial service conglomerates. The first reason is the increased competition from other types of financial institution s and t he erosion of banks’ traditional service areas. The second reason is the Financial Services Modernization Act which has allowed banks to expand their role to be full service providers.1-4. Which businesses are banking’s closest and toughest com petitors? What services do they offer that compete directly with banks’ services?Among a bank’s closest competitors are savings associations, credit unions, money market funds, mutual funds, hedge funds, security brokers and dealers, investment banks, finance companies, financial holding companies, and life and property-casualty insurance companies. All of these financial service providers are converging and embracing each other’s innovations. The Financial Services Modernization Act has allowed many of these financial service providers to offer the public one-stop shopping for financial services.1-5. What is happening to banking’s share of the financial mark etplace and why? What kind of banking and financial system do you foresee for the future if present trends continue?The Financial Services Modernization Act of 1999 allowed many of the banks’ closest competitors to offer a wide array of financial services thereby taking away market share from “traditional” banks. Banks and their closest competitors areconverging into one-stop shopping for financial services and this trend should continue in the future1-6. What different kinds of services do banks offer the public today? What services do their closest competitors offer?Banks offer the widest range of services of any financial institution. They offer thrift deposits to encourage saving and checkable (demand) deposits to provide a means of payment for purchases of goods and services. They also provide credit through direct loans, by discounting the notes that business customers hold, and by issuing credit guarantees. Additionally, they make loans to consumers for purchases of durable goods, such as automobiles, and for home improvements, etc. Banks also manage the property of customers under trust agreements and manage the cash positions of their business customers. They purchase and lease equipment to customers as an alternative to direct loans. Many banks also assist their customers with buying and selling securities through discount brokerage subsidiaries, the acquisition and sale of foreign currencies, the supplying of venture capital to start new businesses, and the purchase of annuities to supply future funding at retirement or for other long-term projects such as supporting a college education. All of these services are also offered by their closest competitors. Banks and their closest competitors are converging and becoming the financial department stores of the modern era.1-7. What is a financial department store? A universal bank? Why do you think these institutions have become so important in the modern financial system? Financial department store and universal bank refer to the same concept. A financial department store is an institution where banking, fiduciary, insurance, and security brokerage services are unified under one roof. A bankthat offers all these services is normally referred to as a universal bank. These have become important because of convergence and changes in regulations that have allowed financial service providers to offer all services under one roof1-8. Why do banks and other financial intermediaries exist in modern society, according to the theory of finance?There are multiple approaches to answering this question. The traditional view of banks as financial intermediaries sees them as simultaneously fulfilling the financial-service needs of savers (surplus-spending units) and borrowers(deficit-spending units), providing both a supply of credit and a supply of liquid assets. A newer view sees banks as delegated monitors who assess and evaluate borrowers on behalf of their depositors and earn fees for supplying monitoring services. Banks also have been viewed in recent theory as suppliers of liquidity andtransactions services that reduce costs for their customers and, through diversification, reduce risk. Banks are also critical in the payment system for goods and services and have played an increasingly important role as a guarantor and a risk management role for customers.1-9. How have banking and the financial services market changed in recent years? What powerful forces are shaping financial markets and institutions today? Which of these forces do you think will continue into the future?Banking is becoming a more volatile industry due, in part, to deregulation which has opened up individual banks to the full force of the financial marketplace. At the same time the number and variety of banking services has increased greatly due to the pressure of intensifying competition from nonbank financial-service providers and changing public demand for more conveniently and reliably provided services. Adding to the intensity of competition, foreign banks have enjoyed success in their efforts to enter countries overseas and attract away profitable domestic business and household accounts.1-10. Can you explain why many of the forces you named in the answer to the previous question have led to significant problems for the management of banks and other financial firms and their stockholders?The net result of recent changes in banking and the financial services market has been to put greater pressure upon their earnings, resulting in more volatile returns to stockholders and an increased bank failure rates. Some experts see banks' role and market share shrinking due to restrictive government regulations and intensifying competition. Institutions have also become more innovative in their service offerings and in finding new sources of funding, such as off-balance-sheet transactions. The increased risk faced by institutions today, therefore, has forced managers to more aggressively utilize a wide array of tools and techniques to improve and stabilize their earnings streams and manage the various risks they face. 1-11. What do you think the financial services industry will look like 20 years from now? What are the implications of your projections for its management today? There appears to be a trend toward continuing consolidation and convergence. There are likely to be fewer financial service providers in the future and many of these will be very large and provide a broad range of financial services under one roof. In addition, global expansion will continue and will be critical to the survival of many financial service providers. Management of financial service providers willhave to be more technologically astute and be able to make a more diverse set of decisions including decisions about mergers, acquisitions and global expansion as well as new services to add to the firm.Problems and Projects1. You have just been hired as the marketing officer for the new First National Bank of Vincent, a suburban banking institution that will soon be serving a local community of 120,000 people. The town is adjacent to a major metropolitan area with a total population of well over 1 million. Opening day for the newly chartered bank is just two months away, and the president and the board of directors are concerned that the new bank may not be able to attract enough depositors and good-quality loan customers to meet its growth and profit projections. There are 18 other financial-service competitors in town, including two credit unions, three finance companies, four insurance agencies, and two security broker offices. Your task is to recommend the various services the bank should offer initially to build up an adequate customer base. You are asked to do the following:a.Make a list of all the services the new bank could offer, according to current regulations.b.List the type of information you will need about the local community tohelp you decide which of the possible services are likely to have sufficientdemand to make them profitable.c.Divide the possible services into two groups--those you think are essentialto customers and should be offered beginning with opening day, and thosethat can be offered later as the bank grows.d. Briefly describe the kind of advertising campaign you would like to run tohelp the public see how your bank is different from all the other financialservice providers in the local area. Which services offered by the nonblankservice providers would be of most concern to the new bank’smanagement?Banks can offer, if they choose, a wide variety of financial services today. These services are listed below. However, unless they are affiliated with a larger bank holding company and can offer some of these services through that company, it may be more limited in what it can offer.Regular Checking Accounts Management Consulting Services NOW Accounts Letters of CreditPassbook Savings Deposits Business Inventory Loans Certificates of Deposit Asset-Based Commercial Loans Money Market Deposits Discounting of Commercial Paper Automobile Loans Plant and Equipment Loans Retirement Savings Plans Venture Capital LoansNonauto Installment Loans to IndividualsResidential Real Estate Loans Leasing Plans for Business Property and EquipmentHome Improvement Loans Security Dealing and Underwriting Personal Trust Management Services Discount Security BrokerageCommercial Trust Services Institutional Trust Services Foreign Currency Trading and ExchangePersonal Financial Advising Personal Cash-Management ServicesInsurance Policy Sales (Mainly Credit-Life)Insurance Today (Except in Some States)) Standby Credit Guarantees Acceptance FinancingTo help the new bank decide which services to offer it would be helpful to gather information about some of the following items in the local community:School Enrollments and Growth in School EnrollmentsEstimated Value of Residential and Commercial PropertyRetail SalesPercentage of Home Ownership Among Residents in the AreaNumber and Size (in Sales and Work Force) of Local Business Establishments Major Population Locations (i.e., Major Subdivisions, etc.) and Any Projected Growth AreasPopulation Demographics (i.e., Age Distribution of the Area) Projected Growth Areas of Industries in the AreaEssential services the bank would probably want to offer right from the beginning includes:Regular Checking Accounts Home Improvement Loans Automobile and other Consumer-type Money Market Deposit Accounts Installment Loans Retirement Savings Plans NOW Accounts Business Inventory LoansPassbook Savings Deposits Discounting of High-QualityCommercial NotesResidential Real Estate LoansCertificates of DepositAs the bank grows, opportunities for the profitable sale of additional services usually increase, especially for trust servicesfor individuals and smaller businesses and personal financial advising as well as some commercial (plant and equipment) loans and leases. Further growth may result in the expansion of commercial trust services as well as a widening variety of commercial loans and credit guarantees.The bank would want to develop an advertising campaign that sends a message to potential customers that the new bank is, indeed, different from its competitors. Small banks often have the advantage of offering highly personalized services in which their customers are known and recognized and services are tailored to each individual customer's special financial needs. Quality and reliability of banking service are often more important to individual customers than is price. A new bank must try to sell prospective customers, most of who will come from other banks in the area, on personalized services, quality, and reliability - all three of which should be emphasized in its advertising program.2. Leading money center banks in the United States have accelerated their investment banking activities all over the globe in recent years, purchasing corporate debt securities and stock from their business customers and reselling those securities to investors in the open market. Is this a desirable move by these banking organizations from a profit standpoint? From a risk standpoint? From the public interest point of view? How would you research their question? If you were managing a corporation that had placed large deposits with a bank engaged in such activities, would you be concerned about the risk to your company's funds? What could you do to better safeguard those funds?In the 1970's and early 1980's investment banking was soprofitable that commercial bankers were lured into the investment banking business largely because of its greater profit potential than possessed by more traditional commercial banking activities. Later foreign banks, particularly the British and Japanese banking firms, began to attract away large corporate customers from U.S. banks, who were restrained by regulation from offering many investment banking services. Thus, U.S. banks ran into severe difficulty in simply trying to hold onto their traditional corporate credit and deposit accounts because they could not compete service-wise in the investment banking field. Today, banks are allowed to underwrite securities through either a subsidiary or through a holding company structure. This change occurred as part of the Gramm-Leach-Bliley Act (Financial Services Modernization Act).Unfortunately, if investment banking is more profitable than traditional banking product lines, it is also more risky, consistent with the basic tenet of finance that risk and return are directly related. That is why the Federal Reserve Board has placed such strict limits on the type of organization that can offer these services. Currently, the underwriting of most corporate securities must be done through a subsidiary or as a separate part of the holding company so that, in theory at least, the bank is not responsible for any losses incurred. For this reason there may be little reason for depositors (including large corporate depositors) to be concerned about risk exposure from investment banking. Moreover, the ability to offer such services may make U.S. banks more viable in the long run which helps their corporate customers who depend upon them for credit.On the other hand, opponents of investment banking powers for bank operations inside the U.S. have some reasonableconcerns that must be addressed. There are, for example, possible conflicts of interest. Information gathered in the investment banking division could be used to the detriment of customers purchasing other bank services. For example, a customer seeking a loan may be told that he or she must buy securities from the bank's investment banking division in order to receive a loan. Moreover, banks could gain effective control over some nonblank industrial corporations which might subject them to added risk exposure and place industrial firms not allied with banks at a competitive disadvantage. As a result the Gramm-Leach-Bliley Act has built in some protections to prevent this from happening.3. The term bank has been applied broadly over the years to include a diverse set of financial-service institutions, which offer different financial service packages.Identify as many o f the different kinds of “banks” as you can. How do the “banks” y ou have identified compare to the largest banking group of all – the commercial banks? Why do you think so many different financial firms have been called banks? How might this terminological confusion affect financial-service customers?The general public tends to classify anything as a bank that offers some sort of financial service, especially deposit and loan services. Other institutions that are often referred to as a bank without being one are savings associations, credit unions, money market funds, mutual funds, hedge funds, security brokers and dealers, investment banks, finance companies, financial holding companies and life and property/casualty insurance companies. All of these institutions offer some of the services that a commercial bank offers, but generally not the entire scope ofservices. Since providers of financial services are normally called banks by the general public they are able to take away business from traditional banks and it is of utmost importance for commercial banks to clarify their unique position among financial services providers.4. What advantages can you see to banks affiliating with insurance companies? How might such an affiliation benefit a bank? An insurer? Can you identify any possible disadvantages to such an affiliation? Can you cite any real world examples of bank-insurer affiliations? How well do they appear to have worked out in practice?Before Glass-Steagall banks used to sell insurance services to their customers on a regular basis. in particular, banks would sell life insurance companies to loan customers to ensure repayment of the loan in case of death or disablement. These reasons still exist today and the right to sell insurances to customers again benefits banks in allowing them to offer their customers complete financial packages from financing the home or car to insure it, from giving investment advice to selling life insurance policies and annuities for retirement planning. Generally, a bank customer who is already purchasing a service from a bank might feel compelled to purchase an insurance product, as well. On the other hand, insurance companies sometimes have a negative image, which makes it more difficult to sell certain insurance products. Combining their products with the trust that people generally have in banks will make it easier for them to sell their products. The most prominent example of a bank-insurer affiliation is the merger of Citicorp and Traveler’s Insurance to Citigroup. However, given that Citigroup has sold Traveler’s Insurance indicates that the anticipated synergy effects did notmaterialize.5. Explain the difference between consolidation and convergence. Are these trends in banking and financial services related? Do they influence each other? How? Consolidation refers to increase in the size of financial institutions and the decline in the number of small independently owned banks and financial service providers. Convergence is the bringing together of firms from different industries to createconglomerate firms offering multiple services. Clearly, these two trends are related. In their effort to compete with each other, banks and their closest competitors have acquired other firms in their industry as well across industries to provide multiple financial services in multiple markets.6. What is a financial intermediary? What are their key characteristics? Is a bank a type of financial intermediary? Why? What other financial-services companies are financial intermediaries? What important role within the financial system do financial intermediaries play?A financial intermediary is a business that interacts with deficit spending individuals and institutions and surplus spending individuals and institutions. For that reason any financial service provider (including banks) is considered a financial intermediary. In their function as intermediaries they act as a bridge between the deficit and surplus spending units by offering financial services to the surplus spending individuals and then loaning those funds to the deficit spending individuals. Financial intermediaries accelerate economic growth by increasing the pool of available funds and lowering the risk of investments through diversification.。

Chapter 15The Management of CapitalFill in the Blank Questions1. The risk that has to do with banks trading in foreign currencies is called_________________________.Answer: exchange risk2. The risk that has to do with fraud, embezzlement and bank robberies is called__________________.Answer: crime risk3. _________________________ is measured by the par value of the shares of common equityoutstanding.Answer: Common stock4. __________________ is the amount in excess of par value paid by the bank's shareholders.Answer: Surplus5. _________________________ are the net earnings of the bank which have been kept by the bankrather than distributed as dividends to stockholders.Answer: Undivided Profits (or retained earnings)6. Core capital such as common stock, surplus, undivided profits, qualifying noncumulative preferredstock, etc. is referred to as __________________ capital as defined by the Basel agreement.Answer: Tier 17. The international treaty involving the U.S. and 11 other leading industrialized countries to imposecommon capital requirements on all banks is known as the _________________________.Answer: Basel Agreement8. Supplemental capital such as the allowance for loan losses, subordinated debt, mandatoryconvertible debt, intermediate-term preferred stock, cumulative preferred perpetual stock andequity notes is more commonly known as _________________________.Answer: Tier 2 capital9. When items on a bank's balance sheet are multiplied by the appropriate risk-weighting factor theyare often called _________________________.Answer: risk-weighted assets10. The fact that a bank may suffer deficiencies in quality control, inefficiencies in producing anddelivering of services, weather damage, aging or faulty computer systems, errors in judgment by management and fluctuations in economy that could adversely affect the bank's performance is known as _________________________ risk.Answer: operational11. One defense against risk for the bank is to spread out a bank's credit accounts and deposits among awide variety of customers, including large and small accounts different industries, etc. Thisdefense is known as _________________________.Answer: portfolio diversification12. One defense against risk is for the bank to seek out customers located in different communities or indifferent countries. This defense is known as _________________________.Answer: geographic diversification13. When all else fails, the ultimate defense against risk in banking is _________________________.Answer: owners' capital (net worth)14. The largest component of capital among thrift institutions is _____________.Answer: retained earnings15. The largest component of capital among banks is ____________.Answer: surplus16. ____________ models attempt to measure price or market risk of a portfolio of assets and attemptto determine the maximum loss they might sustain over a designated period of time.Answer: Value at risk (VaR)17. The latest revision to the Basel accord is known as __________ and will affect only about 20 of thelargest U.S. banks and a handful of leading foreign banks.Answer: Basel II18. ____________ models measure lender exposure to defaults or credit downgrades.Answer: Credit Risk19. Credit risk models will be ________ widely used when Basel II takes effect.Answer: more20.At the center of the debate of the Basel Agreement is the , headquartered inBasel Switzerland , which assists central banks in their transactions with each other and serves as a forum for international financial issues.Answer: Bank for International Settlements (BIS)21. represents funds set aside for contingencies such as legal action against theinstitution as well as providing a reserve for dividends expected to be paid but not yet declared anda sinking fund to retire stock or debt in the future.Answer: Equity reserves22. are debt securities repayable from the sale of stock.Answer: Equity commitment notes23. is a hybrid form of equity capital issued to investors through atrust company, The funds raise are loaned to the financial firm. Dividends paid to stockholders on this time of capital are tax deductible.Answer: Trust preferred stock24. is long-term debt capital whose claims legally follow claims ofdepositors.Answer: Subordinated notes and debentures25. for banks include mortgage servicing rights and purchasedcredit card relationships and can be counted as part of bank capital.Answer: Identifiable intangible assetsTrue/False QuestionsT F 26. In the field of banking, capital refers principally to those funds contributed by a bank's owners.Answer: TrueT F 27. According to the textbook capital and risk are intimately related to each other.Answer: TrueT F 28. One fundamental purpose for regulating capital is to limit losses to the federal government arising from deposit insurance claims.Answer: TrueT F 29. Deposit insurance subsidized by government encourages banks to increase their ratios of capital to deposits.Answer: FalseT F 30. Tier 2 includes undivided profits.Answer: FalseT F 31. Core capital includes the surplus account for stock.Answer: TrueT F 32. Under the international capital (Basel) agreement Tier 2 capital must be raised to a minimum of 4 percent of risk-weighted assets.Answer: FalseT F 33. Off-balance-sheet commitments of banks carry capital requirements under the international (Basel) capital requirements.Answer: TrueT F 34. Portfolio diversification refers to seeking out customers located in different communities or countries, which presumably will experience different economic conditions.Answer: FalseT F 35. Geographic diversification refers to the spreading out credit accounts and deposits among a wide variety of customers, including large and small business accounts, different industries,and households with a variety of sources of income and collateral.Answer: FalseT F 36. The last line of defense against bank failure is owner's capital, according to the textbook.Answer: TrueT F 37. Under the FDIC Improvement Act of 1991 a U.S. bank possessing a leverage ratio greater than 4 percent would be considered well capitalized.Answer: FalseT F 38. Under the FDIC Improvement Act of 1991 a bank whose leverage ratio drops to 2 percent or less is considered to be critically undercapitalized.Answer: TrueT F 39. Recent research suggests that interest-rate contracts display considerably less risk exposure than do foreign-currency contracts.Answer: TrueT F 40. The Basel Agreement on capital as drafted in the 1980s failed to deal with market risk.Answer: TrueT F 41. If a bank benefits when the value of a foreign currency rises, the bank is said to be in a short position.Answer: FalseT F 42. If a bank benefits when a foreign currency declines in value, then the bank is in a long position.Answer: FalseT F 43. If the ratio of tangible equity capital to total assets is 2 percent or less it is subject to being placed in conservatorship or receivership if its capital ratios are not increased within aprescribed period of time even if its net worth is still positive.Answer: TrueT F 44. According to recent research, bank stock prices usually drop within a week after a dividend cut is announced.Answer: TrueT F 45. Equity notes are considered to be part of Tier 1 capital.Answer: FalseT F 46. The most important source of thrift capital in terms of dollar volume is common stock (par value).Answer: FalseT F 47. The daily rate at which robberies have occurred in the U.S. has continued to climb in the 1990s.Answer: FalseT F 48. One of the reasons to regulate the capital position of banks is to limit the risk of bank failures, especially large bank failures.Answer: TrueT F 49. Deposits with the Federal Reserve banks are considered to have moderate credit risk and are therefore placed in the 50 percent risk weight category.Answer: FalseT F 50. The largest component of capital among banks is retained earnings.Answer: FalseT F 51. VaR models provide a single number which indicates the potential for losses on a portfolio of assets.Answer: TrueT F 52. VaR models are most successful in assessing potential risk when the assets are non-traded.Answer: FalseT F 53. Credit risk models will probably not be needed when Basel II takes effect.Answer: FalseT F 54. One of the key innovations which have been proposed in Basel II is to require banks to hold capital against operational risk.Answer: TrueT F 55. Basel II will require each bank to determine its own capital requirements based on its own calculated risk exposure.Answer: TrueT F 56. It is anticipated that Basel II may lower capital requirements for the largest banks.Answer: TrueT F 57. The global financial crisis of 2007-2009 highlighted the importance of taking into consideration a bank’s exposure to market risk that arise from changes in interest rates,security prices, and currency.Answer: TrueT F 58. Smaller banks rely more heavily on internally generated capital than larger banks.Answer: TrueT F 59. A well-capitalized institution has a ratio of capital to risk-weighted assets of at least 10percent and faces no significant regulatory restrictions on its expansion.Answer: TrueT F 60. Regulatory capital focus on the market value of equity.Answer: FalseMultiple Choice Questions61.According to the textbook the role of capital is to:A) Provide a cushion against failure risk.B) Provide funds needed to organize, open, and operate a bank.C) Promote public confidenceD) Support growth and the development of new servicesE) All of the above.Answer: E62.The textbook discusses several alternative defenses banks have against risk. These defensesinclude:A) Quality managementB) Portfolio diversificationC) Geographic diversificationD) Deposit insuranceE) All of the above.Answer: E63.Measured by dollar volume the largest category of capital at U.S. banks is:A) Par value of common stockB) Subordinated notes and debenturesC) SurplusD) Undivided profits and capital reservesE) None of the above.Answer: C64.The fundamental purposes of regulating bank capital cited in the textbook include which of thefollowing?A) To limit the risk of bank failures.B) To preserve public confidence in banks.C) To limit losses to the federal government arising from insurance claims.D) All of the above.E) A and B only.Answer: D65.The Internal Capital Growth Rate for a bank is a function of which of the following factors?A) Profit margin.B) Asset utilization.C) Equity multiplier.D) Earnings retention ratio.E) All of the above.Answer: E66.Second National Bank is forecasting a return on equity of 15 percent for this year. The board ofdirectors wants to maintain its current policy of paying the bank's stockholders 40 percent of any net earnings the bank will earn. How fast can the bank's assets grow this year without jeopardizing its ratio of capital to assets?A) 15 percent.B) 9 percent.C) 8 percent.D) 6 percent.E) None of the aboveAnswer: B67.Possible breakdowns in quality control, inefficiencies in producing and delivering financialservices, weather damage, aging or faulty computer systems and simple errors in judgment by bank management illustrate what form of risk faced by banks?A) Credit riskB) Liquidity riskC) Interest-rate riskD) Operational riskE) None of the aboveAnswer: D68.The ratio of core capital to average assets is called the:A) Supplemental Capital ratioB) Leverage ratioC) Long-term capital ratioD) GAAP capital ratioE) None of the above.Answer: B69.The risk that a customer the bank has entered into a contract with will fail to pay or to perform,forcing the bank to find a replacement contract that may be less satisfactory is what form of risk listed below?A) Counterparty riskB) Interest-rate riskC) Operating riskD) Credit riskE) Liquidity riskAnswer: A70.If a bank benefits when a foreign currency declines in value, then the bank must be in a__________ position. The term below that correctly fills in the blank in the preceding sentence is:A) LongB) ShortC) NegativeD) Credit riskE) None of the aboveAnswer: B71.In the United States a 'well capitalized' bank must have a ratio of capital to risk-weighted assets ofat least:A) 6 percentB) 8 percentC) 10 percent.D) 5 percent.E) None of the aboveAnswer: C72.In the United States a bank to be considered 'adequately capitalized' must have a ratio of Tier 1 (orcore) capital to risk-weighted assets of at least:A) 8 percentB) 6 percentC) 10 percentD) 4 percentE) None of the aboveAnswer: D73. A "well capitalized" bank in the United States must have a leverage ratio of at least:A) 5 percentB) 4 percentC) 6 percentD) 8 percentE) None of the aboveAnswer: B74. A bank has $100 million in assets in the 0 percent risk weight category, $200 million in assets in the20 percent risk weight category, $500 million in assets in the 50 percent risk weight category and$750 million in assets in the 100 percent risk weight category. This bank has $57 million in core (Tier 1) capital. What is this bank's ratio of Tier 1 capital to risk-weighted assets?A) 3.68 percentB) 7.6 percentC) 18.25 percentD) 5.48 percentE) None of the aboveAnswer: D75. A bank has a profit margin of 5 percent, an asset utilization ratio of 11 percent , an equity multiplierof 12 and a retention ratio of 60 percent. What is this bank's ICGR?A) 6.6 percentB) 3.96 percentC) 7.2 percentD) .33 percentE) None of the aboveAnswer: B76.Which of the following would be an example of Tier 1 capital?A) Subordinated debt capital instruments with an original maturity of at least 5 yearsB) Allowance for loan and lease lossesC) Minority interest in the equity accounts of consolidated subsidiariesD) Intermediate term preferred stockE) All of the aboveAnswer: C77.Which of the following would be an example of Tier 2 capital?A) Subordinated debt capital instruments with an original maturity of at least 5 yearsB) Undivided profitsC) Minority interest in the equity accounts of consolidated subsidiariesD) Qualifying noncumulative preferred stockE) All of the aboveAnswer: A78.Which of the following would be an example of crime risk?A) A bank manager that embezzles $1,000,000 from the bankB) A bank that loses $500,000 from trading in foreign currenciesC) A $1,000,000 loan to a business on which no interest and principal has been collected in 2 yearsD) A bank manager predicts that interest rates will rise. However interest rates fall causing thebank 's net income to fall by $250,000E) All of the above are examples of crime riskAnswer: A79.Which of the following assets fits into the 0 percent risk weight category?A) CashB) Deposits at the Federal ReserveC) Treasury BillsD) GNMA mortgage-backed securitiesE) All of the above fit into the 0 percent risk weight categoryAnswer: E80. A bank that is 'well-capitalized':A) Faces no significant regulatory restrictionsB) Cannot accept broker placed deposits without regulatory approvalC) Has limits on dividends and management fees it is allowed to pay and limits on the maximumasset growth rate among other restrictionsD) Will be placed into conservatorship or receivership if it its capital level is not increased withina certain time limit.E) None of the aboveAnswer: A81. A bank that is 'critically undercapitalized':A) Faces no significant regulatory restrictionsB) Cannot accept broker-placed deposits without regulatory approvalC) Has limits on dividends and management fees it is allowed to pay and limits on the maximumasset growth rate among other restrictionsD) Will be placed into conservatorship or receivership if it its capital level is not increased withina certain time limit.E) None of the aboveAnswer: D82. A bank that is adequately capitalized:A) Faces no significant regulatory restrictionsB) Cannot accept broker-placed deposits without regulatory approvalC) Has limits on dividends and management fees it is allowed to pay and limits on the maximumasset growth rate among other restrictionsD) Will be placed into conservatorship or receivership if it its capital level is not increased withina certain time limit.E) None of the aboveAnswer: B83.Which of the following is in the 100 percent risk-weight category?A) CashB) General obligation municipal bondsC) Residential mortgage loansD) Credit card loansE) None of the aboveAnswer: D84.Which of the following is in the 50 percent risk-weight (moderate) category?A) CashB) General Obligation Municipal BondsC) Residential Mortgage LoansD) Credit Card LoansE) None of the aboveAnswer: C85.Which of the following is in the 20 percent risk-weight (low) category?A) CashB) General obligation municipal bondsC) Residential mortgage loansD) Credit card loansE) None of the aboveAnswer: B86. A bank has a ROE of 14 percent and a ROA of 2 percent. What is this bank's equity capital to totalassets ratio?A) 7.00 percentB) 14.29 percentC) 28.00 percentD) 16 percentE) None of the aboveAnswer: B87. A bank has $200 million in assets in the 0 percent risk-weight category. It has $400 million inassets in the 20 percent risk-weight category. It has $1000 million in assets in the 50 percent risk-weight category and has $1000 million in assets in the 100 percent risk-weight category. This bank has $96 million in Tier 1 capital and $48 million in Tier 2 capital. What is this bank's ratio of Tier 1 capital to risk assets?A) 6.08 percentB) 3.04 percentC) 9.11 percentD) 5.54 percentE) None of the aboveAnswer: A88. A bank has $200 million in assets in the 0 percent risk-weight category. It has $400 million inassets in the 20 percent risk-weight category. It has $1000 million in assets in the 50 percent risk-weight category and has $1000 million in assets in the 100 percent risk-weight category. This bank has $96 million in Tier 1 capital and $48 million in Tier 2 capital. What is this bank's ratio of Tier 2 capital to risk assets?A) 6.08 percentB) 3.04 percentC) 9.11 percentD) 5.54 percentE) None of the aboveAnswer: B89. A bank has $200 million in assets in the 0 percent risk-weight category. It has $400 million inassets in the 20 percent risk-weight category. It has $1000 million in assets in the 50 percent risk-weight category and has $1000 million in assets in the 100 percent risk-weight category. This bank has $96 million in Tier 1 capital and $48 million in Tier 2 capital. What is this bank's ratio of total capital to risk assets?A) 6.08 percentB) 3.04 percentC) 9.11 percentD) 5.54 percentE) None of the aboveAnswer: C90. A bank has a net profit margin of 5.25 percent. It has an asset utilization ratio of 45 percent and hasan equity multiplier of 12. It retains 40 percent of its earnings each year. What is this bank's internal capital growth rate?A) 28.35 percentB) 2.36 percentC) 11.34 percentD) 4.8 percentE) None of the aboveAnswer: C91.The revised Basel I rules impose capital requirements for market risk on:A) Only the largest banksB) Only the smallest banksC) Only moderate size banksD) All banksE) No banksAnswer: A92.Bank debt which appears to be highly sensitive to the market perception of the bank's risk is whichof the following?A) DepositsB) Fed fundsC) ReposD) Subordinated debt capitalE) Preferred stockAnswer: D93.Bank operational risk includes:A) Employee fraudB) Account errorsC) Computer breakdownsD) Natural disastersE) All of the aboveAnswer: E94.The issue of correctly adding up all of the different types of bank risk exposure is known as:A) Risk tallyingB) Summing riskC) Risk aggregationD) Risk accumulationE) Risk totalityAnswer: C95.For a bank with deficient capital ratios, which of the following actions could be required byregulators to increase the capital ratios, all else constant?A)Cut the bank's dividend paymentB)Increase the bank's leverageC)Reduce the bank’s holdings of cashD)Increase the bank's growth rate by making additional commercial loans.E)Reduce the bank's holdings of Treasury securities.Answer: A96.Basel II has a different set of rules for different bank size categories and the number of categoriesis:A) twoB) threeC) fourD) fiveE) tenAnswer: A97.Which of the following would be an example of exchange risk?A) A bank manager embezzles $1,000,000 from the bankB) A bank that loses $500,000 from trading in foreign currenciesC) A $1,000,000 loan to a business on which no interest or principal has been collected in 2 yearsD) A bank manager predicts interest rates will rise. However interest rates fall causing the bank’snet income to fall by $250,000E) All of the above are examples of exchange riskAnswer: B98.Which of the following would be an example of credit risk?A) A bank manager embezzles $1,000,000 from the bankB) A bank that loses $500,000 from trading in foreign currenciesC) A $1,000,000 loan to a business on which no interest or principal has been collected in 2 yearsD) A bank manager predicts interest rates will rise. However interest rates fall causing the bank’snet income to fall by $250,000E) All of the above are examples of credit riskAnswer: C99.Which of the following would be an example of interest rate risk?A) A bank manager embezzles $1,000,000 from the bankB) A bank that loses $500,000 from trading in foreign currenciesC) A $1,000,000 loan to a business on which no interest or principal has been collected in 2 yearsD) A bank manager predicts int erest rates will rise. However interest rates fall causing the bank’snet income to fall by $250,000E) All of the above are examples of interest rate risk?Answer: D100.Which of the following would be an example of operational risk?A) A bank teller manages to steal $250,000 over a period of several monthsB) An out of date computer system causes the bank to lose $750,000C) A bank is forced to sell $1,000,000 in loans at a loss in order to meet the needs of depositorsD) A $500,000 loan the bank has made has been deemed uncollectableE) None of the above are examples of operational riskAnswer: B101.Which of the following would be an example of liquidity risk?A) A bank teller manages to steal $250,000 over a period of several monthsB) An out of date computer system causes the bank to lose $750,000C) A bank is forced to sell $1,000,000 in loans at a loss in order to meet the needs of depositorsD) A $500,000 loan the bank has made has been deemed uncollectableE) None of the above are examples of liquidity riskAnswer: C102.Which of the following would not be an example of operational risk?A) A bank on the coast of Louisiana is hit by a hurricane and is flooded for 6 weeksB) A bank employee acting as a derivatives trader is also the one who writes the reports on profitsand losses in derivatives trading at the end of each dayC) The banks older computer system breaks down causing a loss of service to customers for 2weeksD) A bank robber robs a teller at gun point and gets away before police can get to the bankE) All of the above are examples of operational riskAnswer: D103.The Jennings Bank of Texas wants to protect itself from credit risk by making large loans to corporate customers, by making residential mortgages to families, by making agriculture loans to farmers and ranchers in the area, by making small business loans to business along main street and by making automobile loans for the car dealership across the street from the bank. What defense against risk is this bank making?A) Portfolio diversificationB) Geographic diversificationC) Quality managementD) Increasing owners’ capitalE) All of the aboveAnswer: A104.The Michelson Bank of Stetson wants to protect itself from risk. It decides to make loans in Florida, Georgia, Texas and Oklahoma as well as invest in municipal bonds from California and Oregon.What defense against risk is this bank making?A) Portfolio diversificationB) Geographic diversificationC) Quality managementD) Increasing owners’ capitalE) All of the aboveAnswer: B105.The Perdue Bank of Houston has just hired a new manager who has a reputation of anticipating potential problems and acting quickly to prevent those problems so that the bank stays healthy and profitable. What defense against risk is this bank making?A) Portfolio diversificationB) Geographic diversificationC) Quality managementD) Increasing owners’ capitalE) All of the aboveAnswer: C106.The Norton Bank of Illinois has just issued trust preferred stock. What defense against risk is this bank making?A) Portfolio diversificationB) Geographic diversificationC) Quality managementD) Increasing owners’ capitalE) All of the aboveAnswer: D107.What type of preferred stock has become popular among large banks in recent years, partly because dividends paid are tax deductible for the issuing institution?A) Cumulative preferred stockB) Noncumulative preferred stockC) Convertible preferred stockD) Trust preferred stockE) All of the aboveAnswer: D108.Even if individual banks are good at forecasting risk using VAR models there may still be problems because losses may occur at several banks at the same time due to the interdependency of thefinancial system, magnifying each bank’s risk exposure and possibly causing a major problem for regulators. The book calls this:A) Systematic riskB) Operational riskC) Credit riskD) Market riskE) Liquidity riskAnswer: A109.There are three pillars of Basel II. One of them wants to make market discipline a powerful force compelling risky banks to lower their risk exposure. What does Basel II want to do to make this happen?A) Require minimum capital requirement based on the bank’s own evaluation of its riskB) Require greater public disclosure of each bank’s true fina ncial conditionC) Expand the risks to be evaluated to include credit risk, market risk and operational riskD) Require supervisory review of each bank’s risk evaluation proceduresE) All of the aboveAnswer: B110. A bank has capital to risk weighted assets of 11.5%, Tier 1 capital to risk weighted assets of 7.2% and a leverage ratio of 5.8%. What type of bank is this?A) Well capitalizedB) Adequately capitalizedC) UndercapitalizedD) Significantly undercapitalizedE) Critically undercapitalizedAnswer: A111. A bank has capital to risk weighted assets of 9.2%, Tier 1 capital to risk weighted assets of 5% anda leverage ratio of 4.8%. What type of bank is this?A) Well capitalizedB) Adequately capitalizedC) UndercapitalizedD) Significantly undercapitalizedE) Critically undercapitalizedAnswer: B112. A bank has capital to risk weighted assets of 9.2%, Tier 1 capital to risk weighted assets of 4.5% and a leverage ratio of 3.7%. What type of bank is this?A) Well capitalizedB) Adequately capitalizedC) UndercapitalizedD) Significantly undercapitalizedE) Critically undercapitalizedAnswer: C113.A bank has capital to risk weighted assets of 5.5%, Tier 1 capital to risk weighted assets of 2.8% and a leverage ratio of 2.6%. What type of bank is this?A) Well capitalizedB) Adequately capitalized。