Professional Documents
Culture Documents
2. __________________________ is the risk that has to do with the quality of the bank's
assets and, in particular, the bank's loans.
Answer: Credit risk
6. Eurodollars, Fed Funds, Repurchase Agreements, and large CDs together are know as
_____________________.
Answer: Purchased Funds
7. __________________________ is the risk that the financial institution may not be able
to meet the needs of depositors for cash.
Answer: Liquidity risk
12. __________________________ measures the amount of debt or leverage a bank has and
is one part of the evaluation of the bank's ROE) It is generally a number larger than one.
Answer: Equity multiplier
15. __________________________ is the risk that shifting interest rates in the market will
adversely affect a financial institution's net income or the value of its assets or equity.
Answer: Interest rate risk
True/False Questions
T F 26. Financial institutions that pursue the "quiet life" as a goal are really pursuing risk
minimization.
Answer: True
T F 27. Attempting to maximize a bank's stock value is the key objective for banks which
should have priority over all other bank goals.
Answer: True
T F 28. If the expected stream of future bank shareholder dividends rises, a bank's stock
price should also rise, other factors held constant.
Answer: True
T F 29. If the discount factor associated with the value of a bank's stock rises, the bank's
stock price should rise, other factors held constant.
Answer: False
T F 30. A bank's ROA equals its ROE times the ratio of total assets divided by total equity
capital.
Answer: False
T F 31. According to the textbook a bank's asset-utilization ratio reflects the mix and
yield on the bank's portfolio of assets.
Answer: True
T F 33. The ratio of a bank's net after-tax income to pre-tax net operating income is
described in the text as a measure of tax management efficiency.
Answer: True
T F 34. In the textbook the ratio of pre tax net operating income to total operating
revenues is described as a measure of the effectiveness of a financial institutions
expense-control efficiency.
Answer: True
T F 35. The ratio of non-performing assets to total loans and leases is a measure of credit
risk in banking.
Answer: True
T F 36. The measure of a bank's efficiency and return known as the "earnings spread"
subtracts total interest expenses from all the bank's interest income and these two
items are then divided by total assets.
Answer: False
T F 37. In recent years the U.S. banking industry's equity multiplier has generally risen in
response to regulatory pressure to raise more capital.
Answer: False
T F 38. If a bank adds more full-time employees and posts the same net operating income,
its employee productivity ratio, as defined in the text, must fall.
Answer: True
T F 39. The most profitable U.S. banks in terms of both ROA and ROE are medium-size
institutions in the asset size range of $100 million to $10 billion, according to the
textbook.
Answer: True
T F 40. ROA measures how capably the management of a financial institution has been
converting the institution's assets into net earnings.
T F 42. The ratio of nonperforming assets to total loans and leases is considered to be a
measure of a bank's market risk.
Answer: False
T F 43. Charge-offs represent securities a bank decides to sell because they have declined
in value.
Answer: False
T F 44. Loans past due for 90 days or more are classified as nonperforming assets.
Answer: True
T F 45. The ratio of cash and government securities to total assets is considered to be a
measure of liquidity risk in banking.
Answer: True
T F 47. The interest rate spread between market yields on bank debt issues (such as
capital notes and CDs) and the market yields on government securities of the
same maturity is considered to be a measure of market risk in banking.
Answer: False
T F 48. The ratio of a bank's net operating income to the number of a bank's full-time-
equivalent employees is called the employee productivity ratio.
Answer: True
T F 49. Smaller banks usually have fewer liquid assets than larger banks.
Answer: False
T F 51. The FDIC is a private credit rating company which provides credit ratings on the
short term and long term securities issued by banks.
Answer: False
T F 52. During the 1980's the Comptroller of the Currency, the Federal Reserve and the
FDIC created a new tool to help them analyze the financial condition of banks.
This new tool is called the Uniform Bank Performance Report.
Answer: True
T F 53. Liquidity risk for a bank examines the quality of the bank's assets and, in
particular, the quality of the bank's loans.
Answer: False
T F 54. The bank's degree of asset utilization (AU) or ratio of total operating revenue to
total assets is a measure of asset management efficiency, especially in terms of the
mix and yield on assets.
Answer: True
T F 55. According the case study of the failure of Superior Bank of Chicago and the
FDICs takeover of this institution in 2001, the main problem was attributed to
misleading accounting practices of inflating asset values and revenues deflating
liabilities and expenses. The Sarbanes-Oxley Accounting Standards Act of 2002
addresses this issue and expressly encourages combining auditing and consulting
relationships in order to promote efficiency and profitability of financial
institutions.
Answer: False
56. The ratio of a bank's interest income from its loans and security investments less
interest expenses on debt issued divided by total earning assets measures a bank's:
A) Net operating margin
58. The difference between such sources of bank income as service charges on deposits
and trust-service fees and such sources of bank expenses as salaries and wages and
overhead expenses divided by total assets or total earning assets is called the:
A) Net profit margin
B) Net operating margin
C) Net noninterest margin
D) Net return on assets
E) None of the above
Answer: C
62. According to the textbook the most profitable banks in the United States in 2007 fell in
the asset size range of:
A) Under $25 million in total assets
B) Under $100 million in total assets
C) Between $100 million and $10 billion in total assets
D) Over $10 billion in total assets
E) None of the above.
Answer: D
64. The ratio that equals total interest income divided by total earning assets less total
interest expense divided by total interest-bearing liabilities is known as the:
A) Earnings base
B) Earnings spread
C) Net income margin
D) Net return prior to special transactions
E) None of the above
Answer: B
67. The ratio of net loans to total assets is considered to be a measure of what form of risk
in banking?
A) Credit risk
B) Liquidity risk
C) Market risk
D) Interest-rate risk
E) None of the above
Answer: B
69. A ratio that can be used to measure a bank's credit risk would be:
A) Net loans/total assets
B) Interest sensitive assets/interest sensitive liabilities
C) Total assets/number of full time employees
D) Nonperforming loans/total loans
Answer: D
70. A bank that has a low profit margin most likely:
A) Is doing a poor job of controlling expenses
B) Has a small amount of financial leverage
C) Has a small amount of liquidity risk
D) Has assets that are not very productive
E) None of the above
Answer: A
72. Which of the following would be the best example of a ratio used to examine the cost
of one of the bank's liabilities?
A) Demand deposits/ total assets
B) Interest on time deposits/ total time deposits
C) Interest on real estate loans/ total real estate loans
D) Interest sensitive assets/ interest sensitive liabilities
Answer: B
73. Which of the following would be the best example of a ratio used to examine the return
of one of the bank's assets?
A) Demand deposits/ total assets
B) Interest on time deposits/ total time deposits
C) Interest on real estate loans/ total real estate loans
D) Interest sensitive assets/ interest sensitive liabilities
Answer: C
74. Which of the following would be the best example of a ratio used to examine the
bank's interest rate risk?
A) Demand deposits/ total assets
B) Interest on time deposits/ total time deposits
C) Interest on real estate loans/ total real estate loans
D) Interest sensitive assets/ interest sensitive liabilities
Answer: D
75. A bank expects to pay a dividend next year of $3.45 and also expects dividends to
grow at a rate of 7% from now on. If the appropriate discount rate is 15%, what should
this bank's stock price be in the market?
A) $23.00
B) $43.13
C) $46.14
D) $49.29
E) $24.61
Answer: B
A) 8.46 percent
B) 16.03 percent
C) 15.71 percent
D) 1.36 percent
E) None of the above
Answer: C
77. Using the information listed below for Carter State Bank, what is this bank's ROA?
A) 8.46 percent
B) 16.03 percent
C) 15.71 percent
D) 1.36 percent
E) None of the above
Answer: D
78. Using the information listed below for Carter State Bank, what is this bank's net profit
margin?
A) 8.46 percent
B) 16.03 percent
C) 15.71 percent
D) 1.36 percent
E) None of the above
Answer: A
A) 8.46 percent
B) 16.03 percent
C) 15.71 percent
D) 1.36 percent
E) None of the above
Answer: B
80. The TRC Bank has a net profit margin of 7.5%, an asset utilization ratio of 18%, an
equity multiplier of 20 times. What is this bank's ROA?
A) 27.00 percent
B) 1.35 percent
C) 7.50 percent
D) 1.50 percent
E) 3.6 percent
Answer: B
81. The TRC Bank has a net profit margin of 7.5%, an asset utilization ratio of 18%, an
equity multiplier of 20 times. What is this bank's ROE?
A) 27.00 percent
B) 1.35 percent
C) 7.50 percent
D) 1.50 percent
E) 3.6 percent
Answer: A
82. The Smith-James Bank has an ROE of 17.5%, an asset utilization ratio of 13% and a
net profit margin of 9%. What is this bank's ROA?
A) 14.96 percent
B) 1.58 percent
C) 1.17 percent
D) 134.62 percent
E) None of the above
Answer: C
84. What is the equity multiplier for a bank where equity is equal to 10 percent of total
assets?
A) 90.0
B) 10.0
C) 1.1
D) 110.0
E) 1.0
Answer:
87. In recent years banks have been __________ profitable than (as) S&Ls and Savings
Banks.
A) More
B) Less
C) As
D) Much more
E) Much less
Answer: A
89. Brian Smith, CEO of Carter National Bank, decides that interest rates
are going to fall in the future and as a result buys $100 million in 30
year Treasury Bonds for the banks security portfolio. Instead, interest
rates rise causing the value of these bonds to fall. This would be an
example of which of the following types of risk?
A) Operational risk
B) Legal risk
C) Compliance risk
D) Strategic risk
E) Reputation risk
Answer: D
90. Chaos State Bank has an old computer system which can go down for
weeks at a time, leaving customers unable to access their accounts
online. Many customers have left the bank for banks with more
reliable computer systems. Which type of risk would this be an
example of?
A) Operational risk
B) Legal risk
C) Compliance risk
D) Strategic risk
E) Reputation risk
Answer: A
91. Carson County State Bank has a ratio of equity capital to total assets of
2.5%. The FDIC which regulates this bank has determined that this is
not enough equity capital and is making the bank issue new stock in
the market. In addition, they are not allowing the bank to issue a
dividend to their current stockholders. Which type of risk would this be
an example of?
A) Operational risk
92. Everett Bank has just learned that there is a disgruntled former
employee who has created a blog that is telling everyone that Everett
Bank has halved their customer service representatives and so
customers have great difficulty getting through to a live person when
there is a problem with their account. Everett is worried that they may
lose customers as a result. Which type of risk would this be an
example of?
A) Operational risk
B) Legal risk
C) Compliance risk
D) Strategic risk
E) Reputation risk
Answer: E
93. Norman Bank made a loan of $1,000,000 to Jarod LeFevre. Jarod has
declared bankruptcy and Norman Bank has just learned that the judge
in the case has ruled that Jarod does not have to pay any of the loan
back or forfeit any of his assets. Which type of risk would this be an
example of?
A) Operational risk
B) Legal risk
C) Compliance risk
D) Strategic risk
E) Reputation risk
Answer: B
96. Amy Farmer is thinking about investing in the Guthrie National Bank.
She is examining certain ratios of the bank including the ratio of the
book value of the assets to the market value of the assets and the
market value of the bonds held by the bank to their recorded value.
What type of risk is Amy attempting to measure with these ratios?
A) Credit risk
B) Liquidity risk
C) Market risk
D) Interest rate risk
E) Operational risk
Answer: C
98. The Garic State Bank of New Orleans was under water for three weeks
after Hurricane Katrina hit the state. The lobby is full of mud and other
debris. Many of the valuables stored in the banks safety deposit
Use this information to calculate Castle State Banks net profit margin
A) 20.45%
B) 18.33%
C) 12.22%
D) 7.33%
E) 2.5%
Answer: C
ROE 16%
Net Income $1000
Total Assets $62,500
Total Equity $6250