Principles of Banking Final Exam
Course Introduction
Principles of Banking introduces students to the foundational concepts and operations within the banking industry. The course explores the history, structure, and regulations of the banking sector, covering topics such as the functions of commercial banks, types of financial products and services, asset and liability management, risk assessment, and the role of central banks. Students will also examine the importance of ethics and compliance, the impact of technology on modern banking, and how banks contribute to economic development. Through case studies and practical examples, this course prepares students for a deeper understanding of financial institutions and their significance in the global economy.
Recommended Textbook
Bank Management and Financial Services 9th Edition by Peter S. Rose
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Chapter 1: An Overview of the Changing Financial-Services Sector
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Q1) Which of the following is not a purpose of bank regulation?
A)Guarantee minimal profitability of the banking system
B)Provide monetary stability
C)Ensure safety and soundness of banks
D)Provide competitive financial system
E)Protect consumers from abuses of banks
Answer: A
Q2) A(n)_______________________ is a traditional service which permits a depositor to write a draft in payment for goods and services.
Answer: demand deposit (checking account
Q3) Which one of the following nonbank financial-service institutions sell shares to the public representing an interest in a professionally managed pool of stocks,bonds,and other securities?
A)Security brokers and dealers
B)Investment banks
C)Finance companies
D)Mutual funds
E)Hedge funds
Answer: D
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Chapter 2: The Impact of Government Policy and Regulation on
the Financial-Services Industry
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Q1) An institutional arrangement in which federal and state authorities both have significant bank regulatory powers is referred to as:
A)balance of power.
B)federalism.
C)dual banking system.
D)cooperative regulation.
E)coordinated control.
Answer: C
Q2) The main regulators of insurance companies are ____________________________.
Answer: state insurance commissions
Q3) When the Federal Reserve buys T-bills through its open market operations,it causes the growth of bank deposits and loans to decrease.
A)True
B)False
Answer: False
Q4) The McFadden Act and the Douglas amendment which prevented banks from crossing state lines were later repealed by the
Answer: Riegle-Neal Interstate Banking and Branching Efficiency Act
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Chapter 3: The Organization and Structure of Banking and the Financial-Services Industry
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Q1) Which of the following is a type of nonbank businesses a bank holding company can own?
A)Retail Computer Store
B)Security Brokerage Firm
C)Retail Grocery Store
D)Wholesale Electronic Distribution Company
E)All the options are correct
Answer: B
Q2) Under the Bank Holding Company Act,control of a bank is assumed to exist only if:
A)The bank holding company acquires 100% of at least one bank's outstanding stock
B)The bank holding company acquires 50% or more of at least one bank's outstanding stock
C)The bank holding company acquires 25% or more of at least one bank's outstanding stock
D)The bank holding company acquires at least three banks
E)None of the options are correct
Answer: C
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Chapter 4: Establishing
New Banks, Branches, ATMs, Telephone Services, and Websites
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Q1) The Jones State Bank is planning to add a branch office on the west side of Edmond,Oklahoma.The bank has discovered that area surrounding the proposed site averages 4 houses per acre and has several subdivisions that each has 300 to 400 homes.Which factor would this address when considering whether to add a new branch?
A)Traffic count
B)Number of retail shops
C)Average age of the local population
D)Population Density
E)Population Growth
Q2) The _____________ of setting up a new ATM is the present value of the future stream of cash savings discounted at the firm's required rate of return less the total cash outlay for the ATM.
Q3) Higher levels of savings deposits are usually found in those bank branch office locations where there is a higher proportion of residents with above-average age and residents who own their own homes.
A)True
B)False
Q4) The acronym ACH stands for _____________.
Q5) The ______________________ issues charters for new national banks.
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Chapter 5: The Financial Statements of Banks and Their Principal Competitors
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Q1) In U.S.banking,securities gains are treated as an ordinary income.
A)True
B)False
Q2) A bank which starts with ALL of $1.48 million at the beginning of the year,charges off worthless loans of $0.94 million during the year,recovers $0.12 million on loans previously charged off and charges current income for a $1.02 million provision for loan losses,will have an ALL at the end of the year of:
A)$0.66 million.
B)$3.32 million.
C)$1.68 million.
D)$1.28 million.
E)The same amount as at the beginning of the year.
Q3) Which of the following accounts is also called the bank's primary reserves?
A)Cash and deposits due from banks
B)Investment securities
C)Trading account securities
D)Fed funds sold
E)None of the options are correct.
Q4) __________________________ are the primary long-term liabilities of the bank.
Q5) One part of __________ arises from fees charged for ATM and POS transactions. Page 7
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Chapter 6: Measuring and Evaluating the Performance of Banks
and Their Principal Competitors
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Q1) __________________________ assets of a financial institution are those that will mature or be repriced within a set period of time.
Q2) 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 options is correct
Q3) Which of the following would be the best example of a ratio used to examine the cost of one of a 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
E)Interest on business loans/Total business loans
Q4) For a bank,sources of funds like Eurodollars,Fed funds,repurchase agreements,and large CDs are categorized as ____________________.
Page 9
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Chapter 7: Risk Management for Changing Interest Rates:
Asset-Liability Management and Duration Techniques
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Q1) The relationship between a change in an asset's price and an asset's change in the yield or interest rate is captured by _________________________.
Q2) 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.
A)True
B)False
Q3) A bond has a face value of $1,000 and five years to maturity.This bond has a coupon rate 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 percent
B)12.75 percent
C)16 percent
D)11.45 percent
E)12 percent
Q4) Most lending institutions tend to do better when the yield curve is upward-sloping because they tend to have ____________ maturity gap positions.
Q5) Money market deposits are included as part of ______________________ for banks.
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Chapter 14: Investment Banking,Insurance,and Other
Sources of Fee Income
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Q1) A reverse swap is where the parties exchange the principal payments instead of the interest payments on loans.
A)True
B)False
Q2) A put option on Eurodollar deposit futures is most likely to be used by a bank to:
A)reduce its interest sensitive liabilities.
B)protect variable-rate loans and securities.
C)offset a positive interest-sensitive gap.
D)offset a negative interest-sensitive gap.
E)None of the options are correct.
Q3) One reason that banks use derivatives is to generate ________,the money that does not come from interest earned on loans and securities.
Q4) The combination of both a cap and floor is known as an interest-rate ________.
Q5) _________ are financial instruments that derive their value from some underlying asset.
Q6) A(n)_________________________ is the fee a buyer must pay to be able to put securities to,or to call securities away from the option writer.
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Q7) The category of derivative contracts with the largest use by banks is _________.
Chapter 9: Risk Management: Asset-Backed Securities,
Loan Sales, Credit Standbys, and Credit Derivatives
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Q1) A bank that wants to protect itself from higher borrowing costs due to a decrease in its credit rating might purchase:
A)a credit risk option.
B)a standby letter of credit.
C)a credit linked note.
D)a credit swap.
E)None of the options is correct
Q2) A(n)_______________ is an over-the-counter agreement offering protection against loss when default occurs on a loan or other debt instrument.
Q3) The credit derivatives market has grown many-fold during the recent years.
A)True
B)False
Q4) The Government National Mortgage Association (GNMA,or Ginnie Mae):
A)guarantees the issuance of securities by private lenders.
B)creates its own mortgage-backed securities.
C)acquires pools of home-mortgage loans from private lenders.
D)developed a new mortgage-backed instrument-the CMO.
E)is not a government-sponsored enterprise.
Q5) Insurance companies are the principal __________ of credit derivatives.
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Chapter 10: The Investment Function in Financial-Services Management
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Q1) The Roy State Bank has just purchased a portfolio of asset-backed securities.What type of risk do these securities have that other securities do not have?
A)Credit risk
B)Interest rate risk
C)Business risk
D)Call risk
E)Prepayment risk
Q2) A short term debt security issued by major corporations is known as
Q3) 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 currently selling in the market for $917.The bond makes annual coupon payments.What is the duration of this bond?
A)3.38 years
B)3.6 years
C)4.00 years
D)5.50 years
E)None of the options is correct
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Chapter 11: Liquidity and Reserves Management: Strategies and Policies
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Q1) Under a _________________________ strategy,some of the expected demands for liquidity are stored in assets,while others are backstopped by arrangements for lines of credit from banks or other suppliers of funds.
Q2) The base amount of transaction deposits for a depository institution above which the legal reserve requirement changes to ten percent is known as:
A)reserve base.
B)reserve tranche.
C)base limit.
D)limit tranche.
E)cut-off tranche.
Q3) "Core deposits","hot money",and "vulnerable money" are categories of funds under which of the following methods of estimating a bank's liquidity needs?
A)Sources and uses of funds approach
B)Structure of funds approach
C)Liquidity indicator approach
D)Sources and uses of funds approach and liquidity indicator approach
E)None of the options is correct
Q4) Not all _____________ banks around the world have reserve requirements.
Page 14
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Chapter 12: Managing and Pricing Deposit Services
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Q1) According to recent studies cited in this chapter,the number one factor that households consider in choosing a bank to hold their savings deposit is location.
A)True
B)False
Q2) When a customer is charged based on the number and kinds of services used,with the customers that use a number of services being charged less or having some fees waived,this is called __________________ pricing.
Q3) According to recent studies cited in this chapter,the number one factor that households consider in selecting a bank to hold their checking account is low fees and low minimum balance.
A)True B)False
Q4) A(n)_________________________ requires a bank to honor withdrawals immediately upon request.
Q5) Some people feel that everyone is entitled access to a minimum level of financial service,no matter what their income level is.This issue is called the issue of
Q6) The _________________________ is the added cost of bringing in new funds.
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Chapter 13: Managing Nondeposit Liabilities
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Q1) An agreement where one party agrees to sell T-bills to another party and at the same time agrees to buy them back at a future date for set price is known as a:
A)repurchase agreement.
B)commercial paper.
C)term loan.
D)negotiable CD.
E)None of the options is correct
Q2) The HTR Bank is planning on raising $750 million in a new offering of commercial paper through its holding company.It plans on using $725 million of it to fund new loans.The current interest rate for similar commercial paper is 7.15 percent and it expects 0.15 percent in issuing costs.What is the effective rate of interest on this issue of commercial paper?
A)7.30 percent
B)7.15 percent
C)7.40 percent
D)7.55 percent
E)None of the options is correct
Q3) Dollar-denominated CDs issued outside the U.S.are called ______________________.
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Chapter 14: Investment Banking, insurance, and Other
Sources of Fee Income
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Q1) The most rapidly growing source of income for banks is ________ income.
Q2) Which of the following trust agreements allows wealth to be passed free of gift and estate taxes?
A)Revocable trust
B)Irrevocable trust
C)Charitable trust
D)Indenture trust
E)None of the options is correct.
Q3) For which of the following banking services can the bank be legally liable for losses due to failure to act as a prudent decision maker?
A)Underwriting insurance services
B)Insurance sales services
C)Trust services
D)Exchange-traded-funds services
E)None of the options is correct
Q4) One attractive feature of investment banking is that it is generally less risky than commercial banking.
A)True
B)False
and
Chapter 15: The Management of Capital
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Q1) Interbank deposits generally carry:
A)low credit risk.
B)high credit risk.
C)highest credit risk.
D)moderate credit risk.
E)zero credit risk.
Q2) _________ are a type of long-term debt capital whose claims legally follow after the claims of depositors.
Q3) _________ are debt securities repayable from the sale of stock.
Q4) __________________ is the amount in excess of stock's par value paid by the bank's shareholders.
Q5) VaR models are most successful in assessing potential risk when the assets are non-traded.
A)True
B)False
Q6) Regulatory capital focuses on the market value of equity.
A)True
B)False
Q7) __________ is a hybrid form of debt and equity capital issued to investors.
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Q8) The largest component of capital among thrift institutions is ____________.
Chapter 16: Lending Policies and Procedures: Managing Credit Risk
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Q1) Credit card loans are generally more profitable for small and medium-size banks than for the large banks.
A)True
B)False
Q2) ___________________________,usually large banks,devote a bulk of their credit portfolio to large-denomination loans directed towards corporations and other businesses.
Q3) Credit extended to banks,insurance companies,finance companies,and other similar institutions is known as _______________.
Q4) According to the Community Reinvestment Act,selected lenders must make an "affirmative effort" to provide loans and other services to all credit-worthy borrowers in their chosen service area.
A)True
B)False
Q5) An approach that divides the cash flows of a firm into three principal sources,namely cash flow from operations,cash flow from financing activities,and cash flow from investing activities,is known as the _____________ cash flow method.
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Chapter 17: Lending to Business Firms and Pricing Business Loans
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Q1) ____________________________________________ are the other potential claims against the borrower which do not show up on the borrower's balance sheet.One new form of this is due to environmental damage by the borrower.
Q2) ____________ is a type of short-term loan,where the business lenders support installment purchases of automobiles,home appliances,furniture,business equipment,and other durable goods by financing the receivables that dealers take on when they write installment contracts to cover customer purchases.
Q3) Self-liquidating business loans are designed to take advantage of the normal cash cycle in a business firm.
A)True B)False
Q4) Banks attempting to compete with the growing commercial paper market developed the cost-plus business loan pricing method. A)True B)False
Q5) The amount of business lending tends to rise during periods of expansion. A)True
B)False
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Chapter 18: Consumer Loans, Credit Cards, and Real Estate
Lending
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Q1) Customers who apply for credit have the right to receive a written notice along with the reasons for denial if their loan request is turned down by a bank.
A)True
B)False
Q2) A majority of installment and lump-sum payment loans to families and individuals are made on floating interest rates.
A)True
B)False
Q3) A bank is considering making a loan to Sam Snape.Mr.Snape has $1,000 in the bank right now but generally keeps a balance of $4,500 most of the year.What aspect of evaluating a consumer loan application is this fact concerned with?
A)Character and purpose
B)Income level
C)Deposit balance
D)Employment and residential stability
E)Pyramiding of debt
Q4) A popular credit scoring system developed and sold by Fair Isaac Corporation is known as ___________.
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Chapter 19: Acquisitions and Mergers in Financial-Services Management
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Q1) In the United States,most bank mergers have occurred in which of the following geographic region of the country?
A)Southeastern U.S.
B)Northeastern U.S.
C)The West
D)The Midwest
E)Southwestern U.S.
Q2) The most important goal of any merger should be to:
A)increase the market value of the surviving firm.
B)reduce the risk of the surviving firm through geographic diversification.
C)increase managerial compensation.
D)increase the efficiency of the target firm.
E)None of the options is correct.
Q3) Empirical evidence suggests that earnings outcomes from mergers exhibit:
A)a symmetric distribution.
B)a positively skewed distribution.
C)a negatively skewed distribution.
D)a leptokurtic distribution.
E)no fixed pattern of distribution.
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Q4) A large metropolitan or money center bank is often called a(n)______________.
Chapter 20: International Banking and the Future of Banking and Financial Services
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Q1) Which of the following is a risk evaluation system in international lending today?
A)The Seat-of-the-pants method
B)The Discrimination method
C)The Delphi method
D)The State-risk indicator method
E)None of the options is correct.
Q2) A(n)______________________________________ is a receipt issued by a U.S.bank which makes it easier for a foreign business borrower to sell securities in the U.S.
Q3) A(n)______________________ is where a bank customer,anticipating a future need to make foreign currency purchase,will negotiate a contract for the delivery of the currency at a set price on a set date.
Q4) The specialized firms that can be operated by U.S.banking companies and Edge Act corporations are called:
A)international banking facilities (IBFs).
B)export trading companies (ETCs).
C)shell branches.
D)subsidiaries.
E)None of options is correct.
Page 23
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