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292 Cards in this Set
- Front
- Back
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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 B) Net return before special transactions C) Net interest margin D) Return on assets E) None of the above |
C) Net interest margin
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57. ROE for a bank is calculated by:
A) Dividing net after-tax income by total equity capital. B) Dividing total operating revenue less operating expenses by total assets. C) Deducting total interest expenses from total interest income and dividing by total equity capital. D) Noninterest income less noninterest expenses divided by total earning assets. E) None of the above |
A) Dividing net after-tax income by total equity capital.
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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 |
C) Net noninterest margin
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59. A bank's ROE equals its ROA times its:
A) Net profit margin B) Total assets divided by total equity capital C) Total operating revenues divided by total assets D) Ratio of net after-tax income to total operating revenues E) None of the above. |
B) Total assets divided by total equity capital
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60. The earnings spread for a bank is equal to:
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A) Total interest income divided by total earning assets less total interest-expense divided by total interest-bearing bank liabilities.
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61. The so-called employee productivity ratio for a bank is equal to:
A) Net operating revenue less total interest expenses per employee. B) Total interest and noninterest expense per employee C) Net operating income per full-time-equivalent employee D) Total operating earnings less salaries and wages expense per employee. E) None of the above. |
C) Net operating income per full-time-equivalent employee
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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. |
D) Over $10 billion in total assets
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A bank's stock price will tend to rise if the:
A) Value of the stream of future stockholder dividends is expected to increase B) The banking organization's perceived level of risk has fallen C) Expected dividends increase, while perceived level of risk declines D) All of the above. E) None of the above. |
D) All of the above.
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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 |
B) Earnings spread
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65. What do loans and security investments represent for a bank?
A) Earning assets B) Classified assets C) Discretionary accounts D) Market-valued assets E) None of the above |
A) Earning assets
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66. The so-called tax-management efficiency ratio consists of:
A) Total tax liabilities over net income B) Tax-exempt assets over taxable assets C) Net income over pre-tax net operating income D) Taxes owed over total liabilities of a bank E) None of the above |
C) Net income over pre-tax net operating income
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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 |
B) Liquidity risk
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68. OE for a bank reflects:
A) How well the assets of the bank are managed B) The bank's use of leverage C) How well the bank controls expenses D) All of the above E) None of the above |
D) All of the above
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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 |
D) Nonperforming loans/total loans
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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 |
A) Is doing a poor job of controlling expenses
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71. A bank that has a high asset utilization (AU) ratio 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) Is allocating assets to the most productive investments E) None of the above |
A) Is doing a poor job of controlling expenses
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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 |
B) Interest on time deposits/ total time deposits
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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 |
C) Interest on real estate loans/ total real estate loans
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71. A bank that has a high asset utilization (AU) ratio 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) Is allocating assets to the most productive investments E) None of the above |
D) Is allocating assets to the most productive investments
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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 |
D) Interest sensitive assets/ interest sensitive liabilities
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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 |
B) $43.13
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76. Using the information listed below for Carter State Bank, what is this bank's ROE?
Net income $55 million Total operating revenue $650 million Total assets $4,055 million Total equity capital $350 million A) 8.46 percent B) 16.03 percent C) 15.71 percent D) 1.36 percent E) None of the above |
C) 15.71 percent
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77. Using the information listed below for Carter State Bank, what is this bank's ROA?
Net income $55 million Total operating revenue $650 million Total assets $4,055 million Total equity capital $350 million A) 8.46 percent B) 16.03 percent C) 15.71 percent D) 1.36 percent E) None of the above |
D) 1.36 percent
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78. Using the information listed below for Carter State Bank, what is this bank's net profit margin?
Net income $55 million Total operating revenue $650 million Total assets $4,055 million Total equity capital $350 million A) 8.46 percent B) 16.03 percent C) 15.71 percent D) 1.36 percent E) None of the above |
A) 8.46 percent
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79. Using the information listed below for Carter State Bank, what is this bank's asset utilization ratio?
Net income $55 million Total operating revenue $650 million Total assets $4,055 million Total equity Capital $350 million A) 8.46 percent B) 16.03 percent C) 15.71 percent D) 1.36 percent E) None of the above |
B) 16.03 percent
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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 |
B) 1.35 percent
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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 |
A) 27.00 percent
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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 |
C) 1.17 percent
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83. The Smith-James Bank has an ROE of 17.5%, an asset utilization ratio of 13% and a net profit margin of 9%. What must this bank's equity multiplier be?
A) 14.96 times B) 1.58 times C) 1.17 times D) 134.62 times E) None of the above |
A) 14.96 times
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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 |
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B) 10? |
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85. Which of the following ratios would be a measure of credit risk?
A) Nonperforming Loans/Net Loans B) Net Loans/Total Assets C) Interest Sensitive Assets/Interest Sensitive Liabilities D) Equity Capital/Total Assets E) None of the above |
A) Nonperforming Loans/Net Loans
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Which of the following ratios would be a measure of market risk?
A) Nonperforming Loans/Net Loans B) Net Loans/Total Assets C) Interest Sensitive Assets/Interest Sensitive Liabilities D) Equity Capital/Total Assets E) None of the above |
E) None of the above
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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 |
A) More
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88. Operational risk includes which of the following?
A) Failure of bank’s computer system B) Closure of a bank for three months due to flooding from a major hurricane C) Embezzlement of funds of a bank by a teller of the bank D) Closure of a bank for two weeks due to a fire from a lightening strike E) All of the above are example of operational risk |
E) All of the above are example of operational risk
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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 bank’s 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 |
D) Strategic risk
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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 |
A) Operational risk
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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 |
E) Reputation risk
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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 |
B) Legal risk
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94. Forrest Fennell is thinking about investing in Capital City Bank. He is examining certain ratios of the bank including the ratio of nonperforming loans to total loans and leases and the provision for loan losses to total loans and leases. What type of risk is Forrest attempting to measure with these ratios?
A) Credit risk B) Liquidity risk C) Market risk D) Interest rate risk E) Operational risk |
A) Credit risk
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95. Gerald Wilkens is thinking about investing in Tallahassee State Bank. He is examining certain ratios of the bank including the ratio of cash assets and government securities to total assets and purchased funds to total assets. What type of risk is Gerald attempting to measure with these ratios?
A) Credit risk B) Liquidity risk C) Market risk D) Interest rate risk E) Operational risk |
B) Liquidity risk
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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 |
C) Market risk
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97. Paul Smith is thinking about investing in Capital City Bank. He is examining certain ratios of the bank including the ratio of interest sensitive assets to interest sensitive liabilities and uninsured deposits to total deposits. What type of risk is Paul attempting to measure with these ratios?
A) Credit risk B) Liquidity risk C) Market risk D) Interest rate risk E) Operational risk |
D) Interest rate risk
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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 bank’s safety deposit boxes have been ruined. John Garic, the President and CEO of the bank, has been working night and day to reopen the bank. What type of risk has John been dealing with?
A) Credit risk B) Liquidity risk C) Market risk D) Interest rate risk E) Operational risk |
E) Operational risk
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99. Castle State Bank has the following financial information.
Balance Sheet Income Statement Cash $100 Interest Income $400 Securities Investments $600 Interest Expenses ($150) Net Loans $1200 Non-Interest Income $50 Net Premises and Equip. $300 Non-Interest Expenses ($100) Total Assets $2200 Provision for Loan Losses ($60) Deposits $1100 Pre Tax Net Operating Income $140 Non-Deposit Borrowings * $800 Securities Gains (Losses) ($40) Equity Capital $300 Taxes ($45) Total Liabilities and Equity $2200 Net Income $55 * All Purchased Funds Use this information to calculate Castle State Bank’s ROE A) 20.45% B) 18.33% C) 12.22% D) 7.33% E) 2.5% |
B) 18.33%
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100. Castle State Bank has the following financial information.
Balance Sheet Income Statement Cash $100 Interest Income $400 Securities Investments $600 Interest Expenses ($150) Net Loans $1200 Non-Interest Income $50 Net Premises and Equip. $300 Non-Interest Expenses ($100) Total Assets $2200 Provision for Loan Losses ($60) Deposits $1100 Pre Tax Net Operating Income $140 Non-Deposit Borrowings * $800 Securities Gains (Losses) ($40) Equity Capital $300 Taxes ($45) Total Liabilities and Equity $2200 Net Income $55 * All Purchased Funds Use this information to calculate Castle State Bank’s ROA A) 20.45% B) 18.33% C) 12.22% D) 7.33% E) 2.5% |
E) 2.5%
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101. Castle State Bank has the following financial information.
Balance Sheet Income Statement Cash $100 Interest Income $400 Securities Investments $600 Interest Expenses ($150) Net Loans $1200 Non-Interest Income $50 Net Premises and Equip. $300 Non-Interest Expenses ($100) Total Assets $2200 Provision for Loan Losses ($60) Deposits $1100 Pre Tax Net Operating Income $140 Non-Deposit Borrowings * $800 Securities Gains (Losses) ($40) Equity Capital $300 Taxes ($45) Total Liabilities and Equity $2200 Net Income $55 * All Purchased Funds Use this information to calculate Castle State Bank’s net profit margin A) 20.45% B) 18.33% C) 12.22% D) 7.33% E) 2.5% |
C) 12.22%
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102. Castle State Bank has the following financial information.
Balance Sheet Income Statement Cash $100 Interest Income $400 Securities Investments $600 Interest Expenses ($150) Net Loans $1200 Non-Interest Income $50 Net Premises and Equip. $300 Non-Interest Expenses ($100) Total Assets $2200 Provision for Loan Losses ($60) Deposits $1100 Pre Tax Net Operating Income $140 Non-Deposit Borrowings * $800 Securities Gains (Losses) ($40) Equity Capital $300 Taxes ($45) Total Liabilities and Equity $2200 Net Income $55 * All Purchased Funds Use this information to calculate Castle State Bank’s asset utilization ratio A) 20.45% B) 18.33% C) 12.22% D) 7.33% E) 2.5% |
A) 20.45%
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103. Castle State Bank has the following financial information.
Balance Sheet Income Statement Cash $100 Interest Income $400 Securities Investments $600 Interest Expenses ($150) Net Loans $1200 Non-Interest Income $50 Net Premises and Equip. $300 Non-Interest Expenses ($100) Total Assets $2200 Provision for Loan Losses ($60) Deposits $1100 Pre Tax Net Operating Income $140 Non-Deposit Borrowings * $800 Securities Gains (Losses) ($40) Equity Capital $300 Taxes ($45) Total Liabilities and Equity $2200 Net Income $55 * All Purchased Funds Use this information to calculate Castle State Bank’s equity multiplier A) 20.45 times B) 18.33 times C) 12.22 times D) 7.33 times E) 2.5 times |
D) 7.33 times
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104. Castle State Bank has the following financial information.
Balance Sheet Income Statement Cash $100 Interest Income $400 Securities Investments $600 Interest Expenses ($150) Net Loans $1200 Non-Interest Income $50 Net Premises and Equip. $300 Non-Interest Expenses ($100) Total Assets $2200 Provision for Loan Losses ($60) Deposits $1100 Pre Tax Net Operating Income $140 Non-Deposit Borrowings * $800 Securities Gains (Losses) ($40) Equity Capital $300 Taxes ($45) Total Liabilities and Equity $2200 Net Income $55 * All Purchased Funds Use this information to calculate Castle State Bank’s earnings spread A) 37.5% B) 22.22% C) 14.33% D) 7.89% E) 2.5% |
C) 14.33%
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105. Harrison Bank has the following financial information.
Net Profit Margin 12.5% Net Income $1000 Total Assets $62,500 Total Equity $6250 What is this bank’s ROA? A) 1.6% B) 10% C) 12.8% D) 16% E) None of the above |
A) 1.6%
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106. Harrison Bank has the following financial information.
Net Profit Margin 12.5% Net Income $1000 Total Assets $62,500 Total Equity $6250 What is this bank’s ROE? A) 1.6% B) 10 % C) 12.8% D) 16% E) None of the above |
D) 16%
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107. Harrison Bank has the following financial information.
Net Profit Margin 12.5% Net Income $1000 Total Assets $62,500 Total Equity $6250 What is this bank’s Equity Multiplier A) 1.6 times B) 10 times C) 12.8 times D) 16 times E) None of the above |
B) 10 times
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108. Harrison Bank has the following financial information.
ROE 16% Net Income $1000 Total Assets $62,500 Total Equity $6250 What is this bank’s asset utilization ratio? A) 1.6% B) 10% C) 12.8% D) 16% E) None of the above |
C) 12.8%
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109. Harrison Bank has the following financial information.
Net Profit Margin 12.5% Net Income $1000 Total Assets $62,500 Total Equity $6250 What is this bank’s total operating revenue? A) $125 B) $8000 C) $488,281 D) $31,250,000 E) None of the above |
B) $8000
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110. Which assets are excluded from risk assets?
A) Real Estate Loans B) Commercial Paper C) Plant and Equipment D) Commercial and Industrial Loans E) All of the above are risk assets |
C) Plant and Equipment
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78. 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 |
A) When interest rates are volatile.
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79. A bank’s IS GAP is defined as:
A) The dollar amount of rate-sensitive assets divided by the dollar amount of rate-sensitive liabilities. B) The dollar amount of earning assets divided by the dollar amount of total liabilities. C) The dollar amount of rate-sensitive assets minus the dollar amount of rate-sensitive liabilities. D) The dollar amount of rate-sensitive liabilities minus the dollar amount of rate-sensitive assets. E) The dollar amount of earning assets times the average liability interest rate |
C) The dollar amount of rate-sensitive assets minus the dollar amount of rate-sensitive liabilities
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80. 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 management B) Asset management C) Risk management D) Funds management E) None of the above. |
D) Funds management
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81. The principal goal of interest-rate hedging strategy is to hold fixed a bank's:
A) Net interest margin B) Net income before taxes C) Value of loans and securities D) Noninterest spread E) None of the above |
A) Net interest margin
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82. 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. |
B) Interest-sensitive assets exceed its interest-sensitive liabilities
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83. The change in a bank's net income that occurs due to changes in interest rates equals the 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 assets B) Price risk of the bank's assets C) Price risk of the bank's liabilities D) Size of the bank's cumulative gap E) None of the above. |
D) Size of the bank's cumulative gap
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84. A bank with a negative interest-sensitive GAP:
A) Has a greater dollar volume of interest-sensitive liabilities than interest-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. |
E) A and C.
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85. 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-bearing liabilities. C) Changes in the mix of assets and liabilities in the bank's portfolio. D) All of the above. E) A and B only. |
D) All of the above
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86. The discount rate that equalizes the current market value of a loan or security with the expected stream of future income payments from that loan or security is known as the:
A) Bank discount rate B) Yield to maturity C) Annual percentage rate (APR) D) Add-on interest rate E) None of the above. |
B) Yield to maturity
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87. The interest-rate measure often quoted on short-term loans and money market securities such as U.S. Treasury bills is the:
A) Bank discount rate B) Yield to maturity C) Annual percentage rate (APR) D) Add-on interest rate E) None of the above |
A) Bank discount rate
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88. A bank whose interest-sensitive assets total $350 million and its interest-sensitive liabilities amount to $175 million has:
A) An asset-sensitive gap of 525 million B) A liability-sensitive gap of $175 million C) An asset-sensitive gap of $175 million D) A liability-sensitive gap of $350 million E) None of the above. |
C) An asset-sensitive gap of $175 million
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89. A bank has a 1-year $1,000,000 loan outstanding, payable in four equal quarterly installments. What dollar amount of the loan would be considered rate sensitive in the 0 – 90 day bucket?
A) $0 B) $250,000 C) $500,000 D) $750,000 E) $1,000,000 |
B) $250,000
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90. A bank has Federal funds totaling $25 million with an interest rate sensitivity weight 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?
A) $50.25 B) $-15 C) -$50.25 D) $34.25 E) None of the above |
A) $50.25
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91. A bond has a face value of $1000 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% B) 12.75% C) 16% D) 11.45% E) Cannot be calculated from the information given |
C) 16%
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92. A treasury bill currently sells for $9,845, has a face value of $10,000 and has 46 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 above |
B) 12.13%
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93. The _______________ is determined by the demand and supply for loanable funds in the market. The term that correctly fills in the blank in the preceding sentence is:
A) The yield to maturity B) The banker's discount rate C) The holding period return D) The risk-free real rate of interest E) The market rate of interest on a risky loan |
D) The risk-free real rate of interest
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94. A bank with a positive interest-sensitive gap will have a decrease in net interest income when interest rates in the market:
A) Rise B) Fall C) Stay the same D) A bank with a positive interest-sensitive gap will never have a decrease in net interest income |
B) Fall
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95. The fact that a consumer who purchases a particular basket of goods for $100 today has to pay $105 next year for the same basket of goods is an example of which of the following risks:
A) Inflation risk B) Default risk C) Liquidity risk D) Price risk E) Maturity risk |
A) Inflation risk
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96. A bank has Federal Funds totaling $25 million with an interest rate sensitivity weight 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) $50.25 B) $-15 C) -$50.25 D) $34.25 E) None of the above |
B) $-15
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97. If a bank has a positive GAP, an increase in interest rates will cause interest income to __________, interest expense to__________, and net interest income to __________.
A) Increase, increase, increase B) Increase, decrease, increase C) Increase, increase, decrease D) Decrease, decrease, decrease E) Decrease, increase, increase |
A) Increase, increase, increase
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98. If a bank has a negative GAP, a decrease in interest rates will cause interest income to __________, interest expense to__________, and net interest income to __________.
A) Increase, increase, increase B) Increase, decrease, increase C) Increase, increase, decrease D) Decrease, decrease, decrease E) Decrease, decrease, increase |
E) Decrease, decrease, increase
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99. A treasury bill currently sells for $9,845, has a face value of $10,000 and has 46 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 above |
A) 12.49%
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100. 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 million B) $3602 million C) $1115 million D) $3.790 million E) None of the above |
C) $1115 million
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101. 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% |
D) 5.38%
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Which of the following is part of funds management?
A) The goal of funds management is simply to gain control over the bank's funds sources. 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's liabilities. D) The spread between interest revenues and interest expenses is unimportant. E) None of the above |
C) Management of the bank's assets must be coordinated with management of the bank's liabilities
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103. 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) Lower B) Raise C) Stabilize D) Not affect E) None of the above |
A) Lower
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104. 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 years B) 1.7 years C) 2.7 years D) 4.1 years E) None of the above |
B) 1.7 years
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105. 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. |
D) A positive duration gap of 2.5 years.
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106. 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. |
D) A negative duration gap of 1.28 years
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107. 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 duration B) The higher the coupon rate, the higher the duration C) The shorter the duration, the greater the price volatility D) All of the above are true E) None of the above are true |
A) The longer the time to maturity, the greater the duration
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108. 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 percent D) This bond's price will rise by 14.02 percent E) This bond's price will not change |
C) This bond's price will fall by 14 .02 percent
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109. 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 million B) Net worth will increase by $31.81 million C) Net worth will increase by $27.27 million D) Net worth will decrease by $27.27 million E) Net worth will not change at all |
B) Net worth will increase by $31.81 million
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110. 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 years B) –2 years C) 3.5 years D) –3.5 years E) None of the above |
C) 3.5 years
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111. 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 million B) Net worth will increase by $50.47 million C) Net worth will decrease by $240.95 million D) Net worth will increase by $240.95 million E) Net worth will not change at all |
B) Net worth will increase by $50.47 million
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112. 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 years B) 4 years C) 2.65 years D) –2.65 years E) 12.65 years |
D) –2.65 years
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113. 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 years B) This bank has a duration gap of 15.03 years C) This bank has a duration gap of 3.55 years D) This bank has a duration gap of 3.75 years E) This bank has a duration gap of 5.15 years |
D) This bank has a duration gap of 3.75 years
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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 net worth will decline B) A bank with a positive duration gap has a longer average duration for its assets than for its liabilities C) If a bank has a zero duration gap and interest rates rise, the bank's net worth will not change D) If a bank has a negative duration gap and interest rates rise, the bank's net worth will increase E) All of the above are true statements |
E) All of the above are true statements
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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 years B) 4.125 years C) 7.5 years D) 5.5 years E) None of the above |
A) 7.33 years
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116. 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 years B) 2.78 years C) 1.95 years D) 4.31 years E) None of the above |
B) 2.78 years
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117. A bond has a face value of $1000 and coupon payments of $120 annually. This bond matures in three years and is selling in the market for $1160. Market interest rates are 6%. What is this bond's duration?
A) 3 years B) 5.71 years C) 1.96 years D) 2.71 years E) None of the above |
D) 2.71 years
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118. A bond is selling in the market for $950 and has a duration of 6 years. Market interest rates are 9% and are expected to decrease to 7% in the near future. What will this bond's price be after the change in market interest rates?
A) $969 B) $931 C) $1055 D) $854 E) $950 |
C) $1055
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119. A bond is selling in the market for $1100 and has a duration of 4.5 years. Market interest rates are 5% and are expected to increase to 7% in the near future. What will this bond's price be after the change in market interest rates?
A) $1006 B) $1194 C) $1122 D) $1078 E) $1100 |
A) $1006
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120. Which of the following is a true statement?
A) The longer the time to maturity of a security the smaller the duration B) The lower the coupon rate of a security the smaller the duration C) For a given duration and change in interest rates, the change in the price of the security will be larger for a lower starting level of interest rates D) The duration of a security remains constant no matter the level of market interest rates E) All of the above are true statements |
C) For a given duration and change in interest rates, the change in the price of the security will be larger for a lower starting level of interest rates
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121. The fact that the rate of change in an asset's price varies with the level of interest rates is known as:
A) Duration B) Convexity C) Maturity D) Yield E) None of the above |
B) Convexity
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122. U.S. banks tend to fare best when the yield curve is:
A) Flat B) Downward-sloping C) Vertical D) Upward-sloping E) Kinked |
D) Upward-sloping
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123. Carolina National Bank knows that the interest rate on its loans change faster and by a larger amount than the interest rate on its deposits. What type of risk is this an example of?
A) Default risk B) Inflation risk C) Liquidity risk D) Call risk E) Basis risk |
E) Basis risk
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124. Havoc State Bank has a loan that it fears will not be repaid because the company is going into bankruptcy. What type of risk would this be an example of?
A) Default risk B) Inflation risk C) Liquidity risk D) Call risk E) Basis risk |
A) Default risk
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125. The Carter National Bank is worried because it knows that the municipal bonds it has in its bond portfolio can be difficult to sell quickly. What type of risk would this be an example of?
A) Default risk B) Inflation risk C) Liquidity risk D) Call risk E) Basis risk |
C) Liquidity risk
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126. The Jackson State Bank is worried because many of the loans it has made are home mortgages which can be paid off early by the homeowner. What type of risk would this be an example of?
A) Default risk B) Inflation risk C) Liquidity risk D) Call risk E) Basis risk |
D) Call risk
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127. A bank is liability sensitive if its:
A) Deposits and nondeposit borrowings are affected by changes in interest rates B) Interest-sensitive assets exceed interest-sensitive liabilities C) Interest-sensitive liabilities exceed its interest-sensitive assets D) Loans and securities are affected by changes in interest rates E) None of the above |
C) Interest-sensitive liabilities exceed its interest-sensitive assets
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128. Which of the following would be an example of a repriceable asset?
A) Money the bank has borrowed from the money market B) Cash in the vault C) Demand deposits that do not pay interest D) Short term securities issued by the government about to mature owned by the bank E) All of the above are examples of repriceable assets |
D) Short term securities issued by the government about to mature owned by the bank
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129. Which of the following would be an example of a repriceable liability?
A) Money the bank has borrowed from the money market B) Cash in the vault C) Demand deposits that do not pay an interest rate D) Short term securities issued by the government about to mature owned by the bank E) All of the above are examples of repriceable assets |
A) Money the bank has borrowed from the money market
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Which of the following would be an example of a nonrepriceable asset?
A) Money the bank has borrowed from the money market B) Cash in the vault C) Demand deposits that do not pay an interest rate D) Short term securities issued by the government about to mature owned by the bank E) All of the above are examples of repriceable assets |
B) Cash in the vault
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131. Which of the following would be an example of a nonrepriceable liability?
A) Money the bank has borrowed from the money market B) Cash in the vault C) Demand deposits that do not pay an interest rate D) Short term securities issued by the government about to mature owned by the bank E) All of the above are examples of repriceable assets |
C) Demand deposits that do not pay an interest rate
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132. The Tidewater State Bank has $1000 in total assets (all of which are earning assets), $700 of which will be repriced with in the next 90 days. This bank also has $800 in total liabilities, $400 of which will be repriced within the next 90 days. Currently, the bank is earning 8% on its assets and is paying 5% on its liabilities. If interest rates do not change in the next ninety days, what is this bank’s net interest margin?
A) 8% B) 5% C) 4% D) 1.4% E) Cannot tell from the information given |
C) 4%
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133. The Tidewater State Bank has $1000 in total assets (all of which are earning assets), $700 of which will be repriced with in the next 90 days. This bank also has $800 in total liabilities, $400 of which will be repriced within the next 90 days. Currently, the bank is earning 8% on its assets and is paying 5% on its liabilities. What is the dollar interest-sensitive gap of this bank?
A) -$200 B) -$100 C) $200 D) $300 E) $600 |
D) $300
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134. The Tidewater State Bank has $1000 in total assets (all of which are earning assets), $700 of which will be repriced with in the next 90 days. This bank also has $800 in total liabilities, $400 of which will be repriced within the next 90 days. Currently, the bank is earning 8% on its assets and is paying 5% on its liabilities. If interest rates on both assets and liabilities rise by 2% in the next 90 days, what would this bank’s net interest margin be?
A) 4% B) 4.4% C) 4.6% D) 2.4% E) 6% |
C) 4.6%
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135. The Tidewater State Bank has $1000 in total assets (all of which are earning assets), $700 of which will be repriced with in the next 90 days. This bank also has $800 in total liabilities, $400 of which will be repriced within the next 90 days. Currently, the bank is earning 8% on its assets and is paying 5% on its liabilities. If interest rates on both assets and liabilities rise by 2% in the next 90 days, what should happen to this bank’s net interest margin?
A) It should rise B) It should fall C) It should stay the same D) Cannot be determined from the above information |
A) It should rise
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136. The Tidewater State Bank has $1000 in total assets (all of which are earning assets), $700 of which will be repriced with in the next 90 days. This bank also has $800 in total liabilities, $400 of which will be repriced within the next 90 days. Currently, the bank is earning 8% on its assets and is paying 5% on its liabilities. If interest rates on both assets and liabilities decrease by 2% in the next 90 days, what would this bank’s net interest margin be?
A) 3.4% B) 4% C) .4% D) 5.6% E) 2% |
A) 3.4%
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137. The Tidewater State Bank has $1000 in total assets (all of which are earning assets), $700 of which will be repriced with in the next 90 days. This bank also has $800 in total liabilities, $400 of which will be repriced within the next 90 days. Currently, the bank is earning 8% on its assets and is paying 5% on its liabilities. If interest rates on both assets and liabilities decrease by 2%, what should happen to this bank’s net interest margin?
A) It should rise B) It should fall C) It should stay the same D) Cannot be determined from the above information |
B) It should fall
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138. The Arnold National Bank has a bond portfolio that consists of bonds with 5 years to maturity and a 9% coupon rate. These bonds are selling in the market for $1126. Coupon payments are made annually on this bond. What is the yield to maturity on these bonds?
A) 3% B) 6% C) 9% D) 12% E) None of the above |
B) 6%
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The Arnold National Bank has a bond portfolio that consists of bonds with 5 years to maturity and a 9% coupon rate. These bonds are selling in the market for $1126. Coupon payments are made annually on this bond. What is duration of these bonds?
A) 3.77 years B) 4.29 years C) 5 years D) 9 years E) None of the above |
B) 4.29 years
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140. The Harris State Bank has $2000 in total assets (all of which are earning assets), $500 of which will be repriced in the next 90 days. This bank also has $1600 in total liabilities, $1000 of which will be repriced in 90 days. The bank currently earns 9% on its assets and pays 4% on its liabilities. If interest rates do not change in the next 90 days, what is this bank’s net interest margin?
A) .5% B) .8% C) 1.8% D) 5.8% E) None of the above |
D) 5.8%
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141. The Harris State Bank has $2000 in total assets (all of which are earning assets), $500 of which will be repriced in the next 90 days. This bank also has $1600 in total liabilities, $1000 of which will be repriced in 90 days. The bank currently earns 9% on its assets and pays 4% on its liabilities. What is the dollar interest sensitive gap of this bank?
A) $400 B) -$1100 C) -$500 D) $1000 E) None of the above |
C) -$500
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142. The Harris State Bank has $2000 in total assets (all of which are earning assets), $500 of which will be repriced in the next 90 days. This bank also has $1600 in total liabilities, $1000 of which will be repriced in 90 days. The bank currently earns 9% on its assets and pays 4% on its liabilities. If interest rates on both assets and liabilities rise by 2% in the next 90 days, what would be this bank’s net interest margin?
A) 4.2% B) 5.3% C) 5.8% D) 6.2% E) 7.8% |
B) 5.3%
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143. The Harris State Bank has $2000 in total assets (all of which are earning assets), $500 of which will be repriced in the next 90 days. This bank also has $1600 in total liabilities, $1000 of which will be repriced in 90 days. The bank currently earns 9% on its assets and pays 4% on its liabilities. If interest rates on both assets and liabilities rise by 2% in the next 90 days, what should happen to this bank’s net interest margin?
A) It should rise B) It should fall C) It should stay the same D) Cannot be determined from the information given |
B) It should fall
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144. The Harris State Bank has $2000 in total assets (all of which are earning assets), $500 of which will be repriced in the next 90 days. This bank also has $1600 in total liabilities, $1000 of which will be repriced in 90 days. The bank currently earns 9% on its assets and pays 4% on its liabilities. If interest rates on both assets and liabilities fall by 2% in the next 90 days, what would be this bank’s net interest margin?
A) 3.8% B) 5.4% C) 5.8% D) 6.3% E) 7.8% |
D) 6.3%
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145. The Harris State Bank has $2000 in total assets (all of which are earning assets), $500 of which will be repriced in the next 90 days. This bank also has $1600 in total liabilities, $1000 of which will be repriced in 90 days. The bank currently earns 9% on its assets and pays 4% on its liabilities. If interest rates on both assets and liabilities fall by 2% in the next 90 days, what should happen to this bank’s net interest margin?
A) It should rise B) It should fall C) It should stay the same D) Cannot be determined from the information given? |
A) It should rise
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146. Maryellen Epplin notices that a particular T-Bill has a banker’s discount rate of 9% in the Wall Street Journal. She knows that this T-Bill has 20 days to maturity and has a face value of $10,000. What price is this T-Bill selling for in the market?
A) $9100 B) $10,000 C) $9950 D) $1900 E) None of the above |
C) $9950
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147. Maryellen Epplin notices that a particular T-Bill has a banker’s discount rate of 9% in the Wall Street Journal. She knows that this T-Bill has 20 days to maturity and has a face value of $10,000. What is the yield to maturity on this T-Bill?
A) 9% B) .5% C) 4.5% D) 9.17% E) None of the above |
D) 9.17%
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148. The Raymond Burr National Bank has $1000 in assets with an average duration of 5 years. This bank has $800 in liabilities with an average duration of 6.25 years. What is the duration gap of this bank?
A) -1.25 years B) 0 years C) 1.25 years D) -2.25 years E) None of the above |
B) 0 years
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149. The Raymond Burr National Bank has $1000 in assets with an average duration of 5 years. This bank has $800 in liabilities with an average duration of 6.25 years. Market interest rates start at 6% and fall by 1%. What is the change in net worth of this bank?
A) $11.29 B) $-11.29 C) $0 D) -$22.22 E) $22.22 |
C) $0
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86. The interest rate on one year Treasury Bonds is 5%. The interest rate on five year Treasury Bonds is 7.5%. The interest rate on ten year Treasury Bonds is 10%. What is true about the yield curve?
A) It is upward sloping B) It is downward sloping C) It is a horizontal line D) Cannot be determined from the information given |
A) It is upward sloping
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A financial institution with a negative gap could reduce the risk of loss due to changing interest rates by:
A) Extending asset maturities B) Increasing short-term interest-sensitive liabilities C) Using financial futures or options contracts. D) All of the above. E) None of the above. |
D) All of the above.
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If a bank has a positive gap, that is, if it is asset sensitive, the bank can hedge its interest-rate risk by which of the following activities:
A) Reduce its asset maturities. B) Reduce maturities of its liabilities. C) Use a long hedge. D) All of the above. E) A and C only. |
E) A and C only.
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A significant limitation to financial futures as an interest-rate hedging device is a special form of risk known as ___________ risk. Which of the following terms correctly completes the statement?
A) Default B) Basis C) Credit D) Market E) None of the above. |
B) Basis
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The realized return to a bank from a combined cash and futures market trading operation is composed of which of the following elements:
A) Return earned in the cash market. B) Profit or loss from futures trading. C) Difference between the opening and closing basis between cash and futures markets. D) All of the above. E) B and C only. |
D) All of the above.
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Advantages of trading financial futures to hedge interest-rate risk include which of the following:
A) Only a fraction of the value of the contract must be pledged as collateral. B) Brokers' commissions are relatively low. C) There is no risk in trading futures contracts. D) All of the above. E) A and B only. |
E) A and B only.
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An option buyer can:
A) Exercise the option. B) Sell the option to another buyer. C) Allow the option to expire. D) All of the above. E) A and B only |
D) All of the above.
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83. A bank wishing to avoid higher borrowing costs would be most likely to use:
A) A short or selling hedge in futures. B) A long or buying hedge in futures. C) A call option on futures contracts. D) B and C above. E) None of the above. |
A) A short or selling hedge in futures
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A bank seeking to avoid lower than expected yields from loans and security investments would be most likely to use:
A) A short or selling hedge in futures. B) A long or buying hedge in futures. C) A put option on futures contracts. D) B and C above. E) None of the above. |
B) A long or buying hedge in futures.
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The gain or loss to a bank from the use of a financial futures contract depends upon:
A) The duration of the underlying security named in the futures contract B) The initial futures price C) The change expected in interest rates divided by 1 + the original interest rate. D) All of the above. E) None of the above. |
D) All of the above
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The number of futures contracts that a bank will need in order to fully hedge the bank's overall interest rate risk exposure and protect the bank's net worth depends upon (among other factors):
A) The relative duration of bank assets and liabilities. B) The duration of the underlying security named in the futures contract. C) The price of the futures contract. D) All of the above. E) None of the above. |
D) All of the above.
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A put option would most likely be used to:
A) Protect fixed-rate loans and securities. 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 above. |
A) Protect fixed-rate loans and securities
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A call option would most likely be used to:
A) Protect the value of fixed-rate loans and securities. B) Offset a negative interest-sensitive gap. C) Offset a positive duration gap. D) Offset a negative duration gap. E) None of the above. |
D) Offset a negative duration gap.
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According to the textbook, the most popular option contracts used by banks today include:
A) Federal Funds futures contracts. B) Eurodollar time deposit futures contracts. C) U.S. Treasury bond futures contract. D) All of the above. E) None of the above. |
D) All of the above
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A futures contract which calls for the delivery of a $100,000 T-bond with a minimum of 15 years to maturity is called a:
A) U.S. Treasury bond futures contract B) One-month LIBOR futures contract C) Eurodollar time deposit futures contract D) Federal Funds futures contract E) None of the above |
A) U.S. Treasury bond futures contract
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A financial institution that sells a particular futures contract and later purchases the same contract back is executing:
A) A long hedge B) A short hedge C) A sideways hedge D) An up-side-down hedge E) None of the above |
B) A short hedge
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A financial institution that uses a long hedge is most likely:
A) Trying to avoid higher borrowing costs B) Trying to avoid declining asset values C) Trying to avoid lower than expected yields on from loans and securities D) A and B above |
C) Trying to avoid lower than expected yields on from loans and securities
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A bank that uses a short hedge is most likely:
A) Trying to avoid higher borrowing costs B) Trying to avoid declining asset values C) Trying to avoid lower than expected yields on from loans and securities D) A and B above |
D) A and B above
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Suppose a bank has an asset duration of 5 years and a liability duration of 2.5 years. This bank has $1000 million in assets and $750 million in liabilities. They are planning on trading in a Treasury bond future which has a duration of 8.5 years and which is selling right now for $99,000 for a $100,000 contract. How many futures contracts does this bank need to fully hedge itself against interest rate risk?
A) 3714 contracts B) 3125 contracts C) 2971 contracts D) 371 contracts E) None of the above |
A) 3714 contracts
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A bank wishes to sell $350 million in new 30-day time deposits next month. Today interest rates are 7 percent. However, next month interest rates are expected to rise to 7.75 percent. What is the potential loss in profit for the month from this increase in interest rates? (Use a 360 day year)
A) $27.125 million B) $24.500 million C) $.2188 million D) $2.625 million E) There is no potential loss from this increase |
C) $.2188 million
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A futures contract on a 30 day Eurodollar time deposit is currently selling at an IMM index of 95.75 percent. The IMM index on a 30 day Eurodollar time deposit for immediate delivery is 95.10 percent. What is the basis risk for the futures contract?
A) 65 basis points B) –65 basis points C) 490 basis points D) 425 basis points E) There is no basis risk on this contract |
A) 65 basis points
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Suppose a T-Bond futures contract has a duration of 9 years and has a current market price of $98,750. Market interest rates are 6 percent today but are expected to rise to 7.5 percent. What is the change in this futures contract's market price from this change in interest rates?
A) $12,577 B) -$12,577 C) $62,883 D) -$62,883 E) None of the above |
B) -$12,577
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Suppose a Eurodollar time deposit futures contract has a duration of .5 years and has a current market price of $950,000. Market interest rates are 8.5 percent and are expected to fall to 7.5 percent. What is the change in this futures contract's market price from this change in interest rates?
A) $4378 B) -$4378 C) $30,645 D) -$30,645 E) None of the above |
A) $4378
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A financial institution that goes long in the futures market:
A) Has the right to accept delivery of the underlying security at the contract price if they wish B) Has the right to make delivery of the underlying security at the contract price if they wish C) Is obligated to accept delivery of the underlying security at the contract price D) Is obligated to make delivery of the underlying security at the contract price |
C) Is obligated to accept delivery of the underlying security at the contract price
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A bank that goes short in the futures market:
A) Has the right to accept delivery of the underlying security at the contract price if they wish B) Has the right to make delivery of the underlying security at the contract price if they wish C) Is obligated to accept delivery of the underlying security at the contract price D) Is obligated to make delivery of the underlying security at the contract price |
D) Is obligated to make delivery of the underlying security at the contract price
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A financial institution that buys a put option:
A) Has the right to accept delivery of the underlying security at the contract price if they wish B) Has the right to make delivery of the underlying security at the contract price if they wish C) Is obligated to accept delivery of the underlying security at the contract price D) Is obligated to make delivery of the underlying security at the contract price |
B) Has the right to make delivery of the underlying security at the contract price if they wish
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A bank that buys a call option:
A) Has the right to accept delivery of the underlying security at the contract price if they wish B) Has the right to make delivery of the underlying security at the contract price if they wish C) Is obligated to accept delivery of the underlying security at the contract price D) Is obligated to make delivery of the underlying security at the contract price |
A) Has the right to accept delivery of the underlying security at the contract price if they wish
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Interest rate hedging devices used by banks today include which of the following:
A) Financial futures contracts. B) Interest-rate options contracts. C) Interest rate swaps. D) Interest rate caps, floors, and collars. E) All of the above. |
E) All of the above.
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An interest rate swap is:
A) A way to change a bank's exposure to interest rate fluctuations. B) A way to achieve lower borrowing costs. C) A way to convert from fixed rates to floating rates. D) A way to transform actual cash flows through the bank to more closely match desired cash flow patterns. E) All of the above. |
E) All of the above.
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An interest rate collar:
A) Combines a rate floor and a rate cap into one agreement. B) Ranges in maturity from a few days to a few weeks. C) Protects a lender from rising interest rates. D) All of the above. E) B and C only. |
A) Combines a rate floor and a rate cap into one agreement.
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An agreement where two parties agree to exchange different currencies is known as:
A) An interest rate swap B) A currency swap C) A swaption D) A quality swap E) None of the above |
B) A currency swap
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The part of an agreement which allows one or both parties to make certain changes to the agreement or eliminate the agreement is called:
A) An interest rate swap B) A currency swap C) A swaption D) A quality swap E) None of the above |
C) A swaption
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An agreement where a party with a lower credit rating enters into an agreement to exchange interest payments with a borrower having a higher credit rating is know as:
A) An interest rate swap B) A currency swap C) A swaption D) A quality swap E) None of the above |
D) A quality swap
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Which of the following is an advantage of an interest rate swap agreement?
A) Little or no basis risk B) Low brokerage fees C) Increased flexibility over other hedging techniques D) Little or no credit risk E) All of the above are advantages of interest rate swap agreements |
C) Increased flexibility over other hedging techniques
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Which of the following is a disadvantage of an interest rate swap agreement?
A) Basis risk B) High brokerage fees C) Default risk D) Interest rate risk E) All of the above are disadvantages of interest rate swap agreements. |
E) All of the above are disadvantages of interest rate swap agreements.
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Interest rate swaps:
A) First developed in the 1980s B) Are one of the oldest interest rate hedging devices C) Allows for the exchange of different currencies by two parties D) Are rigid and inflexible E) Are none of the above |
A) First developed in the 1980s
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Interest rate caps:
A) First developed in the 1980s B) Are one of the oldest interest rate hedging devices C) Allow for the exchange of different currencies by two parties D) Protect lenders from falling interest rates E) B and D above |
B) Are one of the oldest interest rate hedging devices
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The approximate percentage of banks who reportedly use derivative contracts is:
A) 12% B) 25% C) 50% D) 75% E) 100% |
A) 12%
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All of the following interest-rate futures contracts are traded on exchanges except:
A) Eurodollar futures contract B) Treasury Bond futures contract C) Eurodollar time deposit futures contract D) Federal Funds futures contract E) Corporate Bond futures contract |
E) Corporate Bond futures contract
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A bank with a duration gap of 2 years and total assets of $100 million uses a futures contract with a duration of .5 years and a price of $100,000 to hedge. The number of contracts that are needed is:
A) 2000 B) 4000 C) 8000 D) 10,000 E) 20,000 |
B) 4000
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The floating-rate payer in a swap may want to buy an interest-rate:
A) Floor B) Cap C) Collar D) Option E) Neither a floor nor a cap |
B) Cap
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117. When an investor first purchases or sells a futures contract, she must make a deposit to the exchange. This is called the:
A) Initial margin B) Floor broker C) Settlement price D) Open interest E) Clearinghouse |
A) Initial margin
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118. The person who executes orders in the futures market for the public is called the:
A) Day trader B) Floor broker C) Bank examiner D) Speculator E) Scalper |
B) Floor broker
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119. When contracts are marked to market at the end of each day, the amount that is used to determine this is called the:
A) Initial margin B) Floor broker C) Settlement price D) Open interest E) Clearinghouse |
C) Settlement price
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120. The number of contracts that have been established and not yet offset or exercised is called by the Wall Street Journal.
A) Initial margin B) Floor broker C) Settlement price D) Open interest E) Clearinghouse |
D) Open interest
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121. The amount of initial margin, the settlement price and other rules regarding trading futures contract are determined by:
A) SEC B) Floor brokers C) Dealers D) Open interest E) Clearinghouse |
E) Clearinghouse
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122. Julie Wells has found a Treasury Bond futures contract that has a duration of 8.5 years and is currently selling for $97,500. Interest rates are currently 8% and are expected to rise 1.5%. What is the change in this future contract’s price for this change in interest rates?
A) $1462.50 B) $12,431.25 C) -$11,521.42 D) -$1462.50 E) -$12,431.25 |
C) -$11,521.42
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123. The Kromwell Community Bank has an average duration for its asset portfolio of 6 years. It also has an average duration for its liability portfolio of 2.5 years. This bank has $ $500 million in total assets and $450 million in liabilities. The Kromwell Community Bank is thinking about hedging their risk by using a Treasury Bond futures contract with a duration of 7.5 years and a price of $98,000. How many futures contracts will the Kromwell Community Bank need use to hedge their risk?
A) 2381 contracts B) 2551 contracts C) 3061 contracts D) 4464 contracts E) None of the above |
B) 2551 contracts
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124. A Treasury Bond futures contract is selling in the market for $98,225 and has a duration of 8 years. The same Treasury Bond is selling in the cash market for $98,625 and has a duration of 8.25 years. What is the basis for this futures contract?
A) $400 B) .25 years C) $28,156.25 D) $1600 E) None of the above |
A) $400
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125. What type of futures contract tends to accurately predict the consensus opinion as to actions to be taken by the Federal Open Market Committee in the future?
A) U.S. Treasury Bond futures contract B) Eurodollar time deposit futures contract C) One month LIBOR futures contract D) Federal Funds futures contract E) All of the above |
D) Federal Funds futures contract
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126. Which of the following is one of the risks the OCC requires banks to measure and set limits on?
A) Strategic risk B) Reputation risk C) Price risk D) Liquidity risk E) All of the above |
E) All of the above
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127. What is the objective of a fair value hedge?
A) To offset the losses due to changes in the value of an asset or liability B) To reduce the risk associated with future cash flows C) To maximize future cash flows D) To maximize the value of an asset or minimize the value of a liability E) None of the above |
A) To offset the losses due to changes in the value of an asset or liability
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128. What is the objective of a cash flow hedge?
A) To offset the losses due to changes in the value of an asset or liability B) To reduce the risk associated with future cash flows C) To maximize future cash flows D) To maximize the value of an asset or minimize the value of a liability E) None of the above |
B) To reduce the risk associated with future cash flows
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129. Which of the following is a characteristic of a swap buyer?
A) Prefers flexible, short-term interest rate B) Generally has a higher credit rating C) Often has a positive duration D) Generally has a large holding of short-term assets E) All of the above |
C) Often has a positive duration
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130. Which of the following is a characteristic of a swap seller?
A) Prefers fixed-rate longer term loans B) Generally has a lower credit rating C) Often has a positive duration D) Generally has a large holding of short-term assets E) All of the above |
D) Generally has a large holding of short-term assets
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131. Which of the following is a characteristic of a swap buyer?
A) They generally have a lower credit rating B) They prefer fixed rate longer term loans C) They often have a positive duration D) They generally have substantial holdings of longer term assets E) All of the above |
E) All of the above
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132. Which of the following is a characteristic of a swap seller?
A) They generally have a higher credit rating B) They prefer flexible short-term interest rate C) They often have a negative duration D) They generally have large holdings of short-term assets E) All of the above |
E) All of the above
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133. A swap where the notional amount is constant is called:
A) A quality swap B) A bullet swap C) An amortizing swap D) An accruing swap E) None of the above |
B) A bullet swap
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134. A swap where the notional amount declines over time is called:
A) A quality swap B) A bullet swap C) An amortizing swap D) An accruing swap E) None of the above |
C) An amortizing swap
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135. A swap where the notional amount accumulates over time is called:
A) A quality swap B) A bullet swap C) An amortizing swap D) An accruing swap E) None of the above |
D) An accruing swap
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136. Which of the following is a difference between futures and forward contracts?
A) Futures contracts are market-to-market daily, while forward contracts are not B) Buyers and sellers deal directly with each other on forward contracts but go through organized exchanges in futures contracts C) Futures contracts are standardized, forward contracts generally are not D) Forward contracts are generally more risky because no exchange guarantees the settlement of each contract if one or the other party to the contract defaults E) All of the above are differences between futures and forward contracts |
E) All of the above are differences between futures and forward contracts
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137. The daily settlement process that credits gains or deducts losses from a futures customer’s account is called:
A) The variation margin B) Marking-to-market C) The initial margin D) The maintenance margin E) The notional value |
B) Marking-to-market
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Assume that two firms, one considered a high credit risk (HCR) and the other a low credit risk (LCR), are considering an interest rate swap. Each can borrow at the following rates:
Fixed Rate Variable Rate LCR 8% 5% HCR 12% 7% An interest rate swap would be beneficial to both parties if: A) The LCR firm wants to borrow at the fixed rate and the HCR firm wants to borrow at the variable rate. B) The HCR firm wants to borrow at the fixed rate and the LCR firm wants to borrow at the variable rate. C) Both firms want to borrow at the variable rate. D) Both firms want to borrow at the fixed rate. E) An interest rate swap would be never beneficial in this situation |
B) The HCR firm wants to borrow at the fixed rate and the LCR firm wants to borrow at the variable rate.
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Securitized assets carry a unique form of risk called:
A) Default risk B) Inflation risk C) Interest-rate risk D) Prepayment risk E) None of the above |
D) Prepayment risk
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Short-dated pieces of a longer-term loan, usually maturing in a few days or weeks, are called:
A) Loan participations B) Servicing rights C) Loan strips D) Shared credits E) None of the above |
C) Loan strips
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The party for whom a standby credit letter is issued by a bank is known as the:
A) Account party B) Beneficiary C) Representative D) Credit Guarantor E) None of the above |
A) Account party
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When a bank issues a standby credit guarantee on behalf of one of its customers, the party receiving the guarantee is known as the:
A) Account party B) Beneficiary C) Obligator D) Servicing agent E) None of the above |
B) Beneficiary
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Securitization had its origin in the selling of securities backed by _____________
A) Credit card receivables B) Residential mortgage loans C) Computer leases D) Automobile loans E) Truck leases |
B) Residential mortgage loans
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Loan-backed securities, which closely resemble traditional bonds, carry various forms of credit enhancements, which may include all of the following, EXCEPT:
A) Credit letter guaranteeing repayment of the securities. B) Set aside of a cash reserve. C) Division into different risk classes. D) Early payment clauses. E) None of the above |
D) Early payment clauses
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In some instances, a bank will sell loans and agree to give the loan purchaser recourse to the seller for all or a portion of those loans that become delinquent. In this case, the purchaser, in effect, gets a:
A) Call option. B) Put option. C) Forward contract. D) Futures contract E) None of the above. |
B) Put option.
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The key advantages of issuing standby letters of credit include which of the following:
A) Letters of credit generate fee income for the bank. B) Letters of credit typically reduce the borrower's cost of borrowing. C) Letters of credit can usually be issued for a relatively low cost. D) The probability is low that the issuer of the letter of credit will be called upon to pay. E) All of the above. |
E) All of the above.
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Banks that issue standby letters of credit may face which of the following types of risk?
A) Prepayment risk. B) Interest-rate risk. C) Liquidity risk. D) All of the above. E) B and C only |
E) B and C only.
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59. By agreeing to service any assets that are packaged together in the securitization process a bank can:
A) Ensure the assets that are packaged and securitized remain in the package and are not sold off. B) Choose the best loans to go through the securitization process. C) Earn added fee income. D) Liquidate any assets it chooses. E) None of the above. |
C) Earn added fee income
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The difference in interest rates between securitized loans themselves and the securities issued against the loans is referred to as:
A) The funding gap B) Residual income. C) Service returns D) Security income E) None of the above |
B) Residual income.
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If a credit letter is issued to backstop payments on loan-backed securities, the credit letter is a form of:
A) Collateralized asset B) Residual income C) Direct loan obligation D) Credit enhancement E) None of the above |
D) Credit enhancement
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Loan sales by banks are generally of two types: (a) participation loans; and (b)__________. The term that correctly fills in the blank above is:
A) Assignments B) Recourse loans C) Direct loans D) Subscription loans E) None of the above. |
A) Assignments
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A standby credit letter is a (or an):
A) Securitized strip B) Loan strip C) Contingent obligation D) Indirect loan E) None of the above. |
C) Contingent obligation
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A bank that wants to protect itself from higher credit 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 above |
A) A credit risk option
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When two banks simply agree to exchange a portion of their customers' loan repayments, they are using:
A) A credit option B) A standby letter of credit C) A credit linked note D) A credit swap E) None of the above |
D) A credit swap
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A debt instrument which allows the issuer to lower its coupon payments if some significant factor changes is called:
A) A credit option B) A standby letter of credit C) A credit linked note D) A credit swap E) None of the above |
C) A credit linked note
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Which of the following is a risk of using credit derivatives?
A) Credit derivatives do not protect against credit risk exposure B) The partner in the swap or option contract may fail to perform C) Regulators may decide to lower the amount of capital needed for banks using these derivatives D) Regulators may decide that these derivatives make the bank more stable and efficient E) All of the above are risks of using credit derivatives |
B) The partner in the swap or option contract may fail to perform
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A securitized asset where the asset used to back the securities is a loan based on the residual value of a homeowner's residence is called:
A) A mortgage backed security B) A credit card backed security C) An automobile backed security D) A loan backed bond E) A home equity loan backed security |
E) A home equity loan backed security
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A financial institution plans to issue a group of bonds backed by a pool of automobile loans. However, they fear that the default rate on the automobile loans will rise well above 4 percent of the portfolio – the projected default rate. The financial institution wants to lower the interest payments if the loan default rate rises too high. Which type of credit derivative contract would you most recommend for this situation?
A) Credit linked note B) Credit option C) Credit risk option D) Total return swap E) Credit swap |
A) Credit linked note
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A bank is about to make a $50 million project loan to develop a new oil field and is worried that the petroleum engineer's estimates of the yield on the field are incorrect. The bank wants to protect itself in case the developer cannot repay the loan. Which type of credit derivative contract would you most recommend for this situation?
A) Credit linked note B) Credit option C) Credit risk option D) Total return swap E) Credit swap |
B) Credit option
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A bank plans to offer new subordinated notes in the open market next month but knows that its credit rating is being reviewed by a credit rating agency. The bank wants to avoid paying sharply higher credit costs. Which type of credit derivative contract would you most recommend for this situation?
A) Credit linked note B) Credit option C) Credit risk option D) Total return swap E) Credit swap |
C) Credit risk option
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A bank is concerned about excess volatility in its cash flows from some recent business loans it has made. Many of these loans have a fixed rate of interest and the bank's economics department has forecast a sharp increase in interest rates. The bank wants more stable cash flows. Which type of credit derivative contract would you most recommend for this situation?
A) Credit linked note B) Credit option C) Credit risk option D) Total return swap E) Credit swap |
D) Total return swap
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A bank has a limited geographic area. It would like to diversify its loan income with loans in other market areas but does not want to actually make loans in those areas because of their limited experience in those areas. Which type of credit derivative contract would you most recommend for this situation?
A) Credit linked note B) Credit option C) Credit risk option D) Total return swap E) Credit swap |
E) Credit swap
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A bank has a long term relationship with a particular business customer. However, recently the bank has become concerned because of a potential deterioration in the customer's income. In addition, regulators have expressed concerns about the bank's capital position. The business customer has asked for a renewal of its $25 million dollar loan with the bank. Which credit derivative can help this situation?
A) Credit swap B) Loan sale C) Loan securitization D) Credit risk option E) Credit linked notes |
B) Loan sale
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A bank has placed 5000 consumer loans in a package to be securitized. These loans have an annual yield of 15.25 percent. This bank estimates that the securities on these loans are priced to yield 10.95 percent. The bank expects 1.45 percent of the loans will default. Underwriting and advisory services will cost .25 percent and a credit guarantee if more loans default than expected will cost .35 percent. What is the residual income from this loan securitization?
A) 3.70 percent B) 4.30 percent C) 2.25 percent D) 5.15 percent E) None of the above |
C) 2.25 percent
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Bank use of credit derivatives is dominated by
A) Community Banks B) The largest (over $1 billion) banks C) The retail banks D) None of the banks E) Banks do not use credit derivatives yet |
B) The largest (over $1 billion) banks
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According to the text, in 2005 the securitization of loans reached:
A) Million dollar market B) Billion dollar market C) Trillion dollar market D) Market unknown in value E) Small but growing market |
C) Trillion dollar market
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The principal sellers of credit derivatives include all of the following except:
A) Insurance companies B) Securities dealers C) Fund management firms D) Banks E) None of the above |
D) Banks
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79. The bank or other lender whose loans are pooled is called:
A) The originator B) The special purpose entity C) The trustee D) The servicer E) The credit enhancer |
A) The originator
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80. Loans that are to be securitized pass to . This helps ensure that if the lender goes bankrupt it does not affect the credit status of the pooled loans.
A) The originator B) The special purpose entity C) The trustee D) The servicer E) The credit enhancer |
B) The special purpose entity
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81. Someone appointed to ensure that the issuer fulfills all the requirements of the transfer of the loans to the pool and provides all of the services promised to investors in the securities is called:
A) The originator B) The special purpose entity C) The trustee D) The servicer E) The credit enhancer |
C) The trustee
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82. Someone who collects the payments on the securitized loans and passes those payments on to the trustee is called:
A) The originator B) The special purpose entity C) The trustee D) The servicer E) The credit enhancer |
D) The servicer
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83. Investors in securitized loans normally receive added assurance that they will be repaid in the form of guarantees against default issued by:
A) The originator B) The special purpose entity C) The trustee D) The servicer E) The credit enhancer |
E) The credit enhancer
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84. When an issuer of securitized loans divides them into different risk classes or tranches, they are providing an:
A) Internal credit enhancement B) External credit enhancement C) Internal liquidity enhancement D) External liquidity enhancement E) None of the above |
A) Internal credit enhancement
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85. When an issuer of securitized loans includes a standby letter of credit with the securitized loans, they are providing an:
A) Internal credit enhancement B) External credit enhancement C) Internal liquidity enhancement D) External liquidity enhancement E) None of the above |
B) External credit enhancement
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86. When an issuer of securitized loans sets aside a cash reserve to cover loan defaults, they are providing an:
A) Internal credit enhancement B) External credit enhancement C) Internal liquidity enhancement D) External liquidity enhancement E) None of the above |
A) Internal credit enhancement
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87. Which of the following is an advantage of securitizing loans?
A) Diversifying a lender’s credit risk exposure B) Reducing the need to monitor each individual loan’s payment stream C) Transforming illiquid assets into liquid securities D) Serving as a new source of funds for lenders and attractive investments for investors E) All of the above are advantages of securitizing loans |
E) All of the above are advantages of securitizing loans
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Why are securitized loans often issued through a special purpose entity?
A) Because the securitized loans often add risk to the bank and need to be held separately B) Because the securitized loans are not profitable for the bank and need to be held separately C) Because the special purpose entity might fail and this prevents the failure of the bank D) Because the bank might fail and this protects the credit status of the securitized loans E) All of the above |
D) Because the bank might fail and this protects the credit status of the securitized loans
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89. A group of pooled loans used is expected to yield a return of 23%. The coupon rate promised to investors on securities issued against the pool of loans is 8%. The default rate on the pooled loans is expected to be 4.5%. The fee to compensate a servicing institution for collecting payments on the loans is 2%. Fees to set up credit and liquidity enhancements are 3%. The fee for providing advising how to set up the pool of securitized loans is 1%. What is the residual income on this pool of loans?
A) 18.5% B) 9% C) 4.5% D) 2% E) None of the above |
C) 4.5%
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90. The coupon rate promised investors on securities issued against a pool of loans is 6.5%. The default rate on the pool of loans is expected to be 3.5%. The fee to compensate a servicing institution for collecting payments on the loan is 2%. Fees to set up credit and liquidity enhancements are 5%. The residual income on this pool of loans is 7%. What is the expected yield on this pool of loans?
A) 24% B) 12% C) 10% D) 6.5% E) None of the above |
A) 24%
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91. In a collateralized mortgage obligation (CMO) a tranche:
A) Promises a different return (coupon) to investors B) A liquidity enhancement C) Carries a different risk exposure D) A and C above E) All of the above |
D) A and C above
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92. What is one of the advantages of using loan-backed bonds?
A) Loans used as collateral for the bonds can be sold before the maturity of the bonds B) Loan-backed bonds have longer maturities than deposits C) Banks do not have to meet regulatory capital requirements on loans used as collateral D) Banks can use less loans as collateral than the amount of bonds issued E) All of the above are advantages of loan-backed bonds |
B) Loan-backed bonds have longer maturities than deposits
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93. What is one of the disadvantages of using loan backed bonds?
A) The cost of funding often rises B) There is greater default risk on the bonds C) Loans used as collateral for the bonds must be held until the bonds reach maturity D) Loan backed bonds have shorter maturities than deposits E) All of the above are disadvantages of loan-backed bonds |
C) Loans used as collateral for the bonds must be held until the bonds reach maturity
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94. According to the textbook, what is the minimum size of the loan-backed securities offering that are likely to be successful?
A) $1 million B) $10 million C) $25 million D) $50 million E) $1 trillion |
D) $50 million
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95. Which of the following is a concern regulators have about securitization?
A) The risk of being an underwriter for asset-backed securities that cannot be sold B) The risk of acting as a credit enhancer and underestimating the need for loan-loss reserves C) The risk that unqualified trustees will fail to protect investors in asset-backed instruments D) The risk that loan servicers will be unable to satisfactorily monitor loan performance E) All of the above are concerns regulators have about securitization |
E) All of the above are concerns regulators have about securitization
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96. What prompted a surge in loan sales in the 1980s?
A) A wave of corporate buyouts B) An increase in lesser developed country loans C) A loosening of government regulations D) An increase in international lending E) None of the above |
A) A wave of corporate buyouts
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97. Why have the use of standby credit letters grown in recent years?
A) The growth of bank loans sought by companies in recent years B) The decreased demand for risk reduction devices C) The high cost of standby credit letters in recent years D) The rapid growth of direct financing by companies E) All of the above |
D) The rapid growth of direct financing by companies
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98. Which of the following is true regarding regulatory rules for standby credit letters issued by banks?
A) They must list the standby credit letter as a liability on their balance sheet B) They must count standbys as loans C) They do not have to apply the same credit standards for approving standbys as direct loans D) They can apply lower capital standards to standbys than loans |
B) They must count standbys as loans
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99. Which of the following is true regarding regulatory rules for standby credit letters issued by banks?
A) They must list the standby credit letter as a liability on their balance sheet B) They do not have to list standby credit letters when assessing the risk exposure to a single credit customer C) They must apply the same credit standards for approving standby credit letters as direct loans D) They can apply lower capital standards to standby credit letters than loans E) None of the above is true |
C) They must apply the same credit standards for approving standby credit letters as direct loans
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100. Regular collateralized debt obligations (CDO) have been surpassed by:
A) Credit swaps B) Credit options C) Credit default swaps D) Total return swaps E) Synthetic collateralized debt obligations |
E) Synthetic collateralized debt obligations
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101. According to research, off-balance-sheet standby credit letters reduce risk by:
A) Increasing diversification of assets B) Reducing the need for documentation C) Reducing probability of losses D) Avoiding capital requirements E) Increasing concentration of risk exposure |
A) Increasing diversification of assets
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102. What is the advantage of credit swaps for each partner?
A) Broaden the number of markets B) Broaden the variety of markets from which they collect loan revenues and principal C) Spread out the risk in the loan portfolio D) Avoiding capital requirements E) A, B, and C |
E) A, B, and C
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103. What are the ways to reduce the risk of standby credit letters?
A) Avoid renegotiating the terms of loans of SLC customers B) Specialize in SLCs issued by the same region and industry C) Sell participations in standbys in order to share risk with other lending institutions D) Do not count standbys as loans when assessing the bank’s risk exposure E) All of the above are the ways to reduce the risk |
C) Sell participations in standbys in order to share risk with other lending institutions
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104. The lesson(s) of the credit crisis of 2007-2009 is that the “bankruptcy remote” arrangement of the special-purpose entity (SPE):
A) Reduces the need for securitization B) Eliminates the probability of bankruptcy of the originator institution C) May create problems if the underlying loans go bad in great numbers D) Eliminates the need for a trustee E) All of the above are correct |
C) May create problems if the underlying loans go bad in great numbers
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105. The lesson from the credit crisis of 2007-2009 is that securitized assets and credit swaps are:
A) Complex financial instruments B) Difficult to correctly value and measure in terms of risk exposure C) Affected by cyclically sensitive markets in which financial problems may spread and result in a financial contagion D) Possible to set in motion a financial contagion that cannot be easily stopped without active government intervention E) All of the above are correct |
E) All of the above are correct
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105. 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 Paper B) Banker’s Acceptance C) Corporate Bond D) Certificate of Deposit E) Municipal Bond |
E) Municipal Bond
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104. The Goodknight Company has issued securities with 45 days to maturity. What type of security have they issued?
A) Commercial Paper B) Banker’s Acceptance C) Corporate Bond D) Certificate of Deposit E) Municipal Bond |
A) Commercial Paper
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103. The Wesson Wisconsin State Bank has purchased a bank-qualified municipal bond with a yield of 7.5%. 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 above |
B) 2.7%
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102. 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 above |
D) 2.43%
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101. 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 risk B) Interest rate risk C) Business risk D) Call risk E) Prepayment risk |
E) Prepayment risk
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100. 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 risk B) Interest rate risk C) Business risk D) Call risk E) Prepayment risk |
A) Credit risk
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99. The Caldwell National Bank has purchased a bond that pays a coupon rate of 10.5%. They are a little 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 risk B) Interest rate risk C) Business risk D) Call risk E) Prepayment risk |
B) Interest rate risk
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98. The Terrell State Bank is a small bank located in Guyman, Oklahoma. All of their loans are agriculture 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 risk B) Interest-rate risk C) Business risk D) Call risk E) Prepayment risk |
C) Business risk
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The Dillinger State Bank has purchased a bond from the Interstate Manufacturing Company that has 15 years to maturity and has a coupon rate of 12.5%. Market interest rates have recently declined 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 risk B) Interest-rate risk C) Business- risk D) Call risk E) Prepayment risk |
E) Prepayment risk
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96. The Sheets Savings and Loan Association has purchased a bond that has a coupon rate of 7.5% and a face value of $1000. It has 5 years to maturity and is selling in the market for $1063. The bond makes annual coupon payments. What is the duration of this bond?
A) 7.50 years B) 5.00 years C) 4.65 years D) 4.37 years E) None of the above |
D) 4.37 years
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95. 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 years B) 3.68 years C) 4.00 years D) 5.50 years E) None of the above |
B) 3.68 years
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94. 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 above |
??
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93. The Farmer National Bank has purchased a bond that has a coupon rate of 11.5% and a face value of $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 above |
A) 7%
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92. The Farmer National Bank has purchased a bond that has a coupon rate of 11.5% and a face value of $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 above |
C) 8%
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91. 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 above |
D) 9%
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90. 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 above |
A) 7%
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89. 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 above |
??
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88. 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 above |
B) 5.5%
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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 above |
C) 6.375%
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86. The investment maturity strategy which calls for the bank to put all of their investment assets into very long term securities is called the:
A) Front-end-loaded maturity policy B) Back-end-loaded maturity policy C) Ladder or spaced maturity policy D) Barbell investment portfolio strategy E) Rate expectation approach |
B) Back-end-loaded maturity policy
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85. Which of the following is a characteristic of Treasury bills?
A) They are coupon instruments B) They are the short term debt instruments issued by major corporations C) They are discount securities D) They have more risk than other money market securities E) All of the above are characteristics of Treasury bills |
C) They are discount securities
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84. A bank that is concerned that the economic conditions of the market area they serve may take a downturn with falling demand for loans and higher bankruptcies in the areas is concerned about which of the following things?
A) Business risk B) Liquidity risk C) Tax exposure D) Credit risk E) Inflation risk |
A) Business risk
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83. A financial institution that is concerned about the possibility that the purchasing power of both the interest income and principal income will decline on a loan is concerned about which of the following things?
A) Business risk B) Liquidity risk C) Tax exposure D) Credit risk E) Inflation risk |
E) Inflation risk
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82. A security which was created by the Treasury to protect against inflation risk is called a(n):
A) CMO B) FNMA C) GNMA D) TIPS E) CD |
D) TIPS
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81. A bond has eight years to maturity and a coupon rate of 6.5 percent. Coupon payments are made annually 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 percent B) 12 percent C) 9 percent D) 6 percent E) None of the above |
B) 12 percent
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80. A bond has eight years to maturity and a coupon rate of 6.5 percent. Coupon payments are made annually 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 percent B) 10 percent C) 8.5 percent D) 9 percent E) None of the above |
D) 9 percent
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79. A bond has six years to maturity and has a coupon rate of 7.5 percent. Coupon payments are made annually 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 percent B) 5 percent C) 11.5 percent D) 2.5 percent E) None of the above |
B) 5 percent
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78. A bond has three years to maturity and has a coupon rate of 15 percent. This bond is selling in the market for $1072 and has a yield to maturity of 12%. What is the duration of this bond?
A) 3 years B) 1 year C) 1.92 years D) 2.45 years E) 2.64 years |
E) 2.64 years
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77. 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. |
E) A Treasury bond to finance government debt.
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76. An investor can invest in either a tax-exempt security that pays 5% or a taxable corporate security of comparable risk and maturity that pays 8%. At what marginal tax rate will the investor be indifferent between these two securities?
A) 25.0% B) 32.5% C) 37.5% D) 57.5% E) 62.5% |
C) 37.5%
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Suppose a bank has found bank qualified municipal bonds which have a nominal gross rate of return 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 percent B) 3.5 percent C) 1.75 percent D) 0 percent E) None of the above |
B) 3.5 percent
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74. A bank replaces 5-year corporate bonds with a yield to maturity of 9.75 percent with 5-year municipal 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 risk B) Business risk C) Credit risk D) Tax exposure E) Interest rate risk |
D) Tax exposure
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73. Which of the following is true? Mortgage prepayment risk:
A) Is higher on high interest rate mortgages B) Is felt most dramatically when interest rates rise C) Is eliminated by the use of mortgage backed securities D) Is eliminated by the purchase of a stripped mortgage obligation E) All of the above are true |
A) Is higher on high interest rate mortgages
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60. A security where the interest payments and the principal payments are sold separately is called:
A) A Treasury note B) An accretion C) A structured note D) A stripped security E) None of the above |
D) A stripped security
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71. Banks are generally not allowed to invest in speculative grade bonds. What kind of risk is this designed to limit?
A) Liquidity risk B) Business risk C) Credit risk D) Tax exposure E) Interest rate risk |
C) Credit risk
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70. In recent years security dealers have assembled pools of federal agency securities whose principal interest 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 contract B) Revenue-anticipation note C) Zero coupon instrument D) Structured note E) None of the above |
D) Structured note
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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 only |
E) A and C only
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68. Which of the following is not one of the Capital Market instruments in which banks invest?
A) U.S. Treasury notes B) Corporate notes and bonds C) U.S. Treasury bonds D) Municipal bonds E) Commercial paper |
E) Commercial paper
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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 a higher coupon rate will have a longer duration. B) In comparing two loans with the same maturity and the same interest rate, a fully amortized loan 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 above E) B and C |
B) In comparing two loans with the same maturity and the same interest rate, a fully amortized loan will have a shorter duration than a loan with a balloon payment
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66. The most aggressive investment maturity strategy that calls for the bank to continually shift the maturities of its securities in response to changes in interest rates and other economic conditions is the
A) Barbell strategy B) Rate expectations approach C) Front-end-loaded policy D) Ladder approach E) None of the above |
B) Rate expectations approach
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65. _____________ is the method by which banks can provide a safeguard for the deposits of governmental units.
A) Hedging B) Collateralization C) Pledging D) Securitization E) Window dressing |
C) Pledging
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64. Principal roles that a financial institution's investment portfolio play include which of the following?
A) Income stability B) Geographic diversification C) Hedging interest rate risk D) Backup liquidity E) All of the above |
E) All of the above
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63. Fluctuations in the timing of cash payments flowing from an underlying pool of securitized assets is referred to as:
A) Income risk B) Prepayment risk C) Liquidity risk D) Capital risk E) None of the above |
B) Prepayment risk
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62. Pools of mortgages put together either by a government agency or by a private investment banking corporation to raise more loanable funds for the issuer are known as a (or an):
A) Accretion bond B) Participation certificate C) CMO D) Stripped security E) Commercial paper |
C) CMO
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61. A bank's promise to pay the holder a designated amount of money on a designated future date and is often used in international trade is known as a (or an):
A) Promissory guarantee B) Discount security C) Bankers' acceptance D) In the money option E) Accretion note |
C) Bankers' acceptance
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An important investment security popular with banks that must by law mature within one year from the date of issue and which has a high degree of safety and marketability is the:
A) Treasury bill B) Treasury note C) FNMA note D) Bankers' acceptance E) Eurodollar CD |
A) Treasury bill
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