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2 Feb 2019

Please select the best answer and explain why it is the best answer.

1. A bank is insolvent when

a. Its assets increase in value

b. Its capital exceeds its liabilities

c. Its assets exceed its liabilities

d. Its liabilities exceed its assets

2. Bank capital has both benefits and costs for the bank owners. Higher bank capital the likelihood of bankruptcy, but higher bank capital the return on equity for a given return on assets.

a. Increases; increases

b. Reduces; increases

c. Reduces; reduces

d. Increases; reduces

3. If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to

a. Shrink the size of the bank

b. Sell securities the bank owns and put the funds into the reserve account

c. Buy back bank stock

d. Pay higher dividends

4. In the absence of regulation, banks would probably hold

a. Too much capital, making it more difficult to obtain loans

b. Too much capital, reducing the efficiency of the payments system

c. Too much capital, reducing the profitability of banks

d. Too little capital

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Beverley SmithLv2

5 Feb 2019

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A depository institution holds $190 million in required reserves and $24 million in excess reserves. Its remaining assets include $576 million in loans and $310 million in securities. Equity is $100 million. If the institutionâs only liabilities are transaction deposits, what is the required reserves ratio?

In a recent year, a bank earned $173 million in interest on its assets of $2,153 million, it paid out $81 million in interest on its liabilities (excluding capital) of $2,007 million, and it paid its workers $71 million in total compensation.
a. How much is the net interest?
b. Calculate the net interest margin.
c. Calculate the bank spread.
d. Calculate the return on assets.
e. Calculate the return on equity.

Bradenton/Sarasota Bank had interest income of $80 million last year and $35 million in interest expenses. About $400 million of its $1 billion in assets are rate sensitive, while $700 million of liabilities are rate sensitive.
a. What is the net interest margin ratio?
b. What is the bankâs gap?

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8. Which of the following would require a higher return under a risk-adjusted return on capital (RAROC) approach to capital allocation?

a)traditional commercial lending activities

b)government securities

c) home mortgages

d) 2 and 3.

9. Trend analysis often involves

a) comparison of past firm performance to current industry performance

b)averaging past years' performance to remove the effects of accounting changes

c) graphically portraying performance measures over time

d) all of the above

e) 1 and 3

10. Transaction risk is the risk of a loss _______ and translation risk is the risk of a loss _______

a) in the value of a firmâs equity with assets denominated in one currency and liabilities in another; with changes in exchange rates for foreign transactions

b) with changes in exchange rates for foreign transactions; in the value of a firmâs equity with assets denominated in one currency and liabilities in another

c) in the value of a firmâs assets with equity denominated in one currency and liabilities in another; with changes in exchange rates for foreign transactions

d) none of the above

11. The special-purpose vehicle (SPV)

a) allows sales accounting treatment of under generally accepted accounting principles (GAAP)

b) usually reduces the credit rating of the structured securitization

c) monitors reports by the loan servicer on the pool performance

d) all of the above

12. The major financing source for a bank comes from

a) loans

b) deposits

c) equity

d) none of the above

13. The provision for loan losses would likely be

a) increased during economic downturns

b) decreased during economic downturns

c) increased during an economic expansion

d) none of the above

e) 2 and 3

14. The Internet

a) may allow banks to cross-sell products, reduce transaction costs, and improve market presence, service, and quality provided to customers

b) may make customers more loyal to the bank by increasing the convenience and access to a broad variety of services, thereby reducing the probability of customersâ switching institutions

c) has increased costs for financial institutions due to lack of economies of scale

d) 1 and 2

15. Pillar 2 of Basel II

a) includes capital charges for credit risk on a case-by-case basis

b) is mutually enforced by Pillars 1 and 3

c) provides for supervisory review of banks internal assessments of capital allocation and adequacy

d) all of the above

e) 2 and 3

16. Types of loan sales include

a) the novation, which transfers all rights and obligations of the selling bank to the buyer

b) the assignment, which gives the buyer the right to take action against the borrower if payments are not made

c) the participation, in which the bank continues to service the loan

d) all of the above

17. The difference between the book value of capital and the market value of capital for the same institution is influenced by

a) changes in interest rates

b) changes in reserve requirements

c) changes in historic asset costs

d) none of the above

e) all of the above

18. Financial institutions are required to maintain liquid assets for the purpose(s) of

a) meeting repayment obligations to customers holding maturing liabilities

b) meeting repayment obligations to customers holding maturing liabilities. meeting regulatory requirements for reserves

c) meeting the dividend payment requirements of outstanding common stock

d) all of the above

e) 1 and 2

19. The process of securitization typically involves

a) removing loans from a bank's balance sheet and selling them to investors

b) bank origination of loans.

c) an insurance company surety bond or a bank letter of credit

d) all of the above

20. Generally, as the maturity of an asset or liability rises it has a higher risk premium due to greater maturity risk and greater

a) default risk

b) default risk

c) liquidity risk

d) all of the above

e) 2 and 3

Please select the best answer and explain why it is the best answer.

1. During a âflight to qualityâ

a. The spread between Treasury bonds and Baa bonds increases.

b. The change in the spread between Treasury bonds and Baa bonds cannot to be predicted

c. The spread between Treasury bonds and Baa bonds decreases

d. The spread between Treasury bonds and Baa bonds is not affected

2. The collapse of the subprime mortgage market increased the spread between Baa and default-free U.S. Treasury bonds. This is due to

a. A reduction in risk

b. A reduction in maturity

c. A flight to quality

d. A flight to liquidity

3. Banks earn profits by selling _____ with attractive combinations of liquidity, risk, and return, and using the proceeds to buy _______ with a different set of characteristics.

a. Securities; deposits

b. Loans; deposits

c. Assets; liabilities

d. Liabilities; assets

4. Which of the following bank assets is the most liquid?

a. Reserves

b. Consumer loans

c. Cash items in process of collection

d. U.S. government securities

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