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3 Mar 2018

Money & Banking Self-Assesment

1. Bank holding companies allows bankers to circumvent
A. Regulation Q
B. Interstate banking restrictions
C. Reserve requirements
D. None of the above

2. The Great Inflation affected the banking industry through the following channels
A. Lower nominal interest rates
B. Decline in deposits
C. Decreased competition among banks
D. All of the above

3. ARMs
A. Force borrowers to assume interest rate risk
B. Became more prevalent during The Great Inflation
C. Both of the above
D. Neither of the above

4. A bank can increase its level of reserves by
A. Selling securities
B. Increasing borrowings
C. Calling loans
D. All of the above

5. Which of the following is NOT a method banks use to control credit risk?
A. Credit rationing
B. Restrictive covenants
C. Specialization
D. They are all methods for controlling credit risk

6. Which of the following balance sheet entries is not sensitive to changes in market interest rates?
A. Bonds
B. Reserves
C. Mortgages
D. Borrowings

7. _______risk and _____risk for bank loans are essentially the same
A. Credit, interest rate
B. Default, credit
C. Interest rate, default
D. None of the above

8. Efficiency wages are ____ the level firms would have to pay to fill all their open positions.
A. Higher than
B. Lower than
C. Equal to
D. None of the above

9. Specialized lending helps lenders solve the problems of
A. Adverse selection
B. Moral hazard
C. Transactions costs
D. All of the above

10. Which of the following is a technique lenders use to alleviate assymetric information problems?
A. Specialized lending
B. Diversified lending
C. Requiring collateral
D. All of the above

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4 Mar 2018

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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 firm’s 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 firm’s equity with assets denominated in one currency and liabilities in another

c) in the value of a firm’s 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 customers’ 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

1.Federal Deposit Insurance coverage on a single account in a single institution was set at this maximum insurable amount. A) 1,500,000 B) 1,000,000 C) 500,000 D) 250,000 E) 100,000

2.Federal Deposit Insurance coverage on a joint account in a single institution was set at this maximum insurable amount. A) 1,500,000 B) 1,000,000 C) 500,000 D) 250,000 E) 100,000.

3.If you had a 300,000 joint account with a relative in the FDIC insured Merchants Bank, and a second joint account with the same relative in the FDIC Insured Farmers Bank, then how much of your savings would be covered. A) 150,000 B) 300,000 C) 500,000 D) 600,000

4.If you had a 540,000 joint account with a relative in an FDIC insured financial institution, how much of your savings would not be covered. A) 40,000 B) 20,000 C) 250,000 D) 270,000

5.Under the Federal Truth-in-Savings Act, Banks must use a standard ______________ formula when stating the interest paid; which makes it easier for consumers to compare banks offerings. A) APR B) ROI C) APY D) CPI E) None of the above

6.The Savings Act also requires disclosure of _____________________ on any statements provided to customers. A) fees B) APY earned C) both of the above D) None of the above

7.Money Market Mutual Funds (MMMFs) pay earnings to investors/depositors interest rates based on __________. (A) Treasury yields ( B) Prime (C) Libor ( D) Market interest rates

8.Money Market Deposit Accounts at ____________________________ are federally insured. A) Investment companies B) Banks C) Banks & Investment companies D) Banks & Credit Unions

9.You can make arrangements with the bank to pay a check that overdraws your account, this is. A) Withholding B) Reconciling C) Stopping Payment D) Overdraft Protection E) Compounding

10In order to correct a billing error you must notify the creditor in writing _________ days after the bill was mailed. A) ten B) twenty C) thirty D) sixty

11.Once you have notified a creditor of a billing error, they can give damaging information to other ___________ . (A) Creditors; (B) Credit bureaus; (C) both A & B; (D) none of the above

12.Under the new Federal Reserve rules of 2010, the credit card company must notify you _______ days before they can increase your rate or other fees. A) 30, B) 45, C) 60, D) 90.

13.Under the new Federal Reserve rules beginning in Feb. 2010, the credit card company must notify you ___ days before they can make significant changes to the terms of your credit card. A) 30, B) 45, C) 60, D) 90.

14.Your rates can be increased without advanced notice if, _______________________________. (A) the index tied to your variable rate goes up; (B) your introductory rate expires and reverts to the “go to” rate; (C) you haven’t made your payments as agreed; (D) All of the above

15.The Fair Debt Collection Practices Act prohibits _______________________________ practices. A) abusive, B) deceptive, C) unfair, D) all of the above

16.Medium-priced loans typically cost _______ %. A)5 to 7; B) 6 to 8; C) 9 to 12; D) 8 ti0 20.

17.Expensive loans typically cost _______ %. A)5 to 7; B) 6 to 8; C) 8 to 20; D) 20 to 50.

18.Before the financial crisis of 2008, unethical predatory lending practices exploit __________. A) lower-income borrowers, B) Minority borrowers, C) elderly homeowners, D) all of the above

19.The ____________ favors lenders and dictates that you pay more interest at the beginning of the loan. A) rule of 72; B) rule of 78s; C) rule of the digits; D) catch 22.

20.The new Credit CARD law requires creditors to include a warning in their monthly statements that warn them that paying the minimum due you will ________________________________. A) pay more interest; B) take longer to pay off the balance; C) Both A & B; D) None of the above

21.The Truth in Lending Law requires your creditor disclose whether you are entitled to a ______ of the finance charge if you pay off the loan early. A) discount; B) refund; C) rebate; D) recredit.

22.The Credit Card Act of 2009, amongst other things, limits card issuer’ ability to increase the APR on transferred balances during the __________________ that the credit card account is open. A) first year; B) for 2 years; C) for 5 years; D) during the life of the loan.

23.The Credit Card Act of 2009, amongst other things, restricts the penalties that card issuers can charge for _____________. (A) early payment; (B) going over the credit limit; (C) late payment; D) all of the above.

24.The Credit Card Act of 2009, amongst other things, requires all teaser rates to stay in effect for at least ___ months. A) 6; B) 9; C) 12; D) 18; E) 24.

25.The Credit Card Act of 2009, amongst other things, sets a _________ due date for card payments each month. A) Early B) extended C) consistent D) flexible

26.The Credit Card Act of 2009, amongst other things, restricts card issuers from applying new (higher) interest rates to the ­­­________ ­­­­­­card balances. A) remaining, B) existing, C) undisclosed D) all of the above

27.Debt collection agencies cannot contact before ___ a.m. in the morning. A) 6; B) 7; C) 8; D) 9.

28.Debt collection agencies cannot state that you will be ___________ if you do not pay the debt. A) sued in civil court; B) sued for bankruptcy; C) arrested; D) all of the above

29.Debt collection agencies cannot state they are taking legal action if they _________________. A) haven’t probable cause; B) don’t intend to; C) haven’t done due diligence; D) all of the above

30.Debt collection agencies cannot contact you after ______ p.m. A) 7; B) 8; C) 9; D) 10.

1. Different financial institutions have different levels of service. What is the main reason for this?

a. The Federal regulations relating to the institutions make them provide the services at different levels.

b. Levels of financial service are determined in part by the ownership structure of the financial institution, and different financial institutions have different ownership structures.

c. Financial services require specific expertise and the design of financial institutions favors one type of institution over the other.

d. None of these explain the difference between levels of service at different institutions.

2. Which of the following is not an example of a financial intermediary?

a. Savings and Loans.

b. Commercial banks.

c. Pension funds.

d. Stock markets.

e. All of these are examples of financial intermediaries.

3. Which of the following branches of the Federal Reserve Bank has a permanent seat on the Federal Open Market Committee?

a. New York

b. Cleveland

c. St. Louis

d. Boston

e. None of these.

4. Who owns the Federal Reserve Banking system?

a. No one, it owns itself.

b. The member banks.

c. The US Government.

d. The Chinese Government.

e. The shareholders of the Federal Reserve Corporation.

5. Who is the most important member of the Federal Open Market Committee and often thought of as the second most powerful person in the United States?

a. The President of the United States

b. The Treasury Secretary.

c. The Chairman of the Federal Reserve Bank.

d. The President of the Federal Reserve Bank of New York.

e. None of these.

6. Which of the following markets is the most stable?

a. The market for corporate bonds.

b. The real estate market.

c. The market for Treasury bonds.

d. The New York Stock Exchange.

e. The Chicago Mercantile Exchange.

7. All of the following show interactions between markets except:

a. Purchase of a mortgage issued by Freddie Mac by the Federal Reserve Bank.

b. Sale of stock to raise equity for a new company to an insurance provider.

c. Increase in short term target rates by the Fed on the bond market resulting in stock market increases when announced in the press.

d. Restrictions in bank lending as the result of increasing capital requirements resulting in lower real estate prices and fewer sales on the real estate market.

e. All of these are examples of market interactions.

8. Which of the following acts was repealed by the Gramm-Leach-Bliley Act of 1999:

a. The Depository Institutions Deregulation and Monetary Control Act of 1980.

b. The Banking Act of 1933.

c. The Garn-St Germain Depositary Institutions Act of 1982.

d. The Civil Rights Act of 1964

e. None of these.

9. Which of the following problems was a reason for bank panics prior to the establishment of the Federal Reserve bank:

a. Currency was not uniform in value.

b. Currency was not backed by the full faith and credit of the United States Government.

c. Currency could become worthless if the issuing bank went bankrupt.

d. Lack of regulation of the financial markets often led to bank runs.

e. All of these were elements of the bank panics that occurred prior to the establishment of the Federal Reserve system.

10. Why is the Federal Reserve Bank considered to be relatively but not completely free of political influence in the United States?

a. The Federal Reserve Chairman must be appointed by the President and confirmed by the Senate.

b. The Federal Reserve is not owned by the US Government.

c. The Federal Reserve System is designed to divide power among member banks from different regions of the country.

d. The Federal Reserve appointments are for sufficient length of time that it takes at least 8 years for a majority of members to be appointed by one President.

e. All of these are important in defining the degree of independence of the Federal Reserve from political influence.

11. Which of the following examples is an illustration of interest rate risk?

a. A consumer buys a house with a fixed mortgage that will not change for 30 years.

b. A consumer buys a car with a fixed rate loan at 5.99% for five years.

c. A bank borrows funds from the Federal Reserve discount window for 0.25% and lends that money to a consumer for a car or auto loan of longer duration.

d. A consumer opens a passbook savings account.

e. None of these illustrate interest rate risk

12. If the yield curve is said to be steep, this means:

a. Banks will make a lot of money lending at long term rates that are higher than the short term rates at which they borrow money.

b. The bond market expects inflation to increase in the future.

c. The bond market expects that the economy will grow in the immediate future.

d. None of these are conclusions that can be reached from a steep yield curve.

e. a, b and c are all conclusions that can be reached when the yield curve is steep.

13. According to the expectations theory of interest rates:

a. The total interest rate is equal to the sum of the real interest rate and the expected inflation rate.

b. The total interest rate is equal to the sum of the real interest rate, the expected inflation rate, and a series of additional premiums based on the risks taken in the instrument of interest.

c. The Fed sets interest rates, which cannot be changed by the market.

d. The interest rate in the economy is a balance between the supply and demand of funds.

e. None of these are true.

14. If the real interest rate in the economy is 3% and the expected inflation is 2% per year over a five year period, assuming the maturity risk premium is 0, what is the interest rate that the expectations theory would predict for a five year Treasury note?

a. 10%

b. 3%

c. 2%

d. 6%

e. 5%

15. What is the most important economic function of the money markets?

a. To provide an efficient means of liquidity adjustment for businesses, individuals and governments.

b. To provide a place where buyers and sellers can negotiate a price of funds.

c. To provide a social interaction between borrowers and sellers of funds, allowing for easier relationship-based transactions in the future.

d. To provide a place where stocks and bonds can be sold.

e. None of these are important economic functions of the money markets.

16. The ideal instrument sold in a money market has all of the following characteristics except:

a. High liquidity

b. Low Default Risk

c. Are long term obligations

d. Are short term obligations

e. None of these are characteristics of an ideal money market instrument.

17. What is the reason for the 35% rule in the bid process for Treasury securities?

a. It prevents a single entity from controlling the interest rate in the market.

b. It allows regular consumers access to the treasury market through non-competitive bids.

c. It prevents the government from controlling and regulating banks.

d. It prevents the Chinese from buying too many treasury bills.

e. None of these are reasons for the establishment of the 35% rule.

18. What is the name for the risk that a financial institution might not receive promised cash flows in the form of interest and principal payments from its borrowers?

a. Interest Rate Risk

b. Financial Payment and Principal Risk

c. Market Risk

d. Credit Risk

e. None of these are the correct term.

19. The risk that a financial institution might have to sell a lot of assets in a short period of time at below market prices to pay obligations demanded by its creditors is called:

a. Liquidity Risk

b. Market Risk

c. Credit Risk

d. Interest Rate Risk

e. None of these

20. What is the main difference between firm-specific and systemic credit risk?

a. Firm specific risk can be managed by proper underwriting and diversification in a loan portfolio.

b. Systemic risk affects all borrowers.

c. Firm-specific risk is determined by the individual circumstances of the firm involved.

d. Derivitives can be used to manage systemic risk

e. The Federal Reserve Bank of New York uses open market operations to manage firm-specific risk.

21. A credit crisis in the financial markets can improve bank efficiency by:

a. Focusing the bank underwriting department on firm-specific risk factors associated with default.

b. Forcing banks to reduce staffing needs by eliminating wasteful or unnecessary functions.

c. Marking banks compete more rigorously for customers in a tougher market.

d. None of these are reasons that a recession helps improve bank efficiency.

e. Items a, b and c are all reasons that a bank improves efficiency during a recession.

22. A mutual fund that invests only in Treasury funds has which of the following risk exposures?

a. Interest Rate Risk

b. Liquidity Risk

c. Default Risk

d. Treasury’s are risk free, so a mutual fund that invests in them is also risk free.

e. Credit risk

23. Foreign Stocks carry additional risks beyond those of US companies for US investors. Which of the following risks is not an additional risk that a US investor in foreign stocks faces?

a. Interest Rate Risk

b. Foreign Currency Risk

c. Sovereignty Risk

d. Both a and b are additional risks faced by these investors.

e. All of these risks (a, b and c) are faced by investors in domestic and foreign stocks.

24. According to the theory of Purchasing Power Parity, if the price of a widget in the US is $3.00 and the Euro is worth $1.50, the price of the widget in Germany would be:

a. €5.00

b. €3.00

c. €4.50

d. €7.00

e. €10.00

25. For many years, the current account of the United States has been in deep deficit. In theory, this should lead to a weak dollar. What factors could counteract the effect of the current account deficit on the strength of the dollar?

a. Foreigners use dollars as stores of value

b. When inflation is expected to be low in the USA and interest rates are high, foreigners want to invest here, driving up the price of the dollar.

c. The Dollar is king in the world currency markets

d. Dollars are backed by the full faith and credit of the US Government and therefore maintain a constant value on the market.

e. None of these explains the relative strength of the dollar in the global currency market.

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