This Document Contains Chapters 12 to 13 Chapter 12 Managing and Pricing Deposit Services Fill in the Blank Questions 1. A(n) _________ requires the bank to honor withdrawals immediately upon request. Answer: demand deposit 2. A(n) _________ is an interest bearing checking account and gives the bank the right to insist on prior notice before customer withdrawals can be honored. Answer: Negotiable order of withdrawal (NOW) 3. A(n) _________ is a short-maturity deposit which pays a competitive interest rate. Only 6 preauthorized drafts per month are allowed and only 3 of these can be by check. Answer: money market deposit account 4. _________ are designed to attract funds from customers who wish to set aside money in anticipation of future expenditures or financial emergencies. Answer: Thrift deposits 5. _________ are the stable base of deposited funds that are not highly sensitive to movements in market interest rates and tend to remain with a depository institution. Answer: Core deposits 6. Some people feel that everyone is entitled access to a minimum level of financial service no matter their income level. This issue is called the issue of _________. Answer: basic (lifeline) banking 7. _________ is a way of pricing deposit services in which the rate or return or fees charged on the deposit account are based on the cost of offering the service plus a profit margin. Answer: Cost plus pricing 8. When financial institutions tempt customers by paying postage both ways in bank-by-mail services or by offering free gifts such as teddy bears, they are practicing ___________. Answer: nonprice competition 9. The _________ is the added cost of bringing in new funds. Answer: marginal cost 10. _________ pricing is where the financial institution sets up a schedule of fees in which the customer pays a low or no fee if the deposit balance stays above some minimum level and pays a higher fee if the balance declines below that minimum level. Answer: Conditional 11. When a customer is charged a fixed charge per check this is called _________ pricing. Answer: flat rate 12. When a customer is charged based on the number and kinds of services used, with the customers that use a number of services being charged less or having some fees waived, this is called _________ pricing. Answer: relationship 13. _________ is part of the new technology for processing checks where the bank takes a picture of the back and the front of the original check and which can now be processed as if they were the original. Answer: Check imaging 14. A(n) _________ is a thrift account which carries a fixed maturity date and generally carries a fixed interest rate for that time period. Answer: time deposit 15. A(n) _________ is a conditional method of pricing deposit services in which the fees paid by the customer depend mainly on the account balance and volume of activity. Answer: deposit fee schedule 16. The _________ was passed in 1991 and specifies the information that institutions must disclose to their customers about deposit accounts. Answer: Truth in Savings Act 17. The _________ must be disclosed to customers based on the formula of one plus the interest earned divided by the average account balance adjusted for an annual 365 day year. It is the interest rate the customer has actually earned on the account. Answer: annual percentage yield (APY) 18. A(n) _________ is a retirement plan that institutions can sell which is designed for self-employed individuals. Answer: Keogh plan 19. Deposit institution location is most important to ______-income consumers. Answer: low 20. _____-income consumers appear to be more influenced by the size of the financial institution. Answer: high 21. For decades depository institutions offered one type of savings plan. _________ could be opened with as little as $5 and withdrawal privileges were unlimited. Answer: Passbook savings deposits 22. _________ CD’s allow depositors to switch to a higher interest rate if market rates rise. Answer: Bump-up 23. _________ CD’s permit periodic adjustments in promised interest rates. Answer: Step-up 24. _________ CD’s allow the depositor to withdraw some of his or her funds without a withdrawal penalty. Answer: Liquid 25. A(n) _________, which was authorized by Congress in 1997, allows individuals to make non-tax-deductible contributions to a retirement fund that can grow tax free and also pay no taxes on their investment earnings when withdrawn. Answer: Roth IRA 26. Due to the fact that they may be perceived as more risky, _________ banks generally offer higher deposit rates than traditional banks. Answer: virtual 27. _________ are accounts in domestic banking institutions where the U.S. Treasury keeps most of their operating funds. Answer: Treasury Tax and Loan Accounts (TT&L accounts) 28. _________ is a process where merchants and utility companies take the information from a check an individual has just written and electronically debits the individual’s account instead of sending the check through the regular check clearing process. Answer: electronic check conversion 29. On October 28, 2004, _________ became the law, permitting depository institutions to electronically transfer check images instead of the checks themselves. Answer: Check 21 30. The _________ to the cost plus pricing derives the weighted average cost of all funds raised and is based on the assumption that it is not the cost of each type of deposit that matters but rather the weighted average cost of all funds that matters. Answer: pooled-funds cost approach True/False Questions 31. The volume of core deposits at U.S. banks has been growing in recent years relative to other categories of deposits. Answer: False 32. The U.S. Treasury keeps most of its operating funds in TT&L deposits, according to the textbook. Answer: True 33. Deposits owned by commercial banks and held with other banks are called correspondent deposits. Answer: True 34. The implicit interest rate on checkable deposits equals the difference between the cost of supplying deposit services to a customer and the amount of the service charge actually assessed that customer. Answer: True 35. Legally imposed interest-rate ceilings on deposits were first set in place in the United States after passage of the Bank Holding Company Act. Answer: False 36. Gradual phase-out of legal interest-rate ceilings on deposits offered by U.S. banks was first authorized by the Glass-Steagall Act. Answer: False 37. The contention that there are certain banking services (such as small loans or savings and checking accounts) that every citizen should have access to is usually called socialized banking. Answer: False 38. Domestic deposits generate legal reserves. Answer: True 39. Excess legal reserves are the source out of which new bank loans are created. Answer: True 40. Demand deposits are among the most volatile and least predictable of a bank's sources of funds with the shortest potential maturity. Answer: True 41. IRA and Keogh deposits have great appeal for bankers principally because they can be sold bearing relatively low (often below-market) interest rates. Answer: False 42. In general, the longer the maturity of a deposit, the lower the yield a financial institution must offer to its depositors because of the greater interest-rate risk the bank faces with longer-term deposits. Answer: False 43. The availability of a large block of core deposits decreases the duration of a bank's liabilities. Answer: False 44. Interest-bearing checking accounts, on average, tend to generate lower net returns than regular (noninterest-bearing) checking accounts. Answer: False 45. Personal checking accounts tend to be more profitable than commercial checking accounts. Answer: False 46. NOW accouts can be held by businesses and individuals and are interest bearing checking accounts. Answer: False 47. A MMDA is a short term deposit where the bank can offer a competitive interest rate and which allows up to 6 preauthorized drafts per month. Answer: True 48. A Roth IRA allows an individual to accumulate investment earnings tax free and also pay no tax on their investment earnings when withdrawn provided the taxpayer follows the rules on this new account. Answer: True 49. Competition tends to raise deposit interest costs. Answer: True 50. Competition lowers the expected return to a bank from putting its deposits to work. Answer: True 51. A bank has full control of its deposit prices in the long run. Answer: False 52. Nonprice competition for deposits has tended to distort the allocation of scarce resources in the banking sector. Answer: True 53. Deposits are usually priced separately from loans and other bank services. Answer: True 54. According to recent Federal Reserve data no-fee savings accounts are on the decline. Answer: True 55. According to recent survey information provided by the staff of the Federal Reserve Board the average level of fees on most types of checking and NOW accounts appear to have risen. Answer: True 56. The Truth in Savings Act requires a bank to disclose to its deposit customer the frequency with which interest is compounded on all interest-bearing accounts. Answer: True 57. Under the Truth in Savings Act customers must be informed of the impact of any early deposit withdrawals on the annual percentage yield they expect to receive from an interest-bearing deposit. Answer: True 58. The number one factor households consider in selecting a bank to hold their checking account is, according to recent studies cited in this chapter, low fees and low minimum balance. Answer: False 59. The number one factor households consider in choosing a bank to hold their savings deposits, according to recent studies cited in this chapter, is location. Answer: False 60. Conditionally free deposits for customers mean that as long as the customers do not go above a certain level of deposits there are no monthly fees or per transaction charges. Answer: False 61. When a bank temporarily offers higher than average interest rates or lower than average customer fees in order to attract new business they are practicing conditional pricing. Answer: False 62. Web-centered banks with little or no physical facilities are known as ________ banks Answer: True 63. The total dollar value of checks paid in the United States has grown modestly in recent years. Answer: False 64. There are still a number of existing problems with online bill-paying services which has limited the growth. Answer: True 65. The depository institutions which tend to have the highest deposit yields are credit unions. Answer: False 66. Urban markets are more responsive to deposit interest rates and fees than rural markets. Answer: False 67. Research indicates that at least half of all households and small businesses hold their primary checking account at a depository institution situated within 3 miles of their location. Answer: True Multiple Choice Questions 68. Deposit accounts whose principal function is to make payments for purchases of goods and services are called: A) Drafts B) Second-party payments accounts C) Thrift deposits D) Transaction accounts E) None of the above Answer: D 69. Interest payments on regular checking accounts were prohibited in the United States under terms of the: A) Glass-Steagall Act B) McFadden-Pepper Act C) National Bank Act D) Garn-St. Germain Depository Institutions Act E) None of the above Answer: A 70. Money-market deposit accounts (MMDAs), offering flexible interest rates, accessible for payments purposes, and designed to compete with share accounts offered by money market mutual funds, were authorized by the: A) Glass-Steagall Act B) Depository Institutions Deregulation and Monetary Control Act (DIDMCA) C) Bank Holding Company Act D) Garn-St.Germain Depository Institutions Act E) None of the above Answer: D 71. The stable and predictable base of deposited funds that are not highly sensitive to movements in market interest rates but tend to remain with the bank are called: A) Time deposits B) Core deposits C) Consumer CDs D) Nontrans action deposits E) None of the above Answer: B 72. Negotiable Orders of Withdrawal (NOW) accounts, interest-bearing savings accounts that can be used essentially the same as checking accounts, were authorized by: A) Glass-Steagall Act B) Depository Institutions Deregulation and Monetary Control Act (DIDMCA) C) Bank Holding Company Act D) Garn-St. Germain Depository Institutions Act E) None of the above Answer: B 74. A deposit which offers flexible money market interest rates but is accessible for spending by writing a limited number of checks or executing preauthorized drafts is known as a: A) Demand deposit B) NOW account C) MMDAs D) Time deposit E) None of the above Answer: C 75. The types of deposits that will be created by the banking system depend predominantly upon: A) The level of interest rates B) The state of the economy C) The monetary policies of the central bank D) Public preference E) None of the above. Answer: D 76. The most profitable deposit for a bank is a: A) Time deposit B) Commercial checking account C) Personal checking account D) Passbook savings deposit E) Special checking account Answer: B 77. Some people feel that individuals are entitled to some minimum level of financial services no matter what their income level. This issue is often called: A) Lifeline banking B) Preference banking C) Non-discriminatory banking D) Lifeboat banking E) None of the above Answer: A 78. The formula Operating Expense per unit of deposit service + Estimated overhead expense + Planned profit from each deposit service unit sold reflects what deposit pricing method listed below? A) Marginal cost pricing B) Cost plus pricing C) Conditional pricing D) Upscale target pricing E) None of the above. Answer: B 79. Using deposit fee schedules that vary deposit prices according to the number of transactions, the average balance in the deposit account, and the maturity of the deposit represents what deposit pricing method listed below? A) Marginal cost pricing B) Cost plus pricing C) Conditional pricing D) Upscale target pricing E) None of the above. Answer: C 80. The deposit pricing method that favors large-denomination deposits because services are free if the deposit account balance stays above some minimum figure is called: A) Free pricing B) Conditionally free pricing C) Flat-rate pricing D) Upscale target pricing E) Marginal cost pricing Answer: B 81. The federal law that requires U.S. depository institutions to make greater disclosure of the fees, interest rates, and other terms attached to the deposits they sell to the public is called the: A) Consumer Credit Protection Act B) Fair Pricing Act C) Consumer Full Disclosure Act D) Truth in Savings Act E) None of the above. Answer: D 82. Depository institutions selling deposits to the public in the United States must quote the rate of return pledged to the owner of the deposit which reflects the customer's average daily balance kept in the deposit. This quoted rate of return is known as the: A) Annual percentage rate (APR) B) Annual percentage yield (APY) C) Daily deposit yield (DDY) D) Daily average return (DAR) E) None of the above. Answer: B 83. According to recent studies cited in this book, in selecting a bank to hold their checking accounts household customers rank first which of the following factors? A) Safety B) High deposit interest rates C) Convenient location D) Availability of other services E) Low fees and low minimum balance. Answer: C 84. According to recent studies cited in this chapter, in choosing a bank to hold their savings deposits household customers rank first which of the following factors? A) Familiarity B) Interest rate paid C) Transactional convenience D) Location E) Fees charged. Answer: A 85. According to recent studies cited in this chapter, in choosing a bank to supply their deposits and other services business firms rank first which of the following factors? A) Quality of financial advice given B) Financial health of lending institution C) Whether loans are competitively priced D) Whether cash management and operations services are provided. E) Quality of bank officers. Answer: B 86. A financial institution that charges customers based on the number of services they use and gives lower deposit fees or waives some fees for a customer that purchases two or more services is practicing: A) Marginal cost pricing B) Conditional pricing C) Relationship pricing D) Upscale target pricing E) None of the above Answer: C 87. A bank determines from an analysis on its deposits that account processing and other operating expenses cost the bank $3.95 per month. It has also determined that its non operating expenses on its deposits are $1.35 per month. The bank wants to have a profit margin which is 10 percent of monthly costs. What monthly fee should this bank charge on its deposit accounts? A) $5.30 per month B) $3.95 per month C) $5.83 per month D) $5.70 per month E) None of the above Answer: C 88. A bank determines from an analysis on its deposits that account processing and other operating expenses cost the bank $4.45 per month. The bank has also determined that nonoperating expenses on deposits are $1.15 per month. It has also decided that it wants a profit of $.45 on its deposits. What monthly fee should this bank charge on its deposit accounts? A) $6.05 B) $5.60 C) $5.15 D) $4.45 E) None of the above Answer: A 89. A customer has a savings deposit for 45 days. During that time they earn $5 in interest and have an average daily balance of $1000. What is the annual percentage yield on this savings account? A) 0.5% B) 4.13% C) 4.07% D) 4.5% E) None of the above Answer: B 90. A customer has a savings account for one year. During that year they earn $65.50 in interest. For 180 days they have $2000 in the account for the other 180 days they have $1000 in the account. What is the annual percentage yield on this savings account. A) 6.55% B) 3.28% C) 4.37% D) 8.73% E) None of the above Answer: C 91. If you deposit $1,000 into a certificate of deposit that quotes you a 5.5% APY, how much will you have at the end of 1 year? A) $1,050.00 B) $1,055.00 C) $1,550.00 D) $1,005.50 E) None of the above. Answer: B 92. A bank quotes an APY of 8%. A small business that has an account with this bank had $2,500 in their account for half the year and $5,000 in their account for the other half of the year. How much in total interest earnings did this bank make during the year? A) $300 B) $200 C) $400 D) $150 E) None of the above Answer: A 93. Conditional deposit pricing may involve all of the following factors except: A) The level of interest rates B) The number of transactions passing through the account C) The average balance in the account D) The maturity of the account E) All of the above are used Answer: A 94. Customers who wish to set aside money in anticipation of future expenditures or financial emergencies put their money in A) Drafts B) Second-party payment accounts C) Thrift Deposits D) Transaction accounts E) None of the above Answer: C 95. A savings account evidenced only by computer entry for which the customer gets a monthly printout is called: A) Passbook savings account B) Statement savings plan C) Negotiable order of withdrawal D) Money market mutual fund E) None of the above Answer: B 96. A traditional savings account where evidenced by the entries recorded in a booklet kept by the customer is called: A) Passbook savings account B) Statement savings plan C) Negotiable order of withdrawal D) Money market mutual fund E) None of the above Answer: A 97. An account at a bank that carries a fixed maturity date with a fixed interest rate and which often carries a penalty for early withdrawal of money is called: A) Demand deposit B) Transaction deposit C) Time deposit D) Money market mutual deposit E) None of the above Answer: C 98. A time deposit that has a denominations greater than $100,000 and are generally for wealthy individuals and corporations is known as a: A) Negotiable CD B) Bump-up CD C) Step-up CD D) Liquid CD E) None of the above Answer: A 99. A time deposit that is non-negotiable but where the promised interest rate can rise with market interest rates is called a: A) Negotiable CD B) Bump-up CD C) Step-up CD D) Liquid CD E) None of the above Answer: B 100. A time deposit that allows for a periodic upward adjustment to the promised rate is called a: A) Negotiable CD B) Bump-up CD C) Step-up CD D) Liquid CD E) None of the above Answer: C 101. A time deposit that allows the depositor to withdraw some of his or her funds without a withdrawal penalty is called a: A) Negotiable CD B) Bump-up CD C) Step-up CD D) Liquid CD E) None of the above Answer: D 102. What has made IRA and Keogh accounts more attractive to depositors recently? A) Allowing the bank to have FDIC insurance on these accounts B) Allowing the fund to grow tax free over the life of the fund C) Allowing the depositor to pay no taxes on investment earnings when withdrawn D) Requiring banks to pay at least 6% on these accounts to depositors E) Increasing FDIC insurance coverage to $250,000 on these accounts Answer: E 103. The dominant holder of bank deposits in the U.S. is: A) The private sector B) State and local governments C) Foreign governments D) Deposits of other banks E) None of the above Answer: A 104. The deposit pricing method absent of any monthly account maintenance fee or per-transaction fee is called: A) Free pricing B) Conditionally free pricing C) Flat-rate pricing D) Marginal cost pricing E) Nonprice competition Answer: A 105. The deposit pricing method that charges a fixed charge per check or per period or both is called: A) Free pricing B) Conditionally free pricing C) Flat-rate pricing D) Marginal cost pricing E) Nonprice competition Answer: C 106. The deposit pricing method that focuses on the added cost of bringing in new funds is called: A) Free pricing B) Conditionally free pricing C) Flat-rate pricing D) Marginal cost pricing E) Nonprice competition Answer: D 107. Prior to Depository Institution Deregulation and Control Act (DIDMCA), banks used _________. This tended to distort the allocation of scarce resources. A) Free pricing B) Conditionally free pricing C) Flat-rate pricing D) Marginal cost pricing E) Nonprice competition Answer: E 108. A customer has a savings deposit for 60 days. During that time they earn $11 and have an average daily balance of $1500. What is the annual percentage yield on this savings account? A) .73% B) 4.3% C) 4.5% D) 4.7% E) None of the above Answer: C 109. A customer has a savings deposit for 15 days. During that time they earn $15 and have an average daily balance of $2200. What is the annual percentage yield on this savings account? A) .68% B) 16.36% C) 16.59% D) 17.98% E) None of the above Answer: D 110. A bank determines from an analysis on its deposits that account processing and other operating expenses cost the bank $4.15 per month. It has also determined that its none operating expenses on its deposits are $1.65 per month. The bank wants to have a profit margin which is 10 percent of monthly costs. What monthly fee should this bank charge on its deposit accounts? A) $6.38 per month B) $5.80 per month C) $4.57 per month D) $4.15 per month E) None of the above Answer: A 111. A bank has $200 in checking deposits. Interest and noninterest costs on these accounts are 4%. This bank has $400 in savings and time deposits with interest and noninterest costs of 8%. This bank has $200 in equity capital with a cost of 24%. This bank as estimated that reserve requirements, deposit insurance fees and uncollected balances reduce the amount of money available on checking deposits by 10% and on savings and time deposits by 5%. What is this bank’s before-tax cost of funds? A) 11.00% B) 11.32% C) 11.50% D) 12.00% E) None of the above Answer: B 112. A bank has $100 in checking deposits. Interest and noninterest costs on these accounts are 8%. This bank has $600 in savings and time deposits with interest and noninterest costs of 12%. This bank has $100 in equity capital with a cost of 26%. This bank has estimated that reserve requirements, deposit insurance fees and uncollected balances reduce the amount of money available on checking deposits by 20% and on savings and time deposits by 5%. What is the bank’s before-tax cost of funds? A) 13.05% B) 13.25% C) 15.33% D) 19.17% E) None of the above Answer: A 113. A bank has $500 in checking deposits. Interest and noninterest costs on these accounts are 6%. This bank has $250 in savings and time deposits with interest and noninterest costs of 14%. This bank has $250 in equity capital with a cost of 25%. This bank has estimated that reserve requirements, deposit insurance fees and uncollected balances reduce the amount of money available on checking deposits by 15% and on savings and time deposits by 4%. What is the bank’s before-tax cost of funds? A) 15.00% B) 12.75% C) 13.42% D) 15.74% E) None of the above Answer: C 114. A bank expects to raise $30 million in new money if it pays a deposit rate of 7%. It can raise $60 million in new money if it pays a deposit rate of 7.5%. It can raise $80 million in new money if it pays a deposit rate of 8% and it can raise $100 million in new money if it pays a deposit rate of 8.5%. This bank expects to earn 9% on all money that it receives in new deposits. What deposit rate should the bank offer on its deposits, if they use the marginal cost method of determining deposit rates? A) 7% B) 7.5% C) 8% D) 8.5% E) None of the above Answer: B 115. A bank expects to raise $30 million in new money if it pays a deposit rate of 7%. It can raise $60 million in new money if it pays a deposit rate of 7.5%. It can raise $80 million in new money if it pays a deposit rate of 8% and it can raise $100 million in new money if it pays a deposit rate of 8.5%. This bank expects to earn 9% on all money that it receives in new deposits. What is the marginal cost of deposits if the bank raises their deposit rate from 7 to 7.5%? A) .5% B) 7.5% C) 8.0% D) 9.5% E) 10.5% Answer: C 116. Under the Truth in Savings Act, a bank must inform its customers of the terms being quoted on their deposits. Which of the following is not one of the terms listed? A) Loan rate information B) Balance computation method C) Early withdrawal penalty D) Transaction limitations E) Minimum balance requirements Answer: A 117. Which of these Acts is attempting to address the low savings rate of workers in the U.S. by including an automatic enrollment (“default option”) in employees’ retirement accounts? A) The Economic Recovery Tax Act of 1981 B) The Tax Reform Act of 1986 C) The Tax Relief Act of 1997 D) The Pension Protection Act of 2006 E) None of the above Answer: D 118. Business (commercial) transaction accounts are generally more profitable than personal checking accounts, according to the textbook. Which of the following explain the reasons for this statement: A) The average size of the business transaction is smaller than the personal transaction B) Lower interest expenses are associated with commercial deposit transaction C) The bank receives more investable funds in the commercial deposits transaction D) A and B E) B and C Answer: E 119. A bank expects to raise $30 million in new money if it pays a deposit rate of 7%. It can raise $60 million in new money if it pays a deposit rate of 7.5%. It can raise $80 million in new money if it pays a deposit rate of 8% and it can raise $100 million in new money if it pays a deposit rate of 8.5%. This bank expects to earn 9% on all money that it receives in new deposits. What is the marginal cost of deposits if this bank raises their deposit rate from 7.5% to 8%? A) .5% B) 7.5% C) 8.0% D) 9.5% E) 10.5% Answer: D 120. A bank expects to raise $30 million in new money if it pays a deposit rate of 7%. It can raise $60 million in new money if it pays a deposit rate of 7.5%. It can raise $80 million in new money if it pays a deposit rate of 8% and it can raise $100 million in new money if it pays a deposit rate of 8.5%. This bank expects to earn 9% on all money that it receives in new deposits. What is the marginal cost of deposits if this bank raises their deposit rate from 8% to 8.5%? A) .5% B) 7.5% C) 8.0% D) 9.5% E) 10.5% Answer: E 121. A bank expects to raise $20 million in new money if it pays a deposit rate of 7%. It can raise $60 million in new money if it pays a deposit rate of 7.5%. It can raise $100 million in new money if it pays a deposit rate of 8% and it can raise $120 in new money if it pays a deposit rate of 8.5%. This bank expects to earn 9.5% on all money that it receives in new deposits. What deposit rate should the bank offer on its deposits, if it uses the marginal cost method of determining deposits rates? A) 7% B) 7.5% C) 8% D) 8.5% E) None of the above Answer: C 122. A bank expects to raise $20 million in new money if it pays a deposit rate of 7%. It can raise $60 million in new money if it pays a deposit rate of 7.5%. It can raise $100 million in new money if it pays a deposit rate of 8% and it can raise $120 in new money if it pays a deposit rate of 8.5%. This bank expects to earn 9.5% on all money that it receives in new deposits. What is the marginal cost of deposits if this bank raises their deposit rate from 8 to 8.5%? A) 11% B) 8.75% C) 7.75% D) 7% E) .5% Answer: A 123. A bank expects to raise $20 million in new money if it pays a deposit rate of 7%. It can raise $60 million in new money if it pays a deposit rate of 7.5%. It can raise $100 million in new money if it pays a deposit rate of 8% and it can raise $120 in new money if it pays a deposit rate of 8.5%. This bank expects to earn 9.5% on all money that it receives in new deposits. What is the marginal cost of deposits if this bank raises their deposit rate from 7.5% to 8%? A) 11% B) 8.75% C) 7.75% D) 7% E) .5% Answer: B Chapter 13 Managing No deposit Liabilities Fill in the Blank Questions 1. Dollar denominated CDs issued outside the U.S. are called _________. Answer: Eurodollar CDs 2. The CDs large foreign banks sell through their U.S. branches are called _________. Answer: Yankee CDs 3. When a bank buys funds from other financial institutions in order to cover good quality loan demand and to satisfy deposit reserve requirements they are practicing _________. Answer: liability management 4. When the first priority of a bank is to make loans to all good quality loan customers they are following the _________. Answer: customer relationship doctrine 5. Originally _________ consisted exclusively of deposits held by U.S. banks at the Federal Reserve banks which were loaned from one bank to another. Answer: federal funds 6. _________ is the short-term notes, with maturities ranging from 3 to 4 days to 9 months, issued by well-known companies. Answer: Commercial paper 7. A _________ is the temporary sale of high-quality, easily-liquidated assets accompanied by the agreement to buy back those assets on a future specific date at a predetermined price. Answer: repurchase agreement 8. Because the interest rate on CDs, commercial paper and other no deposit borrowings (except borrowings from the Federal Reserve discount window) are determined by supply and demand conditions in the market they all face _________ risk. Answer: interest rate 9. The spread between current and expected loans and investments and the current and expected deposit inflows and other sources of funds is known as the _________. Answer: funds gap 10. A(n) _________ is an interest bearing receipt for funds issued by a bank with a minimum denomination of $100,000. Answer: negotiable (jumbo) CD 11. Because there is a danger that the bank in need of funds will not be able to find someone willing to grant the bank a loan at a reasonable rate, they face _________. Answer: credit availability risk 12. The Federal Reserve will make loans through its _________. Answer: discount window 13. The securities most often used in a repurchase agreement are _________. Answer: T-Bills 14. Virtually all no deposit borrowing of a bank are ______-term rather than _______-term debt. Answer: short, long 15. Repurchase Agreements (RPs) are very similar to Federal Funds and are often viewed as ____________ federal funds transactions. Answer: collateralized 16. A repurchase agreement (RP) whereby the collateral is specifically identified is known as a conventional or ____________ RP. Answer: fixed-collateral 17. A ______________ repurchase agreement (RP) is one in which the underlying collateral is not identified precisely and thus allows some substitution. Answer: General Collateral Finance 18. The type of discount window loan with generally the highest rates of interest is known as ___________ credit. Answer: secondary 19. The type of discount window loan with generally the lowest rate of interest is known as __________ credit. Answer: seasonal 20. Federal Reserve balances of banks can be transferred from one institution to another in seconds through the Fed’s wire transfer network called the _________. Answer: Fedwire 21. One of the three types of loans in the Fed Funds market, _________ are unwritten agreements, negotiated via wire or telephone, with the borrowed funds returned the next day. Answer: overnight loans 22. One of the three types of loans in the Fed Funds market, _________ are longer-term Fed Funds contracts lasting several days, weeks or months, often accompanied by a written contract. Answer: term loans 23. One of the three types of loans in the Fed Funds market, _________ are automatically renewed each day unless either the borrower or lender decides to end this agreement. Answer: continuing contracts 24. When financial institution borrows in the RP market, this loan is listed as _________. Answer: Securities Sold under Agreements to Repurchase 25. _________ are no deposit borrowings that are fully collateralized by home mortgages and have maturities ranging from overnight to 20 years. Answer: Advances from the Federal Home Loan Banks True/False Questions 26. The traditional and principal source of bank funds is deposits. Answer: True 27. Asset management (i.e., conversion of assets to cash) is regarded as an interest-sensitive approach to raising funds. Answer: False 28. Deposits have been growing faster than no deposit sources of funds in recent years among U.S. banks. Answer: False 29. Federal funds today consist exclusively of deposits held at the Federal Reserve banks. Answer: False 30. There are no reserve requirements on Federal funds borrowings in the U.S. Answer: True 31. Accommodating banks buy and sell Federal funds simultaneously. Answer: True 32. Loans of Federal funds under a continuing contract are automatically renewed each day unless either the borrower or the lender decides to end the agreement. Answer: True 33. The loan from a Federal Reserve bank which normally lasts only a few days and is designed to provide immediate aid in meeting a bank's legal reserve requirement is known as extended credit. Answer: False 34. Yankee CDs are issued by large savings and loan associations and other nonbank savings institutions. Answer: False 35. The volume of variable-rate CDs exceeds the volume of fixed-rate CDs among U.S. banks. Answer: False 36. Liability management is considered to be an interest-sensitive approach to raising bank funds. Answer: True 37. Funds raised by the use of liability management techniques are considered to be flexible. Answer: True 38. Liability management banking calls for using price (the interest rate offered) as the control lever to regulate incoming funds. Answer: True 39. The most common type of federal funds loans are term loans. Answer: False 40. Longer-term federal funds contracts lasting several days, weeks, or months, often accompanied by a written contract, are called continuing contracts. Answer: False 41. According to the FDIC Improvement Act undercapitalized U.S. banks cannot be granted discount window loans for more than 60 days in each 120-day period. Answer: True 42. The largest foreign banks active in the United States sell CDs through their U.S. branches called Yankee CDs. Answer: True 43. Under current federal law commercial banks in the United States can issue commercial paper as direct obligations of the banks. Answer: False 44. No deposit funds do have the advantage of quick availability compared to most types of deposits, but are not as stable a funding source for banks as are time and savings deposits. Answer: True 45. Longer-term federal funds contracts which are automatically renewed each day unless either the borrower or the lender decides to end the agreement are called term loans, Answer: False 46. The main use of federal funds today is still the traditional one. Federal funds provide a mechanism that allows banks short of legal reserves to tap into immediately available funds from other institutions possessing temporarily idle funds. Answer: True 47. One of the factors to consider when a bank chooses among no deposit funding sources is the relative cost. In general, the cheapest source of short-term funds is the Fed Funds market. Answer: True 48. There are no restrictions on getting a Federal Reserve loan and because it is the cheapest source of short-term funds most banks will use this source of funds exclusively. Answer: False 49. CDs must be issued with maturities of at least 7 days. Answer: True 50. Loans from the Fed Funds market must be backed by collateral. Answer: False 51. In recent years financial institutions have gotten better at managing interest rate risk. Answer: True 52. Large banks depend more on no deposit borrowings than small banks. Answer: True 53. Although there is an active federal funds spot market, there is currently no associated futures market for federal funds. Answer: False 54. Repurchase Agreement (RPs) transactions are perceived to be less risky than equivalent federal funds transactions. Answer: True 55. Interest rates in the Repurchase Agreement (RP) market are quoted on a 360-day basis. Answer: True 56. Seasonal credit discount window loans generally have the highest interest rates. Answer: False 57. Primary credit is defined as loans available for short terms and normally considered beneficial for the borrower because it carries an interest rate slightly below the target Fed funds rate. Answer: False 58. When the general credit conditions are tight, there is a possibility that not every borrower will be accommodated by a lender. This chance of credit rationing is referred to as credit availability risk. Answer: True 59. The size of a financial institution has an effect on the type of no deposit funding source that it will consider. For example, larger depository institutions have the credit standing to sell the largest negotiable CDs, while the Fed funds market is suitable for smaller institutions. Answer: True 60. Only federal regulators can limit the terms (amount, frequency, and use) of borrower funds by the U.S. depository institutions. Answer: False Multiple Choice Questions 61. The doctrine that the first priority of a bank is to make loans to all those customers from whom the bank expects to receive positive net earnings is called the: A) Funds management doctrine B) Customer relationship doctrine C) Loan priority doctrine D) Revenue flows doctrine E) None of the above. Answer: B 62. The doctrine that banks should be able to buy the reserves they need to cover good-quality loan requests is known as: A) Funds Management B) Asset Management C) Liability Management D) Asset-Liability Coordinated Management E) None of the above. Answer: C 63. With liability management banking the control lever to regulate incoming bank funds is: A) Management discretion B) The volume of loan demand the bank faces. C) Deposit growth D) Price E) None of the above. Answer: D 64. The most popular domestic source of borrowed reserves for U.S. banks is: A) Federal funds market B) Money market negotiable CDs C) Eurodollar market D) Borrowings from the Federal Reserve Banks E) Commercial paper market Answer: A 65. The phrase "short-term borrowings of immediately available money" refers to: A) Negotiable CDs B) Eurodollar deposits C) Commercial paper issues D) Borrowings of legal reserves at the Federal Reserve banks E) None of the above. Answer: E 66. Large time deposits are generally referred to as: A) Mini CDs. B) Jumbo CDs. C) Large CDs. D) Giant CDs. E) Super CDs. Answer: B 67. The source of short-term funds for commercial banks that was developed to tap temporary surplus funds held by large corporate and wealthy individual customers is: A) Federal funds. B) Commercial paper. C) Eurodollar deposits. D) Negotiable CDs. E) None of the above. Answer: D 68. First National Bank has new loan requests of $225 million, needs to purchase $100 million in U.S. Treasury securities to meet pledging requirements, and anticipates draws against credit lines of $135 million. Deposits received today total $215 million and the bank expects to bring in an additional $100 million next week. What is First National's estimated funds gap for the coming week? A) $225 million. B) $145 million. C) $135 million. D) $100 million. E) None of the above. Answer: B 69. First National Bank has new loan requests of $175 million, needs to purchase $50 million in U.S. Treasury securities to meet pledging requirements, and anticipates draws against credit lines of $45 million. Deposits received today total $140 million and the bank expects to bring in an additional $230 million next week. What is First National's estimated funds gap for the coming week? A) $225 million. B) $145 million. C) $135 million. D) $100 million. E) None of the above. Answer: D 70. Factors that will affect a bank's decision as to which no deposit sources of funds it will use to cover its projected funds gap include which of the following? A) The relative cost of raising the funds. B) The length of time the funds will be required. C) The risk associated with each source of funds. D) The size of the bank. E) All of the above. Answer: E 71. First National Bank is planning to raise $30 million through an offering of negotiable CDs. The current rate for similar CDs is 5.5%. Noninterest cost rate for CDs is 0.25 percent. First National pays a deposit insurance premium of 0.0023 per dollar of insured deposits. Due to other immediate cash needs, only $25 million will be fully invested. What is the effective cost rate of borrowing in the CD market? A) 6.9% B) 7.2% C) 6.0% D) 5.5% E) None of the above. Answer: B 72. CDs that are sold by the largest foreign banks through their U.S. branches are called: A) Thrift CDs. B) Domestic CDs. C) EuroCDs. D) Yankee CDs. E) None of the above. Answer: D 73. Accommodating banks perform what role? A) They act as intermediaries in the Eurodollar market. B) They issue negotiable CDs for themselves and for other banks. C) They sell commercial paper to raise funds for themselves and other firms belonging to their bank holding company. D) They buy and sell federal funds simultaneously in order to make a market for reserves of customer banks. E) None of the above. Answer: D 74. A federal funds loan that is automatically renewed each day unless either the borrower or the lender decides to end the loan agreement is known as a: A) Overnight loan. B) Continuing contract. C) Term loan. D) Rollover loan agreement E) None of the above Answer: B 75. Longer-term federal funds contracts lasting several days, weeks, or months, often accompanied by a written contract, are known as: A) Term loans. B) Continuing contracts C) Rollover loans. D) Federal funds mutuality agreements E) None of the above Answer: A 76. The federal law that restricts Federal Reserve lending to undercapitalized banks and to banks that are "viable entities" is the: A) Riegle Community Development and Regulatory Improvement Act B) FDIC Improvement Act. C) Financial Institutions Reform, Recovery, and Enforcement Act. D) Depository Institutions Deregulation and Monetary Control Act. E) None of the above. Answer: B 77. The bank funding source that is really a "hybrid" account is the: A) Federal funds loan. B) Repurchase agreement. C) Negotiable CD. D) Eurodollar deposit. E) None of the above. Answer: C 78. A bank plans on borrowing $150 million through an RP transaction collateralized by T-bills. The bank plans on borrowing the money for 5 days and the current RP rate is 5.25 percent. What is this bank's total interest cost in dollars? A) $7,875,000 B) $107,877 C) $21,875 D) $109,375 E) None of the above Answer: D 79. Suppose a bank promises an annual return of 6.5 percent on a three month (90 day) $150,000 CD) What will be the total amount due the customer at the end of the three month period? A) $152,437.50 B) $2,437.50 C) $150,000 D) $152,404.11 E) None of the above Answer: A 80. The short-term notes, with maturities ranging from 3 or 4 days to 9 months, issued by well-known companies are known as: A) Negotiable CDs B) Commercial paper C) Federal funds D) Repurchase agreements E) None of the above Answer: B 81. The TRC Bank is planning on raising $500 million in a new offering of commercial paper through its holding company. The plan on using $475 million of it to fund new loans. The current interest rate for similar commercial paper is 6.45 percent and they expect .25 percent in issuing costs. What is the effective rate of interest on this issue of commercial paper? A) 6.65% B) 6.45% C) 7.05% D) 6.79% E) None of the above Answer: C 82. An agreement where one party agrees to sell T-bills to another party and at the same time agrees to buy them back at a set price is known as: A) A repurchase agreement B) Commercial paper C) Federal Funds D) Negotiable CDs E) None of the above Answer: A 83. Which of the following is not an advantage of using a repurchase agreement? A) The bank gains excess reserves which can used to make new deposits B) The bank makes use of high-quality but low yielding assets without losing them permanently C) If the agreement is made with a bank who keeps a checkable deposit with the bank it can reduce both the bank's deposits and reserve requirements D) The interest rate the bank has to pay is usually low E) All of the above are advantages of using a repurchase agreement Answer: A 84. Which of the following is an example of a longer term no deposit funding source? A) Federal funds B) Repurchase agreements C) Capital notes and debentures D) Negotiable CDs E) None of the above Answer: C 85. Suppose a bank expects to issue 45 day negotiable CDs for $150 million. The interest rate on these CDs is 6.35%. What is the dollar amount in interest the bank will owe on these CDs at the end of the 45 days? A) $9,525,000 B) $1,190,625 C) $76,200,000 D) $6,750,000 E) None of the above Answer: B 86. Dollar denominated CDs issued by banks outside the United States are known as: A) Domestic CDs B) Euro CDs C) Yankee CDs D) Commercial paper E) None of the above Answer: B 87. A repurchase agreement (RP) in which the collateral is specifically identified is known as: A) A conventional RP B) A General Collateral Finance RP C) A specific RP D) A general RP E) An individual RP Answer: A 88. A conventional Repurchase Agreement (RP) is ________ flexible for the borrower than (as) a General Collateral Finance RP. A) More B) Less C) As D) Unknown E) None of the above Answer: B 89. The following types of loans are all available at the discount window except: A) Adjustment credit B) Primary credit C) Secondary credit D) Seasonal credit E) None of the above Answer: A 90. In addition to the Federal Reserve, another governmental agency has also been loaning large amounts of money to banks and thrift institutions and is known as the: A) FDIC B) OCC C) OTS D) FHLB E) RTC Answer: D 91. The Bridges State Bank has new loan requests of $315 and wants to purchase $125 million in U.S. Treasury securities and anticipates draws on lines of credit in the amount of $65 million. Deposits received today totaling $205 million and the bank expects to bring in an additional $185 million in deposits next week. What is the estimated funds gap for the Bridges State Bank? A) $505 million B) $390 million C) $115 million D) $315 million E) None of the above Answer: C 92. The Williams National Bank has new loan requests of $585 million and wants to purchase $160 in U.S. Treasury securities. They also anticipate draws on lines of credit in the amount of $120 million. This bank received deposits totaling $300 million and they expect to bring in an additional $340 million in deposits next week. What is the estimated funds gap of the Williams National Bank? A) $225 million B) $585 million C) $640 million D) $865 million E) None of the above Answer: A 93. The Willis Savings Bank is comparing the prevailing interest rate in the Fed Funds market with that in the negotiable CD market. They are making sure to include the noninterest costs and the deposit insurance costs as well as the amount of money that will actually be available for new loans. Which factor that affects a bank’s use of no deposit sources of funds is the bank examining? A) The relative cost of raising the funds B) The length of time the funds will be required C) The risk associated with each source of funds D) The size of the bank E) Regulations Answer: A 94. The First State Bank of Summerville knows that, if they issue commercial paper through a subsidiary, money is very tight and the interest rate on the commercial paper may very high. What factor that affects a bank’s use of no deposit sources of funds is the bank concerned about? A) The relative cost of raising the funds B) The length of time the funds will be required C) The risk associated with each source of funds D) The size of the bank E) Regulations Answer: C 95. The First State Bank of Summerville knows that, if they issue a large amount of the negotiable CD, money is tight. As a result, they choose to ration the credit and lend only to their most loyal clients. What risk factor that affects a bank’s use of no deposit sources of funds is the concern here? A) Interest rate changes B) The length of time the funds will be required C) The relative cost of raising the funds D) Credit availability E) Regulations Answer: D 96. The manager of the First National Bank of Edmond needs $100 million this afternoon to satisfy an unexpected loan demand from an excellent customer of the bank. What factor that affects a bank’s use of no deposit sources of funds is the manager concerned about? A) The relative cost of raising the funds B) The length of time the funds will be required C) The risk associated with each source of funds D) The size of the bank E) Regulations Answer: B 97. The First State Bank of Summerville needs to raise $500,000 in no deposit sources of funds. They know that the Eurodollar market requires a minimum denomination of $1 million. What factor that affects a bank’s use of no deposit sources of funds is this bank concerned about? A) The relative cost of raising the funds B) The length of time the funds will be required C) The risk associated with each source of funds D) The size of the bank E) Regulations Answer: D 98. Bank of America is concerned because they have heard that the Federal Reserve Board may impose legal reserve requirements on money borrowed in the Fed Funds market. Which factor that affects a bank’s use of no deposit sources of funds is this bank concerned about? A) The relative cost of raising the funds B) The length of time the funds will be required C) The risk associated with each source of funds D) The size of the bank E) Regulations Answer: E 99. The Bank of Boulder is planning on issuing $45 million in negotiable CDs. Currently other similar CDs have an interest rate of 4.75%. The Bank of Boulder has estimated that its noninterest costs of issuing these CDs are .15%. The Bank of Boulder must pay a deposit insurance premium of .0023 per dollar of insured funds. Due to other immediate cash needs, only $40 million of the funds raised will be fully invested. What is the effective cost rate for the Bank of Boulder to borrow in the CD market? (Round your answer to the nearest .01%) A) 4.75% B) 4.90% C) 5.10% D) 5.79% E) None of the above Answer: D 100. The Lawrence Bank of Cleveland is planning on issuing $60 million in negotiable CDs. Currently other similar CDs have an interest rate of 5.15%. The Lawrence Bank of Cleveland has estimated that is noninterest costs of issuing these CDs will be .2%. The Lawrence Bank of Cleveland must pay a deposit insurance premium of .0023 per dollar of insured funds. Due to other immediate cash needs, only $50 of the funds raised will be full invested. What is the effective cost rate for the Lawrence Bank of Cleveland to borrow in the CD market? (Round your answer to the nearest .01%) A) 6.71% B) 6.42% C) 5.58% D) 5.15% E) None of the above Answer: A 101. CDs issued by savings institutions are called: A) Thrift CDs B) Domestic CDs C) Euro CDs D) Yankee CDs E) Variable rate CDs Answer: A 102. When a foreign branch lends a Eurodeposit to its home office in the U.S., how is this listed on the balance sheet of the home office? A) Loan from Subsidiary B) Liabilities to Foreign Branches C) Securities Sold under Agreement to Repurchase D) Bankers Acceptance E) None of the above Answer: B 103. A Fed Funds loan that is an unwritten agreement negotiated via wire or telephone with the borrowed funds returned the next day is known as: A) An overnight loan B) A continuing contract C) A term loan D) A daytime loan E) None of the above Answer: A 104. A bank plans on borrowing $225 million for 10 days through a RP transaction collateralized by T-Bills. The current RP rate is 4.5%. What is this bank’s total interest cost in dollars? A) $10,125,000 B) $1,125,000 C) $281,250 D) $28,125 E) None of the above Answer: C 105. A bank plans on borrowing $450 million for 20 days through a RP transaction collateralized by T-Bills. The current RP rate is 6.25%. What is this bank’s total interest cost in dollars? A) $28,125,000 B) $78,125 C) $1,406,250 D) $1,562,500 E) None of the above Answer: D 106. A bank promises an annual return of 7.75 percent on a 180 day, $250,000 CD. What will be the total amount due the customer at the end of the six month period? A) $269,375.00 B) $259,687.50 C) $9687.50 D) $250,000.00 E) None of the above Answer: B 107. A bank promises an annual return of 4.85% on a 60 day, $300,000 CD. What will be the total amount due to the customer at the end of the two month period? A) $302,425 B) $314,550 C) $14,550 D) $2,425 E) None of the above Answer: A 108. The HTR Bank is planning on raising $750 million in a new offering of commercial paper through its holding company. They plan on using $725 million of it to fund new loans. The current interest rate for similar commercial paper is 7.15% and they expect .15% in issuing costs. What is the effective rate of interest on this issue of commercial paper? A) 7.30% B) 7.15% C) 7.40% D) 7.55% E) None of the above Answer: D 109. The Carter State Bank is planning on raising $600 million in a new offering of commercial paper through its holding company. They plan on using $500 million of it to fund new loans. The current interest rate for similar commercial paper is 4.85% and they expect .3% in issuing costs. What is the effective rate of interest on this issue of commercial paper? A) 5.15% B) 6.18% C) 5.82% D) 4.85% E) None of the above Answer: B 110. Setting the Federal Reserve primary-credit discount rate above the Fed Funds rate mirrors what credit facilities used by several European central banks? A) The Vince credit facilities B) The Adam Smith credit facilities C) The Lombard credit facilities D) The Lower Back credit facilities E) None of the above Answer: C Test Bank for Bank Management and Financial Services Peter S. Rose, Sylvia C. Hudgins 9780073382432, 9780078034671
Download
Close
Close
