CH-3-4 The Organization and Structure of Banking and the Financial-Services Industry – Bank Management and Financial Services : Exam Guide

This Document Contains Chapters 3 to 4 Chapter 3 The Organization and Structure of Banking and the Financial-Services Industry Fill in the Blank Questions 1. A(n) _________ is a machine located at the merchant's place of business which allows depositors to use their debit card to pay for purchases directly. Answer: POS 2. A(n) _________ is a bank which offers its full range of services from several locations. Answer: branch bank 3. A(n) _________ is a bank which offers its full range of services from only one location. Answer: unit bank 4. A(n) _________ is a corporation chartered for the express purpose of holding the stock of one or more banks. Answer: Bank Holding Company 5. Managers who value fringe benefits, plush offices and ample travel budgets over the pursuit of maximum returns for stockholders are exhibiting signs of _________. Answer: Expense Preference Behavior 6. A(n) _________ can invest in corporate stock as sell as loan money to help finance the start of new ventures or support the expansion of existing businesses. Answer: Merchant bank 7. A bank which operates exclusively over the internet is known as a ___________ bank. Answer: Virtual 8. One new 21st century bank organizational structures is _________. This is a special type of holding company that may offer the broadest range of financial services. Answer: Financial Holding Company (FHC) 9. The key problem in a large money center bank is _________. Managers may be knowledgeable about banking practices but may be less informed about products and services of subsidiary companies. Answer: span of control 10. The Gramm-Leach-Bliley Act moved the U.S. banking industry closer to _________ banking in which banks may provide securities, insurance, and other financial products. Answer: universal 11. A bank that is not associated with a bank holding company is called a(n) _________ bank. Answer: independent 12. _________ is a view of how modern corporations operate which analyzes the relationship between a firm’s owners and its managers. Answer: Agency theory 13. Many experts believe that _________, the relationships that exist between managers, the board of directors and stockholders, is more complicated in financial institutions. Answer: Because of government regulations. 14. _________ is the idea that there will be a lower cost of production per unit as the firm gets larger. Answer: Economies of scale 15. _________ is the idea that there will be lower cost of producing multiple services using the same organization and resources. Answer: Economies of scope 16. Over the years, managers of banks and other financial institutions have evolved different organizational forms to address changes in the industry. Indeed, these firms are organized to carry out various roles in the most efficient way. This is referred to as _________. Answer: Organizational form follows function True/False Questions 17. Bank size is not considered a significant factor in determining how banks are organized. Answer: False 18. Nearly three quarters of all U.S. banks exceed $100 million in asset size apiece. Answer: False 19. Nearly all U.S. banks with federal or state charters have their deposits insured by the Federal Deposit Insurance Corporation. Answer: True 20. State-chartered banks in the United States represent about a quarter of all U.S.-chartered banks, while national banks account for approximately three quarters of all U.S. chartered banks. Answer: False 21. The majority of all U.S. banks are members of the Federal Reserve System. Answer: False 22. A banking corporation chartered by either federal or state governments that operates only one full-service office is called a unit bank. Answer: True 23. Over half of all U.S. states today limit branching activity. Answer: False 24. The average U.S. bank is larger in size (in terms of number of branch offices) than the average Canadian bank. Answer: False 25. Despite the rapid growth of automation in U.S. banking, there are more full-service branch banking offices than automated teller machines across the whole U.S. Answer: False 26. In the United States there are more one-bank holding companies than multi-bank holding companies. Answer: True 27. Bank holding companies hold more than 90 percent of the industry’s assets in the United States. Answer: True 28. Research evidence suggests that banks taken over by interstate banking organizations have generally increased their market shares over their competitors within the same state and generally are more profitable than their competitors. Answer: False 29. The concentration of bank deposits at the local level (that is in urban communities and rural counties) has displayed only moderate changes in recent years. Answer: True 30. There is evidence that branch banks charge higher fees for some banking services than do unit banks. Answer: True 31. Branch banks tend to offer a wider menu of services than unit banks. Answer: False 32. Recent research suggests that branch banks tend to be more profitable than either unit or holding company banks, while interstate banks tend to be the most profitable of all. Answer: False 33. Less than 10 percent of the largest banks in the U.S. control almost 90 percent of the industry assets. Answer: True 34. Agency theory suggests that bank management will always pursue the goal of maximizing the return of the bank's shareholders. Answer: False 35. Recent research suggests that the relationship between bank size and the cost of production per unit is roughly U shaped. Answer: True 36. Bank holding companies that want to achieve the goal of risk reduction in earnings risk through interstate banking can achieve the same level of risk reduction by entering any of the fifty states. Answer: False 37. Bank holding companies are allowed to own nonbank businesses as long as those businesses offer services closely related to banking. Answer: True 38. Banks tend to have a higher proportion of outside directors than a typical manufacturing firm. Answer: True 39. Banks which operate entirely on the web are known as invisible banks. Answer: False 40. Banks acquired by holding companies are referred to as affiliated banks. Answer: True 41. Bank organizational structure has become more complex in recent years. Answer: True 42. There are only a very small number of unit banks in the U.S. today. Answer: False 43. Traditional brick-and-mortar bank branch offices are on the decline in the U.S. today. Answer: False 44. Community banks are usually smaller banks that are devoted principally to the markets for smaller, locally based deposits and loans. Answer: True 45. The question of whether financial firms operate as efficiently as possible requires researchers to look into the issue of x-efficiency. The concept requires an assessment of the financial firm’s operating costs in relation to its cost-efficient frontier. Answer: True Multiple Choice Questions 46. In banking, organizational form follows __________ because banks usually are organized in such a way as to carry out the tasks and supply the services demanded of them. The term that correctly fills in the blank in the sentence above is: A) Bank size B) Management's decision C) Function D) Regulation E) Location Answer: C 47. Which one of the following is charged with setting policy and overseeing a bank's performance? A) Stockholders B) Board of directors C) Regulators D) Depositors E) None of the above. Answer: B 48. The largest banks possess some potential advantages over small and medium-size banks, according to the textbook. What specific advantage of the largest banks over small and medium-sized banks is not mentioned in the text? A) Greater diversification geographically and by product line B) Availability of financial capital at lower cost C) Greater professional expertise to allocate capital to the most promising products and services D) Better positioned to take advantage of the opportunities afforded by interstate banking. E) All of the above were mentioned in the text as advantages typically possessed by the largest banks. Answer: E 49. Before any financial services can be offered to anyone a bank in the United States must have a: A) Certificate of deposit insurance B) Charter of incorporation C) List of established customers D) New building constructed to be the bank's permanent home E) None of the above. Answer: B 50. In the United States there are close to __________ commercial banks in operation. Which number shown below is closest to the actual total number of U.S. banks operating in the U.S.? A) 20,500 B) 13,500 C) 11,500 D) 9,000 E) 7,500 Answer: E 51. One of the few states that has opted out of interstate banking is: A) New York B) Ohio C) Texas D) Montana E) None of the above Answer: D 52. The concentration of U.S. bank deposits in the hands of the largest banks has _________ during the most recent period, A) Declined B) Increased C) Remained essentially unchanged D) Exhibited large fluctuations in both directions E) None of above. Answer: B 53. Bank holding company organizations have several advantages over other types of banking organizations. Among the advantages mentioned in this chapter is: A) Greater ease of access to capital markets B) Tax advantage C) Product-line diversification D) All of the above. E) None of the above. Answer: D 54. A company which owns the stock of three different banks is known as a(n): A) Unit Bank B) Interstate Bank C) One Bank Holding Company D) Multi-Bank Holding Company E) None of the above Answer: D 55. Which of the following is considered an advantage of branch banking? A) Increased availability and convenience of services B) Decreased chance of failure C) Reduced transaction costs D) B and C above E) All of the above Answer: E 56. The types of nonbank businesses a bank holding company can own include which of the following? A) Retail Computer Store B) Security Brokerage Firm C) Retail Grocery Store D) Wholesale Electronic Distribution Company E) All of the above Answer: B 57. A bank which offers its full range of services from only one office is known as a: A) Unit Bank B) Branch Bank C) Correspondent Bank D) Bank Holding Company E) None of the above Answer: A 58. Why did so many states and the federal government finally enact interstate banking laws? A) The need for new capital in order to revive struggling economies B) The expansion of services by nonbank financial institutions C) Competition from neighboring states that already liberalized their laws D) Advances in technology which allowed banks to service customers in broader geographic areas E) All of the above are reasons for the passage of interstate banking laws Answer: E 59. What is a bank holding company? A) It is a bank that offers all of its services out of one office B) It is a bank that offers all its services out of several offices C) It is a corporation formed to hold the stock of one or more banks D) It is a merchant bank E) None of the above Answer: C 60. Which of the following is a type of service a bank holding company is not allowed to own? A) Merchant banking company B) Savings and loan association C) Retail electronics equipment sales company D) Security brokerage firm E) Insurance agency Answer: C 61. In the last decade, the number of banks has __________ and the number of branches has _________. A) Declined; Increased B) Grown; Increased C) Grown; Decreased D) Declined; Decreased E) Stabilized; Stabilized Answer: A 62. Websites known as electronic branches offer all of the following except: A) Internet banking services B) ATMs C) Point of sales terminals D) Computer and phone services connecting customers E) Traveler's checks Answer: E 63. Relative to manufacturing firms, banks tend to have a (the) ___________ number of board members. A) Same B) Larger C) Smaller D) Unknown E) None of the above Answer: B 64. The percentage of unit banks in the U.S. today is approximately: A) 10% B) 30% C) 50% D) 75% E) 100% Answer: B 65. The ‘typical’ community bank has: A) $300 million in assets and is located in a smaller city in the Midwest. B) $25 billion in assets and is located in a large city in the East C) $100 million in assets and is located in a large city the South D) $10 billion in assets and is located in a small city in the West E) None of the above Answer: A 66. The ‘typical’ money center bank has: A) $250 million in assets and is located in a smaller city in the Midwest B) $25 billion in assets and is located in a large city in the East C) $100 million in assets and is located in a large city in the South D) $10 billion in assets and is located in a small city in the West E) None of the above Answer: B 67. The majority of banks today are: A) Federally chartered B) Uninsured C) State Chartered D) National Banks E) All of the above Answer: C 68. ‘Member’ banks are: A) Members of the FDIC B) National Banks C) Unit Banks D) Members of the Federal Reserve E) All of the above Answer: D 69. _________ and _________ banks tend to be larger and hold more of the public’s deposits. A) National and Member B) State and Non-member C) National and Uninsured D) State and Insured E) None of the above Answer: A 70. Which of the following is a reason for the rapid growth in branch banks? A) Exodus of population from cities to suburban areas B) Bank convergence C) Business failures D) Decreased costs of brick and mortar E) All of the above Answer: A 71. Under the Bank Holding Company Act control of a bank is assumed to exist only if: A) The bank holding company acquires 100% of the bank’s stock B) The bank holding company acquires 50% or more of the bank’s stock C) The bank holding company acquires 25% or more the bank’s stock D) The bank holding company acquires three banks E) None of the above Answer: C 72. When a bank holding company acquires a nonbank business it must be approved by: A) The FDIC B) The Comptroller of the Currency C) The Federal Reserve D) The President of the U.S. E) All of the above Answer: C 73. Many financial experts believe that the customers most likely to be damaged by decreased competition include: A) Large corporations in large cities B) Households and business in smaller cities and towns C) Households that earn more than a billion dollars a year D) Students away at college E) None of the above Answer: B 74. According to Levonian and Rose in order to achieve some reduction in earnings risk, interstate banks must expand into at least: A) 2 states B) 4 states C) 6 states D) 10 states E) 25 states Answer: B 75. The major competitors of banks have: A) Fewer but much larger service providers B) Fewer but smaller service providers C) More but smaller service providers D) More but larger service providers E) None of the above Answer: A 76. Of the following countries in Europe, which has the largest number of banks? A) Belgium B) France C) Germany D) Great Britain E) None of the above Answer: C 77. Which country’s banks were owned by the state until the 1990’s? A) Belgium B) France C) Germany D) Italy E) None of the above Answer: D 78. When financial service providers offer a range of services including banking, insurance and securities services it is known as: A) Consolidation B) Convergence C) Economies of scale D) E-Efficiencies E) None of the above Answer: B 79. The gradual evolution of markets and institutions such that geographic boundaries do not restrict financial transactions is known as: A) Deregulation B) Integration C) Re-regulation D) Globalization E) Moral suasion Answer: D 80. Banks with less than _______ in assets are generally called community banks. A) More than $1 billion B) Less than $1 billion C) More than $5 million D) Less than $1 trillion E) More than $1 trillion Answer: B 81. Nonbank financial firms that supply insurance coverage to customers borrowing money to guarantee repayment of a loan are referred to as: A) Merchant Bankers B) Factoring Companies C) Savings Associations D) Investment Bankers E) Credit Insurance Underwriters Answer: E 82. A financial holding companies (FHC), defined as a special type of holding company that may offer the broadest range of financial services such as securities and insurance activities, were allowed under which act? A) Riegle-Neal Interstate Banking and Branching Efficiency Act B) The Competitive Equality in Banking Act C) The Basel Agreement D) The FDIC Improvement Act E) The Gramm-Leach-Bliley Financial Services Modernization Act Answer: E Chapter 4 Establishing New Banks, Branches, ATMs, Telephone Services, and Web Sites Fill in the Blank Questions 1. The state banking commissions (at the state level) and the Office of the Comptroller of the Currency (at the federal level) are the only ones able to issue a(n) _________ for a new U.S. bank. Answer: charter 2. The _________ issues charters for new national banks. Answer: The Office of the Comptroller of the Currency (OCC) 3. The _________ issues charters for new state banks. Answer: state banking commission 4. _________ is demonstrated by organizers of new banks by showing that local banks are not conveniently located or fail to offer some key services. Answer: public need 5. Banks which offer services from inside grocery stores and other retail outlets are offering services from a(n) _________ branch. Answer: in-store 6. A(n) _________ terminal in a retail store allows a customer to pay for goods and services by instantly debiting their checking account. Answer: POS 7. A(n) _________ combines a computer terminal, record keeping system and vault cash in one unit allowing customers to withdraw money, check deposit balances and which may provide other limited services 24 hours a day. Answer: ATM 8. "Virtual" banks are found on the _________ and more and more banks are using this medium to deliver selected services. Answer: Internet 9. A(n) _________ is a full service facility which offers many of the same services as the home or main office. Answer: branch office 10. The _________ can be calculated when the present value of the future net cash flows are set equal to the initial cash outflow. It is the interest rate that is actually earned on a new project. Answer: expected rate of return (internal rate of return) 11. _________ reduces a bank's overall risk exposure by establishing service facilities in different market areas. Answer: Geographic diversification 12. An) _________ is a bank that offers its services only through the Internet. It does not have any brick and mortar offices. Answer: virtual bank 13. _________ will allow customers to carry pocket-sized terminals with them and pay for goods and services and transfer funds as needed from this pocket terminal. These are already popular in Europe. Answer: digital cash (or smart cards) 14. The acronym ACH stands for _________. Answer: automated clearinghouse 15. For most of the history of financial service providers, ‘convenience’ has meant _________. Answer: location 16. Another name for a ‘new’ financial institution is _________ Answer: de novo 17. New depository institutions are required to have insurance from the _________. Answer: FDIC (Federal Deposit Insurance Corporation) 18. The most effective delivery channel of financial services appears to be _________ which combines full-service branches and electronic, limited service facilities within the same firm. Answer: multi-channel 19. The _________ of a new ATM is the present value of the future stream of cash savings discounted at the firm’s required rate of return less the total cash outlay for the ATM. Answer: net present value 20. Fees for ATM’s are larger and more common if a customer uses another financial institution’s ATM because most institutions charge each other _________ fees. Answer: interchange True/False Questions 21. The FDIC Improvement Act requires that all new depository institutions have FDIC insurance. Answer: True 22. One argument frequently presented for regulation and control over bank chartering activity is that banks can create more money than any other financial institution. Answer: True 23. State banking commissions, on average, impose tougher standards for chartering new banks than the federal chartering agency, the Comptroller of the Currency. Answer: False 24. One of the benefits of applying for a federal banking charter is that banks chartered there need not join the Federal Reserve System. Answer: False 25. Getting a bank charter from the Comptroller of the Currency means that the bank will simultaneously apply for FDIC insurance so no duplication of effort occurs. Answer: True 26. Most new banks are situated along major routes of travel for commuters going to work or to shopping areas and schools. Answer: True 27. "Public need" is usually established with federal or state chartering authorities by showing that existing banks in the area are adequately profitable and have satisfactory amounts of capital. Answer: False 28. Society pays a price if it restricts the number of bank charters below the number that the private sector normally would generate due to lessened competition. Answer: True 29. Most U.S. banks are chartered in urban areas. Answer: True 30. The total number of full-service branch offices has declined in the United States in recent years. Answer: False 31. Newly designed bank branch offices in recent years have emphasized more heavily effective communication of service options to the customer in an effort to promote service sales. Answer: True 32. More desirable bank branch office sites normally have residents who are above-average in age. Answer: True 33. Higher levels of savings deposits are usually to be found in those bank branch office locations where there is an above-average proportion of older heads of households and where there is a large proportion of residents who own their own homes. Answer: True 34. The optimal choice for a new branch site must be that site that offers the bank the highest expected rate of return on the capital invested in the project. Answer: False 35. To close a bank branch office in the United States a bank must give its customers 30 days advance notice. Answer: False 36. Bank branch offices are often specially configured today to maximize sales opportunities. Answer: True 37. One of the keys to branch office profitability is to apply the latest information technology and thereby lower personnel costs. Answer: True 38. Access to a P0S terminal is gained through the use of a credit card. Answer: False 39. On-line P0S terminals substantially out-number off-line P0S service systems. Answer: False 40. One half of all transactions through an ATM machine are deposits. Answer: False 41. The first ATM machine could only handle cash withdrawals. Answer: True 42. ATMs are profitable for all banks since they can eliminate tellers at branches that have ATMs. Answer: False 43. Research indicates that States with more liberal chartering standards experience a higher rate of bank failures. Answer: False 44. More recently the issue of public need has become an increasingly important factor in the granting of bank charters. Answer: False 45. In the short-term newly-chartered banks fail at a higher rate than established banks. Answer: False 46. The majority of new banks do not become profitable for at least a decade. Answer: False 47. The OCC does not charter internet-only banks. Answer: False 48. Payment by electronic direct deposit now comprises over 50 percent of all transactions. Answer: False 49. When considering possible location for new branches, the expected rate of return is the only decision that management should consider. Answer: False 50. The proposed new branch’s negative return correlation with existing branch offices and other assets can serve to lower the overall bank’s riskiness and is an important justification for branch establishment. This is referred to as geographic diversification effect. Answer: True Multiple Choice Questions 51. U.S. banking laws require the organizers of a proposed new bank to demonstrate: A) Adequate future earnings prospects B) Adequate owners' capital will be available C) Evidence of a public need for a new bank D) Existing banks will not be endangered E) All of the above. Answer: E 52. One of the benefits of securing a state bank charter instead of a federal bank charter is: A) It brings added prestige B) It results in the automatic receipt of federal deposit insurance C) It is often able to lend a higher percentage of its capital and surplus to a single borrower D) A state bank must join the Federal Reserve System E) None of the above. Answer: C 53. One of the benefits of securing a federal (national) bank charter instead of a state bank charter is: A) Federal rules can pre-empt state laws B) It is generally easier and less costly to secure a federal charter C) It is often able to lend a higher percentage of its capital and surplus to a single borrower D) Lower supervisory fees E) None of the above. Answer: A 54. The number of bank charters issued annually in the United States has averaged about: A) 1000 B) 2000 C) 10 D) 100 E) None of the above Answer: D 55. The existence of branch banking in a given state: A) Encourages more new banks to be chartered B) Discourages some new banks from being chartered C) Results in more bank failures than normal D) Results in lower operating cost per unit of service E) None of the above. Answer: B 56. Most new banks: A) Become profitable in the first 3 years of their operation B) Have pro-competitive effects on the markets they enter C) Survive rather than fail D) All of the above are correct E) None of the above are correct. Answer: D 57. Most new U.S. banks are chartered in: A) Small communities where there is very little existing competition. B) Relatively large urban areas where organizers can earn higher expected rates of return on their investment. C) Rural areas where they will be more convenient for customers. D) All of the above. E) A and C, only. Answer: B 58. A charter of incorporation to start a new U.S. bank can be issued by: A) The Office of the Comptroller of the Currency. B) The state banking commissions of each state. C) The Federal Deposit Insurance Corporation (FDIC). D) All of the above. E) A and B, only. Answer: E 59. Which factor(s) does OCC assess during the application process for a national bank charter? A) Market demand B) Probably customer base C) Competition and economic conditions D) Risks inherent in the services to be offered to the public E) All of the above Answer: E 60. One of the benefits of applying for a federal (national) bank charter over a state charter is: A) It brings added prestige B) It results in the automatic receipt of federal deposit insurance C) There is better technical support in the event of problems D) A and C above. E) All of the above. Answer: D 61. According to the textbook, the disadvantages of a federal charter include which of the following: A) Closer supervision of banking activities. B) Stricter standards for capital. C) More stringent limits on the offering of new services. D) All of the above. E) B and C only. Answer: D 62. Key factors that organizers of a proposed new bank use in evaluating their investment opportunity include which of the following? A) Expected return on bank stock. B) Risk to the shareholders. C) Demonstrated public need. D) Track record of existing banks that serve the same or a similar area. E) All of the above. Answer: E 63. The FDIC Improvement Act of 1991 requires a bank closing one of its branches to give its customers a minimum notice of: A) 90 days B) 60 days C) 30 days D) 10 days E) None of the above Answer: A 64. The most desirable sites for full-service bank branch offices usually have which of the following characteristics? A) Heavy traffic volume B) Large numbers of retail shops and stores C) Above-average age populations D) All of the above. E) None of the above. Answer: D 65. Typically much less costly to build and maintain, costing as little as one-fourth the expense incurred in constructing and operating as a stand-alone branch, and experiencing more traffic flow than conventional branches are: A) ATMs B) P0S terminals C) ACHs D) In-Store branches E) ALMs Answer: D 66. Computer facilities in retail shops and stores that permit a customer to instantly pay for goods and services electronically by deducting the cost of each purchase directly from his or her deposit account are known as: A) ATMs B) P0S terminals C) ACHs D) In-store branches. E) ALMs Answer: B 67. A so-called PIN gives a bank customer access to his or her account through a(n): A) ACH B) Bank-by-mail service C) ATM D) Electronic calculator E) None of the above Answer: C 68. Computer terminals which allow customers to make cash withdrawals, check deposit balances and make deposits without dealing with a teller are known as: A) ATMs B) POS terminals C) ACHs D) In-store branches E) ALMs Answer: A 69. Which of the following is one of the common services provided by banks on the internet today? A) Applying for a loan B) Opening an account C) Making payments (especially recurring utility bills) D) All of the above E) None of the above Answer: C 70. A bank is thinking about building a new branch. They think this new branch will generate 20 percent of the business of the bank after it is opened. The bank expects the return for this branch will be 15 percent with a standard deviation of 5 percent. Currently the bank has a 12 percent rate of return with a standard deviation of 4 percent. The correlation between the bank and the new branch is expected to be .25. What is this bank's total expected return after adding this branch? A) 15 percent B) 12.6 percent C) 12 percent D) 14.4 percent Answer: B 71. A bank is thinking about building a new branch. They think this new branch will generate 20 percent of the business of the bank after it is opened. The bank expects the return for this branch will be 15 percent with a standard deviation of 5 percent. Currently the bank has a 12 percent rate of return with a standard deviation of 4 percent. The correlation between the branch and the bank is expected to be .25. What is this bank's expected standard deviation after adding this branch? A) 12.84 percent B) 3.35 percent C) 4.36 percent D) 3.58 percent Answer: D 72. The Clearwater National Bank is thinking about building a new branch. This new branch is anticipated to generate 5 percent of the business of the bank after it is opened. The bank expects the return for this branch will be 15 percent with a standard deviation of 5 percent. Currently the bank has a 10 percent rate of return with a standard deviation of 5 percent. The correlation between the bank and the new branch is expected to be -0.3. What is this bank's total expected return after adding this branch? A) 15 percent B) 10 percent C) 15.25 percent D) 10.25 percent Answer: D 73. The Clearwater National Bank is thinking about building a new branch. This new branch is anticipated to generate 5 percent of the business of the bank after it is opened. The bank expects the return for this branch will be 15 percent with a standard deviation of 5 percent. Currently the bank has a 10 percent rate of return with a standard deviation of 5 percent. The correlation between the bank and the new branch is expected to be -0.3. What is this bank's expected risk (measured by the standard deviation) after adding this branch? A) 21.91 percent B) 12.84 percent C) 4.68 percent D) 3.58 percent Answer: C 74. In the above problem, the proposed new branch will _______ overall risk exposure and produce a(an) ______ effect. Fill in the appropriate answers. A) increases; economies of scale B) increases; economies of scope C) reduces; convergence D) reduces; geographic diversification Answer: D 75. In the U.S, what is the average population per branch office? A) 4000 B) 8000 C) 10,000 D) 15,000 E) None of the above Answer: A 76. Suppose Second National Bank is considering adding 5 new ATM machines. Each machine costs $25,000 and installation costs are $15,000 per machine. Second National Bank expects the new machines to save $.33 per transaction and expects 250,000 transactions per year on the new machines. They expect the new machines to last for 15 years. If Second National Bank needs to earn 14 percent interest on this investment, what is the net present value of this investment? A) $506,729 B) $306,729 C) $272,269 D) 381,729 Answer: B 77. Suppose Third State Bank wants to add a new branch office. They have determined that the cost of construction on the new facility will be $1.5 million with another $500,000 in organizational costs. Third State Bank has estimated that they will generate $319,522 in net revenues. If the new branch is expected to last 20 years, what is the expected rate or return on this investment? (Round to the nearest whole percent) A) 6 percent B) 21 percent C) 15 percent D) 32 percent Answer: C 78. Suppose Third State Bank wants to add a new branch office. They have determined that the cost of construction on the new facility will be $1.5 million with another $500,000 in organizational costs. Third State Bank has estimated that they will generate $319,522 in net revenues. If the Third State Bank requires a 17% return on its money, what is this project’s net present value? A) $201,805 B)-$201,805 C) $1,798,195 D) -$1,798,195 Answer: B 79. Which of the following is true concerning branch offices? A) The number of full service offices in the U.S. have shrunk in recent years. B) An ideal location for a new branch bank is one with below average population density C) Branch offices are generally cheaper to establish than chartering a whole new banking corporation D) The decision about whether to establish a new branch is a cash management problem E) All of the above are true Answer: C 80. Murphy National Bank is thinking about adding a new branch in a very different market area. They estimate that the new office will have an expected return of 16% with a standard deviation of 8%. Currently they have an expected return of 12% with a standard deviation of 4%. The correlation between the new branch and the bank is estimated to be .20. The bank estimates that the new branch will represent 15 percent of the revenues of the bank. What is the expected return of the bank with the new branch? A) 12.6 percent B) 15.4 percent C) 4.6 percent D) 7.4 percent Answer: A 81. Murphy National Bank is thinking about adding a new branch in a very different market area. They estimate that the new office will have an expected return of 16% with a standard deviation of 8%. Currently they have an expected return of 12% with a standard deviation of 4%. The correlation between the new branch and the bank is estimated to be .20. The bank estimates that the new branch will represent 15 percent of the revenues of the bank. What is the bank's expected risk (measured by the standard deviation) with the new branch? Round to the nearest .1 percent. A) 14.6 percent B) 3.8 percent C) 4.6 percent D) 7.4 percent Answer: B 82. In what merger region of the country do the most newly-chartered banks occur? A) Northeast B) Southeast C) Midwest D) Southwest E) West Answer: B 83. In the short-term newly-chartered banks fail at a (n) __________ rate than established banks. A) lower B) same C) higher D) extremely higher E) unknown Answer: A 84. Chester National Bank is considering adding a new branch bank. They know that it will cost $2.5 million to build the branch and they believe that it will generate $214,526 per year for the next 25 years. Chester National Bank requires a return of 10% on all new projects it undertakes. What is this project’s net present value? (Round to the nearest $100) A) -$552,700 B) -$3,052,700 C) $1,947,300 D) $2,863,200 E) $5,363,200 Answer: A 85. Chester National Bank is considering adding a new branch bank. They know that it will cost $2.5 million to build the branch and they believe that it will generate $214,526 per year for the next 25 years. Chester National Bank requires a return of 10% on all new projects it undertakes. What is this project’s expected rate of return or internal rate of return? (Round to the nearest whole percent) A) 10% B) 7% C) 12% D) 2% E) 25% Answer: B 86. The Chahad Bank wants to open a new branch in a distance city with very different economic conditions. Currently, the bank has an expected return of 15% with a standard deviation of 7%. The new branch is expected to have a return of 20% with a standard deviation of 10%. The correlation between the bank and the new branch is -.3. The new branch is expected to be 10% of the bank’s revenues. What is the expected return of the bank if they add the new branch? A) 35% B) 19.5% C) 17.5% D) 15.5% E) None of the above Answer: D 87. The Chahad Bank wants to open a new branch in a distance city with very different economic conditions. Currently, the bank has an expected return of 15% with a standard deviation of 7%. The new branch is expected to have a return of 20% with a standard deviation of 10%. The correlation between the bank and the new branch is -.3. The new branch is expected to be 10% of the bank’s revenues. What is the standard deviation of this bank if they add the new branch? (Round your answer to the nearest .1%) A) 36.9% B) 6.1% C) 50.3% D) 7.1% E) 6.7% Answer: B 88. The Boyer Bank wants to add a new ATM machine in a busy mall. They know the new machine will cost $60,000 with another $30,000 to install it and the necessary security measures in the mall. They expect to save $.27 per transaction and generate 100,000 per year. They expect the new machine to last 8 years. If they need to earn a 12% return what is the NPV of this project? (Round your answer to the nearest $1000) A) $126,000 B) $44,000 C) $134,000 D) $27,000 E) $117,000 Answer: B 89. The Boyer Bank wants to add a new ATM machine in a busy mall. They know the new machine will cost $60,000 with another $30,000 to install it and the necessary security measures in the mall. They expect to save $.27 per transaction and generate 100,000 per year. They expect the new machine to last 8 years. What is the expected rate of return or internal rate or return of this project? (Round your answer to the nearest .1%) A) 25% B) 3.3% C) 30% D) 12% E) 2.4% Answer: A 90. A group of six investors wants to open a new bank. In their application to the Comptroller of the Currency, they discuss that the community they want to do business in has a median income of $55,000, that there are approximately 75,000 homes in the community and that there is approximately $5.6 million in sales generated in the community on any given day. Which decision factor for seeking a new charter are the investors discussing? A) The level of economic activity in the community B) The growth of economic activity in the community C) The need for a new financial firm D) The strength and character of the local competition E) None of the above Answer: A 91. A group of six investors wants to open a new bank. In their application to the Comptroller of the Currency, they discuss that new housing starts in the area are up 19% from a year ago with an additional 25 families moving into the community every month. School enrollment has also increased 14% from the previous year. Which decision factor for seeking a new charter are the investors discussing? A) The level of economic activity in the community B) The growth of economic activity in the community C) The need for a new financial firm D) The strength and character of the local competition E) None of the above Answer: B 92. A group of six investors want to open a new bank. In their application to the Comptroller of the Currency, they discuss that the population per banking office is up to 6,000. In addition, growth in the community is to the west of town and there is only one bank serving that part of the community and a new housing subdivision has just started in this part of town that should include 350 new homes. Which decision factor for seeking a new charter are the investors discussing? A) The level of economic activity in the community B) The growth of economic activity in the community C) The need for a new financial firm D) The strength and character of the local competition E) None of the above Answer: C 93. A group of six investors wants to open a new bank. In their application to the Comptroller of the Currency, they discuss that there are six banks already in the community and that the largest of these has just acquired one of the smaller banks. These six banks do a moderate amount of advertising in the community. There is also one credit union that has one office and a savings bank that has two branches on the east side of town. Growth in the community is to the west. Which decision factor for seeking a new charter are the investors discussing? A) The level of economic activity in the community B) The growth of economic activity in the community C) The need for a new financial firm D) The strength and character of the local competition E) None of the above Answer: D 94. A group of six investors wants to open a new bank in the community of Edmond, Oklahoma. They have submitted their application to the Comptroller of the Currency. What type of bank would they be if their application is approved? A) A state, member bank B) A state, insured bank C) A national bank D) A national bank without FDIC insurance E) None of the above Answer: C 95. The Cassil National Bank charges their customers $.50 per transaction for using the ATM machine if their deposit balance is below $500. They charge $.25 per transaction for using the ATM if their deposit balance is between $500 and $1000. If their customer’s deposit balance is over $1000, there is no charge for using the ATM machine. This is an example of: A) An interchange fee B) An independent pricing schedule C) A conditional pricing schedule D) A surcharge fee E) None of the above Answer: C 96. Which of the following would not be a telephone service a customer could get from a bank call center? A) The current balance on their account B) A fax copy of a loan application for the bank C) A Verification of what transactions have passed through the account D) Access to their safety deposit box E) All of the above are telephone services a customer could get from a bank call center Answer: D 97. What categories do authentication factors generally fall in? A) Something a customer knows B) Something a customer has C) Something a customer is D) All of the above E) None of the above Answer: D 98. The Jones State Bank is thinking about adding a branch office on the west side of Edmond, Oklahoma. Growth of new homes in the area has averaged 15% per year over the last five years and is expected to continue at that rate in the future. Which factor would this address when considering whether to add a new branch? A) Traffic count B) Number of retail shops C) Average age of the local population D) Population Density E) Population Growth Answer: E 99. The Jones State Bank is thinking about adding a branch office on the west side of Edmond, Oklahoma. Jones State Bank has done a study and found that the site where they want to build sees 35,000 cars pass in an average day. Which factor would this address when considering whether to add a new branch? A) Traffic count B) Number of retail shops C) Average age of the local population D) Population Density E) Population Growth Answer: A 100. The Jones State Bank is thinking about adding a branch office on the west side of Edmond, Oklahoma. Jones State Bank has discovered that area surrounding the proposed site averages 4 houses per acre and has several subdivisions that each have 300 to 400 homes. Which factor would this address when considering whether to add a new branch? A) Traffic count B) Number of retail shops C) Average age of the local population D) Population Density E) Population Growth Answer: D 101. The Jones State Bank is thinking about adding a branch office on the west side of Edmond, Oklahoma. Jones State Bank has done a survey of local residents near the area where they want to build and has discovered that most residents are in their 50’s and 60’s. Which factor would this address when considering whether to add a new branch? A) Traffic count B) Number of retail shops C) Average age of the local population D) Population Density E) Population Growth Answer: C 102. The Fred National Bank is thinking about adding a branch office on the west side of town. The Fred National Bank has done a survey and has discovered that the mean household income in the area is $76,000 per year. Which factor would this address when considering to add a new branch? A) Number of retail shops B) Average income level of households C) Ratio of population to branches D) Number of service facilities operated by financial service competitors E) Population density Answer: B 103. The First State Bank is proposing to acquire The Second National Bank, to form The First State MegaBank, which will be a state member bank (a member of the Federal Reserve System) and carry federal deposit insurance. Which regulatory agency must approve the merger? A) Office of the Comptroller of the Currency B) Federal Deposit Insurance Corporation C) The state banking board D) Federal Reserve E) U.S. Treasury Answer: D 104. The First National Bank is proposing to take over The Second State Bank, to form The First National MegaBank, which will be a national bank. Which regulatory agency must approve the merger? A) Office of the Comptroller of the Currency B) Federal Deposit Insurance Corporation C) The state banking board D) Federal Reserve E) U.S. Treasury Answer: A 105. Which of the following is not an advantage of ATMs? A) A limited commitment of resources B) Lower cost per transaction C) Personalized service D) Lower staffing needs E) Geographic accessibility Answer: A Test Bank for Bank Management and Financial Services Peter S. Rose, Sylvia C. Hudgins 9780073382432, 9780078034671