This Document Contains Chapters 5 to 6 Chapter 5 The Financial Statements of Banks and Their Principal Competitors Fill in the Blank Questions 1. Fed funds purchased is an example of _________ along with Eurodollar borrowings. Answer: no deposit borrowings 2. The short term securities of the bank, including T-Bills and commercial paper, are often called _________ because they are the second line of defense to meet demands for cash. Answer: secondary reserves 3. _________ is a noncash expense on the bank's income statement which allows the bank to account for future bad loans. Answer: Provision for loan losses 4. _________ is the difference between interest income and interest expenses for a financial institution. Answer: Net interest income 5. _________ are the primary long term liabilities of the bank. These liabilities are paid only after deposits have been paid in the event of bankruptcy. Answer: Subordinated notes and debentures 6. A(n) _________ is where the financial institution agrees to guarantee repayment of a customer's loan received from a third party. Answer: standby credit agreement 7. A(n) _________ is a short term collateralized loan. The collateral that is used generally consists of T-Bills. Answer: repurchase agreement 8. A(n) _________ is a deposit account which pays an interest rate competitive with money market mutual funds and which generally has limited check writing ability. Answer: money market deposit account 9. _________ is the sum of all outstanding IOU's owed to the bank in the form of consumer, real estate, commercial and agriculture loans as well as other types of credit extensions. Answer: gross loans 10. A financial institution often records the value of its assets and liabilities at _______________ which is the original or historical cost of the asset. Answer: book value 11. The principal types of _________ include fee income, income from fiduciary activities and services charges on deposits. Answer: noninterest income 12. The _________ shows the amount of revenues received and expenses incurred over a specific time period. Answer: Report of Income (income statement) 13. The _________ lists the assets, liabilities and equity capital held by the bank on a given date. Answer: Report of Condition (balance sheet) 14. ______________ is labeled "Accounting for Derivative Instruments and Hedging Activities." Answer: FASB 133 15. _________ labeled “Accounting for Derivative Instruments and Hedging Activities” and its recent amendments, FASB 138, are designed to make derivatives more publicly visible on corporate financial statements. Answer: FASB 133 16. Under _________ banks must account for the expected loss of interest income on nonperforming loans when calculating their loan-loss provision. Answer: FASB 114 17. Temporarily buying and selling securities by a securities firm in a thinly traded market so as to influence the price is known as _________. Answer: painting the tape 18. The activity of manipulating the financial statements to artificially enhance the banks financial strength is known as _________. Answer: window dressing or ‘creative accounting’ 19. _________ is direct and indirect investment in real estate. These are properties obtained for compensations for nonperforming loans. Answer: Other Real Estate Owned (OREO) 20. _________ consists of interest income received on loans from customers that has not yet been earned by the bank under accrual accounting methods. Answer: Unearned discount income 21. _________ can be held by individuals and nonprofit institutions, bear interest and permit drafts from being written against the account to pay third parties. Answer: Now accounts 22. In the worldwide banking system, _________ represent transferable time deposits in a variety of currencies and are often the principal source of short term borrows by banks. Answer: Eurocurrency Borrowings 23. One part of _________ arises from fees charged for ATM and POS transactions. Answer: Other Noninterest Income 24. Fees that arise from a financial firm’s trust activities, fees for managing a corporations’ interest and dividend payments and fees for managing corporate or individual retirement plans are all included in the category of fees arising from _________. Answer: fiduciary activities 25. Checking account maintenance fees and overdraft fees are included in the noninterest income account under _________. Answer: service charges on deposit accounts True/False Questions 26. On a bank's income statement (Report of Income) deposit costs are financial inputs. Answer: True 27. Loans and leases are financial outputs on a financial institution's balance sheet or Report of Condition. Answer: True 28. No deposit borrowings are a financial input on a bank's balance sheet or Report of Condition. Answer: True 29. The cost of no deposit borrowings is a financial input on a bank's income statement or Report of Income. Answer: True 30. Securities income is a financial output listed on a financial institution's Report of Condition. Answer: False 31. Net loans on a bank's balance sheet are derived by deducting the allowance for loan losses and unearned discounts from gross loans. Answer: True 32. When a loan is classified as nonperforming any accrued interest recorded on the bank's books, but not actually received, must be deducted from a bank's loan revenues. Answer: True 33. In U.S. banking, securities gains are treated as ordinary income. Answer: True 34. Most banks report securities gains as a component of their total noninterest income. Answer: False 35. A bank displaying trading account securities on its balance sheet is serving as a security dealer and plans to sell those securities before they reach maturity. Answer: True 36. Bad loans normally do not affect a bank's current income. Answer: True 37. The expensing of a worthless loan usually must occur in the year that loan become worthless. Answer: True 38. Recoveries on loans previously charged off are added to the Provision for Loan Losses (PLL) account on a bank's income statement. Answer: False 39. Loan-loss reserves set aside to cover a particular loan or loans expected to be a problem or present the bank with above-average risk are known as specific reserves. Answer: True 40. U.S. banks (especially those with $500 million or more in total assets) are required to file financial statements audited by an independent public accountant with their principal federal regulatory agency. Answer: True 41. Off-balance-sheet items for a bank are fee generating transactions which are not recorded on their balance sheet. Answer: True 42. The experience method of accounting for future loan loss reserves allows a bank to deduct from their income statement up to .6 percent of their eligible loans. Answer: False 43. After the Tax Reform Act of 1986, large banks (>$500 million in assets) were required to use the reserve method of accounting for future loan loss reserves. Answer: False 44. The number one source of revenue for a bank based on dollar volume is loan income. Answer: True 45. In looking at comparative balance sheets, it can be seen that large banks rely more heavily on no deposit borrowings while small banks rely more heavily on deposits. Answer: True 46. The Pension Fund industry is now larger than the Mutual Fund industry. Answer: False 47. Off-balance-sheet items for banks have declined in recent years. Answer: False 48. Except for banks, Savings & Loans and Savings Banks hold the most deposits. Answer: True 49. "Painting the tape" refers to the practice whereby banks understate their nonperforming loans. Answer: False 50. Financial statements issued by banks and nonblank financial service firms are looking increasingly similar today. Answer: True Multiple Choice Questions 51. Bank assets fall into each of the following categories except: A) Loans. B) Investment securities. C) Demand deposits. D) Noninterest cash and due from banks. E) Other assets. Answer: C 52. Banks generate their largest portion of income from: A) Loans. B) Short-term investment. C) Demand deposits. D) Long-term investments. E) Certificates of deposit. Answer: A 53. Loans typically fall into each of the following categories except: A) Real estate. B) Consumer. C) Commercial and Industrial (business). D) Agricultural. E) Municipal. Answer: E 81. Which of the following adjustments are made to gross loans and leases to obtain net loans and leases? A) The loan and lease loss allowance is subtracted from gross loans B) Unearned income is subtracted from gross interest received C) Investment income is added to gross interest received D) A and B. E) A. and C. Answer: D 82. An example of a contra-asset account is: A) The loan and lease loss allowance. B) Unearned income. C) Buildings and equipment. D) Revenue bonds. E) The provision for loan loss. Answer: A 56. The noncash expense item on a bank's Report of Income designed to shelter a bank's current earnings from taxes and to help prepare for bad loans is called: A) Short-term debt interest B) Noninterest expense C) Provision for taxes D) Provision for possible loan losses E) None of the above. Answer: D 57. A financial institution's bad-debt reserve, as reported on its balance sheet, is called: A) Unearned income or discount B) Allowance for possible loan losses C) Intangible assets D) Customer liability on acceptances E) None of the above Answer: B 58. When a bank serves as a security dealer for certain kinds of securities (mainly federal, state, and local government obligations) the value of these securities is usually recorded in what account on a bank's Report of Condition? A) Investment Securities B) Taxable and Tax-Exempt Securities C) Trading Account Securities D) Secondary Reserves E) None of the above Answer: C 59. The difference between noninterest income and noninterest expenses on a bank's Report of Income is called: A) Net Profit Margin B) Net Interest Income C) Net Income After Provision for Possible Loan Losses D) Income or Loss Before Income Taxes E) Net Noninterest Income Answer: E 60. The account that is built up by annual noncash expense deductions and is subtracted from Gross Loans on the Report of Condition is: A) Unearned income B) Nonperforming loans C) Allocated loan risk deductions D) Allowance for possible loan losses E) None of the above. Answer: D 61. Nonperforming loans are credits on which any scheduled loan repayments and interest payments are past due for more than: A) 30 days B) 60 days C) 90 days D) 180 days E) None of the above. Answer: C 62. One-time only transactions that often involve financial assets or real property pledged as collateral behind a loan and upon which the bank has foreclosed affect a bank's account known as: A) Allowance for loan losses B) Nonrecurring sales of assets C) Asset gains or losses D) Provision for loan and security losses E) None of the above. Answer: B 63. The use of fixed assets, rather than financial assets, in order to increase earnings flowing to a bank's stockholders is known as: A) Plant and equipment investment B) Financial leverage C) Operating leverage D) No deposit capital E) None of the above. Answer: C 64. Banks depend heavily upon borrowed funds supplied by customers with little owners' capital invested. This means that banks make heavy use of: A) Financial leverage B) Capital restructuring C) Operating Leverage D) Margin borrowing E) None of the above. Answer: A 65. When a loan is considered uncollectible, the bank's accounting department will write (charge) it off the books by reducing the ______ and the ______ accounts. Which choice below correctly fills in the blank in the preceding sentence? A) PLL and Gross Loans B) ALL and Net Loans C) ALL and Gross Loans D) PLL and Net Loans E) None of the above. Answer: C 66. The common banking practice of selling those investment securities that have appreciated in order to reap a capital gain and holding onto those securities whose prices have declined is known as: A) Gains trading B) Performance banking C) Loss control trading D) Selective portfolio management E) None of the above. Answer: A 67. Noninterest revenue sources for a bank are called: A) Commitment fees on loans B) Fee income C) Supplemental income D) Noninterest margin E) None of the above. Answer: B 68. Large U.S. banks must use which of the methods listed below to determine their provision for loan loss expense? A) Experience method B) Reserve method C) Specific charge-off method D) Historical cost method E) None of the above. Answer: C 69. A bank's temporary lending of excess reserves to other banks is labeled on the balance sheet as: A) Fed Funds Purchased B) Fed Funds Sold C) Money Market Deposits D) Securities Purchased for Resale E) None of the above Answer: B 70. A bank sells shares of its common stock with a par value of $100 for $200 in the market. Which two accounts on the bank's balance sheet are going to be affected? A) Retained earnings and capital surplus accounts B) Subordinated notes and debentures and commons stock outstanding accounts C) Retained earnings and common stock outstanding accounts D) Common stock outstanding and capital surplus accounts E) Only the common stock outstanding account is affected Answer: D 71. A type of letter of credit which is widely used in international trade is known as: A) Banker's acceptance B) Commercial paper C) Repurchase agreement D) Fed funds purchased E) None of the above Answer: A 72. A bank which starts with ALL of $1.48 million at the beginning of the year, charges off worthless loans of $.94 million during the year, recovers $.12 million on loans previously charged off and charges current income for a $1.02 million provision for loan losses will have an ALL at the end of the year of: A) $.66 million B) $3.32 million C) $1.68 million D) $1.28 million E) The same amount as at the beginning of the year Answer: C 73. A bank that has total interest income of $67 million and total noninterest income of $14 million. This bank has total interest expenses of $35 million and total noninterest expenses (excluding PLL) of $28 million. Its provision for loan losses is $6 million and its taxes are $5. What is this bank's net interest income? A) $7 B) -$14 C) $18 D) $32 E) None of the above Answer: D 74. A bank that has total interest income of $67 million and total noninterest income of $14 million. This bank has total interest expenses of $35 million and total noninterest expenses (excluding PLL) of $28 million. Its provision for loan losses is $6 million and its taxes are $5. What is this bank's net noninterest income? A) $7 B) -$14 C) $18 D) $32 E) None of the above Answer: B 75. A bank that has total interest income of $67 million and total noninterest income of $14 million. This bank has total interest expenses of $35 million and total noninterest expenses (excluding PLL) of $28 million. Its provision for loan losses is $6 million and its taxes are $5. What is this bank's net income? A) $7 B) -$14 C) $18 D) $32 E) None of the above Answer: A 76. Which of the following financial statements shows the revenues and expense of a bank over a set period of time? A) The statement of stockholders equity B) The funds-flow statement C) The report of financial condition D) The report of income E) None of the above Answer: D 77. Which of the following accounts is sometimes called the bank's primary reserves? A) Cash and deposits due from bank B) Investment securities C) Trading account securities D) Fed funds sold E) None of the above Answer: A 78. Which of the following assets is the largest asset item on the bank's balance sheet? A) Securities B) Cash C) Loans D) Bank Premises E) None of the above Answer: C 79. What financial service industry category is second to the banking industry in total assets held: A) Mutual funds B) Thrifts C) Investment banks D) Insurance companies E) Pension funds Answer: A 80. FASB Rule 115 focuses primarily on bank: A) Deposit sources B) Investments in marketable securities C) Derivatives trading D) Loan-loss reserves E) Federal funds Answer: B 81. Which of the following most accurately describes the principal type(s) of bank noninterest income: A) Fees from fiduciary transactions B) Fees from deposit transactions C) Fees from securities transactions D) Fees from additional noninterest income E) All of the above Answer: E 82. Fee income arising from fiduciary transactions include all of the following except: A) Checking account maintenance fees B) Fees for managing and protecting a customer’s property C) Fees for recordkeeping for corporate security D) Fees for dispersing interest and dividend payments for a corporation E) Fees for managing corporate and individual retirement plans Answer: A 83. You know the following information about the Miller State Bank: Given this information, what is this firm’s Net Loans? A) $250 B) $350 C) $500 D) $50 E) $150 Answer: A 84. You know the following information about the Miller State Bank Given this information, what is this firm’s Depreciation? A) $250 B) $30 C) $70 D) $40 E) $110 Answer: B 85. You know the following information about the Miller State Bank Given this information, what is this firm’s Total Liabilities? A) $390 B) $60 C) $450 D) $500 E) $50 Answer: C 86. You know the following information about the Miller State Bank Given this information, what is this firm’s Undivided Profits? A) $50 B) $5 C) $10 D) $40 E) $450 Answer: D 87. You know the following information about the Miller State Bank Given this information, what is this firm’s Total Liabilities Plus Equity? A) $250 B) $450 C) $150 D) $50 E) $500 Answer: E 88. You know the following information about the Davis National Bank Given this information, what is this firm’s Net Interest Income? A) $300 B) $150 C) ($50) D) $120 E) $80 Answer: A 89. You know the following information about the Davis National Bank Given this information, what is this firm’s Net Non Interest Income? A) $300 B) $150 C) ($50) D) $120 E) $80 Answer: C 90. You know the following information about the Davis National Bank Given this information, what is this firm’s Pretax Net Operating Income (or Net Income before Extraordinary Items)? A) $300 B) $150 C) ($50) D) $120 E) $80 Answer: B 91. You know the following information about the Davis National Bank Given this information, what is this firm’s Net Income? A) $300 B) $150 C) ($50) D) $120 E) $80 Answer: D 92. You know the following information about the Davis National Bank Given this information, what is this firm’s Increase in Undivided Profits? A) $300 B) $150 C) ($50) D) $120 E) $80 Answer: E 93. You know the following information about the Davis National Bank Given this information, what is this firm’s Total Revenues? A) $800 B) $850 C) $150 D) $950 Answer: D 94. You know the following information about the Webb State Bank Given this information, what is this firm’s Allowance for Loan Losses? A) $1300 B) $1000 C) $50 D) $200 E) $100 Answer: E 95. You know the following information about the Webb State Bank Given this information, what is this firm’s Net Premises? A) $130 B) $1000 C) $50 D) $200 E) $100 Answer: C 96. You know the following information about the Webb State Bank Given this information, what is this firm’s Total Non Deposit Borrowings? A) $1000 B) $300 C) $800 D) $200 E) $500 Answer: B 97. You know the following information about the Webb State Bank Given this information, what is this firm’s Total Liabilities? A) $1000 B) $300 C) $800 D) $200 E) $500 Answer: C 98. You know the following information about the Webb State Bank Given this information, what is this firm’s Total Equity? A) $1000 B) $300 C) $800 D) $200 E) $500 Answer: D 99. You know the following information about the Webb State Bank Given this information, what is this firm’s Total Assets? A) $1000 B) $300 C) $800 D) $200 E) $500 Answer: A 100. You know the following information about the Taylor National Bank Given this information, what is this firm’s Net Interest Income? A) $150 B) $210 C) $400 D) ($250) E) $750 Answer: E 101. You know the following information about the Taylor National Bank Given this information, what is this firm’s Net Non Interest Income? A) $150 B) $210 C) $400 D) ($250) E) $750 Answer: D 102. You know the following information about the Taylor National Bank Given this information, what is this firm’s Net Operating Income or Net Income Before Extraordinary Income? A) $150 B) $210 C) $400 D) ($250) E) $750 Answer: C 103. You know the following information about the Taylor National Bank Given this information, what is this firm’s Net Income? A) $150 B) $210 C) $400 D) ($250) E) $750 Answer: B 104. You know the following information about the Taylor National Bank Given this information, what is this firm’s Increase in Undivided Profits? A) $150 B) $210 C) $400 D) ($250) E) $750 Answer: A 105. You know the following information about the Taylor National Bank Given this information, what is this firm’s Total Revenues? A) $1500 B) $2000 C) $2050 D) $1950 E) $1450 Answer: B Chapter 6 Measuring and Evaluating the Performance of Banks and Their Principal Competitors Fill in the Blank Questions 1. The equity multiplier for a bank measures the amount of _________ of the bank and is one part of the evaluation of the bank's ROE. Answer: leverage (debt) 2. _________ is the risk that has to do with the quality of the bank's assets and, in particular, the bank's loans. Answer: Credit risk 3. Solvency (or capital) risk for a bank can be measured by _________. List one way solvency risk can be measured. Answer: Purchased Funds/Total Liabilities (There are several other ratios that can answer this question as well) 4. _________ are the assets of a financial institution that will mature or be repriced within a set period of time. Answer: Interest Sensitive Assets 5. _________ is the risk that the value of the financial institution's asset portfolio (particularly government or other marketable securities) will decline in value. Answer: Market risk 6. Eurodollars, Fed Funds, Repurchase Agreements, and large CDs together are know as _________. Answer: Purchased Funds 7. _________ is the risk that the financial institution may not be able to meet the needs of depositors for cash. Answer: Liquidity risk 8. _________ are loans which are past due by 90 days or more. Answer: Nonperforming loans 9. _________ reflects the bank's portfolio management policies and the mix and yield on the bank's securities and is one part of the evaluation of ROE. Answer: Asset utilization 10. _________ reflects the effectiveness of the expense management of the bank and is one part of the evaluation of ROE. Answer: Net profit margin 11. _________ measures the return to stockholders on their investment in the bank. It is the product of net profit margin, asset utilization and the equity multiplier. Answer: ROE 12. _________ measures the amount of debt or leverage a bank has and is one part of the evaluation of the bank's ROE) It is generally a number larger than one. Answer: Equity multiplier 13. The _________ is a standardized report provided by federal regulators which reports the balance sheet, income statement and other data for all federally supervised banks. It has this year's data as well as three previous years and also contains information on peer institutions. Answer: Uniform Bank Performance Report 14. _________ measures the bank's risk of long run survival. It measures the bank's capital position and shows if there has been any erosion of capital over time. Answer: Solvency risk (or capital risk) 15. _________ is the risk that shifting interest rates in the market will adversely affect a financial institution's net income or the value of its assets or equity. Answer: Interest rate risk 16. The _________ Act restricts combined auditing and consulting relationships in order to promote auditor independence and objectivity. Answer: Sarbanes-Oxley 17. _________ is one of the most widely respected private institutions that rates the credit quality of financial institutions. Answer: Thomson’s Bank Watch, Inc. 18. _________ refers to the uncertainty regarding the financial firm’s earnings due to failures in computer systems, errors, misconduct by employees, lightening strikes and similar events. Answer: Operational (transactional) risk 19. _________ refers to variability in earnings resulting from actions taken by the legal system including unenforceable contracts, lawsuits and adverse judgements. Answer: Legal risk 20. _________ includes violations of rules and regulations. It can include failure to hold adequate capital which can lead to costly corrective actions. Answer: Compliance risk 21. _________ is the uncertainty associated with public opinion. Negative publicity (whether true or not) can affect a financial firm’s earnings by dissuading customers from using the services of the institution. Answer: Reputation risk 22. As data processing of financial information becomes more important, managers of financial firms can realize cost savings from _________, transferring tasks from inside to firm itself to other firms specializing in information technology. Answer: outsourcing 23. A traditional measure of earnings efficiency is the _________ or total interest income over total earnings assets less total interest expenses over total interest bearing bank liabilities. It measures the effectiveness of a firm’s intermediation function in the borrowing and lending of money. Answer: earnings spread 24. One part of ROE is _________ or net income over pre-tax net operating income which measures the financial firm’s use of security gains and losses and other tax management tools to minimize tax exposure. Answer: tax management efficiency 25. Net profit margin can be split into two parts, _________ and tax management efficiency. The first part is pre-tax net operating income over total operating revenue which looks at how many dollars of revenue survive after operating expenses are removed. Answer: expense control efficiency True/False Questions 26. Financial institutions that pursue the "quiet life" as a goal are really pursuing risk minimization. Answer: True 27. Attempting to maximize a bank's stock value is the key objective for banks which should have priority over all other bank goals. Answer: True 28. If the expected stream of future bank shareholder dividends rises, a bank's stock price should also rise, other factors held constant. Answer: True 29. If the discount factor associated with the value of a bank's stock rises, the bank's stock price should rise, other factors held constant. Answer: False 30. A bank's ROA equals its ROE times the ratio of total assets divided by total equity capital. Answer: False 31. According to the textbook a bank's asset-utilization ratio reflects the mix and yield on the bank's portfolio of assets. Answer: True 32. The bank's profit margin or ratio of net after-tax income to total operating revenue is a measure of financial leverage for a bank. Answer: False 33. The ratio of a bank's net after-tax income to pre-tax net operating income is described in the text as a measure of tax management efficiency. Answer: True 34. In the textbook the ratio of pretax net operating income to total operating revenues is described as a measure of the effectiveness of a financial institution’s expense-control efficiency. Answer: True 35. The ratio of non-performing assets to total loans and leases is a measure of credit risk in banking. Answer: True 36. The measure of a bank's efficiency and return known as the "earnings spread" subtracts total interest expenses from all the bank's interest income and these two items are then divided by total assets. Answer: False 37. In recent years the U.S. banking industry's equity multiplier has generally risen in response to regulatory pressure to raise more capital. Answer: False 38. If a bank adds more full-time employees and posts the same net operating income, its employee productivity ratio, as defined in the text, must fall. Answer: True 39. The most profitable U.S. banks in terms of both ROA and ROE are medium-size institutions in the asset size range of $100 million to $10 billion, according to the textbook. Answer: True 40. ROA measures how capably the management of a financial institution has been converting the institution's assets into net earnings. Answer: True 41. The noninterest margin is generally positive for most banks. Answer: False 42. The ratio of nonperforming assets to total loans and leases is considered to be a measure of a bank's market risk. Answer: False 43. Charge-offs represent securities a bank decides to sell because they have declined in value. Answer: False 44. Loans past due for 90 days or more are classified as nonperforming assets. Answer: True 45. The ratio of cash and government securities to total assets is considered to be a measure of liquidity risk in banking. Answer: True 46. The ratio of uninsured deposits to total deposits is considered to be a measure of credit risk in banking. Answer: False 47. The interest rate spread between market yields on bank debt issues (such as capital notes and CDs) and the market yields on government securities of the same maturity is considered to be a measure of market risk in banking. Answer: False 48. The ratio of a bank's net operating income to the number of a bank's full-time-equivalent employees is called the employee productivity ratio. Answer: True 49. Smaller banks usually have fewer liquid assets than larger banks. Answer: False 50. The bank's asset utilization ratio reflects the effectiveness of the bank's expense management. Answer: False 51. The FDIC is a private credit rating company which provides credit ratings on the short term and long term securities issued by banks. Answer: False 52. During the 1980's the Comptroller of the Currency, the Federal Reserve and the FDIC created a new tool to help them analyze the financial condition of banks. This new tool is called the Uniform Bank Performance Report. Answer: True 53. Liquidity risk for a bank examines the quality of the bank's assets and, in particular, the quality of the bank's loans. Answer: False 54. The bank's degree of asset utilization (AU) or ratio of total operating revenue to total assets is a measure of asset management efficiency, especially in terms of the mix and yield on assets. Answer: True 55. According the case study of the failure of Superior Bank of Chicago and the FDIC’s takeover of this institution in 2001, the main problem was attributed to misleading accounting practices of inflating asset values and revenues deflating liabilities and expenses. The Sarbanes-Oxley Accounting Standards Act of 2002 addresses this issue and expressly encourages combining auditing and consulting relationships in order to promote efficiency and profitability of financial institutions. Answer: False Multiple Choice Questions 56. The ratio of a bank's interest income from its loans and security investments less interest expenses on debt issued divided by total earning assets measures a bank's: A) Net operating margin B) Net return before special transactions C) Net interest margin D) Return on assets E) None of the above Answer: C 57. ROE for a bank is calculated by: A) Dividing net after-tax income by total equity capital. B) Dividing total operating revenue less operating expenses by total assets. C) Deducting total interest expenses from total interest income and dividing by total equity capital. D) Noninterest income less noninterest expenses divided by total earning assets. E) None of the above. Answer: A 58. The difference between such sources of bank income as service charges on deposits and trust-service fees and such sources of bank expenses as salaries and wages and overhead expenses divided by total assets or total earning assets is called the: A) Net profit margin B) Net operating margin C) Net noninterest margin D) Net return on assets E) None of the above Answer: C 59. A bank's ROE equals its ROA times its: A) Net profit margin B) Total assets divided by total equity capital C) Total operating revenues divided by total assets D) Ratio of net after-tax income to total operating revenues E) None of the above. Answer: B 60. The earnings spread for a bank is equal to: A) Total interest income divided by total earning assets less total interest-expense divided by total interest-bearing bank liabilities. B) Total interest income less total interest expenses divided by earning assets. C) Total operating revenues less total operating expenses divided by total assets. D) Total cash and noncash expenses subtracted from interest and noninterest income divided by total assets. E) None of the above. Answer: A 61. The so-called employee productivity ratio for a bank is equal to: A) Net operating revenue less total interest expenses per employee. B) Total interest and noninterest expense per employee C) Net operating income per full-time-equivalent employee D) Total operating earnings less salaries and wages expense per employee. E) None of the above. Answer: C 62. According to the textbook the most profitable banks in the United States in 2007 fell in the asset size range of: A) Under $25 million in total assets B) Under $100 million in total assets C) Between $100 million and $10 billion in total assets D) Over $10 billion in total assets E) None of the above. Answer: D 63. A bank's stock price will tend to rise if the: A) Value of the stream of future stockholder dividends is expected to increase B) The banking organization's perceived level of risk has fallen C) Expected dividends increase, while perceived level of risk declines D) All of the above. E) None of the above. Answer: D 64. The ratio that equals total interest income divided by total earning assets less total interest expense divided by total interest-bearing liabilities is known as the: A) Earnings base B) Earnings spread C) Net income margin D) Net return prior to special transactions E) None of the above Answer: B 65. What do loans and security investments represent for a bank? A) Earning assets B) Classified assets C) Discretionary accounts D) Market-valued assets E) None of the above Answer: A 66. The so-called tax-management efficiency ratio consists of: A) Total tax liabilities over net income B) Tax-exempt assets over taxable assets C) Net income over pre-tax net operating income D) Taxes owed over total liabilities of a bank E) None of the above. Answer: C 67. The ratio of net loans to total assets is considered to be a measure of what form of risk in banking? A) Credit risk B) Liquidity risk C) Market risk D) Interest-rate risk E) None of the above Answer: B 68. OE for a bank reflects: A) How well the assets of the bank are managed B) The bank's use of leverage C) How well the bank controls expenses D) All of the above E) None of the above Answer: D 69. A ratio that can be used to measure a bank's credit risk would be: A) Net loans/total assets B) Interest sensitive assets/interest sensitive liabilities C) Total assets/number of full time employees D) Nonperforming loans/total loans Answer: D 70. A bank that has a low profit margin most likely: A) Is doing a poor job of controlling expenses B) Has a small amount of financial leverage C) Has a small amount of liquidity risk D) Has assets that are not very productive E) None of the above Answer: A 71. A bank that has a high asset utilization (AU) ratio most likely: A) Is doing a poor job of controlling expenses B) Has a small amount of financial leverage C) Has a small amount of liquidity risk D) Is allocating assets to the most productive investments E) None of the above Answer: D 72. Which of the following would be the best example of a ratio used to examine the cost of one of the bank's liabilities? A) Demand deposits/ total assets B) Interest on time deposits/ total time deposits C) Interest on real estate loans/ total real estate loans D) Interest sensitive assets/ interest sensitive liabilities Answer: B 73. Which of the following would be the best example of a ratio used to examine the return of one of the bank's assets? A) Demand deposits/ total assets B) Interest on time deposits/ total time deposits C) Interest on real estate loans/ total real estate loans D) Interest sensitive assets/ interest sensitive liabilities Answer: C 74. Which of the following would be the best example of a ratio used to examine the bank's interest rate risk? A) Demand deposits/ total assets B) Interest on time deposits/ total time deposits C) Interest on real estate loans/ total real estate loans D) Interest sensitive assets/ interest sensitive liabilities Answer: D 75. A bank expects to pay a dividend next year of $3.45 and also expects dividends to grow at a rate of 7% from now on. If the appropriate discount rate is 15%, what should this bank's stock price be in the market? A) $23.00 B) $43.13 C) $46.14 D) $49.29 E) $24.61 Answer: B 76. Using the information listed below for Carter State Bank, what is this bank's ROE? A) 8.46 percent B) 16.03 percent C) 15.71 percent D) 1.36 percent E) None of the above Answer: C 77. Using the information listed below for Carter State Bank, what is this bank's ROA? A) 8.46 percent B) 16.03 percent C) 15.71 percent D) 1.36 percent E) None of the above Answer: D 78. Using the information listed below for Carter State Bank, what is this bank's net profit margin? A) 8.46 percent B) 16.03 percent C) 15.71 percent D) 1.36 percent E) None of the above Answer: A 79. Using the information listed below for Carter State Bank, what is this bank's asset utilization ratio? A) 8.46 percent B) 16.03 percent C) 15.71 percent D) 1.36 percent E) None of the above Answer: B 80. The TRC Bank has a net profit margin of 7.5%, an asset utilization ratio of 18%, an equity multiplier of 20 times. What is this bank's ROA? A) 27.00 percent B) 1.35 percent C) 7.50 percent D) 1.50 percent E) 3.6 percent Answer: B 81. The TRC Bank has a net profit margin of 7.5%, an asset utilization ratio of 18%, an equity multiplier of 20 times. What is this bank's ROE? A) 27.00 percent B) 1.35 percent C) 7.50 percent D) 1.50 percent E) 3.6 percent Answer: A 82. The Smith-James Bank has an ROE of 17.5%, an asset utilization ratio of 13% and a net profit margin of 9%. What is this bank's ROA? A) 14.96 percent B) 1.58 percent C) 1.17 percent D) 134.62 percent E) None of the above Answer: C 83. The Smith-James Bank has an ROE of 17.5%, an asset utilization ratio of 13% and a net profit margin of 9%. What must this bank's equity multiplier be? A) 14.96 times B) 1.58 times C) 1.17 times D) 134.62 times E) None of the above Answer: A 84. What is the equity multiplier for a bank where equity is equal to 10 percent of total assets? A) 90.0 B) 10.0 C) 1.1 D) 110.0 E) 1.0 Answer: B 85. Which of the following ratios would be a measure of credit risk? A) Nonperforming Loans/Net Loans B) Net Loans/Total Assets C) Interest Sensitive Assets/Interest Sensitive Liabilities D) Equity Capital/Total Assets E) None of the above Answer: A 86. Which of the following ratios would be a measure of market risk? A) Nonperforming Loans/Net Loans B) Net Loans/Total Assets C) Interest Sensitive Assets/Interest Sensitive Liabilities D) Equity Capital/Total Assets E) None of the above Answer: E 87. In recent years banks have been __________ profitable than (as) S&Ls and Savings Banks. A) More B) Less C) As D) Much more E) Much less Answer: A 88. Operational risk includes which of the following? A) Failure of bank’s computer system B) Closure of a bank for three months due to flooding from a major hurricane C) Embezzlement of funds of a bank by a teller of the bank D) Closure of a bank for two weeks due to a fire from a lightening strike E) All of the above are example of operational risk Answer: E 89. Brian Smith, CEO of Carter National Bank, decides that interest rates are going to fall in the future and as a result buys $100 million in 30 year Treasury Bonds for the bank’s security portfolio. Instead, interest rates rise causing the value of these bonds to fall. This would be an example of which of the following types of risk? A) Operational risk B) Legal risk C) Compliance risk D) Strategic risk E) Reputation risk Answer: D 90. Chaos State Bank has an old computer system which can go down for weeks at a time, leaving customers unable to access their accounts online. Many customers have left the bank for banks with more reliable computer systems. Which type of risk would this be an example of? A) Operational risk B) Legal risk C) Compliance risk D) Strategic risk E) Reputation risk Answer: A 91. Carson County State Bank has a ratio of equity capital to total assets of 2.5%. The FDIC which regulates this bank has determined that this is not enough equity capital and is making the bank issue new stock in the market. In addition, they are not allowing the bank to issue a dividend to their current stockholders. Which type of risk would this be an example of? A) Operational risk B) Legal risk C) Compliance risk D) Strategic risk E) Reputation risk Answer: C 92. Everett Bank has just learned that there is a disgruntled former employee who has created a blog that is telling everyone that Everett Bank has halved their customer service representatives and so customers have great difficulty getting through to a live person when there is a problem with their account. Everett is worried that they may lose customers as a result. Which type of risk would this be an example of? A) Operational risk B) Legal risk C) Compliance risk D) Strategic risk E) Reputation risk Answer: E 93. Norman Bank made a loan of $1,000,000 to Jarod LeFevre. Jarod has declared bankruptcy and Norman Bank has just learned that the judge in the case has ruled that Jarod does not have to pay any of the loan back or forfeit any of his assets. Which type of risk would this be an example of? A) Operational risk B) Legal risk C) Compliance risk D) Strategic risk E) Reputation risk Answer: B 94. Forrest Fennell is thinking about investing in Capital City Bank. He is examining certain ratios of the bank including the ratio of nonperforming loans to total loans and leases and the provision for loan losses to total loans and leases. What type of risk is Forrest attempting to measure with these ratios? A) Credit risk B) Liquidity risk C) Market risk D) Interest rate risk E) Operational risk Answer: A 95. Gerald Wilkens is thinking about investing in Tallahassee State Bank. He is examining certain ratios of the bank including the ratio of cash assets and government securities to total assets and purchased funds to total assets. What type of risk is Gerald attempting to measure with these ratios? A) Credit risk B) Liquidity risk C) Market risk D) Interest rate risk E) Operational risk Answer: B 96. Amy Farmer is thinking about investing in the Guthrie National Bank. She is examining certain ratios of the bank including the ratio of the book value of the assets to the market value of the assets and the market value of the bonds held by the bank to their recorded value. What type of risk is Amy attempting to measure with these ratios? A) Credit risk B) Liquidity risk C) Market risk D) Interest rate risk E) Operational risk Answer: C 97. Paul Smith is thinking about investing in Capital City Bank. He is examining certain ratios of the bank including the ratio of interest sensitive assets to interest sensitive liabilities and uninsured deposits to total deposits. What type of risk is Paul attempting to measure with these ratios? A) Credit risk B) Liquidity risk C) Market risk D) Interest rate risk E) Operational risk Answer: D 98. The Garic State Bank of New Orleans was under water for three weeks after Hurricane Katrina hit the state. The lobby is full of mud and other debris. Many of the valuables stored in the bank’s safety deposit boxes have been ruined. John Garic, the President and CEO of the bank, has been working night and day to reopen the bank. What type of risk has John been dealing with? A) Credit risk B) Liquidity risk C) Market risk D) Interest rate risk E) Operational risk Answer: E 99. Castle State Bank has the following financial information. Use this information to calculate Castle State Bank’s ROE A) 20.45% B) 18.33% C) 12.22% D) 7.33% E) 2.5% Answer: B 100. Castle State Bank has the following financial information. Use this information to calculate Castle State Bank’s ROA A) 20.45% B) 18.33% C) 12.22% D) 7.33% E) 2.5% Answer: E 101. Castle State Bank has the following financial information. Use this information to calculate Castle State Bank’s net profit margin A) 20.45% B) 18.33% C) 12.22% D) 7.33% E) 2.5% Answer: C 102. Castle State Bank has the following financial information. Use this information to calculate Castle State Bank’s asset utilization ratio A) 20.45% B) 18.33% C) 12.22% D) 7.33% E) 2.5% Answer: A 103. Castle State Bank has the following financial information. Use this information to calculate Castle State Bank’s equity multiplier A) 20.45 times B) 18.33 times C) 12.22 times D) 7.33 times E) 2.5 times Answer: D 104. Castle State Bank has the following financial information. Use this information to calculate Castle State Bank’s earnings spread A) 37.5% B) 22.22% C) 14.33% D) 7.89% E) 2.5% Answer: C 105. Harrison Bank has the following financial information. What is this bank’s ROA? A) 1.6% B) 10% C) 12.8% D) 16% E) None of the above Answer: A 106. Harrison Bank has the following financial information. What is this bank’s ROE? A) 1.6% B) 10 % C) 12.8% D) 16% E) None of the above Answer: D 107. Harrison Bank has the following financial information. What is this bank’s Equity Multiplier A) 1.6 times B) 10 times C) 12.8 times D) 16 times E) None of the above Answer: B 108. Harrison Bank has the following financial information. What is this bank’s asset utilization ratio? A) 1.6% B) 10% C) 12.8% D) 16% E) None of the above Answer: C 109. Harrison Bank has the following financial information. What is this bank’s total operating revenue? A) $125 B) $8000 C) $488,281 D) $31,250,000 E) None of the above Answer: B 110. Which assets are excluded from risk assets? A) Real Estate Loans B) Commercial Paper C) Plant and Equipment D) Commercial and Industrial Loans E) All of the above are risk assets Answer: C Test Bank for Bank Management and Financial Services Peter S. Rose, Sylvia C. Hudgins 9780073382432, 9780078034671
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