Ch 12 Smartbook Assignment

Four additional sources of purchased funds available to banks are (choose four)

discount window loans. medium-term notes. commercial paper. banker's acceptances.

The sum of investment securities and net loans and leases are the bank's

earning assets.

One important difference between federal funds loans and repurchase agreements is that federal funds loans can be _______ while repurchase agreements are difficult to transact ________.

entered into anytime during the banking day; late in the day due to their collateral requirement

Due to their ready access to capital markets, large banks generally operate with less ________ than small banks.

equity capital

Off-balance-sheet items are less visible to financial statement readers because they often appear in ________ on the financial statements.

footnotes

For almost all banks, noninterest expense is ________ noninterest income, making it the "burden" of the bank.

greater than

Both commercial letters of credit and standby letters of credit are _______ that obligate the bank to perform if a contingent event occurs.

guarantees

The largest group of trusts managed by banks' trust departments are

individual trusts.

The largest interest income producing category on the commercial bank's income statement is

interest and fee income on loans and leases.

The average cost of interest-bearing liabilities for the bank can be calculated as the ratio of the ________ divided by the ________.

interest expense; interest-bearing liabilities

The bank's interest expense ratio can be calculated by dividing the ________ by the ________.

interest expense; total operating income

The asset utilization ratio (AU) can also be written as the sum of the _______ and the ________.

interest income ratio; noninterest income ratio

The average yield on earning assets for the bank can be calculated as the ratio of the ________ divided by the ________.

interest income; earning assets

The bank's interest income ratio can be calculated as the ________ divided by the ________.

interest income; total assets

Interest expense on the bank's income statement include interest paid on ________ and on ________.

interest-bearing deposits; purchased funds

The more _______ the bank holds and/or the more _______, the ______ the bank's net income, all else being equal.

interest-bearing liabilities; interest they charge; lower interest-paying assets; interest they pay; higher

More so than for other types of firms, the commercial bank's net income is directly related to the _______ and the _______ on the balance sheet and the _______ associated with each.

interest-earning assets; interest-paying liabilities; interest rate

The bank's earning assets are the sum of its ________ and its ________.

investment securities; net loans and leases

When the customer finally draws funds on the loan commitment, the bank shows a(n) ________ on its balance sheet, though the bank must stand ready to loan ______ at any time.

loan asset; the full amount

A loan that the bank has sold to another party "with recourse" is recorded as the off-balance-sheet item called

loans sold.

Commercial banks' cash management services have included the provision of ________, where customers of a firm send payments to a PO box managed by a bank and the bank processes them for the firm.

lockbox services

Banks offer _________ in order to be competitive with the similar funds offered by groups such as Vanguard and Fidelity.

money market deposit accounts (MMDA)

Real estate loans are primarily ________ and some ________.

mortgage loans; revolving home equity loans

Interest income is taxable to the bank, with the exception of interest on ________ and tax-exempt income from ________.

municipal securities; direct lease financing

The banks profit margin (PM) is the ratio of its ________ divided by its ________ and is a measure of how efficiently it converts income into profit.

net income; total operating income

The bank's net interest margin (NIM) is equal to ________ divided by ________, and is a measure of the net return on the bank's interest earning assets.

net interest income; earning assets

Each period, the difference between loans lost and loans recovered is the bank's

net write-offs.

Payment for correspondent banking services is usually in the form of ________ held at the bank providing the services.

non-interest-bearing deposits

The noninterest expense ratio can be calculated by dividing the ________ by the ________.

noninterest expense; total operating income

The income earned by a bank on its wide variety of fee-generating services is called

noninterest income.

Large banks generate more ________ and ________ than small banks.

noninterest income; are more diversified

The bank's overhead efficiency is the ratio of ________ divided by ________.

noninterest income; noninterest expense

The bank's noninterest income ratio can be calculated as the ________ divided by the ________.

noninterest income; total assets

Although a bank subsidiary itself cannot issue commercial paper, its _______ can do so and provide the funds to the bank subsidiary.

parent bank holding company

Banks are not required to hold cash reserves against MMDA's, so they are generally able to _________ than on NOW accounts

pay higher rates

The second largest group of trusts managed by banks' trust departments are

pension funds.

Consumer loans are loans such as ________ and ________.

personal loans; auto loans

Noninterest expense is largely _______ expenses, but may also include depreciation and other operating expenses.

personnel-related

Off-balance-sheet items are an important source of fee income to banks and have the potential to produce ______ as well as ______ cash flows.

positive; negative

A bank's equity capital consists of (choose all that apply)

preferred stock. retained earnings. common stock.

The bank's return on assets (ROA) is the product of the ________ times the ________, and is a measure of how efficiently the bank uses its total assets to generate profits.

profit margin; asset utilization

For a commercial bank, net income is the sum of net interest income and net noninterest income, minus ______ and ______.

provision for loan loss; taxes and extraordinary items

The ________ is a noncash, tax deductible expense which represents the current period's allocation to the ________ listed on the balance sheet.

provision for loan losses; allowance for loan losses

The provision for loan loss ratio can be calculated by dividing the ________ by the ________.

provision for loan losses; total operating income

Large banks use more ________ and less ________ than small banks.

purchased funds; core deposits

The ________ require banks to hold a minimum level of equity capital to act as a buffer against losses from their on and off balance sheet activities.

regulators

In addition to issuing deposits, banks also borrow in various markets for purchased funds, which are not subject to ________ or _______.

reserve requirements; FDIC insurance payments

The major categories of bank time deposits are ________ and ________.

retail certificates of deposit; wholesale certificates of deposit

ROE can also be expressed as the product of the ________ times the ________.

return on assets; equity multiplier

Interest expense is the ________ major category on the commercial bank's income statement.

second

Commercial loans that are backed by a specific assets of the borrower are called

secured loans.

A standby letter of credit is a formal guarantee by a bank covering contingencies that are more ________ and less ________ than trade transactions.

severe; predictable

Federal funds loans are _______ and ________ loans made by a bank with excess reserves to one that needs the funds.

short-term; uncollateralized

For most banks, the overhead efficiency ratio is rarely larger than _____.

1.0

Residential mortgages are very long term loans with an average maturity of approximately

20 years

Which of the following long-term securities are default free?

Ginnie Mae bonds U.S. Treasury bonds

The size of the provision for loan losses is determined by the bank's management, but it is subject to a maximum tax-deductible amount set by the

IRS.

Since 1980, all banks in the United States have been able to offer checkable deposits that pay interest and are withdrawable on demand, called

NOW accounts.

When banks take a position in ________ they are exposed to ________.

OTC derivatives; default risk

True or false: Because interest income is recorded on an accrued basis, loans on which interest payments are up to 90 days past due can still be recorded as generating income for a bank.

TRUE

The bank's profit margin can be calculated by adding the four expense ratios below (choose them) and subtracting that combined ratio from 1 (100%).

Tax ratio Noninterest expense ratio Interest expense ratio Provision for loan loss ratio

True or false: Large banks tend to invest more in salaries, premises and other expenses than small banks.

True

True or false: The bank's spread is equal to its average yield on earning assets minus its average cost of interest-bearing liabilities.

True

True or false: a bank's core deposits are defined to be its demand deposits, NOW accounts, MMDA accounts, other savings accounts and retail CD's.

True

Short-term investments include (choose four)

U.S Treasury bills. agency securities. repurchase agreements. federal funds sold.

NOW accounts require that the depositor maintain ______ or the account reverts to a demand deposit.

a minimum account balance

Commercial banks have traditionally provided financial data processing services for customers, which included processing their customers' ________ and ________.

accounts payable; accounts receivable

Wholesale CD's obtained through a brokerage or investment bank rather than directly from a customer are referred to as

brokered deposits.

Banks facing temporary liquidity crunches can borrow from the ______ at the _______.

central bank's discount window; discount rate

A repurchase agreement is a _________ federal funds loan.

collateralized

Loans that are used to finance a firm's capital needs, equipment purchases and plant expansion are called

commercial and industrial loans.

A formal guarantee by a bank that payment for goods or services sold or shipped will be forthcoming is called a

commercial letter of credit.

Off-balance-sheet items are ________ and ________ that may affect the future status of a financial institutions balance sheet.

contingent assets; contingent liabilities

The cheapest and most stable source of funds for a commercial bank are called its

core deposits.

The provision of banking services to a bank that does not have the staff resources to perform the services themselves is called

correspondent banking.

Commercial banks and other financial institutions provide consumer loan financing through

credit cards

Banks are ______ of derivative securities when they act as intermediaries in trades with customers for a fee.

dealers

Transaction accounts at banks held by individuals, corporations, partnerships, and governments that pay no explicit interest are

demand deposits.

MMDA's are checkable but subject to the following limitations (choose all that apply):

the number of checks written per month and minimum check denomination is restricted. the number of automatic transfers per month is limited. a minimum balance is required.

The equity multiplier (EM) is the ratio of ________ divided by ________ and is a measure of debt utilization by the bank.

total assets; total equity capital

The sum of the bank's interest income plus its noninterest income is called its

total operating income.

The asset utilization ratio (AU) is the ratio of its ________ divided by its ________, and is a measure of how efficiently the bank uses its assets to generate operating income.

total operating income; total assets

The ________ department of a commercial bank holds and manages assets for individuals or corporations.

trust

Commercial loans for which the lender has only a general claim on the borrower's assets in case of default are

unsecured loans.

In return for making the loan commitment, the bank may charge a(n) ______ fee and a(n) _______ for use of the funds.

up-front commitment

Banks are ______ of derivative securities when they use them to hedge bank risk.

users

The currency and coin on hand needed to meet customer withdrawals is calledThe currency and coin on hand needed to meet customer withdrawals is called

vault cash

Fixed-maturity time deposits with face values over $100,000 and which can be sold in a secondary market to other investors are

wholesale CD's.

A loan sold ________ may be returned to the originating bank in the future if its credit quality deteriorates.

with recourse