FIN 404 Exam 3 Quiz Questions

Under the current capital requirements, assets in Category 2, such as repurchase agreements, have an effective total capital-to-total-assets ratio of:

1.6%

Under the current capital requirements, assets in Category 3, such as 1-4 family real estate loans, have an effective total capital-to-total-assets ratio of:

4%

To be considered ADEQUATELY capitalized, a bank's minimum Tier 1 capital, total capital, and leverage capital must be: a. 4%, 8%, and 3%, respectively. b. 8%, 5%, and 3%, respectively. c. 10%, 10%, and 10%, respectively. d. 6%, 10%, and 5%, respectively. e. 3%, 4%, and 8%, respectively.

4%, 8%, and 3%, respectively.

To be considered well-capitalized, a bank's minimum Tier 1 capital, total capital, and leverage capital must be: a. 4%, 8%, and 3%, respectively. b. 8%, 5%, and 3%, respectively. c. 10%, 10%, and 10%, respectively. d. 6%, 10%, and 5%, respectively. e. 3%, 4%, and 8%, respectively.

6%, 10%, and 5%, respecitively

When the final Basel III rules are implemented in 2019, the minimum Tier 1 capital/risk-weighted assets percentage will be:

8.5%

Approximately what percentage of commercial banks were currently considered well capitalized at the end of 2007?

94%

Which of the following would not be considered a bank qualified municipal security? a. A Hays County general obligation bond to modernize the county fire department. b. A Lubbock County general obligation bond to build a new sewer plant. c. A City of San Marcos general obligation bond to pay for street repairs. d. A City of El Paso general obligation bond to pay for a new city jail. e. A State of Texas bond to finance road repairs.

A State of Texas bond to finance road repairs

All of the following are basic functions of a bank's trading activities except: - offering investment advice to customers - maintaining an inventory of securities for possible sale to investors - speculating on ST interest rate movements - all of the above

All of the above - offering investment advice to customers - maintaining an inventory of securities for possible sale to investors - speculating on ST interest rate movements

Callable agency bonds: - exhibit both call risk and market risk - are issued by Gov Sponsored Agencies (GSAs) - pay a higher yield than comparable noncallable bonds - all of the above

All of the above: - exhibit both call risk and market risk - are issued by Gov Sponsored Agencies (GSAs) - pay a higher yield than comparable noncallable bonds

Which of the following is false regarding bank preferred stock? a. Preferred stock investor claims are senior to those of common stockholders. b. All preferred stock investors pay taxes on only 20% of dividends. c. Most preferred stock issues are adjustable-rate perpetual stock. d. Preferred stock has the same disadvantages as common stock. e. None of the statements is false.

All preferred stock investors pay taxes on only 20% of dividends.

Under current capital requirements, Tier 1 Capital takes of all of the following into account except: a. common stockholder's equity. b. equity in subsidiaries. c. goodwill. d. allowance for loan and lease losses. e. noncumulative perpetual preferred stock.

Allowance for loan and lease losses

Long-term interest rates tend to be higher than short-term interest rates:

At the bottom of the business cycle

The yield curve tends to be inverted:

At the peak of the business cycle

For which of the following classes of securities are unrealized gains and losses included as a COMPONENT OF CAPITAL?

Available-for-sale

A short-term interest-bearing time draft created by a high-quality bank is called: - commercial paper - bankers acceptance - Eurodollar deposit - reverse repo - negotiable CD

Bankers acceptance

All of the following are capital market instruments except: - treasury bonds - Ginnie Mae bonds - mortgage backed securities - treasury notes - bankers acceptances

Bankers acceptances

Banks with greater capital can do all of the following except: - borrow at lower rates - make larger loans - expand faster through acquisitions - expand faster through internal growth

Banks with greater capital can do all of the above

Which passive investment strategy differentiates between bonds that have been purchased for liquidity versus income purposes? a. Barbell maturity strategy b. Riding the yield curve c. Laddered maturity strategy d. Timing maturity strategy e. Cycle maturity strategy

Barbell maturity strategy

How do capital requirements constrain bank growth?

By limiting the amount of new assets that a bank can acquire through debt financing

Which of the following is not a Category 1 (Risk Rate = 0%) balance sheet asset?

Cash items in the process of collection

Regulators generally prohibit banks from purchasing _______ for income purposes

Common stock

A bank that does not meet the minimum levels for Tier 1 capital, total capital, and leverage capital ratios is classified as:

Critically undercapitalized

Which of the following is not part of Tier 1 or core capital? a. minority interests in equity capital of consolidated subsidiaries. b. common stockholders equity c. cumulative perpetual preferred stock. d. noncumulative perpetual preferred stock.

Cumulative perpetual preferred stock

For a bank with deficient capital ratios, which of the following actions could be taken to increase the capital ratios, holding everything else the same?

Cut the bank's dividend payment

Investment portfolio

Designed to supplement the loan portfolio - loans are main means of driving income

Which of the following is not true regarding common stock? a. Common stock has no maturity. b. New issues of common stock may dilute existing shareholder equity. c. Common stock is a permanent source of funds. d. Dividends paid are not tax-deductible. e. Dividends are considered a fixed charge that must be paid.

Dividends are considered a fixed charge that must be paid

Tier 2 capital consists of all of the following except: a. 30-year subordinated debt. b. cumulative perpetual preferred stock. c. mandatory convertible preferred stock. d. preferred stock with a maturity of 7 years. e. equity in subsidiaries.

Equity in subsidiaries

A bank that holds only U.S. Treasury securities is not required to hold any capital since all the assets are risk-less.

False

A significantly undercapitalized bank is one that does not meet the minimum levels for all three capital ratios.

False

An adequately capitalized bank may obtain brokered deposits without FDIC approval.

False

Banks can circumvent capital requirements by moving assets off the books.

False

Decreasing capital increases risk by decreasing financial leverage.

False

In general, bank capital ratios have increased over the last 100 years.

False

Riding the yield curve:

Generally involves buying securities with a longer maturity than the intended holding period

GMNA pass-through securities: - are issued by the US gov - have higher yields than other comparable MBSs - have high liquidity - all of the above - none of the above

Have high liquidity ??

Which of the following classes of securities are recorded at amortized cost on the balance sheet?

Held-to-maturity

For banks that have insufficient capital, which of the following is not a typical operating strategy to achieve capital adequacy? - limit asset growth - shrink the bank - increase the dollar amount of commercial loans outstanding - shift more bank assets into lower risk categories - reprice assets to reflect greater equity support

Increase the dollar amount of commercial loans outstanding

Banks can effectively improve their portfolios by:

Increasing bond quality when quality yield spreads are low

Which of the following is NOT true regarding collateralized mortgage obligations (CMOs)? - interest earned on CMOs is exempt from state income taxes - CMO yields are generally higher than comparable Treasury yields - CMOs exhibit little default risk

Interest earned on CMOs is exempt from state income taxes

Which of the following is true regarding subordinated debt? a. Subordinated debt claims come before the claims of depositors. b. Principal payments are not mandatory. c. Transaction costs on issuing new debt are lower than when issuing new equity. d. Interest payments on subordinated debt are tax-deductible. e. New subordinated debt dilutes existing shareholder equity.

Interest payments on subordinated debt are tax-deductible

Mortgage prepayment risk:

Is larger on high-rate mortgages

A bond that has positive convexity:

Is more price sensitive when rates fall than when they rise

Why do regulators prefer higher capital requirements?

It better protects the deposit insurance fund

A security might exhibit negative convexity because:

It has embedded options

How does bank capital reduce bank risk?

It provides a cushion for firms to absorb losses

A portfolio is equally invested in securities with 1-, 2-, and 3-years to maturity. Each year as the 1-year securities mature, the funds are reinvested in 3-year securities. This is an example of which investment strategy?

Laddered maturity strategy

Which of the following is NOT an objective of a bank's investment portfolio? - Meeting capital requirements - Maintaining liquidity - Diversifying credit risk - Managing interest rate exposure - Preserving capital

Meeting capital requirements

4%

Minimum Tier 1

8%

Minimum total capital

Supplementary or Tier 2 capital does not include: a. hybrid capital instruments b. intermediate-term preferred stock c. cumulative perpetual preferred stock d. long-term preferred stock e. noncumulative perpetual preferred stock

Noncumulative perpetual preferred stock

Securities with embedded options:

Often have higher yields than comparable Treasury securities

Municipal bonds whose primary source of repayment are the revenues from the underlying financed project are known as:

Revenue bonds

Which is an active investment strategy? - Barbell - Riding the yield curve - Laddered - Interest maturity strategy - Risk maturity strategy

Riding the yield curve

As market rates rise, prepayment speed _______, while modified duration _______

Slows, lengthens

Which of the following is included in regulatory capital but not accounting capital? a. Capital reserve for contingencies b. Preferred stock c. Subordinated debt d. Surplus e. All of the above are included in both regulatory and accounting capital

Subordinated debt

(Common Stockholders Equity - Intangible Assets)/(Total Assets - Intangible Assets)

Tangible common equity

Static spread is:

The different between the yield on a security with options and the yield on a maturity-matched zero coupon Treasury security

Which of the following was not part of the Basel Agreement? a. Bank's required capital was linked to its composition of assets. b. Banks are required to operate with a minimum level of equity. c. The ownership of equity by banks was prohibited. d. Capital requirements across countries were standardized. e. The minimum total capital requirements were set to 8% of risk-adjusted assets.

The ownership of equity by banks was prohibited

Prior to the Basel Agreement, capital requirements were established without regard to:

The size of the bank's assets

Which of the following is not a weakness of risk-based capital standards? - they ignore interest rate risk - they ignore the value of deposit insurance - they ignore changes in the market value of assets - they ignore credit risk - they ignore the value of a bank's charter

They ignore credit risk

Common stock + Common Stock Surplus + Retained Earnings

Tier 1

Subordinated Debt + Cumulative Preferred Stock + Allowance for Loan Loss

Tier 2

Why do banks generally prefer lower capital requirements?

To increase a bank's return on equity

For which of the following classes of securities are unrealized gain and losses included as INCOME?

Trading

Most repurchase agreements are secured by:

Treasury securities

Regulatory capital ratios focus on the book value of equity.

True

Smaller banks rely more heavily on internally generated capital rather than larger banks.

True

Under the current risk-based capital requirements, banks must hold capital against standby letters of credit they have issued as guarantees.

True

What constitutes Tier 2 capital varies substantially between countries.

True

Which of the following is a hybrid form of equity that effectively pays dividends that are tax deductible and is considered Tier 1 capital?

Trust preferred stock

If the Federal Reserve is easing monetary policy at the end of a recession, you would expect the yield curve to be: - upward sloping - flat - inverted - humped - none of the above

Upward sloping

Dollar-denominated bonds that are issued in the United States by a foreign issuer are called: a. Eurodollar bonds b. foreign bonds c. Yankee bonds d. global bonds

Yankee bonds

The underlying mortgages in Ginnie Mae mortgage pools include: a. Federal Housing Associaton (FHA) mortgages b. Veterans Admin (VA) mortgages c. privately issued mortgages d. all of the above e. a and b only

a and b only - FHA mortgages - VA mortgages

Eurodollar deposits... a. are dollar-denominated deposits issued outside of the US b. markets are less regulated than US security markets c. rates generally are lower than comparable US CD rates d. all of the above e. a and b only

a and b only - are dollar-denominated deposits issued outside of the US - markets are less regulated than US security markets

In general, commercial paper: a. is rated by the various rating agencies b. has a maturity of 270 days or less c. sell at a premium to face value d. all of the above e. a and b only

a and b only - is rated by the various rating agencies - has a maturity of 270 days or less

Which of the following is true? For rate increases/decreases,...

a and c - For rate INCREASES, the estimated price based on duration will be BELOW the actual price - For rate DECREASES, the estimated price based on duration will be BELOW the actual price **Doesn't make sense, but it was right??

Which of the following is true of Treasury bills? a. Interest on T bills is exempt from state income taxes b. Interest on T bills is exempt from federal income taxes c. T bills pay a lower pretax yield than comparable corp securities d. all of the above e. a and c only

a and c only - Interest on T bills is exempt from state income taxes - T bills pay a lower pretax yield than comparable corp securities

Which of the following classes of securities are carried at market value on the balance sheet? a. Held-to-maturity b. Available-for-sale c. Trading d. all of the above e. b and c only

b and c only - Available-for-sale - Trading