FIN 4324 Final
Article Link: https://www.wsj.com/articles/accountants-lawmakers-urge-rules-on-crypto-accounting-11626687002 According to the Wall Street Journal article on corporate investors in cryptocurrencies, as of March 31, 2021, Tesla has bitcoin holdings of: A. $2.48 billion B. $1.2 trillion C. $3 billion D. $500 million
$2.48 billion
https://www.wsj.com/articles/median-existing-home-price-hit-new-high-in-june-11626963073?mod=hp_major_pos2#cxrecs_s The median home price grew _______ since June of last year A.15.9% B.9% C.33.5% D. 23.4%
23.4%
Article https://www.wsj.com/articles/the-shortage-of-starter-homes-extends-beyond-major-cities-11626872400?mod=markets_lead_pos5 Data shows that homeowners ages between __ and __ accumulate more money in medium housing wealth by their early 60s? A. 25; 34 B. 40; 54 C. 33; 63 D. 44; 56
25; 34
Finance Companies are the number-one originator of loans to households (consumers) in the United States?
Falsew
Credit requests from customers the institution wishes to keep in either the form of loan requests or drawings upon existing credit lines is one of the two sources that is most pressing demand for spendable funds.
True
Customer Relationship Doctrine proclaims that the first priority of a lending institution is to make loans to all those customers from whom the lender expects to receive positive net earnings.
True
Deposit accounts are the number one source of funds at most banks.
True
Commercial and industrial (or business) loans represented the earliest form of lending that banks carried out in their more than 2,000-year history.
True
Consumer debt become one of the fastest growing forms of borrowing money around the globe, reaching nearly $14 trillion in volume
True
Dilution of ownership results from offering the acquired firm's stockholders an excessive number of new shares relative to the value of their old shares.
True
Eurocurrency deposits originally were developed in western Europe to provide liquid funds to swap among institutions or lend to customers.
True
Fee income is among the most rapidly growing sources of revenue for depository institutions and selected other financial-service providers.
True
Fee income is among the most rapidly growing sources of revenue for depository institutionsand selected other financial-service providers.
True
Financial institution loans include credit to banks, insurance companies, finance companies, and other financial institutions.
True
In mergers there may also be market-positioning benefits in which a merger will permit the acquiring institution to acquire a base in a completely new market.
True
In the United States about 25 percent of banks' total loans consist of commercial and industrial loans.
True
Increasing the market value of a surviving firm is an important goal of any merger.
True
Installment loans are short-term to medium term loans, repayable in two or more consecutive payments.
True
International banks can help their customers limit interest rate risk exposure by arranging interest rate swaps.
True
Investment bankers (IBs) are financial advisers to corporations, governments, and other large institutions.
True
Irrevocable trust allows wealth to be passed free of gift and estate tax to heirs.
True
Managing the liquidity position for a financial institution can be one of the most chal-lenging jobs in the financial sector.
True
Many mergers arise from expected tax benefits, especially where the acquired firm has earnings losses that can be used to offset taxable profits of the acquirer.
True
Nonresidential consumer loans include credit to finance the purchase of home appliances.
True
One of the most fertile fields for growth in future revenues on the part of financial firms appears to be fee income.
True
One of the most important tasks of the management of any financial institution is ensuring adequate liquidity.
True
One of the most important tasks the management of any financial institution faces is ensuring adequate liquidity at all times.
True
One of the most pressing demands for liquidity from a bank comes from customers withdrawing their deposits.
True
One reason is that Consumer loans are among the most costly and most risky to make per dollar of loanable funds committed to them.
True
Savings or thrift deposits are designed to attract funds from customers who wish to set aside money in anticipation of future expenditures or for financial emergencies.
True
Secondary credit posting the highest interest rate
True
Self-liquidating inventory loans were usually used to finance the purchase of inventory
True
Short-term to medium-term loans, repayable in two or more consecutive payments are known as installment loans
True
Smaller lenders are frequently among the most effective controlling loan losses compared to bigger institutions usually due to knowing their customers more personally.
True
Syndicated loans may be "drawn" by the borrowing company, with the funds used to support business operations or expansion, or "undrawn," serving as lines of credit to back a security issue or other venture.
True
THE BIS is the primary source for international bank statistics.
True
The Fed funds market is most volatile on settlement day.
True
The biggest problem for international banks at the beginning of the 21stcentury are non-performing loans.
True
The definition of "Hot Money" in the 80's was what we know today as money laundering?
True
The hottest item in the transaction deposit field today appears to be the mobile check deposit.
True
The largest credit card lender (as a group) in the US are Finance companies
True
The largest loans in dollar volume is real estate loans, accounting for just over half of total bank loans among U.S. banking firms.
True
The largest of all depository institutions are commercial banks.
True
The main goals of an international Cash Manager are first the quick and efficient cash control and also the optimal conservation and utilization of these funds.
True
The market for banking in China exhibits general lack of access from outside the country
True
The meaning of the customer relationship doctrine is that the first priority of a lending institution is to make loans to all those customers from whom the lender expects to receive positive net earnings.
True
The mix, quality, and yield of the loan portfolio are heavily influenced by regulation
True
The most frequent kind of merger in depository institutions involves wholesale banks merging with smaller retail banks.
True
The most important goal of any merger should be to Increase the efficiency of the target firm.
True
The most popular domestic source of borrowed reserves among depository institutions is the Federal funds market.
True
The ratio of core capital to average assets is called the Leverage ratio.
True
The task of correctly adding up all of the different types of bank risk exposures is known as risk aggregation.
True
The traditional source of funds for most depository institutions is the deposit account
True
There is a trade-off between liquidity and profitability.
True
Thrift deposits are designed to attract funds from customers who wish to set aside money in anticipation of future expenditures or for financial emergencies?
True
Transaction deposits are among the most profitable deposit services due to their nonexistent interest rates and higher service fees.
True
Under current U.S. law the Federal Reserve Board must be notified with a minimum of 30 days in advance if a foreign bank wishes to close any of its U.S. offices.
True
When an international bank acquires majority ownership of a separate, legal incorporated foriegn bank under host country rules, the foregin bank is referred to as a subsidiary
True
When two or more different industry types merge with each other, this strategic move is called convergence
True
Working capital loans are most often used to fund the purchase of inventories in order to put goods on shelves or to purchase raw materials.
True
Working capital loans can be secured by accounts receivables.
True
https://www.cnn.com/2021/07/16/investing/bank-mergers-stocks/index.html According to the article, Democrats are trying to reintroduce Bank Merger Review Modernization Act bill from 2019 in order to scrutinize bank mergers
True
A company requires funds to finance its working capital needs for 1 year. It can borrow pesos at 45% or dollars at 11%. Determine the appropriate borrowing strategy if peso is expected to devalue by 20%. Dollar cost of LC loan = Interest Expenses + Exchange rate change
rL (1+c)+c = .45(1-.2)-.2 = .16 The dollar cost of a peso loan is 16% compared to 11% on a dollar loan. Borrowing in dollars will be cheaper than borrowing in pesos.
A firm is evaluating an investment that costs $90,000 and is expected to generate annual cash flows equal to $20,000 for the next 6 years. If the firms required rate if return is 10 percent, what is the net present value (NPV) of the project? What is the internal rate of return? Should the project be purchased?
vNPV = Present value of future cash flows (PV) - Initial investment Use a fin. calculator to find PV. NPV = -$2,894.78602
Andover Bank is thinking about purchasing Berkley Bank. The current market value of Andover's stock is $55 per share. The current market value of Berkley's stock is $15 per share and Andover is planning on paying Berkley's stockholders a $5 bonus per share. Currently, Andover has 100,000 shares outstanding and earnings per share of $12. Currently, Berkley has 50,000 shares outstanding and earnings per share of $5. Suppose the earnings of the combined bank do not increase over the total earnings of the two banks before the merger. In addition assume that the new bank will have 118,182 shares outstanding. What will the earnings per share of the new bank be?
$12.27 per share
Which describes the Community Reinvestment Act of 1977? A. No individual can be denied credit because of race, sex, religious affiliation, age, or receipt of public assistance (demographic factors) B. Make public any credit exposures to a single country > 15% of primary capital or 0.75% of total assets, smaller of the two; restrictions on fees lenders charge troubled international borrowers to restructure loans C. "affirmative effort" needs to be made so that no areas of local community are discriminated against in seeking access to credit D. Total volume of real estate loans granted by banks can't exceed that bank's capital and surplus or 70% of its time and savings deposits
"affirmative effort" needs to be made so that no areas of local community are discriminated against in seeking access to credit
A Bank's current stock price is $100 per share and is earning $20 per share, what is the P-E ratio of this stock?
$100 price per share/$20 earnings per share= 5 P.E ratio
Suppose a depository institution promises an 8 percent annual interest rate to the buyer of a $100,000 six-month ( 180-day) CD. What amount will the depositor have at the end of six months?
$104,000 = $100,000 + $100,000(180/360)(0.08)
If the total deposits received from the public through CD's is $52 million dollars, and the FDIC insurance rate is currently at $0.0031 per dollar, what would the insurance fee be on those deposits? A. $16,120 B. $161,200 C. $242,400 D. $24,200
$161,200
A bank quotes an APY of 8%. A small business that has an account with this bank had $2,500 in their account for half the year and $5,000 in their account for the other half of the year. How much in total interest earnings did this bank make during the year?
$300
A bank has a prime rate of 6 percent for its best customers. It has determined that the default risk premium for a particular customer is 0.4 percent and the term-risk premium for this loan is 0.25 percent. If this customer wants to borrow $5.0 million from the bank, how much in interest will this customer pay in one year?
$332,500
The Marquez family has been planning a vacation to Europe and got a $7,200 loan from Duke Savings to finance the trip, provided they pay back the loan in 12 equal monthly installments. Duke will charge an add-on loan rate of 6 percent. How much interest will the Marquez family pay under the add-on loan rate method? What is the amount of each required monthly payment? *Interest paid = Loan principal * Loan rate
$7,200 * 0.06 = $432 *Amount of monthly payment = ($7,200 + $432)/12 = $636
How many shares does Robinhood plan on selling to its customers through their app?
$770 million shares
What would the gross profit margin (GPM) be for Luis' supermarket if he has net sales of $20 million and it cost Luis' supermarket $5 million for the purchase of the goods that where sold?GPM= (Net sales - Cost of goods sold)/net sales
(20 million - 5 million) /20 million = .75 GPM = .75
Which of the following are the factors to consider for nondeposit funding sources? -The relative cost -The length of time -Regulations -All of the above
All of the above
The amount of capital a bank holds has proven to be a good predictor of its chances to fail.
False
When choosing a financial firm to open a checking account, a savings account, what are 3 common factors that customers look for? Define,explain and give examples.
- The priority between the customer opening a checking or savings account may vary. However, they share some key characteristics they must include in order to choose that financial institution. Location is important because people need accessibility to the bank they need to make deposits and take out money as well. Fees are also important, low if any fees to maintain accounts. Services, checking accounts are used to pay bills while savings accounts want the convenience of transactions. Each account has their own priority scheme but overall they look for a well established institution to make their decision. A customer might prefer a Chase since it's in almost every corner, has low fees, and they offer the services he or she needs.
Stages of a bank examination
-Planning -Examination -Exit meeting -Report issuance
The lender's secondary source of repayment in case of default is Capacity.
False
Imagine management has forecast a return on equity (ROE) of 10 percent for this year and plans to pay the stockholders 50 percent of any net earnings generated. How fast can assets grow without reducing the current ratio of total capital to total assets? ICGR=ROE X Retention Ratio
.10 X .50 = 5%
A bank has a ROE of 12 percent and a ROA of 3 percent. What is this bank's equity capital to total assets ratio? Equity to total assets = ROA/ROE
0.03/0.12 = 25%
The Herfindahl-Hirschman Index measures the synergy gained from a merger.
False (Market Concentration)
Suppose a bank had a clearing balance averaging $1 million during a particular two-week maintenance period and the Federal funds interest rate over this same period averaged 5.50 percent. Then it would earn a Federal Reserve credit of: Average clearing balance * Annualized fed funds rate * n/360
1,000,000*0.55*(14/360) = 2,138.89
What is a liquid asset?
1. A liquid asset has a ready market so it can be converted into cash without delay. 2. It has a reasonably stable price so that, no matter how quickly the asset must be sold or how large the sale is, the market is deep enough to absorb the sale without a significant decline in price. 3. It is reversible, meaning the seller can recover his or her original investment (principal) with little risk of loss.
List the five types of information used to calculate an individual's FICO score.
1. The borrower's payment history. 2. The amount of money owed. 3. The length of a prospective borrower's credit history. 4. The nature of new credit being requested. 5. The types of credit the borrower has already used.
Assume a Bank has 125 million in Sales Revenue, 82 million in Cost of Goods Sold, 12 in Administrative expenses, pays 6.5 in annual taxes, and its noncash expenses are 7 million. What is the bank's Cash Flow? Cash Flow = Sales Revenue - Cost of Goods Sold - General Administrative Expenses - Tax Expense - Noncash Expenses
125 - 82 - 12 - 6.5 - 7 = 17.5 Cash flow = 17.5 million
Suppose a banking company decides to add insurance services to its existing product menu. It expects to earn a 12 percent average return from sales of its traditional banking products and a 20 percent return from selling or underwriting insurance services. These two service lines are judged to be about equally risky in the variance of their cash flows (with a standard deviation of about 5 percent each), but the banking firm expects to receive 20 percent of its revenues from insurance sales and 80 percent from sales of traditional banking products. Suppose that cash flows from the two sets of services are negatively correlated over time with a correlation coefficient of -0.50. What is the bank's expected return? E(r) = Rts * E(rts) + Rns * E(rns)
13.6% = 0.80(12%) + 0.20(20%)
Evaluate the Interest Coverage Ratio of a Business Firm that has earning of $14.536 million and $3.425 million in Interest Expenses Interest Coverage Ratio = Earnings Before Interest and Tax / Interest Expense
14536 / 3425 = 4.24 ICR = 4.24
Suppose a consumer requests a one-year loan to be repaid in 12 monthly installments but is able to repay the loan after only nine months. How much of the finance charges will the consumer receive back as an interest rebate? A. 5.00 percent B. 7.69 percent C. 6.36 percent D. 4.55 percent
3 months remaining, (1+2+3)/1+2+..12) = 6/78 = 7.69% 7.69 percent
2021-07.24-U.S. Median Home Price Hit New High in June-The Wall Street Journal by Nicole Friedman URL address: https://www.wsj.com/articles/median-existing-home-price-hit-new-high-in-june-11626963073?mod=hp_major_pos2#cxrecs_s Multiple choice: According to the article what is the new median price per home for the month of June? a. 100,000 b. 1,000,000 c. 363,300 d. None of the statements are correct
363,300
Article Link: https://www.marketwatch.com/articles/airline-stocks-fall-as-the-pandemic-picks-up-again-51626710469?mod=newsviewer_click According to the article on airline stocks and the new Delta variant for COVID-19, the NYSE Arca Airline Index signaled that the airline sector returns dropped by: A. 10% B. 8% C. 4% D. 21%
4%
First National Bank's stock is currently selling at $50 per share and the bank recently reported earnings per share of $10 for its 200,000 shares. Second National Bank has 150,000 shares outstanding, with a current market price of $30 per share. Second National just reported its earnings per share of $5. If First National acquires Second National in a stock purchase, with the two banks agreeing to exchange stock at the current market prices, and post-merger earnings are expected to be $1,800,000, what will the post-merger EPS be?
5 * [2000000 / (2000000 + 4500000) ] + 6 * [4500000/ (2000000 + 4500000 ] = 5 * 0.307 + 6 * 0.69 = 1.535 + 4.15 = 5.705 times Post-merger earnings per share = Total earnings / Total shares outstanding = (1800000) / 350000 = $5.14 Expected market price per share of merged firm = Post merger P/E Ratio * Post-merger earnings per share = 5.705 * $ 5.14 = $ 29.32
Determine the capital adequacy ratio below using the formula total regulatory capital/ total risk weighted assets. In this case total regulatory capital = 4000 and total risk weighted assets = 80,500 A. 55.52 percent B. 0.502 C. 52% D. 5.52 percent
5.52 percent
According to the Chapter 12 presentation during class, what percentage does unbanked individuals account for? a. 6% b. 20% c. -3% d. I don't know.
6%
On July 19th tbe DOW dropped how many points because of the scare caused my new Delta COvid variant? A.700 B.400 C.300 D.200
700
A lender's cost accounting system reveals that its losses on real estate loans average 0.45 percent of loan volume and its operating expenses from making these loans average 1.85 percent of loan volume. If the gross yield on real estate loans is currently 8.80 percent, what is this lender's net yield on these loans? Lender's net yield = Gross yield - Loss on real estate - Operating expenses
8.8% - 0.45% - 1.85% = 6.50%
Suppose a depository institution promises an 8% annual interest rate to the buyer of a $100,000 six-month (180-day) CD. The depositor will have the following at the end of six months: amount due CD customer = principal + principal * days to maturity/360 days * annual rate of interest
= $100,000 + $100,000 * 180/360 * 0.08 = $104,000
Suppose a depository institution promises a 10 percent annual interest rate to the buyer of a $200,000 six-month (180-day) CD. The depositor will have the following at the end of six months Amount due, CD Customer= Principal + Principal X Days to Maturity/360 days X Annual Interest Rate
= $200,000 + $200,000 X 180/360 X 0.10 = 210,000
If a bank total regulatory capital is $4,000 and total risk-weighted assets of $60,200. Its total risk-weighted assets included total on-balance-sheet assets of $43,500 and off-balance-sheet standby credit letters and corporate loan commitments of $7,500. We add to these other assets the $1,200 in risk-weighted currency and interest rate contracts we just determined. What would be the bank's ratios of regulatory capital to risk-weighted assets? total capital/risk weighted assets = (total capital)/risk weighted on balance sheet + risk weighted off balance sheets
= $4,000 / ($43,500 + $7,500 + $1,200) = $7,000 / $52,200 = 0.0767 = 7.67%
1. Suppose a bank maintains an average clearing balance of $5 million during a period in which the Federal funds rate averages 6 percent. How much would this bank have available in credits at the Federal Reserve Bank in its district to help offset the charges assessed against the bank for using Federal Reserve services? Formula Average clearing balance*annualized Fed Funds Rate*14/360 days
= $5,000,000 * .06 * 14/360 =$11,666.67
Suppose a bank borrows $50 million through an RP transaction collateralized by government bonds for three days and the current RP rate in the market is 6 percent. Then this bank's total interest cost would be? interest cost of RP = amount borrowed x current RP rate x (# days in RP borrowing/360)
= $50,000,000 X 0.06 X 3/360 =$24,995
Banks and other lending affiliates within the holding company of Interstate National Bank are reporting heavy loan demand this week from companies in the southeastern United States that are planning a significant expansion of inventories and facilities before the beginning of the fall season. The holding company and its lead bank plan to raise $850 million in short-term funds this week, of which about $835 million will be used to meet these new loan requests. Market interest rates for federal funds 2.25% and non interest cost rate is 0.25. Calculate the effective federal funds cost rate: Effectice cost rate on deposit/nondeposit sources of funds = (current interest cost on amount borrowed + non interestcosts incurred)/net investable funds raised from this source
= (0.0225 x $850 +0.0025 x $850)/835 =(19.13 + 2.125)/835 =2.54%
A bank has a net profit margin of 5.25 percent. It has an asset utilization ratio of 45 percent and has an equity multiplier of 12. It retains 40 percent of its earnings each year. What is this bank's internal capital growth rate? InternalCap.GrowthRate = ProfitMarging*AssetsUtilization*EquityMultiplayer*Retention Ratio A. 28.35 percent B. 2.36 percent C. 11.34 percent D. 4.8 percent
= 0.0525*0.45*12*0.40 = 11.34 %
A bank has a prime rate of 6 percent for its best customers. It has determined that the default risk premium for a particular customer is .4% and the term-risk premium for this loan is .25 percent. If this customer wants to borrow $5.0 million from the bank, how much in interest will this customer pay in one year?
= 0.06+0.004+0.0025=0.0665 = 0.0665×$5,000,000 = $3,32,500
1. First National Bank's stock is currently selling at $50 per share and the bank recently reported earnings per share of $10 for its 200,000 shares. Second National Bank has 150,000 shares outstanding, with a current market price of $30 per share. Second National just reported its earnings per share of $5. If First National acquires Second National in a stock purchase, with the two banks agreeing to exchange stock at the current market prices, and post-merger earnings are expected to be $1,800,000, what will the post-merger EPS be? Post-merger P/E Ratio = P/E ratio of first national bank * ( Earnings of first national bank/ Combined earnings) + P/E ratio of second national bank*( Earnings of second national bank/ Combined earnings)
= 5 * [2000000 / (2000000 + 4500000) ] + 6 * [4500000/ (2000000 + 4500000 ] = 5 * 0.307 + 6 * 0.69 = 1.535 + 4.15 = 5.705 times Post-merger earnings per share = Total earnings / Total shares outstanding = (1800000) / 350000 = $5.14 Expected market price per share of merged firm = Post merger P/E Ratio * Post-merger earnings per share = 5.705 * $ 5.14 = $ 29.32
A bank expects to raise $25 million in new deposits by offering its depositors an interest rate of 7 percent. If the bank offers a 7.50 percent interest rate, it can raise $50million in new deposit money. At 8 percent, $75 million is expected to flow in, while a posted deposit rate of 8.5 percent will bring in a projected $100 million. If the bank raises its offer rate on new deposits from 7 percent to 7.5percent, what's the marginal cost and its marginal cost rate? Marginal cost Change in total cost = New interest rate * Total funds raised at new rate -Old interest rate * Total funds raised at old rate Marginal cost rate = Change in total cost / Additional funds raised
= 7.5% * $50M - 7%* $25M= $2M = $2M/($50M-$25M) =0.08 = 8% If the bank raises its offer rate on new deposits from 7 percent to 7.5percent, the marginal cost will be $2 million and its marginal cost rate will increase to 8%.
A bank promises an annual return of 5% on a 60 day, $300,000 CD. What will be the total amount due to the customer at the end of the two month period? Formula= (total amount of CD x annual return) x days/360
=(300,000 x 0.05) x 60/360 =15,000 x 60/360 = $302,500
1. A customer has a savings deposit for 60 days. During that time, they earn $11 and have an average daily balance of $1500. What is the annual percentage yield on this savings account? APY earned = 100 [(1 + Interest earned/Average account balance)^365/Days in period) -1]
=100[(1+11/1500)^365/60)-1] =4.5%
Which of the following is a part of a Loan Agreement: a. Promissory Note b. Loan Commitment Agreement c. Events of Default d. All of the above
All of the above
Define and explain a depository receipt (DR).
A DR is a form of assistance that international banks provide customers. IT is a negotiable instrument representing an ownership interest in the stock or debt securities of a foreign institution. This instrument usually arises when a broker purchases securities issued by a foreign entity and delivers them to a custodian who, in turn, instructs the depository bank to issue DRs representing the security.
Which of the following is a type of loan granted to individuals or families? A. Residential mortgage loan B. Installment loans C. Non installment loans D. All of the above
All of the above
Define, Explain, and Give examples of a liquid asset.
A liquid asset must have three characteristics. It has to be readily marketable and converted into cash without delay. It has to have a reasonable stable price. And it must be reversible meaning the seller can recover his or her original investment with little risk or loss.
Define, explain, and give an example of liquid assets
A liquid asset must have three characteristics: 1) a liquid asset has a ready market so it can be converted into cash without delay 2) it has a reasonably stable price so that no matter how quickly the asset must be sold or how large the sale is, the market is deep enough to absorb the sale without a significant decline in price 3) it is reversible, meaning the seller can recover his or her original investment (principal) with little risk of loss. Among the most popular liquid asset are Treasury bills, federal funds loans, certificate of deposit, municipal bonds, federal agency securities, and Eurocurrency loans.
Explain what a long-term project loan is and give examples of the risks involved.
A long-term project loan is credit to finance the construction of fixed assets. It's the riskiest of all business loans due to large amounts of funds involved. A project may be delayed by weather or shortage of materials. Changes in laws, regulations, and interest rates affect it as well.
Define and give possible motives for a merger
A merger the voluntary fusion of two companies on broadly equal terms into one new legal entity. Mergers are most commonly done to gain market share, reduce costs of operations, expand to new territories, unite common products, grow revenues, and increase profits—all of which should benefit the firms' shareholders. They also give banks tax benefits, help reduce competition, reduce cash flow and credit risk and helps rescue failing institutions.
What is the Purchase of Asset Method?
A method of accounting for a merger or combination in which one firm is considered to have purchased the assets of the other firm. If the price paid for the acquired firm exceeds the market value of the acquired firm's assets, the difference is recorded as goodwill on the acquiring firm's balance sheet.
Define, explain, and give a written loan policy.
A policy gives loan officers and management specific guidelines in making individual loan decisions and in shaping the overall loan portfolio. The actual makeup of a lender's loan portfolio should reflect what its loan policy says. Otherwise, the loan policy is not functioning effectively and should be either revised or more strongly enforced. For example some well-written loan policy will include elements such as lines of responsibility in making assignments and reporting information.
A bank that primarily makes its loans to individuals, families and small businesses is: A A retail bank B A wholesale lender C A money center bank D A money market bank
A retail bank
Define, Explain, and give examples of a revolving credit line.
A revolving credit line allows a customer to borrow up to a limit, repay all or a portion of the borrowing, and reborrow as necessary until the credit line matures. An example of a revolving credit line is a credit card, where businesses can use it as working capital and repay the credit card balance at a later date.
Suppose Stockholder of Bank A , whose current Stock is $25 per share, agree to acquire Bank B, whose stock is currently valued at $18 per share. If Bank A earned $5 per share of stock on its latest report and Bank B earned $4 per share, what would be their PE ratios PE Ratio =Price Per Share/Earnings Per Share
A's PE= 25/5=5 B's PE= 18/4=4.5
Which of these are types of International Banking organizations or facilities? A) All of the answers are correct B) Agency Offices C) Branch Offices D) Joint Ventures E) Export Trading Companies.
All of the answers are correct
Billy wants to open a retirement account. She is concerned that she might pay taxes later on for the amount of money she will put into the account so she wants to pay them now. You are the expert in retirement accounts, therefore she seeks out for your help. What would you recommend and why?
According to the needs and wants of Billy she is looking for a Roth IRA. This account benefits her by paying up taxes now rather than later on the money that will be deposited. In comparison to a traditional IRA which the individuals pay taxes at withdrawal. Also, Billy will not pay taxes after she is 60 years old due to her life expectancy she might take her savings and not pay a cent in taxes.
What is a merger? Who does it benefit and why?
Acquisition in which all assets and liabilities are absorbed by the buyer or any combination of two companies. A merger is beneficial to the stockholders in the long run if it increases stock price per share.
The following types of loans are all available at the discount window except: A. Seasonal credit B. Secondary credit C. Primary credit D. Adjustment credit
Adjustment credit
Which of the following is a type of loan? a) Real Estate Loan b) Financial Institution Loan c) Miscellaneous Loan d) Agriculture Loan e) All Statements are correct
All Statements are correct
Customers purchasing nondeposit investment accounts sold by a bank operating in the United States must be told in writing: A. Investment accounts are not federally insured B. Investment accounts are not deposits in nor guaranteed by a depository institution C. Investment accounts could suffer loss of principal D. All answers are correct.
All answers are correct.
Nontransaction (Savings or Thrift) Deposits are: A. Longer-Term B. Higher Interest Rates Than Transaction Deposits C. Generally Less Costly to Process and Manage D. All are correct
All are correct
Liquidity managers have developed strategies for deal-ing with liquidity problems: A: asset liquidity management B: liability management C: balanced liquidity management. D: All of the answers are mentioned
All of the answers mentioned
What is the reason for capital regulation? A.To limit risk of failures B.To preserve public confidence C.To limit losses to the government and other institutions arising from deposit insurance claims D. All of the options
All of the options
Which of the following is not an example of fee income a. A service charge of $16 a month for a business checking account b. A $30 charge for a same day wire transfer c. A $3.99 fee for taking cash out of a ATM d. All of the statements are examples of fee income e. None of these statements are examples of fee income
All of the statements are examples of fee income
The International Banking Act of 1978 includes: A. Branches and agency offices must secure federal licenses for U.S. operations B. Foreign branching within the U.S. is regulated, requiring a home state. C. U.S. branches of foreign banks are eligible for deposit insurance D. All of the statements listed are correct
All of the statements listed are correct
Which factors cause financial Firms liquidity Problems? a. Short-term Cash to Long-term Credit b. Market Interest Rates c. Negligence resulting in no cash at teller windows or ATMs d. All of the statements mentioned.
All of the statements mentioned.
What are some key risks in banking and financial institutions' management? a) Credit Risk b) Liquidity Risk c) Interest Rate Risk d) Crime Risk e) All statements are correct
All statements are correct
International banking services today include: a. Supplying foreign currencies, b. Providing hedging services to deal with currency and interest rate risk, c. Supplying credit and credit guarantees to fund trade and capital expansion, d. supplying cash management services d. Providing assessments of foreign marketing opportunities. e. All the statements are correct.
All the statements are correct.
Which of the following are key risks in banking? a. Credit Risk b. Liquidity Risk c. Interest Rate Risk d. All the statements mentioned.
All the statements mentioned.
Which of the following are types of loans? a. Real Estate b. Financial Institution c. Agricultural d. All the statements mentioned.
All the statements mentioned.
Dollar denominated CDs issued by banks outside the United states are known as Negotiable CDs.
False (Euro CDs)
Define, explain, and give examples of an annuity.
An annuity is a savings instrument where the customer makes a lump sum payment to the investment manager who invests the payment in earning assets and later receives a stream of income from the assets. Examples of annuities are pension funds or social security payments made to a retired individual.
Define, explain annuity. What are the types of annuities?
Annuities are often associated with insurance companies and with individuals approaching retirement, comes in either fixed or variable form. Fixed annuities promise a customer who contributes a lump sum of savings a fixed rate of return over the life of the annuity contract. Variable annuities allow investors to invest a lump sum of money in a basket of stocks, mutual funds, or other investments under a tax-deferred agreement, but there may be no promise of a guaranteed rate of return.
Which of the following is an example of an insurance product? A. Individual Stock B. Annuity C. Mutual Fund D. Index Fund
Annuity
A bank following an _________liquidity management strategy must take care that those assets with the least profit potential are sold first.The strategy that correctly fills in the blank in the foregoing sentence is. a. Liability b. Borrowed c. Asset Conversion d. Balanced
Asset Conversion
Which approach is the oldest and meeting liquidity needs? a.Opportunity cost b. Asset Conversion c. liability management D.balanced liquidity management
Asset Conversion
The oldest approach to meeting liquidity needs is known as _______. A. asset conversion B. limited risk C. balanced liquidity management D. liability management
Asset conversion
Suppose Bank of America holds assets denominated in yen of 190 million and liabilities denominated in yen of 30 million. They also have yen purchases of 70 million and yen sales of 50 million. What is Bank of America's net exposure to currency risk (in million)?
Assets - liabilities = 190 - 30 = 160 million Yen Purchases - sales = 70 - 50 = 20 since purchase can be considered as liability is can be offset net exposure = 160 - 20 = 140 million
What liquidity strategy is the most effective for banks today? Explain this strategy
Balanced Liquidity Management is the most effective strategy for banks today. The balanced liquidity management strategy entails combining both asset and liability management. It entails storing a portion of the expected demands for liquidity in assets while backstopping other anticipated liquidity needs by advance arrangements for lines of credit from potential suppliers of funds. Near-term borrowings are used to meet unexpected cash needs, while short-term and medium-term assets are used to meet longer-term liquidity needs. It must, therefore, raise funds from the cheapest and most timely sources available.
Which of the following liquidity strategies is the most effective for banks today? A. Balanced liquidity management B. Liquidity management C. Asset management D. none are correct
Balanced liquidity management
The federal law that requires each U.S. merging bank to notify its principal federal regulatory agency and request approval before a merger can take place is the: A. Bank Merger Act B. Glass-Steagall Act C. Depository Institutions Deregulation and Monetary Control Act D. Garn-St Germain Depository Institutions Act
Bank Merger Act
In the United States the foundation law affecting the mergers and acquisition of banks is? . A.Glass Steagall Act of 1933 B.Riegle-Neal Act of 1994 C.Bank Merger Act of 1960 D. USA Patriot Act of 2001
Bank Merger Act of 1960
For most financial institutions, the most pressing demands for spendable funds generallycome from two sources: A. customers withdrawing money from their accounts B. credit requests from customers the institution wishes to keep, either in the form of new loan requests or drawings upon existing credit lines. C. The Act of 1922 D. Both A & B
Both A & B
What is the CAMELS rating and how is it used?
CAMELS is a rating system used by federal bank examiners to evaluate the overall health of a bank. It is an abbreviation for each of the six factors used to assess the bank. The letters in the word are derived from—Capital adequacy, Asset quality, Management quality, Earnings record, Liquidity position, and Sensitivity to market risk.
What does CAMELS stand for and what is it used for?
CAMELS stands for capital adequacy, asset quality, management quality, earnings record, liquidity position, and sensitivity to market risk exposure. CAMELS is used by regulatory banking authorities to rate financial institutions.
A commercial paper company has a net profit $500 million a year and it also carries a noncash expense of $200 Million. What is this companies cashflow? Cash Flow = net profits - Noncash expense
CF = 500 - 200CF = $300 MILLION
Define, Explain and give examples of Customer Relationship Doctrine (CRD).
CRD states that a lending institution's first priority is to EXTEND loans to its customers. It focuses on lending to customers that will result in positive net earnings. An example of CRD is a customer with a good credit rating requesting a loan from the bank. The bank trusts this customer and wants to maintain the relationship, therefore the lender's first priority is to secure the loan with the customer.
Define Camels. And explain and give an example how firms use this in the loan process.
Camels is an acronym that stands for capital adequacy, Asset quality, Management quality, Earnings quality, Liquidity, Sensitivity to market risk. Lenders use CAMELS as a rating scale from 1-5 from trustworthy to riskiest. Borrowers with a 4 or a 5 are examined thoroughly before being granted a loan. All categories of camels are important but perhaps the asset quality, management quality, and liquidity are looked at more specifically to have a deeper understanding of the risk in doing business.
https://www.wsj.com/articles/escalating-materials-prices-turn-construction-bids-into-a-gamble-11626609600?mod=business_lead_pos4 According to the following article, what is one of the concerns that rises when Companies start doing more estimations in regard to Materials Expenses and build in many price increases A. B. Can complicate the bidding process C. Can underbid the competition D. Can underestimate expenses
Can be easily underbid by competitors
What is the usual provider of start-up funds needed by a firm to charter, organize and operate before revenues start flowing in? a. Federal Reserve Loans b. Loans from other banks c. Capital d. Commercial mortgages
Capital
What does CAMELS stand for?
Capital Asset quality Management Earnings Liquidity Sensitivity to risk
Define, explain and give an example of conditional pricing.
Conditional pricing, where a depository sets up a schedule of fees in which the customer pays a low fee or no fee if the deposit balance remains above some minimum level, but faces a higher fee if the average balance falls below that minimum. Example Conditionally free pricing.
Mention the types of risk relating to capital and explain at least two of them.
Capital and risk are intimately related to each other. The key risks involving owner's equity are credit risk, liquidity risk, interest rate risk, operational risk, exchange risk and crime risk. Depository institutions encounter substantial liquidity risk-the danger of running out of cash when cash is needed to cover deposit withdrawals and to meet credit requests from good customers. For example, if a depository institution cannot raise cash in a timely fashion, it is likely to lose many of its customers and suffer a loss in earnings for its owners. Financial intermediaries also encounter risk to their spread- the danger that revenues from earning assets will decline or that interest expenses will rise, squeezing the spread between revenues and expenses and thereby reducing net income. Changes in the spread are usually related to either portfolio management decisions or to interest rate risk.
Which one is NOT a vital role capital plays in supporting the daily operations and ensuring the long-run viability of a financial firm? A. Capital is used to measure a banks performance B. Capitals provides the funds needed to charter, organize, and operate a financial firm. C. Capital promotes public confidence D. Capital serves as a regulator of growth
Capital is used to measure a banks performance
Define, explain, and give an example of why is capital so important in financial services management?
Capital performs such indispensable functions as providing a cushion of protection against risk and promoting public confidence in the long-term viability of a financial firm. Moreover, capital has become the centerpiece of supervision and regulation today—the lever that regulators can pull whenever the alarm bell sounds in an effort to prevent the collapse of a financial firm. For example, lending institution must have a capital reservation for customers that may default on loans
Define, explain and give examples of how the 2007-2009 financial crisis illustrated the importance of capital for public confidence.
Capital promotes public confidence and reassures creditos concerning an institution's financial strength. The public needs to know that the bank has enough capital to provide for a cushion against an economic downturn. Capital will absorb financial and operating losses until management can address the problems and restore profitability. With the 2008 financial and banking crisis, the US Government and several European countries decided to "save" financial institutions by injecting government funds into the system. Meaning the government had to put up capital for the public to be able to trust financial institutions again.
Posted by Jonathan Lee on 07/21/2021 in WAP:-Class 08-Week 04 (July 15-21, 2021) Based on the article "Tesla CEO Elon Musk Says He Personally Owns Bitcoin—and So Does SpaceX" Which of the following is not a cryptocurrency that Elon Musk owns? A. Bitcoin B. Ethereum C. Cardano . D. Dogecoin
Cardano
Suppose a business borrower projects that it will experience net profits of $2.1 million, compared to $2.7 million the previous year and will record depreciation and other noncash expenses amounted of $0.7 million this year versus $0.6 million last year. What is this firm's projected cash flow for this year and the previous year? Is the firm's cash flow rising or falling?
Cash Flow for Previous Year = Net Profit + Depreciation and non Cash Expense $2.7 Million + 0.6 Million = $3.3 Million Cash Flow for Current Year = Net Profit + Depreciation and non Cash Expense $2.10 Million + 0.70 Million = $2.80 Million The Cash Flow for the Firm is falling when compared with previous year
If a business firm has $100 million in annual sales revenue, reports $70 million in cost of goods sold, carries annual selling and administrative expenses of $15 million, pays annual taxes amounting to $5 million, and posts depreciation and other noncash expenses of $6 million, what is its cash flow?
Cash flow = Sales Revenues - Cost of Goods Sold - Selling, General and Administrative Expenses - Taxes Paid in Cash + Non-cash Expenses $100million - $70million - $15million - $5million + $6million = $16million
A lender's secondary source of repayment in case of default is: A. Credit B. Collateral C. Character D. none of them
Collateral
The most common type of loan foreign banks make in the U.S. are: A. Commercial Loans B. Retail Loans C. Real Estate Loans D. Credit Card Loans
Commercial Loans
What is commercial paper and for what purpose was it designed?
Commercial paper consists of short-term notes, with maturities normally ranging from three or four days to nine months, issued by well-known companies to raise working capital. The notes are generally sold at a discount from face value through security dealers or through direct contact with the issuing company. A substantial portion of this paper-often called industrial paper-is designed to finance the purchase of inventories of goods or raw materials and to meet other immediate cash needs of nonfinancial companies. Another form of commercial paper usually called finance paper-is issued mainly by finance companies and the affiliates of financial holding companies.
1. Which U.S. federal law required branches and agency offices of foreign banks to secure federal licenses for their U.S. operations for the first time? A. Unconcentrated B. Mildly concentrated C. Moderately concentrated D. Concentrated
Concentrated
Suppose there are four banks in a local community. Each of these banks has 25 percent of the deposits in this community. This market is: A. Unconcentrated B. Mildly concentrated C. Moderately concentrated D. Concentrated E. None of the statements
Concentrated
1. Using deposit fee schedules that vary deposit prices according to the number of transactions, the average balance in the deposit account, and the maturity of the deposit represents what deposit pricing method listed below? a. Cost plus pricing b. Conditional free pricing c. Conditional Pricing d. None of the options mentioned above.
Conditional Pricing
Define, Explain, and Give examples of conditional pricing.
Conditional Pricing is where a depository sets up a schedule of fees in which the customer pays a low fee or no fee if the deposit balance remains above some minimum levels, but they face a higher fee if it remains below the minimum level. The customer selects the deposit plan that results in the lowest fees possible and/or the maximum yields, given the number of checks he or she plans to write, or charges planned to be made, the number of deposits and withdrawals expected, and the planned average balance. One example of conditional pricing is TD Bank wanting to have more funds to use, however they do not have the necessary deposits, so they decide to use conditional pricing to find out which depositors they want to have without giving too much back with the interest with the three factors in mind.
The most popular deposit-pricing method is: a. Cost-plus formula b. Conditional pricing c. Marginal cost pricing d. Flat fee pricing
Conditional pricing
Define, Explain, and Give examples of Conditional Pricing.
Conditional pricing is where a depository sets up a schedule of fees in which the customer pays a low fee or no fee if the deposit balance remains above that minimum. This means the customer will need to pay a price conditional on how he or she uses a deposit account. Thes pricing techniques vary in deposit prices based on one or more factors.
Explain how consumer loans are classified and give some examples.
Consumer loans are classified by purpose and type. Purpose refers to what the borrowed funds will be used for and type refers to whether the borrower must repay in installments or in one lump sum. Some consumer loans are mortgage loans, auto loans, and student loans.
Define, explain and give examples of Contingent Liability:
Contingent Liability is a liability that can occur based on the outcomes of the uncertainty of a future event. These are recorded if the likelihood of a liability happening is high. One example of a Contingent Liability is a bank facing a lawsuit from a competitor due to patent infringement, the bank registers that $3 million could be lost since the other company has a strong case, and this is recorded as a debit on the balance sheet to increase legal expenses and credit accrued expenses for said amount.
A federal funds loan that is automatically renewed each day unless either the borrower or the lender decides to end the loan agreement is known as a: a. Overnight loan b. Continuing contract c. Term Loan d. Rollover loan agreement
Continuing contract
Suppose a bank has $6,000 in Tier 1 capital and $3,000 in Tier 2 capital, $125,000 in total assets and the following on-balance-sheet and off-balance-sheet items: On balance sheet Items Cash 10,000 US Treasury Securities 25,000 Deposit balances held at domestic banks 10,000 Loans secured by first liens on 1-to-4 family residential properties 10,000 Loans to private corporations 70,000 Total Balance Sheet Assets 125,000 Calculate the bank's core-capital-or-leverage-ratio and the total-capital-to-total-balance-sheet-assets ratio
Core capital or leverage ratio Tier 1 Capital / Total Balance Sheet Assets $6,000 / $125,000 = 4.76% Total capital to total balance sheet assets ratio Tier 1 + Tier 2 Capital / Total Balance Sheet Assets $6,000 + $3,000 / $125,000 = 7.2%
What are core deposits and why are they so important today?
Core deposits are the most stable components of a depositary institution's funding base and usually include smaller denomination savings and third-party payments accounts. They are characterized by relatively low interest-rate elasticity. Holding a substantial proportion of core deposits has an advantage in having access to a stable and cheaper source of funding with relatively low interest-rate risk.
What are the principal strengths and weak- nesses of the different loan-pricing methods in use today?
Cost plus pricing is the simplest loan pricing model. However, it assumes that a lending institution can accurately know what its costs are and often they don't. Price leadership overcomes the problems of accurately predicting what the costs of a loan will be to a lending institution. However, it is still difficult to assign risk premiums to loans. In addition, using something like the prime rates as the base rates has been challenged by LIBOR and other market based rates. Below prime market pricing uses LIBOR as the base rate and includes only a small profit margin as part of the loan price. This works well for short-term loans as large, well-known corporations but it is not generally used by medium and small sized companies or long term loans. Customer profitability analysis is similar to cost plus pricing but differs in that it considers the whole customer profitability into account when pricing a loan. Customer profitability analysis has become increasingly sophisticated as computer models have been designed to help with the analysis.
Which of the following is NOT a risk contributing factor for capital in a financial firm? A. Credit Risk B. Liquidity risk C. Operational Risk D. Country risk
Country risk
A bank maintains a clearing balance of $5,000,000 with the Federal Reserve. The Federal funds rate is currently 6.5 percent. What credit will this bank earn over the reserve maintenance period (14 days) to offset any fees charged this bank by the Federal Reserve? (Round to nearest dollar amount) Credit amount = Clearance Balance * Federal Funds Rate * Reserve Maintenance Period / 360 days
Credit Amount = $5,000,000 * 0.065 * 14/360 = $12,639
In the most recent years which of the following financial institutions has been lending the least in the U.S. economy? A. Savings Institutions B. Insurance Companies C. Commercial Banks D. Credit Unions
Credit Unions
Which of the following is in the 100 percent risk-weight category? A. Credit card loans B. Cash C. Residential mortgage loans D. General obligation municipal bonds
Credit card loans
Define Crime Risk, explain and give examples of modern day crime risk banks and institutions face.
Crime risk is a type of risk that financial institutions face and must take into account. It can involve physical harm but mostly it is financial based, usually fraud, identity theft, embezzlement, money laundering and bribes. Though bank robberies at gunpoint are still common they have declined in occurances nowadays. Usually crime risk involves atm break ins, imposters of customers trying to obtain funds or information. And security breaching via online banking systems.
Which of the following below are not part of the 7 categories loans are divided into? A. Commercial/Industrial Loans B. Real estate loans C. Criminal Loans D. Agricultural Loans
Criminal loans
A foreign currency contract where one-party trades currencies with another and trades it back at the end of the contract is called a(n): A. Currency option contract B. Currency forward contract C. Currency swap contract D. Currency futures contract
Currency swap contract
1. The doctrine that the first priority of a bank is to make loans to all those customers from whom the bank expects to receive positive net earnings is called the: a. Liability Management b. Customer Relationship Doctrine c. Federal Funds market d. Asset Management.
Customer Relationship Doctrine
What are the major types of deposit plans that depository institutions offer today?
Deposit plans can be divided broadly into transaction deposits, thrift or nontransaction deposits, and retirement savings deposits. The primary function of transaction deposits is to make immediate payments to the customers and these deposits include regular checking accounts, market deposit accounts, NOW accounts, and mobile check deposit.
Describe how to select a suitable merger partner
Determine the value of a financial firm's stock by calculating their expected stream of future dividends and the discount factor applied to future stock.
Define security dealer financing
Dealers in securities need short-term financing to purchase new securities and carry their existing portfolios of securities until they are sold to customers or reach maturity
Which of the following is NOT a disadvantage of linking commercial and investment banking? -Increase competition -Lower client fees -Increasing the risk exposure -Decrease competition
Decrease competition
What is the other variant for the covid-19 that has been rising over last few month? A. Spirit B. JetBlue C. Frontier D. Delta
Delta
In recent articles, we've seen some fluctuations in the market. What is one of the main concerns resulting in the fluctuations? A. House prices B. Delta Variant of COVID-19 C. Oil prices D. None of the statements
Delta Variant of COVID-19
What is the biggest concern investors have about the recovery phase? a. Inflation rates b. Trade war c. Delta variant d. Overvalued market
Delta variant
Define, explain and give an example of a liquidity gap.
Discrepancy or mismatch in the supply or demand for a security or the maturity dates of securities. When sources of liquidity (e.g., increasing deposits or decreasing loans) exceed uses of liquidity (e.g., decreasing deposits or increasing loans), the financial firm will have a positive liquidity gap (surplus).
A bank decides to add insurance services to its existing product menu. It expects to earn a 9 percent average return from sales of its traditional banking products and a 15 percent return from selling or underwriting insurance services. The bank expects to receive 25 percent of its revenues from insurance sales and 75 percent from sales of traditional banking products. What would be the overall return? E(r) = Rts * Erts + Rns * Eens
E(r) = 0.75(9%) + 0.25(15%) E(r) = 6.75 + 3.75 E(r) = 10.50%
A banking company decides to add insurance services to its existing product menu. It expects to earn a 12 percent average return from sales of its traditional banking products and a 20 percent return from selling or underwriting insurance services. These two service lines are judged to be about equally risky in the variance of their cash flows (with a standard deviation of about 5 percent each), but the banking firm expects to receive 20 percent of its revenues from insurance sales and 80 percent from sales of traditional banking products. Suppose that cash flows from the two sets of services are negatively correlated over time with a correlation coefficient of -0.50. What would happen to the bank's overall return from sales of traditional and nontraditional products in this case? Expected return from the overall service menu [E(r)] = Proportion of revenue from traditional services (RTS) * Expected return from traditional services [E(rTS)] + Proportion of revenue from nontraditional services (RNS) * Expected return from nontraditional services [E(rNS)]
E(r) = 0.80(12%) + 0.20(20%) = 13.6%
Suppose a banking company decides to add insurance services to its existing product menu. It expects to earn a 12% average return from sales of its traditional banking products and a 20% return from selling or underwriting insurance services. The bank expects to receive 20% of its revenue from insurance sales and 80% from sales of traditional banking products. What would happen to the bank's overall return from sales of traditional and nontraditional products in this case?
E(r) = Rts * Erts + Rns * Eens E(r) = 0.8 (12%)+0.2 (20%) = 13.6 %
Suppose a banking company decides to add insurance services to its existing product menu. It expects to earn a 10% average return from sales of its traditional banking products and a 13% return from selling or underwriting insurance services. The bank expects to receive 10% of its revenue from insurance sales and 90% from sales of traditional banking products. What would happen to the bank's overall return from sales of traditional and nontraditional products in this case? E(r) = Rts * Erts + Rns * Eens
E(r) = Rts * Erts + Rns * Eens E(r) = 0.9 (10%) + 0.1 (13%) = 10.3%
The Glassconduct corporation receives a loan for $10,000 at 11% with a 15% compensating balance requirement for one year. What is the EIR? EIR = Annual Interest Paid/Funds Received
EIR = $1,100 (10,000x.11) $8,500 (10,000-1500) = 12.9%
A deposit which offers flexible money market interest rates but is accessible for spending by writing a limited number of checks or executing preauthorized drafts is known as a Super NOW.
False (Money Market Deposit Account)
If the combined earnings of Bank A and Bank B are $750,000, and the combined organizations have 140,000 shares outstanding, what will be the stockholder's earnings per share? Earnings per share = Combined Earnings/ Shares Outstanding
Earnings per share = 750,000/140,000 Earnings per share = $5.36.
_____________ are domestic US companies owned by a US or foriegn bank, but located outside the home state of the bank that owns them A.Edge Acts B.Agreement Corporations C.Joint Ventures D.Shell Branches
Edge acts
The Keogh retirement plan account was not available for self-employed individuals back in the day.
False
A multinational company issues short-term credit through London's financial district. They are most likely using: a. Depository paper (DR) b. Currency Swap c. Bank Holding Act d. Eurocommercial paper (ECP)
Eurocommercial paper (ECP)
1. Which U.S. federal law required branches and agency offices of foreign banks to secure federal licenses for their U.S. operations for the first time? A. Eurrocommercial paper B. Depository receipt C. Note Issuance Facility D. Currency Swap
Eurrocommercial paper
A bank money manager estimates that the bank will experience a liquidity deficit of $400 million with a probability of 10 percent, a liquidity deficit of $900 million with a probability of 20 percent, a liquidity surplus of $600 million with a probability of 30 percent and a liquidity surplus of $1200 with a probability of 40 percent over the next month. What is this bank's expected liquidity deficit or surplus over this next month? Expected Liquidity Requirement = requirement Probability of Outcome A* Estimated liquidity surplus or deficit in Outcome A+ requirement Probability of Outcome B* Estimated liquidity surplus or deficit in Outcome B+...........
Expected Liquidity Requirement = 10% *(- $400)+20%*(-$900)+30%*$600+40%*$1200 = $440 million This bank's expected liquidity surplus is $440 million over this next month.
A bank is considering adding security underwriting services to the services it offers. It has estimated that the expected return of its traditional service is 10%. It has estimated that the expected return of its new securities underwriting services is 18%. The bank estimates that 80% of its revenue will be from traditional services and 20% from the new services. What is the expected return of the new combined firm? Expected Return= (Portion of revenue from traditional services x Expected return of traditional services) + (Portion of revenue from nontraditional services x Expected return of nontraditional services)
Expected Return= (0.80*0.10)+(0.20*0.18) Expected Return= 0.116 or 11.6%
Management sees the worst possible situation next week as one characterized by a $20 million liquidity deficit, but this least desirable outcome is assigned a probability of only 25 percent. Similarly, the best possible outcome would be a $60 million liquidity surplus. However, this is judged to have only a 15 percent probability of occurring. More likely is the middle ground-a $10 million liquidity surplus-with a management-estimated probability of 60 percent. What, then, is the institution's expected liquidity requirement?
Expected liq. requirement = Prob. outcome A x (est. liq. surplus/deficit outcome A) + (same steps for b...c...d...) + $10 million
What is the expected return of a portfolio made up of 60% Stock A and 40% Stock B when the expected return for Stock A is 10% and the expected return for Stock B is 20%?
Expected return = (Ra *Wa )+(Rb * Wb) = (10 * .40) +(16 *.60) = 4 + 9.6 = 13.60% Standard deviation = square root of [ (35)^2(.40)^2 + (55)^2(.60)^2 + 2(35)(.40)(55)(.60)*.2 ] = SR [196 + 1089 + 184.8] = SR [ 1469.8] = 38.34%
A trust officer can not place certain monies of a customer, on his/her own initiative, in a checking or a time deposit account for future use.
False
Capital is the least important aspect in the supervision and regulation of financial institutions performed by regulators.
False
Coverage refers to the protection afforded creditors based on the amount of a business customer's capital.
False
During the 1990's the customer relationship doctrine spawned the liquidity management strategy known as the liability doctrine.
False
Each share in an annuity permits an investor to receive a pro rate share of any dividends or other forms of income generated by a pool of stocks, bonds, or other securities.
False
Employment history is not important when lenders are analyzing a customer's credit.
False
Import trading Offices are a type on International Banking organization or facility.
False
In the United States the financial-services industry has consistently ranked in the top five of all industries in the number or value of merger transactions taking place each year
False
Lenders are expected to support their local communities with an adequate supply of credit for all businesses, whether legitimate or not, and to price those credits reasonably in line with competitively determined market interest rates.
False
Long Term Project Loans are one of the safest loans a bank can make.
False
Many mergers arise from expected tax consequences, especially where the acquired firm has earnings gains, that can be used to offset taxable profits for the acquirer.
False
Negotiable order of withdrawal (NOW) accounts are noninterest-bearing saving deposits that give the offering depository institution the right to insist on prior notice before the customer withdraws funds.
False
Prepaid cards which compete with credit cards and debit cards are match cards.
False
Shell branches are large branch locations that often contain 2 or more stories, several offices, and usually act as a secondary headquarters for international banks.
False
Small Business lending by banks is rising.
False
What is the most popular domestic source of borrowed reserves among depository institutions?? A. Virtual Banks B. Federal funds Market C. The decline in interest for the labor force in banking D. The online connectivity across the new generation
Federal funds Market
One of the most fertile fields for growth in future revenues on the part of financial firmsappears to be? A. Virtual Banks B. Fee Income C. The decline in interest for the labor force in banking D. The online connectivity across the new generation
Fee income
Define, Explain, and Give examples of Fee Income.
Fee income is among the most rapidly growing sources of revenue for depository institutionsand selected other financial-service providers. Some of this revenue comes fromthe sale of traditional services, such as charges associated with the use of checking andsavings accounts, fees for the use of an automated teller machine (ATM), and commitmentfees to extend a loan in the future when the customer needs it. Indeed, much to theanger of some customers, fees on many traditional services, particularly deposits, not onlyhave been multiplying, but, on average, are often rising faster than the rate of inflation.
What kind of loans include credit to banks, insurance companies, finance companies, and other financial institutions? A. Auto loans B. Real Estate loans C. Miscellaneous Loans D. Financial Institution loans
Financial Institution loans
All these are part of the types of loans that institutions offer to individuals except for a. Real estate loans b. Automobile loans c. Financial institutions loans d. Retail store credit cards
Financial institutions loans
The first major bank within the U.S. to establish a separate department for granting loans to consumers was: A. First National City Bank of New York. B. BankAmerica. C. Bank One. D. State Street Bank. E. Bank of New York.
First National City Bank of New York.
Term loans normally are secured by: A) Fixed assets B) Accounts receivable C) Inventories D) Personal property E) None of the above.
Fixed assets
Which of these is NOT a Liquidity Indicator? A. Current Ratio B. Acid-test Ratio C. Gross Profit Margin D. Net Working Capital
Gross Profit Margin
What does the term capital mean as it applies to financial institutions?
Funds contributed to a financial institution primarily by its owners, consisting mainly of stock, equity reserves, surplus, and retained earnings, plus any long-term debt issued that qualifies under regulations.
Money-market deposit accounts (MMDAs), offering flexible interest rates, accessible for payments purposes, and designed to compete with share accounts offered by money market mutual funds, were authorized by the: -Glass-Steagall Act -Depository Institutions Deregulation and Monetary Control Act (DIDMCA). -Bank Holding Company Act -Garn-St.Germain Depository Institutions Act
Garn-St.Germain Depository Institutions Act
Which of the following is not part of the threefold to regulate capital? A. To preserve public confidence B. To limit risk failures C. Generate wealth for stockholders D. To limit losses to the Gov & other institutions arising from deposit insurance claims
Generate wealth for stockholders
Which act prohibited Interest payments on regular checking accounts and why?
Glass-Steagall Act 1933 was created with the goal of prohibiting banks from paying interest on deposits in checking accounts. The purpose of these measures was to limit speculative behavior by banks competing for customer deposits as it led to banks seeking risky means of profit to be able to pay the interest on these deposits. This was later commonly regarded as a means of financial repression.
What types of risk exposure do international banks strive to control to aid their customers?
Goals of regulation in the international banking is that ensuring that there is safety on the funds of depositor. This requires enactment of laws which should prohibit the banks from getting risks and get rid of criminal activities. Key customer services as supplied by international banks provides foreign exchange currencies to the customers and providing payment and cash management services. They generally help in controlling towards interest rate risk, foreign exchange risk and currency risk. Finally help in providing short term and long-term credit and credit guarantees.
Which act stated the following: the full range of investment banking services was opened up for adequately capitalized and well-managed commercial banking firms A. Gramm-Leach-Bliley (GLB) B. Bank Secrecy Act (BSA) C. Expedited Funds Availability Act (EFA) D. The Glass-Steagall Act
Gramm-Leach-Bliley (GLB)
A company expects to earn a 16 percent average return from sales of its traditional banking products and a 25 percent return from selling or underwriting insurance services. These two service lines are judged to be about equally risky in the variance of their cash flows (with a standard deviation of about 5 percent each), but the banking firm expects to receive 40 percent of its revenues from insurance sales and 60 percent from sales of traditional banking products What is the expected return from the overall service menu?
HOW TO SOLVE* = E(r)= 0.60(16%) + 0.40(25%) = 19.6%.
A private partnership whose shares are primarily offered to wealthy individuals and large institutions and which often makes high-stakes bets on the direction of the market is called: A. An annuity B. A mutual fund C. A hedge fund D. The net asset value
Hedge Fund
Interim Construction Financing Secured short-term loan used to support
Homes
Define and explain what is the ICGR, and why is it important to the management of a financial firm?
ICGR stands for Internal Capital Generation Rate. It is the rate of growth of net earnings that remains inside a firm rather than being paid out to its stockholders. This growth rate depends on a firm's return on equity and its dividend policies. It states that when there are increases in the profit margin, equity multiplier, and asset utilization ratio, the bank can raise internally generated capital for the bank.
Define, explain, and give an example of a non-residential loan?
In contrast to residential mortgage loans, nonresidential loans to individuals and families include installment loans and non-installment (or single-payment) loans and a hybrid form of credit extended through credit cards. An example of a non residential loan would be you going to the bank and asking for a loan so you can purchase a car.
Describe the essential differences between the following deposit pricing methods in use today: cost-plus pricing, conditional pricing, and relationship pricing
In the cost-plus pricing method, it matches benefits offered to customers with the costs incurred and also includes a profit margin. The total cost of the service are uniformly distributed over the entire customer base to get the unit cost of the service. In conditional pricing, prices for services are levied depending upon a customer exceeding some limits for usage of facilities or failures to maintain the minimum balance and deposit accounts. These conditions are explained to the customer when he or she opens an account. In relationship pricing the extent of a customer's dealing with a depository or his loyalty to one depository is rewarded by lower charges or fees for services. Thus, a customer using more than one service is charged lower fees for the service than a customer who has a limited association with a depository or bank.
A bank is considering making a loan to John Carter. John is a commissioned sales broker. Some months he earns as much as $10,000 and in other months he earns virtually nothing. Which aspect of evaluating a consumer loan would this be concerned with A.Character and purpose B.Income level C.Deposit balance D.Employment and residential stability E.Pyramiding of debt
Income level
A bank is considering making a loan to John Carter. John is a commissioned sales broker. Some months he earns as much as $10,000 and in other months he earns virtually nothing. Which aspect of evaluating a consumer loan would this be concerned with? A. Character and purpose B. Income Level C. Deposit Balance D. Employment and residential stability
Income level
Short-term to medium-term loans repayable in two or more consecutive payments are known as? A. Non installment loans B. Installment loan C. Residential mortgage loans D. Nonresidential cash loans
Installment loan
Annuities are insurance contracts that promise to pay regular income immediately or in the future.
True
A bank borrows $35 million through an RP transaction collateralized by government bonds for four days and the current RP rate in the market is 7 percent. What is the bank's total interest cost? Interest cost of RP = Amount borrowed * Current RP rate * # days in RP / 360 days
Interest cost of RP = $35,000,000 * 0.07 * 4/360 = $27,222.22
Suppose a customer purchases a $1 million 90-day CD, carrying a promised 6% annualized yield. How much in interest income will the customer earn when this 90-day instrument matures? What total volume of funds will be available to the depositor at the end of 90 days?
Interest income = principal * annual rate of interest * days to maturity/360 1 million * 0.06 * 90/360 = $15000 Total funds = principal + interest income 1 million +15000 = $ 1015000
Suppose a customer asks for $2,000 for a year at a simple interest rate of 12 percent in order to purchase some furniture. If none of the principal of this loan is to be paid off until the year ends, the interest owed by the customer is? Interest=Principal*rate* time,
Interest=$2,000*.12*1= $240
Short-term lending to support the construction of homes, apartments, office buildings, shopping centers, and other permanent structures is known as a (or an): A) Self-liquidating B) Working capital loan C) Interim construction loan D) Asset-based loan E) None of the above
Interim construction loan
Imagine management has forecast a return on equity of 10 percent for this year and plans to pay the stockholders 50 percent of any net earnings generated. How fast can assets grow without reducing the current ratio of total capital to total assets?
Internal Capital Generation Rate = Return on Equity X Retention Ratio 0.10 X 0.50 = 5 percent
One Banking Service that been prominent, but volatile, is: a. Investment Banking b. Security underwriting c. IPOs d. Leverage buyouts
Investment Banking
Stocks, bonds, mutual funds, annuities, are examples of A. Savings tools B.Risk transfers C.Investment products D.Bank deposits
Investment products
2021-07-20 - Joe Biden wants to overhaul global tax rules. Ireland stands in the way. - CnnBusiness - Julia Horowitz https://www.cnn.com/2021/07/20/economy/ireland-global-tax-deal/index.html (Links to an external site.) Read article above, Why is Ireland worried about Joe biden new proposal about a global tax rate? A.Ireland prefers republicans than democrats B. Ireland is in debt to the United States C. Ireland thinks if it agrees it could harm their status in the EU D. Ireland is an offshore tax haven for many companies and this could affect their economy.
Ireland is an offshore tax haven for many companies and this could affect their economy.
Which of the following is not a characteristic of liquid assets? A. Has a ready market B. Stable price C. It has gap D. Reversible
It has a gap
Capital has become the centerpiece of supervision and regulation today.
True
What is the International Banking Act of 1978 and what are its key components?
It is the first major federal law regulating foreign bank activity in the United States. Its key components include: Branches and agency offices of foreign banks must secure federal licenses for their U.S. operations. Foreign branching within the United States is regulated, requiring each bank to designate a home state and follow that state's branching rules just as American banks have had to do. Deposits accepted at the U.S. branch or agency offices of foreign banks holding $1 billion or more in consolidated assets are subject to legal reserve requirements determined by the Federal Reserve Board. U.S. branches of foreign banks are eligible for deposit insurance under stipulated conditions and have access to certain Federal Reserve services, such as the ability to borrow from the Federal Reserve banks.
What is pro forma statement of cash flows purpose?
It is useful not only to look at historical data in a Statement of Cash Flows, but also to estimate the business borrower's future cash flows and financial condition.
What does Joe Biden want to do with the Global Tax Rule and how will this impact Ireland's economy? Article 09 2021-07-20 - Joe Biden wants to overhaul global tax rules. Ireland stands in the way. - CnnBusiness - Julia Horowitz https://www.cnn.com/2021/07/20/economy/ireland-global-tax-deal/index.html
Joe Biden plans to at least have the global rate bumped up to 15% which if implemented would mean bad business for Ireland's economy. Ireland has benefited tremendously from corporations doing business in the country. If this global rate does come to fruition it would be pointless for big companies to do business there and therefore affecting Ireland's income, employment, and overall economy.
Large time deposits are generally referred to as: A. Mini CDs B. Euro CDs C. Jumbo CDs D. Yankee CDs
Jumbo CDs
Management strategy that aligns raw-material orders from suppliers directly with production schedules. a. Just in Case (JIC) b. Just if Necessary (JIN) c. Just in Transportation (JIT) d. Just in Time (JIT)
Just in Time (JIT)
Define, explain and give examples of how an institution's market defines the bulk of the loans in their portfolio.
Lenders are chartered with the main purpose of providing loans to their markets. Each lender must respond to the demands for credit arising from customers in its own market. For example, a small bank located in Pembroke Pines (suburb of Fort Lauderdale) will probably have a majority of residential real estate loans, automobile loans and credit for purchases of appliances and other household expenses. In contrast, a big bank located in downtown Fort Lauderdale, will most likely have a majority of business loans designed to stock inventories, purchase equipment and meet business payrolls in its loan portfolio.
A firm currently has $1000 in assets and $450 in liabilities. They expect to increase their liabilities by $200 in the next year. At the end of the next year, by how much would the leverage ratio change? A. 200 B. 0.45 C. 0.65 D. 0.20
Leverage ratio = Total liabilities/Total Assets 0.20
Define, explain and give an example of liability management
Liability management consists of buying funds, mainly from other financial institutions in order to cover good-quality credit requests and satisfy any legal reserve requirements on deposits and other borrowings that law or regulation may require. A lending institution may acquire funds by borrowing short term, such as in the domestic Federal funds market, or borrowing abroad through the Eurocurrency market.
Define, explain and give examples of liability management.
Liability management is a process that calls upon managers of financial institutions to actively manage their liabilities as well as their assets on the balance sheet and to use market interest rates as the control lever. Borrowing short term in the federal funds market or eurocurrency market allows financial institutions to acquire funds and satisfy legal reserve requirements.
What are some of the types of insurance products sold today?
Life insurance policies are a type of insurance product that protects individuals, families, and businesses against the loss in the event of death and may include a savings account component to financially assist the policyholder's beneficiary. Life insurance companies also frequently sell health insurance policies as well. Property/Casualty insurance policies cover many different risks. These policies deal with risks such as driving an automobile, operating a boat, industrial accidents, medical care, negligence or fraud in opening a business, damages or negligence in a home, and losses due to changing interest rates.
What are the types of insurance products sold today and what are examples of them?
Life insurance policies protect individuals, families, and businesses against loss in the event of death and may also include a savings account component to prepare the policyholder or his beneficiaries for future financial needs. Property/casualty insurance policies cover a wide array of business and personal risks. For example, these policies deal with such risks as driving an automobile, operating a boat or ship, industrial accidents, illness and medical care, negligence or fraud in operating a business.
A financial institution that has ready access to immediately spendable funds at reasonable cost at precisely the time those funds are needed is: a. Risk free b. Liquid c. Secure d. Profitable
Liquid
Which one does not belong to the transaction deposit account? A. Super NOW B. MMDA C. Liquid CD D. Demand Account
Liquid CD
Define, Explain, and Give examples of liquid assets.
Liquid assets are assets that can be converted into cash without delay with minimum risk. Liquid assets have three characteristics that they must have which are converting quickly, has a reasonably stable price where no matter how quickly the asset must be sold or how large the sale is, the market is deep enough to absorb the sale without a little decline in price, and it is reversible which means the seller can recover their original investment with little risk of loss. Examples of liquid assets include treasury bills, federal fund loans, certificates of deposit, municipal bonds, federal agency securities, and Eurocurrency loans.
What aspects need the institution's money position managers to consider for liquid funds to cover the legal reserve deficit?
Liquidity and money position managers choose their sources of liquidity based on several key factors, including (1) immediacy of need; (2) duration of need; (3) market access; (4) relative costs and risks; (5) the outlook for market interest rates; (6) the outlook for central bank monetary policy; and (7) government regulations.
Define,explain and give examples of liquidity and what are the principal differences among asset management, liability management, and balanced liquidity management?
Liquidity is the ability to convert an asset into cash with the minimum loss. Some managers use strategies such as ALM, liability management and balanced liquidity management. Asset management is a strategy for meeting liquidity needs, used mainly by smaller banks, in which liquid funds are stored in readily marketable assets that can be quickly converted into cash as needed. Liability management involves borrowing enough immediately spendable funds to cover demands for liquidity made against a bank. Balanced liquidity management calls for using both asset management and liability management to cover a bank's liquidity needs.
Define, explain, and give an example of liquidity in a financial firm.
Liquidity refers to the ability of a financial firm to have access to immediately spendable funds at reasonable cost at precisely the time those funds are needed. This means that a liquid financial firm has access to money on hand or can raise funds in a timely manner by boring or selling assets. As a customer I expect my money to be available at all times, if a bank fails to meet those expectations because of their low liquidity levels, then there could be the possibility that the bank is a troubled bank.
Suppose a bank estimates that the marginal cost of raising loanable funds to make a $10 million loan to one of its corporate customers is 4 percent, its non funds operating costs are 0.5 percent, the default-risk premium on the loan is 0.375 percent, a term-risk premium of 0.625 is to be added, and the bank's desired profit margin is 0.25 percent. What loan rate should be quoted for this borrower?
Loan Rate = 4 percent loan funds cost + 0.5 percent nonfunds operating cost + 0.375 percent default-risk premium + 0.625 percent term-risk premium + 0.25 percent profit margin = 5.75 percent
Which of the following best describes primary credit? a. Loans are available for short terms and to institutions in sound financial condition. Rate is slightly higher than the federal funds rate. b. This loans are available for long terms and to institutions in awful financial condition. Rate is lower than the federal funds rate. c. When you first open a bank account and you file a primary credit slip to start building credit. d. None of the statements mentioned.
Loans are available for short terms and to institutions in sound financial condition. Rate is slightly higher than the federal funds rate.
In what ways does the lending function affect the economy of its community or region?
Loans are defined as the amount that the lenders provide to the borrowers as per the borrower's financing need. The loan is generally disbursed by the lender on the agreed terms and conditions along with the prescribed rate of interest and term to maturity. The loans can be classified as residential loans, non-residential installment loans, credit cards or revolving loans and non-installment loans. The lending function generally impacts the economy in bigger way. The loans generally help in the consumption as well as in the investment spending are one of the principal and economic functions of the banks. For lending to be successful, the economic stability of the region plays a critical part as the loans primarily helps towards the growth of new jobs and business as summarized under the area of the lender. The loans also form a part of the valuable information in the lenders market wherein the prospective lenders may acquire information on the credit quality of the borrower and this aspect may help the borrower also in getting more and more loans at a cheaper cost.
Which is NOT a short-term business loan? A. Self-liquidating inventory loans B. Working capital loans C. Loans to support the acquisition of other firms D. Security dealer financing
Loans to support the acquisition of other firms
Which of the following is not a reason for the congress fear concerning the Glass-Steagall Act? A. Highly volatile B. Least predictable C. Shortest potential maturity D. Lower yields
Lower yields
Describe the International Lending and Supervision Act
Make public any credit exposures to a single country > 15% of primary capital or 0.75% of total assets, smaller of the two; restrictions on fees lenders charge troubled international borrowers to restructure loans.
What is the marginal cost rate if a bank raises its offer rate on new deposits from 7 percent to 7.5 percent when the new rate total funds is $50 million and the old rate total funds is $25 million?
Marginal cost = change in total cost = new interest rate x total funds raised at new rate - old interest rate x total funds raised at old rate and Marginal cost rate = change in total cost/additional funds raised ($50million * .075) - ($25million * .07) $3.75million - $1.75million = $2million $2m/$25m = 8%
Suppose JP Morgan Chase holds assets dominated in euros of 100 billion and liabilities of 60 billion. Its euro purchases in the most recent period amounted to 50 billion while its euro sales reached 40 billion. This represents an exposure to fluctuations in the exchange value euros of:
Net exposure to risk from any currency = (assets held that are denominated in currency - Liabilities issued in the currency) + (Volume of the currency purchased - Volume of the currency sold) = (100 billion euros - 60 billion euros) + (50 billion euros - 40 billion euros) = +50 billion euros
Suppose a bank expects to raise $25 million in new deposits by offering its depositors an interest rate of 7 percent. Management estimates that if the bank offers a 7.50 percent interest rate, it can raise $50 million in new deposit money. At 8 percent, $75 million is expected to flow in, while a posted deposit rate of 8.5 percent will bring in a projected $100 million. Finally, if the bank promises an estimated 9 percent yield, management projects that $125 million in new funds will result from both new and existing deposits that customers will keep in the bank to take advantage of the higher rates offered. Let's assume as well that management believes it can invest the new deposit money at a yield of 10 percent. Given these facts, what deposit interest rate should the bank offer its customers?
Marginal cost = change in total cost = new interest rate x total funds raised at new rate - old interest rate x total funds raised at old rate and Marginal cost rate = change in total cost/additional funds raised Change in total cost= $50 million X 7.5 percent - $25 million X 7 percent= $3.75 million - $1.75 million= $2.00 million $2.00 million / $25.00 million = 8%
Suppose a bank expects to raise $25 million in new deposits by offering its depositors an interest rate of 6.5 percent. Management estimates that if the bank offers a 7.50 percent interest rate, it can raise $50 million in new deposit money. At 6 percent, $65 million is expected to flow in, while a posted deposit rate of 9.5 percent will bring in a projected $100 million. Finally, if the bank promises an estimated 9.5 percent yield, management projects that $120 million in new funds will result from both new and existing deposits that customers will keep in the bank to take advantage of the higher rates offered. Let's assume as well that management believes it can invest the new deposit money at a yield of 10 percent. What is the Marginal cost and Marginal cost rate?
Marginal cost = change in total cost = new interest rate x total funds raised at new rate - old interest rate x total funds raised at old rate and Marginal cost rate = change in total cost/additional funds raised Marginal Cost= 7.5% X 50 - 6.5% X 25= 3.75-1.625=2.125 Marginal Cost Rate= 2.125/25= 0.085 or 8.5%
Red Rose National Bank (RRNB) has the following sources of funds: $350 million in capital and surplus, $375 million in demand deposits, $730 million in time and savings deposits and $230 million in subordinated debt. What is the maximum dollar amount RRNB may lend to a single customer?
Max dollar amount to single customer = 15% of bank's unimpaired capital and surplus account Max dollar amount to single customer = 0.15 * $350 million Max dollar amount to single customer = $52.5 million
Crockett Manufacturing and Service Company holds a sizeable inventory of dryers and washing machines, which it hopes to sell retail dealers over the next six months. These appliances have a total estimated market value currently of $25 million. The firm also reports accounts receivable currently amounting to $12,650,000. Under the guidelines for taking collateral discussed in this chapter, what is the minimum size loan or credit line Crockett is likely to receive from its principal lender? What is the maximum size loan or credit line Crockett is likely to receive?
Minimum-Size Credit Line Available = 0.30 x $25,000,000 + 0.40 x $12,650,000 = $7,500,000 + $5,060,000 = $12,560,000. Maximum-Size Credit Line Available = 0.80 x $25,000,000 + 0.90 x $12,650,000 = $20,000,000 + $11,385,000 = $31,385,00
What is the Net exposure to risk from any one currency if the assets held that are denominated in the currency are 100 billion euros, the liabilities issued in the currency are 60 billion euros, the volume of the currency purchased is 50 billion euros and the volume of the currency sold is 40 billion euros? Net exposure to risk from any one currency= (assets held that are denominated in the currency - the liabilities issued in the currency) + (the volume of the currency purchased - the volume of the currency sold)
Net exposure to risk from any one currency = ( 100 billion euros - 60 billion euros) + (50 billion euros- 40 billion euros) Net exposure to risk from any one currency = (40 billion euros) + (10 billion euros) Net exposure to risk from any one currency = +50 billion euros.
A bank determines from an analysis on its deposits that account processing and other operating expenses cost the bank $4.15 per month. It has also determined that its non operating expenses on its deposits are $1.65 per month. The bank wants to have a profit margin which is 10 percent of monthly costs. What monthly fee should this bank charge on its deposit accounts? Monthly fee = (operating expense + non-operating expense) + (operating expense + non-operating expense) * profit margin
Monthly fee = (4.15+1.65) + (4.15+1.65) * 0.1 = $6.38
Define, explain, and give an example of project loans
Most risky of all business loans and credit to finance the construction of fixed assets designed to generate a flow of revenue in future periods. The largest risks surrounds projects like oil refineries, power plants, and harbor facilities are the amount of funds involved (often billions of dollars), project delay by cause of weather or a material shortage, interest rates, and the laws and regulations specific to where the project is.
Define, explain and give examples of a mutual fund.
Mutual funds are an investment product that allows its shareholders to receive a pro rata share of any dividends or other forms of income generated by a pool of stocks, bonds, or other securities the fund holds. A mutual fund is a great product for more inexperienced investors as they are managed by experts, hence inexperienced investors won't have to actively research stocks and other securities in exchange for a relatively small expense ratio. An example of a mutual fund is a target date fund such as T Rowe Price 2060 Retirement Fund.
Who are the regulators for the following banks: -National -State (Member) -State (Non-member)
National: OCC State (member): Federal reserve and OFR State (nonmember): FDIC and OFR
Define and give examples of negotiable CD's.
Negotiable CD's are interest-bearing receipts evidencing the deposit of funds in the bank for a specified period of time for a specified interest rate. There are four types of negotiable CDs. Domestic CDs are issued by domestic banks in the US. Euro CDs are dollar denominated CDs issued by banks outside the US. Yankee CDs are issued by foreign banks in the US. Thrift CDs are issued by large savings and loans and other nonbanks in the US.
Suppose Wells Fargo holds assets denominated in euros of 200 billion and liabilities of 120 billion. Its euro purchases in the most recent period amounted to 100 billion while its euro sales reached 80 billion. Calculate the net exposure risk of the currency Net Exposure Risk from any One Currency= (Asset held that are denominated in the currency -- liabilities issued in the currency) + (Volume of the Currency Purchased -- Volume of the currency sold)
Net Exposure= (200 billion -- 120 billion) + (100 billion -- 80 billion)= +100 billion euros
Capital in a financial firm refers to the funds contributed by the owner of a financial institution.
True
Given the following information on a fixed-rate loan, determine the maximum amount that the lender will be willing to provide to the borrower. Loan Term: 30 years, Monthly Payment: $800, Interest Rate: 6%.
No. of Payments = Loan Term (n) = 30 Years or 30 x 12 = 360 times Interest Rate ® = 6% per annum or 6 / 12 = 0.5% per month Monthly Payment = $800 Maximum Amount the lender will be willing to provide to the borrower today = Monthly Payment x PVIFA (0.5%, 360 times) Value of PVIFA (0.5%, 360) can be calculated by using following formula or with the help of excel: PVIFA (0.5%, 360) = [1 - 1/(1+R)n] / R = [1 - 1 / (1+0.005)360] / 0.005 = (1 - 0.166042) / 0.005 = 166.7916 So, the maximum amount the lender will be willing to provide to the borrower today = $800 x 166.7916 = $133,433
Which of the following is not a motive for a merger? A) Reduce Competition B) Tax Benefits C) Market-Positioning Benefits D) Cost Savings. E) None of the answers
None of the answers
Explain the current U.S. regulations require that customers must be told orally that investment products are:
Not insured by the Federal Deposit Insurance Corporation (FDIC). Not a deposit or other obligation of a depository institution and not guaranteed by the offering institution. Subject to investment risks, including possible loss of principal.
Describe what is a mutual fund investment product?
One of the most popular of the investment products. Each share in a mutual fund permits an investor to receive a pro rata share of any dividends or other forms of income generated by a pool of stocks, bonds, or other securities the fund holds. If a mutual fund is liquidated, each investor receives a portion of the net asset value (NAV) of the fund after its liabilities are paid off, based on the number of shares each investor holds
What is one alternative nondeposit source of funds?
One would be the Eurocurrency Market as Eurodollars are dollar-denominated deposits placed in banks outside of the U.S., and Eurocurrency deposits are originally developed in Western Europe to provide liquid funds to swap among institutions or lend to customers.
Define, explain, and give examples of operational risk.
Operational risk focuses on how things are accomplished within an organization and not necessarily what is produced or inherent within an industry. These risks are often associated with active decisions relating to how the organization functions and what it prioritizes.Some examples of operational risk are a bank on the coast of Louisiana is hit by a hurricane and is flooded for 6 weeks, a bank employee acting as a derivatives trader is also the one who writes the reports on profits and losses in derivatives trading at the end of each day, and the banks older computer system breaks down causing a loss of service to customers for 2 weeks.
Suppose the stockholders of Bank A, whose current stock price is $20 per share, agree to acquire Bank B, whose stock is currently valued at $16 per share. If Bank A earned $5 per share of stock on its latest report and B also earned $5 per share, they would have the following P-E ratios:
P-E Ratio = Price per share/Earnings per share *Bank A = $20/$5 = 4 *Bank B = $16/$5 = 3.2
Which of the following is not one of the advantages of a centralized system? a. Efficient liquidity level. b. Enhanced profitability c. Perceive overall problems and opportunities. d. Corporate benefits supersede over individual unit's benefits. e. Pare the short-term funds to finance those current assets.
Pare the short-term funds to finance those current assets.
A bank customer is granted credit for a $2,000 loan at 10% to be repaid in 12 equal installments. If the loan quoted has an add-on rate, what is the approximate annual percentage rate (APR) on the loan?
Payment= (2,000*(1.10/12)) = 183.33 2,000= 183.33* PVAF (2%, 12 Period) R= 17% P/Y=12 PV= -2000 PMT= (2,000*(1+.10))/12= 183.33 R= 17% + (10/12*2) = 17.95% = 18%
6 P's for loans
People Purpose Protection Payment Problem Prospects
Which one is NOT one of the different types of commercial loan a bank, finance company, and lenders may grant? A. Working capital loan B. Self-liquidating inventory loan C. Project loans D. Personal loan
Personal loan
The Bank Merger Act of 1960... A. Requires each merging bank to request approval from its regulatory agency B. Requires the merging banks to conform to one leadership group C. Requires a 5% asset tax upon merger D. All of the statements listed are correct
Requires each merging bank to request approval from its regulatory agency
Peru might enter into a communist regime and the economy has already been impacted by the possibility of becoming Cuba or Venezuela. Several individuals are withdrawing money from banks and many others are transferring money to accounts outside Peru, such as Bank of America. Around 15 billion dollars have been transferred outside of Peru. How this might represent a liquidity problem for the peruvian banking system.
Peruvian citizens are facing a panic period where they don't trust their own currency and the devaluation it might get in the near future. People are exchanging Peruvian Soles to US dollars causing the dollar to rise. Since money is being withdrawn from banks, banks may face a liquidity problem. Also, if the bank only collects a devaluting money, their assets will eventually lose money.
Define, explain, and give examples of predatory lending.
Predatory lending is an abusive practice among some lenders, usually consisting of granting subprime loans to borrowers with below average credit records and charging excessive fees for these lower quality loans. Predatory lending is often associated with home mortgage and home equity loans.
Several types of loans are available from the Fed's discount window, name 2 of them and explain one.
Primary credit, secondary credit, seasonal credit. Primary credit are loans available more short term, usually up to 90 days to financially sound institutions. Secondary credit are loans available at a higher interest rate to institutions not qualifying for primary credit. Used to get an institution back on its feet. Seasonal credit are loans covering longer periods of time than primary credit for small and medium sized institutions that experience seasonal swings in their deposits and loans. An example would be swings that farm banks experience during planting and harvesting time
The First State Bank of Wyoming wants to acquire the First State Bank of Oklahoma. The management of the bank feels that this geographic diversification will increase earnings as new markets will be exploited and new services are offered to all of their bank customers. Which motive for a merger does this most likely reflect? A.Profit Potential B.Risk Reduction C.Rescue of Failing Institution D.Tax and Market-Positioning E.Maximizing Management Welfare
Profit Potential
Define, and explain one of the motives behind the rapid growth of financial-service mergers.
Profit potential is the expectation of stockholders that profit potential will increase once a merger is completed. Stockholders expect that revenues and earnings may rise. In addition, if the management of the acquiring firm is better trained, the efficiency of the merged organization may increase.Risk reduction is the anticipation of reduced cash flow risk and reduced earnings risk. Lower risk may arise because mergers increase the overall size and prestige of an organization, open up new markets with different economic characteristics from markets already served, or make possible the offering of new services.
Which of the following is an example of a nondeposit investment product of the bank? -Proprietary mutual fund -Passbook savings account -NOW account -Time deposit
Proprietary mutual fund
Mark Green is considering buying a new Honda Accord. The purchase price of the car is $21,000 but Mark has a trade-in worth $4500. Mark needs a loan to buy the car and knows that his local bank requires him to put down 10% of the purchase price after the value of the trade-in is considered. Mark also knows that bank will charge 8% for the loan and require monthly payments over the next 4 years. What is the minimum down payment that Mark can make?
Purchase price 21000 Trade In -4500 Net price 16500 Down payment required 16500*10%= 1650
Capital is the cushion against risk of failure.
True
Which of these permitted holding companies to reach for bank acquisitions nationwide? A. Glass-Steagal Act B.Reagel Neal Interstate Banking Act C. Gramm-Leach Biley Act D. Depository Institutions Deregulation and Monetary Control Act
Reagel Neal Interstate Banking Act
Top Kingdom is projecting a net liquidity deficit of $18 million next week partially as a result of expected quality loan demand of $30 million, necessary repayments of previous borrowings of $13 million, planned stockholder dividend payments of $7 million, expected deposit inflows of $29 million, revenues from nondeposit service sales of $20 million, scheduled repayments of previously made customer loans of $26 million, asset sales of $12 million, other operating expenses of $14 million, and money market borrowings of $15 million. How much must Top Kingdom's expected deposit withdrawals be for the coming week?
Refer to formula in discussion post. Group 6, Chap. 11 18= 29+20+26+12+15-30-13-14-7-DW 18=38-DW=38-18=20 DW=20
A bank is considering adding life insurance underwriting to the services it offers. It has estimated that the expected return and standard deviation of its traditional services are 12% and 6% respectively. It has also estimated that the expected return and standard deviation of its new underwriting services are 18% and 10% respectively. The correlation between these services has been estimated to be +.10 and the bank estimates that 90% of its business will be from traditional services and 10% from the new underwriting services. What is the expected standard deviation of the new combination of the services?
Refer to formula. Chapter 14 =12%^2 * 6%^2 + 18%^2 * 10%^2 + 2 * 90% * (1-10%) * .10 * 6% * 10% =5.59%
What type of pricing promotes greater customer loyalty and makes the customer less sensitive to the prices posted on services offered by competing financial firms? A. conditional pricing B. market pricing C. relationship pricing D. consumer pricing
Relationship pricing
What organization forms do international banks use to research their customers? Why are there so many different types of international organizations in the financial Institution sector?
Representative, agency, and branch offices. There are 170 foreign banks in 53 countries operating more than 250 branches and agency offices in US territories in 2009.
Define, Explain, and Give examples of repurchase agreements.
Repurchase agreements are less popular than fed funds and more complex. They are often viewed as collateralized fed fund transactions. Most RP's are transacted on across the fed wire system and take a bit longer to transact because the seller of funds must be satisfied with the quality and quantity of securities provided as collateral.
The Hollingsworth National Bank maintains a clearing balance of $7,000,000 with the Federal Reserve. The Federal Funds rate is currently 5.25 percent. What is the credit this bank will earn over the maintenance period to offset any fees charged this bank by the Federal Reserve? Formula: Reserve Credit = Avg. Clearing Balance x Annualized Fed Funds Rate x 14 days/360
Reserve Credit = 7,000,000 x .0525 x 14/360 Reserve Credit = $14,292
Loans to individuals and families to finance the purchase of new homes are known as: A) Noninstallment loans B) Installment loans C) Residential mortgage loans D) Nonresidential cash loans E) None of the above
Residential mortgage loans
Define, explain, and give an example of restrictive covenants.
Restrictive covenants are parts of a loan agreement, specifying actions the borrower must take or must not take for a loan agreement to remain in force. There are two types, affirmative covenants, and negative covenants. Affirmative covenants require the borrower to take actions, such as periodically filing financial statements with the Lending institution, maintaining insurance cover- age on the loan and on any collateral pledged, and maintaining specified levels of liquidity and equity. While negative covenants restrict the borrower from doing certain things without lender approval, such as taking on new debt, selling assets, acquiring additional fixed assets, paying excessive dividends to stockholders, or participating in mergers.
What is the largest component of capital among thrift institutions, banking's most important competitor? A. Retained Earnings B. Net Income C. Profit D. Loss
Retained Earnings
The Fair Credit Reporting Act lets individuals to: A. Review their credit files for accuracy B. Block their credit score to the public C. Let individuals' self-report their credit. D. All the statements listed are correct
Review their credit files for accuracy
Capital is the funds contributed by the owners of a financial institution
True
Define, explain and give examples of Real Estate Loans:
Secured by a Real Property, land buildings and other structures, and include a short-term loan for construction and land development and longer-term loans to finance the purchase of farmland, homes, apartments, commercial structures, and foreign properties.
A government security dealer requires credit to add new government securities to his security portfolio. What type of loan is this? A.Self-liquidating inventory loan B.Working capital loan C.Security dealer financing D.Revolving line of credit E.None of the above
Security dealer financing
What is the difference between self-liquidating inventory loans and working capital loans?
Self liquidating inventory loans are for inventory buying purposes or raw materials, and it typically has terms of up to 90 days. Working capital loans are also short term financing but they are used for a wider array of costs and terms vary between a day to a year.
Organizational devices used by international banks to take deposits offshore and avoid regulations (such as deposit insurance assessments) are known as: A. International Banking Facility (IBF) B. Export Trading Company (ETC. C. Shell branches D. Subsidiaries E. None of the statements
Shell branches
Define, explain and give examples of Installment loans:
Short term loans to medium term loans, repayable in two or more consecutive payments (usually monthly or quarterly). Such loans are frequently used to buy automobiles, furniture, and home appliances or it can consolidate existing household debt.
Classifications of loans
Special mentions Substandard Doubtful Loss
Inflation has recently increased as the economy recovers from the COVID-19 pandemic. What is one of the main reasons that contributed to the rapid inflation? A. Delta Variant of COVID-19 B. Slowing down demand C. Supply cannot keep up with the demand D. Consumers are bulk buying
Supply cannot keep up with the demand
Article 09 2021-07.21-How to invest as the Delta variant takes hold- CNN-Paul R. La Monica How to invest as the Delta variant takes hold - CNN Posted by Jorge Nunez in WAP:-Class 09-Week 05 (July 20-26, 2021) Read the article " how to invest as the delta variant takes hold" What is Phil Orlando's advice for long term investors? A. Pull out out now to limit losses B. Take advantage of the volatility and add to positions and companies you really like C. Wait until the variants clear to invest D. Invest in crypto currency
Take advantage of the volatility and add to positions and companies you really like
What is Annual Percentage Rate (APR)?
The APR is the internal rate of return (annualized) that equates xpected total payments with the amount of the loan. It takes into account how fast the loan is being repaid and how much credit the customer will actually have use of during the life of the loan.
The primary source for international bank statistics is: A. The FDIC B. The OCC C. The BIS D. The World Bank
The BIS
Capital refers principally to the funds contributed by the owners of a financial institution.
True
What is the Basel Agreement and what are the differences between the three?
The Basel Agreement is an international agreement on new capital standards. The difference between Basel 1, 2, and 3 are that Basel 1 divides various sources of capital into two tiers, Basel 2 set up a system in which capital requirements would be more sensitive to risk and protect against more types of risk than Basel 1, and Basel 3 covers the capital, liquidity, and debt positions of individual international banks and also broader issues associated with global business cycles and systemic risks.
Define, and explain the purpose of the Community Reinvestment Act of 1977.
The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations. It was enacted by the Congress in 1977 (12 U.S.C. 2901) and is implemented by Regulation BB (12 CFR 228). The CRA requires federal banking agencies to assess the institution's record of meeting the credit needs of its entire community, including LMI neighborhoods, consistent with the safe and sound operation of such institution, and take such record into account in its evaluation of an application for a deposit facility by such institution.
How did the Dodd-Frank reforms impact banks
The Dodd-Frank reform regulated the credit requirements of banks in order to ensure that banks were not overextending their lines of credit to people with no or limited ability to pay.
Define, explain and give examples of how Gramm-Leach-Bliley Financial Services Modernization Act created new ways for banks to earn fee-income services.
The GLB Financial Services Modernization Act removed the barriers among banking companies, securities companies and insurance companies that prohibited any one institution from acting as any combination of investment bank, commercial bank and insurance company. Many leading US bank recently either acquired or formed their own investment banking affiliates in order to serve corporations and governments. For example: Citigroup's acquisition of Solomon Brother Smith Barney, Chase Mangattan's purchase of Hambrecht & Quist, and JP Morgan Chase's acquisition of Bear Stearns
Define, explain, and give examples of the Gramm-Leach Biley Act.
The Gramm-Leach Biley Act opened wide the arena for bank-nonbank financial-service combinations.It permits banks, insurance companies, and security firms to acquire each other, increasing opportunities for relatively large financial firms to diversify their product lines and reduce their dependence upon a limited menu of services. An example of this can be seen in Citi Corps merger with Travelers Insurance Inc.
What is the international Banking Act of 1978?
The International Banking Act was a law passed in 1978 that put foreign bank units operating the U.S. under the purview of American regulators and the FDIC. With the Act, all banks, domestic or foreign, operating within U.S. borders became subject to the same uniform regulatory rules and scrutiny..
Capital must be strong enough to reassure borrowers that a lending institution will be able to meet their credit needs even if the economy turns down.
True
Suppose a Bank has $5000 in Tier 1 and $1000 in Tier 2 capital, $100,000 in total assets, what is the bank's core capital or leverage ratio and total capital to total balance sheet asset ratio? Tier 1 Leverage Ratio = Tier 1 Capital/ Total Assets Total capital to total balance sheet asset ratio = (Tier 1 Capital + Tier 2 Capital)/ Total Assets
The banks core capital or leverage ratio is: 5000/100,000= 5% and the banks total capital to total balance sheet assets ratio (5000+1000)/100,000= 6000/100,000= 6%
Define and explain what are the most common sources of repayment for business loan.
The business borrower's profits or cash flow, Business assets pledged as collateral behind the loan, a strong balance sheet with ample amounts of marketable assets and net worth and guarantees given by the business such as drawings on the owners personal property to backstop the loan.
What are some tools for reducing currency risk?
The currency option gives a buyer the right to deliver or take a designated currency. Currency swap lets two borrowers have money denominated in different currencies.
What is the customer relationship doctrine, and what are its implications for fund-raising by lending institutions?
The customer relationship doctrine states that a lending institution's first priority is to extend loans to its customers. Thus, granting of loans takes precedence over funds sourcing. Once loan decisions are made the lender must ensure that adequate funding is available to meet the loan commitments. A caveat to the doctrine is that the proposed loans are to top quality borrowers from whom the lender expects to earn net positive returns. Thus, the returns from lending must exceed the costs of borrowing and the borrower must meet the lenders minimum quality standards. In the following doctrine, a lender may lose sight of quality standards and make poor quality loans hurried lending and funding decisions may also lead to poor choices in funds sourcing, where the institution may have to borrow funds at higher cost to meet the lending outflow requirements.
While most consumer loans allow the customer to pay off the interest owed gradually over the life of a loan, the discount rate method requires A. The customer to pay interest up front B. The lender to waive interest fees C. The customer to pay interest every month D. The customer to pay no interest but is charged fees instead
The customer to pay interest up front
Define, explain, and give an example of transaction accounts
Transaction accounts are deposit accounts whose primary purpose is to make payments for purchases of goods and services. These accounts are most commonly known as checking accounts and they serve both as a payment method for clients through the use of debit cards as well as a place to store and receive money. I am an owner of this type of account since I have a checking account and a debit to which I use to make purchases as well as receive my direct deposit from my employer.
A bank more liquid is a bank less profitable
True
A joint venture is used when a bank is concerned about risk exposure in foreign markets, they attach onto another firm who has experience in that market.
True
A lender that makes a loan to a minor would be violating the Capacity C of lending.
True
Define and explain what are the characteristics that a lender needs to look for when evaluating a consumer loan application?
The key points when evaluating a consumer loan application are Character and purpose, income levels , deposit balances, employment and residential stability and pyramiding of debt.
A loan is the lending of money by one or more individuals, organizations, to other individuals or organization.
True
Which of the following is not a factor that determines the particular nondeposit funds sources chosen by management? A. The relative cost of each source B. The risk or dependability of each funds source C. The location of each funds source D. The length of time funds will be needed
The location of each funds source
Define and explain the difference between Thrift CDs and Euro CDs.
Thrift CDs are mainly issued by large savings and loans and other nonbanks in the U.S, while Euro CDs are dollar denominated CDs issued by banks that are outside of the U.S.
What factors should a financial firm consider when choosing a good merger partner?
The prime motive for mergers among financial service business is to maximize the wealth of the shareholders as well as to gain market share of the industry. Factors that should be looked upon is improving operational efficiency and eliminating duplicated financial firms with similar operations by merging into one entity. Also, a favorable partner is diversification achieved through spreading across geographies to reach new customers.
What forms of capital are in use today? What are the key differences between the different types of capital?
The principal forms of bank capital include common and preferred stock, surplus, undivided profits, equity reserves, subordinated notes and debentures, minority interest in consolidated subsidiaries, and equity commitment notes. Common stock represents the par value paid by owners, while surplus is the amount paid over par value for the stock when it is first sold. Preferred stock is a special type of ownership where dividends are fixed, and stockholders generally do not have a vote on major activities undertaken by the firm. Retained earnings or undivided profits are the accumulated earnings of the firm kept reinvesting back in the company. Subordinated notes and debentures are long term debt instruments that don does not represent ownership claims. Equity reserves represents the funds set aside for contingencies, such as legal action against the institution, reserve for dividend expected to be paid but not yet declared or shrinking fund to retire stock or debt in the future. Minority interests in consolidated subsidiaries are one in which financial firms holds ownership shares in other businesses. Equity commitment notes are one in which debt securities are repaid from the sale of stock.
FICO scores are based on each of these types of information except: A. The borrower's payment history B. The prospective borrower's income level C. The nature of new credit being requested D. The length of a prospective borrower's credit history
The prospective borrower's income level
Which of the following is deposit to attract funds from customers who wish to set aside money in anticipation of future expenditures or for financial emergencies. a.Time deposits b.Passbook saving deposits c.Retirement savings deposits d.Thrift deposits
Thrift deposits
Define and explain the CAMELS rating.
The quality of loans is a major component of asset quality but is only one dimension of a lender's performance that is rated under the Uniform Financial Institutions Rating System. Numerical ratings are assigned based on examiner judgment about capital adequacy, asset quality, management quality, earnings record, liquidity position, and sensitivity to market risk exposure. Capital Adequacy Examiners assess institutions' capital adequacy through capital trend analysis. Examiners also check if institutions comply with regulations pertaining to risk-based net worth requirements. Asset Quality Asset quality covers an institutional loan's quality, which reflects the earnings of the institution. -involves rating investment risk factors the bank may face and balance those factors against the bank's capital earnings. -how the stability of the bank when faced with particular risks Management Management assessment determines whether an institution is able to properly react to financial stress -reflected by the management's capability to point out, measure, look after and control risks of the institution's daily activities. Earnings A bank's ability to produce earnings to be able to sustain its activities, expand, remain competitive are a key factor in rating -Examiners determine this by assessing the bank's earnings, earnings' growth, stability, valuation allowances, net margins, net worth level, and the quality of the bank's existing assets. Liquidity To assess a bank's liquidity, -examiners look at interest rate risk sensitivity, availability of assets that can easily be converted to cash, - depends on short-term volatile financial resources Sensitivity Sensitivity covers how particular risk exposures can affect institutions. Examiners assess an institution's sensitivity to market risk by monitoring the management of credit -examiners are able to see how lending to specific industries affects an institution. -These loans include agricultural lending, medical lending, credit card lending, and energy sector lending.
Define, explain and give examples of the goals for international banking regulation.
The reasons for international banking regulation are basically the same as for domestic banking regulations. The universal concern is to protect the safety of depositors funds, which translates into laws restricting risk exposure and specifying minimums of capital required. Regulation also seeks to prevent criminal activity, and to promote stable growth in money and credit to avoid threats to economic health of individual nations. For example, since 1991 Foregin banks in the US need to be approved for FDIC insurance in order to accept retail deposits of less than $100,000.
A time deposit that allows for a periodic upward adjustment to the promised rate is called a step-up CD.
True
A manager that looks at deposit increases and decreases and loan increases and decreases among other things to measure their liquidity position is using: -The sources and uses of funds approach -The structured funds approach -The liquidity indicator approach -Signals from the marketplace
The sources and uses of funds approach
How does the sources and uses of funds approach help a manager estimate a financial institution's need for liquidity?
The sources-and-uses-of-funds approach estimates future deposit inflows and estimated outflows of funds associated with expected loan demand and calculates the net difference between these items in each planning period.
Which one of the following statements is wrong about inflation? Article 08 2020-07-21-How Inflation Threatens the Recovery- The Wallstreet Journal - Greg Ip https://www.wsj.com/articles/how-inflation-threatens-the-recovery-11626876000 A. Inflation can be both beneficial to economic recovery and, in some cases, negative. B. If inflation is controlled and at reasonable levels, the economy may prosper. C. The Consumer Price Index (CPI) measures an economy's inflation and includes "basket" of basic goods and services, such as food, energy, clothing, and housing. D. The standard measurement of inflation is the government's House Market Index
The standard measurement of inflation is the government's House Market Index
Define, explain, and give an example of conditional pricing
This is where a depository sets up a schedule of fees in which the customer pays a low fee or no fee if the deposit balance remains above some minimum level, but faces a higher fee if the average balance falls below that minimum. Meaning the customer pays a price conditional on how they use a deposit account. The pricing techniques vary based on three factors: 1) the number of transactions passing through the account (e.g. number of checks written, deposits made, wire transfers, stop-payment orders, or notices of insufficient funds issued) 2) The average balance held in the account over a designated period (usually per month) 3) the maturity of the deposit in days, weeks, months, or years.
A trust department's activities often center around establishing a fiduciary relationship with the customer.
True
Explain and define BASEL 1. BASEL 2 AND BASEL 3
There are 3 main pillars for managing capital requirements. Pillar 1 improves on the policies of Basel I by taking into consideration operational risks in addition to credit risks associated with risk-weighted assets (RWA). It requires banks to maintain a minimum capital adequacy requirement of 8% of its RWA. Basel II also provides banks with more informed approaches to calculate capital requirements based on credit risk, while taking into account each type of asset's risk profile and specific characteristics. 1. The standardized approach is suitable for banks with a smaller volume of operations and a simpler control structure. It involves the use of credit ratings from external credit assessment institutions for the evaluation of the creditworthiness of a bank's debtor. 2. The internal ratings-based approach is suitable for banks engaged in more complex operations, with more developed risk management systems. There are two IRB approaches for calculating capital requirements for credit risk Pillar 2 was added owing to the necessity of efficient supervision and lack thereof in Basel I, pertaining to the assessment of a bank's internal capital adequacy. Under Pillar 2, banks are obligated to assess the internal capital adequacy for covering all risks they can potentially face in the course of their operations. The supervisor is responsible for ascertaining whether the bank uses appropriate assessment approaches and covers all risks associated. Pillar 3 aims to ensure market discipline by making it mandatory to disclose relevant market information. This is done to make sure that the users of financial information receive the relevant information to make informed trading decisions and ensure market discipline.
All loans are subject to review
True
All six dimensions of performance are combined into one overall numerical rating, referred to as the CAMELS rating
True
An agreement where one party agrees to sell T-bills to another party and at the same time agrees to buy them back at a set price is known as a repurchase agreement.
True
Define, explain and give some examples of what the profit potential is.
To most authorities in the field the recent upsurge in financial-service mergers reflects the expectation of stockholders that profit potential will increase once a merger is completed. If the acquiring organization has more skillful management than the firm it acquires, revenues and earnings may rise as markets are more fully exploited and new services developed. This is especially true of interstate or international mergers where many new markets are entered, opening up greater revenue potential. One of the most dramatic examples of profit potential as a merger and acquisitions motive has been happening in China with the unfolding of the 21st century. Several of the world's leading banks have been forecasting sharply increased revenues from carving out a portion of China's vast financial services marketplace. With a population of over a billion, most of whom are "underbanked" but hold estimated savings of more than $1.5 trillion, China seems to offer enormous profit potential from sales of credit cards, business loans, retirement plans, and insurance services.
The fundamental purposes of regulating bank capital cited in the textbook include which of the following? A To limit the risk of bank failures. B To preserve public confidence in banks. C To limit losses to the federal government arising from insurance claims. D All of the above.
To preserve public confidence in banks.
Paul Carter requests an automobile loan of $15,000 that will be repaid over the next four years in monthly repayments. The First National Bank tells Mr. Carter that his total finance charges will be $4675.20. What is the APR on this loan?
Total Finance Charges= 4675.20 Loan Amount= 15000 Total amount paid in 4 years= $4675.2+ $15000= 19675.2 Monthly Payment= $19675.2/48 = $409.9 If "i" is the APR then, using the PV of annuity equation (PV=A*((1-(1+r)^n/r)), we get 15000= 409.9*((1-(1+i/12))^-48)/(i/12)) V= 409.9*((1-(1+(i/12))^-48)/(i/12))-15000= 0 When i = 12% V= 565.526 When i = 13% V= 279.1003 When i = 14% V= 0.104 Since value at i = 14% is approximately zero, APR is 14%
What is one of the oldest services offered by a depository institution? A. Transaction Deposits B. Online Banks C. Internet Banks D. Chrome Banks
Transaction Deposits
An agreement where one party agrees to sell T-bills to another party and at the same time agrees to buy them back at a set price is known as repurchase agreement.
True
What is the UFIRS?
Uniform Financial Institution Rating System. 1 is the best, 5 is the worst. Measures CAMELS
Define, explain and give examples of when a foreign bank is referred to as a subsidiary.
When an international bank acquires majority ownership of a separate, legally incorporated foreign bank incorporated under host-country rules, the foreign bank is referred to as a subsidiary. Because a subsidiary possesses its own charter and capital stock, it will not necessarily close down if its principal owner fails. Similarly, a subsidiary may be closed without a substantial adverse effect on the international bank that owns it (as happened in the Philippines when a subsidiary of New York's Citicorp closed many years ago). In the case of subsidiaries, the legal obligation of a parent banking firm is restricted to the amount of capital the parent has invested in each subsidiary. Subsidiaries may be used instead of branches because local regulations may prohibit or restrict branching or because of tax advantages. Also, many international banks prefer to acquire an existing firm over-seas that already has an established customer base. Subsidiaries typically consolidate their financial statements with their parent company so that home-country rules usually take precedence over host-country rules.
A commercial bank decides to expand its service menu to include investment banking as well as offering traditional lending and deposits services. The expected return and risk associated with these two sets of service offerings are as follows: Expected returns - traditional services 3.5% Expected returns - investment banking services 10.75% Standard deviation - traditional services 2.5% Standard deviation - investment banking services 8.25% Correlation of returns between two services +0.25 Proportion of revenue - traditional services 65% Proportion of revenue - investment banking services 35%
Where Rts is proportion of traditional services E(rts) is expected returns of traditional services Rns is proportion of investment banking services E(rns) is expected returns of investment banking services E(r) = 0.65 * 0.035 + 0.35 * 0.1075 E(r) = 0.0604 E(r) = 6.04 % Where Wt is proportion of traditional services Sigma t is standard deviation of traditional services Ws is proportion of investment banking services Sigma s is standard deviation of investment banking services Rts is correlation of returns between traditional and investment banking services S.D = sqrt (0.65^2 * 0.025^2 + 0.35^2 * 0.0825^2 + 2 * 0.25 * 0.65 * 0.35 * 0.025 * 0.0825) S.D. = 0.0365 S.D. = 3.65% By transitioning from an all traditional services approach to the incorporation of investment banking services, based on these estimates, the expected returns will go from 3.5% to 6.04% and the standard deviation of returns will go from 2.5% to 3.65%
_______ provide businesses with short-run credit, lasting from a few days to about one year. A. Self-liquidating loans B. Working capital loans C. Interim construction loans D. Asset-based loans
Working capital loans
Define, explain, and give an example of a working capital loan?
Working capital loans provide businesses with short-run credit, lasting from a few days to about one year. Working capital loans are most often used to fund the purchase of inventories in order to put goods on shelves or to purchase raw materials. For example, a supermarket would get this working capital loans to buy the fruits and buy the loan off when they sell all the fruits for profits.
What is GAP based on? a. Current and expected deposit inflows b. Current and projected demand and investments c. The bank desire to make...minus d. all choices stated
all choices stated
What changes would need to be to have Elon Musk accept crypto currency as payment? A. Become more volatile B. Make more Coins C. Centralize the coins D. become less fuel reliant
become less fuel reliant
Which of the following is less popular than fed feds and more complex, and often viewed as collateralized fed funds transactions? A. liability contracts B. collateralized loans C. repurchase agreements D. borrower's contract
repurchase agreements
Define and give examples of investment products.
stocks, bonds, mutual funds, annuities, and similar financial instruments that seemed to promise better returns than are available on many conventional deposits. As the new century began many depositors also withdrew their money to invest in real estate to keep up with inflation. Moreover, the passing years have ushered in growing public concern over the lack of adequate savings for the retirement years, given today's longer average life spans. Then, too, yield curves have tended to be positively sloped in recent years, suggesting that longer-term assets, such as stocks and bonds, might ultimately deliver higher returns than relatively short-term deposits and build personal savings faster.
What type of loan classification is for protection, is adequate due to weaknesses in collateral or in the borrower's repayment abilities? a.Loss loans b.Doubtful loans C.real estate loans D.substandard loans
substandard loans
One of the main reasons the economy has improved is because:
the levels of consumer spending have increased which has been provoked by March's pandemic relief package
First National Bank reports the following items on its latest balance sheet: allowance for loan and lease losses = $42 million; undivided profits = $81 million; subordinated debt capital = $3 million; common stock and surplus = $27 million; equity notes = $2 million; minority interest in subsidiaries = $4 million; mandatory convertible debt = $5 million; identifiable intangible assets = $3 million; and noncumulative perpetual preferred stock = $5 million. How much does the bank hold in Tier 1 capital? In Tier 2 capital? Does the bank have too much Tier 2 capital?
tier 1 capital = common stock + undivided profits + perpetual preferred stock + interest in subsidaries = 27 + 81 + 5 + 4 = 117 million tier 2 capital = allowance of lease losses + debt capital + convertiable debt + equity notes + intangiable assets = 42 + 3 + 5 + 2 + 3 = 55 million No, tier 2 capital can be as high as 100% of tier 1 of capital