finc 3700
Small banks control about 70 percent of banking industry assets
False
The dollar's value increased when the Fed cut interest rates in late 2007.
False
The majority of banks are nationally chartered and insured by the FDIC.
False
The ongoing accumulation of foreign currency reserves by foreign monetary authorities contributed to the dollar's drop in 2006.
False
Net loans and leases plus_____________________plus___________________equals gross loans and leases
Unearned income; the allowance for loan and lease losses
New York is global center of foreign exchange trading with the largest daily volume of currency trading.
False
The allowance for loan and lease losses is bank management's estimate of the amount of gross loans and leases that will not be repaid to the bank
True
What is the difference between a loan commitment and a letter of credit?
A loan commitment is a promise made by a bank that allows a customer to borrow up to a specified maximum for the remaining time of the commitment. The bank normally charges a commitment fee and a fee for any unused portion of this commitment. It is expected that the customer will borrow (draw down) at least a portion of this commitment. Letters of credit are insurance policies sold fora fee that state that the bank will pay in event of nonpayment by the party that draws the line of credit. It is not expected that bank funds will be necessary to cover the letter except in unusual circumstances.
You can buy or sell the yen spot at 102 yen to the dollar. you can buy or sell the yen one-year forward at 104 yen to the dollar. If the annual interest rates are 4 percent, what must the approximate one-year Japanese interest rate if interest rate parity holds? A. 6.04% B. 3.2% C. 2.75% D. 4.73% E. 6.8%
A. 6.04% 1+.04=(1/(1/102))(1+iJ)*1/104 solve for iJ
Plains National Bank has interest income of $250 million and interest expense of $110 million, non-interest income of $40 million and non-interest expense of $65 million on earning assets of $3,900 million. What is Plains' overhead efficiency ratio? A. 61.54 % B. 44.00% C. 9.23% D. 42.45 % E. 37.46 %
A. 61.54% (40/65)=61.54%
Bank A has a higher ROA than Bank B. Both banks have similar interest income to asset ratios and non interest income to asset ratios.We know that I. Bank A has a higher profit margin than bank B II. Bank A has a higher AU ratio than bank B III. Bank A must have a higher PLL/OI ratio
A. Bank A has a higher profit margin than Bank B
The provisions of banking services to other banks, such as check clearing, foreign exchange trading, and so forth, is an example of A. correspondent banking B. Trust services C. Off-balance sheet assets D. Economies of scope E. Credit derivatives
A. Correspondent banking
The___________________Measures the net flows of imports and exports of goods, services, income payments, and unilateral transfers A. Current accounts B. Capital account C. Change in official reserves D. Statistical discrepancy E. Basic balance account
A. Current account
If a firm has more foreign has more foreign currency assets than liabilities, and no other foreign currency transactions, it has A. Positive net exposure B. negative net exposure C. A fully balanced position D. Zero net exposure
A. Positive net exposure
The first bank of the Ozarks generates $0.0155 dollars of net income per dollar of assets and it has a profit margin of 12.25 percent. how much operating income per dollar of total assets does first bank generate? A. 12.5% B. 12.65% C. 12.75% D. 12.85% E. 12.95%
B. 12.65%
A U.S. bank has 120 million pounds in loans to corporate customers and has 70 million pounds in deposits it owes to customers with the same maturity. The bank has also sold 20 million pounds forward. The bank's net exposure is A. 210 million pounds B. 30 million pounds C. 70 million pounds D. 170 million pounds E. 190 million pounds
B. 30 million pounds
A bank has interest income to total assets ratio of 5.45 percent and has noninterest income of $45 million and total assets of $700 million. What is the bank's asset utilization ratio? A. 5.45% B. 6.43% C. 9.67% D. 15.02% E. 11.88 %
B. 6.43% .0545 + (45 million/700 millioin)=6.43%
A negotiated OTC agreement to exchange currencies at a fixed date in the future but at an exchange rate specified today is a A. Currency swap agreement B. Forward foreign exchange transaction C. Currency futures contract D. Currency options contract E. Spot foreign exchange transactions.
B. Forward Foreign exchange transactions
Bank assets tend to have ____________Maturities and ________________Liquidity than/as bank liabilities A. longer, greater B. Longer; lower C. shorter; greater D. shorter; lower E. Equal; Equal
B. Longer; Lower
A contingent item that may eventually be placed on the right-hand side of the balance sheet or expensed on the income statement is a(n) A. Loan commitment B. Off-balance-sheet liability C. Off-balance-sheet asset D. Net charge-off E. Loan sold without recourse
B. Off-balance-sheet liability
Nationally chartered banks receive chartering and merger approval from the A. Federal deposit insurance corporation B. Office of comptroller of the currency C. Federal reserve system D. Office of thrift supervision E. Any of the options may grant a charger and approve a merger.
B. Office of comptroller of the currency.
A U.S. bank borrowed dollars, converted them to euros, and invested in euro-denominated CDs to take advantage of interest rate differentials. To cover the currency risk the investor should A. Sell dollars forward. B. Sell Euros forward. C. Buy euros forward D. Sell euros spot E. None of the options
B. Sell euros forward.
A current account deficit implies that A. More goods and services are exported than are imported B. The country borrowed from abroad more than it loaned and/or sold off some of its assets C. There is excessive consumption of foreign financial assets. D. The value of the dollar will rise E. The country is going bankrupt
B. The Country borrowed from abroad more than it loaned and/or sold off some of its assets.
Core deposits are deposits that are A. At the bank solely for the interest rate earned. B. Very stable funds sources C. Typically for larger denominations than hot money sources. D. Very frequently turned over.
B. very stable funds sources.
A U.S. investor has borrowed pounds, converted them to dollars, and invested the dollars in the United States take advantage of interest rate differentials. To cover the currency risk the investor should. A. Sell pounds forward. B. Buy dollars forward. C. Buy pounds forward. D. Sell pounds spot E. None of these options
Buy pounds forward.
Which one of the following is the definition of the NIM? A. (net interest income - Net interest income)/Earning assets B. Net interest income/Interest bearing liabilities C. (interest income-interest expense)/Earning assets D. (interest income-interest expense) /Interest-bearing liabilities E.(interest income /earning assets)-(interest expense/interest-bearing liabilities)
C. (Interest income - Interest expense)/earning assets
A bank has an interest rate spread of 150 basis points on $30 million in earning assets funded by interest-bearing liabilitites. However, the interest rate on its assets is fixed and the interest rate on its liabilities is variable. If all interest rates go up 50 basis points, the bank's new pretax net interest income will be_____ A. 60,000 B. 450,000 C. 300,000 D. 250,000 E. 175,000
C. 300,000 (1.5%-.5%) X 30 million
Which of the following could result in a negative NIM? A. growth in net interest income B. Lower non-interest expense C. Decline in net interest income D. Higher non-interest income E. Positive net interest spread
C. Decline in net interest income
Uniform principles, standards, and report forms for depository institutions are prescribed by the A. FDIC B. Federal Reserve. C. Federal financial institutions Examination council. D. Office of comptroller of currency
C. Federal Financial institutions examination council.
Uniform principles, standards, and report forms for depository institutions are prescribed by the A. FDIC B. Federal Reserve C. Federal Financial Institutions Examination council. D. Office of comptroller of currency
C. Federal financial institutions examination council.
The largest source of income at a typical bank is A. interest income on securities held for sale. B. Interest income on securities held for investment. C. Interest income on loans and leases. D. Non-interest income. E. Dividends or stocks
C. Interest income on loans and leases.
State chartered banks____________________be members of the Federal Reserve System and nationally chartered banks_________________be members of the Federal Reserve System. A. Must; May B. Must; Must C. May; Must D. May; May
C. May; Must
In comparison to small banks, larger banks typically have A. More equity capital B. More core deposits. C. More off-balance-sheet activities. D. Larger net interest margins E. all of the options
C. More off-balance-sheet activities
Bank's net foreign exposure is equal to A. Net foreign assets B. Net FX bought C. Net foreign assets + Net FX bought D. Assets - liabilities E. None of these options
C. Net foreign assets + Net FX bought
If the dollar is initially worth 120 yen and then the exchange rate changes so that the dollar is now worth 115 yen, the value of the yen has depreciated.
False
Lonas to consumers and to individuals are jointly termed C&I loans on a bank's balance sheet.
False
The spot rate for the Argentine peso is $.36 per perso. Over the year, inflation in Argentina is 10 percent and U.S. inflation is 4 Percent. If purchasing power parity holds, at year-end the exchange rate should be approximately _______________dollars per peso. A. .2987 B. .3614 C. .2875 D. .3384 E. .3015
D. .3384
At the beginning of the year the exchange rate between the brazilian real and the U.S. dollar was 2.2 reals per dollar. over the year, Brazilian inflation was 12 percent and U.S. inflation was 4 percent. If purchasing power parity holds, at year-end the exchange rate should be approximately ________________________dollars per real. A. 2.3913 B. .4895 C. 2.8498 D. 0.4181 E. .3440
D. .4181 (4%-12%)= (Sus/Brazil(t+1) -.4545)/.4545 -->Sus/Brazil (t+1) = .4181
Equity capital at commercial banks in 2013 comprised about ____________________of liabilities and equity. A. 25 percent B. 21 percent C. 55 percent D. 11 percent E. 5 percent
D. 11 percent
Cash in the process of collection is A. A deposit at another financial institution. B. A fed funds transaction. C. Checks the bank owes other institutions that have not yet been paid. D. Checks that the bank is owed but has not yet collected. E. Equity capital
D. Checks that the bank is owed but has not yet collected.
If interest rate parity holds and the annual German nominal interest rate is 3 percent, and the U.S. annual nominal rate is 5 percent and real interest rates are 2 percent in both countries, then inflation in Germany is about ________________than the U.S. A. 1 percent higher B. 2 percent higher C. 1 percent lower D. 4 percent lower E. 2 percent lower
E. 2 percent lower
Oceanside bank converts a dollar of equity into 10 cents of net income and has $9.5 in assets per dollar of equity capital. Oceanside also has a profit margin of 15 percent. What is Oceanside's AU ratio? A. 1.05% B. 3.55 % C. 5.56 % D. 6.45 % E. 7.02 %
E. 7.02% (.10/9.5)/.15=7.02 %
An investor sarts with 1 million euros and converts it to 694,500 pounds, which is then invested for one year. In a year the investor has 736,170 pounds, which she then converts back to euros at an exchange rate of .68 pounds per euro. the annual euro rate of return earned was. A. 7.55 percent B. 6 percent C. 7.45 percent D. 8.13 percent E. 8.26 percent
E. 8.26 percent {(736,170 pounds/.68)/1 million Euros} -1
An investor starts with $1 million and converts it to .75 million pounds, which is then invested for one year. In a year the investor has .7795 million pounds, which she then converts to dollars at an exchange rate of .72 pounds per dollar. The U.S. dollar annual rate of return earned was A. 4.97 percent B. 5.27 Percent C. 6.45 percent D. 7.69 percent E. 8.26 percent
E. 8.26 {(.7795 million pounds/.72)/$1 million} -1 = 8.26%
Purchased funds include all but which of the following? A. Brokered deposits B. Wholesale CDs C. Fed funds purchased D. Repurchase agreements E. Demand deposits
E. Demand deposits
The largest market available for purchased funds is the A. Wholesale CD market B.Eurodollar deposit market C.Banker's acceptance market D. Discount window purchases E. Fed funds market
E. Fed funds market
The Large U.S. current account deficit implies that A. U.S. interest rates are too high B. The value of the dollar is too weak C. Dollar foreign currency reserves at Asian central banks are too low D. The presidential administration desires to improve growth of overseas economies. E. The United States must rely on foreigners to be willing to invest in the United States.
E. The United States must rely on foreigners to be willing to invest in the United States.
Banks generally pay higher interest rates on NOW accounts than on MMDAs
False
Composite rating 5 (CAMELS) is the rating for the soundest financial institutions
False
If the United States has inflation of 3 percent and Europe has inflation of 5 percent, the value of the Euro should increase, ceteris paribus
False
Which of the following conditions may lead to a decline in the value of a country's currency I. Low interest rates II. High inflation III. Large current account deficit
High inflation, Large current account deficit
Which of the following are likely to lead to an appreciation of the U.S. dollar (Ceteris Paribus) I. Higher real U.S. Interest rates II. Lower U.S. inflation III. Higher nominal U.S. interest rates
Higher real U.S. interest rates Lower U.S. Inflation
If a bank has more purchased funds than the average bank, you would not be surprised to see a higher than average__________ratio.
Interest expense ratio
Discuss the major differences between large banks and small banks. which have had higher ROAs? why?
Large banks tend to have lower equity %, easier acces to capital markets; hence they often hold a lower percentage of liquid securities.More business loans; business borrowers often have greater bargaining power so profitability on these loans can be low. Lower interest rate spreads, higher salaries, more noninterest income (and expenses) more diversification. More aggressive management. The picture emerges that smaller banks tend to operate in less-competitive markets and are more conservatively managed. In terms of profitability, large banks will tend to have lower ROAs but may often have higher ROEs when banks are performing well because they take more risks and have less equity. In periods of poorer bank performance, the conservative tactics of smaller banks are likely to result in better ROA and ROE than large banks
A construction firm cannot obtain the necessary permits to begin building a shopping mall until it can show it either has or will have the necessary funding to complete the project. The firm may ask a bank for which of the following to allow it to obtain the permits? I. Commercial letter of credit II. Loan commitment III. Credit line IV. Repurchase agreemeent
Loan commitment or credit line
Why are loans such a high percentage of total assets at the typical bank? What four broad classes of loans to banks engage in?
Loans are the highest earning asset on the bank's balance sheet.In order to compete and reward its shareholders, banks must invest heavily in their highest returning asset. Prior to deregulation and increased competition, banks held much lower percentages of loans. The four major loan categories are commercial and industrial loans (Loans to businesses), mortgage loans, consumer loans, and ubiquitous "other category.
The largest center for trading in foreign exchange is A. New York B. London. C. Tokyo D. Hong Kong E. Geneva
London
Interest-bearing retail accounts with limited checking features designed to compete with money market mutual fund investments are called_____________ A. NOWs B. Retail CDs C. MMDAs D. Special savings deposits E. Negotiable CDs
MMDAs
What are the differences between purchased funds and core deposits.
Purchased funds are very sensitive to the interest rate earned. They are usually high denomination (100,000 and over) and have high turnover, particularly as other investment opportunities become ore attractive. Core deposits are usually retail deposits made primarily by individuals. They are usually low-denomination, low turnover accounts that are not very interest-sensitive and are at the bank for convenience reasons. They are normally a less-volatile, low-interest cost source of funds to the bank transaction accounts can be quite expensive to the bank; many banks now pass on these costs to the customer via fees.
What is the difference between net charge-offs (sometimes called write-offs) and the provision for loan loss? What is the purpose of the provision for loan loss account?
The PLL account is for forward looking; it is management's estimate of the loans that will default in the upcoming period. NCOs are records of actual loans that defaulted. The PLL is used to reduce current earnings estimates so that interest income (accrual based) more accurately reflects the actual cash that is likely to be received. The allowance account on the balance sheet provides a cushion against equity write-downs if loans default.
How is the negotiable feature of wholesale CDs improved banks' ability to manage their liquidity?
Time deposits carry a substantial interest penalty for early withdrawals (usually forfeiting all current period interest). This penalty would make them unsuitable investments for corporations that are unsure whether the funds will be needed prior to maturity. The Bank can also withhold the funds prior to maturity if the bank cannot immediately provide the funds. The ability to resell the CD to a third party without any interest penalty encourages corporate use of wholesale CDs, giving banks another source of funds that can be tapped via a deposit broker if needed.
Most non-financial firms would never hold as much of their assets in safe liquid securities as banks do. Why do banks maintain such high percentage of investment in securities?
To answer this we must look at the right-hand side of the balance sheet as well as the left side. A major portion of bank funds is raised through short-term deposits that people can choose to withdraw at short notice. Consequently, banks must plan for withdrawals and keep a significant portion of their assets in cash or near cash investments. Likewise, Banks must have cash available for loan customers and to honor previous loan commitments.So even though much of the investment portfolio earns only low rates of interest, banks must maintain liquid reserves to meet loan demand and deposit withdrawals.
A U.S. firm agrees to import textiles from Hong Kong and pay in 90 days. The invoice requires payment in Hong Kong dollars. The U.S. importer could hedge this currency risk by buying the Hong Kong dollar forward.
True
A country with lower interest rates than another country is likely to see its currency appreciate if parity holds.
True
A wholesale bank is one that focuses its business activities on commercial banking relationships
True
Banks have higher leverage than most manufacturing firms.
True
C&I loans are loans to businesses used to finance capital needs, equipment purchases, and plant expansions
True
If a foreign currency appreciates, that country's goods and services become relatively more expensive for U.S. buyers.
True
In 2010, The notional value of bank off-balance-sheet activites was greater than bank industry assets
True
In ratio analysis, the profit margin times the asset utilization ratio equals return on assets.
True
Loans are the major item on a bank's balance sheet, and they generate the largest amount of revenue
True
Loans comprise the single largest asset category for a bank
True
MMDAs are a type of savings account that has some limited checking features. These accounts were designed to help banks compete with MMMFs
True
On average, bank liabilities tend to have shorter maturities and greater liquidity than bank assets.
True
Rate-sensitive funding sources at a bank are termed core deposits.
false
Banks have an average total debt ratio of about 90 percent
true
If you can convert 150 Swiss Francs to $90, the exchange rate is 1.67 francs per dollar
true