FIN-3110-Test 2
Following is the information listed below for Carter State Bank. What is the bank's ROA? Net income$55 millionTotal operating revenue$650 millionTotal assets$4,055 millionTotal equity capital$350 million -16.03 percent -15.71 percent -8.46 percent -1.36 percent
-1.36 percent
Following is the information for Carter State Bank. What is the bank's Equity Multiplier? Net income$55 millionTotal operating revenue$650 millionTotal assets$4,055 millionTotal equity capital$350 million -73.73 -16.3 -11.59 -6.24
-11.59
Following is the information listed below for Carter State Bank. What is the bank's ROE? Net income$55 millionTotal operating revenue$650 millionTotal assets$4,055 millionTotal equity capital$350 million -8.46 percent -1.36 percent -16.03 percent -15.71 percent
-15.71 percent
Following is the information for Carter State Bank. What is the bank's asset utilization rate? Net income$55 millionTotal operating revenue$650 millionTotal assets$4,055 millionTotal equity capital$350 million -15.71 percent -8.46 percent -16.03 percent -1.36 percent
-16.03 percent
Which of the following is NOT a characteristic commonly assessed by life insurance regulators to detect any problems in a life insurance company? -All of these are assessed by regulators. -liquidity of the asset portfolio -return on investment -relative size of operating expenses
-All of these are assessed by regulators.
Which of the following statements is incorrect with respect to the Financial Services Modernization Act (aka Gramm-Leach-Bliley Act) of 1999? -It enabled commercial banks to more easily pursue securities and insurance activities. -All of these options are correct. -It expanded the Glass-Steagall Act. -It allowed securities firms and insurance companies to acquire banks. -It required commercial banks to have a strong rating in community lending in order to pursue additional expansion in securities and other nonbank activities.
-It expanded the Glass-Steagall Act.
Banks can reduce their credit risk by restructuring their asset portfolio to contain fewer ____ and more ____. -None of these are correct. -Treasury bonds; municipal bonds -Treasury bonds; commercial loans -Treasury bonds; corporate bonds
-None of these are correct.
____ effectively reallocates a portion of an insurance company's return and risk to other insurance companies. -Cash flow underwriting -Universal insurance -Factor insurance -Reinsurance
-Reinsurance
____ loans are primarily used to finance the purchase of fixed assets. -Informal line of credit -Working capital -Term -Revolving credit
-Term
In a standby letter of credit, a bank agrees to -provide a customer with funds up to a specified maximum amount over a specified period. -back a customer's obligation to a third party. -service credit card loans originated by another bank. -charge a fixed interest rate for a line of credit for a specified period.
-back a customer's obligation to a third party.
Pension funds managed by life insurance companies concentrate on: -bonds and mortgages -money market instruments -preferred stock -common stock
-bonds and mortgages
The asset composition of private pension portfolios is most heavily concentrated in: -money market securities -mortgages -common stock -corporate bonds
-common stock
The most common use of funds for property and casualty insurance companies is for: -corporate bonds and municipal securities -commercial paper -corporate stock -Treasury bills
-corporate bonds and municipal securities
Banks can resolve cash deficiencies by: -creating additional liabilities -selling assets -buying back common stock -increasing dividend payouts -creating additional liabilities AND selling assets
-creating additional liabilities AND selling assets
A bank that wants to protect itself from the default risk of its loan customer may purchase -standby letter of credit -credit default swap -interest rate swap -currency swap
-credit default swap
If Fifth National Bank's asset duration exceeds its liability duration and if interest rates rise, the bank's net worth will _________________. -be unaffected -stabilize -decrease -increase
-decrease
A ____ plan allows a firm to know with certainty the amount of funds to contribute. The ____ plan allows a firm to know with certainty the amount of benefits that must be provided. -defined-contribution; defined-contribution -defined-benefit; defined-contribution -defined-benefit; defined-benefit -defined-contribution; defined-benefit
-defined-contribution; defined-benefit
Which of the following is NOT a corrective action that regulators may take when a bank is identified as a problem bank? -examine the bank frequently and thoroughly -request that the bank boost its capital level or delay its plans to expand -require the bank to provide additional financial information that is periodically updated to allow continued monitoring -take legal action against the bank if it does not comply with their suggested remedies -All of these are possible corrective actions taken by bank regulators.
-examine the bank frequently and thoroughly
Hurricane damage in a given area is an example of a ________ for which it is difficult to predict loss exposure. -high-severity, high-frequency event -low-severity, low-frequency event -high-severity, low-frequency event -low-severity, high-frequency event
-high-severity, low-frequency event
Because riskier assets offer ____ returns, a bank's strategy to increase its return will typically entail a(n) ____ in the overall credit risk of its asset portfolio. -None of these are correct. -higher; decrease -lower; decrease -higher; increase -lower; increase
-higher; increase
Which of the following is NOT an off-balance-sheet activity? -standby letters of credit -highly leveraged transactions (HLTs) -swap contracts -forward contracts
-highly leveraged transactions (HLTs)
The Basel III framework proposes -relying on the rating agencies to assess the risk of bank assets. -lower capital requirements for banks to enable them to generate higher earnings to make up for their losses during the credit crisis. -using the gap ratio to set the capital ratio. -increased capital requirements and liquidity requirements for banks.
-increased capital requirements and liquidity requirements for banks.
Pension funds managed by life insurance companies are normally referred to as: -insured plans -trust portfolios -projective plans -matched plans
-insured plans
Obtaining funds through ____ is not a common way for banks to satisfy a temporary deficiency of funds. -the federal funds market -repurchase agreements -borrowing from the Federal Reserve -issuing bonds
-issuing bonds
The main use of bank funds is for: -loans -repurchase agreements -investment securities -fixed assets
-loans
Banks with relatively ____ ROAs often incur ____ noninterest expenses. -low; very high -high; very high -None of the options are correct. -low; very low
-low; very high
Changes in ____ are a factor affecting the value of a commercial bank over which the bank has some control. -industry conditions -economic growth -None of these options are correct. -the risk-free interest rate -management abilities
-management abilities
Which of the following factors affecting a bank's gross interest income is NOT influenced by the bank's policy decisions? -market interest rate movements -composition of the bank's assets -maturity and rate sensitivity of the bank's assets -the bank's loan rate
-market interest rate movements
Gross interest expense is affected by -fee services provided by the bank. -the composition of assets held by the bank. -market interest rates. -market interest rates AND the composition of assets held by the bank.
-market interest rates.
Property and casualty insurers hold ________ short-term assets than life insurers because property and casualty loss rates are ________ predictable than life insurance loss rates. -more; less -less; less -more; more -less; more
-more; less
A ____ life insurance company is owned by its policyholders; most life insurance companies are ____. -stock-owned; stock-owned -mutual; mutual -stock-owned; mutual -mutual; stock-owned
-mutual; stock-owned
With a _________, a bank agrees to purchase a firm's __________ if the firm cannot place the issue in the market at an acceptable interest rate. -paper placement commitment; commercial paper -bond placement commitment; bonds -note issuance facility; bonds -note issuance facility; commercial paper
-note issuance facility; commercial paper
Money market deposit accounts differ from conventional checking accounts in that they: -are less liquid -specify a maturity -offer limited check-writing privileges -None of these are correct.
-offer limited check-writing privileges
For any given bank, federal funds ____ represent a(n) ____. -None of the options are correct. -purchased; liability -purchased; asset -sold; liability
-purchased; liability
If a bank sells interest rate futures, it ____ of rising interest rates and ____ of declining interest rates on its interest expenses. -increases the potential adverse effect; decreases the potential favorable effect -decreases the potential adverse effect; increases the potential favorable effect -increases the potential adverse effect; increases the potential favorable effect -reduces the potential adverse effect; reduces the potential favorable effect
-reduces the potential adverse effect; reduces the potential favorable effect
Which of the following was NOT a provision of the Financial Reform Act (Dodd-Frank Act) of 2010? -established the Financial Stability Oversight Council -required derivative securities to be traded through a clearinghouse or exchange -reestablished the separation between banking and securities activities that had existed under the Glass-Steagall Act -put limits on banks' proprietary trading -established the Consumer Financial Protection Bureau
-reestablished the separation between banking and securities activities that had existed under the Glass-Steagall Act
A credit agreement in which a business customer may borrow up to a pre-specified limit, repay all or a portion of the borrowing, and reborrow as necessary until the credit line matures is known as a(an): -interim construction lone -working capital loan -project loan -revolving credit loan
-revolving credit loan
Which type of life insurance policy does NOT build a cash value for policyholders? -universal life -whole life -term -All these policies build cash value.
-term
A bank's return on assets (ROA) could be lower than desired because of all of the following EXCEPT: -the bank has reduced its noninterest expenses. -the bank was locked into fixed-rate loans prior to a rise in market interest rates. -the bank is receiving a relatively small amount of noninterest income. -the bank has experienced heavy loan losses.
-the bank has reduced its noninterest expenses.
Mortgage insurance protects -homeowners against damage to their home such as from storms or fire. -homeowners in the event that they cannot make their mortgage payments. -All of these are correct. -the lender who provided the mortgage in the event that the homeowner defaults on the mortgage.
-the lender who provided the mortgage in the event that the homeowner defaults on the mortgage.
Under ____, the benefits awarded by the life insurance company to a beneficiary vary with the assets backing the policy. -universal life insurance -whole life insurance -variable life insurance -term insurance
-variable life insurance
Credit is extended to a company up to one year to purchase raw materials and cover a seasonal peak need for cash. What type of loan is this? -working capital loan -security dealer financing -interim construction lone -revolving credit financing
-working capital loan
Which of the following is a difference in characteristics between life insurance companies and property and casualty insurance companies? -Future compensation amounts paid on property and casualty policies are more difficult to forecast. -Property and casualty policies are longer term. -Life insurance companies need to maintain a more liquid asset portfolio. -The type of policies offered by life insurance companies are less focused.
-Future compensation amounts paid on property and casualty policies are more difficult to forecast.
The key reason for regulatory examinations (such as CAMELS ratings) is to -detect problems of a bank in time to correct them. -monitor reserve requirements. -check for embezzlement. -rate past performance
-detect problems of a bank in time to correct them.
Which of the following is a method that a bank can use to reduce its credit risk? -diversifying its loans across industries -focusing on consumer loans -selling its holdings of -Treasury securities -focusing on credit card loans
-diversifying its loans across industries
For most banks, the average duration of assets ____ the average duration of liabilities, so the duration gap is ____. -exceeds; negative -exceeds; zero -exceeds; positiveis -less than; negative
-exceeds; positiveis
As the secondary market for loans has become active, banks are more able to satisfy their liquidity needs with a ____ proportion of loans while achieving ____ profitability. -higher; higher -lower; higher -lower; lower -higher; lower
-higher; higher
Which of the following is most appropriate for a business that may experience a sudden need for funds but does not know precisely when? -direct lease loan -informal line of credit -term loan -working capital loan
-informal line of credit
A forward contract on currency: -is an agreement between a customer and a bank to exchange one currency for another on a specified date at a specified exchange rate. -is an agreement between a customer and a bank to exchange one currency for another on a specified date at whatever the exchange rate is on that day. -is a way to hedge credit (default) risk. -is used to swap fixed interest payments in euros for variable interest payments in dollars.
-is an agreement between a customer and a bank to exchange one currency for another on a specified date at a specified exchange rate.
During the credit crisis, the level of ____ was much higher than in other periods, depressing bank performance. -loan loss provisions -interest income -noninterest expenses -income expenses
-loan loss provisions
A ____ is a time deposit offered by some large banks to corporations, with a specific maturity date, a minimum deposit of $100,000 or more, and a secondary market. -protective CD -market CD -retail CD -negotiable CD
-negotiable CD
If a bank increases its provisions for loan losses, its interest income is ____, and its noninterest income is ____. -reduced; not affected -not affected; not affected -not affected; reduced -reduced; reduced
-not affected; not affected
Which of the following financial institutions would be most willing to swap variable-rate payments for fixed-rate payments in order to reduce exposure to interest rate risk? -one whose assets and liabilities are equally interest-rate sensitive -one whose liabilities are more interest-rate sensitive than its assets -one whose assets are more interest-rate sensitive than its liabilities -one whose gap ratio is equal to 1.0
-one whose assets are more interest-rate sensitive than its liabilities
Following is the information listed below for Carter State Bank. What is the bank's net profit margin? Net income$55 millionTotal operating revenue$650 millionTotal assets$4,055 millionTotal equity capital$350 million -8.46 percent -16.03 percent -1.36 percent -15.71 percent
8.46 percent
If pension fund investment decisions are made with the objective of generating cash flows at the same time as planned outflow payments, the fund follows a ____ strategy. When comparing matched funding and projective funding, ____ is more flexible for portfolio managers. -matched funding; matched funding -projective funding; matched funding -matched funding; projective funding -projective funding; projective funding
matched funding; projective funding
The Glass-Steagall Act of 1933 prevented -state-chartered banks from offering commercial loans. -any firm that accepts deposits from underwriting stocks and bonds of corporations. -any firm that accepts deposits from underwriting general obligation bonds of states and municipalities. -any firm that accepts deposits from holding any corporate bonds in its asset portfolio.
-any firm that accepts deposits from underwriting stocks and bonds of corporations.
Which of the following banks would likely have the highest return on equity? -high return on assets, high capital ratio -high return on assets, low capital ratio -low return on assets, high capital ratio -low return on assets, low capital ratio
-high return on assets, low capital ratio
Banks A and B have the same net income. Bank A has a higher capital ratio and more assets than B. Bank A's return on assets is ____ than Bank B's. Bank A's return on equity is ____ than Bank B's. -higher; lower -higher; higher -lower; lower -lower; higher
-lower; lower
Net income measured as a percentage of assets is -return on liabilities (ROL). -return on equity (ROE). -return on investment (ROI). -return on assets (ROA).
-return on assets (ROA).
The Basel framework recommends that banks maintain capital in proportion to their: -risk-weighted assets -liabilities -mortgages -commercial paper
-risk-weighted assets
Which type of life insurance policy can offer flexibility on the size and timing of premium payments? -whole life -decreasing term -universal life -term
-universal life
When a bank in need of funds for a few days sells some of its government securities to a corporation with a temporary excess of funds, then buys them back shortly thereafter, this is a -commercial paper transaction. -federal funds loan. -discount window loan. -repurchase agreement.
repurchase agreement.
____ are the most popular assets of life insurance companies. -State and local bonds -Mortgages and mortgage-backed securities -Corporate stocks and corporate debt securities -Treasury securities
-Corporate stocks and corporate debt securities
