Chapter 06
Chapter 06
Chapter 06
1. The equity multiplier for a bank measures the amount of _____________________ of the bank
and is one part of the evaluation of the bank's ROE.
Answer: leverage (debt)
2. __________________________ is the risk that has to do with the quality of the bank's assets
and, in particular, the bank's loans.
Answer: Credit risk
3. Solvency (or capital) risk for a bank can be measured by__________________________. List
one way solvency risk can be measured.
Answer: Purchased Funds/Total Liabilities (There are several other ratios that can answer this
question as well)
5. __________________________ is the risk that the value of the financial institution's asset
portfolio (particularly government or other marketable securities) will decline in value.
Answer: Market risk
6. Eurodollars, Fed Funds, Repurchase Agreements, and large CDs together are know as
_____________________.
Answer: Purchased Funds
7. __________________________ is the risk that the financial institution may not be able to meet
the needs of depositors for cash.
Answer: Liquidity risk
10. __________________________ reflects the effectiveness of the expense management of the bank
and is one part of the evaluation of ROE.
Answer: Net profit margin
12. __________________________ measures the amount of debt or leverage a bank has and is one
part of the evaluation of the bank's ROE) It is generally a number larger than one.
Answer: Equity multiplier
14. __________________________ measures the bank's risk of long run survival. It measures the
bank's capital position and shows if there has been any erosion of capital over time.
Answer: Solvency risk (or capital risk)
15. __________________________ is the risk that shifting interest rates in the market will adversely
affect a financial institution's net income or the value of its assets or equity.
Answer: Interest rate risk
16. The ____________________ Act restricts combined auditing and consulting relationships in
order to promote auditor independence and objectivity.
Answer: Sarbanes-Oxley
22. As data processing of financial information becomes more important, managers of financial firms
can realize cost savings from , transferring tasks from inside to firm
itself to other firms specializing in information technology.
Answer: outsourcing
24. One part of ROE is or net income over pre-tax net operating income
which measures the financial firm’s use of security gains and losses and other tax management
tools to minimize tax exposure.
Answer: tax management efficiency
25. Net profit margin can be split into two parts, and tax management efficiency.
The first part is pre-tax net operating income over total operating revenue which looks at how
many dollars of revenue survive after operating expenses are removed.
Answer: expense control efficiency
T F 26. Financial institutions that pursue the "quiet life" as a goal are really pursuing risk
minimization.
Answer: True
T F 27. Attempting to maximize a bank's stock value is the key objective for banks which should
have priority over all other bank goals.
Answer: True
T F 28. If the expected stream of future bank shareholder dividends rises, a bank's stock price
should also rise, other factors held constant.
Answer: True
T F 29. If the discount factor associated with the value of a bank's stock rises, the bank's stock
price should rise, other factors held constant.
Answer: False
T F 30. A bank's ROA equals its ROE times the ratio of total assets divided by total equity
capital.
Answer: False
T F 31. According to the textbook a bank's asset-utilization ratio reflects the mix and yield on the
bank's portfolio of assets.
Answer: True
T F 32. The bank's profit margin or ratio of net after-tax income to total operating revenue is a
measure of financial leverage for a bank.
Answer: False
T F 33. The ratio of a bank's net after-tax income to pre-tax net operating income is described in
the text as a measure of tax management efficiency.
Answer: True
T F 34. In the textbook the ratio of pre tax net operating income to total operating revenues is
described as a measure of the effectiveness of a financial insitution's expense-control
efficiency.
Answer: True
T F 36. The measure of a bank's efficiency and return known as the "earnings spread" subtracts
total interest expenses from all the bank's interest income and these two items are then
divided by total assets.
Answer: False
T F 37. In recent years the U.S. banking industry's equity multiplier has generally risen in
response to regulatory pressure to raise more capital.
Answer: False
T F 38. If a bank adds more full-time employees and posts the same net operating income, its
employee productivity ratio, as defined in the text, must fall.
Answer: True
T F 39. The most profitable U.S. banks in terms of both ROA and ROE are medium-size
institutions in the asset size range of $100 million to $10 billion, according to the
textbook.
Answer: True
T F 40. ROA measures how capably the management of a financial institution has been
converting the institution's assets into net earnings.
Answer: True
T F 42. The ratio of nonperforming assets to total loans and leases is considered to be a measure
of a bank's market risk.
Answer: False
T F 43. Charge-offs represent securities a bank decides to sell because they have declined in
value.
Answer: False
T F 44. Loans past due for 90 days or more are classified as nonperforming assets.
Answer: True
T F 46. The ratio of uninsured deposits to total deposits is considered to be a measure of credit
risk in banking.
Answer: False
T F 47. The interest rate spread between market yields on bank debt issues (such as capital notes
and CDs) and the market yields on government securities of the same maturity is
considered to be a measure of market risk in banking.
Answer: False
T F 48. The ratio of a bank's net operating income to the number of a bank's full-time-equivalent
employees is called the employee productivity ratio.
Answer: True
T F 49. Smaller banks usually have fewer liquid assets than larger banks.
Answer: False
T F 50. The bank's asset utilization ratio reflects the effectiveness of the bank's expense
management.
Answer: False
T F 51. The FDIC is a private credit rating company which provides credit ratings on the short
term and long term securities issued by banks.
Answer: False
T F 52. During the 1980's the Comptroller of the Currency, the Federal Reserve and the FDIC
created a new tool to help them analyze the financial condition of banks. This new tool is
called the Uniform Bank Performance Report.
Answer: True
T F 53. Liquidity risk for a bank examines the quality of the bank's assets and, in particular, the
quality of the bank's loans.
Answer: False
54. The ratio of a bank's interest income from its loans and security investments less interest expenses
on debt issued divided by total earning assets measures a bank's:
A) Net operating margin
B) Net return before special transactions
C) Net interest margin
D) Return on assets
E) None of the above
Answer: C
56. The difference between such sources of bank income as service charges on deposits and trust-
service fees and such sources of bank expenses as salaries and wages and overhead expenses
divided by total assets or total earning assets is called the:
A) Net profit margin
B) Net operating margin
C) Net noninterest margin
D) Net return on assets
E) None of the above
Answer: C
59. The so-called employee productivity ratio for a bank is equal to:
A) Net operating revenue less total interest expenses per employee.
B) Total interest and noninterest expense per employee
C) Net operating income per full-time-equivalent employee
D) Total operating earnings less salaries and wages expense per employee.
E) None of the above.
Answer: C
60. According to the textbook the most profitable banks in the United States fall in the asset size
range of:
A) Under $25 million in total assets
B) Under $100 million in total assets
C) Between $100 million and $10 billion in total assets
D) Over $10 billion in total assets
E) None of the above.
Answer: C
62. The ratio that equals total interest income divided by total earning assets less total interest
expense divided by total interest-bearing liabilities is known as the:
A) Earnings base
B) Earnings spread
C) Net income margin
D) Net return prior to special transactions
E) None of the above
Answer: B
65. The ratio of net loans to total assets is considered to be a measure of what form of risk in
banking?
A) Credit risk
B) Liquidity risk
C) Market risk
D) Interest-rate risk
E) None of the above
Answer: B
67. A ratio that can be used to measure a bank's credit risk would be:
A) Net loans/total assets
B) Interest sensitive assets/interest sensitive liabilities
C) Total assets/number of full time employees
D) Nonperforming loans/total loans
Answer: D
69. Which of the following would be the best example of a ratio used to examine the cost of one of
the bank's liabilities?
A) Demand deposits/ total assets
B) Interest on time deposits/ total time deposits
C) Interest on real estate loans/ total real estate loans
D) Interest sensitive assets/ interest sensitive liabilities
Answer: B
70. Which of the following would be the best example of a ratio used to examine the return of one of
the bank's assets?
A) Demand deposits/ total assets
B) Interest on time deposits/ total time deposits
C) Interest on real estate loans/ total real estate loans
D) Interest sensitive assets/ interest sensitive liabilities
Answer: C
71. Which of the following would be the best example of a ratio used to examine the bank's interest
rate risk?
A) Demand deposits/ total assets
B) Interest on time deposits/ total time deposits
C) Interest on real estate loans/ total real estate loans
D) Interest sensitive assets/ interest sensitive liabilities
Answer: D
72. A bank expects to pay a dividend next year of $3.45 and also expects dividends to grow at a rate
of 7% from now on. If the appropriate discount rate is 15%, what should this bank's stock price
be in the market?
A) $23.00
B) $43.13
C) $46.14
D) $49.29
E) $24.61
Answer: B
A) 8.46 percent
B) 16.03 percent
C) 15.71 percent
D) 1.36 percent
E) None of the above
Answer: C
74. Using the information listed below for Carter State Bank, what is this bank's ROA?
A) 8.46 percent
B) 16.03 percent
C) 15.71 percent
D) 1.36 percent
E) None of the above
Answer: D
75. Using the information listed below for Carter State Bank, what is this bank's net profit margin?
A) 8.46 percent
B) 16.03 percent
C) 15.71 percent
D) 1.36 percent
E) None of the above
Answer: A
A) 8.46 percent
B) 16.03 percent
C) 15.71 percent
D) 1.36 percent
E) None of the above
Answer: B
77. The TRC Bank has a net profit margin of 7.5%, an asset utilization ratio of 18%, an equity
multiplier of 20 times. What is this bank's ROA?
A) 27.00 percent
B) 1.35 percent
C) 7.50 percent
D) 1.50 percent
E) 3.6 percent
Answer: B
78. The TRC Bank has a net profit margin of 7.5%, an asset utilization ratio of 18%, an equity
multiplier of 20 times. What is this bank's ROE?
A) 27.00 percent
B) 1.35 percent
C) 7.50 percent
D) 1.50 percent
E) 3.6 percent
Answer: A
79. The Smith-James Bank has an ROE of 17.5%, an asset utilization ratio of 13% and a net profit
margin of 9%. What is this bank's ROA?
A) 14.96 percent
B) 1.58 percent
C) 1.17 percent
D) 134.62 percent
E) None of the above
Answer: C
82. In recent years banks have been __________ profitable than (as) S&Ls and Savings Banks.
A) more
B) less
C) as
D) much more
E) much less
Answer: A
84. Brian Smith, CEO of Carter National Bank, decides that interest rates are going to fall in
the future and as a result buys $100 million in 30 year Treasury Bonds for the bank’s
security portfolio. Instead, interest rates rise causing the value of these bonds to fall.
This would be an example of which of the following types of risk?
A) Operational risk
B) Legal risk
C) Compliance risk
D) Strategic risk
E) Reputation risk
Answer: D
86. Carson County State Bank has a ratio of equity capital to total assets of 2.5%. The FDIC
which regulates this bank has determined that this is not enough equity capital and is
making the bank issue new stock in the market. In addition, they are not allowing the
bank to issue a dividend to their current stockholders. Which type of risk would this be
an example of?
A) Operational risk
B) Legal risk
C) Compliance risk
D) Strategic risk
E) Reputation risk
Answer: C
87. Everett Bank has just learned that there is a disgruntled former employee who has created
a blog that is telling everyone that Everett Bank has halved their customer service
representatives and so customers have great difficulty getting through to a live person
when there is a problem with their account. Everett is worried that they may lose
customers as a result. Which type of risk would this be an example of?
A) Operational risk
B) Legal risk
C) Compliance risk
D) Strategic risk
E) Reputation risk
Answer: E
89. Forrest Fennell is thinking about investing in Capital City Bank. He is examining certain
ratios of the bank including the ratio of nonperforming loans to total loans and leases and
the provision for loan losses to total loans and leases. What type of risk is Forrest
attempting to measure with these ratios?
A) Credit risk
B) Liquidity risk
C) Market risk
D) Interest rate risk
E) Operational risk
Answer: A
90. Gerald Wilkens is thinking about investing in Tallahassee State Bank. He is examining
certain ratios of the bank including the ratio of cash assets and government securities to
total assets and purchased funds to total assets. What type of risk is Gerald attempting to
measure with these ratios?
A) Credit risk
B) Liquidity risk
C) Market risk
D) Interest rate risk
E) Operational risk
Answer: B
91. Amy Farmer is thinking about investing in the Guthrie National Bank. She is examining
certain ratios of the bank including the ratio of the book value of the assets to the market
value of the assets and the market value of the bonds held by the bank to their recorded
value. What type of risk is Amy attempting to measure with these ratios?
A) Credit risk
B) Liquidity risk
C) Market risk
D) Interest rate risk
E) Operational risk
Answer: C
93. The Garic State Bank of New Orleans was under water for three weeks after Hurricane
Katrina hit the state. The lobby is full of mud and other debris. Many of the valuables
stored in the bank’s safety deposit boxes have been ruined. John Garic, the President and
CEO of the bank, has been working night and day to reopen the bank. What type of risk
has John been dealing with?
A) Credit risk
B) Liquidity risk
C) Market risk
D) Interest rate risk
E) Operational risk
Answer: E
Use this information to calculate Castle State Bank’s net profit margin
A) 20.45%
B) 18.33%
C) 12.22%
D) 7.33%
E) 2.5%
Answer: C
Use this information to calculate Castle State Bank’s asset utilization ratio
A) 20.45%
B) 18.33%
C) 12.22%
D) 7.33%
E) 2.5%
Answer: A
ROE 16%
Net Income $1000
Total Assets $62,500
Total Equity $6250