Question 1

Which of the following is true regarding subordinated debt?

Accepted Answer

A)  Subordinated debt claims come before the claims of depositors. 
B)  Principal payments are not mandatory. 
C)  Transaction costs on issuing new debt are lower than when issuing new equity. 
D)  Interest payments on subordinated debt are tax-deductible. 
E)  New subordinated debt dilutes existing shareholder equity. 
A)  Subordinated debt claims come before the claims of depositors. 
B)  Principal payments are not mandatory. 
C)  Transaction costs on issuing new debt are lower than when issuing new equity. 
D)  Interest payments on subordinated debt are tax-deductible. 
E)  New subordinated debt dilutes existing shareholder equity. D

Question 2

How do capital requirements constrain bank growth?

Accepted Answer

A)  By discouraging investments in Treasury securities. 
B)  By disallowing the ownership of mortgage loans. 
C)  By decreasing a bank's net interest margin. 
D)  By limiting the amount of new assets that a bank can acquire through debt financing. 
E)  By reducing a bank's CAMELS ratings. 
A)  By discouraging investments in Treasury securities. 
B)  By disallowing the ownership of mortgage loans. 
C)  By decreasing a bank's net interest margin. 
D)  By limiting the amount of new assets that a bank can acquire through debt financing. 
E)  By reducing a bank's CAMELS ratings. D

Question 3

Tier 2 capital consists of all of the following except:

Accepted Answer

A)  30-year subordinated debt. 
B)  cumulative perpetual preferred stock. 
C)  mandatory convertible preferred stock. 
D)  preferred stock with a maturity of 7 years. 
E)  equity in subsidiaries. 
A)  30-year subordinated debt. 
B)  cumulative perpetual preferred stock. 
C)  mandatory convertible preferred stock. 
D)  preferred stock with a maturity of 7 years. 
E)  equity in subsidiaries. E

Question 4

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

Accepted Answer

A)  1.6%. 
B)  2.0%. 
C)  4.0%. 
D)  8.0%. 
E)  8.6%. 
A)  1.6%. 
B)  2.0%. 
C)  4.0%. 
D)  8.0%. 
E)  8.6%.

Question 5

Use the following information for questions
A bank currently just meets its total capital requirements of 8%. The bank currently has a dividend payout ratio of 35%. Assets are expected to grow at 5%.
-What is the required ROA to support the growth in assets?

Accepted Answer

A)  0.62% 
B)  0.65% 
C)  0.68% 
D)  0.72% 
E)  0.75% 
A)  0.62% 
B)  0.65% 
C)  0.68% 
D)  0.72% 
E)  0.75%

Question 6

Banks with greater capital can do all of the following except:

Accepted Answer

A)  borrow at lower rates. 
B)  make larger loans. 
C)  expand faster through acquisitions. 
D)  expand faster through internal growth 
E)  Banks with greater capital can do all of the above. 
A)  borrow at lower rates. 
B)  make larger loans. 
C)  expand faster through acquisitions. 
D)  expand faster through internal growth 
E)  Banks with greater capital can do all of the above.

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Supplementary or Tier 2 capital does not include:

Accepted Answer

A)  hybrid capital instruments 
B)  intermediate-term preferred stock 
C)  cumulative perpetual preferred stock 
D)  long-term preferred stock 
E)  noncumulative perpetual preferred stock 
A)  hybrid capital instruments 
B)  intermediate-term preferred stock 
C)  cumulative perpetual preferred stock 
D)  long-term preferred stock 
E)  noncumulative perpetual preferred stock

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Under current capital requirements, Tier 1 Capital takes of all of the following into accountexcept:

Accepted Answer

A)  common stockholder's equity. 
B)  equity in subsidiaries. 
C)  goodwill. 
D)  allowance for loan and lease losses. 
E)  noncumulative perpetual preferred stock. 
A)  common stockholder's equity. 
B)  equity in subsidiaries. 
C)  goodwill. 
D)  allowance for loan and lease losses. 
E)  noncumulative perpetual preferred stock.

Question 12

Use the following information for questions
A bank currently just meets its total capital requirements of 8%. The bank currently has a dividend payout ratio of 35%. Assets are expected to grow at 5%.
-If the bank expects its ROA to be .45% and the bank does not wish to change its dividend payout ratio from 35%, how much new equity capital (as a percent of total assets) must the bank issue to support the growth in assets?

Accepted Answer

A)  0.2925% 
B)  2.935% 
C)  0.1075% 
D)  1.075% 
E)  1.367% 
A)  0.2925% 
B)  2.935% 
C)  0.1075% 
D)  1.075% 
E)  1.367%

Question 13

Use the following information for questions
A bank currently just meets its total capital requirements of 8%. The bank currently has a dividend payout ratio of 35%. Assets are expected to grow at 5%.
-If the bank expects its ROA to be .45%, what is the maximum dividend payout ratio to support the increase in assets?

Accepted Answer

A)  11.1% 
B)  22.2% 
C)  33.3% 
D)  44.4% 
E)  89.9% 
A)  11.1% 
B)  22.2% 
C)  33.3% 
D)  44.4% 
E)  89.9%

Question 14

For banks that have insufficient capital, which of the following is not a typical operating strategy to achieve capital adequacy?

Accepted Answer

A)  Limit asset growth 
B)  Shrink the bank 
C)  Increase the dollar amount of commercial loans outstanding 
D)  Shift more bank assets into lower risk categories. 
E)  Reprice assets to reflect greater equity support 
A)  Limit asset growth 
B)  Shrink the bank 
C)  Increase the dollar amount of commercial loans outstanding 
D)  Shift more bank assets into lower risk categories. 
E)  Reprice assets to reflect greater equity support

Question 15

Which of the following is false regarding bank preferred stock?

Accepted Answer

A)  Preferred stock investor claims are senior to those of common stockholders. 
B)  All preferred stock investors pay taxes on only 20% of dividends. 
C)  Most preferred stock issues are adjustable-rate perpetual stock. 
D)  Preferred stock has the same disadvantages as common stock. 
E)  None of the statements is false. 
A)  Preferred stock investor claims are senior to those of common stockholders. 
B)  All preferred stock investors pay taxes on only 20% of dividends. 
C)  Most preferred stock issues are adjustable-rate perpetual stock. 
D)  Preferred stock has the same disadvantages as common stock. 
E)  None of the statements is false.

Question 16

Regulatory capital ratios focus on the book value of equity.

Accepted Answer

A) True 
 B)False

Question 17

Explain Tier 3 Capital Requirements for market risk under Basel I.

Accepted Answer

Under the Basel I framework, which was t

Question 18

Why do smaller banks often have a more difficult time raising new capital compared to larger banks?

Accepted Answer

Smaller banks often face more challenges

Question 19

Why do banks generally prefer lower capital requirements?

Accepted Answer

A)  To minimize the impact shareholders have on management decisions. 
B)  To increase the influence of bank regulators. 
C)  To increase a bank's return on equity. 
D)  To increase depositor protection. 
E)  To maximize operating leverage. 
A)  To minimize the impact shareholders have on management decisions. 
B)  To increase the influence of bank regulators. 
C)  To increase a bank's return on equity. 
D)  To increase depositor protection. 
E)  To maximize operating leverage.

Question 20

Decreasing capital increases risk by decreasing financial leverage.

Accepted Answer

A) True 
 B)False

Which of the following is true regarding subordinated debt?

How do capital requirements constrain bank growth?

Tier 2 capital consists of all of the following except:

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

Use the following information for questions A bank currently just meets its total capital requirements of 8%. The bank currently has a dividend payout ratio of 35%. Assets are expected to grow at 5%. -What is the required ROA to support the growth in assets?

Banks with greater capital can do all of the following except:

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

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

Supplementary or Tier 2 capital does not include:

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

Under current capital requirements, Tier 1 Capital takes of all of the following into accountexcept:

For banks that have insufficient capital, which of the following is not a typical operating strategy to achieve capital adequacy?

Which of the following is false regarding bank preferred stock?

Regulatory capital ratios focus on the book value of equity.

Explain Tier 3 Capital Requirements for market risk under Basel I.

Why do smaller banks often have a more difficult time raising new capital compared to larger banks?

Why do banks generally prefer lower capital requirements?

Decreasing capital increases risk by decreasing financial leverage.

Banking and the Financial Services Industry

Government Policies and Regulation

Analyzing Bank Performance

Managing Noninterest Income and Noninterest Expense

The Performance of Nontraditional Banking Companies

Pricing Fixed-Income Securities

Managing Interest Rate Risk: Gap and Earnings Sensitivity

Managing Interest Rate Risk: Duration Gap and Economic Value of Equity

Using Derivatives to Manage Interest Rate Risk

Funding the Bank

Managing Liquidity

Overview of Credit Policy and Loan Characteristics

Evaluating Commercial Loan Requests and Managing Credit Risk

Evaluating Consumer Loans

Managing the Investment Portfolio

Global Banking Activities

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Exam 12: The Effective Use of Capital

Which of the following is true regarding subordinated debt?

How do capital requirements constrain bank growth?

Tier 2 capital consists of all of the following except:

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

Use the following information for questions A bank currently just meets its total capital requirements of 8%. The bank currently has a dividend payout ratio of 35%. Assets are expected to grow at 5%. -What is the required ROA to support the growth in assets?

Banks with greater capital can do all of the following except:

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

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

Supplementary or Tier 2 capital does not include:

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

Under current capital requirements, Tier 1 Capital takes of all of the following into accountexcept:

For banks that have insufficient capital, which of the following is not a typical operating strategy to achieve capital adequacy?

Which of the following is false regarding bank preferred stock?

Regulatory capital ratios focus on the book value of equity.

Explain Tier 3 Capital Requirements for market risk under Basel I.

Why do smaller banks often have a more difficult time raising new capital compared to larger banks?

Why do banks generally prefer lower capital requirements?

Decreasing capital increases risk by decreasing financial leverage.

Banking and the Financial Services Industry

Government Policies and Regulation

Analyzing Bank Performance

Managing Noninterest Income and Noninterest Expense

The Performance of Nontraditional Banking Companies

Pricing Fixed-Income Securities

Managing Interest Rate Risk: Gap and Earnings Sensitivity

Managing Interest Rate Risk: Duration Gap and Economic Value of Equity

Using Derivatives to Manage Interest Rate Risk

Funding the Bank

Managing Liquidity

Overview of Credit Policy and Loan Characteristics

Evaluating Commercial Loan Requests and Managing Credit Risk

Evaluating Consumer Loans

Managing the Investment Portfolio

Global Banking Activities

Filters