Deck 19: Bank Management

Question 1

Floating-rate loans cannot completely eliminate interest rate risk; if the cost of funds is changing more frequently than the rate on assets, the bank's net interest margin is still affectedbyinterest rate fluctuations.

Answer 1

True

Question 2

Which of the following is not a likely method used by a bank to reduce interest rate risk?

A) maturity matching
B) using fixed-rate loans
C) using interest rate futures contracts
D) using interest rate caps

Answer 2

B

Question 3

Other things being equal, assets with ____ maturities and ____ frequent coupon payments have longer durations.

A) shorter; more
B) shorter; less
C) longer; more
D) longer; less

Answer 3

D

Question 4

Each bank may have its own classification system of interest rate sensitivity, because there is no perfect measurement of the gap.

Question 5

If a bank expects interest rates to consistently ____ over time, it will consider allocating most funds to rate-____ assets.

A) decrease; sensitive
B) decrease; insensitive
C) increase; insensitive
D) none of the above

Question 6

Other things being equal, assets with shorter maturities have ____ durations. Assets that generate more frequent coupon payments have ____ durations.

A) shorter; longer
B) shorter; shorter
C) longer; shorter
D) longer; longer

Question 7

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.

A) higher; higher
B) lower; lower
C) higher; lower
D) lower; higher

Question 8

Banks are more liquid as a result of securitization because it allows them to request repayment of the loan principal from the borrower upon demand.

Question 9

During a period of rising interest rates, a bank's net interest margin will likely ____ if its liabilities are ____ its assets.

A) increase; more rate sensitive than
B) decrease; more rate sensitive than
C) increase; equally rate sensitive as
D) decrease; equally rate sensitive as

Question 10

The ____ of interest rate futures ____ the potential adverse effect of rising interest rates on a bank's interest expenses.

A) sale; increases
B) sale; reduces
C) purchase; reduces
D) both A and C are correct

Question 11

Petri Bank had interest revenues of $70 million last year and $30 million in interest expenses. About $300 million of Petri's $800 million in assets are rate sensitive, while $600 million of itsliabilities are rate sensitive. Petri Bank's net interest margin is ____ percent.

A) 4
B) 3.6
C) 6.7
D) 5

Question 12

The measure of interest rate risk that uses the difference between rate-sensitive assets and rate-sensitive liabilities is called

A) gap measurement.
B) duration measurement.
C) duration ratio.
D) gap ratio.

Question 13

Which of the following statements is incorrect?

A) Managers may be tempted to make decisions that are in their own best interests rather than shareholder interests.
B) Directors are responsible for making most of the bank's decisions regarding loans to customers, which encourages a loan department to extend loans with a very high concern for risk.
C) To prevent agency problems, some banks provide stock as compensation to managers.
D) The underlying goal behind the managerial policies of a bank is to maximize the wealth of the bank's shareholders

Question 14

Banks can resolve cash deficiencies by

A) creating additional liabilities
B) selling assets
C) buying back common stock
D) increasing dividend payouts
E) A or B

Question 15

If a bank attempts to reduce exposure to interest rate risk by replacing long-term marketable securities with more floating-rate commercial loans, it is likely that the bank's

A) credit risk would decrease.
B) credit risk would increase.
C) liquidity risk would increase.
D) liquidity risk would decrease.
E) B and C

Question 16

For most banks, the average duration of assets ____ the average duration of liabilities, so the duration gap is ____.

A) exceeds; zero
B) exceeds; negative
C) exceeds; positive
D) is less than; negative

Question 17

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?

A) one whose assets and liabilities are equally interest-rate sensitive
B) one whose assets are more interest-rate sensitive than its liabilities
C) one whose liabilities are more interest-rate sensitive than its assets
D) one whose gap ratio is equal to 1.0

Question 18

The duration of zero-coupon bonds will be ____ the duration of coupon bonds with the same maturity.

A) lower than
B) higher than
C) the same as
D) A or B, depending on the size of the coupon payment

Question 19

Banks increase their risk by increasing their capital as a percentage of assets

Question 20

A gap ratio of less than one suggests that

A) rate-sensitive assets exceed rate-sensitive liabilities.
B) an increase in interest rates would increase the bank's net interest margin.
C) rate-sensitive liabilities exceed rate-sensitive assets.
D) a decrease in interest rates would decrease the bank's net interest margin.
E) B and D

Question 21

Banks can reduce their credit risk by restructuring their asset portfolio to contain fewer ____ and more ____.

A) Treasury bonds; corporate bonds
B) Treasury bonds; municipal bonds
C) Treasury bonds; commercial loans
D) none of the above

Question 22

If Bank A has a negative gap and Bank B has a positive gap, which of the following is true?

A) Bank A is more favorably affected by rising interest rates.
B) Bank B is more favorably affected by falling interest rates.
C) Bank A is adversely affected by falling interest rates.
D) none of the above

Question 23

International diversification of loans can best reduce a bank's overall credit risk if

A) the countries where loans are given are clustered together in a single continent.
B) the countries where loans are given have economic cycles that do not move together over time.
C) A and B
D) none of the above

Question 24

A bank's net interest margin is commonly defined as

A) interest revenues minus interest expenses.
B) (interest revenues minus interest expenses)/total assets.
C) (interest revenues minus interest expenses)/total liabilities.
D) (interest revenues minus interest expenses)/capital.

Question 25

During a period of rising interest rates, a bank's net interest margin will likely decline if it has a large amount of

A) rate-sensitive assets and no rate-sensitive liabilities.
B) rate-sensitive liabilities and no rate-sensitive assets.
C) loans to technology firms.
D) real estate loans.

Question 26

Banks tend to focus their loans in one industry so that they can specialize on that industry and reduce the credit risk of their loan portfolio.

Question 27

The greater the ____, the greater the amount of assets per dollar's worth of equity.

A) leverage measure
B) ratio of equity to debt
C) capital ratio
D) proportion of loans to securities in the asset portfolio

Question 28

Most loan sales enable the bank originating the loan to continue servicing the loan.

Question 29

Bank A has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million. Bank A's net interest margin is

A) $1 million.
B) -$1 million.
C) -5 percent.
D) 5 percent.

Question 30

Banks can increase their potential interest revenues by restructuring their asset portfolio to contain fewer ____ and more ____.

A) Treasury bonds; commercial loans
B) Treasury bonds; excess reserves
C) consumer loans; Treasury bills
D) none of the above

Question 31

When a bank makes an international loan containing a clause that allows repayment in a foreign currency, the bank is exposed to

A) loan settlement risk.
B) exchange rate risk.
C) global exchange risk.
D) currency transaction risk.

Question 32

Banks would reduce their liquidity by restructuring their asset portfolio to contain fewer ____ and more ____.

A) Treasury securities; excess reserves
B) loans; Treasury securities
C) corporate bonds; Treasury securities
D) none of the above

Question 33

A bank has a return on assets of 2 percent, $40 million in assets, and $4 million in equity. What is the return on equity?

A) 10 percent
B) .2 percent
C) 2 percent
D) 20 percent
E) none of the above

Question 34

If a bank sells interest rate futures, it ____ of rising interest rates and ____ of declining interest rates on its interest expenses.

A) reduces the potential adverse effect; reduces the potential favorable effect
B) increases the potential adverse effect; increases the potential favorable effect
C) decreases the potential adverse effect; increases the potential favorable effect
D) increases the potential adverse effect; decreases the potential favorable effect

Question 35

Banks can improve their liquidity position by restructuring their asset portfolio to contain fewer ____ and more ____.

A) excess reserves; Treasury bills
B) Treasury bonds; corporate bonds
C) loans; Treasury bills
D) none of the above

Question 36

Banks generally ____ loans and ____ their purchases of low-risk securities when the economy is weak.

A) increase; increase
B) reduce; reduce
C) increase; reduce
D) reduce; increase

Question 37

Which of the following is a measure for banks to use to assess their exposure to interest rate risk?

A) capital ratio
B) leverage measure
C) duration measurement
D) gap ratio
E) C and D

Question 38

A common method for banks to reduce their credit risk is to

A) specialize in loans to just one or a few particular industries in which they have expertise in assessing creditworthiness.
B) specialize in loans to companies whose earnings patterns are quite similar over time.
C) A and B
D) none of the above

Question 39

When measuring exposure to market risk, banks commonly use the ________.

A) value-at-risk method
B) operating leverage measure
C) matching maturity method
D) forward rate method

Question 40

If a bank desires to maximize its net interest margin, it would best achieve its goal by attempting to obtain most of its funds through ____ and use most of its funds for ____ (assuming thatallloans will be repaid).

A) traditional demand deposits; commercial loans
B) traditional demand deposits; consumer loans
C) NOW accounts; consumer loans
D) NOW accounts; commercial loans

Question 41

The say on pay rules require all decisions about executive compensation to be made only by outside directors.

Question 42

A bank can usually simultaneously maximize its return on assets and minimize credit risk.

Question 43

Durango Bank has $2 million in rate-sensitive liabilities and $3 million in rate-sensitive assets. Durango's gap is ____, and Durango is probably more concerned about a(n) ____ in interest rates.

A) -$1 million; increase
B) -$1 million; decrease
C) $1 million; increase
D) $1 million; decrease
E) none of the above

Question 44

The performance of a bank that continually concentrates on short-term deposits in euros and adjustable-rate dollar loans with equal rate sensitivity is

A) unaffected if euro interest rates increase and U.S. rates decrease.
B) unaffected if U.S. interest rates increase and euro interest rates decrease.
C) adversely affected if euro interest rates increase and U.S. rates decrease.
D) adversely affected if U.S. interest rates increase and euro rates decrease.
E) A and B

Question 45

Macon Bank has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million. Macon Bank's net interest margin is

A) $1 million.
B) -$1 million.
C) 5 percent.
D) -5 percent.

Question 46

Floating-rate loans completely eliminate interest rate risk.

Question 47

If a bank has assets and liabilities in dollars and euros, its exposure to interest rate risk can best be minimized if the

A) currency mix of assets is similar to that of liabilities.
B) overall rate sensitivity of assets and liabilities is similar.
C) rate sensitivity of assets and liabilities is matched for each currency.
D) A and B

Question 48

Whether a bank has a temporary or a permanent need for funds, the decision should be to borrow in the federal funds market.

Question 49

____ is (are) least likely to be used as a method of reducing interest rate risk.

A) Maturity matching
B) Floating-rate loans
C) Stock options
D) Interest rate swaps
E) Interest rate caps

Question 50

The risk of a loss due to closing out a transaction is referred to as ____ risk.

A) credit
B) settlement
C) interest rate
D) exchange rate
E) none of the above

Question 51

A positive gap (or gap ratio of more than 1.00) suggests that rate-sensitive liabilities exceed rate-sensitive assets.

Question 52

If the duration of all banks assets with a maturity of greater than one year is similar to that of its liabilities with a maturity greater than one year, , interest rate risk is nonexistent.

Question 53

Ringo Bank has a profit after taxes of $3 million, total assets of $300 million, and shareholder's equity of $30 million. Ringo's return on equity (ROE) is ____ percent.

A) 1
B) 10
C) 3
D) none of the above

Question 54

Assume a bank accepts deposits in Australian dollars (A$) and makes some fixed-rate loans in British pounds. Which of the following would reduce the bank's profit margin?

A) The A$ appreciates against the pound.
B) The A$ is stable against the pound.
C) The A$ depreciates against the pound.
D) British interest rates increase.
E) C and D

Question 55

Leskar Bank has $2 million in rate-sensitive liabilities and $3 million in rate-sensitive assets. Leskar's gap ratio is ____.

A) 1.5
B) 0.67
C) $1 million
D) none of the above

Question 56

For most banks, the average duration of liabilities exceeds the average duration of assets, so the duration gap is positive.

Question 57

For a commercial bank, when the average duration of assets exceeds the average duration of liabilities, the duration gap is

A) zero
B) positive.
C) negative.
D) B or C

Question 58

____ is not a method used to assess interest rate risk.

A) Gap analysis
B) Ratio analysis
C) Duration analysis
D) Regression analysis
E) All of the above are methods to assess interest rate risk.

Question 59

The Sarbanes-Oxley Act has had little impact on the monitoring conducted by the board members of commercial banks.

Question 60

____ is not a method used to assess interest rate risk.

A) Efficiency analysis
B) Gap analysis
C) Duration analysis
D) Regression analysis

Question 61

In a regression analysis using a bank's stock return, an interest rate proxy, and market returns, a ____ coefficient for the interest rate variable suggests that the bank's performance is ____affected by ____ interest rates.

A) positive; adversely; rising
B) positive; favorably; declining
C) negative; adversely; rising
D) negative; favorably; rising

Question 62

If a bank expects interest rates to consistently ____ over time, it will consider allocating most of its funds to rate-____ assets.

A) decrease; sensitive
B) increase; insensitive
C) increase; sensitive
D) answers A and B are correct
E) none of the above

Question 63

If interest rates ____, banks with ____ duration gaps will be ____ affected.

A) rise; positive; positively
B) rise; positive; adversely
C) decrease; positive; adversely
D) decrease; negative; positively
E) none of the above

Question 64

During a period of ____ interest rates, a bank's net interest margin will likely ____ if its liabilities are more rate sensitive than its assets

A) decreasing; decrease
B) increasing; increase
C) decreasing; increase
D) increasing; decrease
E) answers C and D are correct

Question 65

Which of the following is not a function of a bank's board of directors?

A) overseeing acquisitions
B) determining a compensation system for the bank's executives
C) overseeing policies for changing the bank's capital structure
D) pursuing a proxy contest to change the bank's dividend policy

Question 66

If a bank has a ____ duration gap, its average asset duration is probably ____ than its liability duration.

A) negative; smaller
B) positive; larger
C) negative; larger
D) none of the above

Question 67

Crazer Bank has a profit after taxes of $2 million, total assets of $100 million, and shareholder's equity of $10 million. Crazer's return on equity (ROE) is ____ percent.

A) 18
B) 210
C) 15
D) 20
E) none of the above

Question 68

In an interest rate swap, a bank whose liabilities are ____ rate sensitive than its assets can swap payments with a ____ interest rate in exchange for payments with a ____ interest rate.

A) more; fixed; variable
B) more; variable; fixed
C) less; fixed; variable
D) less; fixed; fixed
E) none of the above

Question 69

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.

A) lower; increase
B) lower; decrease
C) higher; increase
D) higher; decrease
E) none of the above

Question 70

An effective way to align bank managers' interests with shareholders' goal of higher returns is to compensate the managers with fixed salaries without a bonus.

Question 71

When determining the appropriate interest rate to charge on a loan, a bank uses the Federal Reserve's primary credit lending rate as a benchmark and adds a premium to this rate for less creditworthy customers.

Question 72

Which of the following is a method that a bank can use to reduce its credit risk?

A) diversifying its loans across industries
B) focusing on credit card loans
C) focusing on consumer loans
D) selling its holdings of Treasury securities

Question 73

____________ is an agreement for a fee to receive payments when the interest rate of a particular security rises above a specified level by a specified date.

A) interest rate cap
B) interest rate futures contract
C) interest rate swap
D) maximum rate contract