FIN 4020: Chapter 12 Smartbook

Question 1

Financial information on commercial banks is reported in two documents: the ________ and the ________.

a) balance sheet; uniform bank performance report
b) report of condition; report of income
c) income statement; report of income
d) uniform bank performance report; statement of cash flows

Answer 1

report of condition; report of income

Question 2

Unlike manufacturing companies, the majority of a commercial bank’s assets are ________ rather than ________.

a) financial assets; fixed assets
b) fixed assets; financial assets
c) fixed assets; tangible assets
d) intangible assets; tangible assets

Answer 2

financial assets; fixed assets

Question 3

Deposits at other financial institutions are used to purchase services from those financial institutions who are serving as

a) correspondent banks.
b) service banks.
c) parent banks.
d) partners.

Answer 3

correspondent banks.

Question 4

Investment securities (choose three)

a) always have long maturities.
b) can be traded in secondary markets.
c) are inexpensive.
d) have low default risk.
e) are highly liquid.

Answer 4

can be traded in secondary markets.

have low default risk.

are highly liquid.

Question 5

Some of the common long-term investments carried on the bank’s balance sheet are (choose four)

a) U.S. agency securities.
b) commercial paper.
c) U.S. Treasury bonds.
d) mortgage-backed securities.
e) junk bonds.
f) municipals.

Answer 5

U.S. agency securities.

U.S. Treasury bonds.

mortgage-backed securities.

municipals.

Question 6

Commercial banks must submit their financial statements to regulators and shareholders at the end of every ________.

a) fiscal year
b) calendar quarter
c) calendar year
d) fiscal quarter

Answer 6

calendar quarter

Question 7

Unlike manufacturing companies, the majority of a commercial bank’s liabilities are ________ and ________.

Multiple choice question.

short-term deposits; short-term borrowings

long-term deposits; long-term borrowings

long-term deposits; short-term borrowings

short-term deposits; long-term borrowings

Answer 7

short-term deposits; short-term borrowings

Question 8

The currency and coin on hand needed to meet customer withdrawals is called

Multiple choice question.

vault cash.

reserves.

liquidity.

cash items.

Answer 8

vault cash

Question 9

Short-term investment securities generate ________ for the bank and provide ________.

Multiple choice question.

interest expense; liquidity

risk; income

risk; liquidity

interest income; liquidity

Answer 9

interest income; liquidity

Question 10

Which of the following long-term securities are default free?

Multiple select question.

Freddie Mac securities

Municipal bonds

Ginnie Mae bonds

Fannie Mae securities

U.S. Treasury bonds

Answer 10

Ginnie Mae bonds

U.S. Treasury bonds

Question 11

A bank’s report of income is its ________ and the report of condition is its ________.

Multiple choice question.

income statement; balance sheet

balance sheet; income statement

statement of cash flows; balance sheet

income statement; statement of cash flows

Answer 11

income statement; balance sheet

Question 12

Multiple bank holding companies control ________ subsidiary commercial banks and report _______ financial statement(s) for the subsidiary banks.

Multiple choice question.

two or more; consolidated

one; simple

more than two; separate

two or more; separate

Answer 12

two or more; consolidated

Question 13

Cash items in the process of collection are checks drawn on other institutions that have been deposited at the bank but not yet

Multiple choice question.

signed.

cleared.

returned.

approved.

Answer 13

cleared

Question 14

A repurchase agreement is a _________ federal funds loan.

Multiple choice question.

guaranteed

long-term

collateralized

risky

Answer 14

collateralized

Question 15

Long-term securities held on the bank’s balance sheet generate ________ and ________.

Multiple choice question.

interest income; dividends

interest income; fee income

interest income; capital gains or losses

fee income; capital gains or losses

Answer 15

interest income; capital gains or losses

Question 16

Financial information on commercial banks is reported in two documents: the ________ and the ________.

Multiple choice question.

balance sheet; uniform bank performance report

report of condition; report of income

uniform bank performance report; statement of cash flows

income statement; report of income

Answer 16

report of condition; report of income

Question 17

Commercial loans that are backed by a specific assets of the borrower are called

Multiple choice question.

junior debt.

debentures.

secured loans.

unsecured loans.

Answer 17

secured loans.

Question 18

Unlike manufacturing companies, the majority of a commercial bank’s assets are ________ rather than ________.

Multiple choice question.

financial assets; fixed assets

fixed assets; tangible assets

intangible assets; tangible assets

fixed assets; financial assets

Answer 18

financial assets; fixed assets

Question 19

Real estate loans are primarily ________ and some ________.

Multiple choice question.

mortgage loans; mortgage backed securities

mortgage loans; revolving home equity loans

revolving home equity loans; mortgage loans

mortgage loans; commercial loans

Answer 19

mortgage loans; revolving home equity loans

Question 20

The sum of investment securities and net loans and leases are the bank’s

Multiple choice question.

investment assets.

total assets.

earning assets.

risk assets.

Answer 20

earning assets.

Question 21

Federal funds loans are _______ and ________ loans made by a bank with excess reserves to one that needs the funds.

Multiple choice question.

long-term; uncollateralized

short-term; collateralized

long-term; collateralized

short-term; uncollateralized

Answer 21

short-term; uncollateralized

Question 22

Some of the common long-term investments carried on the bank’s balance sheet are (choose four)

Multiple select question.

U.S. agency securities.

municipals.

U.S. Treasury bonds.

commercial paper.

junk bonds.

mortgage-backed securities.

Answer 22

U.S. agency securities.

municipals.

U.S. Treasury bonds.

mortgage-backed securities.

Question 23

Loans that are used to finance a firm’s capital needs, equipment purchases and plant expansion are called

Multiple choice question.

commercial mortgage loans.

term loans.

syndicated loans.

commercial and industrial loans.

Answer 23

commercial and industrial loans.

Question 24

Residential mortgages are very long term loans with an average maturity of approximately

Multiple choice question.

10 years.

25 years.

20 years.

30 years.

Answer 24

20 years

Question 25

An accumulated reserve account on the bank's balance sheet where the bank records loans that are in danger of default is the Multiple choice question. contra-loan account. default allowance. adjustment for bad loans. allowance for loan and lease losses.

Answer 25

allowance for loan and lease losses.

Question 26

Investment securities (choose three) Multiple select question. always have long maturities. have low default risk. are inexpensive. can be traded in secondary markets. are highly liquid.

Answer 26

have low default risk. can be traded in secondary markets. are highly liquid.

Question 27

Long-term securities held on the bank's balance sheet generate ________ and ________. Multiple choice question. fee income; capital gains or losses interest income; fee income interest income; capital gains or losses interest income; dividends

Answer 27

interest income; capital gains or losses

Question 28

Transaction accounts at banks held by individuals, corporations, partnerships and governments that pay no explicit interest are Multiple choice question. regular savings. passbook savings. NOW accounts. demand deposits.

Answer 28

demand deposits.

Question 29

Commercial and industrial loans can be short-term loans to fund ________ or long-term loans to fund ________. Multiple choice question. working capital; fixed assets fixed assets; working capital long-term securities; short-term securities short-term securities; long-term securities

Answer 29

working capital; fixed assets

Question 30

MMDA's are checkable but subject to the following limitations (choose all that apply): Multiple select question. the number of automatic transfers per month is limited. there is a maximum balance limitation. the number of checks written per month and minimum check denomination is restricted. a minimum balance is required. investors cannot hold a NOW account and MMDA account with the same bank.

Answer 30

the number of automatic transfers per month is limited. the number of checks written per month and minimum check denomination is restricted. a minimum balance is required.

Question 31

The interest on a loan paid to the bank by the borrower but not yet recorded as interest income on the bank's income statement is recorded on the balance sheet as Multiple choice question. a liability. unearned income. accrued income. accrued interest.

Answer 31

unearned income

Question 32

Fixed-maturity time deposits with face values under $100,000 are Multiple choice question. wholesale CD's. commercial paper. MMDA accounts. retail CD's.

Answer 32

retail CD's.

Question 33

NOW accounts require that the depositor maintain ______ or the account reverts to a demand deposit. Multiple choice question. fee payments a savings account also a minimum account balance minimum monthly transactions

Answer 33

a minimum account balance

Question 34

One important difference between federal funds loans and repurchase agreements is that federal funds loans can be _______ while repurchase agreements are difficult to transact ________. Multiple choice question. entered into anytime during the banking day; late in the day due to their collateral requirement setup only before noon of the day of the trade; unless the collateral is acceptable to both parties setup using the Federal Reserve Fedwire network; before noon in the U.S. due to the global nature of the market difficult to setup late in the day; due to their collateral requirement

Answer 34

entered into anytime during the banking day; late in the day due to their collateral requirement

Question 35

Loans that are used to finance a firm's capital needs, equipment purchases and plant expansion are called Multiple choice question. commercial mortgage loans. term loans. commercial and industrial loans. syndicated loans.

Answer 35

commercial and industrial loans.

Question 36

Banks facing temporary liquidity crunches can borrow from the ______ at the _______. Multiple choice question. U.S. Treasury; LIBOR rate central bank's discount window; federal funds rate central bank's discount window; discount rate parent holding company; prime rate

Answer 36

central bank's discount window; discount rate

Question 37

Banks are not required to hold cash reserves against MMDA's, so they are generally able to _________ than on NOW accounts Multiple choice question. offer more benefits charge lower fees support higher balances pay higher rates

Answer 37

pay higher rates

Question 38

The sum of investment securities and net loans and leases are the bank's Multiple choice question. earning assets. risk assets. investment assets. total assets.

Answer 38

earning assets.

Question 39

The major categories of bank time deposits are ________ and ________. Multiple choice question. retail certificates of deposit; NOW accounts retail certificates of deposit; passbook savings wholesale certificates of deposit; MMDA's retail certificates of deposit; wholesale certificates of deposit

Answer 39

retail certificates of deposit; wholesale certificates of deposit

Question 40

Four additional sources of purchased funds available to banks are (choose four) Multiple select question. banker's acceptances. commercial paper. high-yield bonds. junk bonds. medium-term notes. discount window loans.

Answer 40

banker's acceptances. commercial paper. medium-term notes. discount window loans.

Question 41

Although a bank subsidiary itself cannot issue commercial paper, its _______ can do so and provide the funds to the bank subsidiary. Multiple choice question. parent bank holding company own bank subsidiary peer bank subsidiary correspondent bank

Answer 41

parent bank holding company

Question 42

Banks offer _________ in order to be competitive with the similar funds offered by groups such as Vanguard and Fidelity. Multiple choice question. retail certificates of deposit passbook savings accounts money market deposit accounts (MMDA) negotiable certificates of deposit

Answer 42

money market deposit accounts (MMDA)

Question 43

Each period, the difference between loans lost and loans recovered is the bank's Multiple choice question. net write-offs. net loans. net loan assets. net losses.

Answer 43

net write-offs.

Question 44

Fixed-maturity time deposits with face values over $100,000 and which can be sold in a secondary market to other investors are Multiple choice question. wholesale CD's. retail CD's. commercial paper. MMDA accounts.

Answer 44

wholesale CD's.

Question 45

In addition to issuing deposits, banks also borrow in various markets for purchased funds, which are not subject to ________ or _______. Multiple choice question. reserve requirements; taxes reserve requirements; FDIC insurance payments excessive risk; excessive loss taxes; FDIC insurance payments

Answer 45

reserve requirements; FDIC insurance payments

Question 46

Since the largest banks in the U.S. are owned by bank holding companies, these large banks have access to _______ as a funding source that smaller banks do not. Multiple choice question. medium-term notes repurchase agreements commercial paper banker's acceptances

Answer 46

commercial paper

Question 47

True or false: a bank's core deposits are defined to be its demand deposits, NOW accounts, MMDA accounts, other savings accounts and retail CD's. True false question. True False

Answer 47

True

Question 48

Off-balance-sheet items are less visible to financial statement readers because they often appear in ________ on the financial statements. Multiple choice question. liability accounts footnotes equity accounts asset accounts

Answer 48

footnotes

Question 49

A(n) ________ is a contractual commitment by a financial institution to loan to a customer a certain amount at given interest rate terms for a specified period of time. Multiple choice question. debenture amortized loan loan commitment term loan

Answer 49

loan commitment

Question 50

True or false: A bank's purchased funds are its brokered deposits, wholesale CD's, deposits at foreign offices, repurchase agreements and subordinated notes and debentures. True false question. True False

Answer 50

True

Question 51

The largest group of trusts managed by banks' trust departments are Multiple choice question. pension funds. individual trusts. mutual funds. brokerage accounts.

Answer 51

individual trusts.

Question 52

Off-balance-sheet items are ________ and ________ that may affect the future status of a financial institutions balance sheet. Multiple choice question. contingent assets; contingent liabilities derivatives; securities assets; contingent liabilities Reason: contingent assets; contingent liabilities loans; securities Reason: contingent assets; contingent liabilities

Answer 52

contingent assets; contingent liabilities

Question 53

The largest market available for purchased funds is the Multiple choice question. repurchase agreement market. banker's acceptance market. federal funds market. commercial paper market.

Answer 53

federal funds market.

Question 54

In return for making the loan commitment, the bank may charge a(n) ______ fee and a(n) _______ for use of the funds. Multiple select question. commitment payment origination up-front

Answer 54

commitment up-front

Question 55

True or false: Because interest income is recorded on an accrued basis, loans on which interest payments are up to 90 days past due can still be recorded as generating income for a bank.

Answer 55

True

Question 56

The second largest group of trusts managed by banks' trust departments are Multiple choice question. brokerage accounts. Reason: pension funds. pension funds. individual trusts. Reason: pension funds. mutual funds. Reason: pension funds.

Answer 56

pension funds.

Question 57

Interest expense on the bank's income statement include interest paid on ________ and on ________. Multiple choice question. C&I loans; real estate loans interest-bearing deposits; purchased funds transaction accounts; CD's short-term debt securities; long-term debt securities

Answer 57

interest-bearing deposits; purchased funds

Question 58

When the customer finally draws funds on the loan commitment, the bank shows a(n) ________ on its balance sheet, though the bank must stand ready to loan ______ at any time. Multiple choice question. asset; at least half of the principal Reason: loan asset; the full amount liability; the full amount Reason: loan asset; the full amount liability; at least half of the principal Reason: loan asset; the full amount loan asset; the full amount

Answer 58

loan asset; the full amount

Question 59

Interest income is taxable to the bank, with the exception of interest on ________ and tax-exempt income from ________. Multiple choice question. federal funds loans; direct lease financing municipal securities; federal funds loans municipal securities; direct lease financing U.S. Treasury securities; direct lease financing

Answer 59

municipal securities; direct lease financing

Question 60

The ________ department of a commercial bank holds and manages assets for individuals or corporations. Multiple choice question. brokerage Reason: trust escrow Reason: trust trust title Reason: trust

Answer 60

trust

Question 61

Multiple Choice Question The ________ is a noncash, tax deductible expense which represents the current period's allocation to the ________ listed on the balance sheet. Multiple choice question. provision for loan losses; loans and leases account allowance for loan losses; provision for loan losses interest on other borrowed funds; allowance for loan losses provision for loan losses; allowance for loan losses

Answer 61

provision for loan losses; allowance for loan losses

Question 62

Interest expense is the ________ major category on the commercial bank's income statement. Multiple choice question. fourth Reason: second third Reason: second first Reason: second second

Answer 62

second

Question 63

A(n) ________ is a contractual commitment by a financial institution to loan to a customer a certain amount at given interest rate terms for a specified period of time. Multiple choice question. debenture term loan amortized loan loan commitment

Answer 63

loan commitment

Question 64

For a commercial bank, net income is the sum of net interest income and net noninterest income, minus ______ and ______. Multiple choice question. taxes; provision for loan loss provision for loan loss; taxes and extraordinary items provision for loan loss; extraordinary items extraordinary items; taxes

Answer 64

provision for loan loss; taxes and extraordinary items

Question 65

True or false: Because interest income is recorded on an accrued basis, loans on which interest payments are up to 90 days past due can still be recorded as generating income for a bank.

Answer 65

True

Question 66

ROE can also be expressed as the product of the ________ times the ________. Multiple choice question. profit margin; equity multiplier return on assets; equity multiplier return on assets; asset utilization profit margin; asset utilization

Answer 66

return on assets; equity multiplier

Question 67

The banks profit margin (PM) is the ratio of its ________ divided by its ________ and is a measure of how efficiently it converts income into profit. Multiple choice question. net income; total liabilities net income; total operating income net interest income; total assets net income; total assets

Answer 67

net income; total operating income

Question 68

The size of the provision for loan losses is determined by the bank's management, but it is subject to a maximum tax-deductible amount set by the Multiple choice question. FDIC. Reason: IRS. IRS. FRS. Reason: IRS. OCC. Reason: IRS.

Answer 68

IRS

Question 69

Interest expense on the bank's income statement include interest paid on ________ and on ________. Multiple choice question. C&I loans; real estate loans short-term debt securities; long-term debt securities interest-bearing deposits; purchased funds transaction accounts; CD's

Answer 69

interest-bearing deposits; purchased funds

Question 70

More so than for other types of firms, the commercial bank's net income is directly related to the _______ and the _______ on the balance sheet and the _______ associated with each. Multiple choice question. interest-paying assets; interest-earning liabilities; interest rate loans; securities; interest rate total assets; total liabilities; costs interest-earning assets; interest-paying liabilities; interest rate

Answer 70

interest-earning assets; interest-paying liabilities; interest rate

Question 71

The bank's net interest margin (NIM) is equal to ________ divided by ________, and is a measure of the net return on the bank's interest earning assets. Multiple choice question. net income; earning assets net interest income; total assets net interest income; earning assets net noninterest income; earning assets

Answer 71

net interest income; earning assets

Question 72

A commercial bank's ROE is defined as the ratio of ________ divided by ________. Multiple choice question. net interest income; total equity capital net income; total earning assets net income; total equity capital net income; total assets

Answer 72

net income; total equity capital

Question 75

The bank's return on assets (ROA) is the product of the ________ times the ________, and is a measure of how efficiently the bank uses its total assets to generate profits. Multiple choice question. profit margin; asset utilization asset utilization; equity multiplier return on equity; equity multiplier profit margin; equity multiplier

Answer 75

profit margin; asset utilization

Question 76

The ________ is a noncash, tax deductible expense which represents the current period's allocation to the ________ listed on the balance sheet. Multiple choice question. provision for loan losses; loans and leases account allowance for loan losses; provision for loan losses provision for loan losses; allowance for loan losses interest on other borrowed funds; allowance for loan losses

Answer 76

provision for loan losses; allowance for loan losses

Question 77

Interest expense is the ________ major category on the commercial bank's income statement. Multiple choice question. first third fourth second

Answer 77

second

Question 78

Due to their ready access to capital markets, large banks generally operate with less ________ than small banks. Multiple choice question. equity capital deposits investment securities cash

Answer 78

equity capital

Question 79

True or false: The bank's net interest income is equal to interest income minus interest expense.

Answer 79

True

Question 80

Large banks generate more ________ and ________ than small banks. Multiple choice question. noninterest income; have more equity interest income; are less diversified noninterest income; are less diversified noninterest income; are more diversified

Answer 80

noninterest income; are more diversified

Question 81

The bank's earning assets are the sum of its ________ and its ________. Multiple choice question. investment securities; net loans and leases repurchase agreements and federal funds purchased; net loans and leases loans and leases; U.S. Treasury securities loans; leases

Answer 81

investment securities; net loans and leases

Question 82

The asset utilization ratio (AU) is the ratio of its ________ divided by its ________, and is a measure of how efficiently the bank uses its assets to generate operating income. Multiple choice question. total operating income; total equity total operating income; total assets net interest income; total assets net noninterest income; total assets

Answer 82

total operating income; total assets

Question 83

Large banks use more ________ and less ________ than small banks. Multiple choice question. purchased funds; core deposits purchased funds; commercial paper Reason: purchased funds; core deposits core deposits; purchased funds Reason: purchased funds; core deposits time deposits; purchase funds Reason: purchased funds; core deposits

Answer 83

purchased funds; core deposits