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1. FIN 350 Week 10 Quiz – Strayer
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Quiz 9 Chapter 20 and 21
Bank Performance
1. A(n) ____ in interest rates could reduce a commercial bank's expected cash flows because
the interest paid on deposits may ____ than the interest earned on loans and investments.
a. increase; increase to a greater degree
b. increase; increase to a lesser degree
c. decrease; increase to a greater degree
d. decrease; increase to a lesser degree
2. Even if other external forces (such as interest rates) are unchanged, a commercial bank's
expected cash flows can change in response to a change in its management skills.
a. True
b. False
3. The risk premium on a commercial bank is ____ related to economic growth and ____
related to management skills.
a. positively; negatively
b. positively; positively
c. negatively; negatively
d. negatively; positively
4. Interest income generated from all assets is called
a. net interest margin.
b. the spread.
c. gross interest income.
d. net interest income.

2. 5. Interest paid on deposits and borrowed funds is called
a. net interest expense.
b. net interest margin.
c. gross interest expense.
d. net spread expense.
6. Net interest income is the difference between gross interest income and interest expenses
and is measured as a percentage of
a. liabilities.
b. shareholder's equity.
c. assets.
d. revenues.
7. Fees charged by a bank on various services allow the bank to generate:
a. noninterest income
b. components of net interest margin
c. components of net interest income
d. components of gross interest income
8. The loan loss provision as a percentage of assets should increase during periods of high
economic growth.
a. True
b. False
9. A bank's net interest margin represents the proportion of its investments that are financed

3. with borrowed funds.
a. True
b. False
10. If a bank has short-term deposits and provides long-term fixed rate loans, and interest rates
decline over time, its net interest margin should be:
a. declining over time.
b. rising over time.
c. constant over time.
d. consistently negative.
11. For a given level of return on assets, a bank with a higher level of capital will have a lower
a. return on equity.
b. leverage measure.
c. noninterest income.
d. liquidity.
12. Net income measured as a percentage of assets is
a. return on equity (ROE).
b. return on liabilities (ROL).
c. return on investment (ROI).
d. return on assets (ROA).
13. When only equity counts as capital, the leverage measure is
a. equal to the capital ratio.
b. equal to return on assets.
c. the inverse of return on assets.
d. assets divided by equity.

4. 14. When only equity counts as capital, the higher the capital ratio, the
a. lower the leverage measure.
b. lower the degree of financial leverage.
c. higher the leverage measure.
d. A and B
e. B and C
15. Gross interest income is affected by
a. market interest rates.
b. the composition of assets held by banks.
c. interest expenses.
d. non-interest expenses.
e. A and B
16. If a bank increases its provisions for loan losses, its interest income is ____, and its
noninterest income is ____.
a. reduced; not affected
b. reduced; reduced
c. not affected; reduced
d. not affected; not affected
17. Return on assets (ROA) will usually reveal when a bank's performance is not up to par, but
it does not indicate the reason for poor performance.
a. True
b. False

5. 18. Gross interest expense is affected by
a. market interest rates.
b. the composition of assets held by the bank.
c. fee services provided by the bank.
d. A and B
19. If a bank had long-term fixed-rate assets and short-term liabilities, and interest rates
increased over time, its net interest margin should
a. decrease.
b. increase.
c. stay the same.
d. either A or B, depending on whether the asset maturities exceed 10 years
20. The sum of net interest income, non-interest income, and securities gains, minus provision
for loan losses and non-interest expenses equals
a. net interest margin.
b. gross interest margin.
c. net income.
d. income before taxes.
21. Which of the following banks would likely have the highest return on equity?
a. high return on assets, high capital ratio
b. high return on assets, low capital ratio
c. low return on assets, low capital ratio
d. low return on assets, high capital ratio
22. 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.

6. a. higher; higher
b. higher; lower
c. lower; higher
d. lower; lower
23. Banks G and H are the same size and have similar operations. Bank G holds the minimum
level of capital and Bank H holds a higher level of capital. Bank G's return on equity is
probably ____ volatile than that of Bank H. Bank G's beta is probably ____ than that of
Bank H.
a. less; lower
b. less; higher
c. more; higher
d. more; lower
24. Bank K is conservatively managed. It benefits slightly when general economic conditions
are very favorable and is hurt slightly when general economic conditions are very
unfavorable. Its beta would likely be
a. less than zero.
b. zero.
c. between zero and 1.00.
d. greater than 1.00.
25. ____ results from a bank's sale of securities.
a. Noninterest income
b. Loan loss provision
c. Securities gains and losses
d. Noninterest expenses
e. none of the above

7. 26. Bank X obtains most of its funds from NCDs, while Bank Y obtains much of its funds
from passbook savings and from demand deposit accounts. Given this information, the net
interest margin of Bank X would likely be ____ than that of Bank Y, and noninterest
expenses would likely be ____ than that of Bank Y.
a. greater; greater
b. greater; less
c. less; less
d. less; greater
27. A bank's ROE ____ account for its financial leverage. A bank's ROA ____ account for its
financial leverage.
a. does; does
b. does; does not
c. does not; does not
d. does not; does
28. A bank's ROA ____ account for taxes on earnings. A bank's ROE ____ account for taxes
on earnings.
a. does; does
b. does; does not
c. does not; does not
d. does not; does
29. A bank's ROA ____ account for loan losses. A bank's ROE ____ account for loan losses.
a. does; does
b. does; does not
c. does not; does not
d. does not; does

8. 30. A bank's net interest margin includes
a. noninterest expenses.
b. noninterest income.
c. loan losses.
d. none of the above
31. Banks with relatively ____ ROAs often incur ____ noninterest expenses.
a. low; very low
b. low; very high
c. high; very high
d. none of the above
32. Bank T generally obtains a high percentage of its funds from wholesale CDs. Bank V
which obtains most of its funds from retail CDs. Bank Z obtains its funds from checking
accounts. The bank that will incur the highest interest expenses is ____.
a. Bank T
b. Bank V
c. Bank Z
d. all banks are the same
33. Which of the following is not a factor that affects cash flows of a commercial bank?
a. changes in economic growth
b. changes in the risk-free interest rate
c. changes in industry conditions
d. changes in management abilities
e. all of the above are factors that affect cash flows of a commercial bank
34. The value of a commercial bank can be modeled as the present value of its future cash
flows.

9. a. True
b. False
35. The level of competition is an industry characteristic that will favorably affect cash flows,
because a high level of competition may increase a bank's volume of business or increase
the prices it can charge for its services.
a. True
b. False
36. If the risk premium on a commercial bank rises, so will the required rate of return by
investors who invest in the bank.
a. True
b. False
37. Gross interest expenses of banks are normally higher in periods when market interest rates
are higher
a. True
b. False
38. If banks continue to offer new services (such as insurance or securities services), their
noninterest income will decrease over time.
a. True
b. False
39. The loan loss provision should increase during periods when loan losses are more likely,
such as during a recessionary period.
a. True
b. False

10. 40. Any individual bank's ROA depends on the bank's policy decisions, but not on
uncontrollable factors relating to the economy and government regulations.
a. True
b. False
41. Access to a bank's ROA without any other information reveals when its performance is not
up to par and the reasons for its poor performance.
a. True
b. False
42. During the credit crisis, the level of ____ was much higher than in other periods.
a. interest income
b. income expenses
c. noninterest expenses
d. loan loss provision
43. During periods of ____ economic growth, loan demand tends to be ____, allowing banks
to provide ____ loans.
a. strong; higher; more
b. weak; higher; more
c. weak; lower; more
d. strong; lower; fewer
e. none of the above
44. Changes in ____ are a factor affecting the value of a commercial bank over which the
bank has some control.
a. economic growth
b. the risk-free interest rate

11. c. industry conditions
d. management abilities
e. none of the above
45. If a bank is too ____ in attempting to avoid loan losses, its net interest margin will be
____.
a. conservative; high
b. conservative; low
c. aggressive; high
d. aggressive; low
e. none of the above
46. Banks offering ____ nontraditional services will incur ____ noninterest expenses and ____
noninterest income.
a. fewer; higher; higher
b. more; lower; higher
c. more; higher; higher
d. fewer; lower; higher
e. none of the above
47. When interest rates fall, the rates that a bank pays on deposits typically decline less than
the interest rates that the bank earns on its loans and investments.
a. True
b. False
48. Small banks tend to make more loans to small local businesses, and the rates on these
loans are typically lower than the rates that larger banks charge on the loans they provide
to large businesses.

12. a. True
b. False
49. Which of the following factors affecting a bank’s gross interest income is not influenced
by the bank’s policy decisions?
a. maturity and rate sensitivity of the bank’s assets
b. market interest rate movements
c. the bank’s loan rate
d. composition of the bank’s assets
50. A bank’s return on assets (ROA) could be lower than desired because of all of the
following except:
a. the bank has experienced heavy loan losses.
b. the bank was locked into fixed-rate loans prior to a rise in market interest rates.
c. the bank is receiving a relatively small amount of noninterest income.
d. the bank has reduced its noninterest expenses.
Chapter 21—Thrift Operations
1. The insuring agency for savings institutions is the
a. Securities and Exchange Commission (SEC).
b. Federal Deposit Insurance Corporation (FDIC).
c. U.S. Treasury.
d. Federal Reserve
2. The ____ savings institutions hold the most assets in aggregate.
a. stock owned
b. mutual
c. closely-held

13. d. privatized
3. Which of the following statements is incorrect?
a. A mutual-to-stock conversion allows savings institutions to obtain additional capital
by issuing stock.
b. Because of the difference in owner control, mutual savings institutions are more
susceptible to unfriendly takeovers.
c. When a mutual savings institution is involved in an acquisition, it first converts to a
stock-owned savings institution.
d. Consolidation and acquisitions have caused the number of mutual and stock savings
institutions to decline consistently over the years.
4. Savings institutions use most of their funds for ____. Commercial banks use most of their
funds for ____.
a. mortgages; mortgages
b. mortgages; business loans and commercial real estate loans
c. business loans; commercial real estate loans and mortgages
d. commercial real estate loans and mortgages; business loans
5. Federally-chartered savings institutions are regulated by the
a. Securities and Exchange Commission (SEC).
b. National Credit Union Administration.
c. Federal Reserve.
d. U.S. Treasury.
6. Savings institutions obtain most of their funds from
a. savings and time deposits.
b. loans.
c. mortgages.

14. d. repurchase agreements.
7. When savings institutions are unable to attract sufficient deposits, they can
a. borrow in the federal funds market.
b. borrow from the Federal Reserve.
c. borrow through a repurchase agreement.
d. all of the above
8. The capital of savings institutions is primarily composed of retained earnings and funds
obtained from issuing stock.
a. True
b. False
9. If depositors move money from their checking account to short-term CDs, this would ____
the rate-sensitivity of the savings institution's liabilities to interest rate movements.
a. increase
b. have no effect on
c. decrease
d. A or C, depending on the size of the savings institution
10. ____ are the primary asset of savings institutions.
a. Mortgages
b. Cash balances
c. Investment securities
d. Business loans

15. 11. Savings institutions that reduce their amount of ____ will best reduce their exposure to
interest rate risk.
a. fixed-rate mortgages
b. consumer loans
c. commercial loans
d. short-term securities
12. ____ do not represent an asset of credit unions.
a. Mortgage-backed securities
b. Home equity loans
c. Automobile loans
d. Stocks
13. Which of the following is not an asset of savings institutions?
a. loans
b. mortgages
c. NOW accounts
d. mortgage-backed securities
14. Most mortgages originated by savings institutions are for
a. commercial buildings.
b. land for commercial purposes.
c. single-family homes or multifamily dwellings.
d. none of the above.
15. If a savings institutions' assets have considerably longer duration than its liabilities, it can
reduce its exposure to interest rate risk by

16. a. reducing its proportion of assets in the short duration categories.
b. increasing its proportion of liabilities in the short duration categories.
c. increasing its proportion of liabilities in the long duration category.
d. A and B
16. Adjustable-rate mortgages ____ of rising interest rates on a typical savings institution's
spread. They ____ of declining interest rates on the spread.
a. reduce the adverse impact; reduce the favorable impact
b. reduce the adverse impact; increase the favorable impact
c. increase the adverse impact; increase the favorable impact
d. increase the adverse impact; reduce the favorable impact
17. To measure ____ risk, some savings institutions measure the duration of their respective
assets and liabilities.
a. credit
b. interest rate
c. liquidity
d. none of the above
18. A contract that allows for the purchase of a specified debt security for a specified price at a
future point in time is known as a(n)
a. interest rate futures contract.
b. interest rate swap contract.
c. interest cap contract.
d. security swap contract.
19. When a savings institution uses interest rate swaps to hedge interest rate risk, it would
likely exchange ____ outflows for ____ inflows.

17. a. variable-rate; fixed-rate
b. variable-rate; variable-rate
c. fixed-rate; variable-rate
d. fixed-rate; fixed-rate
20. An interest rate swap reduces the favorable impact of declining interest rates.
a. True
b. False
21. A savings institution owned by its depositors is a ____ savings institution.
a. mutual
b. stock
c. credit
d. closed-end
22. Which of the following was not a major reason for the savings institution crisis in the late
1980s?
a. a large proportion of loan losses on real estate loans
b. a large proportion of loan losses on loans by savings institutions to less-developed
countries
c. fraud
d. illiquidity
e. increased interest expenses
23. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) prohibited
a. savings institutions from merging.
b. commercial banks from acquiring savings institutions.
c. savings institutions.
d. savings institutions from making loans to foreign governments.

18. 24. The risk that a credit union will experience an unanticipated wave of withdrawals without
an offsetting amount of new deposits is ____ risk.
a. credit (default)
b. interest rate
c. liquidity
d. exchange rate
e. none of the above
25. Money market deposit accounts (MMDAs) represent
a. trust accounts managed by savings institutions.
b. checking accounts that do not pay interest.
c. accounts offered primarily by money market funds.
d. deposit accounts offering limited checking and close-to-market interest rates.
26. Savings institutions ____ allowed to borrow funds in the federal funds market; savings
institutions ____ allowed to borrow funds from the Federal Reserve.
a. are; are
b. are; are not
c. are not; are not
d. are not; are
27. Savings institutions commonly ____ to reduce their risk.
a. purchase futures contracts on stock indexes
b. purchase futures contracts on treasury bonds
c. sell futures contracts on stock indexes
d. sell futures contracts on treasury bonds

19. 28. Stock-owned savings institutions ____ susceptible to unfriendly takeovers. Mutual savings
institutions ____ susceptible to unfriendly takeovers.
a. are; are not
b. are; are
c. are not; are
d. are not; are not
29. Savings institutions can obtain capital by:
a. issuing stock.
b. repurchasing stock.
c. borrowing from the Federal Reserve.
d. borrowing in the federal funds market.
30. To obtain short-term funds, savings institutions commonly borrow funds in the ____
market.
a. stock
b. bond
c. mortgage
d. federal funds
e. futures
31. ____ risk is probably the least concern for savings institutions.
a. Liquidity
b. Exchange rate
c. Credit
d. Interest rate

20. 32. Which of the following is not an advantage of credit unions?
a. They can offer attractive rates to their member savers and borrowers because they are
nonprofit and therefore are not taxed.
b. Their noninterest expenses are relatively low, because their labor, office, and furniture
are often donated or provided at a very low cost through the affiliation of their
members.
c. Their large membership allows them to effectively diversify geographically.
d. All of the above are advantages of credit unions.
33. A savings institution's cash flows are ____ related to interest rate movements.
a. positively related to
b. negatively related to
c. unrelated to
d. none of the above
34. The primary use of credit union funds is
a. loans to credit union members.
b. the purchase of government securities.
c. the purchase of agency securities.
d. the purchase of corporate bonds.
e. none of the above
35. ____ are non-profit organizations composed of members with a common bond.
a. Credit unions
b. Savings banks
c. Savings and loan associations
d. Commercial banks

21. 36. Because credit unions ____ stock, they are technically owned by the ____.
a. issue; depositors
b. do not issue; depositors
c. issue; stockholders
d. do not issue; management
37. Credit unions obtain most of their funds from
a. issuing common stock.
b. retained earnings.
c. share deposits by members.
d. issuing long-term bonds.
38. Checkable accounts offered by credit unions are called
a. NOW accounts.
b. money market deposit accounts.
c. share certificates.
d. share drafts.
39. The ____ acts as a temporary lender to credit unions.
a. World Bank
b. Central Liquidity Facility
c. Federal Home Loan Bank
d. National Credit Union Administration
40. The sensitivity of cost of funds to interest rate movements has been
a. greater for credit unions than savings institutions.
b. greater for credit unions than commercial banks.
c. lower for credit unions than for savings institutions or commercial banks.

22. d. similar for credit unions as savings institutions and commercial banks.
41. Credit unions use the majority of their funds to
a. purchase investment securities.
b. provide commercial real estate loans.
c. provide small business loans to members.
d. provide consumer loans to members.
42. If credit union members have a particular affiliation with their employers and large layoffs
occur, the credit union's exposure to ____ risk may increase.
a. settlement
b. interest rate
c. credit
d. none of the above
43. The maximum insurance per depositor by the National Credit Union Insurance Fund is
a. $250,000.
b. $50,000.
c. $40,000.
d. $25,000.
44. Comparing credit unions with commercial banks and savings institutions
a. credit unions are less able to quickly generate additional deposits.
b. savings institutions and commercial banks can borrow from the Central Liquidity
Facility, but credit unions cannot.
c. savings institutions and commercial banks are less able to quickly generate additional
deposits.
d. credit unions have less exposure to liquidity risk.

23. 45. The majority of maturities on consumer loans offered by credit unions are ____ term,
causing income generated on their asset portfolio to be ____ to interest rate movements.
a. long; insensitive
b. short or medium; sensitive
c. long; sensitive
d. short or medium; insensitive
46. Because credit unions' sources and uses of funds are generally interest rate ____,
movements in interest revenues and interest expenses of credit unions are ____.
a. sensitive; negatively correlated
b. insensitive; highly correlated
c. sensitive; uncorrelated
d. sensitive; highly correlated
e. insensitive; uncorrelated
47. Deposits at credit unions are called
a. NOW accounts.
b. money market deposit accounts.
c. shares.
d. credit union deposit accounts.
48. Credit unions differ from savings institutions in that they use a ____ proportion of their
funds for mortgages and are ____ institutions.
a. smaller; non-profit
b. larger; non-profit
c. smaller; for-profit
d. larger; for-profit

24. 49. Today, credit unions are regulated as to the
a. types of services they can offer.
b. rates they offer on deposits.
c. maturity of residential loans they make.
d. size of residential mortgage loans.
50. The National Credit Union Share Insurance Fund (NCUSIF) requires all
a. federal-chartered credit unions to obtain insurance from the NCUSIF.
b. state-chartered credit unions to obtain insurance from the NCUSIF.
c. credit unions to pay an annual supplemental insurance premium each year.
d. depository institutions to pay a supplemental insurance premium each year.
51. Federal credit unions are regulated and supervised by the
a. Central Liquidity Facility.
b. National Credit Union Administration.
c. Securities and Exchange Commission.
d. Corporate Credit Union Network.
e. none of the above
52. According to your text, about ____ percent of credit unions are insured by the National
Credit Union Share Insurance Fund.
a. 20
b. 40
c. 60
d. 90

25. 53. In general, savings institutions are larger than commercial banks.
a. True
b. False
54. Today, savings institutions are not permitted to invest in junk bonds.
a. True
b. False
55. Because savings institutions commonly use long-term liabilities to finance short-term
assets, they depend on additional deposits to accommodate withdrawal requests.
a. True
b. False
56. Savings institutions commonly measure the gap between their rate-sensitive assets and
rate-sensitive liabilities in order to determine their exposure to credit risk.
a. True
b. False
57. Savings institutions do not really know the actual maturity of the mortgages they hold and
cannot perfectly match the interest rate sensitivity of their assets and liabilities.
a. True
b. False
58. In general, when interest rates fall, a savings institution's cost of obtaining funds declines
more than the decline in the interest earned on its loans and investments.
a. True
b. False

26. 59. High economic growth results in more risk for a savings institution, since its consumer
loans, mortgage loans, and investments in debt securities are more likely to default.
a. True
b. False
60. Because credit unions do not issue stock, they are technically sole proprietorships.
a. True
b. False
61. Because credit unions are for-profit organizations, their income is taxable.
a. True
b. False
62. Credit unions obtain most of their funds by borrowing from the U.S. government.
a. True
b. False
63. Credit unions use the majority of their funds to invest in the stock market.
a. True
b. False
64. The National Credit Union Administration (NCUA) is responsible for regulating savings
institutions.
a. True
b. False

27. 65. Credit unions are unregulated as to the types of services they offer.
a. True
b. False
66. All federally chartered credit unions are required to obtain insurance from the National
Credit Union Share Insurance Fund (NCUSIF).
a. True
b. False
67. The primary source of funds for credit unions is
a. share certificates.
b. share deposits.
c. share drafts.
d. borrowed funds from the Central Liquidity Facility (CLF).
e. none of the above
68. Which of the following is not an objective of a credit union?
a. to satisfy credit union members
b. to act as an intermediary for members by repackaging deposits
c. to provide loans to members who are in need of funds
d. all of the above are objectives of credit unions.
69. ____ are not a main source of funds for savings institutions.
a. Deposits
b. Borrowed funds
c. Capital
d. Mortgages

28. 70. Which of the following is not a deposit source of funds for savings institutions?
a. passbook savings
b. retail CDs
c. money market deposit accounts
d. negotiable order of withdrawal (NOW) accounts
e. All of the above are deposit sources of funds for savings institutions.
71. ____ is not a main use of funds for savings institutions.
a. Capital
b. Mortgages
c. Consumer and commercial loans
d. Mortgage-backed securities
72. Savings institutions were adversely affected by the credit crisis because of their exposure
to ____.
a. deposits
b. mortgages
c. commercial loans
d. loans from the Federal Reserve
73. To manage interest rate risk, a savings institution could use
a. fixed-rate mortgages.
b. currency options.
c. interest rate futures contracts.
d. letters of credit.

29. 74. Under the Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), all
federally chartered savings institutions are to be regulated by the Federal Reserve, so these
savings institutions no longer have an incentive to go regulator shopping.
a. True
b. False
75. During the credit crisis of 2008–2009, some credit unions suffered losses on second
mortgages and home-equity loans that they had provided, and some credit unions
experienced losses on mortgage-backed securities in which they had invested.
a. True
b. False
76. During the credit crisis of 2008–2009:
a. the Resolution Trust Corporation was formed to deal with insolvent savings
institutions.
b. several large savings institutions failed, including Countrywide Financial and
Washington Mutual.
c. savings institutions were insulated because their regulator subsidized any of them that
experienced large loan defaults.
d. the main problem for savings institutions was exposure to interest rate risk.
77. During the credit crisis of 2008–2009, savings institutions experienced all of the following
except:
a. high default rates on loans to finance leveraged buyouts.
b. a decline in the level of mortgage originations.
c. high default rates on subprime mortgages.
d. losses on investments in mortgage-backed securities.

30. 78. The Financial Reform Act of 2010 did all of the following except:
a. strengthened the standards required to obtain a mortgage.
b. required more disclosures by financial institutions regarding the quality of the
underlying assets when they sell mortgage-backed securities.
c. required savings institutions to sell off any holdings of junk bonds and prohibited
them from investing in junk bonds in the future.
d. established the Consumer Financial Protection Bureau.