Deck 17: Commercial Bank Operations

Question 1

Which type of savings account transfers funds to a checking account when checks are written?

A)ATS
B)passbook savings
C)CDs
D)MMDAs

Answer 1

A

Question 2

Commercial banks can be a lender or a borrower when using repurchase agreements and loans in the federal funds market.

Answer 2

True

Question 3

The intent of federal funds transactions is to

A)correct short-term fund imbalances experienced by banks.
B)correct long-term fund imbalances experienced by banks.
C)serve as a permanent source of bank capital.
D)serve as the primary depository source of funds.

Answer 3

A

Question 4

Protective covenants impose conditions in which the bank must provide additional loans to a borrower to protect the borrower from going bankrupt.

Question 5

Which of the following is true?

A)The primary credit lending rate is set by the president of the United States.
B)The federal funds rate is set by the president of the United States.
C)The primary credit lending rate is set by commercial banks.
D)The primary credit lending rate is now set at a level above the federal funds rate.
E)A and B

Question 6

____ are offered to bank customers who desire to write checks against their account.

A)Time deposit accounts
B)CDs
C)Demand deposit accounts
D)Money market deposit accounts

Question 7

A(n) ____ account provides checking services as well as interest.

A)demand deposit
B)negotiable order of withdrawal (NOW)
C)passbook savings
D)time deposit

Question 8

Obtaining funds through ____ is not a common source of funds for banks to satisfy a temporary deficiency of funds?

A)issuing bonds
B)the federal funds market
C)repurchase agreements
D)borrowing from the Federal Reserve

Question 9

When a bank in need of funds for a few days sells some of its government securities to a corporation with a temporary excess of funds, then buys them back shortly thereafter, this is a

A)federal funds loan.
B)discount window loan.
C)repurchase agreement.
D)commercial paper transaction.

Question 10

Because U.S. dollars are widely used as an international medium of exchange, the Eurodollar market is very active.

Question 11

The federal funds rate is ____ the yield on a Treasury security with a similar term remaining until maturity.

A)substantially above
B)substantially below
C)close to
D)none of the above; the rate is much higher than the Treasury yield in some periods, and much lower than the Treasury yield in other periods

Question 12

For any given bank, federal funds ____ represent a(n) ____.

A)purchased; asset
B)sold; liability
C)purchased; liability
D)A and B

Question 13

A ____ is a time deposit offered by some large banks to corporations, with a specific maturity date, minimum deposit of $100,000 or more, and a secondary market.

A)retail CD
B)negotiable CD
C)market CD
D)protective CD

Question 14

Commercial banks have expanded in recent years not only by acquiring other banks but also by acquiring other types of financial service firms.

Question 15

Which of the following statements is incorrect?

A)Banks have expanded their business across services over time.
B)Acquisitions have been a convenient method for banks to grow quickly and capitalize on economies of scale.
C)The banking industry has become less concentrated in recent years.
D)All of the statements above are correct.

Question 16

Money market deposit accounts differ from conventional time deposits in that they

A)specify a maturity.
B)offer limited check writing privileges.
C)are less liquid.
D)none of the above

Question 17

A bank's sources of funds represent liabilities or equity of the bank.

Question 18

The Federal Reserve provides loans to banks in order to

A)resolve permanent shortages of funds experienced by banks.
B)resolve temporary shortages of funds experienced by banks.
C)finance the shortages of funds of finance companies.
D)none of the above

Question 19

When banks need funding for just a few days, they would most likely

A)issue bonds and then call them.
B)issue stock and then repurchase it.
C)borrow in the federal funds market.
D)issue NCDs.

Question 20

The operations, management, and regulation of a financial conglomerate are the same irrespective of the types of services offered.

Question 21

As a source of funds, small banks rely more heavily on ____, and larger banks rely more heavily on ____.

A)time deposits and foreign deposits; savings deposits and short-term borrowings
B)savings deposits and short-term borrowings; foreign deposits and time deposits
C)savings and time deposits; foreign deposits and short-term borrowings
D)foreign deposits and short-term borrowings; savings and time deposits

Question 22

Banks sometimes need funds and sometimes have excess funds available. Which of the following is commonly a source of bank funds and a use of bank funds?

A)MMDAs
B)federal funds
C)the discount window
D)retail CDs

Question 23

All other things equal, when banks issue new stock, they

A)increase reported earnings per share.
B)decrease their ability to absorb operating losses.
C)dilute the ownership of the bank.
D)A and B

Question 24

Which of the following is most appropriate for a business that may experience a sudden need for funds but does not know precisely when?

A)working capital loan
B)direct lease loan
C)term loan
D)informal line of credit

Question 25

A ____ loan may be especially appropriate when the bank wishes to avoid adding more debt to its balance sheet.

A)term
B)bullet
C)direct lease
D)revolving credit

Question 26

In a revolving credit loan, the bank typically charges businesses a commitment fee on any unused funds.

Question 27

____ loans are primarily used to finance the purchase of fixed assets.

A)Term
B)Working capital
C)Informal line of credit
D)Revolving credit

Question 28

Transaction deposits do not include

A)demand deposits.
B)NCDs.
C)NOW accounts.
D)all of the above are transactions deposits

Question 29

Commercial banks are not allowed to invest in

A)Treasury securities.
B)Freddie Mac securities.
C)Fannie Mae securities.
D)Banks can invest in all securities mentioned above.

Question 30

The bank holding company structure allows more flexibility to borrow funds, issue stock, repurchase the company's own stock, and acquire other firms.

Question 31

Bank regulators are concerned that banks may maintain a higher level of capital than they should and have therefore imposed capital requirements on them.

Question 32

The interest rate banks charge their most creditworthy customers is known as the

A)federal funds rate.
B)primary credit lending rate.
C)prime rate.
D)call money rate.

Question 33

Bank loans designed to support a firm's ongoing business operations are called

A)term loans.
B)working capital loans.
C)direct lease loans.
D)revolving credit loans.

Question 34

Like other market interest rates, the primary credit lending rate moves in reaction to changes in demand or supply of funds or both.

Question 35

Subordinated notes and debentures are examples of

A)primary capital.
B)secondary capital.
C)depository sources of funds.
D)repurchase agreements.

Question 36

The yield on repurchase agreements is slightly higher than the federal funds rate at any given point in time.

Question 37

Which of the following accounts does not allow checks (at least a limited amount) to be written?

A)NOW accounts
B)money market deposit accounts (MMDAs)
C)retail CDs
D)all of the above allow checks to be written

Question 38

Money market deposit accounts (MMDAs)

A)require a maturity of 6 months or longer.
B)allow a limited number of checks to be written against the account.
C)pay a higher interest rate than CDs.
D)none of the above

Question 39

The main use of bank funds is for

A)loans.
B)investment securities.
C)fixed assets.
D)repurchase agreements.

Question 40

Cash held ____ represents the major portion of a bank's required reserves.

A)at other commercial banks
B)in a bank's vault
C)on deposit at the federal funds window
D)on deposit with the Board of Governors

Question 41

The primary credit lending rate is determined by

A)the Federal Reserve.
B)Congress.
C)the Treasury.
D)the President of the United States.

Question 42

Banks sometimes prefer to minimize their amount of capital since

A)interest payments must be paid by the bank on all capital that is held.
B)they try to avoid diluting ownership of the bank.
C)A and B
D)none of the above

Question 43

When a bank obtains funds through a ____, the provider of the funds receives collateral.

A)retail CD
B)NOW account
C)repurchase agreement
D)money market deposit account

Question 44

Bank capital represents funds obtained through ____ and through ____.

A)issuing stock; offering long-term CDs
B)issuing repurchase agreements; issuing bonds
C)issuing stock; retaining earnings
D)offering long-term CDs; issuing bonds

Question 45

The interest rate charged on loans between depository institutions is commonly referred to as the

A)federal funds rate.
B)discount rate.
C)primary credit lending rate.
D)none of the above

Question 46

The federal funds rate is typically ____ the primary credit lending rate.

A)greater than
B)less than
C)equal to
D)none of the above

Question 47

Which of the following is not an off-balance sheet activity?

A)highly leveraged transactions (HLTs)
B)standby letters of credit
C)forward contracts
D)swap contracts

Question 48

Which of the following is not an off-balance sheet activity for commercial banks?

A)consumer loans
B)loan commitments
C)standby letters of credit
D)swap contracts
E)All of the above are off-balance sheet activities.

Question 49

A single loan in the federal funds market is usually for ____; when a bank sells a single repurchase agreement, the maturity is usually ____.

A)just a few days; one year or more
B)several weeks; one year or more
C)several weeks; just a few days
D)just a few days; just a few days

Question 50

A ____ is a type of loan commitment.

A)standby letter of credit (SLC)
B)note issuance facility (NIF)
C)forward contract
D)swap contract
E)none of the above

Question 51

While U.S. banks have expanded into non-U.S. markets, few non-U.S. banks have entered U.S. markets.

Question 52

____ are the largest bank source of funds as a percentage of total liabilities.

A)Small-denomination time deposits
B)Money market deposit accounts (MMDAs)
C)Transaction deposits
D)Borrowed funds
E)Savings deposits (including MMDAs)

Question 53

The interest rate charged on loans from the Federal Reserve to banks is commonly referred to as the

A)federal funds rate.
B)primary credit lending rate.
C)repo rate.
D)none of the above

Question 54

When banks obtain funds in the federal funds market, the providers of the funds are

A)other depository institutions.
B)nonfinancial corporations.
C)consumers.
D)the Federal Reserve.

Question 55

____ loans are extended primarily to finance the purchase of fixed assets such as machinery.

A)Term
B)Working capital
C)Federal fund
D)Direct lease

Question 56

____ do not specify a maturity and provide limited check-writing ability (they allow only a limited number of transactions per month).

A)Money market deposit accounts (MMDAs)
B)Negotiable CDs (NCDs)
C)Retail CDs
D)Callable CDs
E)Negotiable order of withdrawal (NOW) accounts

Question 57

____ is (are) not a major source of funds for commercial banks.

A)Deposit accounts
B)Borrowed funds
C)Commercial loans
D)Bank capital
E)All of the above are commercial banks sources of funds.

Question 58

Bank rates on credit card balances are usually not very different from the rate charged on business loans.

Question 59

When a bank obtains funds through ____, households are not a common provider of the funds.

A)NOW accounts
B)retail CDs
C)passbook savings accounts
D)NCDs

Question 60

Which of the following statements is incorrect with respect to the federal funds market?

A)It allows depository institutions to accommodate the short-term liquidity needs of other financial institutions.
B)Federal funds purchased represent an asset to the borrowing bank and a liability to the lending bank that sells them.
C)The federal funds market is typically most active on Wednesday, because that is the final day of each particular settlement period for which each bank must maintain a specified volume of reserves required by the Fed.
D)All of the above are true with respect to the federal funds market.

Question 61

When a bank engages in proprietary trading, it:

A)uses its own funds to make investments.
B)is not subject to regulations.
C)lends the funds in the federal funds market.
D)normally uses the funds to build its capital.

Question 62

A bank's uses of funds represent liabilities of a bank.

Question 63

In a standby letter of credit, a bank agrees to:

A)charge a fixed interest rate for a line of credit for a specified period.
B)back a customer's obligation to a third party.
C)provide a customer with funds up to a specified maximum amount over a specified period.
D)service credit card loans originated by another bank.

Question 64

The five largest banks in the United States account for about one-tenth of all assets in U.S. banks.

Question 65

A forward contract on currency:

A)is a way to hedge credit (default) risk.
B)is used to to swap fixed interest payments in euros for variable interest payments in dollars.
C)is an agreement between a customer and a bank to exchange one currency for another on a specified date at a specified exchange rate.
D)is an agreement between a customer and a bank to exchange one currency for another on a specified date at whatever the exchange rate is on that day.

Question 66

Before establishing foreign branches, a U.S. bank must obtain the approval of the:

A)U.S. Treasury.
B)U.S. Commerce Department.
C)Federal Deposit Insurance Corporation.
D)Federal Reserve.

Question 67

In a loan participation arrangement, normally all of the participating banks are exposed to credit (default) risk.

Question 68

____ are the largest bank source of funds (as a percentage of total liabilities).

A)Small-denomination time deposits
B)Large-denomination time deposits
C)Transaction deposits
D)Savings deposits (including MMDAs)

Question 69

Proprietary trading is generally less risky than a bank's lending operations.

Question 70

Before the credit crisis, _________ were heavily used to protect against the credit (default) risk from investing in mortgage-backed securities.

A)standby letters of credit
B)interest rate swap contracts
C)credit default swap contracts
D)forward contracts on mortgages

Question 71

From a bank manager's perspective, the differential in interest between a bank's loans and its deposits;

A)must not exceed the federal funds rate.
B)is called the primary credit lending rate.
C)must be sufficient to cover the bank's other expenses and generate a reasonable profit for the bank's owners.
D)must be sufficient to cover the bank's deposit insurance premiums and its reserve requirements at the Federal Reserve.

Question 72

Banks will not accept intangible assets, such as patents and brand names, as collateral for commercial loans.