Deck 10: Funding the Bank

Question 1

With "relationship pricing":

A) banks unbundle services and charge separate prices for each.
B) service charges decline with larger customer deposit balances.
C) interest rates paid on deposit accounts decreases with customer deposit balances.
D) large depositors pay the highest fees.
E) small depositors receive the highest interest rates.

Answer 1

B

Question 2

High interest rates in the late 1990's on large CDs lead to the introduction of:

A) zero coupon CDs.
B) variable rate CDs.
C) callable CDs.
D) stock market indexed CDs.
E) immediately available funds CDs

Answer 2

C

Question 3

Noninterest-checking accounts are called:

A) Automatic transfer from savings accounts.
B) NOW accounts.
C) demand deposit accounts.
D) repurchase accounts.
E) whole-tail accounts.

Answer 3

C

Question 4

___________ includes federal funds purchased, repurchase agreements and Federal Home Loan Bank borrowings.

A) Retail funding
B) Wholesale funding
C) Borrowed funding
D) Equity funding
E) Lockbox funding

Question 5

Liability management decisions determines all of the following except:

A) interest expense on borrowed funds.
B) check handling costs.
C) personnel costs.
D) fee income.
E) loan rates.

Question 6

Which of the following would not be considered "hot money"?

A) Jumbo CDs
B) Fed funds purchased
C) Eurodollar time deposits
D) Retail demand deposits
E) Repurchase agreements

Question 7

___________ includes transaction accounts, MMDAs, savings accounts and small time deposits.

A) Retail funding
B) Wholesale funding
C) Borrowed funding
D) Equity funding
E) Lockbox funding

Question 8

On-us checks cashed are:

A) checks drawn on any bank other than the bank into which it was deposited.
B) the accounting transaction for selling fed funds.
C) discount window loans.
D) illegal.
E) checks drawn on a bank's own customer's account.

Question 9

All of the following are considered transaction accounts except:

A) negotiable orders of withdrawal.
B) automatic transfer from savings.
C) demand deposit accounts.
D) money market deposit accounts.
E) all of the above are considered transaction accounts.

Question 10

CDs sold at a steep discount from par and appreciate to face value at maturity are known as:

A) zero coupon CDs.
B) variable rate CDs.
C) callable CDs.
D) stock market indexed CDs.
E) immediately available funds CDs

Question 11

A bank estimates that their average balance on demand deposit accounts is $2,500, net of float. Each account costs the bank $175 per year in processing costs. The bank collects an average of $5 per month on each account in service charges. Assume reserve requirements are 10%. What is the net cost of an average demand deposit?

A) 4.5%
B) 4.8%
C) 5.1%
D) 6.8%
E) 7.0%

Question 12

Large time deposits are generally referred to as:

A) mini CDs.
B) jumbo CDs.
C) big CDs.
D) giant CDs.
E) super CDs.

Question 13

___________ includes common stock, preferred stock and retained earnings.

A) Retail funding
B) Wholesale funding
C) Borrowed funding
D) Equity funding
E) Lockbox funding

Question 14

Which of the following is true regarding money market deposit accounts (MMDAs)?

A) A maximum of three checks per month may be written on a MMDA account.
B) The average check size on an MMDA account is smaller than the average demand deposit check size.
C) MMDAs are formally transaction accounts.
D) Required reserves on MMDAs are higher than on demand deposit accounts.
E) Rates paid on MMDAs are generally higher than rates on money market mutual funds.

Question 15

Overdraft fees:

A) represent a risk charge.
B) are a source of wholesale funding.
C) reduce reserve requirements.
D) increases capital.
E) have increased in maturity.

Question 16

The least expensive source of funds for a typical bank is:

A) certificates of deposit.
B) negotiable order of withdrawal accounts.
C) savings accounts.
D) demand deposit accounts.
E) federal funds purchased.

Question 17

Small time deposits are characterized by all of the following except:

A) they have denominations are less than $250,000.
B) they have substantial interest penalties for early withdrawal.
C) banks can pay market interest rates on them.
D) there is a substantial interest penalty for early withdrawal.
E) they have a minimum maturity of 3 days.

Question 18

Banks prefer money market deposit accounts to demand deposits for all of the following reasons except:

A) required reserves on money market deposit accounts are lower.
B) money market deposit accounts are less interest rate sensitive than demand deposit accounts.
C) demand deposit accounts have fewer checks written each month.
D) average demand deposit balances are higher than money market deposit account balances.
E) money market deposits accounts are not limited to the $250,000 deposit insurance limit like demand deposit accounts.

Question 19

Core deposits are affected by all of the following except:

A) location.
B) availability.
C) volatile liabilities.
D) service charges.
E) Core deposits are affected by all of the above.

Question 20

Transit checks deposited are:

A) checks drawn on any bank other than the bank into which it was deposited.
B) the accounting transaction for selling fed funds.
C) discount window loans.
D) illegal.
E) checks drawn on a bank's own customer's account.

Question 21

Which of the following is primarily used as collateral for borrowings from the Federal Home Loan Bank Board?

A) Real estate loans
B) Treasury securities
C) Negotiable CDs
D) Credit card receivables
E) Repurchase agreement

Question 22

Federal Home Loan Bank advances:

A) have maturities ranging from one day to 20 years.
B) can be for any amount with proper collateral.
C) may be callable.
D) all of the above.
E) none of the above.

Question 23

Federal funds:

A) can only be traded by banks.
B) transactions are generally 7-day loans.
C) loans are collateralized.
D) large transactions are denominated in multiples of $1 million.
E) All of the above.

Question 24

It is best for a bank to use average historical costs:

A) to make pricing decisions.
B) to evaluate past performance.
C) when deciding to issue preferred stock..
D) A bank should use average historical cost for all these decisions.
E) A bank should not use average historical cost for any of these decisions.

Question 25

In regards to repurchase agreements, the margin is:

A) a good faith deposit.
B) a loan against the repurchase agreement.
C) a risk-free guarantee.
D) the difference between the market value of the collateral and the amount of the loan.
E) all of the above.

Question 26

Preferred stock:

A) has characteristics of debt and common equity.
B) claims are subordinate to common stockholders.
C) dividends may not be deferred.
D) always pay fixed-rate dividends.
E) all of the above.

Question 27

Which of the following are sold at a deep discount to par?

A) Trust CD
B) Zero coupon CD
C) Bump-up CD
D) Federal funds CD
E) Fixed-rate CD

Question 28

Federal funds are:

A) secured bank loans from the discount window.
B) unsecured short-term loans that are settled in immediately available funds.
C) secured inter-bank loans of reserves.
D) secured core deposits.
E) secured overnight loans.

Question 29

A jump rate CD is also known as a(n):

A) trust CD.
B) zero coupon CD.
C) bump-up CD.
D) federal funds CD.
E) fixed-rate CD.

Question 30

Most repurchase agreements are:

A) riskier than fed funds loans.
B) unsecured short-term loans.
C) secured overnight loans.
D) secured loans of reserves.
E) secured Fed funds loans.

Question 31

Which of the following is an example of immediately available funds?

A) Deposits at the Federal Reserve
B) Stock market indexed CDs
C) Demand deposits
D) Money market deposit accounts
E) All of the above

Question 32

Which of the following is not a purpose of Check 21?

A) Prevent check truncation.
B) Foster innovation in the check collection system.
C) Improve overall efficiency of the payment system.
D) All of the above are purposes of Check 21.
E) None of the above are purposes of Check 21.

Question 33

A bank estimates that their average balance on demand deposit accounts is $2,000, net of float. Each account costs the bank $150 per year in processing costs. The bank collects an average of $7.50 per month on each account in service charges. Assume reserve requirements are 10%. What is the net cost of an average demand deposit?

A) 3.0%
B) 3.3%
C) 3.6%
D) 3.9%
E) 4.2%

Question 34

Which of the following is not a characteristic of jumbo CDs?

A) They have a minimum maturity of 7 days.
B) Interest rates are quoted on a 365-day year.
C) They are generally issued at face value.
D) They are only insured up to $250,000 per individual per institution.
E) All of the above are characteristics of jumbo CDs

Question 35

A brokered deposit would most likely take which of the following forms?

A) Demand deposit
B) NOW account
C) Jumbo CDs
D) Savings account
E) Small time deposit

Question 36

When it comes to Federal Reserve Banks, primary credit:

A) The majority of depository institutions do not qualify for this program.
B) Primary credit has an allowable maturity of up to 90 days.
C) Primary credit use should be viewed by bank examiners as exceptional.
D) All of the above.
E) None of the above.

Question 37

Which of the following would be an example of a Eurodollar account?

A) A U.S. dollar denominated deposit held at a Japanese bank.
B) A British pound denominated deposit held at a New York bank.
C) A French franc denominated deposit held at a Toronto bank.
D) A U.S. dollar denominated deposit held at a Chicago bank.
E) A EMU euro denominated deposit held at a London bank.

Question 38

A primary difference between "intelligent" smart cards and "memory" smart cards is that:

A) intelligent smart cards can store information, while memory smart cards cannot.
B) intelligent smart cards are larger than memory smart cards.
C) memory cards can only store information.
D) intelligent smart cards are "digital", while memory smart cards are not.
E) intelligent smart cards are used in ACH transactions, while memory smart cards are not.

Question 39

Which of the following is true about a ROTH IRA?

A) Funds contributed are tax-deductible.
B) Funds withdrawn before age 62 are subject to a 10% penalty.
C) Withdrawn proceeds are totally non-taxable.
D) All of the above are true about a ROTH IRA.
E) None of the above are true about a ROTH IRA

Question 40

Most checks clear in no more than _____ days.

A) 1
B) 2
C) 3
D) 4
E) 5

Question 41

Today, most demand deposit accounts are owned by individuals.

Question 42

Individuals, as a group, are not as interest-rate sensitive as wholesale customers.

Question 43

Liquidity risk is a function of many factors. Which of the following is NOT one of those factors?

A) Funding sources.
B) Location of depositors.
C) Average size of accounts.
D) Number of depositors.
E) All of the above are liquidity risk factors.

Question 44

When calculating its cost of funds, should a bank use average or marginal costs? Why?

Question 45

Briefly explain two models used to estimate the cost of equity?

Question 46

How has the use of "hot money" affected bank's liquidity risk?

Question 47

When interest rates rise, average historical costs overstate the actual marginal costs of issuing new debt.

Question 48

Given the following marginal cost estimates associated with obtaining additional interest-checking account funding: Market interest rate 0.3%,
Servicing costs: 2.6% of balances
Acquisition costs: 0.2% of balances
Deposit insurance costs = 0.25% of balances
Net investable balance = 85% (10% required reserves and 5% float)
What is the estimated marginal cost of obtaining additional interest-checking balances?

A) 2.85%
B) 3.35%
C) 3.53%
D) 3.72%
E) 3.94%

Question 49

Discuss the process of estimating the cost of deposit accounts.

Question 50

What is the purpose of having a correspondent bank relationship?

Question 51

An ACH transaction is a sale that uses a smart card.

Question 52

Trust preferred stock:

A) does not pay any dividends
B) has priority over all other claims.
C) is issued through a "preferred" bank subsidiary.
D) effectively allows banks to pay dividends that are tax deductible.
E) All of the above.

Question 53

Repurchase agreements generally carry a lower interest rate than comparable maturity Fed funds.