Question 1

If interest rates increase from 9 percent to 10 percent,a bank with a duration gap of 2 years would experience a decrease in its net worth of

Accepted Answer

The change in net worth due to a change in interest rates can be approximated by the duration gap formula: ΔNW/NW = -DG × Δy, where ΔNW/NW is the percentage change in net worth, DG is the duration gap, and Δy is the change in yield (interest rates). Here, with a 1 percentage point increase in interest rates (from 9% to 10%) and a duration gap of 2 years, the decrease in net worth would be approximately 2 × 1% = 2% of its assets. However, since the options provided are either 0.9% or 1.8%, the closest and correct choice is 1.8% of its assets.

Question 2

Interest income minus interest expenses divided by assets is a measure of bank performance known as the

Accepted Answer

Net interest margin measures how much profit a bank makes on its interest-earning assets. It is calculated by subtracting a bank's interest expenses from its interest income and dividing the result by its assets. A higher net interest margin indicates better performance by the bank in effectively managing its interest-earning assets and liabilities.

Question 3

When a bank suspects that a $1 million loan might prove to be bad debt that will have to be written off in the future the bank

Accepted Answer

When a bank suspects that a loan might prove to be a bad debt in the future, it can set aside a portion of its earnings in the loan loss reserves account. This reserve account is used to offset any future losses from bad debts, which helps to mitigate the impact of such losses on the bank's financials. Therefore, the best choice is A.

Question 4

All of the following are operating expenses for a bank EXCEPT

Accepted Answer

Service charges on deposit accounts are income for a bank, not an operating expense. Operating expenses are costs associated with running the business, such as salaries, rent, and equipment servicing costs.

Question 5

Most of a bank's operating income results from

Accepted Answer

The primary source of revenue for banks is interest earned on assets, such as loans and investments. While service charges and fees also contribute to operating income, they are typically secondary sources of revenue. Off-balance-sheet activities and fees from standby lines of credit may generate revenue, but are not as significant as interest on assets.

Question 6

One of the problems in conducting a duration gap analysis is that the duration gap is calculated assuming that interest rates for all maturities are the same. That means that the yield curve is

Accepted Answer

Duration gap analysis is a tool used to measure the sensitivity of a bank's assets and liabilities to changes in interest rates. The calculation assumes that the interest rates for all maturities are the same, which would result in a flat yield curve. If the yield curve is not flat, then the duration gap may not accurately reflect the actual interest rate risk exposure of the bank. Therefore, a flat yield curve is the best assumption for conducting a duration gap analysis.

Question 7

For banks

Accepted Answer

Return on equity measures the profitability of a company's shareholder investment, whereas return on assets measures the profitability of all invested assets. It is typical for banks to have a higher return on assets than return on equity because banks often rely heavily on borrowed funds, which increases their assets and subsequently their returns.

Question 8

Based on the Net Interest Margin the poor bank performance in the late 1980s

Accepted Answer

The answer of Based on the Net Interest Margin the...

Quiz 9: Banking and the Management of Financial Institutions