Question 1

Loans are the major item on a bank's balance sheet, and they generate the largest amount of revenue.

Accepted Answer

Loans are one of the major items on a bank's balance sheet and they generate a significant amount of revenue for the banks.

Question 2

Wholesale CDs obtained from an investment house rather than directly from a customer are referred to as brokered deposits.

Accepted Answer

Brokered deposits are obtained through a third party, such as an investment broker, rather than directly from the customer, making CDs obtained from an investment house an example of brokered deposits.

Question 3

Banks generally pay higher interest rates on NOW accounts than on MMDAs.

Accepted Answer

Money Market Deposit Accounts (MMDAs) generally pay higher interest rates than Negotiable Order of Withdrawal (NOW) accounts, as MMDAs require a higher minimum balance and have limited check-writing capabilities.

Question 4

MMDAs are a type of savings account that has some limited checking features. These accounts were designed to help banks compete with MMMFs.

Accepted Answer

MMDAs, or Money Market Deposit Accounts, were created as a response to the popularity of MMMFs, or Money Market Mutual Funds, which offered higher interest rates than traditional savings accounts. MMDAs allowed banks to offer similar interest rates while also providing limited check-writing and withdrawal options for customers.

Question 5

Fernando Bank has interest expense of $150 million, earning assets of $1,400 million and a NIM of 5.00%. The bank also has interest-bearing liabilities of $1,100 million. Fernando Bank's spread is

Accepted Answer

Using the NIM formula, the calculation for the spread is [(0.05 x 1,400) + 150]/1,400 - (150/1,100) = 2.08%. Therefore, the correct answer is option D.

Question 6

In ratio analysis, the profit margin times the asset utilization ratio equals return on assets.

Accepted Answer

This statement is true. The formula for return on assets (ROA) is:
ROA = Profit Margin x Asset Utilization Ratio
Therefore, if you multiply the profit margin and asset utilization ratio, you will get the ROA.

Question 7

A construction firm cannot obtain the necessary permits to begin building a shopping mall until it can show it either has or will have the necessary funding to complete the project. The firm may ask a bank for which of the following to allow it to obtain the permits?
I. Commercial letter of credit
II. Loan commitment
III. Credit line
IV. Repurchase agreement

Accepted Answer

A commercial letter of credit (option I) and a repurchase agreement (option IV) are not suitable for the construction firm's needs. A loan commitment (option II) would provide the necessary funding for the construction firm to obtain the permits, and a credit line (option III) would provide the firm with ongoing access to funding as needed while the project is being completed. Therefore, options II or III would be the best choices for the construction firm to obtain the necessary funding to begin building the shopping mall.

Question 8

The allowance for loan and lease losses is bank management's estimate of the amount of gross loans and leases that will not be repaid to the bank.

Accepted Answer

The allowance for loan and lease losses is indeed bank management's estimate of the amount of gross loans and leases that will not be repaid to the bank. This estimate is used to provide for potential future loan losses and is required by bank regulators.

Question 9

Both retail and wholesale CDs are negotiable instruments despite their different denominations.

Accepted Answer

Retail CDs are negotiable instruments, meaning they can be bought and sold before maturity, but wholesale CDs, typically issued in larger denominations, are not considered negotiable instruments in the traditional sense as they are often bought and held by institutional investors and have different transferability rules.

Question 10

Rate sensitive funding sources at a bank are termed core deposits.

Accepted Answer

Core deposits refer to the deposits that form a stable source of funds for a bank, typically including checking accounts, savings accounts, and small denomination time deposits. Rate-sensitive funding sources, on the other hand, are those that can fluctuate with changes in interest rates, such as large denomination time deposits or borrowed funds.

Question 11

Loans to consumers and to individuals are jointly termed C&I loans on a bank's balance sheet.

Accepted Answer

C&I loans refer to commercial and industrial loans, which are usually given to businesses rather than individual consumers.

Question 12

Banks have higher leverage than most manufacturing firms.

Accepted Answer

Banks typically have much higher leverage than manufacturing firms due to the nature of their business, which often involves borrowing and lending large amounts of money. This means that a higher proportion of a bank's assets are financed through debt, as opposed to equity, which can increase its financial risks.

Question 13

At almost all banks noninterest expense is greater than noninterest income; hence, the overhead efficiency ratio is usually greater than 100%.

Accepted Answer

The overhead efficiency ratio is calculated as noninterest expense divided by noninterest income. If noninterest expense is greater than noninterest income, the ratio would be greater than 100%. However, this is not always the case for all banks, as some banks manage to keep their noninterest expenses lower than their noninterest income.

Question 14

Core deposits are deposits that are

Accepted Answer

Core deposits are known to be very stable funds sources, meaning that they are less likely to be withdrawn or moved around frequently, unlike hot money sources. Core deposits are usually long-term deposits, such as checking and savings accounts, and are considered a reliable source of funding for banks.

Question 15

C&I loans are loans to businesses used to finance capital needs, equipment purchases, and plant expansions.

Accepted Answer

C&I loans (Commercial and Industrial loans) are indeed loans to businesses used to finance various capital needs such as equipment purchases and plant expansions.

Question 16

A wholesale bank is one that focuses its business activities on commercial banking relationships.

Accepted Answer

A wholesale bank focuses on providing banking services and credit facilities to corporate clients, financial institutions, and other large customers, rather than individual customers.

Question 17

The provision for loan loss account is actual loan losses less loan recoveries in a given time period.

Accepted Answer

The provision for loan loss account is an estimate of potential loan losses that a bank expects to incur due to the default of borrowers, not the actual loan losses less loan recoveries.

Question 18

Composite rating 5 is the rating for the soundest financial institutions.

Accepted Answer

Composite rating 5 actually indicates the financial institutions that are the most troubled or at risk, not the soundest. The soundest institutions are typically rated 1.

Question 19

Which one of the following is the definition of the NIM?

Accepted Answer

NIM (Net Interest Margin) is defined as the difference between interest income and interest expense generated by a bank or financial institution in relation to its earning assets (such as loans and investments). Therefore, the formula (Interest income - Interest expense)/Earning assets represents the definition of NIM.

Question 20

Uniform principles, standards, and report forms for depository institutions are prescribed by the

Accepted Answer

The Federal Financial Institutions Examination Council (FFIEC) is responsible for prescribing uniform principles, standards, and report forms for depository institutions, which includes banks, credit unions, and savings and loan associations. The FFIEC is comprised of several government agencies, including the Federal Reserve, the FDIC, and the Office of Comptroller of Currency, but it is the FFIEC itself that sets the standards.

Quiz 12: Commercial Banks Financial Statements and Analysis