Deck 17: Commercial Bank Operations

Question 1

A financial institution is likely to call a callable CD before its maturity if interest rates have risen since the CD was issued.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

A)at other commercial banks
B)in a bank's vault
C)at the Federal Reserve district banks
D)on deposit with the Board of Governors

Answer 3

C

Question 4

A commercial bank can be a lender or a borrower when using repurchase agreements and loans in the federal funds market.

Question 5

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

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

Question 6

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

Question 7

Obtaining funds through ____ is not a common way 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 8

Interstate banking regulations presently allow commercial banks to acquire other banks in their region of the country, but not to expand across the nation.

Question 9

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 these are correct.

Question 10

Which of the following is true in regard to money market deposit accounts?

A)MMDAs specify a maturity.
B)MMDAs offer limited check-writing privileges.
C)MMDAs are less liquid than retail CDs.
D)MMDAs require no minimum balance.

Question 11

The main use of bank funds is for

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

Question 12

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

Question 13

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 and then buys them back shortly thereafter, this is a

A)federal funds loan.
B)loan through the Federal Reserve's lending facility.
C)repurchase agreement.
D)commercial paper transaction.

Question 14

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

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

Question 15

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)The rate is much higher than the Treasury yield in some periods and much lower in other periods.

Question 16

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

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

Question 17

Protective covenants impose conditions that require the bank to provide additional loans to a borrower to protect the borrower from going bankrupt.

Question 18

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 19

All other things being 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)increase reported earnings per share AND decrease their ability to absorb operating losses.

Question 20

Which of the following statements is NOT correct?

A)The five largest U.S. banks now account for more than 50 percent of bank assets.
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 these statements are correct.

Question 21

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

Question 22

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

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

Question 23

Transaction deposits do NOT include

A)demand deposits.
B)NCDs.
C)NOW accounts.
D)All of these are transaction deposits.

Question 24

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

A)Savings and small time deposits
B)Large deposits
C)Transaction deposits
D)Borrowed funds
E)Bank capital and bonds issued by the bank

Question 25

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

Question 26

Money market deposit accounts (MMDAs)

A)require a maturity of six 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 these are correct.

Question 27

Commercial banks are allowed to invest in

A)Treasury securities.
B)Freddie Mac securities.
C)Fannie Mae securities.
D)All of these are correct; banks can invest in all of these securities.

Question 28

Banks sometimes need funds temporarily 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 Federal Reserve's lending facility
D)retail CDs

Question 29

The interest rate banks charge on business loans is known as the

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

Question 30

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

Question 31

The most common way for U.S. commercial banks to expand internationally is by purchasing banks in other countries.

Question 32

Bank rates on credit card balances are usually similar to the rate charged on business loans.

Question 33

Which of the following types of deposits offer check-writing privileges?

A)NOW accounts
B)money market deposit accounts (MMDAs)
C)retail CDs
D)NOW accounts AND  money market deposit accounts (MMDAs)

Question 34

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 35

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 36

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

A)higher than
B)less than
C)equal to
D)None of these are correct.

Question 37

Which of the following is NOT correct 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 (borrowed)represent an asset to the borrowing bank and a liability to the lending bank .
C)It is typically most active on Wednesday when banks that are short of required reserves must compensate before the settlement period ends.
D)All of these are correct.

Question 38

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

A)Deposit accounts
B)Borrowed funds
C)Commercial loans
D)Bank capital

Question 39

____ 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 40

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

Question 41

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 42

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

Question 43

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 rate.
C)must be sufficient to cover the bank's 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 44

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

Question 45

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 46

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 47

When banks obtain funds in the federal funds market, the funds are provided by

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

Question 48

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 49

The primary credit rate is determined by

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

Question 50

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 51

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 rate.
C)repo rate.
D)None of these are correct.

Question 52

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 these are correct.

Question 53

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

Question 54

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

Question 55

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 rate.
D)None of these are correct.

Question 56

States may enact _______ to set a maximum on the rate of interest that banks can charge.

A)leveraged loan laws
B)credit protection laws
C)consumer interest laws
D)usury laws

Question 57

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 58

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 59

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

Question 60

With a _________, a bank agrees to purchase a firm's __________ if the firm cannot place the issue in the market at an acceptable interest rate.

A)note issuance facility; commercial paper
B)note issuance facility; bonds
C)paper placement commitment; commercial paper
D)bond placement commitment; bonds

Question 61

A forward contract on currency

A)is a way to hedge credit (default)risk.
B)is used to swap fixed interest payments in one currency for variable interest payments in another currency.
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 62

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.