Deck 5: Authorised Deposit-Taking Institutions

Question 1

There are many types of bank accounts which offer depositors a range of risk and return options.

Answer 1

False

Question 2

The effective interest rate on a bank account will be lower than the quoted per annum nominal rate.

Answer 2

False

Question 3

The main advantage of 'at call' accounts is they enable depositors easy access to their funds.

Answer 3

True

Question 4

Bank accounts are capital stable investments.

Question 5

'The majors' are the four largest Australian-owned banks.

Question 6

Term deposits are illiquid because the funds cannot be withdrawn prior to the end of the term.

Question 7

An NCD is a wholesale-sized deposit that has a fixed term and an agreed interest rate that can be traded in the money market.

Question 8

A $1000 deposit at 5% p.a.with daily compounding will earn interest of $1161.82 in three years.

Question 9

The main advantage of savings accounts is they enable depositors to store funds and earn interest.

Question 10

'The majors' are retail banks only and do not provide investment banking services.

Question 11

Intermediation implies that banks only earn net interest income.

Question 12

The main way that banks borrow from the domestic financial markets is through the issue of bonds.

Question 13

Banks have increased their reliance on funding from the financial markets since the GFC.

Question 14

Since the GFC banks have viewed deposits as a more reliable source of funds than the financial markets.

Question 15

ADIs manage the mismatch between the preferences of depositors and borrowers.

Question 16

ADIs accept deposits and make loans.

Question 17

Credit unions and building societies operate as though they were small retail banks.

Question 18

Banking regulations prohibit foreign subsidiary banks from participating in the retail segment of the Australian banking industry.

Question 19

Macquarie Bank is Australia's fifth-largest retail bank.

Question 20

If $1000 grows to $1161.82 over a period of three years, the effective interest rate is 5% p.a.

Question 21

Banks set the interest rate on each loan having regard to the borrower's credit standing.

Question 22

Covered bonds are secured by a pool of high quality bank assets which allows them to be issued at lower yields than unsecured bonds.

Question 23

Loans to business are usually in the form of an overdraft.

Question 24

ADIs in Australia apply conservative lending standards.One of these is that the loan-to-value ratio (LVR)should not normally exceed 80 per cent.

Question 25

A personal overdraft is usually an unsecured form of ADI lending.

Question 26

Securities are 'liquid' when they can be readily sold at their face value.

Question 27

The main use of funds by the banking system is loans and advances.

Question 28

After making 72 monthly payments on a 25-year $240 000 reducible loan at 6.80 per cent, the amount still owed to the bank is $120 064.56 ).

Question 29

Housing loans are always repaid by a regular payment that covers the interest due each payment period and contributes to the loan's repayment

Question 30

Lenders applying conservative lending practices were not sufficient to prevent the emergence of the GFC in the US sub-prime loan market.

Question 31

Banks invest in securities as a store of liquidity, to hold an inventory for trading purposes and to earn income from secure investments.

Question 32

Loans to business are generally made on a standardised basis in terms of the loan application process and the interest rate charged.

Question 33

Bill acceptance is a source of funds for banks.

Question 34

A company deposits funds and receives a NCD promising repayment of $10 million in 90 days.If the company sells the NCD after 25 days at 3.5% they will receive $9 976 084.73.

Question 35

Loan covenants and negative pledges are alternative security arrangements to mortgages for wholesale loans.

Question 36

The default risk on a loan secured by a residential mortgage is shared by the lender and the borrower.

Question 37

The monthly repayment on a 25-year $240 000 reducible loan at 6.80 per cent compounding monthly is $1665.77.

Question 38

Australian banks borrow in overseas financial markets in foreign currencies to fund their overseas activities.

Question 39

Typically wholesale borrowers are charged the bank's prime rate.

Question 40

Loans for residential property are the main purpose of ADI lending.

Question 41

The amount of BABs trading in the money market has increased since the GFC.

Question 42

Interest rates quoted by banks on deposit accounts are usually:

A)effective interest rates
B)nominal interest rates
C)simple interest rates
D)simple interest yields.
E)None of these.

Question 43

A bill facility is a form of floating-rate finance.

Question 44

Securitisation of bank loans converts indirect financing into direct financing.

Question 45

Mortgage originators are banks.

Question 46

A bank accepts 90 day bills with a face value of $20 million for a fee of 120 bps.This bill is sold to an investor at a yield of 4% p.a.The amount paid by the investor is $19 804 666.30.

Question 47

The activities of loan originators in Australia were disrupted by the GFC.

Question 48

As at 2013, which of the following is the largest source of funds for banks?

A)Retail deposits
B)Short-term securities (domestic and overseas)
C)Bonds (domestic and overseas)
D)Equity
E)Securitsation

Question 49

A bank accepts 90 day bills with a face value of $20 million for a fee of 120 bps.This bill is sold to an investor at a yield of 4% p.a.The amount received by the borrower is $19 804 666.30.

Question 50

Bill receivable agreements are assets for acceptors.

Question 51

The mortgage origination process finances housing loans with funds borrowed from investment banks.

Question 52

The ADI category with the largest share of bank assets is:

A)the major banks
B)other domestic banks
C)foreign subsidiary
D)foreign branches
E)credit unions and building societies.

Question 53

ADIs enhance the flow of funds through intermediation by transforming:

A)many small loans into fewer, larger deposits
B)long-term deposits into short-term loans
C)the risk posed by borrowers into a risk acceptable by depositors
D)interest expense into interest revenue.
E)All of these.

Question 54

A special purpose vehicle (SPV)is a legal entity that becomes the owner of the MBSs.

Question 55

Securitisation is the process of selling assets to investors in asset-backed securities

Question 56

Banks improve the credit risk of bills by accepting them.

Question 57

ADI deposit accounts do NOT offer depositors:

A)a safe place to keep funds
B)a wide range of risk and return opportunities
C)liquidity
D)interest and/or payment services.
E)All of these are benefits of deposit accounts.

Question 58

A bank accepts 90 day bills with a face value of $20 million for a fee of 120 bps.This bill is sold to an investor at a yield of 4% p.a.The bank's acceptance fee is $240 000.

Question 59

Fixed-term deposits:

A)are funds that are available at call to depositors without penalty
B)provide access to payment services
C)have specified terms
D)are also known as transaction accounts
E)can be traded in the money market.

Question 60

Identify the INCORRECT statement regarding the income of ADIs from intermediation.

A)ADIs earn an interest-rate margin.
B)ADIs also earn fees from their activities as intermediaries.
C)ADIs fees include account servicing fees and credit card fees.
D)The net interest margin of ADIs has increased over the last 15 years.
E)All of these are correct.

Question 61

A bank's prime interest rate refers to:

A)its cost of funds
B)the variable rate on housing loans
C)the rate that applies on loans to their lowest risk business borrowers
D)the rate that applies to business loans
E)the interest rate they earn on their holdings of securities

Question 62

What type of loan arrangement is most common when banks lend to business?

A)Revolving credit facilities
B)Syndicated loans
C)Standby facilities
D)Term loans
E)Leasing

Question 63

Bill acceptance:

A)uses commercial bills, which are secured short-term securities
B)is a common arrangement that allows companies to borrow from banks
C)exposes the investor to the credit risk of the borrower
D)enhances the bill's credit standing, allowing it to be issued at a lower yield
E)is a recent innovation in financing.

Question 64

A company that uses a bill facility to provide finance for a period of two years:

A)is exposed to interest-rate risk
B)will not be required to make any payments until the end of the facility
C)will issue bank bills that mature in two years' time
D)will initially receive the bills' face value.
E)All of these.

Question 65

A process whereby a bank can sell a parcel of its existing home loans to investors in the financial markets is best described as:

A)bill acceptance
B)mortgage origination
C)securitisation
D)indirect financing
E)None of these.

Question 66

Housing loans are secured by a mortgage over the acquired property.The main advantage of this for borrowers is that it:

A)reduces the credit risk for the ADI
B)helps lenders deal with information asymmetry
C)lowers the interest rate on the loans
D)reduces losses in the case of default.
E)All of these.

Question 67

The major banks raise debt funds from the issue of securities.Most of these securities are issued:

A)offshore
B)in the Australian money market
C)in the domestic bond market
D)in the share market
E)through securitisation.

Question 68

Of the following, which is NOT one of the main elements of ADI lending standards in relation to housing loans in Australia?

A)All borrowers are required to take out lenders mortgage insurance (LMI).
B)Loans are made to borrowers who have been assessed as having the capacity to repay.
C)Loans generally do not exceed 80 per cent of the property's value.
D)The lender has reliable documentary evidence supporting the borrower's capacity to repay and of the property's value.
E)Loans are secured.

Question 69

A bank issues 90-day bank-accepted bills on behalf of a borrower for a fee of 50 basis points.Given a market yield of 4.5% and a face value of $1 million, what fee will the bank earn?

A)$5000.00
B)$1204.50
C)$4945.13
D)$4939.11
E)None of these.

Question 70

Problems underlying the US sub-prime loans that triggered the GFC included which of the following?

A)Borrowers often had a poor employment record.
B)Borrowers often had a history of loan defaults.
C)LVR's were commonly 100 per cent.
D)It was assumed property prices would always rise.
E)All of these.

Question 71

Which of the following is NOT a related implication of the practice of securing loans?

A)It assists the lender in dealing with information asymmetry.
B)It shifts most of the default risk from the borrower to the lender.
C)It reduces the lender's loss if the borrower defaults.
D)The loan should carry a lower interest rate.
E)None of these.

Question 72

Identify the INCORRECT statement regarding the holding of securities by banks.

A)Bank's most liquid assets include cash, ES funds and interbank overnight deposits.
B)Banks hold an inventory of shares for trading purposes.
C)Banks earn income from their holdings of securities.
D)The main liquid securities held are money market securities and bonds.
E)All of these are correct.

Question 73

The interest rates set by banks on housing and business loans are established to cover:

A)the bank's cost of funds
B)the bank's operating costs
C)provisions for loan losses
D)a profit margin for the bank
E)All of these.

Question 74

Negotiable certificates of deposits are NOT:

A)a wholesale deposit
B)tradeable in the money market
C)for fixed terms
D)the same as a fixed-term deposit
E)a type of promissory note.

Question 75

What type of loan arrangement is made by a group of banks?

A)Revolving credit facilities
B)Syndicated loans
C)Standby facilities
D)Term loans
E)Leasing

Question 76

Negotiable certificates of deposit:

A)are funds that are available at call to depositors
B)provide access to payment services
C)are long-term deposits
D)are also known as transaction accounts
E)can be traded in the money market.

Question 77

In relation to a housing loan of $250 000 for 20 years at 9% per annum compounding monthly with monthly repayments:

A)the monthly repayment is $2249.31
B)the first repayment includes $1875.00 in interest
C)the amount of interest payable will fall each month
D)the amount of the loan outstanding (owing)will fall at an increasing rate as the loan progresses.
E)All of these.

Question 78

Factors contributing to the increased popularity of deposits as investments since the GFC include:

A)the attractiveness of capital stable investments given the losses experienced on shares
B)the increase in interest rates paid by banks on deposits
C)the government guarantee of deposits up to $250 000
D)the rise in fixed-term deposit rates relative to returns achieved by cash management trusts.
E)All of these.

Question 79

The main use of funds by ADIs is:

A)as cash
B)as liquid assets
C)in trading securities
D)for loans and advances
E)for bill acceptances.

Question 80

When a bank securities a parcel of its home loans, the credit risk posed by the loans is borne by:

A)the bank whose loans are being sold
B)the special purpose vehicle
C)investors in the mortgage backed securities
D)the ratings agency
E)None of these.