Deck 17: Commercial Bank Operations

Question 1

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

A) at other commercial banks
B) in a bank's vault
C) on deposit at the federal funds window
D) on deposit with the Board of Governors

Answer 1

B

Question 2

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

Answer 2

B

Question 3

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

Answer 3

False

Question 4

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

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

Question 5

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

Question 6

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

Question 7

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 the above

Question 8

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) none of the above; the rate is much higher than the Treasury yield in some periods and much lower than the Treasury yield in other periods

Question 9

The main use of bank funds is for

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

Question 10

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

Question 11

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) A and B

Question 12

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, then buys them back shortly thereafter, this is a

A) federal funds loan.
B) discount window loan.
C) repurchase agreement.
D) commercial paper transaction.

Question 13

Commercial banks have expanded in recent years not only by acquiring other banks but also by acquiring other types of financial service firms.

Question 14

Money market deposit accounts differ from conventional time deposits in that they

A) specify a maturity.
B) offer limited check-writing privileges.
C) are less liquid.
D) none of the above

Question 15

____ 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 16

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 17

Which of the following statements is incorrect?

A) Banks have expanded their business across services over time.
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 the statements above are correct.

Question 18

____ 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 19

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 20

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

Question 21

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

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

Question 22

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 23

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

Question 24

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

A) Small-denomination time deposits
B) Money market deposit accounts (MMDAs)
C) Transaction deposits
D) Borrowed funds
E) Savings deposits (including MMDAs)

Question 25

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 26

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 27

Which of the following types of deposits does not allow any check-writing privileges?

A) NOW accounts
B) money market deposit accounts (MMDAs)
C) retail CDs
D) All of the above allow checks to be written.

Question 28

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

Question 29

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 the above

Question 30

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

Question 31

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

A) greater than
B) less than
C) equal to
D) none of the above

Question 32

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

A) Deposit accounts
B) Borrowed funds
C) Commercial loans
D) Bank capital
E) All of the above are sources of funds for commercial banks.

Question 33

Transaction deposits do not include

A) demand deposits.
B) NCDs
C) NOW accounts
D) All of the above are transactions deposits.

Question 34

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 35

Which of the following statements is incorrect 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 represent an asset to the borrowing bank and a liability to the lending bank that sells them.
C) The federal funds market is typically most active on Wednesday, because that is the final day of each particular settlement period for which each bank must maintain a specified volume of reserves required by the Fed.
D) All of the above are true with respect to the federal funds market.

Question 36

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

Question 37

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

Question 38

Commercial banks are not allowed to invest in

A) Treasury securities
B) Freddie Mac securities.
C) Fannie Mae securities.
D) Banks can invest in all securities mentioned above.

Question 39

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

Question 40

Banks sometimes need funds 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 discount window
D) retail CDs

Question 41

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 42

The primary credit lending rate is determined by

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

Question 43

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 the above

Question 44

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 45

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

Question 46

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 lending rate.
C) repo rate
D) none of the above

Question 47

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 48

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 49

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

Question 50

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 51

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 lending rate.
C) must be sufficient to cover the bank's other 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 52

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

Question 53

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

Question 54

A forward contract on currency:

A) is a way to hedge credit (default) risk.
B) is used to swap fixed interest payments in euros for variable interest payments in dollars.
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 55

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 56

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

Question 57

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 58

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 lending rate.
D) none of the above

Question 59

When banks obtain funds in the federal funds market, the providers of the funds are

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

Question 60

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 61

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