Question 1

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

A flat yield curve means that interest rates for all maturities are the same, which is the assumption made when conducting a duration gap analysis. If the yield curve is sloping (upward or downward), different maturities will have different interest rates, which would affect the calculation of the duration gap. Therefore, the best choice is A) flat.

Question 2

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 may become a bad debt, it can set aside a portion of its earnings in the loan loss reserves account as a provision for the potential loss. This is a common accounting practice used by banks to account for potential bad debts and is required by regulatory authorities. The bank does not immediately reduce its assets or reserves, nor does it reduce its reported earnings until the loan actually becomes a bad debt. Therefore, option A is the best choice.

Question 3

For banks,

Accepted Answer

Return on equity measures the return on shareholder's investment, while return on assets measures the profitability of a bank's assets. If return on equity exceeds return on assets, it indicates that the bank is operating with a high level of leverage or debt, which can magnify returns on equity. Therefore, C is the correct answer. Options A, B, and D are incorrect because they do not accurately describe the relationship between return on equity and return on assets.

Question 4

Looking at the Net Interest Margin indicates that the poor bank performance in the late 1980s

Accepted Answer

The answer of Looking at the Net Interest Margin indicates...

Question 5

The quantity interest income minus interest expenses divided by assets is a measure of bank performance known as

Accepted Answer

Net interest margin is a ratio of interest income minus interest expenses to average interest-earning assets. It measures the bank's profitability in terms of how much money it earns on its interest-earning assets. Therefore, the correct answer is B. Operating income is a broader measure of profitability that includes non-interest income and non-interest expenses. Return on assets and return on equity are measures of bank profitability relative to their assets and equity capital, respectively.

Question 6

Most of a bank's operating income results from

Accepted Answer

Interest on assets, such as loans and investments, is the primary source of a bank's operating income. Service charges on deposit accounts, fees from standby lines of credit, and off-balance-sheet activities can also contribute to a bank's income, but they are typically a smaller portion of the overall revenue.

Question 7

All of the following are operating expenses for a bank except

Accepted Answer

Service charges on deposit accounts are actually a source of revenue for a bank, and not an operating expense. The other options listed are all common operating expenses for a bank.

Quiz 10: Banking and the Management of Financial Institutions