Question 1

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 might prove to be a bad debt in the future, it can set aside a portion of its earnings in the loan loss reserves account. This reserve account is used to offset any future losses from bad debts, which helps to mitigate the impact of such losses on the bank's financials. Therefore, the best choice is A.

Question 2

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 3

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

Accepted Answer

The measure described in the question is net interest margin, which is calculated as (interest income - interest expense) / assets. Operating income is not the correct answer as it doesn't necessarily include interest income and expenses. Return on assets (ROA) is a related performance measure, but it does not take into account the difference between interest income and expenses. Return on equity (ROE) is another related measure, but it focuses on the return to shareholders rather than the overall performance of the bank.

Question 4

All of the following are operating expenses for a bank except

Accepted Answer

Service charges on deposit accounts are a source of revenue for banks, not an operating expense.

Question 5

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

In a flat yield curve scenario, interest rates for all maturities are the same, which is the assumption made when conducting a duration gap analysis. Therefore, the answer is A).

Question 6

Most of a bank's operating income results from

Accepted Answer

Most of a bank's operating income results from interest earned on assets such as loans, securities, and investments. Service charges and other fees also contribute to income, but interest on assets is the primary driver. Off-balance-sheet activities and standby lines of credit are not significant sources of income.

Question 7

For banks,

Accepted Answer

Return on equity (ROE) is a measure of a bank's profitability that shows the rate of return on the money shareholders have invested in the bank. It is calculated by dividing net income by shareholder equity. Return on assets (ROA), on the other hand, is a measure of how effectively the bank is utilizing its assets to generate profits. ROA is calculated by dividing net income by total assets. Generally, banks aim to earn a return on equity that exceeds the return on assets, indicating that the bank is generating higher profits relative to the level of investment by shareholders.

Quiz 10: Banking and the Management of Financial Institutions