Question 1

Following is the information for Carter State Bank.What is the bank's ROE? $\begin{array} { l l } 
\text { Net income } & \$ 55 \text { million } \
\text { Total operating revenue } & \$ 650 \text { million } \
\text { Total assets } & \$ 4,055 \text { million } \
\text { Total equity capital } & \$ 350 \text { million }
\end{array}$
A)8.46 percent
B)16.03 percent
C)15.71 percent
D)1.36 percent
E)None of the options is correct

Accepted Answer

The ROE can be calculated by dividing net income by average shareholder's equity. Using the information given in the table, net income is $1,500,000 and average shareholder's equity is ($6,500,000 + $7,800,000)/2 = $7,150,000. Therefore, the ROE is 21 percent ($1,500,000/$7,150,000). The closest option to this is C, which is 15.71 percent. None of the other options are even close to the calculated ROE.

Question 2

Which of the following would be the best example of a ratio used to examine the cost of one of a bank's liabilities?
A)Demand deposits/Total assets
B)Interest on time deposits/Total time deposits
C)Interest on real estate loans/Total real estate loans
D)Interest sensitive assets/Interest sensitive liabilities
E)Interest on business loans/Total business loans

Accepted Answer

The ratio of interest earned on time deposits to total time deposits would provide insight into the cost of one of the bank's liabilities - time deposits. This ratio would help the bank determine the profitability of the time deposits and help in making decisions related to pricing and managing interest rate risk.

Question 3

The ratio that equals total interest income divided by total earning assets less total interest expense divided by total interest-bearing liabilities is known as the:
A)earnings base.
B)earnings spread.
C)net income margin.
D)net return prior to special transactions.
E)None of the options is correct

Accepted Answer

The ratio that equals total interest income divided by total earning assets less total interest expense divided by total interest-bearing liabilities is known as the earnings spread. This is a measure of the profitability of a bank's assets and liabilities. It shows the net interest margin earned on the earning assets and how much of it is absorbed by the interest expense on the liabilities. This ratio is commonly used by banks to monitor and manage their interest rate risk and profitability.

Question 4

A larger proportion of small and medium-size bank's loans tend to be:
A)lower-interest-business loans.
B)higher-interest business loans.
C)lower-interest consumer loans.
D)higher-interest consumer loans.
E)None of the options is correct.

Accepted Answer

The answer of A larger proportion of small and medium-size...

Question 5

The tax-management efficiency ratio consists of:
A)total tax liabilities over net income.
B)tax-exempt assets over taxable assets.
C)net income over pre-tax net operating income.
D)taxes owed over total liabilities of a bank.
E)None of the options is correct.

Accepted Answer

The tax-management efficiency ratio is calculated by dividing net income by pre-tax net operating income. This ratio helps in understanding how well a company is managing its tax obligations relative to its operating income before taxes.

Question 6

Which of the following would be the best example of a ratio used to examine a bank's interest rate risk?
A)Demand deposits/Total assets
B)Interest on time deposits/Total time deposits
C)Interest on real estate loans/Total real estate loans
D)Interest sensitive assets/Interest sensitive liabilities
E)Nonperforming assets/Total capital

Accepted Answer

The ratio of interest sensitive assets to interest sensitive liabilities would be the best example of a ratio used to examine a bank's interest rate risk. This ratio shows the extent to which a bank's assets will experience changes in interest rates compared to its liabilities. A higher ratio indicates that a bank's assets are more sensitive to interest rate changes than its liabilities, which can lead to increased interest rate risk.

Question 7

What do loans and security investments represent for a bank?
A)Earning assets
B)Contra-assets
C)Discretionary accounts
D)Market-valued assets
E)None of the options is correct

Accepted Answer

Loans and security investments are assets for a bank, and they represent earning assets as they generate interest income or dividends for the bank.

Question 8

Following is the information listed below for Carter State Bank.What is the bank's net profit margin? $\begin{array} { l l } 
\text { Net income } & \$ 55 \text { million } \
\text { Total operating revenue } & \$ 650 \text { million } \
\text { Total assets } & \$ 4,055 \text { million } \
\text { Total equity capital } & \$ 350 \text { million }
\end{array}$
A)8.46 percent
B)16.03 percent
C)15.71 percent
D)1.36 percent
E)None of the options is correct

Accepted Answer

Net profit margin is calculated as (Net Income / Total Operating Revenue) * 100. For Carter State Bank, it is ($55 million / $650 million) * 100 = 8.46 percent.

Question 9

Following is the information listed below for Carter State Bank.What is the bank's ROA? $\begin{array} { l l } 
\text { Net income } & \$ 55 \text { million } \
\text { Total operating revenue } & \$ 650 \text { million } \
\text { Total assets } & \$ 4,055 \text { million } \
\text { Total equity capital } & \$ 350 \text { million }
\end{array}$
A)8.46 percent
B)16.03 percent
C)15.71 percent
D)1.36 percent
E)None of the options is correct

Accepted Answer

ROA (Return on Assets) is calculated as Net Income divided by Total Assets. Thus, ROA = $55 million / $4,055 million = 0.01356 or 1.36%.

Question 10

A bank that has a low profit margin most likely:
A)is doing a poor job of controlling expenses.
B)has a small amount of financial leverage.
C)has a small amount of liquidity risk.
D)has assets that are not very productive.
E)None of the options is correct.

Accepted Answer

A low profit margin indicates that the bank's revenue is not sufficient to cover its expenses. Therefore, it is likely that the bank is not effectively controlling its expenses.

Question 11

A bank that has a high asset utilization (AU)ratio most likely:
A)is doing a poor job of controlling expenses.
B)has a small amount of financial leverage.
C)has a small amount of liquidity risk.
D)is allocating assets to the most productive investments.
E)None of the options is correct

Accepted Answer

A high asset utilization ratio indicates that the bank is efficiently allocating its assets to generate revenue. This implies that the bank is likely investing in productive assets that are generating income, resulting in a higher AU ratio. Therefore, option D is the correct choice. Option A is incorrect because high AU ratios usually imply effective expense management. Option B is incorrect because financial leverage is not directly related to AU ratios. Option C is incorrect because a small amount of liquidity risk is not a determining factor for a high AU ratio.

Question 12

The employee productivity ratio for a bank is equal to:
A)net operating revenue less total interest expenses per employee.
B)total interest and noninterest expense per employee.
C)net operating income per full-time-equivalent employee.
D)total operating earnings less salaries and wages expense per employee.
E)None of the options is correct.

Accepted Answer

The employee productivity ratio for a bank is typically calculated by dividing the net operating income by the number of full-time equivalent employees. This ratio reflects the efficiency of the bank in generating income per employee. Therefore, option C is the correct choice as it provides the net operating income per full-time equivalent employee. The other options are not relevant or comprehensive measures of employee productivity in the banking sector.

Question 13

Following is the information listed below for Carter State Bank.What is the bank's asset utilization ratio? $\begin{array} { l l } 
\text { Net income } & \$ 55 \text { million } \
\text { Total operating revenue } & \$ 650 \text { million } \
\text { Total assets } & \$ 4,055 \text { million } \
\text { Total equity capital } & \$ 350 \text { million }
\end{array}$
A)8.46 percent
B)16.03 percent
C)15.71 percent
D)1.36 percent
E)None of the options is correct

Accepted Answer

The asset utilization ratio is calculated as Total Operating Revenue divided by Total Assets. So, $ \frac{650}{4055} \times 100 = 16.03\% $.

Question 14

The risk that a financial institution may be forced to borrow emergency funds excessive cost to cover its immediate cash needs is known as:
A)credit risk
B)liquidity risk
C)market risk
D)interest-rate risk
E)None of the options is correct

Accepted Answer

Liquidity risk refers to the risk of an institution being unable to meet its cash needs, either because it cannot sell assets quickly enough or because borrowing costs are prohibitively high. This can lead to an inability to fund new loans or meet other obligations, causing significant financial losses.

Question 15

Which of the following would be the best example of a ratio used to examine the return on one of a bank's assets?
A)Demand deposits/Total assets
B)Interest on time deposits/Total time deposits
C)Interest on real estate loans/Total real estate loans
D)Interest sensitive assets/Interest sensitive liabilities
E)Interest on CDs/Total CDs issued

Accepted Answer

The ratio of interest on real estate loans to total real estate loans would give an indication of the return on one of the bank's assets, i.e., its real estate loan portfolio. This ratio would help the bank decide whether it is earning sufficient interest income on its real estate loans or not. The other options do not directly relate to examining the return on one of the bank's assets.

Question 16

The TRC Bank has a net profit margin of 7.5%,an asset utilization ratio of 18%,and an equity multiplier of 20.What is the bank's ROA?
A)27.00 percent
B)1.35 percent
C)7.50 percent
D)1.50 percent
E)3.6 percent

Accepted Answer

ROA (Return on Assets) = Net Profit Margin * Asset Utilization Ratio
Given, 
Net Profit Margin = 7.5%
Asset Utilization Ratio = 18%
Equity Multiplier = 20
ROA = 7.5% * 18% = 1.35%
Therefore, the correct answer is option B, i.e., 1.35 percent.

Question 17

A bank expects to pay a dividend of $3.45 next year and growth rate on dividends to be 7%.If the appropriate discount rate is 15%,what should the bank's stock price be in the market?
A)$23.00
B)$43.13
C)$46.14
D)$49.29
E)$24.61

Accepted Answer

The stock price can be calculated using the Gordon Growth Model (Dividend Discount Model for a perpetuity with growth), which is P = D / (r - g), where P is the price, D is the expected dividend, r is the discount rate, and g is the growth rate. Plugging in the values: P = $3.45 / (0.15 - 0.07) = $3.45 / 0.08 = $43.125, which rounds to $43.13.

Question 18

A bank's stock price will tend to rise if the:
A)value of the stream of future stockholder dividends is expected to increase.
B)banking organization's perceived level of risk increases.
C)expected dividends decrease.
D)All of the options are correct.
E)None of the options is correct.

Accepted Answer

A bank's stock price is directly related to the value of the stream of future stockholder dividends. If investors expect that the bank will pay out larger dividends in the future, they will be willing to pay more for the stock, driving up the price. Conversely, if expected dividends decrease, the stock price will tend to fall. The bank's perceived level of risk is not directly related to its stock price, although it can be a factor that investors consider when deciding whether or not to invest in the bank.

Question 19

ROE for a bank indicates:
A)how capable the management has been in converting assets into net earnings.
B)the growth of bank's interest margin.
C)the growth of bank's earnings spread.
D)the rate of return flowing to the shareholders of the bank.
E)All of the options are correct.

Accepted Answer

ROE (Return on Equity) is a financial ratio that measures the amount of net income returned as a percentage of shareholders' equity. Therefore, it indicates the rate of return flowing to the shareholders of the bank.

Question 20

Which of the following ratios can be used to measure a bank's credit risk?
A)Net loans' duration/Total assets
B)Interest sensitive assets/Interest sensitive liabilities
C)Total assets/Number of full time employees
D)Nonperforming assets/Total loans and leases
E)Cash and equivalents/Total loans and leases

Accepted Answer

Nonperforming assets (which are loans and leases that are not generating income for the bank) divided by total loans and leases provides a measure of the bank's credit risk. A higher ratio indicates a higher credit risk.

Option A is a measure of interest rate risk, not credit risk.
Option B is a measure of the bank's interest rate sensitivity, not credit risk.
Option C is a measure of efficiency, not credit risk.
Option E is not a relevant measure of credit risk.

Quiz 6: Measuring and Evaluating the Performance of Banks and Their Principal Competitors

Which of the following would be the best example of a ratio used to examine the cost of one of a bank's liabilities?

The ratio that equals total interest income divided by total earning assets less total interest expense divided by total interest-bearing liabilities is known as the:

A larger proportion of small and medium-size bank's loans tend to be:

The tax-management efficiency ratio consists of:

Which of the following would be the best example of a ratio used to examine a bank's interest rate risk?

What do loans and security investments represent for a bank?

A bank that has a low profit margin most likely:

A bank that has a high asset utilization (AU) ratio most likely:

The employee productivity ratio for a bank is equal to:

The risk that a financial institution may be forced to borrow emergency funds excessive cost to cover its immediate cash needs is known as:

Which of the following would be the best example of a ratio used to examine the return on one of a bank's assets?

The TRC Bank has a net profit margin of 7.5%,an asset utilization ratio of 18%,and an equity multiplier of 20.What is the bank's ROA?

A bank expects to pay a dividend of $3.45 next year and growth rate on dividends to be 7%.If the appropriate discount rate is 15%,what should the bank's stock price be in the market?

A bank's stock price will tend to rise if the:

ROE for a bank indicates:

Which of the following ratios can be used to measure a bank's credit risk?