Q&A Hero

Q: Because of the collateral feature, RPs typically have a higher interest rate than fed funds.

Q: The advantage to a lender in a repurchase agreement transaction versus a fed funds sale is the collateral of government securities or other acceptable liquid assets provided by the borrowing FI.

Q: FIs participating in the fed funds market, either buying or selling, are usually able to do so without amount or maturity restrictions.

Q: Fed funds are subject to settlement risk, but have little or no early withdrawal risk.

Q: Fed funds are short-term uncollateralized loans with maturities that typically do not exceed one day.

Q: Federal funds are excess reserves held by the Federal Reserve Banks that are loaned to banks that have liquidity needs.

Q: Because the minimum amount of a negotiable wholesale CD is $100,000, holders of these CDs are fully covered by FDIC insurance.

Q: The negotiable instrument characteristic of large wholesale CDs effectively eliminates the adverse withdrawal risk for the bank.

Q: Short-term CDs often are priced competitively with T-bills of similar maturity.

Q: Because of penalties imposed for early withdrawal, a CD depositor is unlikely to withdrawal the CD funds from the bank before maturity.

Q: Because retail CDs have fixed maturities, FI managers always should have perfect information regarding the scheduling of interest and principal payments.

Q: Because MMDAs are in direct competition with MMMFs, the withdrawal rate is affected by the relative amount of explicit interest paid on these accounts.

Q: In the U.S., MMDAs typically are transaction accounts without limitations on the size or number of checks or transfers that can occur each month.

Q: MMDAs are considered to be more liquid than demand deposits and NOW accounts.

Q: The interest rate paid on money market deposit accounts by U.S. DIs must directly reflect the rates earned on investments in commercial paper, bankers acceptances, repurchase agreement, and T-bills.

Q: Passbook savings accounts are less liquid than demand deposit accounts.

Q: Passbook savings accounts normally receive a lower interest rate than NOW accounts.

Q: The DI manager can change the pricing on NOW accounts by changing both implicit and explicit interest payments.

Q: NOW accounts allow the explicit payment of interest.

Q: The DI can influence the withdrawal rates of NOW accounts through explicit interest payments, implicit interest payments, or minimum balance requirements.

Q: NOW accounts are potentially less prone to withdrawal risk than demand deposits.

Q: The following information is available on the average costs of the three major banks in a given local market. Bank A has assets of $10 million and average costs are 15 percent, Bank B has assets of $20 million and average costs of 13 percent while Bank C has assets of $30 million with average costs of 12 percent. Average costs are measured as a proportion of total assets.By how much should operating costs of the combined entity (Bank A + Bank B) be reduced in order to stay competitive in the local market, ceteris paribus? A. $900,000.B. $600,000.C. $500,000.D. $400,000.E. $300,000.

Q: The following information is available on the average costs of the three major banks in a given local market. Bank A has assets of $10 million and average costs are 15 percent, Bank B has assets of $20 million and average costs of 13 percent while Bank C has assets of $30 million with average costs of 12 percent. Average costs are measured as a proportion of total assets.Bank B plans to acquire Bank A and in the process cut costs by $100,000. What is the combined bank's average costs? A. 12.00 percent.B. 12.67 percent.C. 13.00 percent.D. 13.33 percent.E. 15.00 percent.

Q: The following information is available on the average costs of the three major banks in a given local market. Bank A has assets of $10 million and average costs are 15 percent, Bank B has assets of $20 million and average costs of 13 percent while Bank C has assets of $30 million with average costs of 12 percent. Average costs are measured as a proportion of total assets.The above figures indicate that A. there are significant economies of scale still present in the local markets.B. there are significant diseconomies of scale still present in the local markets.C. there are significant economies of scope still present in the local markets.D. there are significant diseconomies of scope still present in the local markets.E. there is not enough information to determine economies of scale or scope.

Q: Spruce Bank is planning to automate some of its back office functions and reduce operating costs. The installation of new computers and software will require an initial investment of $1,000,000. The savings generated because of reduced personnel cost is $200,000 per year. The bank uses an 8 percent rate of discount to evaluate cost saving projects which are expected to last 10 years.The maximum cost savings that can be generated with this new equipment has been estimated to be $264,237. In order to accept this project, what is the minimum number of years the projected savings must be realized before the project breaks even? A. 3.7 years.B. 4.7 years.C. 5.7 years.D. 6.7 years.E. 7.7 years.

Q: Spruce Bank is planning to automate some of its back office functions and reduce operating costs. The installation of new computers and software will require an initial investment of $1,000,000. The savings generated because of reduced personnel cost is $200,000 per year. The bank uses an 8 percent rate of discount to evaluate cost saving projects which are expected to last 10 years.What must be the minimum annual cost savings in order to accept this project? Assume a five-year horizon and 8 percent discount rate. A. $200,000.B. $222,256.C. $250,456.D. $279,724.E. $500,913.

Q: Spruce Bank is planning to automate some of its back office functions and reduce operating costs. The installation of new computers and software will require an initial investment of $1,000,000. The savings generated because of reduced personnel cost is $200,000 per year. The bank uses an 8 percent rate of discount to evaluate cost saving projects which are expected to last 10 years.On further analysis, it is estimated that the project has a finite life of 5 years, i.e. further investment will be required to generate the same savings. Should they undertake the project if they assume a five-year horizon for evaluating the project? A. Yes, because the NPV of the project is $500,000.B. Yes, because the NPV of the project is $342,016.C. No, because the NPV of the project is -$500,000.D. No, because the NPV of the project is -$201,458.E. No, because the IRR of the project is greater than 15 percent.

Q: Spruce Bank is planning to automate some of its back office functions and reduce operating costs. The installation of new computers and software will require an initial investment of $1,000,000. The savings generated because of reduced personnel cost is $200,000 per year. The bank uses an 8 percent rate of discount to evaluate cost saving projects which are expected to last 10 years.Should the bank undertake the project given the above information? A. Yes, because the NPV of the project is $500,000.B. Yes, because the NPV of the project is $342,016.C. No, because the NPV of the project is -$500,000.D. No, because the NPV of the project is -$201,458.E. No, because the IRR of the project is lower than 12 percent.

Q: A new computer system is expected to cost $40 million and generate annual savings of $12 million over the next five years.What is the IRR for this investment? A. 11.18 percent.B. 12.98 percent.C. 15.24 percent.D. 12.00 percent.E. 18.00 percent.

Q: A new computer system is expected to cost $40 million and generate annual savings of $12 million over the next five years.Should the bank invest in this project if the discount rate is 18 percent? A. Yes, because the net present value of the project is $2,473,948.B. No, because the net present value of the project is -$2,473,948.C. Yes, because the net present value of the project is $24.8 million.D. No, because the net present value of the project is -$24.8 million.E. Yes, because the net present value of the project is $1,342,688.

Q: A new computer system is expected to cost $40 million and generate annual savings of $12 million over the next five years.Should the bank invest in this project if the discount rate is 12 percent? A. Yes, because the net present value of the project is $3,257,314.B. No, because the net present value of the project is -$3,257,314.C. Yes, because the net present value of the project is $20 million.D. No, because the net present value of the project is -$20 million.E. Yes, because the net present value of the project is $4,980,000.

Q: Consider the following two FIs: Company A has $500 million in total assets and total costs equal to $200 million. Company B has $60 million in total assets and total costs equal to $24 million.Assume a third FI (company C) operates in the same market with two FIs, and it has $800 million in assets and total costs of $420 million. What can you conclude about the cost structure of the FIs in this market? A. There are significant economies of scale because companies A, B, and C coexist in the industry.B. There are no significant economies of scale because both companies A and C are much larger than company B.C. There are no significant economies of scale because the unit costs are constant.D. There are significant economies of scale beyond the $500 million asset size.E. There are no significant economies of scale because the unit costs increase as size increases.

Q: Consider the following two FIs: Company A has $500 million in total assets and total costs equal to $200 million. Company B has $60 million in total assets and total costs equal to $24 million.What can you conclude about the cost structure of the market consisting of the two FIs? A. There are significant economies of scale because both companies A and B coexist in the industry.B. There are no significant economies of scale because company A is much larger than company B.C. There are no significant economies of scale because the unit costs are constant.D. There are significant economies of scale because the unit costs decline as size increases.E. There are no significant economies of scale because the unit costs increase as size increases.

Q: Consider the following two FIs: Company A has $500 million in total assets and total costs equal to $200 million. Company B has $60 million in total assets and total costs equal to $24 million.What are average costs for each FI? A. 0.40 for A and 2.50 for B.B. 2.50 for both A and B.C. 2.50 for A and 0.40 for B.D. 0.40 for both A and B.E. Insufficient information.

Q: Which of the following is NOT a retail banking service? A. Check deposit services. B. Point of sale/debit cards. C. Telephone bill paying services. D. Pre-authorized debits/credits. E. Automated teller machines.

Q: Which of the following is NOT a wholesale banking service? A. Controlled disbursement accounts. B. Account reconciliation. C. Electronic funds transfer. D. Electronic initiation of letters of credit. E. Automated teller machines.

Q: Which is the most important banking area in which technology has had an impact? A. Cash-management services. B. Residential mortgage lending. C. Issuance of certificates of deposit. D. Credit approval. E. None of the above.

Q: Which of the following is consistent with economies of scope? The subscript "b" refers to a banking firm, "s" for a securities firm, "AC" is average costs and "TC" is total costs. A. ACb + s > ACb + ACs. B. ACb + s = ACb + ACs. C. ACb + s < ACb + ACs. D. TCb + s < TCb + TCs. E. TCb + s > TCb + TCs.

Q: Why has empirical evidence on economies of scale and scope been so contradictory? A. Data on bank costs are unavailable. B. Efficiency may be related to overall market conditions. C. Efficiency may be related to non-quantifiable variables such as managerial ability. D. Neither the intermediation nor the production approach conform to reality. E. The methodology to detect economies of scale and scope are still very rudimentary.

Q: Suppose that the doubling of a bank's deposit funding allows the bank to triple its loan output. What can you conclude about the bank's production technology? A. It exhibits economies of scale using the production approach. B. It exhibits diseconomies of scale using the production approach. C. It exhibits diseconomies of scale using the intermediation approach. D. It exhibits economies of scale using the intermediation approach. E. It exhibits neither economies nor diseconomies of scale.

Q: On Fedwire, daylight overdraft A. is a bank's positive intraday balance in its reserve account at the Fed. B. does not occur under the current payments system. C. invites a fee is 50 basis points, quoted as an annual rate on the basis of a 24-hour day. D. has a seasonal component. E. is not a potential source of instability in the financial markets.

Q: Daylight overdrafts occur when A. FIs in different time zones clear transactions. B. FI debits exceed credits during the day. C. FI credits exceed debits during the day. D. the sum of all debits transmitted over the system exceed the sum of all credits during the day. E. the sum of all credits transmitted over the system exceed the sum of all debits during the day.

Q: Settlement risk is important because A. of the interdependent nature of many international transactions. B. of the impact on sovereign country risk. C. problems may induce countries to limit the freedom of international capital flows. D. the electronic funds transfer network itself may become insolvent. E. the Fed's guarantee may prove to be even more costly to the Federal government than the thrift debacle.

Q: Which of the following observations is NOT true? A. The use of electronic methods of payment is far higher in major developed countries other than the United States. B. E-money payments are virtually nonexistent in the United States. C. Money stored in e-money accounts and cards is covered by deposit insurance. D. U.S. FIs have been slow in adopting and using online banking and electronic payment methods extensively. E. All of the above.

Q: Which of the following observations concerning e-money is NOT true? A. Check writing lays the foundation of e-money. B. E-money removes the middleman from a transaction. C. The e-money user transfers the money from his or her bank account to the account of the funds' receiver. D. The primary function of e-money is to facilitate transactions on the Internet. E. E-money is not a cost efficient way of managing transactions that are small in value.

Q: As of January 2012, which of the following accounts for the highest volume of noncash transactions worldwide? A. Checks. B. Card payments. C. Debit transfers. D. E-money payments. E. Credit transfers.

Q: As of January 2012, which of the following represented the highest percent of the dollar value of noncash transactions worldwide? A. Checks. B. Card payments. C. Debit transfers. D. E-money payments. E. Credit transfers.

Q: As of January 2012, which of the following accounts for the highest volume of noncash transactions in the United States? A. Checks. B. Card payments. C. Debit transfers. D. E-money payments. E. Credit transfers.

Q: As of January 2012, which of the following represented the highest percent of the dollar value of noncash transactions in the United States? A. Checks. B. Card payments. C. Debit transfers. D. E-money payments. E. Credit transfers.

Q: Which of the following statements is NOT true? A. The Federal Reserve operates the Fedwire electronic payments system while CHIPS is a private network. B. Fedwire is used to transfer funds from the Fed to the banking system while CHIPS is used to make interbank funds transfers. C. The Fed guarantees all payments on Fedwire while CHIPS transfers are provisional until settlement. D. Large daylight overdrafts are incurred on both Fedwire and CHIPS. E. Fedwire has a fee for daylight overdrafts but CHIPS does not.

Q: Which of the following observations concerning the intermediation approach to measure the cost function of FIs is true? A. It views FIs' outputs of services as having two underlying inputs. B. Labor and capital are the only inputs. C. It views the output as being produced by labor, capital and the funds used to produce intermediated services. D. Premiums or reserves are viewed as an input in the banking and thrift industries. E. None of the above.

Q: Which of the following observations concerning the production approach to measure the cost function of FIs is true? A. It views FIs' outputs of services as having three underlying inputs. B. Labor and capital are the only inputs. C. It views the output as being produced by labor, capital and the funds used to produce intermediated services. D. Deposit costs are viewed as an input in the banking and thrift industries. E. None of the above.

Q: Which of the following are the two basic approaches to analyzing the cost functions of FIs? A. Basic indicator approach and standardized approach. B. Standardized approach and advanced measurement approach. C. Production approach and intermediation approach. D. Basic indicator approach and advanced measurement approach. E. Intermediation approach and advanced measurement approach.

Q: Which of the following best describes economies of scale? A. The average cost of production decreases as the level of output increases. B. The effects on costs related to managerial ability and other hard-to-quantify factors. C. Cost savings are realized from using many of the same inputs to produce multiple products. D. The average cost of production increases as the level of output increases. E. Cost increases are realized from using many of the same inputs to produce multiple products.

Q: Which of the following best describes/defines X-inefficiencies? A. The average cost of production decreases as the level of output increases. B. The effects on costs related to managerial ability and other hard-to-quantify factors. C. Cost savings are realized from using many of the same inputs to produce multiple products. D. The average cost of production increases as the level of output increases. E. Cost increases are realized from using many of the same inputs to produce multiple products.

Q: Which of the following best describes economies of scope? A. They occur when the average cost of production decreases as the level of output increases. B. They are effects on costs related to managerial ability and other hard-to-quantify factors. C. They occur when cost savings are realized from using many of the same inputs to produce multiple products. D. They occur when the average cost of production increases as the level of output increases. E. They occur when cost increases are realized from using many of the same inputs to produce multiple products.

Q: According to studies, which of the following may better explain cost differences and operating cost efficiencies among FIs? A. Diseconomies of scale. B. Economies of scale. C. Economies of scope. D. X-inefficiencies. E. Diseconomies of scope.

Q: Which of the following occurs if the costs of joint production of FI services are higher than they would be if they were produced independently? A. Economies of scale. B. Diseconomies of scale. C. Economies of scope. D. Diseconomies of scope. E. Constant returns to scale.

Q: Which of the following implies that small FIs are more cost efficient than large FIs, and that in a freely competitive environment for financial services, small FIs may outperform their larger counterparts? A. Economies of scale. B. Diseconomies of scale. C. Economies of scope. D. Diseconomies of scope. E. Constant returns to scale.

Q: Large-scale investment projects that lead to excess capacity and integration problems that create cost overruns and control problems are examples of A. diseconomies of scale. B. economies of scale. C. economies of scope. D. diseconomies of scope. E. constant returns to scale.

Q: Which of the following implies reduced unit costs as the range of products offered increases inputs in producing multiple products? A. Diseconomies of scale. B. Economies of scale. C. Economies of scope. D. Diseconomies of scope. E. Constant returns to scale.

Q: Which of the following implies reduced unit costs as size or volume of assets increases? A. Diseconomies of scale. B. Economies of scale. C. Economies of scope. D. Diseconomies of scope. E. Constant returns to scale

Q: As banks and other FIs increase the use of technology, an unintended consequence may be that A. cost savings are seldom realized. B. customers are driven away because they still want to interact with a person for certain transactions. C. innovation of new products tends to take longer periods of time to attract new customers. D. the marginal cost of adding new customers tends to increase at an increasing rate. E. None of the above.

Q: Which of the following partially explains why cash management services have not attracted customers in Europe to the degree that they have in the US? A. Prevalence of nationwide branching and banking in Europe. B. Prevalence of interregional banking restrictions in Europe. C. Prohibitive charges imposed for the use of domestic telephone lines in Europe. D. Prohibitive charges imposed on such services in Europe. E. None of the above.

Q: Which of the following wholesale services offered by FIs to businesses allows the FI to combine the e-mail capabilities of the internet with the FIs ability to process payments electronically through the interbank payment networks? A. Electronic data exchange. B. E-commerce facilitation. C. Electronic billing. D. Electronic funds transfer. E. Account reconciliation.

Q: Which of the following wholesale services offered by FIs allows businesses to transfer and transact invoices, purchase orders, and shipping notices automatically? A. Electronic data exchange. B. E-commerce facilitation. C. Electronic billing. D. Electronic funds transfer. E. Account reconciliation.

Q: Which of the following is a centralized collection service for corporate payments that helps reduce the float? A. Funds concentration. B. Electronic billing. C. Treasury management. D. Controlled disbursement accounts. E. Wholesale lockbox.

Q: What is float? A. Overnight payments via CHIPS or Fedwire. B. Encoding, endorsing, microfilming, and handling customers' checks. C. Time it takes a check to clear at a bank. D. Management of multiple currency and security portfolios for trading and investment purposes. E. Interval between the dispatch of a bill and actual payment by the consumer.

Q: As banks have increased the use of technology over the past 20 years, A. noninterest income as a percent of total operating income has approximately doubled. B. there has been a decrease in the importance of both Fedwire and CHIPS. C. there has been an increase in negative net present value because of the speed in which rivals can replicate innovations. D. banks no longer need to consolidate because they can access customers worldwide through internet services. E. noninterest expense as a percent of total operating income has decreased as supporting branch banking has decreased in importance.

Q: The expenses relating to increased technological improvements made by FIs during the last several years has the most impact on which of the following? A. Interest expense. B. Noninterest expense. C. Net income. D. Provision for loan losses. E. Net securities gains or losses

Q: Which of the following occur when managers undertake growth-oriented investments to increase an FI's size that may be inconsistent with stockholders' value-maximizing objectives? A. Technology risk. B. Operational efficiency. C. Agency conflicts. D. Diseconomies of scale. E. Diseconomies of scope.

Q: Which of the following are potential benefits of technology for an FI? A. Improved service quality, especially for customers of large banks. B. The rate of innovation of new products can be increased. C. FIs can more easily cross-market new and existing products to customers. D. Improved flexibility in financial transactions for retail customers. E. All of the above.

Q: Which of the following is NOT a source of operational risk for an FI? A. Capital assets. B. Customer relationships. C. Technology. D. Employees. E. Positive duration gap.

Q: How can interest income of an FI be increased by improved technological efficiency? A. By improving the efficiency of management of information flows. B. By obtaining access to low cost sources of funds. C. By linking services to the quality of the FI's technology. D. By innovating new interest earning products. E. By complying with all government regulations.

Q: How can interest expense of an FI be reduced by improved technological efficiency? A. By improving the efficiency of management of information flows. B. By obtaining access to low cost sources of funds. C. By linking services to the quality of the FI's technology. D. By innovating new interest earning products. E. By complying with all government regulations.

Q: How can noninterest operating expenses of an FI be reduced by improved technological efficiency? A. By improving the efficiency of management of information flows. B. By obtaining access to low cost sources of funds. C. By linking services to the quality of the FI's technology. D. By innovating new interest earning products. E. By complying with all government regulations.

Q: How can noninterest operating income of an FI be increased by improved technological efficiency? A. By improving the efficiency of management of information flows. B. By obtaining access to low cost sources of funds. C. By linking services to the quality of the FI's technology. D. By innovating new interest earning products. E. By complying with all government regulations.

Q: Regulators have proposed that operational risk should be measured for the purpose of meeting overall capital adequacy.

Q: The operational risk faced by an FI includes sources other than technology.

Q: The U.S. tax burden faced by domestic FIs has been minimized, in part, by the ability to use international wire networks for the transfer of funds.