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Banking
Q:
Usury ceilings place caps on interest rates that FIs can charge on certain types of loans and are established by federal regulatory authorities.
Q:
Delaware and South Dakota have become leading states in the distribution of some financial services because of liberal regulations.
Q:
The increased use of wire transfers as a replacement for check and cash payments has decreased the risk of fraud.
Q:
Regulation F, a part of the FDIC Improvement Act of 1991, requires financial institutions to develop internal procedures to limit settlement exposures to correspondent banks.
Q:
The Fed now charges 20 basis points annually for daylight overdrafts.
Q:
CHIPS guarantees that any wire transfer is final at the time it is made.
Q:
Daylight overdraft risk occurs because banks often provide immediate credit to customers for deposits, even though the funds may not arrive until later in the day.
Q:
Funds transferred on the Fedwire are settled immediately.
Q:
Funds transferred on CHIPS are settled at the end of the day.
Q:
As of 2012, the combined value of payments sent over Fedwire and CHIPS often exceeded $5.0 trillion a day.
Q:
Fedwire is a wire transfer network of over 9,300 international FIs with the Federal Reserve System.
Q:
Fedwire is a wire transfer network operated through the Federal Reserve System to assist banks in making financial transactions among themselves, on behalf of themselves and customers.
Q:
As of January 2012, credit cards used in either a credit or debit function accounted for less than 5 percent of the dollar value of payments made in the U.S.
Q:
As of January 2012, credit cards used in either a credit or debit function accounted for over 60 percent of the number of payments made in the U.S.
Q:
Compared to the United States, the use of electronic methods of payment is lower in other major developed countries.
Q:
In the U.S., electronic methods of payment account for a larger number of transactions, but a lower aggregate dollar value than non-electronic methods of payment.
Q:
Banks in given size classes tend to have very little difference in cost structures.
Q:
Recent evidence strongly suggests that economies of scope exist for both asset and liability products, but not for off-balance-sheet products.
Q:
Recent evidence suggests that economies of scale may exist for banks up to the $10 billion to $25 billion range.
Q:
An increase in the cost of the joint production of services as compared to the production of those services independently is an example of diseconomies of scale.
Q:
According to economic theory involving economies of scale, larger and more cost-efficient FIs should prevail over smaller, less cost-efficient FIs.
Q:
The increased use of technology may have positive and negative effects on the perceived service quality provided to retail customers.
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Increases in the rate of innovation of new financial products, whether successful or not, is often credited to advances in technology.
Q:
Cross-market selling of financial products requires production of the products within the same branch or bank office.
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The success in technologically related innovation often is dependent on changes in regulations and regulatory procedures.
Q:
New retail products and services based heavily on technology often are risky because of the high usage rate necessary to make them positive net present value projects.
Q:
Although cloud computing is a technology that FIs can provide to business clients, the FI itself seldom uses cloud computing in their own operations.
Q:
Although secure communications can be carried out between an FI and their customers in dedicated message centers, the centers have yet to replace e-mail communications as the primary means of customer contact.
Q:
Retail banking services and products in recent years have moved strongly toward electronic payment technology.
Q:
Account reconciliation redirects funds from accounts in a large number of different banks to a few centralized accounts at one bank.
Q:
Cash management services include the collection, disbursement, and transfer of funds.
Q:
Appropriate technology may allow an FI to achieve lower-cost funding.
Q:
Controlled disbursement accounts are designed to reduce the delay in check clearing.
Q:
Wholesale cash management services allow corporate customers to minimize cash balances and to monitor quickly cash transactions and balances.
Q:
Investment in technology has allowed FIs to lower the amount of non-interest income as a percent of total operating income.
Q:
Investing in appropriate technology allows an FI to access lower-cost funding markets.
Q:
The initial steps of cross selling financial products can easily occur with computer technology.
Q:
In recent years, U.S. banks have alone spent $20 billion per year in technology related expenditures.
Q:
Bernie Madoff and his infamous Ponzi scheme is an example of external operational risk to the hedge funds he managed.
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The U.S. Treasury has recently proposed that banks carry a capital cushion against losses resulting from operational risk.
Q:
Noninterest expense has increased faster than interest expense for all U.S. insured commercial banks in recent years.
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The "flash crash" on the NYSE in May 2010 was directly attributable to the manipulation of LIBOR by Barclays PLC.
Q:
As of the first quarter 2012, non-interest expense was approximately 640 percent larger than interest expense for all FDIC insured banks.
Q:
The Bank for International Settlements has stated that banks should carry extra capital as a cushion against operational risks.
Q:
According to Hitachi Data Systems, recovery time from system failures averages 12 hours.
Q:
Technological efficiency focuses exclusively on the cost side of financial intermediation.
Q:
Two important input factors in financial intermediation are capital and labor.
Q:
If ACX + Y < ACX + ACY, where AC is average production cost and X and Y are products, economies of scope are present.
Q:
Q:
An FI can protect itself against insolvency resulting from off-balance sheet activities by purchasing insurance.
Q:
All off-balance-sheet items will eventually move on to the balance sheet at some point in time.
Q:
Even though an FI has off-balance-sheet activities, the true net worth is equal to on-balance sheet assets minus on-balance sheet liabilities. FALSE
Q:
Off-balance-sheet items often are called contingent assets and liabilities because they may, or may not, affect the balance sheet in the future.
Q:
Off-balance sheet positions are risky because they may yield negative future cash flows.
Q:
Off-balance-sheet activities generally have risk-reducing attributes, but seldom have risk-increasing attributes.
Q:
Off-balance sheet activities can have both positive and negative effects on the risk of the FI.
Q:
Off-balance-sheet activities are an important source of fee income for many FIs.
Q:
Off-balance-sheet items can generate cash flows that immediately impact the bank's financial performance.
Q:
Which method is preferable, between the loan commitment and the standby letter of credit?
A. The loan commitment is preferable because the savings are greater.
B. The standby letter of credit is preferable because the savings are greater.
C. The loan commitment is preferable it has a lower risk of default.
D. The standby letter of credit is preferable because it has a lower risk of default.
E. The loan commitment is preferable because the back-end fee is payable at the end of the year.
Q:
A corporation is planning to issue $10 million worth of 180-day commercial paper. In order to reduce the interest rates by 25 basis points (per year), it plans to back this issue with a standby letter of credit or a loan commitment. The standby letter of credit is available for 20 basis points (per year) to be paid up-front. The loan commitment for $10 million is available for an up-front fee of 15 basis points (per year) and a 5 basis points back-end fee.What are the savings to the corporation if it obtains a loan commitment to back its $10 million issue of commercial paper? A. $1,250.B. $2,500.C. $3,750.D. $5,000.E. $6,250
Q:
A corporation is planning to issue $10 million worth of 180-day commercial paper. In order to reduce the interest rates by 25 basis points (per year), it plans to back this issue with a standby letter of credit or a loan commitment. The standby letter of credit is available for 20 basis points (per year) to be paid up-front. The loan commitment for $10 million is available for an up-front fee of 15 basis points (per year) and a 5 basis points back-end fee.What are the savings to the corporation if it obtains a standby letter of credit to back its $10 million issue of commercial paper? A. $1,250.B. $2,500.C. $3,750.D. $5,000.E. $6,250.
Q:
Sun Bank has issued a one-year $5 million loan commitment to a customer for an up-front fee of 15 basis points and at a fixed rate of 12 percent. The back-end fee for the unused portion of the commitment is 5 basis points. The bank requires a 10 percent compensating balance in demand deposits. Reserve requirements on demand deposits are 10 percent.Assume 50 percent of the loan is drawn and that there are reserve requirements of 10 percent on demand deposits. What should the bank charge as back-end fees if they require an expected return of 13.63 percent? Do not take future values of fees or interest income received. A. 5 basis points.B. 10 basis points.C. 15 basis points.D. 20 basis points.E. 25 basis points.
Q:
Sun Bank has issued a one-year $5 million loan commitment to a customer for an up-front fee of 15 basis points and at a fixed rate of 12 percent. The back-end fee for the unused portion of the commitment is 5 basis points. The bank requires a 10 percent compensating balance in demand deposits. Reserve requirements on demand deposits are 10 percent.What is the expected return on the loan to the bank if 50 percent of the loan is drawn using discounted cash flows? That is, the return has to be estimated at the beginning of the loan period using present values. Assume there are reserve requirements of 10 percent on demand deposits. A. 12.00 percent.B. 12.26 percent.C. 12.59 percent.D. 13.01 percent.E. 13.26 percent.
Q:
Sun Bank has issued a one-year $5 million loan commitment to a customer for an up-front fee of 15 basis points and at a fixed rate of 12 percent. The back-end fee for the unused portion of the commitment is 5 basis points. The bank requires a 10 percent compensating balance in demand deposits. Reserve requirements on demand deposits are 10 percent.What is the expected return on the loan to the bank if 50 percent of the loan is drawn immediately and there are no reserve requirements on demand deposits? Do not take future values of fees or interest income received. A. 13.45 percent.B. 13.57 percent.C. 13.60 percent.D. 13.72 percent.E. 13.90 percent.
Q:
Sun Bank has issued a one-year $5 million loan commitment to a customer for an up-front fee of 15 basis points and at a fixed rate of 12 percent. The back-end fee for the unused portion of the commitment is 5 basis points. The bank requires a 10 percent compensating balance in demand deposits. Reserve requirements on demand deposits are 10 percent.What is the expected return on the loan at the end of the year if 50 percent of the loan is drawn? Estimate using future values of fee and interest income received, that is, return is defined as all fee and interest income earned at year-end as a percentage of funds used. Assume the cost of funds to the bank is 8 percent. A. 13.45 percent.B. 13.57 percent.C. 13.60 percent.D. 13.72 percent.E. 13.90 percent.
Q:
Sun Bank has issued a one-year $5 million loan commitment to a customer for an up-front fee of 15 basis points and at a fixed rate of 12 percent. The back-end fee for the unused portion of the commitment is 5 basis points. The bank requires a 10 percent compensating balance in demand deposits. Reserve requirements on demand deposits are 10 percent.What is expected return on the loan to the bank if 50 percent of the loan is drawn? Do not take future values of fee or interest income received. A. 13.45 percent.B. 13.57 percent.C. 13.60 percent.D. 13.72 percent.E. 13.90 percent.
Q:
An FI has assets of $800 million and liabilities of $740 million.If the FI had contingent assets of $40 million and contingent liabilities of $160 million, calculate the stockholder's true net worth (ignore the option mentioned in previous question). A. -$60 million.B. $60 million.C. $70 million.D. -$160 million.E. $190 million.
Q:
An FI has assets of $800 million and liabilities of $740 million.If the FI bought call options on bonds with a face value of $50 million, what is the minimum amount of the stockholder's potential true net worth? A. $10 million.B. $70 million.C. $110 million.D. $790 million.E. $850 million.
Q:
An FI has assets of $800 million and liabilities of $740 million.What is the balance sheet capital? A. -$60 million.B. $60 million.C. $740 million.D. $800 million.E. This question cannot be answered without information about off-balance sheet assets and liabilities.
Q:
A $200 million loan commitment has an up-front fee of 20 basis points and a back-end fee of 25 basis points on the unused portion.If 25 percent of the commitment is taken down, the total fees are A. $250,000.B. $4,000,000.C. $400,000.D. $775,000.E. $375,000.
Q:
A $200 million loan commitment has an up-front fee of 20 basis points and a back-end fee of 25 basis points on the unused portion.If 50 percent of the commitment is taken down, the back-end fee is A. $250,000.B. $4,000,000.C. $400,000.D. $775,000.E. $375,000.
Q:
A $200 million loan commitment has an up-front fee of 20 basis points and a back-end fee of 25 basis points on the unused portion.The up-front fee is A. $250,000.B. $4,000,000.C. $400,000.D. $775,000.E. $375,000.
Q:
Which of the following observations is NOT true?
A. The settlement risk that an FI is exposed to within-day appears on its balance sheet.
B. Settlement Risk is a form of OBS risk that FIs participating on private wholesale wire transfer system networks face.
C. A holding company is a corporation that owns more than 25 percent of the shares of other corporations.
D. Failure of an affiliated firm or bank imposes affiliate risk on another bank in a holding company structure in a number of ways.
E. Investors do not distinguish between the failing corporation and its surviving affiliate because of name similarity.
Q:
Which of the following is a non-schedule L off-balance-sheet risk?
A. Takedown risk.
B. Settlement risk.
C. Aggregate funding risk.
D. When-issued trading.
E. Credit risk with derivative securities.
Q:
Why is the default risk much more serious for forward contracts than for futures contracts?
A. Because forward contracts are nonstandard contracts.
B. Forward contracts are entered into bilaterally by the negotiating parties.
C. For forwards, all cash flows are required to be paid at one time on contract maturity.
D. Forwards are essentially OTC arrangements with no external guarantees in case of default.
E. All of the above.
Q:
In the early 1980s
A. banks increased their off-balance-sheet activities to avoid competition from nonbank banks.
B. banks decreased their off-balance-sheet activities to avoid regulatory taxes.
C. banks decreased their off-balance-sheet activities to avoid competition from nonbank banks.
D. banks increased their off-balance-sheet activities to avoid regulatory costs.
E. banks increased their off-balance-sheet activities to avoid interest rate risk exposure.
Q:
Which of the following is an out-of-the-money counterparty?
A. Counterparty in a loan commitment contract.
B. FI that trades in securities prior to their actual issue.
C. Counterparty that is currently at an advantage in terms of cash flows.
D. FI that guarantees to underwrite the performance of the buyer of the guaranty.
E. Counterparty that is currently at a disadvantage in terms of cash flows.
Q:
The delta of an option is
A. a measure of the option's price volatility.
B. calculated by dividing the price of the underlying security by the change in the option's price.
C. equal to the option premium.
D. calculated by multiplying the change in the price of the underlying security by the change in the option's price.
E. usually negative.
Q:
If an option's price increases 1.4 percent for every 2 percent change in the price of the underlying security, what is the value of the option's delta?
A. 0.60.
B. 1.40.
C. 0.70.
D. 2.00.
E. 3.00.
Q:
Which of the following is true of the delta of an option?
A. It lies between 0 and 0.5.
B. It is always negative.
C. It lies between 0 and 1.
D. It is greater than 1.
E. It is always equal to 1.