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Finance
Q:
A bank's temporary lending of excess reserves to other banks is labeled on the balance sheet as:
A) Fed Funds Purchased
B) Fed Funds Sold
C) Money Market Deposits
D) Securities Purchased for Resale
E) None of the above
Q:
According to CAPM, all investments plot along the security market line.
Q:
Large U.S. banks must use which of the methods listed below to determine their provision for loan loss expense?
A) Experience method
B) Reserve method
C) Specific charge-off method
D) Historical cost method
E) None of the above.
Q:
Beta measures the marginal contribution of a stock to the risk of a well-diversified portfolio.
Q:
Noninterest revenue sources for a bank are called:
A) Commitment fees on loans
B) Fee income
C) Supplemental income
D) Noninterest margin
E) None of the above.
Q:
Investors are mainly concerned with those risks that can be eliminated through diversification.
Q:
The common banking practice of selling those investment securities that have appreciated in order to reap a capital gain and holding onto those securities whose prices have declined is known as:
A) Gains trading
B) Performance banking
C) Loss control trading
D) Selective portfolio management
E) None of the above.
Q:
Portfolios that offer the highest expected return for a given variance or standard deviation are known as efficient portfolios.
Q:
If two investments offer the same expected return, most investors would prefer the one with higher variance.
Q:
When a loan is considered uncollectible, the bank's accounting department will write (charge) it off the books by reducing the ______ and the accounts. Which choice below correctly fills in the blank in the preceding sentence?
A) PLL and Gross Loans
B) ALL and Net Loans
C) ALL and Gross Loans
D) PLL and Net Loans
E) None of the above.
Q:
Banks depend heavily upon borrowed funds supplied by customers with little owners' capital invested. This means that banks make heavy use of:
A) Financial leverage
B) Capital restructuring
C) Operating Leverage
D) Margin borrowing
E) None of the above.
Q:
If the expected return of stock A is 12% and that of stock B is 14% and both have the same variance, then investors would prefer stock B to stock A.
Q:
The use of fixed assets, rather than financial assets, in order to increase earnings flowing to a bank's stockholders is known as:
A) Plant and equipment investment
B) Financial leverage
C) Operating leverage
D) Nondeposit capital
E) None of the above.
Q:
The distribution of annual returns for a stock would be closely related to the normal distribution.
Q:
One-time only transactions that often involve financial assets or real property pledged as collateral behind a loan and upon which the bank has foreclosed affect a bank's account known as:
A) Allowance for loan losses
B) Nonrecurring sales of assets
C) Asset gains or losses
D) Provision for loan and security losses
E) None of the above.
Q:
Nonperforming loans are credits on which any scheduled loan repayments and interest payments are past due for more than:
A) 30 days
B) 60 days
C) 90 days
D) 180 days
E) None of the above.
Q:
The distribution of daily returns for a stock would be closely related to the lognormal distribution.
Q:
For a company like Alcoa, what is likely to be the major factor when developing an arbitrage pricing model?
A. Asset price of stocks
B. Commodity price of aluminum
C. GDP
D. Inflation
Q:
The account that is built up by annual noncash expense deductions and is subtracted from Gross Loans on the Report of Condition is:
A) Unearned income
B) Nonperforming loans
C) Allocated loan risk deductions
D) Allowance for possible loan losses
E) None of the above.
Q:
The difference between noninterest income and noninterest expenses on a bank's Report of Income is called:
A) Net Profit Margin
B) Net Interest Income
C) Net Income After Provision for Possible Loan Losses
D) Income or Loss Before Income Taxes
E) Net Noninterest Income
Q:
How does an investor earn more than the return generated by the tangency portfolio and still stay on the security market line?
A. Borrow at the risk free rate and invest in the tangency portfolio.
B. Add high risk/return assets to the portfolio.
C. Adjust the weight of stock in the portfolio to include more high return stocks.
D. It cannot be done.
Q:
When a bank serves as a security dealer for certain kinds of securities (mainly federal, state, and local government obligations) the value of these securities is usually recorded in what account on a bank's Report of Condition?
A) Investment Securities
B) Taxable and Tax-Exempt Securities
C) Trading Account Securities
D) Secondary Reserves
E) None of the above
Q:
Given the following data for the a stock: risk-free rate = 5%; beta (market) = 1.4; beta (size) = 0.4; beta (book-to-market) = -1.1; market risk premium = 7%; size risk premium = 3.7%; and book-to-market risk premium = 5.2%. Calculate the expected return on the stock using the Fama-French three-factor model.
A. 22.3%
B. 7.8%
C. 10.6%
D. none of the above
Q:
A financial institution's bad-debt reserve, as reported on its balance sheet, is called:
A) Unearned income or discount
B) Allowance for possible loan losses
C) Intangible assets
D) Customer liability on acceptances
E) None of the above
Q:
Given the following data for the a stock: risk-free rate = 5%; beta (market) = 1.5; beta (size) = 0.3; beta (book-to-market) = 1.1; market risk premium = 7%; size risk premium = 3.7%; and book-to-market risk premium = 5.2%. Calculate the expected return on the stock using the Fama-French three-factor model.
A. 22.3%
B. 7.8%
C. 11.5%
D. none of the above
Q:
The noncash expense item on a bank's Report of Income designed to shelter a bank's current earnings from taxes and to help prepare for bad loans is called:
A) Short-term debt interest
B) Noninterest expense
C) Provision for taxes
D) Provision for possible loan losses
E) None of the above.
Q:
The three factors in the Three-Factor Model are:
I) Market factor
II) Size factor
III) Book-to-market factor
A. I only
B. I and II only
C. I,II, and III
D. III only
Q:
An example of a contra-asset account is:
A) The loan and lease loss allowance.
B) Unearned income.
C) Buildings and equipment.
D) Revenue bonds.
E) The provision for loan loss.
Q:
Given the following data for a stock: risk-free rate = 4%; factor-1 beta = 1.5; factor-2 beta = 0.5; factor-1 risk-premium = 8%; factor-2 risk-premium = 2%. Calculate the expected rate of return on the stock using the two-factor APT model.
A. 13%
B. 17%
C. 10%
D. none of the above
Q:
Which of the following adjustments are made to gross loans and leases to obtain net loans and leases?
A) The loan and lease loss allowance is subtracted from gross loans
B) Unearned income is subtracted from gross interest received
C) Investment income is added to gross interest received
D) A and B.
E) A. and C.
Q:
A "factor" in APT is a variable that:
A. is pure "noise"
B. correlates with risky asset returns in an unsystematic manner
C. affects the return of risky assets in a systematic manner
D. affects the return of a risky asset in a random manner
Q:
Loans typically fall into each of the following categories except:
A) Real estate.
B) Consumer.
C) Commercial and Industrial (business).
D) Agricultural.
E) Municipal.
Q:
Given the following data for a stock: beta = 0.9; risk-free rate = 4%; market rate of return = 14%; and Expected rate of return on the stock = 13%. Then the stock is:
A. overpriced
B. under priced
C. correctly priced
D. cannot be determined
Q:
Banks generate their largest portion of income from:
A) Loans.
B) Short-term investment.
C) Demand deposits.
D) Long-term investments.
E) Certificates of deposit.
Q:
Given the following data for a stock: beta = 0.5; risk-free rate = 4%; market rate of return = 12%; and Expected rate of return on the stock = 10%. Then the stock is:
A. overpriced
B. under priced
C. correctly priced
D. cannot be determined
Q:
Bank assets fall into each of the following categories except:
A) Loans.
B) Investment securities.
C) Demand deposits.
D) Noninterest cash and due from banks.
E) Other assets.
Q:
Given the following data for a stock: beta = 1.5; risk-free rate = 4%; market rate of return = 12%; and Expected rate of return on the stock = 15%. Then the stock is:
A. overpriced
B. under priced
C. correctly priced
D. cannot be determined
Q:
If a stock is under priced it would plot:
A. Above the security market line
B. Below the security market line
C. On the security market line
D. On the Y-axis
Q:
Checking account maintenance fees and overdraft fees are included in the noninterest income account under .
Answer: service charges on deposit accounts
T F 26. On a bank's income statement (Report of Income) deposit costs are financial inputs.
Answer: True
T F 27. Loans and leases are financial outputs on a financial institution's balance sheet or Report of Condition.
Answer: True
T F 28. Nondeposit borrowings are a financial input on a bank's balance sheet or Report of Condition.
Answer: True
T F 29. The cost of nondeposit borrowings is a financial input on a bank's income statement or Report of Income.
Answer: True
T F 30. Securities income is a financial output listed on a financial institution's Report of Condition.
Answer: False
T F 31. Net loans on a bank's balance sheet are derived by deducting the allowance for loan losses and unearned discounts from gross loans.
Answer: True
T F 32. When a loan is classified as nonperforming any accrued interest recorded on the bank's books, but not actually received, must be deducted from a bank's loan revenues.
Answer: True
T F 33. In U.S. banking, securities gains are treated as ordinary income.
Answer: True
T F 34. Most banks report securities gains as a component of their total noninterest income.
Answer: False
T F 35. A bank displaying trading account securities on its balance sheet is serving as a security dealer and plans to sell those securities before they reach maturity.
Answer: True
T F 36. Bad loans normally do not affect a bank's current income.
Answer: True
T F 37. The expensing of a worthless loan usually must occur in the year that loan become worthless.
Answer: True
T F 38. Recoveries on loans previously charged off are added to the Provision for Loan Losses (PLL) account on a bank's income statement.
Answer: False
T F 39. Loan-loss reserves set aside to cover a particular loan or loans expected to be a problem or present the bank with above-average risk are known as specific reserves.
Answer: True
T F 40. U.S. banks (especially those with $500 million or more in total assets) are required to file financial statements audited by an independent public accountant with their principal federal regulatory agency.
Answer: True
T F 41. Off-balance-sheet items for a bank are fee generating transactions which are not recorded on their balance sheet.
Answer: True
T F 42. The experience method of accounting for future loan loss reserves allows a bank to deduct from their income statement up to .6 percent of their eligible loans.
Answer: False
T F 43. After the Tax Reform Act of 1986, large banks (>$500 million in assets) were required to use the reserve method of accounting for future loan loss reserves.
Answer: False
T F 44. The number one source of revenue for a bank based on dollar volume is loan income.
Answer: True
T F 45. In looking at comparative balance sheets, it can be seen that large banks rely more heavily on nondeposit borrowings while small banks rely more heavily on deposits.
Answer: True
T F 46. The Pension Fund industry is now larger than the Mutual Fund industry.
Answer: False
T F 47. Off-balance-sheet items for banks have declined in recent years.
Answer: False
T F 48. Except for banks, Savings & Loans and Savings Banks hold the most deposits.
Answer: True
T F 49. "Painting the tape" refers to the practice whereby banks understate their nonperforming loans.
Answer: False
T F 50. Financial statements issued by banks and nonblank financial service firms are looking increasingly similar today.
Answer: True
Q:
Fees that arise from a financial firms trust activities, fees for managing a corporations interest and dividend payments and fees for managing corporate or individual retirement plans are all included in the category of fees arising from .
Q:
If a stock is overpriced it would plot:
A. Above the security market line
B. Below the security market line
C. On the security market line
D. On the Y-axis
Q:
The main shortcoming of CAPM is that it
A. ignores the return on the market portfolio
B. uses too many factors
C. requires a single risk measure of systematic risk
D. ignores risk-free rate of return
Q:
If the market risk premium is (rm - rf) is 8%, then according to the CAPM, the risk premium of a stock with beta value of 1.7 must be:
A. less than 12%
B. 12%
C. greater than 12%
D. cannot be determined
Q:
A stock with a beta of 1. 25 would be expected to:
A. Increase in returns 25% faster than the market in up markets
B. Increase in returns 25% faster than the market in down markets
C. Increase in returns 125% faster than the market in up markets
D. Increase in returns 125% faster than the market in down markets
Q:
can be held by individuals and nonprofit institutions, bear interest and permit drafts from being written against the account to pay third parties.
Q:
A stock with a beta of zero would be expected to:
A. Have a rate of return equal to zero
B. Have a rate of return equal to the market risk premium
C. Have a rate of return equal to the risk-free rate
D. Have a rate of return equal to the market rate of return
Q:
If the beta of Exxon Mobil is 0.65, risk-free rate is 4% and the market rate of return is 14%, calculate the expected rate of return from Exxon:
A. 12.6%
B. 10.5%
C. 13.1%
D. 6.5%
Q:
consists of interest income received on loans from customers that has not yet been earned by the bank under accrual accounting methods.
Q:
is direct and indirect investment in real estate. These are properties obtained for compensations for nonperforming loans.
Q:
If the beta of Amazon.com is 2.2, risk-free rate is 5.5% and the market risk premium is 8%, calculate the expected rate of return for Amazon.com stock:
A. 15.8%
B. 14.3%
C. 35.2%
D. 23.1%
Q:
If the beta of Microsoft is 1.13, risk-free rate is 3% and the market risk premium is 8%, calculate the expected return for Microsoft.
A. 12.04%
B. 15.66%
C. 13.94%
D. 8.65%
Q:
The activity of manipulating the financial statements to artificially enhance the banks financial strength is known as ___________________.
Q:
The security market line (SML) is the graph of:
A. Expected rate on investment (Y-axis) vs. variance of return
B. Expected return on investment vs. standard deviation of return
C. Expected rate of return on investment vs. beta
D. A and B
Q:
Temporarily buying and selling securities by a securities firm in a thinly traded market so as to influence the price is known as _________________.
Q:
Beta measure indicates:
A. The ability to diversify risk
B. The change in the rate of return on an investment for a given change in the market return
C. The actual return on an asset
D. A and C
Q:
Under _____________ banks must account for the expected loss of interest income on nonperforming loans when calculating their loan-loss provision.
Q:
The graphical representation of CAPM (Capital Asset Pricing Model) is called:
A. Capital Market Line
B. Characteristic Line
C. Security Market Line
D. None of the above
Q:
________________ labeled Accounting for Derivative Instruments and Hedging Activities and its recent amendments, FASB 138, are designed to make derivatives more publicly visible on corporate financial statements.
Q:
The capital asset pricing model (CAPM) states that:
A. The expected risk premium on an investment is proportional to its beta
B. The expected rate of return on an investment is proportional to its beta
C. The expected rate of return on an investment depends on the risk-free rate and the market rate of return
D. The expected rate of return on an investment is dependent on the risk-free rate
Q:
Beta of the market portfolio is:
A. Zero
B. +0.5
C. -1.0
D. +1.0
Q:
______________ is labeled "Accounting for Derivative Instruments and Hedging Activities."
Q:
Beta of Treasury bills is:
A. +1.0
B. +0.5
C. -1.0
D. 0
Q:
Sharpe ratio is defined as:
A. (rP - rf)/sP
B. (rP - rM)/sP
C. (rP - rf)/bP
D. none of the above
Q:
In the presence of a risk-free asset, the investor's job is to:
I) invest in the market portfolio
II) find an interior portfolio using quadratic programming
III) borrow or lend at the risk-free rate
IV) read and understand Markowitz's portfolio theory
A. I and II only
B. I and III only
C. II and IV only
D. IV only
Q:
A financial institution often records the value of its assets and liabilities at _______________ which is the original or historical cost of the asset.
Q:
The correlation between the efficient portfolio and the risk-free asset is:
A. +1
B. -1
C. 0
D. cannot be calculated
Q:
_____________________ is the sum of all outstanding IOU's owed to the bank in the form of consumer, real estate, commercial and agriculture loans as well as other types of credit extensions.
Q:
24. If the correlation coefficient between Stock A and Stock B is +0.6, what is the correlation between Stock B with Stock A?
A. +0.6
B. -0.6
C. +0.4
D. -0.4
Q:
If the covariance of Stock A with Stock B is - 100, what is the covariance of Stock B with Stock A?
A. +100
B. -100
C. 1/100
D. Need additional information
Q:
Suppose you borrow at the risk-free rate an amount equal to your initial wealth and invest in a portfolio with an expected return of 20% and a standard deviation of returns of 16%. The risk-free asset has an interest rate of 4%; calculate standard deviation of the resulting portfolio:
A. 28%
B. 40%
C. 32%
D. none of the above
Q:
Suppose you borrow at the risk-free rate an amount equal to your initial wealth and invest in a portfolio with an expected return of 16% and a standard deviation of returns of 20%. The risk-free asset has an interest rate of 4%; calculate the expected return on the resulting portfolio:
A. 20%
B. 32%
C. 28%
D. none of the above
Q:
Suppose you invest equal amounts in a portfolio with an expected return of 16% and a standard deviation of returns of 20% and a risk-free asset with an interest rate of 4%; calculate the standard deviation of the returns on the resulting portfolio:
A. 8%
B. 10%
C. 20%
D. none of the above
Q:
__________________________ are the primary long term liabilities of the bank. These liabilities are paid only after deposits have been paid in the event of bankruptcy.
Q:
Suppose you invest equal amounts in a portfolio with an expected return of 16% and a standard
deviation of returns of 20% and a risk-free asset with an interest rate of 4%; calculate the expected
return on the resulting portfolio:
A. 10%
B. 4%
C. 12%
D. none of the above
Q:
__________________________ is the difference between interest income and interest expenses for a financial institution.
Q:
By combining lending and borrowing at the risk-free rate with the efficient portfolios, we can I) extend the range of investment possibilities
II) change efficient set of portfolios from being curvilinear to a straight line.
III) provide a higher expected return for any level of risk except the tangential portfolio
A. I only
B. I and II only
C. I, II, and III
D. none of the above
Q:
__________________________ is a noncash expense on the bank's income statement which allows the bank to account for future bad loans.
Q:
The short term securities of the bank, including T-Bills and commercial paper, are often called __________________________ because they are the second line of defense to meet demands for cash.
Q:
In practice, efficient portfolios are generated using:
A. regression analysis
B. quadratic programming
C. trial and error method
D. graphical method
Q:
Fed funds purchased is an example of _______________________ along with Eurodollar borrowings.