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Finance
Q:
T F 32. The U.S. Treasury keeps most of its operating funds in TT&L deposits, according to the textbook.
Q:
"Accept investments that have positive net present values" is called the net present value rule.
Q:
T F 37. Bank holding companies are allowed to own nonbank businesses as long as those businesses offer services closely related to banking.
Q:
A safe dollar is always worth less than a risky dollar because the rate of return on a safe investment is generally low and the rate of return on a risky investment is generally high.
Q:
The opportunity cost of capital is higher for safe investments than for risky ones.
Q:
T F 27. "Public need" is usually established with federal or state chartering authorities by showing that existing banks in the area are adequately profitable and have satisfactory amounts of capital.
Q:
Net present value is found by subtracting the required investment from the present value of future cash flows.
Q:
T F 31. The volume of core deposits at U.S. banks has been growing in recent years relative to other categories of deposits.
Q:
The present value of a future cash flow can be found by dividing it by an appropriate
discount factor.
Q:
T F 36. Bank holding companies that want to achieve the goal of risk reduction in earnings risk through interstate banking can achieve the same level of risk reduction by entering any of the fifty states.
Q:
A dollar today is worth more than a dollar tomorrow if the interest rate is positive.
Q:
T F 26. Most new banks are situated along major routes of travel for commuters going to work or to shopping areas and schools.
Q:
The rate of return, discount rate, hurdle rate or opportunity cost of capital all means the same.
Q:
The to the cost plus pricing derives the weighted average cost of all funds raised and is based on the assumption that it is not the cost of each type of deposit that matters but rather the weighted average cost of all funds that matters.
Q:
The present value of a $100 per year perpetuity at 10% per year interest rate is $1000. What would be the present value if the payments were compounded continuously?
A. $1000.00
B. $1049.21
C. $1024.40
D. None of the above
Q:
T F 35. Recent research suggests that the relationship between bank size and the cost of production per unit is roughly U shaped.
Q:
An investment at 10% nominal rate compounded continuously is equal to an equivalent annual rate of:
A. 10.250%
B. 10.517%
C. 10.381%
D. None of the above
Q:
T F 25. Getting a bank charter from the Comptroller of the Currency means that the bank will simultaneously apply for FDIC insurance so no duplication of effort occurs.
Q:
Mr. William expects to retire in 30 years and would like to accumulate $1 million in the pension fund. If the annual interest rate is 12% per year, how much should Mr. Williams put into the pension fund each month in order to achieve his goal? Assume that Mr. Williams will deposit the same amount each month into his pension fund and also use monthly compounding.
A. $286.13
B. $771.60
C. $345.30
D. None of the above
Q:
T F 60. Regulatory capital focus on the market value of equity.
Q:
An investment at 12% nominal rate compounded monthly is equal to an annual rate of:
A. 12.68%
B. 12.36%
C. 12%
D. None of the above
Q:
T F 34. Agency theory suggests that bank management will always pursue the goal of maximizing the return of the bank's shareholders.
Q:
An investment at 10.47% effective rate compounded monthly is equal to a nominal (annual) rate of:
A. 10.99%
B. 9.57%
C. 10%
D. None of the above
Q:
T F 24. One of the benefits of applying for a federal banking charter is that banks chartered there need not join the Federal Reserve System.
Q:
Ms. Colonial has just taken out a $150,000 mortgage at an interest rate of 6% per year. If the mortgage calls for equal monthly payments for twenty years, what is the amount of each payment? (Assume monthly compounding or discounting.)
A. $1254.70
B. $1625.00
C. $1263.06
D. None of the above are true
Q:
T F 59. A well-capitalized institution has a ratio of capital to risk-weighted assets of at least 10 percent and faces no significant regulatory restrictions on its expansion.
Q:
The concept of compound interest is most appropriately described as:
A. Interest earned on an investment
B. The total amount of interest earned over the life of an investment
C. Interest earned on interest
D. None of the above
Q:
T F 33. Less than 10 percent of the largest banks in the U.S. control almost 90 percent of the industry assets.
Q:
Which of the following statements is true?
A. The process of discounting is the inverse of the process of compounding.
B. Ending balances using simple interest is always greater than the ending balance using compound interest at positive interest rates.
C. Present value of an annuity due is always less than the present value of an equivalent annuity at positive interest rates.
D. All of the above are true.
Q:
T F 23. State banking commissions, on average, impose tougher standards for chartering new banks than the federal chartering agency, the Comptroller of the Currency.
Q:
If you invest $100 at 12% APR for three years, how much would you have at the end of 3 years using compound interest?
A. $136
B. $140.49
C. $240.18
D. None of the above
Q:
T F 58. Smaller banks rely more heavily on internally generated capital than larger banks.
Q:
If you invest $100 at 12% APR for three years, how much would you have at the end of 3 years using simple interest?
A. $136
B. $140.49
C. $240.18
D. None of the above
Q:
T F 32. Recent research suggests that branch banks tend to be more profitable than either unit or holding company banks, while interstate banks tend to be the most profitable of all.
Q:
The managers of a firm can maximize stockholder wealth by:
A. Taking all projects with positive NPVs
B. Taking all projects with NPVs greater than the cost of investment
C. Taking all projects with NPVs greater than present value of cash flow
D. All of the above
Q:
T F 22. One argument frequently presented for regulation and control over bank chartering activity is that banks can create more money than any other financial institution.
Q:
The discount rate is used for calculating the NPV is:
A. Determined by the financial markets
B. Found by the government
C. Found by the CEO
D. None of the above
Q:
T F 57. The global financial crisis of 2007-2009 highlighted the importance of taking into consideration a bank’s exposure to market risk that arise from changes in interest rates, security prices, and currency.
Q:
You would like to have enough money saved to receive a growing annuity for 25 years, growing
at a rate of 4% per year, the first payment being $60,000 after retirement, so that you and your
family can lead a good life. How much would you need to save in your retirement fund to
achieve this goal? (assume that the growing perpetuity payments start one year from the date of
your retirement. The interest rate is 12%)?
A. $1,500,000
B. $632,390
C. $452,165
D. None of the above
Q:
You would like to have enough money saved to receive a growing annuity for 20 years, growing at a rate of 5% per year, the first payment being $50,000 after retirement. That way, you hope that you and your family can lead a good life after retirement. How much would you need to save in your retirement fund to achieve this goal.(assume that the growing annuity payments start one year from the date of your retirement. The interest rate is 10%)?
A. $1,000,000
B. $425,678.19
C. $605,604.20
D. None of the above
Q:
T F 31. Branch banks tend to offer a wider menu of services than unit banks.
Q:
T F 21. The FDIC Improvement Act requires that all new depository institutions have FDIC insurance.
Q:
Mr. Hopper is expected to retire in 30 years and he wishes accumulate $1,000,000 in his retirement fund by that time. If the interest rate is 12% per year, how much should Mr. Hopper put into the retirement fund each year in order to achieve this goal?
A. $4,143.66
B. $8,287.32
C. $4,000
D. None of the above
Q:
Mr. Hopper is expected to retire in 25 years and he wishes accumulate $750,000 in his retirement fund by that time. If the interest rate is 10% per year, how much should Mr. Hopper put into the retirement fund each year in order to achieve this goal? [Assume that the payments are made at the end of each year]
A. $4,559.44
B. $2,500
C. $7,626.05
D. None of the above
Q:
T F 56. It is anticipated that Basel II may lower capital requirements for the largest banks.
Q:
T F 30. There is evidence that branch banks charge higher fees for some banking services than do unit banks.
Q:
You are considering investing in a retirement fund that requires you to deposit $5,000 per year, and you want to know how much the fund will be worth when you retire. What financial technique should you use to calculate this value?
A. Future value of a single payment
B. Future value of an annuity
C. Present value of an annuity
D. None of the above
Q:
Fees for ATM’s are larger and more common if a customer uses another financial institution’s ATM because most institutions charge each other fees.
Q:
If the present value annuity factor at 8% APR for 10 years is 6.71, what is the equivalent future value annuity factor?
A. 3.108
B. 14.487
C. 2.159
D. None of the above
Q:
If the present value annuity factor at 12% APR for 5 years is 3.6048, what is the equivalent future value annuity factor?
A. 2.0455
B. 6.3529
C. 1.7623
D. None of the above
Q:
T F 55. Basel II will require each bank to determine its own capital requirements based on its own calculated risk exposure.
Q:
T F 29. The concentration of bank deposits at the local level (that is in urban communities and rural counties) has displayed only moderate changes in recent years.
Q:
If the present value annuity factor at 10% APR for 10 years is 6.1446, what is the equivalent future value annuity factor?
A. 3.108
B. 15.9374
C. 2.5937
D. None of the above
Q:
If the future value annuity factor at 10% and 5 years is 6.1051, calculate the equivalent present value annuity factor
A. 6.1051
B. 3.7908
C. 6.7156
D. None of the given ones
Q:
T F 55. According the case study of the failure of Superior Bank of Chicago and the FDIC’s takeover of this institution in 2001, the main problem was attributed to misleading accounting practices of inflating asset values and revenues deflating liabilities and expenses. The Sarbanes-Oxley Accounting Standards Act of 2002 addresses this issue and expressly encourages combining auditing and consulting relationships in order to promote efficiency and profitability of financial institutions.
Q:
If the future value of $1 invested today at an interest rate of r% for n years is 9.6463, what is the present value of $1 to be received in n years at r% interest rate?
A. $9.6463
B. $1.00
C. $0.1037
D. None of the above
Q:
T F 54. One of the key innovations which have been proposed in Basel II is to require banks to hold capital against operational risk.
Q:
If the present value of $1.00 received n years from today at an interest rate of r is 0.621, then what is the future value of $1.00 invested today at an interest rate of r% for n years?
A. $1.00
B. $1.61
C. $1.621
D. Not enough information to solve the problem
Q:
T F 28. Research evidence suggests that banks taken over by interstate banking organizations have generally increased their market shares over their competitors within the same state and generally are more profitable than their competitors.
Q:
If the present value of $1.00 received n years from today at an interest rate of r is 0.3855, then what is the future value of $1.00 invested today at an interest rate of r% for n years?
A. $1.3855
B. $2.594
C. $1.70
D. Not enough information to solve the problem
Q:
T F 54. The bank's degree of asset utilization (AU) or ratio of total operating revenue to total assets is a measure of asset management efficiency, especially in terms of the mix and yield on assets.
Q:
John House has taken a 20-year, $250,000 mortgage on his house at an interest rate of 6% per year. What is the value of the mortgage after the payment of the fifth annual installment?
A. $128,958.41
B. $211,689.53
C. $141,019.50
D. None of the above
Q:
T F 53. Credit risk models will probably not be needed when Basel II takes effect.
Q:
John House has taken a $250,000 mortgage on his house at an interest rate of 6% per year. If the mortgage calls for twenty equal annual payments, what is the amount of each payment?
A. $21,796.14
B. $10,500.00
C. $16,882.43
D. None of the above
Q:
T F 53. Liquidity risk for a bank examines the quality of the bank's assets and, in particular, the quality of the bank's loans.
Q:
For $10,000 you can purchase a 5-year annuity that will pay $2358.65 per year for five years. The payments are made at the beginning of each year. Calculate the effective annual interest rate implied by this arrangement: (approximately)
A. 8%
B. 9%
C. 10%
D. none of the above
Q:
T F 52. VaR models are most successful in assessing potential risk when the assets are nontraded.
Q:
If the present annuity factor is 3.8896, what is the present value annuity factor for an equivalent annuity due if the interest rate is 9%?
A. 3.5684
B. 4.2397
C. 3.8896
D. None of the above.
Q:
T F 27. Bank holding companies hold more than 90 percent of the industrys assets in the United States.
Q:
If the present value annuity factor for 10 years at 10% interest rate is 6.1446, what is the present value annuity factor for an equivalent annuity due?
A. 6.1446
B. 7.38
C. 6.759
D. None of the above
Q:
T F 52. During the 1980's the Comptroller of the Currency, the Federal Reserve and the FDIC created a new tool to help them analyze the financial condition of banks. This new tool is called the Uniform Bank Performance Report.
Q:
For $10,000 you can purchase a 5-year annuity that will pay $2504.57 per year for five years. The payments are made at the end of each year. Calculate the effective annual interest rate implied by this arrangement: (approximately)
A. 8%
B. 9%
C. 10%
D. None of the above
Q:
T F 51. VaR models provide a single number which indicates the potential for losses on a portfolio of assets.
Q:
After retirement, you expect to live for 25 years. You would like to have $75,000 income each year. How much should you have saved in the retirement to receive this income, if the interest is 9% per year (assume that the payments start one year after the retirement)?
A. $736,693.47
B. $6,352,567.22
C. $1,875,000
D. None of the above
Q:
T F 26. In the United States there are more one-bank holding companies than multi-bank holding companies.
Q:
After retirement, you expect to live for 25 years. You would like to have $75,000 income each year. How much should you have saved in the retirement to receive this income, if the interest is 9% per year (assume that the payments start on the day of retirement)?
A. $736,693.47
B. $802,995.88
C. $2,043,750
D. None of the above
Q:
T F 51. The FDIC is a private credit rating company which provides credit ratings on the short term and long term securities issued by banks.
Q:
What is the present value of $5000 per year annuity at a discount rate of 10% for 6 years?
A. $21,776.30
B. $3,371.91
C. $16,760.78
D. None of the above
Q:
T F 50. The largest component of capital among banks is retained earnings.
Q:
What is the present value of $1000 per year annuity for five years at an interest rate of 12%?
A. $6,352.85
B. $3,604.78
C. $567.43
D. None of the above