Q&A Hero

Q: T F 73. An interest-rate cap will become more valuable as interest rates rise.

Q: T F 52. Financial institutions that disagree with examiner classifications of their loans can appeal these examiner ratings.

Q: T F 72. Most derivatives (measured by notional value) are traded on organized exchanges.

Q: T F 51. Loans to a bank’s officers can never exceed 2.5 percent of a bank’s capital and unimpaired surplus or $25,000 whichever is larger and cannot be more than $100,000.

Q: T F 71. Many banks are not only users of derivative products but also dealers.

Q: T F 50. Loans granted to businesses appear to convey positive information to the market place about a borrower’s credit quality, enabling a borrower to obtain more and cheaper funds from other sources.

Q: T F 70. An interest-rate cap on a loan would protect the lender.

Q: T F 49. Foreclosure on property pledged behind a bank loan does not subject a bank to liability to clean up any environmental damage the borrower may have caused to happen.

Q: T F 69. A reverse swap is where the parties exchange the principal payments instead of the interest payments on loans.

Q: T F 48. If the economy slows down a bank should review its outstanding loans more frequently.

Q: T F 68. Basis risk exists on interest rate swaps because the interest rate on the swap agreement may differ from the interest rate on assets and liabilities that the parties hold.

Q: T F 47. Construction loans by a bank fit under the loan category known as commercial and industrial loans.

Q: T F 67. An interest rate collar sets both a minimum and a maximum interest rate on a variable rate loan agreement.

Q: T F 46. The type of bank loan experiencing the largest losses per dollar of loan is credit card loans.

Q: T F 66. Interest rate floors protect the lender from falling interest rates.

Q: T F 45. Banks should concentrate their lending on those loans in which they have the greatest cost advantage.

Q: T F 65. Interest rate caps protect the lender from falling interest rates.

Q: T F 44. Credit card loans are generally more profitable for small and medium-size banks than for the largest banks.

Q: T F 64. Unlike futures contracts, interest rate swap agreements have no basis risk.

Q: T F 43. Troubled loans normally are subject to more frequent review than are sound loans.

Q: T F 63. One advantage of an interest rate swap agreement is that the brokerage fees are very small.

Q: T F 42. The process of loan review means that a loan committee must generally approve a loan before the borrower is told the loan is approved.

Q: T F 62. In most interest rate swaps netting reduces the default risk because the parties actually exchange only the difference in the interest payments.

Q: T F 41. The letter “M” in the CAMELS rating system for banks in the U.S. refers to the “management quality” of a bank.

Q: T F 61. A currency swap is where two parties agree to exchange interest payments in order to hedge against interest rate risk.

Q: T F 40. The letter “C” in the CAMELS rating system for banks in the U.S. refers to the “condition” of a bank.

Q: T F 60. In the typical quality swap a borrower with a positive duration gap is more likely to pay all or part of the other swap party's long-term interest rate.

Q: T F 39. Loans to minors are not legally enforceable contracts in most states.

Q: T F 59. Basis risk is the difference in the interest rates (or prices) of the same security between the cash market and the futures market.

Q: T F 38. Federally-supervised banks in the U.S. must make an “affirmative effort” to provide loans and other services to all credit-worthy borrowers in their chosen service area.

Q: T F 58. One of the significant disadvantages of using futures contracts to hedge against interest rate risk is the high commissions that must be paid to brokers.

Q: T F 37. Loans made by a particular bank secured by the bank’s own stock are not usually permitted except under special circumstances.

Q: T F 57. A bank will use a short hedge in the futures market to avoid higher borrowing costs or to protect against declining asset values.

Q: T F 36. Retail credit in banking refers to such loans as residential mortgages and installment loans to individuals.

Q: T F 56. If a financial institution makes an offsetting sale and purchase of the same futures contract, it has no obligation either to deliver or take delivery of the contract.

Q: T F 35. Smaller banks tend to emphasize wholesale banking services.

Q: T F 55. A futures contract is "marked to market" weekly to reflect the current market price of the contract. This means that one or the other party has to make a cash payment to the exchange at the end of each week.

Q: T F 34. Banks in the United States are, on average, examined at least once every three years.

Q: T F 54. The market value of a futures contract changes daily as the market price of the underlying security price changes.

Q: T F 33. Real estate lending is popular with bank, in part, due to the growth of the secondary mortgage market.

Q: T F 53. Banks are generally writers (sellers) of put and call option contracts.

Q: T F 32. The largest banks have, on average, reduced their dependence on real estate loans relative to smaller banks.

Q: T F 52. According to the textbook the two principal uses of option contracts by banks are to protect the value of a bond portfolio or to hedge against interest-sensitive or duration gaps.

Q: T F 31. Risk in banking tends to be concentrated in a bank’s loan portfolio.

Q: T F 51. If a U.S. bank's financial futures trading can be linked to a particular asset or liability position where it faces interest-rate risk exposure, that bank must take immediate recognition of any losses or gains it experiences from futures trading.

Q: T F 30. The principal reason banks are chartered by federal and state governments is to make loans to their customers.

Q: T F 50. In U.S. banking any gain or loss from futures trading must be "coincidental" to the main purpose of the trading--interest-rate hedging.

Q: In the loan workout process, the preferred option is nearly always to seek a _______________, which gives both the lending institution and its customer the chance to restore normal operations.

Q: T F 49. The sensitivity of the market price of a financial futures contract depends upon the duration of the security to be delivered under the futures contract.

Q: T F 78. Financial institutions generally use internal credit rating systems to evaluate credit quality.

Q: T F 48. A financial institution confronted with a negative interest-sensitive gap could avoid unacceptable losses from rising interest rates by covering the gap with a short hedge.

Q: T F 77. The amount of business lending tends to fall during recessionary periods.

Q: T F 47. A financial institution with a positive interest-sensitive gap and anticipating falling interest rates could protect against loss by covering the gap with a long hedge.

Q: T F 76. The amount of business lending tends to rise during periods of expansion.

Q: T F 46. The short hedge would usually be the correct choice if a bank is concerned about avoiding lower than expected yields from loans and security investments.

Q: T F 75. According to the textbook, small business lending by banks is on the decline.

Q: T F 45. The long hedge in financial futures contracts is most likely to be used in situations where a bank would suffer losses due to rising interest rates.

Q: T F 74. Syndicated loans are a type of working capital loan.

Q: T F 44. The short hedge in financial futures contracts is most likely to be used in situations where a bank would suffer losses due to falling interest rates.

Q: T F 73. The majority of syndicated loans are held by banks.

Q: T F 43. A futures hedge against interest-rate changes generally requires a bank to take an opposite position in the futures market from its current position in the cash market.

Q: T F 72. The basic weakness of the below prime market pricing model is that there are narrow margins or markups on loans.

Q: T F 42. U.S. Treasury bond futures contracts call for the future delivery of U.S. T-bonds with minimum denominations of $100,000 and minimum maturities of 15 years.

Q: T F 71. The basic strength of the below prime market pricing model is that it allows the bank to compete with the commercial paper market.

Q: T F 41. A hedging tool that provides "one-sided" insurance against interest rate risk is the interest rate option, which, like financial futures contracts, obligates the parties to the contract to either deliver or take delivery of securities.

Q: T F 70. The basic weakness of the cost plus loan pricing method is that it does not consider the competition from other lenders when setting the loan price.

Q: T F 40. An effective hedge is one where the positive or negative returns earned in the cash market are approximately offset by the profit or loss from futures trading.

Q: T F 69. The basic strength of the cost plus loan pricing method is that it considers the competition from other lenders.

Q: T F 39. There are some significant limitations to financial futures as interest-rate hedging devices, among them is a special form of risk known as credit risk.

Q: T F 68. The loan-pricing technique known as CPA can be used to identify the most profitable types of bank customers and loans and also who are the most successful loan officers.

Q: T F 38. When a financial institution offers to sell financial futures contract, it is "going short" in futures and is agreeing to take delivery of certain kinds of securities on a stipulated date at a predetermined price.

Q: T F 67. The loan-pricing method that takes the whole customer relationship into account when pricing each loan request is known as the cost-benefit loan pricing method.

Q: T F 37. The financial futures markets are designed to shift the risk of interest rate fluctuations from risk-averse investors to speculators who are willing to accept and possibly profit from such risks.

Q: T F 66. Banks attempting to compete with the growing commercial paper market developed the cost-plus business loan pricing method.

Q: T F 36. One of the most popular methods of neutralizing duration gap risks is to buy and sell financial futures contracts.

Q: T F 65. If interest rates fall, a customer's loan rate will decline more rapidly under the timesprime method than under the prime-plus method of business loan pricing.

Q: T F 64. In a period of rising interest rates the times-prime method causes the customer's loan rate to rise faster than the prime-plus method.

Q: T F 50. Insurance companies are one of the principal sellers of credit derivatives.

Q: T F 63. In order to control the risk exposure on their business loans most banks use both price and credit rationing to regulate the size and composition of their loan portfolios.

Q: T F 49. Banks are one of the principal buyers of credit derivatives.