Q&A Hero

Q: T F 61. There is usually a positive relationship between the interest rate a consumer is asked to pay and the amount of deposits the consumer is willing to keep with the bank.

Q: T F 40. Eurocurrency deposits that some banks purchase as investments generally carry higher market yields than domestic time deposits issued by comparable-size U.S. banks.

Q: T F 60. The Community Reinvestment Act is designed to prevent a lender from arbitrarily marking out certain neighborhoods as undesirable and refusing to lend to people who live in those neighborhoods.

Q: T F 39. Interest income and capital gains from a bank's portfolio of investment securities is taxed in the United States as ordinary income.

Q: T F 59. Real estate loans are smaller in size and shorter in maturity than most other types of bank loans.

Q: T F 38. According to the textbook the dominant security held in U.S. bank investment portfolios is state and local government bonds.

Q: T F 58. The burden of proof is on the bank to demonstrate that its credit scoring system successfully identifies quality loan applications at a statistically significant level.

Q: T F 37. Stripping a security eliminates prepayment risk.

Q: T F 36. Prepayment risk on securitized assets generally increases when interest rates rise.

Q: T F 57. The Equal Credit Opportunity Act authorizes individuals and families to review their credit file for accuracy and to demand an investigation and correction of any apparent inaccuracies.

Q: T F 35. A short-term IOU offered by major corporations that is of short maturity (most of these lOUs mature in 90 days or less) is known as a CMO.

Q: T F 56. An installment loan is a loan in which the customer repays the loan in two or more consecutive payments. These payments are often monthly or quarterly.

Q: T F 34. Investment securities are expected to help stabilize a financial institutions's income.

Q: T F 55. Under FNMA rules for buying home mortgages FNMA will not usually purchase a borrower's mortgage if the borrower's credit report is more than 45 days old.

Q: T F 33. Investment securities are expected to "dress up" a bank's balance sheet, according to the textbook.

Q: T F 54. FNMA will buy home mortgages provided the borrower's monthly house payment does not exceed 35 percent of monthly gross income.

Q: T F 32. Bank income from loans is fully taxable.

Q: T F 53. Banks awarded top CRA marks usually get strong commitments from their boards of directors and senior management to promote community involvement.

Q: T F 31. Investments in securities provide diversification for a bank's assets because most loans come from the local areas served by a bank's offices.

Q: T F 52. The symbol "SN" indicates that a bank has been judged to be an outstanding performer under the terms of the Community Reinvestment Act.

Q: T F 51. Small business owners with gross annual revenues of $1 million or less who apply for credit have the right to receive a written notice if their loan request is turned down by a bank.

Q: A(n) is a picture of how market interest rates differ across loans securities of varying times to maturity.

Q: T F 50. The Truth-in-Lending Act of 1968 gave consumers access to the information from their credit files kept at local and regional credit bureaus.

Q: T F 64. Loan commitments ratio measures the volume of promises a lender has made to its customers to provide credit up to pre-specified amount over a given time period.

Q: T F 49. Credit-scoring systems tend to be valid over long periods of time (usually several years) and need not be periodically retested.

Q: T F 63. Core deposit ratio is used as one of the liquidity indicators for depository institutions and is defined as the ratio of core deposits to total assets.

Q: T F 48. "Pyramiding of debt" refers to borrowing from one lender to repay another lender.

Q: T F 62. All central banks around the world have some specified reserve requirement.

Q: T F 47. The "right of offset" allows a bank to sell a customer's property to the highest bidder to repay a customer's loan if the loan is in default.

Q: T F 61. A bank or financial service institution can meet reserve requirements by selling Treasury securities in its portfolio.

Q: T F 46. Lenders in the consumer loan field prefer to measure a borrowing customer's income by the amount of take-home pay.

Q: T F 60. Discount window loans jumped dramatically the day following 9/11.

Q: T F 45. Households tend to be interest-inelastic borrowers.

Q: T F 59. Bank robberies have declined in recent years.

Q: T F 44. Consumer loans appear to have virtually no sensitivity to the business cycle, staying relatively level through both recessions and expansions.

Q: T F 58. Interest in bank and financial service liquidity management is a relatively new phenomenon which arose following the 9/11 crisis.

Q: T F 43. Credit cards offer convenience to customers plus a revolving line of credit.

Q: T F 57. Some central banks around the world impose reserve requirements on nondeposit liabilities.

Q: T F 42. Nonresidential consumer loans include credit to finance the purchase of home appliances.

Q: T F 41. The dominant lender in the United States to households is the finance company with commercial banks ranked second as consumer lenders.

Q: T F 55. The oldest approach to liquidity management is the asset liquidity management approach.

Q: One new type of mortgage where no principal payments are made is called a(n) .

Q: T F 54. One of the most common motives for large banks to acquire smaller banks is to gain access to capable new management which is always in short supply at larger institutions.

Q: T F 54. The liquidity problem for banks is made easier because depositors and borrowers are not sensitive to changing interest rates.

Q: T F 53. The agency problem described in the textbook is referred to the idea of bank managers driven primarily by their own interest to increase salaries and benefits at the expense of company stockholders.

Q: T F 52. The 2007 credit crunch resulted in numerous banks experiencing financial distress for which mergers and acquisitions were often the only option.

Q: T F 52. One of the problems with liquidity management for a bank is that there is a trade-off between bank liquidity and profitability.

Q: T F 51. Recent research indicates that some merger activity may actually stimulate "de novo" bank entry into the marketplace.

Q: T F 50. There is no evidence for cost savings resulting from large financial institution mergers.

Q: T F 50. The sources and uses of funds method of estimating a bank's liquidity requirements divides the bank's liabilities into three types (hot money, vulnerable funds and stable funds) and estimates the probability of each being withdrawn from the bank.

Q: T F 49. A 2002 study by the Federal Reserve indicates that there are economies of scale (cost savings) resulting from small mergers among banks and insurance companies.

Q: T F 49. All central banks impose reserve requirements on the banks they regulate.

Q: T F 48. In order to get regulatory approval for a merger, many times banks have been required to open up a number of new branch offices.

Q: T F 48. Banks making heavy use of borrowed sources of liquidity must wrestle with the problem of interest cost uncertainty, according to the textbook.

Q: T F 47. According to FASB, goodwill must now be amortized over its useful life.

Q: T F 47. According to the textbook if a bank's liquidity deficit is expected to last for only a few hours, the federal funds market or the central bank's discount window is normally the preferred source of funds.

Q: T F 46. As a result of many bank mergers, research indicates that goodwill on many bank balance sheets has exploded in recent years.

Q: T F 46. If a bank receives more checks deposited to the accounts it holds than checks drawn against its deposit accounts, the bank's legal reserves will tend to increase.

Q: T F 45. Mergers with anticompetitive effects cannot go unchallenged by federal authorities unless the banks can show that the resultant bank would have significant public benefits.

Q: T F 45. If a bank in the United States runs a legal reserve deficit of more than 2 percent of its required daily average legal reserve position it will be assessed an interest penalty equal to the Federal Reserve's discount rate plus 5 percent.

Q: T F 44. The most important goal of any merger should be to increase the market value of the surviving firm.

Q: T F 44. A bank's money position manager is responsible for insuring that the bank maintains an adequate level of legal reserves.

Q: T F 43. The passage of the Garn-St. Germain Depository Institutions Act allowed bank holding companies to acquire failing banks and thrifts in other states.

Q: T F 43. The liquidity indicator, core deposits divided by total assets, is a measure of stored liquidity.

Q: T F 42. If one of the banks is in financial difficulty a merger is not allowed to take place.

Q: T F 42. The Federal Reserve has been lowering deposit reserve requirements in recent years.

Q: T F 41. Some merger partners anticipate reduced earnings risk as a result of the merger. One reason for this may be that the merger opens up new markets with different economic characteristics.

Q: T F 40. One of the major motives behind the rapid growth of mergers in recent years is that stockholders expect the profit potential will increase once the merger is completed.

Q: T F 41. Holdings of liquid assets at U.S. banks have experienced a gradual decline in recent years.

Q: T F 39. Bank executives identify the most important factor in choosing a merger target as the ability of the merged bank to better accommodate their corporate customers.

Q: T F 40. Most liquidity problems in banking arise from inside a bank, not from its customers.

Q: T F 38. Under the purchase-of-stock method the acquired bank ceases to exist as a separate corporation.

Q: T F 39. A U.S. bank can run up to a 5-percent deficit in its legal reserve requirement without incurring an interest penalty from the Federal Reserve System.

Q: T F 37. The merger of Bank of America and Security Pacific in 1992 resulted in an expansion of branch offices at both banks.

Q: T F 33. A market area served by one bank which is the only provider of financial services in that market would have an HHI of 100 percent.

Q: T F 38. According to the customer relationship doctrine a bank should turn down any loan requests for which it does not have enough deposits on hand but should help its borrowing customer obtain funds from some other source (such as by issuing a letter of credit to backstop the customer's loan from another lender).

Q: T F 32. Mergers with anticompetitive effects can only be approved at the federal level if one of the banks involved is failing.

Q: Deviations of actual sales from projected sales should be evaluated to determine how to improve future forecasts and the predictability of future operations, and therefore to ensure that the goals of the firm are being pursued appropriately. a. True b. False

Q: A firm should scale back its projected level of operations if the funds required to meet the forecasted sales are readily available. a. True b. False

Q: If the projected operating results are disappointing, management can reformulate its plans and develop targets that are more reasonable for the coming year. a. True b. False