Ch14 tb kidwell 3e PDF

Preview

Summary

Ch14 tb kidwell 3e...

Description

Testbank to accompany

Financial Markets, Institutions & Money rd 3 edition Prepared by Dr Frédérique Bracoud University of Queensland

© John Wiley & Sons Australia, Ltd 2013 Chapter 14 - Commercial bank operations

Testbank to accompany Financial Markets, Institutions and Money 3e

True/False 1.

The reduction in bank branches took place because Australian banks wanted to generate cost reductions. *a. b.

True False

Correct answer: a

2.

The Australian government ban on mergers and takeovers among the four major banks aims at preventing one bank to control a too large share of the banking sector, which would be detrimental to competition. *a. b.

True False

Correct answer: a

3.

Banks issue commercial paper for raising funds for long periods. a. *b.

True False

Correct answer: b

4.

The shareholders’ equity of a bank can be calculated by subtracting liabilities owed to creditors from the total assets owned by the bank. *a. b.

True False

Correct answer: a

5.

The principal source of funds for banks is through the issue of debt securities. a.

True © John Wiley & Sons Australia, Ltd 2013

13.2

Chapter 14: Commercial bank operations

*b.

False

Correct answer: b 6.

Trading and investment securities are the main use of funds for banks. a. *b.

True False

Correct answer: b 7.

Loan capital refers to long-term, subordinated notes and debentures, some of which may be convertible into ordinary shares. *a. b.

True False

Correct answer: a

8.

Securitisation of loans reduces banks’ capital requirements. *a. b.

True False

Correct answer: a 9.

A line of credit is an agreement between a bank and a customer under which the bank guarantees the customer a fixed dollar amount of loan. a. *b.

True False

Correct answer: b

10.

Interests on loans are banks’ interest income whereas fees earned for the management of trusts are banks’ interest expense. a.

True

© John Wiley & Sons Australia, Ltd 2013

13.3

Testbank to accompany Financial Markets, Institutions and Money 3e

*b.

False

Correct answer: b

11.

Securities in the trusts managed by banks are not included in the banks’ assets. *a. b.

True False

Correct answer: a

12.

ATM surcharge and credit cards fees are examples of growing non interest income for banks. *a. b.

True False

Correct answer: a

13.

Short-term securities are a better form of secondary reserves than long-term securities due to their highest marketability. *a. b.

True False

Correct answer: a

14.

Bank can increase their liquidity (mainly currency and balances on deposits at the RBA) exclusively by selling other forms of assets. a. *b.

True False

Correct answer: b

15.

Minimum capital requirements are enforced in order to increase banks’ liquidity. a. *b.

True False

© John Wiley & Sons Australia, Ltd 2013

13.4

Chapter 14: Commercial bank operations

Correct answer: b 16.

The minimum amount of capital that a bank must carry is an imposedpercentage of its risk-weighted liabilities. a. *b.

True False

Correct answer: b

17.

Provisions for loan losses are made at the time when a problem loan is written off. a. True *b. False

Correct answer: b 18.

Concentration ratio is a tool used by banks to assess the credit risk of an individual loan. a. *b.

True False

Correct answer: b 19.

In order to decrease the credit risk of a portfolio of loans, banks need to make loans with default rates that are less than perfectly correlated. *a. b.

True False

Correct answer: a

20.

A maturity gap measures the assets minus the liabilities that mature or reprice over a certain horizon period. *a. b.

True False

© John Wiley & Sons Australia, Ltd 2013

13.5

Testbank to accompany Financial Markets, Institutions and Money 3e

Correct answer: a

© John Wiley & Sons Australia, Ltd 2013

13.6

Chapter 14: Commercial bank operations

Multiple Choice Questions 21.

The Australian banking sector is dominated by a. b. c. *d.

one bank. two banks. three banks four banks.

Correct answer: d Learning Objective 14.1 ~ describe the size and structure of the banks within the Australian financial sector

22.

Which of the following statements is NOT correct? The four pillars policy *a. b. c. d.

prevents the four major banks from merging with smaller banks. prevents the four major banks from merging among themselves. aims at maintaining enough competition in the banking sector. aims at maintaining four major players of similar size.

Correct answer: a Learning Objective 14.1 ~ describe the size and structure of the banks within the Australian financial sector

23. The gradual reduction of bank branches has been motivated by a. b. *c. d.

activity diversification. geographical spread. cost reduction. safety.

Correct answer: c Learning Objective 14.1 ~ describe the size and structure of the banks within the Australian financial sector

© John Wiley & Sons Australia, Ltd 2013

13.7

Testbank to accompany Financial Markets, Institutions and Money 3e

24.

Which of the following statements is NOT correct? a. *b. c. d.

A manufacturing company purchasing new production equipment could finance it through a bank long-term asset loan. The feature that allows a transaction account to go into a negative balance is called a line of credit facility. Mortgage loans are secured by the real estate they finance. Individuals who want to purchase a car or a computer could finance them with a personal loan.

Correct answer: b Learning Objective 14.2 ~ discuss banks’ sources and uses of funds as reflected in their balance sheet assets, liabilities and equity capital Feedback: The feature that allows a transaction account to go into a negative balance is called an overdraft facility.

25.

Which of the following is NOT one of the six Cs in credit analysis? a. b. *c. d.

Conditions Capital Crisis Collateral

Correct answer: c Learning Objective 14.2 ~ discuss banks’ sources and uses of funds as reflected in their balance sheet assets, liabilities and equity capital

26. Which of the following is NOT a component of bank shareholders’ equity? a. *b. c. d.

Share capital Loan capital Retained profits Reserve accounts

Correct answer: b Learning Objective 14.2 ~ discuss banks’ sources and uses of funds as reflected in their balance sheet assets, liabilities and equity capital Feedback: Loan capital is not equity but a liability: it is a long term subordinated note or debenture.

© John Wiley & Sons Australia, Ltd 2013

13.8

Chapter 14: Commercial bank operations

27.

Which of the following feature makes a negotiable CDs different from a term deposit? a. *b. c. d.

It has a maturity date. It can be transferred to a third party before the maturity date. The bank pays a fixed interest rate on it. The interests are paid at the maturity date.

Correct answer: b Learning Objective 14.2 ~ discuss banks’ sources and uses of funds as reflected in their balance sheet assets, liabilities and equity capital 28.

Which of the following is NOT a bank debt security? *a. b. c. d.

Term deposits Commercial paper Bonds Eurobonds

Correct answer: a Learning Objective 14.2 ~ discuss banks’ sources and uses of funds as reflected in their balance sheet assets, liabilities and equity capital Feedback: Term deposits are not traded therefore they are not securities.

29.

Transactions accounts a. b. *c. d.

pay high interest rates. have a maturity date. are the deposit accounts that can be used directly for payment. can only be withdrawn before maturity with a penalty.

Correct answer: c Learning Objective 14.2 ~ discuss banks’ sources and uses of funds as reflected in their balance sheet assets, liabilities and equity capital

© John Wiley & Sons Australia, Ltd 2013

13.9

Testbank to accompany Financial Markets, Institutions and Money 3e

30.

Which of the following is NOT a bank asset? a. b. *c. d.

Loans made by the bank Trading securities owned by the bank Debt issues Cash

Correct answer: c Learning Objective 14.2 ~ discuss banks’ sources and uses of funds as reflected in their balance sheet assets, liabilities and equity capital 31.

Which of the following is NOT a bank liability? a. b. *c. d.

Transaction accounts offered by the bank Funds borrowed by the bank Investment securities owned by the bank Time deposits offered by the bank

Correct answer: c Learning Objective 14.2 ~ discuss banks’ sources and uses of funds as reflected in their balance sheet assets, liabilities and equity capital

32.

Banks’ major use of funds is a. b. c. *d.

investments and trading securities. cash and liquid assets. property, plant and equipment loans, advances and other receivables.

Correct answer: d Learning Objective 14.2 ~ discuss banks’ sources and uses of funds as reflected in their balance sheet assets, liabilities and equity capital 33.

Which of the following is NOT a form of bank loan? a. b. *c. d.

Overdraft facility Line of credit Government securities Lease

Correct answer: c Learning Objective 14.2 ~ discuss banks’ sources and uses of funds as reflected in their balance sheet assets, liabilities and equity capital

© John Wiley & Sons Australia, Ltd 2013

13.10

Chapter 14: Commercial bank operations

34.

Which of the following is NOT a bank liability? a. b. c. *d.

Term deposits offered by the bank Transaction accounts offered by the bank Negotiable CD issued by the bank Deposits at the RBA

Correct answer: d Learning Objective 14.2 ~ discuss banks’ sources and uses of funds as reflected in their balance sheet assets, liabilities and equity capital 35.

Which of the following is NOT an off-balance sheet activity of banks? *a. b. c. d.

Financial advice Standby letters of credit Line of credit Financial guarantees

Correct answer: a Learning Objective 14.3 ~ explain the various off-balance-sheet activities of banks Feedback: They all bring fee income to the bank but financial advice will never appear in the balance sheet and is not contingent. 36.

In a standby letter of credit (SLC) the bank a. b. *c. d.

receives interest income. raises some funds. acquires a contingent liability. acquires a contingent asset.

Correct answer: c Learning Objective 14.3 ~ explain the various off-balance-sheet activities of banks

© John Wiley & Sons Australia, Ltd 2013

13.11

Testbank to accompany Financial Markets, Institutions and Money 3e

37.

Banks became increasingly involved in the securitisation of loans in the 1980s and 1990s because securitisation *a. b. c. d.

allows banks to reduce the amount of risky assets, and therefore to reduce capital requirements. provides a use of funds that pays more interests than others. allows banks to generate interests from the securitisation process. allows banks to buy some loans from other banks.

Correct answer: a Learning Objective 14.3 ~ explain the various off-balance-sheet activities of banks 38.

Which of the following is NOT taken into account in the calculation of banks’ net interest income? a. b. c. *d.

Interest on loans made Interest on saving accounts offered Interest on government bonds held Fees from management of trusts

Correct answer: d Learning Objective 14.4 ~ discuss the performance of Australian banks in terms of sources of income and expenses Feedback: Net interest income is interest income minus interest expense. Noninterest income, like fees, are not taken into account.

39.

Which of the following are NOT part of bank interest income? a. *b. c. d.

Interest on loans made by the bank Interest on term deposits offered by the bank Interest on investment securities held by the bank Interests on balances of deposits held at the RBA

Correct answer: b Learning Objective 14.4 ~ discuss the performance of Australian banks in terms of sources of income and expenses Feedback: Interests on liabilities are interest expense for the bank.

© John Wiley & Sons Australia, Ltd 2013

13.12

Chapter 14: Commercial bank operations

40.

The return on average assets (ROAA) is a. b. c. *d.

the net income generated during the period under review divided by the total assets at the end of the period considered. the net income generated during the period under review divided by the total assets at the beginning of the period considered. the average net income generated during the period under review divided by the total assets at the end of the period considered. the net income generated during the period under review divided by the average total assets over the period considered.

Correct answer: d Learning Objective 14.4 ~ discuss the performance of Australian banks in terms of sources of income and expenses Feedback: Net income is a flow while assets are a stock. The measurement of ROAA uses in the denominator the average of the different values of total assets during the period for which the net income is calculated.

41.

In order to survive, banks have to balance the demand of *a. b. c. d.

shareholders, depositors and bank regulators. depositors and bank regulators. shareholders and depositors. shareholders and bank regulators.

Correct answer: a Learning Objective 14.4 ~ discuss the performance of Australian banks in terms of sources of income and expenses 42.

Which of the following statements is NOT correct? Banks can get liquidity by a. b. c. *d.

selling securities from their portfolio. issuing securities. attracting new depositors. buying securities.

Correct answer: d Learning Objective 14.5 ~ discuss how banks manage their liquidity risk Feedback: Liquidity means notes and coins and balances on the deposits at the RBA. Buying securities requires the payment with deposits at the RBA so liquidity decreases.

© John Wiley & Sons Australia, Ltd 2013

13.13

Testbank to accompany Financial Markets, Institutions and Money 3e

43.

The liquidity gained through liability management is useful to a bank because a. b. c. *d.

it can be used to counteract deposit outflows. it can be used to meet increases in loan demand by the bank's customers. none of the above both of the above.

Correct answer: d Learning Objective 14.5 ~ discuss how banks manage their liquidity risk 44.

Which of the following is NOT a situation where a bank needs liquidity? a. b. c. *d.

Customers’ payments with their deposit accounts balances. Withdrawal by customers at the bank’sATMs. Loan request by credit worthy customers. Sale of securities from the bank portfolio.

Correct answer: d Learning Objective 14.5 ~ discuss how banks manage their liquidity risk Feedback: Sale of securities brings liquidity.

45.

Capital is important to a bank because a. b. c. *d.

it absorbs asset losses preventing bankruptcy. it helps maintain public confidence in the soundness and safety of individual banks and the banking system. it provides funds that do not need to be paid back. all of the above.

Correct answer: d Learning Objective 14.6 ~ describe the capital requirements faced by banks

© John Wiley & Sons Australia, Ltd 2013

13.14

Chapter 14: Commercial bank operations

46. The Basel II Accord incorporates _________ into capital standards. *a. b. c. d.

credit, market and operational risks credit, market and liquidity risks credit, capital and operational risks credit, liquidity and operational risks

Correct answer: a Learning Objective 14.6 ~ describe the capital requirements faced by banks Feedback: Credit risk was the main focus of Basel I. The incorporation of market risk to Basel I occurred later. Operational risk is a new focus of Basel II. 47.

In Basel II Accord the ratio of a. b. *c. d.

Tier 1 capital to risk-weighted assets must be at least 8%. Total capital to risk-weighted assets must be at least 4%. Tier 1 capital to risk-weighted assets must be at least 4%. Tier 2 capital to risk-weighted assets must be at least 8%.

Correct answer: c Learning Objective 14.6 ~ describe the capital requirements faced by banks Feedback: In Basel II Tier 1 capital to risk-weighted assets must be at least 4% while Total capital (Tier 1 plus Tier 2) to risk-weighted assets must be at least 8%. These ratios were the same in Basel I. However Tier 1 minimum capital ratio introduced by Basel III and implemented from January 2013 is 6%.

48.

Which of the following is NOT part of Tier 1? a. b. c. *d.

Retained profits Ordinary shares Non cumulative irredeemable preference shares Perpetual subordinated debt

Correct answer: d Learning Objective 14.6 ~ describe the capital requirements faced by banks Feedback: Perpetual subordinated debt is part of Tier 2 but not Tier 1.

© John Wiley & Sons Australia, Ltd 2013

13.15

Testbank to accompany Financial Markets, Institutions and Money 3e

49.

The most common way of assessing the overall credit risk of a loan portfolio is by using a. *b. c. d.

internal credit risk rating of the borrower. concentration ratio by geographical area, loan types and business type. credit analysis of the 6 Cs. credit scoring.

Correct answer: b Learning Objective 14.7 ~ explain the methods employed by banks to manage credit risk Feedback: Credit scoring is for assessing the character of the borrower. Credit analysis with the 6Cs and internal credit risk rating of the borrower are for the assessment of credit risk of an individual loan.

50.

Credit derivatives are instruments that banks can use a. b. *c. d.

to increase their profit. to increase their capital. to minimise their credit risk exposure. to increase their liquidity.

Correct answer: c Learning Objective 14.7 ~ explain the methods employed by banks to manage credit risk 51.

Which of the following statements is NOT correct? Credit swaps bought by a bank a. b. *c. d.

are credit derivatives. are off- bank balance sheets. help the bank protect itself against interest rate risk. require a regular payment to the seller ...