FIN 4020: Chapter 12 Smartbook Flashcards
Financial information on commercial banks is reported in two documents: the ________ and the ________.
a) balance sheet; uniform bank performance report
b) report of condition; report of income
c) income statement; report of income
d) uniform bank performance report; statement of cash flows
report of condition; report of income
Unlike manufacturing companies, the majority of a commercial bank’s assets are ________ rather than ________.
a) financial assets; fixed assets
b) fixed assets; financial assets
c) fixed assets; tangible assets
d) intangible assets; tangible assets
financial assets; fixed assets
Deposits at other financial institutions are used to purchase services from those financial institutions who are serving as
a) correspondent banks.
b) service banks.
c) parent banks.
d) partners.
correspondent banks.
Investment securities (choose three)
a) always have long maturities.
b) can be traded in secondary markets.
c) are inexpensive.
d) have low default risk.
e) are highly liquid.
can be traded in secondary markets.
have low default risk.
are highly liquid.
Some of the common long-term investments carried on the bank’s balance sheet are (choose four)
a) U.S. agency securities.
b) commercial paper.
c) U.S. Treasury bonds.
d) mortgage-backed securities.
e) junk bonds.
f) municipals.
U.S. agency securities.
U.S. Treasury bonds.
mortgage-backed securities.
municipals.
Commercial banks must submit their financial statements to regulators and shareholders at the end of every ________.
a) fiscal year
b) calendar quarter
c) calendar year
d) fiscal quarter
calendar quarter
Unlike manufacturing companies, the majority of a commercial bank’s liabilities are ________ and ________.
Multiple choice question.
short-term deposits; short-term borrowings
long-term deposits; long-term borrowings
long-term deposits; short-term borrowings
short-term deposits; long-term borrowings
short-term deposits; short-term borrowings
The currency and coin on hand needed to meet customer withdrawals is called
Multiple choice question.
vault cash.
reserves.
liquidity.
cash items.
vault cash
Short-term investment securities generate ________ for the bank and provide ________.
Multiple choice question.
interest expense; liquidity
risk; income
risk; liquidity
interest income; liquidity
interest income; liquidity
Which of the following long-term securities are default free?
Multiple select question.
Freddie Mac securities
Municipal bonds
Ginnie Mae bonds
Fannie Mae securities
U.S. Treasury bonds
Ginnie Mae bonds
U.S. Treasury bonds
A bank’s report of income is its ________ and the report of condition is its ________.
Multiple choice question.
income statement; balance sheet
balance sheet; income statement
statement of cash flows; balance sheet
income statement; statement of cash flows
income statement; balance sheet
Multiple bank holding companies control ________ subsidiary commercial banks and report _______ financial statement(s) for the subsidiary banks.
Multiple choice question.
two or more; consolidated
one; simple
more than two; separate
two or more; separate
two or more; consolidated
Cash items in the process of collection are checks drawn on other institutions that have been deposited at the bank but not yet
Multiple choice question.
signed.
cleared.
returned.
approved.
cleared
A repurchase agreement is a _________ federal funds loan.
Multiple choice question.
guaranteed
long-term
collateralized
risky
collateralized
Long-term securities held on the bank’s balance sheet generate ________ and ________.
Multiple choice question.
interest income; dividends
interest income; fee income
interest income; capital gains or losses
fee income; capital gains or losses
interest income; capital gains or losses
Financial information on commercial banks is reported in two documents: the ________ and the ________.
Multiple choice question.
balance sheet; uniform bank performance report
report of condition; report of income
uniform bank performance report; statement of cash flows
income statement; report of income
report of condition; report of income
Commercial loans that are backed by a specific assets of the borrower are called
Multiple choice question.
junior debt.
debentures.
secured loans.
unsecured loans.
secured loans.
Unlike manufacturing companies, the majority of a commercial bank’s assets are ________ rather than ________.
Multiple choice question.
financial assets; fixed assets
fixed assets; tangible assets
intangible assets; tangible assets
fixed assets; financial assets
financial assets; fixed assets
Real estate loans are primarily ________ and some ________.
Multiple choice question.
mortgage loans; mortgage backed securities
mortgage loans; revolving home equity loans
revolving home equity loans; mortgage loans
mortgage loans; commercial loans
mortgage loans; revolving home equity loans
The sum of investment securities and net loans and leases are the bank’s
Multiple choice question.
investment assets.
total assets.
earning assets.
risk assets.
earning assets.
Federal funds loans are _______ and ________ loans made by a bank with excess reserves to one that needs the funds.
Multiple choice question.
long-term; uncollateralized
short-term; collateralized
long-term; collateralized
short-term; uncollateralized
short-term; uncollateralized
Some of the common long-term investments carried on the bank’s balance sheet are (choose four)
Multiple select question.
U.S. agency securities.
municipals.
U.S. Treasury bonds.
commercial paper.
junk bonds.
mortgage-backed securities.
U.S. agency securities.
municipals.
U.S. Treasury bonds.
mortgage-backed securities.
Loans that are used to finance a firm’s capital needs, equipment purchases and plant expansion are called
Multiple choice question.
commercial mortgage loans.
term loans.
syndicated loans.
commercial and industrial loans.
commercial and industrial loans.
Residential mortgages are very long term loans with an average maturity of approximately
Multiple choice question.
10 years.
25 years.
20 years.
30 years.
20 years
An accumulated reserve account on the bank’s balance sheet where the bank records loans that are in danger of default is the
Multiple choice question.
contra-loan account.
default allowance.
adjustment for bad loans.
allowance for loan and lease losses.
allowance for loan and lease losses.
Investment securities (choose three)
Multiple select question.
always have long maturities.
have low default risk.
are inexpensive.
can be traded in secondary markets.
are highly liquid.
have low default risk.
can be traded in secondary markets.
are highly liquid.
Long-term securities held on the bank’s balance sheet generate ________ and ________.
Multiple choice question.
fee income; capital gains or losses
interest income; fee income
interest income; capital gains or losses
interest income; dividends
interest income; capital gains or losses
Transaction accounts at banks held by individuals, corporations, partnerships and governments that pay no explicit interest are
Multiple choice question.
regular savings.
passbook savings.
NOW accounts.
demand deposits.
demand deposits.
Commercial and industrial loans can be short-term loans to fund ________ or long-term loans to fund ________.
Multiple choice question.
working capital; fixed assets
fixed assets; working capital
long-term securities; short-term securities
short-term securities; long-term securities
working capital; fixed assets
MMDA’s are checkable but subject to the following limitations (choose all that apply):
Multiple select question.
the number of automatic transfers per month is limited.
there is a maximum balance limitation.
the number of checks written per month and minimum check denomination is restricted.
a minimum balance is required.
investors cannot hold a NOW account and MMDA account with the same bank.
the number of automatic transfers per month is limited.
the number of checks written per month and minimum check denomination is restricted.
a minimum balance is required.
The interest on a loan paid to the bank by the borrower but not yet recorded as interest income on the bank’s income statement is recorded on the balance sheet as
Multiple choice question.
a liability.
unearned income.
accrued income.
accrued interest.
unearned income
Fixed-maturity time deposits with face values under $100,000 are
Multiple choice question.
wholesale CD’s.
commercial paper.
MMDA accounts.
retail CD’s.
retail CD’s.
NOW accounts require that the depositor maintain ______ or the account reverts to a demand deposit.
Multiple choice question.
fee payments
a savings account also
a minimum account balance
minimum monthly transactions
a minimum account balance
One important difference between federal funds loans and repurchase agreements is that federal funds loans can be _______ while repurchase agreements are difficult to transact ________.
Multiple choice question.
entered into anytime during the banking day; late in the day due to their collateral requirement
setup only before noon of the day of the trade; unless the collateral is acceptable to both parties
setup using the Federal Reserve Fedwire network; before noon in the U.S. due to the global nature of the market
difficult to setup late in the day; due to their collateral requirement
entered into anytime during the banking day; late in the day due to their collateral requirement
Loans that are used to finance a firm’s capital needs, equipment purchases and plant expansion are called
Multiple choice question.
commercial mortgage loans.
term loans.
commercial and industrial loans.
syndicated loans.
commercial and industrial loans.
Banks facing temporary liquidity crunches can borrow from the ______ at the _______.
Multiple choice question.
U.S. Treasury; LIBOR rate
central bank’s discount window; federal funds rate
central bank’s discount window; discount rate
parent holding company; prime rate
central bank’s discount window; discount rate
Banks are not required to hold cash reserves against MMDA’s, so they are generally able to _________ than on NOW accounts
Multiple choice question.
offer more benefits
charge lower fees
support higher balances
pay higher rates
pay higher rates
The sum of investment securities and net loans and leases are the bank’s
Multiple choice question.
earning assets.
risk assets.
investment assets.
total assets.
earning assets.
The major categories of bank time deposits are ________ and ________.
Multiple choice question.
retail certificates of deposit; NOW accounts
retail certificates of deposit; passbook savings
wholesale certificates of deposit; MMDA’s
retail certificates of deposit; wholesale certificates of deposit
retail certificates of deposit; wholesale certificates of deposit
Four additional sources of purchased funds available to banks are (choose four)
Multiple select question.
banker’s acceptances.
commercial paper.
high-yield bonds.
junk bonds.
medium-term notes.
discount window loans.
banker’s acceptances.
commercial paper.
medium-term notes.
discount window loans.
Although a bank subsidiary itself cannot issue commercial paper, its _______ can do so and provide the funds to the bank subsidiary.
Multiple choice question.
parent bank holding company
own bank subsidiary
peer bank subsidiary
correspondent bank
parent bank holding company
Banks offer _________ in order to be competitive with the similar funds offered by groups such as Vanguard and Fidelity.
Multiple choice question.
retail certificates of deposit
passbook savings accounts
money market deposit accounts (MMDA)
negotiable certificates of deposit
money market deposit accounts (MMDA)
Each period, the difference between loans lost and loans recovered is the bank’s
Multiple choice question.
net write-offs.
net loans.
net loan assets.
net losses.
net write-offs.
Fixed-maturity time deposits with face values over $100,000 and which can be sold in a secondary market to other investors are
Multiple choice question.
wholesale CD’s.
retail CD’s.
commercial paper.
MMDA accounts.
wholesale CD’s.
In addition to issuing deposits, banks also borrow in various markets for purchased funds, which are not subject to ________ or _______.
Multiple choice question.
reserve requirements; taxes
reserve requirements; FDIC insurance payments
excessive risk; excessive loss
taxes; FDIC insurance payments
reserve requirements; FDIC insurance payments
Since the largest banks in the U.S. are owned by bank holding companies, these large banks have access to _______ as a funding source that smaller banks do not.
Multiple choice question.
medium-term notes
repurchase agreements
commercial paper
banker’s acceptances
commercial paper
True or false: a bank’s core deposits are defined to be its demand deposits, NOW accounts, MMDA accounts, other savings accounts and retail CD’s.
True false question.
True
False
True
Off-balance-sheet items are less visible to financial statement readers because they often appear in ________ on the financial statements.
Multiple choice question.
liability accounts
footnotes
equity accounts
asset accounts
footnotes
A(n) ________ is a contractual commitment by a financial institution to loan to a customer a certain amount at given interest rate terms for a specified period of time.
Multiple choice question.
debenture
amortized loan
loan commitment
term loan
loan commitment
True or false: A bank’s purchased funds are its brokered deposits, wholesale CD’s, deposits at foreign offices, repurchase agreements and subordinated notes and debentures.
True false question.
True
False
True
The largest group of trusts managed by banks’ trust departments are
Multiple choice question.
pension funds.
individual trusts.
mutual funds.
brokerage accounts.
individual trusts.
Off-balance-sheet items are ________ and ________ that may affect the future status of a financial institutions balance sheet.
Multiple choice question.
contingent assets; contingent liabilities
derivatives; securities
assets; contingent liabilities
Reason: contingent assets; contingent liabilities
loans; securities
Reason: contingent assets; contingent liabilities
contingent assets; contingent liabilities
The largest market available for purchased funds is the
Multiple choice question.
repurchase agreement market.
banker’s acceptance market.
federal funds market.
commercial paper market.
federal funds market.
In return for making the loan commitment, the bank may charge a(n) ______ fee and a(n) _______ for use of the funds.
Multiple select question.
commitment
payment
origination
up-front
commitment
up-front
True or false: Because interest income is recorded on an accrued basis, loans on which interest payments are up to 90 days past due can still be recorded as generating income for a bank.
True
The second largest group of trusts managed by banks’ trust departments are
Multiple choice question.
brokerage accounts.
Reason: pension funds.
pension funds.
individual trusts.
Reason: pension funds.
mutual funds.
Reason: pension funds.
pension funds.
Interest expense on the bank’s income statement include interest paid on ________ and on ________.
Multiple choice question.
C&I loans; real estate loans
interest-bearing deposits; purchased funds
transaction accounts; CD’s
short-term debt securities; long-term debt securities
interest-bearing deposits; purchased funds
When the customer finally draws funds on the loan commitment, the bank shows a(n) ________ on its balance sheet, though the bank must stand ready to loan ______ at any time.
Multiple choice question.
asset; at least half of the principal
Reason: loan asset; the full amount
liability; the full amount
Reason: loan asset; the full amount
liability; at least half of the principal
Reason: loan asset; the full amount
loan asset; the full amount
loan asset; the full amount
Interest income is taxable to the bank, with the exception of interest on ________ and tax-exempt income from ________.
Multiple choice question.
federal funds loans; direct lease financing
municipal securities; federal funds loans
municipal securities; direct lease financing
U.S. Treasury securities; direct lease financing
municipal securities; direct lease financing
The ________ department of a commercial bank holds and manages assets for individuals or corporations.
Multiple choice question.
brokerage
Reason: trust
escrow
Reason: trust
trust
title
Reason: trust
trust
Multiple Choice Question
The ________ is a noncash, tax deductible expense which represents the current period’s allocation to the ________ listed on the balance sheet.
Multiple choice question.
provision for loan losses; loans and leases account
allowance for loan losses; provision for loan losses
interest on other borrowed funds; allowance for loan losses
provision for loan losses; allowance for loan losses
provision for loan losses; allowance for loan losses
Interest expense is the ________ major category on the commercial bank’s income statement.
Multiple choice question.
fourth
Reason: second
third
Reason: second
first
Reason: second
second
second
A(n) ________ is a contractual commitment by a financial institution to loan to a customer a certain amount at given interest rate terms for a specified period of time.
Multiple choice question.
debenture
term loan
amortized loan
loan commitment
loan commitment
For a commercial bank, net income is the sum of net interest income and net noninterest income, minus ______ and ______.
Multiple choice question.
taxes; provision for loan loss
provision for loan loss; taxes and extraordinary items
provision for loan loss; extraordinary items
extraordinary items; taxes
provision for loan loss; taxes and extraordinary items
True or false: Because interest income is recorded on an accrued basis, loans on which interest payments are up to 90 days past due can still be recorded as generating income for a bank.
True
ROE can also be expressed as the product of the ________ times the ________.
Multiple choice question.
profit margin; equity multiplier
return on assets; equity multiplier
return on assets; asset utilization
profit margin; asset utilization
return on assets; equity multiplier
The banks profit margin (PM) is the ratio of its ________ divided by its ________ and is a measure of how efficiently it converts income into profit.
Multiple choice question.
net income; total liabilities
net income; total operating income
net interest income; total assets
net income; total assets
net income; total operating income
The size of the provision for loan losses is determined by the bank’s management, but it is subject to a maximum tax-deductible amount set by the
Multiple choice question.
FDIC.
Reason: IRS.
IRS.
FRS.
Reason: IRS.
OCC.
Reason: IRS.
IRS
Interest expense on the bank’s income statement include interest paid on ________ and on ________.
Multiple choice question.
C&I loans; real estate loans
short-term debt securities; long-term debt securities
interest-bearing deposits; purchased funds
transaction accounts; CD’s
interest-bearing deposits; purchased funds
More so than for other types of firms, the commercial bank’s net income is directly related to the _______ and the _______ on the balance sheet and the _______ associated with each.
Multiple choice question.
interest-paying assets; interest-earning liabilities; interest rate
loans; securities; interest rate
total assets; total liabilities; costs
interest-earning assets; interest-paying liabilities; interest rate
interest-earning assets; interest-paying liabilities; interest rate
The bank’s net interest margin (NIM) is equal to ________ divided by ________, and is a measure of the net return on the bank’s interest earning assets.
Multiple choice question.
net income; earning assets
net interest income; total assets
net interest income; earning assets
net noninterest income; earning assets
net interest income; earning assets
A commercial bank’s ROE is defined as the ratio of ________ divided by ________.
Multiple choice question.
net interest income; total equity capital
net income; total earning assets
net income; total equity capital
net income; total assets
net income; total equity capital
The bank’s return on assets (ROA) is the product of the ________ times the ________, and is a measure of how efficiently the bank uses its total assets to generate profits.
Multiple choice question.
profit margin; asset utilization
asset utilization; equity multiplier
return on equity; equity multiplier
profit margin; equity multiplier
profit margin; asset utilization
The ________ is a noncash, tax deductible expense which represents the current period’s allocation to the ________ listed on the balance sheet.
Multiple choice question.
provision for loan losses; loans and leases account
allowance for loan losses; provision for loan losses
provision for loan losses; allowance for loan losses
interest on other borrowed funds; allowance for loan losses
provision for loan losses; allowance for loan losses
Interest expense is the ________ major category on the commercial bank’s income statement.
Multiple choice question.
first
third
fourth
second
second
Due to their ready access to capital markets, large banks generally operate with less ________ than small banks.
Multiple choice question.
equity capital
deposits
investment securities
cash
equity capital
True or false: The bank’s net interest income is equal to interest income minus interest expense.
True
Large banks generate more ________ and ________ than small banks.
Multiple choice question.
noninterest income; have more equity
interest income; are less diversified
noninterest income; are less diversified
noninterest income; are more diversified
noninterest income; are more diversified
The bank’s earning assets are the sum of its ________ and its ________.
Multiple choice question.
investment securities; net loans and leases
repurchase agreements and federal funds purchased; net loans and leases
loans and leases; U.S. Treasury securities
loans; leases
investment securities; net loans and leases
The asset utilization ratio (AU) is the ratio of its ________ divided by its ________, and is a measure of how efficiently the bank uses its assets to generate operating income.
Multiple choice question.
total operating income; total equity
total operating income; total assets
net interest income; total assets
net noninterest income; total assets
total operating income; total assets
Large banks use more ________ and less ________ than small banks.
Multiple choice question.
purchased funds; core deposits
purchased funds; commercial paper
Reason: purchased funds; core deposits
core deposits; purchased funds
Reason: purchased funds; core deposits
time deposits; purchase funds
Reason: purchased funds; core deposits
purchased funds; core deposits
