Chapter 3 in Class Question

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Chapter 3

Analyzing Bank Performance

1. Which of the following is not a characteristic of a typical commercial bank? a. Most banks own few fixed assets.
b. Most banks have a high degree of operating leverage.
c. Most banks have few fixed costs.
d. Many bank liabilities are payable on demand.
e. Banks generally operate with less equity capital than non-financial firms. Answer: b

2. Bank assets fall into each of the following categories except: a. loans.
b. investment securities.
c. demand deposits.
d. noninterest cash and due from banks.
e. other assets.
Answer: c

3. Which of the following would not be considered a commercial loan? a. An interim construction loan
b. A working capital loan
c. A loans to another financial institution
d. A loan to purchase a piece of industrial equipment
e. A loan to expand a factory
Answer: a

4. Banks generate their largest portion of income from:
a. loans.
b. short-term investment.
c. demand deposits.
d. long-term investments.
e. certificates of deposit.
Answer: a

5. Which of the following adjustments are made to gross loans and leases to obtain net loans and leases? a. The loan and lease loss allowance is subtracted from gross loans b. Unearned income is subtracted from gross interest received c. Investment income is added to gross interest received

d. a. and b.
e. a. and c.

Answer: d
6. An example of a contra-asset account is:
a. the loan and lease loss allowance.
b. unearned income.
c. buildings and equipment.
d. revenue bonds.
e. the provision for loan loss.

Answer: a

7. Which of the following bank assets is the most liquid?
a. Long-term investments
b. Short-term investments
c. Loans
d. Demand deposits
e. Unearned income

Answer: b

8. Which of the following would a bank generally classify as a short-term investment? a. Demand deposits
b. Deposits at the Federal Reserve
c. Repurchase agreements
d. Fed Funds purchased
e. Vault cash

Answer: c

9. Securities that require unrealized gains or losses to be recorded on the income statement are called: a. held-to-maturity securities.
b. trading account securities.
c. available-for-sale securities.
d. revenue securities.
e. repurchase agreements

Answer: c

10. The volume of net deferred credit is commonly referred to as: a. the burden.
b. NOW balances.
c. reserve requirements.
d. equity.
e. float.

Answer: e

11. Core deposits consist of all of the following except:
a. demand deposits.
b. Negotiable Orders of Withdrawal (NOW) accounts
c. jumbo certificates of deposit.
d. savings accounts.
e. money market demand accounts.

Answer: c

12. Which of the following would be the least sensitive to changes in interest rates? a. Demand deposits
b. Repurchase agreements
c. Federal funds purchased
d. Eurodollar liabilities
e. Jumbo CDs

Answer: a

13. The “provision for loan and lease losses”:
a. are the realized losses from the previous accounting period. b. represents management’s estimate of potential lost revenue from bad loans. c. determined by the Federal Reserve for all banks.

d. does not affect net income.
e. is another name for a bank’s “burden.”
Answer: b

14. A bank’s “burden” is defined as:
a. net interest income minus non-interest income.
b. non-interest income minus non-interest expense.
c. non-interest expense minus non-interest income.
d. net interest income plus non-interest income.
e. interest expense plus non-interest expense.

Answer: c

15. Interest income includes:
a. interest earned on all of the bank’s assets.
b. fees earned on all of the bank’s assets.
c. fees earned on all of the bank’s deposit accounts.
d. all of the above.
e. a. and b. only
Answer: e

16. A bank...
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