Question 1

The volatile liability dependency ratio subtracts temporary investments from volatile liabilities and expresses the difference as a fraction of loans.

Accepted Answer

The volatile liability dependency ratio subtracts temporary investments from volatile liabilities and expresses the difference as a fraction of loans.

Question 2

The dollar gap ratio is calculated by subtracting the amount of interest-rate sensitive liabilities from the amount of interest-rate sensitive assets and expressing the difference as a percent of total assets.

Accepted Answer

The dollar gap ratio measures the difference between interest-rate sensitive assets and liabilities, expressed as a percentage of total assets, to assess interest rate risk.

Question 3

RAROC is an external performance evaluation measure.

Accepted Answer

RAROC (Risk-Adjusted Return on Capital) is an internal performance evaluation measure used by banks and financial institutions to assess the profitability of their investments or projects, taking into account the risk involved.

Question 4

EVA is a financial management technique that enables banks to select loans that maximize shareholder wealth.

Accepted Answer

EVA (Economic Value Added) is a measure of a company's financial performance based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis. It can be used by banks to select loans that maximize shareholder wealth by focusing on those opportunities that are expected to generate a return above their cost of capital, thereby enhancing value for shareholders.

Question 5

RAROC and EVA can reduce agency costs.

Accepted Answer

RAROC (Risk-Adjusted Return on Capital) and EVA (Economic Value Added) are financial metrics that help align the interests of managers with those of shareholders, thereby reducing agency costs. RAROC ensures that the risks taken are adequately compensated by returns, while EVA focuses on generating value beyond the cost of capital, encouraging decisions that enhance shareholder value.

Question 6

All of the following are examples of banking objectives EXCEPT:
A) improve the market share of prime grade loans
B) establish a more automated delivery system for payment services
C) upgrade the quality of management
D) cut loans for residential real estate by 5%

Accepted Answer

Banking objectives typically focus on improving services, expanding market share, and enhancing management quality. Cutting loans for residential real estate does not align with the general objectives aimed at growth and service improvement.

Question 7

Banks quantify goals and formalize the planning process by using:
A) budgets
B) profit plans
C) objectives
D) a and b
E) a, b, and c

Accepted Answer

Budgets and profit plans are both used by banks to quantify goals and formalize the planning process.

Question 8

Which of the following is a characteristic of strategic planning?
A) it focuses on cost efficiency
B) it must be consistent with the bank's budget
C) it is creative by nature
D) a and b
E) a, b, and c

Accepted Answer

Strategic planning is characterized by focusing on cost efficiency, ensuring consistency with the bank's budget, and being inherently creative as it involves devising long-term plans and innovative solutions to achieve the organization's goals.

Question 9

The proportion of assets, deposits, and loans held by a bank in its business region relative to other banks is called:
A) profit ratio
B) market share
C) asset quality
D) capitalization

Accepted Answer

Market share refers to the proportion of assets, deposits, and loans a bank holds in its business region compared to other banks.

Question 10

Banks implement new technologies for all of the following reasons EXCEPT:
A) it can be a marketing tool to attract new customers
B) it can improve the competitiveness of the bank
C) it increases the dependence on human resources
D) it enhances the convenience of the bank

Accepted Answer

Implementing new technologies in banks typically reduces dependence on human resources by automating processes and improving efficiency, rather than increasing it.

Question 11

The _____ of increasing technology must be weighed against the potential benefits of ______.
A) benefits, increased return on equity
B) added costs, improved competitiveness
C) lower costs; increased deposits
D) added costs; asset liquidity

Accepted Answer

The correct choice is B) added costs, improved competitiveness. This sentence correctly fills in the blanks by suggesting that the added costs of increasing technology must be balanced against the potential benefits of improved competitiveness. This reflects a common consideration in business investments in technology, where the initial financial outlay is justified by the potential for gaining a competitive edge in the market.

Question 12

A high equity multiplier can increase ROE and the growth rate of the bank as long as ROA is:
A) increasing
B) decreasing
C) positive
D) negative

Accepted Answer

A high equity multiplier can increase Return on Equity (ROE) and the growth rate of the bank as long as Return on Assets (ROA) is positive. This is because a positive ROA indicates that the bank is generating profits from its assets, and leveraging those assets through a high equity multiplier can amplify the ROE.

Question 13

The _____ ratio gives actual losses on loans, while the ______ ratio gives the extent to which the bank's assets are devoted to loans.
A) loan risk; loss rate
B) loss rate; capitalization
C) operating efficiency; loan risk
D) loss rate; loan risk

Accepted Answer

The loss rate ratio measures actual losses on loans, while the loan risk ratio indicates the proportion of a bank's assets that are allocated to loans.

Question 14

The operating efficiency ratios calculated to provide information on cost control include all of the following EXCEPT:
A) depository ratio
B) occupancy ratio
C) wages and salaries expense rate
D) interest expense ratio

Accepted Answer

The depository ratio is not typically considered an operating efficiency ratio related to cost control. Operating efficiency ratios like occupancy ratio, wages and salaries expense rate, and interest expense ratio are directly related to analyzing how well a company manages its operating expenses. The depository ratio, however, is more relevant to the banking sector and relates to the management of deposits, not directly to cost control.

Question 15

Decreasing the amount of liquid assets held for the purpose of meeting loan demands and deposit withdrawals and increasing the usage of deposit and nondeposit sources of funds paying market rates of interest is known as:
A) liquidity management
B) leverage adjustment
C) liability management
D) liquidity adjustment

Accepted Answer

This strategy is known as liability management. It involves managing the liabilities side of a bank's balance sheet (i.e., its sources of funding) by increasing the use of deposits and other borrowings that pay market rates of interest, rather than relying solely on traditional liquid assets to meet loan demands and withdrawal requests.

Question 16

If a firm has $250,000 in securities, $40,000 due from other institutions, $22,000 in cash, and $8 million in total assets, its cash ratio equals:
A) 3.9%
B) 0.78%
C) 0.28%
D) 0.50%
E) none of the above.

Accepted Answer

The answer of If a firm has $250,000 in securities,...

Question 17

The ratio that best measures the tax exposure of a bank is ____ divided by _____.
A) total taxes paid divided by net income before taxes
B) net income before taxes divided by total taxes paid
C) municipal bond rate divided by marginal tax rate
D) net income before taxes divided by (1-marginal tax rate)

Accepted Answer

The ratio of total taxes paid divided by net income before taxes best measures the tax exposure of a bank, as it directly compares the amount of taxes a bank pays to its income before those taxes are applied, giving a clear picture of the tax burden on the bank's earnings.

Question 18

Which of the following groups have an interest in evaluating bank performance?
A) bank shareholders
B) bank management
C) bank regulators
D) bank depositors
E) all of the above.

Accepted Answer

All listed groups have a vested interest in evaluating bank performance for various reasons such as investment health, operational efficiency, regulatory compliance, and financial security.

Question 19

Internal bank performance includes which of the following:
A) bank planning
B) technology assessment
C) personnel development
D) all of the above.

Accepted Answer

Internal bank performance encompasses a wide range of activities aimed at improving the bank's operations and services. This includes bank planning (strategic planning, financial planning, etc.), technology assessment (evaluating current technology and identifying needs for new technology), and personnel development (training, career development programs for employees). Therefore, all of the options listed are aspects of internal bank performance.

Question 20

Cash assets include which of the following?
A) vault cash
B) deposits at the Federal Reserve and at other commercial banks
C) cash items in the process of collection
D) all of the above.

Accepted Answer

Cash assets for a bank include vault cash, deposits at the Federal Reserve and at other commercial banks, and cash items in the process of collection. These are all considered liquid assets that are either in the form of cash or can be quickly converted to cash.

Quiz 3: Evaluating Bank Performance

The volatile liability dependency ratio subtracts temporary investments from volatile liabilities and expresses the difference as a fraction of loans.

The dollar gap ratio is calculated by subtracting the amount of interest-rate sensitive liabilities from the amount of interest-rate sensitive assets and expressing the difference as a percent of total assets.

RAROC is an external performance evaluation measure.

EVA is a financial management technique that enables banks to select loans that maximize shareholder wealth.

RAROC and EVA can reduce agency costs.

All of the following are examples of banking objectives EXCEPT:

Banks quantify goals and formalize the planning process by using:

Which of the following is a characteristic of strategic planning?

The proportion of assets, deposits, and loans held by a bank in its business region relative to other banks is called:

Banks implement new technologies for all of the following reasons EXCEPT:

The _ of increasing technology must be weighed against the potential benefits of __.

A high equity multiplier can increase ROE and the growth rate of the bank as long as ROA is:

The _ ratio gives actual losses on loans, while the __ ratio gives the extent to which the bank's assets are devoted to loans.

The operating efficiency ratios calculated to provide information on cost control include all of the following EXCEPT:

Decreasing the amount of liquid assets held for the purpose of meeting loan demands and deposit withdrawals and increasing the usage of deposit and nondeposit sources of funds paying market rates of interest is known as:

If a firm has $250,000 in securities, $40,000 due from other institutions, $22,000 in cash, and $8 million in total assets, its cash ratio equals:

The ratio that best measures the tax exposure of a bank is divided by _.

Which of the following groups have an interest in evaluating bank performance?

Internal bank performance includes which of the following:

Cash assets include which of the following?