Question 1

Charge-offs represent the securities a bank decides to sell because they have declined in value.

Accepted Answer

Charge-offs represent the loans or debts that a bank has given up on collecting and written off as losses. They do not necessarily refer to securities.

Question 2

During the 1980s,the Comptroller of the Currency,the Federal Reserve and the FDIC created a new tool called the Uniform Bank Performance Report to help them analyze the financial condition of banks.

Accepted Answer

The statement is true. The Uniform Bank Performance Report was created in the 1980s by the Comptroller of the Currency, the Federal Reserve, and the FDIC to help them assess the financial health of banks.

Question 3

Smaller banks usually have fewer liquid assets than larger banks.

Accepted Answer

The answer of Smaller banks usually have fewer liquid assets...

Question 4

Loans past due for 90 days or more are classified as nonperforming assets.

Accepted Answer

Loans past due for 90 days or more are considered nonperforming assets because they have a higher risk of default and are unlikely to be repaid in full.

Question 5

A bank's ROE equals its ROA times its:
A)net profit margin.
B)total assets divided by total equity capital.
C)total operating revenues divided by total assets.
D)ratio of net after-tax income to total operating revenues.
E)None of the options is correct.

Accepted Answer

ROE (Return on Equity) is calculated as Net Income divided by Shareholder's Equity. ROA (Return on Assets) is calculated as Net Income divided by Total Assets. The relationship between ROE and ROA can be expressed as ROE = ROA * (Total Assets / Shareholder's Equity), which is the financial leverage multiplier. Therefore, the correct answer is B) total assets divided by total equity capital, as this formula represents the leverage factor that amplifies ROA to achieve ROE.

Question 6

The ratio of a bank's interest income from its loans and security investments less interest expenses on debt issued,divided by total earning assets measures a bank's:
A)net operating margin.
B)net return before special transactions.
C)net interest margin.
D)return on assets.
E)None of the options is correct

Accepted Answer

The given ratio is typically known as net interest margin (NIM) which measures a bank's profitability based on its interest income and expenses relative to its earning assets. Thus, the correct option is C - net interest margin.

Question 7

The ratio of a bank's net operating income to the number of a bank's full-time-equivalent employees is called the employee productivity ratio.

Accepted Answer

The statement is true.

Question 8

The ratio of nonperforming assets to total loans and leases is considered to be a measure of a bank's market risk.

Accepted Answer

The ratio of nonperforming assets to total loans and leases is actually a measure of credit risk, not market risk.

Question 9

Liquidity risk examines the quality of a bank's assets and,in particular,the quality of the bank's loans.

Accepted Answer

Liquidity risk refers to the risk that a bank will not be able to meet its financial obligations as they come due, without incurring unacceptable losses, rather than examining the quality of the bank's assets or loans. Asset quality is more directly related to credit risk.

Question 10

A bank's asset utilization ratio reflects the effectiveness of the bank's expense management.

Accepted Answer

A bank's asset utilization ratio reflects the efficiency of how well the bank is using its assets to generate income or revenue. It does not directly reflect the effectiveness of the bank's expense management.

Question 11

The difference between such sources of bank income as service charges on deposits and trust-service fees,and such sources of bank expenses as salaries and wages and overhead expenses divided by total assets or total earning assets is called the:
A)net profit margin.
B)net operating margin.
C)net noninterest margin.
D)net return on assets.
E)None of the options is correct.

Accepted Answer

The difference between sources of bank income and expenses divided by total assets or total earning assets is referred to as the net noninterest margin. This measure provides insight into a bank's ability to generate revenue from activities besides the traditional interest earning activities such as loans and investments. It is a key performance measure for banks, as it helps in determining the bank's profitability from noninterest sources.

Question 12

ROE for a bank is calculated by:
A)dividing net after-tax income by total equity capital.
B)dividing total operating revenue less operating expenses by total assets.
C)dividing net pre-tax income by total equity capital.
D)noninterest income less noninterest expenses divided by total earning assets.
E)None of the options is correct.

Accepted Answer

ROE (Return on Equity) is calculated by taking the net after-tax income of a company and dividing it by the total equity capital. This formula specifically allows the calculation of how much profit a bank generates from its shareholders' investments.

Question 13

The interest rate spread between market yields on bank debt issues (such as capital notes and CDs)and the market yields on government securities of the same maturity is considered to be a measure of market risk in banking.

Accepted Answer

The interest rate spread between market yields on bank debt issues and the market yields on government securities of the same maturity is considered to be a measure of credit risk, not market risk. This spread reflects the perceived creditworthiness of the bank relative to the risk-free government securities.

Question 14

The ratio of cash and government securities to total assets is considered to be a measure of liquidity risk in banking.

Accepted Answer

The ratio of cash and government securities to total assets is considered to be a measure of liquidity risk in banking as it reflects the ability of a bank to meet its cash obligations in the short term.

Question 15

The ratio of uninsured deposits to total deposits is considered to be a measure of credit risk in banking.

Accepted Answer

The ratio of uninsured deposits to total deposits is considered a measure of liquidity risk, not credit risk. Credit risk is the risk of loss due to a borrower's failure to make payments on any type of debt.

Question 16

The earnings spread for a bank is equal to:
A)total interest income divided by total earning assets less total interest expense divided by total interest-bearing bank liabilities.
B)total interest income less total interest expenses divided by earning assets.
C)total operating revenues less total operating expenses divided by total assets.
D)total cash and noncash expenses subtracted from interest and noninterest income divided by total assets.
E)None of the options is correct.

Accepted Answer

The earnings spread for a bank is the difference between the interest earned on loans and other interest-earning assets and the interest paid on deposits and other interest-bearing liabilities. Option A is the correct formula for calculating the earnings spread as it takes into consideration both the interest income and interest expenses. Option B only considers the difference between interest income and expenses, while Options C and D calculate different ratios unrelated to the earnings spread. Option E is incorrect as there is a correct answer.

Question 17

The noninterest margin is generally positive for most banks.

Accepted Answer

The answer of The noninterest margin is generally positive for...

Question 18

The main reason behind the failure of Superior Bank of Chicago and eventual FDIC's takeover of this institution in 2001 was attributed to misleading accounting practices of inflating asset values and revenues deflating liabilities and expenses.

Accepted Answer

The answer of The main reason behind the failure of...

Question 19

The FDIC is a private credit rating company which provides credit ratings on the short term and long term securities issued by banks.

Accepted Answer

The FDIC (Federal Deposit Insurance Corporation) is a federal agency that provides insurance to protect depositors in case of bank failures. It does not provide credit ratings on bank securities. Credit rating companies such as Moody's and Standard & Poor's provide such services.

Question 20

A bank's degree of asset utilization (AU)or the ratio of total operating revenues to total assets is a measure of asset management efficiency,especially in terms of the mix and yield on assets.

Accepted Answer

The statement accurately defines the concept of asset utilization and its role in measuring asset management efficiency.

Quiz 6: Measuring and Evaluating the Performance of Banks and Their Principal Competitors