444 Chapter 20 Bank Performance Chapter 20 Bank Performance 1 A n in interest rates could reduce a commercial bank s expected cash flows because the interest paid on deposits may to a degree than the interest earned on loans and investments A increase increase greater B increase increase lesser C decrease increase greater D decrease increase lesser ANSWER A 2 The risk premium on a commercial bank is related to economic growth and related to management skills A positively negatively B positively positively C negatively negatively D negatively positively ANSWER A 3 Interest income generated from all assets is called A net interest margin B the spread C gross interest income D net interest income ANSWER C 4 Interest paid on deposits and borrowed funds is called A net interest expense B net interest margin C gross interest expense D net spread expense ANSWER C 5 Net interest income is the difference between gross interest income and interest expenses and is measured as a percentage of A liabilities B shareholder s equity C assets D revenues ANSWER C 445 Chapter 20 Bank Performance 6 Fees charged by a bank on various services allow the bank to generate A non interest income B components of net interest margin C components of net interest income D components of gross interest income ANSWER A 7 Non interest income as a percentage of assets has been consistently lowest for banks that A focus on providing loans B offer substantial insurance services C offer substantial securities related services D offer substantial advisory services ANSWER A 8 If a bank has short term deposits and provides long term fixed rate loans and interest rates decline over time its net interest margin should be A declining over time B rising over time C constant over time D consistently negative ANSWER B 9 For a given level of return on assets a bank with a higher level of capital will have a lower A return on equity B leverage measure C both return on equity and leverage measure D neither return on equity nor leverage measure ANSWER A 10 Net income measured as a percentage of assets is A return on equity ROE B return on liabilities ROL C return on investment ROI D return on assets ROA ANSWER D 11 When only equity counts as capital the leverage measure is A equal to the capital ratio B equal to return on assets C the inverse of return on assets D assets divided by equity ANSWER D Chapter 20 Bank Performance 446 12 When only equity counts as capital the higher the capital ratio the lower the A leverage measure B degree of financial leverage C both of these D neither of these ANSWER C 13 Gross interest income is affected by A market interest rates B the composition of assets held by banks C both of these D neither of these ANSWER C 14 If a bank increases its provisions for loan losses its interest income is and its non interest income is A reduced not affected B reduced reduced C not affected reduced D not affected not affected ANSWER D 15 Gross interest expense is affected by A market interest rates B the composition of assets held by the bank C fee services provided by the bank D all of these ANSWER A 16 If a bank had long term fixed rate assets and short term liabilities and interest rates increased over time its net interest margin should A decrease B increase C stay the same D either decrease or increase depending on whether the asset maturities exceed 10 years ANSWER A 17 The sum of net interest income non interest income and securities gains minus provision for loan losses and non interest expenses equals A net interest margin B gross interest margin C net income D income before taxes ANSWER D 447 Chapter 20 Bank Performance 18 Which of the following banks would likely have the highest return on equity A high return on assets high capital ratio B high return on assets low capital ratio C low return on assets low capital ratio D low return on assets high capital ratio ANSWER B 19 Banks A and B have the same net income Bank A has a higher capital ratio and more assets than Bank B Bank A s return on assets is than Bank B s Bank A s return on equity is than Bank B s A higher higher B higher lower C lower higher D lower lower ANSWER D 20 Banks G and H are the same size and have similar operations Bank G holds the minimum level of capital and Bank H holds a higher level of capital Bank G s return on equity is probably volatile than that of Bank H Bank G s beta is probably than that of Bank H A less lower B less higher C more higher D more lower ANSWER C 21 Bank K is conservatively managed It benefits slightly when general economic conditions are very favorable and is hurt slightly when general economic conditions are very unfavorable Its beta would likely be A less than zero B zero C between zero and 1 00 D greater than 1 00 ANSWER C 22 result s from a bank s sale of securities A Non interest income B Loan loss provision C Securities gains and losses D Non interest expenses E None of these ANSWER C Chapter 20 Bank Performance 448 23 Bank X obtains most of its funds from NCDs while Bank Y obtains much of its funds from passbook savings and from demand deposit accounts Given this information the net interest margin of Bank X would likely be than that of Bank Y and non interest expenses would likely be than that of Bank Y A greater greater B greater less C less less D less greater ANSWER C 24 A bank s ROE account for its financial leverage A bank s ROA account for its financial leverage A does does B does does not C does not does not D does not does ANSWER B 25 A bank s ROA account for taxes on earnings A bank s ROE account for taxes on earnings A does does B does does not C does not does not D does not does ANSWER A 26 A bank s ROA account for loan losses A bank s ROE account for loan losses A does does B does does not C does not does not D does not does ANSWER A 27 A bank s net interest margin includes A non interest expenses B non interest income C loan losses D none of these ANSWER D 449 Chapter 20 Bank Performance 28 Banks with relatively ROAs often incur non interest expenses A low very low B low very high C high very high D none of these ANSWER B 29 Bank T generally obtains a high percentage of its funds from wholesale CDs Bank V obtains most of its funds from retail CDs Bank Z obtains its funds from checking accounts The bank that will incur the highest interest expenses is A Bank T B …