Test Bank Chapter 3 Banks And Other Financial Institutions

Chapter 3

Banks and Other Financial Institutions

TRUE-FALSE QUESTIONS

1. A mortgage is a loan backed by real property in the form of buildings and houses.

Difficulty Level: Easy

Subject Heading: Financial Institution Problems During the Financial Crisis

L.O. 3.1

2. A mortgage-backed security is a loan for by real property in the form of buildings and houses backed by stocks, bonds, or other securities.

Difficulty Level: Easy

Subject Heading: Financial Institution Problems During the Financial Crisis

L.O. 3.1

3. In the U.S., housing prices peaked in 2008 and home values then began a sharp decline leading to the 2008 financial crisis.

Difficulty Level: Medium

Subject Heading: Financial Institution Problems During the Financial Crisis

L.O. 3.1

4. The Economic Stabilization Act of 2008 had a primary focus of allowing the U.S. Treasury to purchase up to $700 billion of “troubled” or “toxic” assets held by financial institutions.

Difficulty Level: Medium

Subject Heading: Financial Institution Problems During the Financial Crisis

L.O. 3.1

5. The Economic Stabilization Act of 2008 created the TARP program. TARP stands for Troubled Asset Recovery Program.

Difficulty Level: Hard

Subject Heading: Financial Institution Problems During the Financial Crisis

L.O. 3.1

6. Depository institutions include commercial banks, savings and loans, mutual savings banks, and credit unions.

Difficulty Level: Easy

Subject Heading: Types and Roles of Financial Institutions

L.O. 3.2

7. Pension funds receive contributions from employees and/or their employers and invest the proceeds on behalf of the employees.

Difficulty Level: Easy

Subject Heading: Contractual Savings Organizations

L.O. 3.2

8. Commercial banks accept deposits and makes loans to individuals and businesses.

Difficulty Level: Easy

Subject Heading: Depository Institutions

L.O. 3.2

9. Credit unions are cooperative nonprofit organizations that exist primarily to provide member depositors with consumer credit.

Difficulty Level: Easy

Subject Heading: Depository Institutions

L.O. 3.2

10. Savings and loan associations are cooperative nonprofit organizations that exist primarily to provide member depositors with consumer credit.

Difficulty Level: Easy

Subject Heading: Depository Institutions

L.O. 3.2

11. Major types of financial institutions in the U.S. include commercial banks, mutual funds, insurance companies, and pension funds.

Difficulty Level: Medium

Subject Heading: Types of Financial Institutions

L.O. 3.2

12. Investment companies sell shares in their firms to individuals and invest the pooled proceeds in corporate and government securities.

Difficulty Level: Medium

Subject Heading: Securities Firms

L.O. 3.2

13. Insurance companies sell shares in their firms to individuals and invest the pooled proceeds in corporate and government securities.

Difficulty Level: Medium

Subject Heading: Contractual Savings Organizations

L.O. 3.2

14. Investment banking firms sell shares in their firms to businesses and invest the pooled proceeds in corporate and government securities.

Difficulty Level: Medium

Subject Heading: Securities Firms

L.O. 3.2

15. Mutual funds are open-end investment companies that can issue an unlimited number of shares to its investors and use the pooled proceeds to purchase corporate and government securities.

Difficulty Level: Medium

Subject Heading: Securities Firms

L.O. 3.2

16. Insurance companies receive contributions from employees and/or their employers and invest the proceeds on behalf of the employees for use during their retirement years.

Difficulty Level: Medium

Subject Heading: Contractual Savings Organizations

L.O. 3.2

17. Pension funds receive contributions from employees and/or their employers and invest the proceeds on behalf of the employees for use during their retirement years.

Difficulty Level: Medium

Subject Heading: Contractual Savings Organizations

L.O. 3.2

18. Investment banking firms sell or market new securities issued by businesses to individual and institutional investors.

Difficulty Level: Medium

Subject Heading: Securities Firms

L.O. 3.2

19. Mortgage banking firms provide loans directly to consumers and businesses or aid individuals in obtaining financing of durable goods and homes.

Difficulty Level: Medium

Subject Heading: Finance Firms

L.O. 3.2

20. Commercial banks provide loans directly to consumers and businesses or aid individuals in obtaining financing of durable goods and homes.

Difficulty Level: Medium

Subject Heading: Depository Institutions

L.O. 3.2

21. An investment bank accepts deposits, makes loans, and issues checking accounts.

Difficulty Level: Easy

Subject Heading: Securities Firms

L.O. 3.2

22. Investment banks accept deposits and makes loans to individuals and businesses.

Difficulty Level: Easy

Subject Heading: Securities Firms

L.O. 3.2

23. Credit unions are cooperative nonprofit organizations that exist primarily to provide member depositors with consumer credit.

Difficulty Level: Medium

Subject Heading: Depository Institutions

L.O. 3.2

24. Savings and loans were first known as building societies.

Difficulty Level: Easy

Subject Heading: Depository Institutions

L.O. 3.2

25. Financial diversification is the process by which individual savings are accumulated in depository institutions and, in turn, lent or invested.

Difficulty Level: Easy

Subject Heading: Types and Roles of Financial Institutions

L.O. 3.2

26. Depository institutions accept deposits or savings from businesses, governments, and individuals and then lend these pooled savings to individuals.

Difficulty Level: Medium

Subject Heading: Types and Roles of Financial Institutions

L.O. 3.2

27. Savings and loan institutions collect premiums on insurance policies and employee/employer contributions from pension fund participants and provide retirement benefits and insurance against major financial losses.

Difficulty Level: Medium

Subject Heading: Types and Roles of Financial Institutions

L.O. 3.2

28. Banks accept and invest individual savings and also facilitate the sale and transfer of securities between investors.

Difficulty Level: Medium

Subject Heading: Types and Roles of Financial Institutions

L.O. 3.2

29. Finance firms provide loans directly to consumers and businesses, as well as help borrowers obtain mortgage loans on real property.

Difficulty Level: Medium

Subject Heading: Types and Roles of Financial Institutions

L.O. 3.2

30. Investment banking firms assist individuals to purchase new or existing securities issues or to sell previously purchased securities.

Difficulty Level: Medium

Subject Heading: Securities Firms

L.O. 3.3

31. The Glass-Steagall Act of 1933 provided for separation of commercial banking and investment banking activities in the United States.

Difficulty Level: Medium

Subject Heading: Commercial, Investment, and Universal Banking

L.O. 3.3

32. The Glass-Steagall Act of 1933 was also known as the Great Depression Recovery Act of 1933.

Difficulty Level: Hard

Subject Heading: Commercial, Investment, and Universal Banking

L.O. 3.3

33. A corporate bank is a bank that engages in both commercial banking and investment banking activities.

Difficulty Level: Hard

Subject Heading: Commercial, Investment, and Universal Banking

L.O. 3.3

34. The U.S. banking system as it exists today is relatively unchanged since just before the Civil War.

Difficulty Level: Easy

Subject Heading: Before the Civil War

L.O. 3.4

35. During the colonial period, small unincorporated banks issued their own paper money.

Difficulty Level: Medium

Subject Heading: Before the Civil War

L.O. 3.4

36. The First Bank of the United States was the first federally chartered bank in the U.S.

Difficulty Level: Easy

Subject Heading: Before the Civil War

L.O. 3.4

37. The Second Bank of the United States was the second federally chartered bank in the U.S.

Difficulty Level: Easy

Subject Heading: Before the Civil War

L.O. 3.4

38. Part of the reason that the Banking Act of 1933 was passed was in response to the large numbers of bank failures.

Difficulty Level: Medium

Subject Heading: General Banking Legislation

L.O. 3.5

39. The National Banking Act of 1864 made it possible for banks to receive federal charters.

Difficulty Level: Medium

Subject Heading: General Banking Legislation

L.O. 3.5

40. The main provisions of the Monetary Control Act of 1980 are deregulation and monetary control.

Difficulty Level: Medium

Subject Heading: General Banking Legislation

L.O. 3.5

41. The Monetary Control Act prohibited the Federal Reserve from controlling thrift institutions.

Difficulty Level: Medium

Subject Heading: General Banking Legislation

L.O. 3.5

42. The Federal Reserve Act of 1913 created a system of central banks in the United States.

Difficulty Level: Medium

Subject Heading: General Banking Legislation

L.O. 3.5

43. The Glass-Steagall Act was repealed with the passage of the Gramm-Leach-Bliley Act of 1999.

Difficulty Level: Medium

Subject Heading: Bank Legislation

L.O. 3.5

44. Branch banks are those banking offices that are controlled by a single parent bank.

Difficulty Level: Easy

Subject Heading: General Banking Legislation

L.O. 3.5

45. Today, reserve requirements imposed by the Federal Reserve apply only to member banks.

Difficulty Level: Medium

Subject Heading: General Banking Legislation

L.O. 3.5

46. The 2007–08 financial crisis and the 2008–09 Great Recession led to the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

Difficulty Level: Medium

Subject Heading: General Banking Legislation

L.O. 3.5

47. The Federal Savings and Loan Insurance Corporation (FSLIC) when bankrupt in 1988.

Difficulty Level: Medium

Subject Heading: General Banking Legislation

L.O. 3.5

48. The bank holding company may not engage in direct banking activities.

Difficulty Level: Medium

Subject Heading: Bank Regulation

L.O. 3.6

47. Branch banking is permitted on an interstate basis by all state banks.

Difficulty Level: Medium

Subject Heading: Degree of Branch Banking

L.O. 3.6

48. The United States is a tri-banking system.

Difficulty Level: Medium

Subject Heading: Bank Charters

L.O. 3.6

49. The principal assets of all depository institutions are cash, securities, and loans.

Difficulty Level: Easy

Subject Heading: Assets

L.O. 3.7

50. The primary types of assets on a bank’s balance sheet include cash and deposits.

Difficulty Level: Easy

Subject Heading: Assets

L.O. 3.7

51. The primary types of assets on a bank’s balance sheet include cash, securities, and loans.

Difficulty Level: Easy

Subject Heading: Assets

L.O. 3.7

52. The prime rate of interest has been relatively stable during the past twenty-five years.

Difficulty Level: Medium

Subject Heading: Loans

L.O. 3.7

53. The primary type of liability on a bank’s balance sheet is deposits.

Difficulty Level: Easy

Subject Heading: Assets

L.O. 3.7

54. Primary capital consists of owners’ capital, preferred stock, debt convertible into common stock, and loan loss reserves.

Difficulty Level: Medium

Subject Heading: Structure of Financial Institutions

L.O. 3.7

55. The effective rate of interest is generally lower on a standard loan than an otherwise equivalent discount loan.

Difficulty Level: Medium

Subject Heading: Assets

L.O. 3.7

56. An unsecured loan represents a general claim against specific assets of the borrower.

Difficulty Level: Medium

Subject Heading: Assets

L.O. 3.7

57. For a standard loan, the percent annual rate is calculated as the interest paid divided by the amount borrowed all times 365.

Difficulty Level: Easy

Subject Heading: Equation 3.1

L.O. 3.7

58. For a discount loan, the percent annual rate is calculated as the discount amount divided by the amount borrowed times 100.

Difficulty Level: Easy

Subject Heading: Equation 3.1

L.O. 3.7

59. Secondary reserves are vault cash and deposits held at other depository institutions and at Federal Reserve Banks.

Difficulty Level: Medium

Subject Heading: Liquidity Management

L.O. 3.8

60. Commercial banks are aggressive and often assume large amounts of risk.

Difficulty Level: Easy

Subject Heading: Liquidity Management

L.O. 3.8

61. Bank solvency reflects the ability to keep the value of a bank’s assets greater than its liabilities.

Difficulty Level: Medium

Subject Heading: Bank Management

L.O. 3.8

62. Bank solvency is the likelihood that a bank will be unable to meet depositor withdrawal demands and other liabilities when due.

Difficulty Level: Medium

Subject Heading: Bank Management

L.O. 3.8

63. Credit risk is the likelihood that a bank will be unable to meet depositor withdrawal demands and other liabilities when due.

Difficulty Level: Medium

Subject Heading: Liquidity Management

L.O. 3.8

64. Credit risk is the chance of nonpayment or delayed payment of interest or principal.

Difficulty Level: Medium

Subject Heading: Liquidity Management

L.O. 3.8

65. Interest rate risk results from possible price fluctuations in fixed-rate debt instruments associated with changes in market interest rates.

Difficulty Level: Medium

Subject Heading: Capital Management

L.O. 3.8

66. The total capital ratio can be computed as total capital divided by total assets times 100.

Difficulty Level: Medium

Subject Heading: Equation 3.5

L.O. 3.8

67. Bank solvency reflects the ability to meet depositor withdrawals and to pay off other liabilities when due.

Difficulty Level: Medium

Subject Heading: Bank Management

LO 3.8

68. A bank’s common equity capital ratio is calculated as common equity divided by total assets all times 12.

Difficulty Level: Medium

Subject Heading: Equation 3.3

L.O. 3.8

69. A bank’s tier 1 ratio is calculated as its tier 1 capital divided by its risk-adjusted assets all times 100.

Difficulty Level: Medium

Subject Heading: Equation 3.4

L.O. 3.8

68. International banking exists when banks operate in more than one country.

Difficulty Level: Easy

Subject Heading: International Banking and Foreign Systems

L.O. 3.9

69. The Bretton Woods Agreement was an agreement between major central banks to adopt capital adequacy requirements for internationally involved banks.

Difficulty Level: Medium

Subject Heading: International Banking and Foreign Systems

L.O. 3.9

MULTIPLE-CHOICE QUESTIONS

70. A loan backed by real property in the form of buildings and houses.

a. Mortgage-backed security

b. Serial mortgage

c. Mortgage

d. Secured mortgage

e. Unsecured loan

Difficulty Level: Easy

Subject Heading: Financial Institution Problems During the Financial Crisis

L.O. 3.1

71. A debt security created by pooling together a group of mortgage loans.

a. Mortgage-backed security

b. Serial mortgage

c. Mortgage package

d. Secured mortgage

Difficulty Level: Easy

Subject Heading: Financial Institution Problems During the Financial Crisis

L.O. 3.1

72. Which of the following are not thrift institutions?

a. credit unions

b. savings and loan institutions

c. commercial banks

d. mutual savings banks

Difficulty Level: Easy

Subject Heading: Depository Institutions

L.O. 3.2

73. Credit unions are

a. for profit organizations.

b. made up of individuals who possess common bonds of association.

c. institutions that derive funds from investment activities.

d. generally larger than most commercial banks.

Difficulty Level: Easy

Subject Heading: Depository Institutions

L.O. 3.2

74. Financial institutions include all of the following except

a. banks.

b. pension funds.

c. insurance companies.

d. pawn shops.

Difficulty Level: Easy

Subject Heading: Types and Roles of Financial Institutions

L.O. 3.2

75. Another name for an open-end investment company is a

a. brokerage firm.

b. finance company.

c. mutual fund.

d. investment bank.

Difficulty Level: Easy

Subject Heading: Securities Firms

L.O. 3.2

76. Which of the following institutions is not part of the modern banking system?

a. credit unions

b. savings and loan associations

c. mutual funds

d. mutual savings banks

Difficulty Level: Medium

Subject Heading: Types and Roles of Financial Institutions

L.O. 3.2

77. Major types of depository institutions include all of the following except

a. commercial banks.

b. savings and loan associations.

c. credit unions.

d. brokerage firms.

Difficulty Level: Medium

Subject Heading: Types and Roles of Financial Institutions

L.O. 3.2

78. An open-end investment company that can issue an unlimited number of its shares to investors and use the pooled proceeds to purchase corporate and government securities is called a(n)

a. mutual fund.

b. pension fund.

c. insurance company.

d. brokerage firm.

Difficulty Level: Medium

Subject Heading: Securities Firms

L.O. 3.2

79. An organization that sells or markets new securities issued by businesses to individuals and institutional investors is called a(n)

a. mutual fund.

b. investment bank.

c. insurance company.

d. brokerage firm.

Difficulty Level: Medium

Subject Heading: Securities Firms

L.O. 3.2

80. An organization that received contributions from employees and/or their employers and invests the proceeds on behalf of the employees for use during their retirement years is called a(n)

a. mutual fund.

b. savings bank.

c. pension fund.

d. retirement fund.

Difficulty Level: Medium

Subject Heading: Contractual Savings Organizations

L.O. 3.2

81. An organization that sells shares in their firms to individuals and others and invests the proceeds in corporate and government securities is called a(n)

a. investment company.

b. investment bank.

c. insurance company.

d. brokerage firm.

Difficulty Level: Medium

Subject Heading: Securities Firms

L.O. 3.2

82. An organization that provides loans directly to consumers and businesses or aid individuals in obtaining financing for durable goods is called a(n)

a. commercial bank.

b. investment bank.

c. savings and loan.

d. finance company.

Difficulty Level: Medium

Subject Heading: Types and Roles of Financial Institutions

L.O. 3.2

83. __________________ accept savings from individuals and then lend these pooled savings to businesses, governments, and individuals.

a. Insurance companies

b. Commercial finance companies

c. Depository institutions

d. Investment banks

Difficulty Level: Medium

Subject Heading: Types and Roles of Financial Institutions

L.O. 3.2

84. __________________ accept savings from individuals and then lend these pooled savings to businesses, governments, and individuals.

a. Insurance companies

b. Commercial finance companies

c. Government institutions

d. Investment banks

e. None of the above

Difficulty Level: Medium

Subject Heading: Types and Roles of Financial Institutions

L.O. 3.2

85. __________________ collect premiums on insurance policies and employee/employer contributions from pension fund participants and provide retirement benefits and insurance against major financial losses.

a. Banks

b. Contractual savings institutions

c. Investment banking firms

d. Brokerage firms

Difficulty Level: Medium

Subject Heading: Types and Roles of Financial Institutions

L.O. 3.2

86. __________________ collect premiums on insurance policies and employee/employer contributions and provide retirement benefits and insurance against major financial losses.

a. Banks

b. Pension funds

c. Investment banking firms

d. Brokerage firms

Difficulty Level: Medium

Subject Heading: Contractual Savings Organizations

L.O. 3.2

87. __________________ are the two important forms of contractual savings organizations.

a. Insurance companies and pension funds

b. banks and insurance companies

c. Investment banks and pension funds

d. Pension funds and brokerage firms

Difficulty Level: Medium

Subject Heading: Types and Roles of Financial Institutions

L.O. 3.2

88. __________________ accept and invest individual savings and also facilitate the sale and transfer of securities between investors.

a. Securities firms

b. Pension funds

c. Asset management companies

d. Mortgage banking firms

Difficulty Level: Medium

Subject Heading: Types and Roles of Financial Institutions

L.O. 3.2

89. Investment companies (mutual funds), investment banking firms, and brokerage firms are the primary types of ____________.

a. banks

b. securities firms

c. pension funds

d. finance companies

Difficulty Level: Medium

Subject Heading: Types and Roles of Financial Institutions

L.O. 3.2

90. _______________ provide loans directly to consumers and businesses and help borrowers obtain mortgage loans on real property.

a. banks

b. securities firms

c. pension funds

d. finance firms

Difficulty Level: Medium

Subject Heading: Finance Firms

L.O. 3.2

91. _______________ accept the savings of individuals and lend pooled savings to individuals primarily in the form of mortgage loans and operate almost entirely in New England , New York, and New Jersey, with most of their assets continuing to be invested in mortgage loans.

a. Commercial banks

b. Thrift institutions

c. Savings banks

d. Credit unions

Difficulty Level: Medium

Subject Heading: Depository Institutions

L.O. 3.2

92. _______________ accept the savings of individuals and lend the pooled savings to individuals.

a. Investment banks

b. Savings and loan associations

c. Pension funds

d. Finance companies

Difficulty Level: Medium

Subject Heading: Depository Institutions

L.O. 3.2

93. _______________ are cooperative nonprofit organizations that exist primarily to provide member depositors with consumer credit, including the financing of automobiles and the purchase of homes, and derive their funds almost entirely from the savings of their members.

a. Commercial banks

b. Thrift institutions

c. Savings banks

d. Credit unions

Difficulty Level: Medium

Subject Heading: Depository Institutions

L.O. 3.2

94. _______________ are for profit organizations that exist primarily to provide customers with consumer credit, including the financing of automobiles and the purchase of durable goods.

a. Commercial banks

b. Sales finance companies

c. Savings banks

d. Brokerage firms

Difficulty Level: Medium

Subject Heading: Finance Firms

L.O. 3.2

95. _______________ sell or market new securities issued by businesses to individual and institutional investors, whereas ______________ firms assist individuals who want to purchase new or existing securities issues or who want to sell previously purchased securities.

a. Brokerage firms, investment banks

b. Investment banks, brokerage firms

c. savings banks, investment banks

d. Brokerage firms, savings banks

Difficulty Level: Hard

Subject Heading: Securities Firms

L.O. 3.2

96. _______________ provide loans directly to consumers and businesses or aid individuals in obtaining financing of durable goods and homes, whereas ______________ originate mortgage loans on homes and other real property by bringing together borrowers and institutional investors.

a. thrift institutions; savings and loans

b. thrift institutions; mortgage banking firms

c. finance companies; savings and loans

d. finance companies; mortgage banking firms

Difficulty Level: Hard

Subject Heading: Finance Firms

L.O. 3.2

97. The most basic functions of depository institutions are

a. safekeeping for depositors.

b. record keeping for depositors.

c. efficient and economical transfer of payments.

d. accepting deposits and granting loans.

Difficulty Level: Easy

Subject Heading: Depository Institutions

L.O. 3.2

98. Commercial banks obtain the bulk of their loanable funds from

a. depositors.

b. the issue of certificates of deposit.

c. sale of bank stock.

d. sale of subordinated debenture bonds.

Difficulty Level: Easy

Subject Heading: Structure and Roles of Financial Institutions

L.O. 3.2

99. If $5,000 is borrowed on a discount basis and the rate is 10 percent, the annual percentage interest rate on this loan would be

a. 10 percent.

b. 10.1 percent.

c. 11 percent.

d. 11.1 percent.

0.10 x $5,000 = $500 and $5,000 - $500 = $4,500.

Therefore $500 / $4,500 = 0.111

Difficulty Level: Medium

Subject Heading: Equation 3.2

L.O. 3.7

100. The first thrift institutions were

a. The First and Second Banks of the United States.

b. savings banks and savings and loans.

c. credit unions.

d. commercial banks.

Difficulty Level: Hard

Subject Heading: Depository Institutions

L.O. 3.2

101. __________________ is the process by which individual savings are accumulated in depository institutions and, in turn, lent or invested.

a. Investing

b. Financial intermediation

c. The multiplier effect

d. Lending

Difficulty Level: Medium

Subject Heading: Types and Roles of Financial Institutions

L.O. 3.2

102. What is the primary sources of funds for savings and loan associations?

a. Individual savings

b. Premiums paid on policies

c. Employee/employer contributions

d. Other financial institutions

Difficulty Level: Easy

Subject Heading: Types of Financial Institutions

L.O. 3.2

103. What is the primary sources of funds for savings banks?

a. Individual savings

b. Premiums paid on policies

c. Employee/employer contributions

d. Other financial institutions

Difficulty Level: Easy

Subject Heading: Types of Financial Institutions

L.O. 3.2

104. What is the primary sources of funds for credit unions?

a. Individual savings

b. Premiums paid on policies

c. Employee/employer contributions

d. Other financial institutions

Difficulty Level: Easy

Subject Heading: Types of Financial Institutions

L.O. 3.2

105. What is the primary sources of funds for insurance companies?

a. Individual savings

b. Premiums paid on policies

c. Employee/employer contributions

d. Other financial institutions

Difficulty Level: Easy

Subject Heading: Types of Financial Institutions

L.O. 3.2

106. What is the primary sources of funds for pension funds?

a. Individual savings

b. Premiums paid on policies

c. Employee/employer contributions

d. Other financial institutions

Difficulty Level: Easy

Subject Heading: Types of Financial Institutions

L.O. 3.2

107. What is the primary sources of funds for investment companies?

a. Individual savings

b. Premiums paid on policies

c. Employee/employer contributions

d. Other financial institutions

Difficulty Level: Easy

Subject Heading: Types of Financial Institutions

L.O. 3.2

108. What is the primary sources of funds for investment banking firms?

a. Individual savings

b. Premiums paid on policies

c. Employee/employer contributions

d. Other financial institutions

Difficulty Level: Easy

Subject Heading: Types of Financial Institutions

L.O. 3.2

109. What is the primary sources of funds for brokerage firms?

a. Individual savings

b. Premiums paid on policies

c. Employee/employer contributions

d. Other financial institutions

Difficulty Level: Easy

Subject Heading: Types of Financial Institutions

L.O. 3.2

110. What is the primary sources of funds for finance companies?

a. Individual savings

b. Premiums paid on policies

c. Employee/employer contributions

d. Other financial institutions

Difficulty Level: Easy

Subject Heading: Types of Financial Institutions

L.O. 3.2

111. What is the primary sources of funds for mortgage banking firms?

a. Individual savings

b. Premiums paid on policies

c. Employee/employer contributions

d. Other financial institutions

Difficulty Level: Easy

Subject Heading: Types of Financial Institutions

L.O. 3.2

112. NOW accounts

a. are not subject to ceiling rates under Regulation Q.

b. enable depository institutions to compete effectively for funds that were flowing in large amounts to nonblank money market funds.

c. typically pay interest rates equal to that paid by money market funds.

d. don’t allow transfers to checking accounts.

Difficulty Level: Easy

Subject Heading: General Banking Legislation

L.O. 3.3

85. The three basic ways to clear a check through the U.S. banking system includes all of the following except

a. through a Federal Reserve Bank.

b. through the U.S. Treasury Bank.

c. through a bank clearinghouse.

d. bank to bank.

Difficulty Level: Medium

Subject Heading: Functions of Banks and the Banking System

L.O. 3.3

118. Major types of securities firms include all of the following except

a. investment companies.

b. pension funds.

c. brokerage firms.

d. investment banking companies.

Difficulty Level: Medium

Subject Heading: Types of Financial Institutions

L.O. 3.3

119. The Bank of North America

a. was the first incorporated bank in the United States.

b. was patterned after the Central Bank of England.

c. was established to assist in financing the Civil War.

d. oversees the Federal Reserve Bank.

Difficulty Level: Easy

Subject Heading: Before the Civil War

L.O. 3.4

120. Early chartered banks included

a. the Bank of North America.

b. the Bank of California.

c. Wells Fargo Bank.

d. Bank of America.

Difficulty Level: Easy

Subject Heading: Before the Civil War

L.O. 3.4

121. The notes of the Bank of North America

a. served as a circulating medium of exchange.

b. never loaned to the government.

c. were not redeemable in metallic coins upon demand.

d. were substituted for checks.

Difficulty Level: Medium

Subject Heading: Before the Civil War

L.O. 3.4

122. The First Bank of the United States

a. is still in operation in Massachusetts.

b. transferred funds from region to region.

c. was unchartered.

d. became the Bank of America.

Difficulty Level: Medium

Subject Heading: Before the Civil War

L.O. 3.4

123. The First Bank of the United States ceased operations because

a. it was superseded by the Second Bank of the United States.

b. of the opposition of state banking interests.

c. its charter had expired and there was no provision for its renewal.

d. the need to provide financing for the Civil War was not supported by Congress.

Difficulty Level: Medium

Subject Heading: Before the Civil War

L.O. 3.4

124. The Second Bank of the United States was created to

a. replace the First Bank of the United States.

b. appease political interests.

c. restore order to chaotic banking conditions.

d. sell gold to commercial banks.

Difficulty Level: Medium

Subject Heading: Before the Civil War

L.O. 3.4

125. During the colonial period in the nation’s history, banks depended on

a. their own issue of paper money.

b. foreign sources for their loanable funds.

c. deposits of foreign currency such as the Spanish dollar.

d. the investment of their own stockholders.

Difficulty Level: Medium

Subject Heading: Before the Civil War

L.O. 3.4

126. Our system of national banks

a. was designed to destroy state banking.

b. was an integral part of the Federal Reserve Act.

c. was replaced by Federal Reserve banking.

d. came into existence during the Civil War.

Difficulty Level: Medium

Subject Heading: Before the Civil War

L.O. 3.4

127. Legislation that permits depository institutions to compete with money market mutual funds on an equal basis with respect to interest rates offered to investors is the

a. Garn–St. Germain Depository Institutions Act.

b. National Banking Act.

c. Hunt Commission legislation.

d. Depository Institutions Deregulation and Monetary Control Act.

Difficulty Level: Medium

Subject Heading: General Banking Legislation

L.O. 3.5

128. Legislation that provided for the separation of commercial banking and investment banking activities in the United States is called

a. Garn–St. Germain Depository Institutions Act.

b. Glass-Steagall Act.

c. Hunt Commission legislation.

d. Depository Institutions Deregulation and Monetary Control Act.

Difficulty Level: Medium

Subject Heading: General Banking Legislation

L.O. 3.5

129. The National Banking Act of 1864 provided for

a. federally chartered banks.

b. the establishment of a system of central banks.

c. deregulation and monetary control.

d. the establishment of deposit insurance.

Difficulty Level: Medium

Subject Heading: General Banking Legislation

L.O. 3.5

130. The Depository Institutions Deregulation and Monetary Control Act

a. established a system of central banks.

b. has resulted in more competition among depository institutions.

c. increased federal deposit insurance from $40,000 to $80,000 for each account.

d. established minimum capital requirements for banks with federal charters .

Difficulty Level: Medium

Subject Heading: General Banking Legislation

L.O. 3.5

131. The Resolution Trust Corporation was brought into existence to

a. help savings and loan institutions invest funds in a wide range of higher yielding instruments.

b. authorize savings and loan institutions to issue a new money market account
with no regulated interest rate ceiling.

c. take over and liquidate the assets of failed savings and loan institutions.

d. to sell securities for investment banks.

Difficulty Level: Medium

Subject Heading: The Savings and Loan Crisis

L.O. 3.5

132. The Garn–St. Germain Depository Institutions Act, among other things

a. extended the FED’s control to thrift institutions and to commercial banks that are not members of the Fed.

b. enabled depository institutions to issue money market accounts with no regulated interest rate ceiling.

c. was designed to assist the investment banking industry.

d. allowed commercial banks to lend to each other.

Difficulty Level: Medium

Subject Heading: General Banking Legislation

L.O. 3.5

133. The _______________________ provided for separation of commercial banking and investment banking activities in the United States.

a. Glass Steagall Act

b. Gramm-Leach-Bliley Act

c. Garn-Saint Germain Act

d. Depository Institutions Deregulation and Monetary Control Act

Difficulty Level: Medium

Subject Heading: General Banking Legislation

L.O. 3.5

134. The _______________________ was designed to reduce or eliminate interest rate limitations and increase access to various sources of funds available to banks and thrifts and expand the Federal Reserve’s control over thrifts and non-member banks.

a. Glass Steagall Act

b. Gramm-Leach-Bliley Act

c. Garn-Saint Germain Act

d. Depository Institutions Deregulation and Monetary Control Act

Difficulty Level: Medium

Subject Heading: General Banking Legislation

L.O. 3.5

135. The _______________________ was designed mainly to assist the savings and loan industry.

a. Glass Steagall Act

b. Gramm-Leach-Bliley Act

c. Garn-Saint Germain Act

d. Depository Institutions Deregulation and Monetary Control Act

Difficulty Level: Medium

Subject Heading: General Banking Legislation

L.O. 3.5

136. The _______________________ made it possible for banks to receive federal charters and provided a basis for national banking laws.

a. Glass Steagall Act

b. National Banking Act

c. Garn-Saint Germain Act

d. Federal Reserve Act

Difficulty Level: Medium

Subject Heading: General Banking Legislation

L.O. 3.5

137. The _______________________ established the U.S. central banking system and increased the effectiveness of commercial banking in general.

a. Glass Steagall Act

b. National Banking Act

c. Garn-Saint Germain Act

d. Federal Reserve Act

Difficulty Level: Medium

Subject Heading: General Banking Legislation

L.O. 3.5

138. Which of the following statements is most correct?

a. The National Banking Act of 1894 has long lost any relationships to
modern bank regulation.

b. The Federal Reserve System was created in large measure to force state
chartered banks into conformity with nationally chartered banks.

c. “Wildcat banking” during the first half of the 1800s referred to risky banking practices by many state banks, such as excessive note issues, lack of adequate bank capital, and insufficient reserves against their notes and deposits.

d. The Federal Reserve Act required all banks to sell gold to the Government.

Difficulty Level: Hard

Subject Heading: Before the Civil War

L.O. 3.5

139. The Federal Deposit Insurance Corporation Improvement Act of 1991

a. transferred the reserves and functions of the Federal Savings and Loan Insurance Corporation to the FDIC.

b. required that failed banks be handled in such a way as to provide the lowest cost to the FDIC.

c. increased federal deposit insurance from $40,000 to $100,000 for each account.

d. extended federal deposit insurance to S&L depositors.

Difficulty Level: Medium

Subject Heading: Protection of Depositors’ Funds

L.O. 3.5

140. The Federal Savings and Loan Insurance Corporation

a. has ceased operations and has been replaced by the Savings Association Insurance Fund (SAIF) in its insuring operations.

b. protects credit unions.

c. insures money market accounts.

d. is responsible for insuring deposits at savings banks.

Difficulty Level: Medium

Subject Heading: Protection of Depositors’ Funds

L.O. 3.5

141. In 1989, the Financial Institution Reform, Recovery and Enforcement Act provided for all but which of the following?

a. strengthening the federal deposit insurance programs

b. the creation of the Resolution Trust Corporation

c. enhanced enforcing powers

d. stronger capital standards for thrift institutions

Difficulty Level: Medium

Subject Heading: Protection of Depositors’ Funds

L.O. 3.5

142. The National Banking Act of 1864

a. established maximum capital requirements for federally chartered banks.

b. regulated loans with respect to safety and liquidity.

c. did not regulate reserves.

d. allowed national banks to open across state lines.

Difficulty Level: Medium

Subject Heading: General Banking Legislation

L.O. 3.5

143. The Monetary Control Act

a. extended the Fed’s control to thrift institutions and non-member commercial banks.

b. has resulted in more competition among depository institutions.

c. increased federal deposit insurance from $40,000 to $80,000 for each account.

d. established minimum capital requirements for banks with federal charters.

Difficulty Level: Medium

Subject Heading: General Banking Legislation

L.O. 3.5

144. The primary purpose of which Act was to aid the savings and loan industry?

a. Garn–St. Germain Depository Institutions Act

b. Glass-Steagall Act

c. Hunt Commission legislation

d. Depository Institutions Deregulation and Monetary Control Act

Difficulty Level: Medium

Subject Heading: General Banking Legislation

L.O. 3.5

145. One of the most significant advantages claimed by branch banking is

a. lower interest rates are usually available from branch bank.

b. convenience for customers.

c. banking operations are easier to regulate.

d. it allows more banks to be chartered.

Difficulty Level: Medium

Subject Heading: Degree of Branch Banking

L.O. 3.6

146. The Bank Holding Company Act of 1956

a. established uniform standards to evaluate the legality of bank holding company acquisitions.

b. allowed bank holding companies to acquire credit card companies.

c. defined a bank holding company as one which owns 25% or more of the voting
shares of each of two or more banks.

d. allowed banks to own corporations.

Difficulty Level: Medium

Subject Heading: Bank Holding Companies

L.O. 3.6

147. Which of the following statements is most correct?

a. FDIC membership is required for all banks having national charter.

b. The First Bank of the United States was the first incorporated bank created along modern banking lines.

c. Secured loans represent the single most important activity of the commercial bank.

d. The FED supervises the FDIC.

Difficulty Level: Hard

Subject Heading: Bank Charters

L.O. 3.6

148. Unit banking means

a. a bank may have only one full-service office.

b. the bank is owned by a unit trust.

c. all branch offices are controlled by a central unit.

d. banks must use the number of deposit units to report their size.

Difficulty Level: Medium

Subject Heading: Degree of Branch Banking

L.O. 3.6

149. Limited branch banking

a. permits banks to located offices within a geographically defined distance
of the main office.

b. is controlled by the Federal Reserve system.

c. means that banks may only engage in certain limited activities.

d. only bank holding companies can open branches.

Difficulty Level: Medium

Subject Heading: Degree of Branch Banking

L.O. 3.6

150. The adequacy of capital for commercial banks as measured by regulatory authorities is

a. a composite of various asset risk categories.

b. a measure of investment success.

c. based on the total amount of deposits of a bank.

d. based on the ratio of federal government obligations to deposits.

Difficulty Level: Medium

Subject Heading: Bank Management

L.O. 3.8

151. Statewide branch banking

a. is prohibited in all 50 states.

b. means that branch systems are less likely to fail than independent systems.

c. permits banks to located within a geographically defined distance of the main office.

d. is allowed in only 7 states.

Difficulty Level: Medium

Subject Heading: Degree of Branch Banking

L.O. 3.6

152. Which of the following statements is false?

a. It is not possible for a bank to invest all of its funds in profitable loans or securities.

b. All states now permit statewide branch banking.

c. Regulation Q established interest rate ceilings on time and savings deposits.

d. The depositors of a bank are creditors and hence have a claim that is superior to that of stockholders in the event of liquidation.

Difficulty Level: Hard

Subject Heading: Degree of Branch Banking

L.O. 3.6

153. The principal liabilities of all depository institutions are

a. reserves.

b. deposits.

c. loans.

d. securities.

Difficulty Level: Easy

Subject Heading: Liabilities and Stockholders’ Equity

L.O. 3.7

154. In general, the effective rate of interest on a discount loan

a. is lower than that on standard loan.

b. is higher than that on a standard loan.

c. is identical to that on a standard loan.

d. is unknown because it’s not disclosed.

Difficulty Level: Medium

Subject Heading: Assets

L.O. 3.7

155. The principal assets of savings banks are

a. securities.

b. vault cash and deposits at other banks.

c. real estate mortgages.

d. deposits.

Difficulty Level: Easy

Subject Heading: Assets

L.O. 3.7

156. Which of the following is not an asset of depository institutions?

a. cash

b. unsecured loans

c. time deposits

d. U.S. government securities

Difficulty Level: Medium

Subject Heading: Assets

L.O. 3.7

157. Savings banks have nearly three quarters of their assets in the form of

a. securities.

b. cash.

c. unsecured loans.

d. real estate mortgages and mortgage-backed securities.

Difficulty Level: Medium

Subject Heading: Assets

L.O. 3.7

158. The principal assets of banks do not include

a. cash.

b. loans.

c. time deposits.

d. securities owned.

Difficulty Level: Medium

Subject Heading: Assets

L.O. 3.7

159. Which of the following would not be part of primary bank capital?

a. bank premises

b. common stock of the bank

c. loan loss reserves

d. perpetual preferred stock

Difficulty Level: Medium

Subject Heading: Assets

L.O. 3.7

160. The item on the liabilities and equity section of a bank’s balance sheet that represents the largest proportion is

a. deposits.

b. owner’s capital.

c. securities.

d. federal funds.

Difficulty Level: Medium

Subject Heading: Assets

L.O. 3.7

161. The item on the assets side of a bank’s balance sheet that represents the largest proportion of bank assets is

a. deposits.

b. owner’s capital.

c. securities.

d. loans.

Difficulty Level: Medium

Subject Heading: Assets

L.O. 3.7

162. The interest rate charged by banks for short-term unsecured loans to their highest quality business customers is referred to as the

a. discount rate.

b. federal fund rate.

c. prime rate.

d. the LIBOR rate.

Difficulty Level: Easy

Subject Heading: Assets

L.O. 3.7

163. Percent annual rate on a standard loan.

a. Interest paid / Amount borrowed x 100

b. Discount amount / (Amount borrowed – Discount amount) x 100

c. Company equity / Total assets x 100

d. Tier 1 capital / Risk-adjusted assets x 100

e. Tier 1 + Tier 2 capital / Risk-adjusted assets x 100

Difficulty Level: Easy

Subject Heading: Equation 3.1

L.O. 3.7

164. Percent annual rate on a discount loan.

a. Interest paid / Amount borrowed x 100

b. Discount amount / (Amount borrowed – Discount amount) x 100

c. Company equity / Total assets x 100

d. Tier 1 capital / Risk-adjusted assets x 100

e. Tier 1 + Tier 2 capital / Risk-adjusted assets x 100

Difficulty Level: Easy

Subject Heading: Equation 3.2

L.O. 3.7

165. Common equity capital ratio.

a. Interest paid / Amount borrowed x 100

b. Discount amount / (Amount borrowed – Discount amount) x 100

c. Company equity / Total assets x 100

d. Tier 1 capital / Risk-adjusted assets x 100

e. Tier 1 + Tier 2 capital / Risk-adjusted assets x 100

Difficulty Level: Easy

Subject Heading: Equation 3.3

L.O. 3.8

166. Tier 1 ratio.

a. Interest paid / Amount borrowed x 100

b. Discount amount / (Amount borrowed – Discount amount) x 100

c. Company equity / Total assets x 100

d. Tier 1 capital / Risk-adjusted assets x 100

e. Tier 1 + Tier 2 capital / Risk-adjusted assets x 100

Difficulty Level: Easy

Subject Heading: Equation 3.4

L.O. 3.8

167. Total capital ratio.

a. Interest paid / Amount borrowed x 100

b. Discount amount / (Amount borrowed – Discount amount) x 100

c. Company equity / Total assets x 100

d. Tier 1 capital / Risk-adjusted assets x 100

e. Tier 1 + Tier 2 capital / Risk-adjusted assets x 100

Difficulty Level: Easy

Subject Heading: Equation 3.5

L.O. 3.8

168. The function of the bank capital of a commercial bank is to

a. meet bank reserve requirements.

b. provide funds for real estate loans.

c. provide a cushion for possible bank losses.

d. support the purchase of bank buildings and equipment.

Difficulty Level: Medium

Subject Heading: Capital Management

L.O. 3.8

169. Primary reserves

a. include the cash assets of the firm under the heading “cash and balances due from depository institutions.

b. are short term securities held by banks that are quickly converted into cash at little cost to the banks.

c. reflects the bank’s ability to meet depositor withdrawals.

d. reflects the bank’s ability to keep the value of a bank’s assets greater than its liabilities.

Difficulty Level: Medium

Subject Heading: Liquidity Management

L.O. 3.8

170. Reasons that banks become insolvent include all of the following except

a. excessive credit risk.

b. interest rate risk.

c. insufficient collateral.

d. continued operating losses.

Difficulty Level: Medium

Subject Heading: Bank Management

L.O. 3.8

171. The likelihood that borrowers are ill and would not be able to make interest and principal payments is an example of

a. interest rate risk.

b. credit risk.

c. liquidity risk.

d. capital adequacy risk.

Difficulty Level: Medium

Subject Heading: Capital Management

L.O. 3.8

172. The Equity Capital Ratio for a bank with owners’ equity of $3 million and total assets of $50 million would be

a. 3 percent.

b. 6 percent.

c. 2.83 percent.

d. 5.66 percent.

$3 / $50 = 0.06

Difficulty Level: Hard

Subject Heading: Equation 3.3

L.O. 3.8

173. Foreign banks in the United States

a. are prohibited in all 50 states.

b. need the approval of the Federal Reserve.

c. are not subject to federal examination.

d. do not need FDIC insurance.

Difficulty Level: Medium

Subject Heading: International Banking and Foreign Systems

L.O. 3.9