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MANAGEMENT OF COMMERCIAL BANKING

Assignment- Week 0
TYPE OF QUESTION: MCQ/MSQ
Number of questions: 20 Total mark: 20 X 1 = 20
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QUESTION 1:
The real rate of interest required by investors is 3% p.a., inflation for the next year is expected to
be 4% and the liquidity premium is 1% for every year to maturity. If the rate quoted on a two
year loan is 11%, the risk premium must be:

a. 7%
b. 9%
c. 4%
d. 3%
Correct Answer: d. 3%
Detailed Solution:
Quoted nominal return = r = r* + IP + DRP + MRP + LP
where, r = the quoted, or nominal rate on a given security
r* = real risk-free rate
IP = inflation premium (the average of expected future inflation rates)
DRP = default risk premium
MRP = maturity risk premium
LP = liquidity premium
QUESTION 2:
The reason that finding the present value of a future sum of money requires us to discount it, is
that:
a. We can’t be certain of receiving it
b. Waiting deprives us of its use
c. Inflation will reduce its purchasing power
d. Waiting involves risk
Correct Answer: b. Waiting deprives us of its use
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Detailed Solution:
The time value of money is a basic financial concept that holds that money in the present is
worth more than the same sum of money to be received in the future. This is true because money
that you have right now can be invested and earn a return, thus creating a larger amount of
money in the future.
QUESTION 3:
CRR refers to:
a. Credit Reserve Ratio
b. Cash Reserve Ratio
c. Credit Reserve Requirement
d. Common Reserve Ratio
Correct Answer: b. Cash Reserve Ratio
Detailed Solution:
CRR refers to Cash Reserve Ratio
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QUESTION 4:
SLR refers to:
a. Statutory Liquidity Ratio
b. Stability Liquidity Ratio
c. Safety Liquidity Ratio
d. Small Loan Ratio
Correct Answer: a. Statutory Liquidity Ratio
Detailed Solution:
SLR refers to Statutory Liquidity Ratio
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QUESTION 5:
X1=10, X2=14, X3=18, X4=12, and X5=11

The sample standard deviation is closest to:

a. 10.00
b. 8.00
c. 3.16
d. 2.82
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Correct Answer: c. 3.16

Detailed Solution:

X1=10, X2=14, X3=18, X4=12, and X5=11

Mean =13

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QUESTION 6:
________________ is a credit facility granted by commercial banks to current account holders
a. Cash credit
b. Discounting of bills of exchange
c. Overdraft
d. Demand loans
Correct Answer: c. Overdraft
Detailed Solution:
An overdraft facility is a credit agreement made with a bank that allows an account holder to use
or withdraw more money than what they have in their account up to the approved limit.
QUESTION 7:
A saver who is capital-risk averse is worried that interest rates in the economy might:
a. rise.
b. remain unchanged.
c. fall.
d. fall and later rise.
Correct Answer: a. rise.

Detailed Solution:
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The term risk-averse refers to investors who, when faced with two investments with a similar
expected return, prefer the lower-risk option. Risk-averse can be contrasted with risk seeking.

QUESTION 8:
The benchmark stock market index of India is ________
a. Dow Jones
b. Nikkei 225
c. S&P 500
d. Nifty

Correct Answer: d. Nifty

Detailed Solution:

The NIFTY 50 index National Stock Exchange of India's benchmark broad based stock market
index for the Indian equity market. Full form of NIFTY is National Stock Exchange Fifty.

QUESTION 9:
Commercial banks are said to create money through:
a. Printing of Money
b. CRR
c. SLR
d. Bank Rate
Correct Answer: b. CRR
Detailed Solution:
Banks are said to create money through the money multiplier. The ratio of new deposits to the
original increase in reserves is called the money multi-plier or credit multiplier or deposit
multiplier. This multiplier will be equal to the reciprocal of the required cash reserve ratio
(1/CRR). Higher the CRR, lesser the banks can lend as loans and lower is the money multiplier.

QUESTION 10:
Which of the following statements are NOT true about commercial banks?

a. Their objective is to make profits

b. They manage exchange rates
c. They provide online banking facility
d. Banks invest in the capital market
Correct Answer: b. They manage exchange rates
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Detailed Solution:
Commercial banks deal with foreign exchange. As per the requirement of customers, banks
exchange foreign currencies with local currencies. However, it is the function of the RBI to
maintain the external value of the rupee. It pursues this objective through its domestic policies
and the regulation of the foreign exchange market. The RBI chooses the exchange rate system
and fixes or manages the exchange rate between rupee and the other currencies.
QUESTION 11:
The overall increase in price level is called Inflation
a. True
b. False
Correct Answer: a.True
Detailed Solution:
Rise in prices per se should not be considered as inflation. Inflation is a persistent and
appreciable rise in the general level or average prices
QUESTION 12:
The largest commercial bank in the country is ________.

a. HDFC Bank
b. Central Bank of India
c. State Bank of India
d. Reserve Bank of India
Correct Answer: c. State Bank of India

Detailed Solution:

SBI is India’s largest public sector bank and is ranked 232nd on the Fortune Global 500 list of
the world’s biggest corporations. The bank is also the country’s biggest lender.

QUESTION 13:
The RBI started functioning from:

a. April 1, 1935 on the terms of the Reserve Bank of India Act, 1935
b. April 12, 1934 on the terms of the Reserve Bank of India Act, 1934
c. April 1, 1935 on the terms of the Reserve Bank of India Act, 1934
d. April 12, 1935 on the terms of the Reserve Bank of India Act, 1934
Correct Answer: c. April 1, 1935 on the terms of the Reserve Bank of India Act, 1934

Detailed Solution:
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RBI started functioning from April 1, 1935 on the terms of the Reserve Bank of India Act, 1934

QUESTION 14:
Which of the following banks require meeting targets in respect of sectoral deployment of credit,
regional distribution of branches and regional credit-deposit ratios?
a. Private Sector banks
b. Public Sector banks
c. Foreign banks
d. All of the above

Correct Answer: d. All of the above

Detailed Solution:
Not only the public sector, but also the private sector and foreign banks are required to meet
targets in respect of sectoral deployment of credit, regional distribution of branches and regional
credit-deposit ratios.
QUESTION 15:
How many BASEL accords have been introduced as of now?
a. 1
b. 2
c. 3
d. 4
Correct Answer: c. 3
Detailed Solution:
There are three BASEL accords: I II and III
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QUESTION 16:
The market value of an asset is the value that a rational investor with full knowledge about the
asset’s characteristics would be willing to pay.

a. True
b. False

Correct Answer: b. False

Detailed Solution:
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The market value of an asset is its current price while the intrinsic value or fundamental value of
an asset is the value that a rational investor with full knowledge about the asset’s characteristics
would be willing to pay. In highly efficient markets, market value reflects the intrinsic value. If
markets are not completely efficient, active managers will buy assets for which they think
intrinsic value>market value and sell assets for which they think intrinsic value > market value.

QUESTION 17:
Which of the following is a scheduled bank?

a. Co-operative Banks
b. Private Sector Banks
c. Public Sector Banks
d. All of the above

Correct Answer: d. All of the above

Detailed Solution:

Scheduled Banks in India refer to those banks which have been included in the Second Schedule
of Reserve Bank of India Act, 1934. RBI in turn includes only those banks in this Schedule
which satisfy the criteria laid down vide section 42(6)(a) of the said Act. Banks not under this
Schedule are called Non-Scheduled Banks. Every Scheduled bank enjoys two types of principal
facilities: it becomes eligible for debts/loans at the bank rate from the RBI; and, it automatically
acquires the membership of clearing house. The Scheduled banks comprise Scheduled
Commercial Banks and Scheduled Co-operative banks.

QUESTION 18:
________ account is maintained by businesses for their daily operations
a. Fixed Deposit
b. Current
c. Recurring Deposit
d. Savings

Correct Answer: b. Current

Detailed Solution:
A savings account is a deposit account which allows limited transactions, while a Current
Account is meant for daily transactions. A savings account is most suitable for people who are
salaried employees or have a monthly income, whereas, Current Accounts work best for traders
and entrepreneurs who need to access their accounts frequently. Both FD and RD are fixed
income investments.
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QUESTION 19:
Risk management is a process by which managers identify, assess, monitor, and transforms risk
associated with a financial institution’s activities

a. True

b. False

Correct Answer: b. False

Detailed Solution:

Risk management is a process by which managers identify, assess, monitor, and control risk
associated with a financial institution’s activities

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QUESTION 20:
The primary function of money is
a. Medium of exchange function.
b. Store of value function.
c. Savings function
d. Unit of account function.

Correct Answer: a. Medium of exchange function.

Detailed Solution:

Static Functions of Money

A medium of Exchange – In an exchange economy, money plays an intermediary role. It makes

the exchange system smooth and convenient.

A measure of Value – The value of a product or service is determined on the basis of the money
needed for its possession. This helps in making the exchange a mutually profitable activity.

The Standard of Deferred Payments – Money plays an important role in lending and borrowing.
Money is taken as a loan and repaid after a time-gap.

Store of Value – You can store the purchasing power of money and keep a part of it for future
use – monetary savings. You can use your current income for current consumption as well as
future consumption through savings.
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