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MIDTERM EXAM QUESTIONS

PRINCIPLES OF BANKING - NHA302
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Semester: 1 Academic year: 2022 – 2023 Class code: ML176,182

Form of Exam: Multiple choice
Duration: 50 minutes (excluding paper distribution time)

MULTIPLE CHOICES

There are 30 questions in this part. Give ONE answer only for each question.

1. An FI that invests $100 million into corporate bonds is exposed to the following risks:
A. credit and interest rate risk.
B. liquidity and technology risk.
C. solvency and technology risk.
D. off-balance-sheet and interest rate risk.
E. All options are correct.
2. A decrease in interest rates means that the discount rate on cash flows is:
A. decreased and thus the market value of an FI's assets and liabilities decreases.
B. increased and thus the market value of an FI's assets and liabilities decreases.
C. increased and thus the market value of an FI's assets and liabilities increases.
D. decreased and thus the market value of an FI's assets and liabilities increases.
E. All options are correct.
3. Which of the following are typical off-balance-sheet activities?
A. letters of credit
B. loan commitments
C. forward contracts, swaps and other derivative securities
D. All of the listed options are correct.
E. None of the listed options is correct.
4. Which function of an FI involves buying primary securities and issuing secondary
securities?
A. brokerage
B. asset transformation
C. maturity transformation
D. B and C are correct.
E. None of the listed options is correct.

5. Which of the following is not represented in the CAMELS ratings.

A. Cash adequacy
B. Asset quality
C. Management quality
D. Liquidity
E. Sensitivity to market risk.
6. Bank regulations:
A. can prevent bank failures.
B. can eliminate economic risk for banks.
C. serve as guidelines for sound operating policies.
D. guarantee bankers will make sound management decisions.
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E. guarantee bankers act in an ethical manner.

7. Which of the following is a true statement?
A. The longer the time to maturity of a security, the smaller will be the
duration
B. The lower the coupon rate of a security, the higher the duration
C. For a given duration and change in interest rates, the change in the price
of the security will be larger for a lower starting level of interest rates
D. The duration of a security remains constant no matter the level of
market interest rates
E. All of the options are true statements.
8. A bank has an average asset duration of 5 years and an average liability duration of 9
years. This bank has total assets of $1,000 million and total liabilities of $850 million.
Currently, market interest rates are 5 percent. What will be this bank's leverage-adjusted
duration gap?
A. -4 years
B. 4 years
C. 2.65 years
D. -2.65 years
E. 3.65 years
9. A customer makes a savings deposit for 45 days. During that time he earns $5 in
interest and maintains an average daily balance of $1,000. What is the annual
percentage yield on this savings account?
A. 0.5%
B. 4.13%
C. 4.07%
D. 4.5%
E. None of the options is correct

10. Which of the following statements is/are correct?

A. Higher capital requirements often result in a higher cost of capital for
banks.
B. Small banks have greater access to the equity markets than large banks.
C. Higher capital requirements encourage small banks to consolidate into
larger banks.
D. All of the above are correct.
E. Only a. and c. are correct.
11. A time deposit that allows for a periodic upward adjustment to the promised rate is
called a:
A. negotiable CD.
B. bump-up CD.
C. step-up CD.
D. liquid CD.

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E. None of the options is correct.

12. When a loan is considered uncollectible, the bank's accounting department will write
(charge) it off the books by reducing the ______ and the ______ accounts. Which
choice below correctly fills in the blanks in the preceding sentence?
A. PLL, gross loans
B. ALL, net loans
C. ALL, gross loans
D. PLL, net loans
E. None of the options are correct.
13. Why do banks generally prefer lower capital requirements?
A. To minimize the impact shareholders have on management decisions.
B. To increase the influence of bank regulators.
C. To increase a bank’s return on equity.
D. To increase depositor protection.
E. To maximize operating leverage.
14. A bank has total interest income of $67 million and total noninterest income of $14
million. This bank has total interest expenses of $35 million and total noninterest
expenses (excluding PLL) of $28 million. Its provision for loan losses is $6 million and
its taxes are $5. What is this bank's net income?
A. $7
B. -$14
C. $18
D. $32
E. None of the options are correct.

15. To be considered well-capitalized, a bank's minimum Tier 1 capital, total capital, and
leverage capital must be:
A. 4%, 8%, and 3%, respectively.
B. 8%, 5%, and 3%, respectively.
C. 10%, 10%, and 10%, respectively.
D. 6%, 10%, and 5%, respectively.
E. 3%, 4%, and 8%, respectively.
16. If there is an increase in interest rates over the current planning horizon and the
commercial bank has a negative cumulative gap, the net interest margin
will____________.
A. will increase and manager should do nothing.
B. will increase and manager should extend asset maturities.
C. will be reduced and manager should shorten asset maturities.
D. will be reduced and manager should increase interest-sensitive
liabilities.
E. to diversify their customer base.
17. A bank has total interest income of $67 million and total noninterest income of $14
million. This bank has total interest expenses of $35 million and total noninterest

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expenses (excluding PLL) of $28 million. Its provision for loan losses is $6 million and
its taxes are $5. What is this bank's net interest income?
A. $7
B. -$14
C. $18
D. $32
E. None of the options are correct.
18. The D2K Bank has an ROE of 17.5%, an asset utilization ratio of 13%, and a net profit
margin of 9%. What is the bank's ROA approximately?
A. 14.9%
B. 1.58%.
C. 1.17%.
D. 134.62%.
E. None of the options is correct.
19. A bank has an average asset duration of 5 years and an average liability duration of
3 years. This bank has total assets of $500 million and total liabilities of $250 million.
Currently, market interest rates are 10 percent. If interest rates fall by 2 percent (to 8
percent), what is this bank's change in net worth?. What is duration of these bonds?
A. Net worth will decrease by $31.81 million.
B. Net worth will increase by $31.81 million
C. Net worth will decrease by $27.27 million.
D. Net worth will increase by $27.27 million
E. None of the options is correct.
20. You have discovered that the price of a bond rose from $975 to $995 when the yield to
maturity fell from 9.75 percent to 9.25 percent. What is the duration of the bond$100
million in new money if it pays a deposit rate of 8.5%?
A. 4 years
B. 4.5 years
C. 4.89 years
D. 5.3 years
E. None of the options is correct
21. The Tidewater State Bank has $1,000 in total assets (all of which are earning assets),
$700 of which will be repriced within the next 90 days. This bank also has $800 in total
liabilities, $400 of which will be repriced within the next 90 days. Currently, the bank is
earning 8 percent on its assets and is paying 5 percent on its liabilities.
What is the dollar interest-sensitive gap of this bank?
A. -$200
B. -$100
C. $200
D. $300
E. $600
22. The view that depositors hire banks to analyze the financial condition of prospective
borrowers and continually evaluate the condition of outstanding loans is referred to as:
A. the concept of financial intermediation.

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B. the specialness of banking.

C. market imperfection theory.
D. delegated monitoring.
E. the economics of scale.
23. Which of the following is not a current trend in the banking industry?
A. The number of banks is declining
B. The number of bank branches is declining
C. The number of bank services is increasing
D. The number of bank competitors is increasing
E. Bank industry convergence
24. Wholesale banks are those banks that:
A. provide all kinds of financial services
B. serve corporations and government.
C. have only retail customers.
D. only make loans to the wholesale industry.
E. sell at a discount relative to all commercial banks.
25. Which of the following is an adequate definition of an asset transformer?
A. A corporation that issues financial claims that are more attractive to
household savers than the claims issued by other corporations.
B. An FI that issues financial claims that are more attractive to household savers
than the claims issued by other FIs.
C. A corporation that issues financial claims that are more attractive to household
savers than the claims directly issued by FIs.
D. An FI that issues financial claims that are more attractive to household savers
than the claims directly issued by corporations.
E. none of above is correct.
26. Which of the following statements is true?
A. Household savers are likely to be attracted to direct investments in corporate
securities because of lower monitoring costs compared to using financial
intermediaries.
B. Household savers are likely to be attracted to direct investments in corporate
securities because of lower liquidity costs compared to using financial
intermediaries.
C. Household savers are likely to be attracted to direct investments in corporate
securities because of lower price risk compared to using financial intermediaries.
D. All of the listed option are correct
E. None of the listed options are correct
27. Which of the following statements is true?
A. An off-balance-sheet item is recorded on the balance sheet of a financial
institution when the annual report is being prepared.
B. An off-balance-sheet liability is an item that moves onto the liability side of the
balance sheet when a contingent event occurs.
C. An off-balance-sheet asset is an item that moves onto the asset side of the balance
sheet when a contingent event occurs or at the end of a financial period.

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D. All of the listed options are correct.

E. None of the listed options are correct
28. Which of the following statements is true?
A. The net interest margin is a profitability indicator and is measured as net income
divided by earning assets.
B. The net interest margin is a profitability indicator and is measured by interest
income minus interest expense, divided by earning assets.
C. The net interest margin is a profitability indicator and is measured by interest
income plus interest expense, divided by earning assets.
D. The net interest margin is a profitability indicator and is measured as interest
income minus non-interest income divided by total assets.
E. None of the listed options are correct.
29. Which of the following statements is true?
A. Credit unions are mutual cooperative organisations.
B. Credit unions provide deposit facilities, personal and housing loans and payments
services to their members.
C. In case of credit unions the depositors are also members of the society.
D. Credit unions are mutual cooperative organisations that provide deposit facilities,
personal and housing loans and payments services to their members.
E. None of the listed options are correct.
30. An example of refinancing risk is a case in which an FI:
A. funds 2-year maturity assets with 1-year maturity liabilities.
B. funds 1-year maturity assets with 2-year maturity liabilities.
C. funds 2-year maturity assets with 2-year maturity liabilities
D. All of the listed options are correct.
E. None of the listed options are correct.