PRINCIPLES OF BANKING CORE REVIEW ANSWERS
AND QUESTIONS SET A+
✔✔What are Treasury Inflation Protected Securities (TIPS)? - ✔✔They have 5- 10- and
30-year maturities and protect investors against inflation because the principal
increases with the CPI. When these mature, the investor is paid the inflation-adjusted
principal or the original principal, whichever is greater.
✔✔What kinds of government agencies issue mortgage-backed agency securities? -
✔✔Ginnie Mae, Fannie Mae, and Freddie Mac
✔✔What kinds of government agencies issue nonmortgage-back agency securities? -
✔✔The Export-Import Bank
✔✔What are banker's acceptances? - ✔✔They are drafts or bills of exchange that
banks accept as liabilities by pledging their credit on behalf of customers.
✔✔What are negotiable certificates of deposit? - ✔✔They can be sold before maturity
and have a $100K minimum denomination. The rate may be negotiated with depositors.
✔✔What is commercial paper? - ✔✔They are short-term, unsecured obligations of
large, financially sound corporations, both foreign and domestic. There is no collateral
except the firm's good reputation
✔✔What is a certified public accountant? - ✔✔An accountant licensed to practice public
accounting. They are normally used to audit banks and other companies
✔✔What is the most important organization involved in developing the Generally
Accepted Accounting Principles (GAAP)? - ✔✔The Financial Accounting Standards
Board (FASB)
✔✔What is an annual report? - ✔✔This is management's summation of the bank's
achievements over the course of the year. Includes information about the bank's
financial position and business performance.
, ✔✔What are the four main components of an annual report? - ✔✔1. Promotional
information: promotes the company to investors using photographs of the bank at work,
reports of employee contributions and achievements, and nonfinancial statistics
2. Analysis: discusses management's business strategies and how they played out in
the previous year
3. Financial statement: sets out the numbers that reflect performance, such as the
income statement
4. Audit report: a written statement by outside accountants attesting to the integrity of
the financial reports provided
✔✔Why are shareholders and investors interested in a bank's financial data? - ✔✔The
information can have an immediate effect on stock value
✔✔What is a ratio analysis? - ✔✔A technique for analyzing a financial statement that
examines the relationships between certain values reported in the statement
✔✔What is the statement of cash flows? - ✔✔This illustrates a bank's sources and uses
of cash over a period of times. Details the bank's financing, investing, and operating
activities.
✔✔What is a peer group? - ✔✔In banking, a statistical grouping of similar
characteristics, such as asset size. Each bank is compared to other banks in the group
✔✔What is the formula for return on assets (ROA) and what does it mean? - ✔✔ROA =
Net profit / total assets x 100
Return on assets measures how well a bank uses assets to produce income
✔✔What is the formula for return on equity (ROE) and what does it mean? - ✔✔ROE =
Net profit / total equity x 100
Return on equity measures the rate of return achieved relative to funds invested
✔✔What is the formula for capital ratio and what does it mean? - ✔✔Capital ratio =
Capital / assets x 100
Measures bank stability and strength; the capital account absorbs losses not covered by
current earnings and loan loss reserves
✔✔What is the formula for net interest income and what does it mean? - ✔✔Net interest
income = interest earned - interest paid
Defines the difference between interest earned on loans and interest paid on deposits;
the higher the amount, the greater the profit if other expenses are constant
AND QUESTIONS SET A+
✔✔What are Treasury Inflation Protected Securities (TIPS)? - ✔✔They have 5- 10- and
30-year maturities and protect investors against inflation because the principal
increases with the CPI. When these mature, the investor is paid the inflation-adjusted
principal or the original principal, whichever is greater.
✔✔What kinds of government agencies issue mortgage-backed agency securities? -
✔✔Ginnie Mae, Fannie Mae, and Freddie Mac
✔✔What kinds of government agencies issue nonmortgage-back agency securities? -
✔✔The Export-Import Bank
✔✔What are banker's acceptances? - ✔✔They are drafts or bills of exchange that
banks accept as liabilities by pledging their credit on behalf of customers.
✔✔What are negotiable certificates of deposit? - ✔✔They can be sold before maturity
and have a $100K minimum denomination. The rate may be negotiated with depositors.
✔✔What is commercial paper? - ✔✔They are short-term, unsecured obligations of
large, financially sound corporations, both foreign and domestic. There is no collateral
except the firm's good reputation
✔✔What is a certified public accountant? - ✔✔An accountant licensed to practice public
accounting. They are normally used to audit banks and other companies
✔✔What is the most important organization involved in developing the Generally
Accepted Accounting Principles (GAAP)? - ✔✔The Financial Accounting Standards
Board (FASB)
✔✔What is an annual report? - ✔✔This is management's summation of the bank's
achievements over the course of the year. Includes information about the bank's
financial position and business performance.
, ✔✔What are the four main components of an annual report? - ✔✔1. Promotional
information: promotes the company to investors using photographs of the bank at work,
reports of employee contributions and achievements, and nonfinancial statistics
2. Analysis: discusses management's business strategies and how they played out in
the previous year
3. Financial statement: sets out the numbers that reflect performance, such as the
income statement
4. Audit report: a written statement by outside accountants attesting to the integrity of
the financial reports provided
✔✔Why are shareholders and investors interested in a bank's financial data? - ✔✔The
information can have an immediate effect on stock value
✔✔What is a ratio analysis? - ✔✔A technique for analyzing a financial statement that
examines the relationships between certain values reported in the statement
✔✔What is the statement of cash flows? - ✔✔This illustrates a bank's sources and uses
of cash over a period of times. Details the bank's financing, investing, and operating
activities.
✔✔What is a peer group? - ✔✔In banking, a statistical grouping of similar
characteristics, such as asset size. Each bank is compared to other banks in the group
✔✔What is the formula for return on assets (ROA) and what does it mean? - ✔✔ROA =
Net profit / total assets x 100
Return on assets measures how well a bank uses assets to produce income
✔✔What is the formula for return on equity (ROE) and what does it mean? - ✔✔ROE =
Net profit / total equity x 100
Return on equity measures the rate of return achieved relative to funds invested
✔✔What is the formula for capital ratio and what does it mean? - ✔✔Capital ratio =
Capital / assets x 100
Measures bank stability and strength; the capital account absorbs losses not covered by
current earnings and loan loss reserves
✔✔What is the formula for net interest income and what does it mean? - ✔✔Net interest
income = interest earned - interest paid
Defines the difference between interest earned on loans and interest paid on deposits;
the higher the amount, the greater the profit if other expenses are constant
