FICEP CUNA UPDATED TEST PAPER QUESTIONS AND
SOLUTIONS GUARANTEE A+
✔✔What must grow at the same speed - ✔✔Assets and Capital
✔✔Definition of ROE (return on equity) - ✔✔Sustainable asset growth rate
✔✔Definition of liquidity Risk - ✔✔Maintaining an adequate availability of funds (for loan
demand, deposit flows and expense payments in a changing interest rate environment
✔✔What should you do if you expect interest rates to decrease in the future -
✔✔Originate more fixed rate loans (consumer and syndicated) more long term
investments (series B Munis, 5 Year treasuries) and issue more short term liabilities ( 3
month CD's). This will lead to more liabilities repricing than assets -This is called
"negative GAP"
✔✔What should you do if you expect interest rates to increase in the future -
✔✔Originate more adjustable-rate loans (commercial loans, ARMS) today an. T Bills)
Issue more fixed rate liabilities (1 yr CDs) this will lead to more assets repricing than
liabilities or what is known as "positive GAP"
✔✔Definition of Positive GAP - ✔✔More assets repricing than liabilities
✔✔Definition of Negative GAP - ✔✔more liabilities repricing than assets
✔✔What ratio measures how efficiently deposits are turned into loans - ✔✔Loan to
share ratio
✔✔What can cause loan loss reserves to grow - ✔✔Increase in loan balances,
loosening underwriting, shift to riskier loans and recessionary economy
✔✔what does the operational efficiency ratio measure - ✔✔Productivity, efficiency and
economics of scale
✔✔What will increase profit margin - ✔✔operational efficiency
✔✔What is effective cost of funds - ✔✔difference between avg yield from interest
obtained from loans and the avg rate of interest paid for deposits and other funds (cost
of funds) This is called Net interest spread or net interest margin)
✔✔Definition of credit risk - ✔✔The danger that a borrower will simply fail to meet
interest payments or repay debt
, ✔✔What is the credit union Economic model - ✔✔Maximize profit subject to financial
constraints
✔✔What do members vote with - ✔✔Their feet and dollars
✔✔In order for Credit unions to operate in a prudent manner they must: - ✔✔maintain
sufficient capital relative to assets
✔✔Rising asset growth over a long period is a sign of? - ✔✔high quality member
service
✔✔What do CU's build capital with - ✔✔Net Income
✔✔What is leverage - ✔✔measure for insolvency (assets to equity)
✔✔What is profit Margin - ✔✔measure for Efficiency (net income to gross revenue)
✔✔Asset Utilization is a measure for what - ✔✔the degree of risk taking-(credit risk,
interest risk and liquidity risk) or how hard each asset dollar is working to generate
revenue)
✔✔gross revenue is divided in to what 4 categories - ✔✔operating expenses, provision
for loan loss, interest expense and income
✔✔Definitions of endogenous - ✔✔internal factors that can be controlled
✔✔definition of exogenous - ✔✔external factors that cannot be controlled
✔✔What is the ratio composition for Profit Margin - ✔✔R/GR
✔✔What is the ratio composition for Return on Equity - ✔✔R/E
✔✔What should every business decision do - ✔✔evaluate the relevant additional cost
and additional benefits
✔✔What is the virtuous cycle of banking - ✔✔faster asset growth, economies of scale,
higher profit margin, higher return on assets, higher return on equity (self reinforcing
spiral, feedback loop)
✔✔What does the "Valve" stand for in the tub analogy - ✔✔provision for loan loss
✔✔What is in the tub in the tub analogy - ✔✔allowance for loan losses
✔✔What is the drain stand for in the tub analogy - ✔✔charge offs
SOLUTIONS GUARANTEE A+
✔✔What must grow at the same speed - ✔✔Assets and Capital
✔✔Definition of ROE (return on equity) - ✔✔Sustainable asset growth rate
✔✔Definition of liquidity Risk - ✔✔Maintaining an adequate availability of funds (for loan
demand, deposit flows and expense payments in a changing interest rate environment
✔✔What should you do if you expect interest rates to decrease in the future -
✔✔Originate more fixed rate loans (consumer and syndicated) more long term
investments (series B Munis, 5 Year treasuries) and issue more short term liabilities ( 3
month CD's). This will lead to more liabilities repricing than assets -This is called
"negative GAP"
✔✔What should you do if you expect interest rates to increase in the future -
✔✔Originate more adjustable-rate loans (commercial loans, ARMS) today an. T Bills)
Issue more fixed rate liabilities (1 yr CDs) this will lead to more assets repricing than
liabilities or what is known as "positive GAP"
✔✔Definition of Positive GAP - ✔✔More assets repricing than liabilities
✔✔Definition of Negative GAP - ✔✔more liabilities repricing than assets
✔✔What ratio measures how efficiently deposits are turned into loans - ✔✔Loan to
share ratio
✔✔What can cause loan loss reserves to grow - ✔✔Increase in loan balances,
loosening underwriting, shift to riskier loans and recessionary economy
✔✔what does the operational efficiency ratio measure - ✔✔Productivity, efficiency and
economics of scale
✔✔What will increase profit margin - ✔✔operational efficiency
✔✔What is effective cost of funds - ✔✔difference between avg yield from interest
obtained from loans and the avg rate of interest paid for deposits and other funds (cost
of funds) This is called Net interest spread or net interest margin)
✔✔Definition of credit risk - ✔✔The danger that a borrower will simply fail to meet
interest payments or repay debt
, ✔✔What is the credit union Economic model - ✔✔Maximize profit subject to financial
constraints
✔✔What do members vote with - ✔✔Their feet and dollars
✔✔In order for Credit unions to operate in a prudent manner they must: - ✔✔maintain
sufficient capital relative to assets
✔✔Rising asset growth over a long period is a sign of? - ✔✔high quality member
service
✔✔What do CU's build capital with - ✔✔Net Income
✔✔What is leverage - ✔✔measure for insolvency (assets to equity)
✔✔What is profit Margin - ✔✔measure for Efficiency (net income to gross revenue)
✔✔Asset Utilization is a measure for what - ✔✔the degree of risk taking-(credit risk,
interest risk and liquidity risk) or how hard each asset dollar is working to generate
revenue)
✔✔gross revenue is divided in to what 4 categories - ✔✔operating expenses, provision
for loan loss, interest expense and income
✔✔Definitions of endogenous - ✔✔internal factors that can be controlled
✔✔definition of exogenous - ✔✔external factors that cannot be controlled
✔✔What is the ratio composition for Profit Margin - ✔✔R/GR
✔✔What is the ratio composition for Return on Equity - ✔✔R/E
✔✔What should every business decision do - ✔✔evaluate the relevant additional cost
and additional benefits
✔✔What is the virtuous cycle of banking - ✔✔faster asset growth, economies of scale,
higher profit margin, higher return on assets, higher return on equity (self reinforcing
spiral, feedback loop)
✔✔What does the "Valve" stand for in the tub analogy - ✔✔provision for loan loss
✔✔What is in the tub in the tub analogy - ✔✔allowance for loan losses
✔✔What is the drain stand for in the tub analogy - ✔✔charge offs
