FIN 325 Banking Management Exam
Practice Questions And Correct Answers
(Verified Answers) Plus Rationales 2027
Q&A | Instant Download Pdf
1. What is the primary function of a commercial bank?
A. Manufacture consumer goods
B. Accept deposits and provide loans
C. Regulate the stock market
D. Set government tax rates
Answer: B. Accept deposits and provide loans
Rationale: Commercial banks primarily mobilize funds through deposits
and allocate those funds through lending and other financial services.
2. Which of the following is generally considered a bank's most liquid
asset?
A. Long-term mortgage loans
,B. Commercial real estate
C. Cash and balances due from banks
D. Equity securities
Answer: C. Cash and balances due from banks
Rationale: Cash and correspondent-bank balances can be used
immediately to meet withdrawals and other payment obligations.
3. What is liquidity risk?
A. The risk that borrowers will default
B. The risk that a bank cannot meet obligations when due
C. The risk of changes in tax rates
D. The risk of employee turnover
Answer: B. The risk that a bank cannot meet obligations when due
Rationale: Liquidity risk occurs when a financial institution cannot obtain
sufficient cash to meet expected or unexpected obligations without
unacceptable losses.
4. Which banking activity generally creates credit risk?
A. Making loans
B. Maintaining cash
,C. Paying utility bills
D. Printing account statements
Answer: A. Making loans
Rationale: Lending exposes a bank to the possibility that a borrower will
fail to repay principal or interest as agreed.
5. What is the main purpose of bank capital?
A. Eliminate all operating expenses
B. Absorb losses and protect depositors
C. Guarantee profits
D. Replace customer deposits
Answer: B. Absorb losses and protect depositors
Rationale: Capital provides a financial cushion that allows a bank to
absorb losses while continuing operations and protecting creditors and
depositors.
6. Which of the following is a liability on a commercial bank's balance
sheet?
A. Cash
B. Loans
, C. Securities
D. Customer deposits
Answer: D. Customer deposits
Rationale: Deposits represent amounts owed by the bank to its customers
and are therefore recorded as liabilities.
7. A bank's loans to customers are normally classified as:
A. Assets
B. Liabilities
C. Expenses
D. Equity distributions
Answer: A. Assets
Rationale: Loans represent claims against borrowers and are therefore
assets that generate interest income for the bank.
8. Which deposit typically permits customers to write checks?
A. Time deposit
B. Demand deposit
C. Certificate of deposit only
D. Restricted deposit
Practice Questions And Correct Answers
(Verified Answers) Plus Rationales 2027
Q&A | Instant Download Pdf
1. What is the primary function of a commercial bank?
A. Manufacture consumer goods
B. Accept deposits and provide loans
C. Regulate the stock market
D. Set government tax rates
Answer: B. Accept deposits and provide loans
Rationale: Commercial banks primarily mobilize funds through deposits
and allocate those funds through lending and other financial services.
2. Which of the following is generally considered a bank's most liquid
asset?
A. Long-term mortgage loans
,B. Commercial real estate
C. Cash and balances due from banks
D. Equity securities
Answer: C. Cash and balances due from banks
Rationale: Cash and correspondent-bank balances can be used
immediately to meet withdrawals and other payment obligations.
3. What is liquidity risk?
A. The risk that borrowers will default
B. The risk that a bank cannot meet obligations when due
C. The risk of changes in tax rates
D. The risk of employee turnover
Answer: B. The risk that a bank cannot meet obligations when due
Rationale: Liquidity risk occurs when a financial institution cannot obtain
sufficient cash to meet expected or unexpected obligations without
unacceptable losses.
4. Which banking activity generally creates credit risk?
A. Making loans
B. Maintaining cash
,C. Paying utility bills
D. Printing account statements
Answer: A. Making loans
Rationale: Lending exposes a bank to the possibility that a borrower will
fail to repay principal or interest as agreed.
5. What is the main purpose of bank capital?
A. Eliminate all operating expenses
B. Absorb losses and protect depositors
C. Guarantee profits
D. Replace customer deposits
Answer: B. Absorb losses and protect depositors
Rationale: Capital provides a financial cushion that allows a bank to
absorb losses while continuing operations and protecting creditors and
depositors.
6. Which of the following is a liability on a commercial bank's balance
sheet?
A. Cash
B. Loans
, C. Securities
D. Customer deposits
Answer: D. Customer deposits
Rationale: Deposits represent amounts owed by the bank to its customers
and are therefore recorded as liabilities.
7. A bank's loans to customers are normally classified as:
A. Assets
B. Liabilities
C. Expenses
D. Equity distributions
Answer: A. Assets
Rationale: Loans represent claims against borrowers and are therefore
assets that generate interest income for the bank.
8. Which deposit typically permits customers to write checks?
A. Time deposit
B. Demand deposit
C. Certificate of deposit only
D. Restricted deposit
