COMMERCIAL BANKING EXAM 2
QUESTIONS WITH VERIFIED
ANSWERS
Which of these capital ratios does not adjust for the bank's credit risk. - Answer-Tier
1 leverage ratio
A goal of regulatory capital is to - Answer-absorb losses
provide funds for firms to get started
protect the deposit insurance fund
Match each type of risk with its description. - Answer-Call risk
A bond with a 5% yield is retired early by the issuer when rates fall.
Liquidity risk
A bond needs to be sold quickly, but few buyers can be found.
Inflation risk
A bond's purchasing power erodes over time due to a decline in the purchasing
power of the dollar
Prepayment risk
A mortgage-backed security is paid off early as refinancing surges.
Suppose the price of a tax-free municipal bond and the price of an identical taxable
bond are equal. What will happen in the bond market for these bonds? - Answer-all
these answers are correct
the ultimate adjustments will lead to the bonds having tax-equivalent yields
the yield of the tax-free bond will decrease
the price of the tax-free bond will increase
A bank may use securities investments as "window dressing" by selling securities
with big capital gains in years in which net income is high so that the bank receives
tax credits. - Answer-False
A bank investment portfolio can - Answer-all these answers are correct
be used as collateral for other transactions
provide a source of asset-side liquidity
earn a steady interest income stream, which typically has far less credit risk than the
loan portfolio
A bank is considering selling a three-year bond that it purchased at origination and
held for one year so two years are remaining in the bond's life. All else equal, the
, expected holding period return to the bank will increase as the bond price rises. -
Answer-True
In bond pricing language, a bond's "yield" is the same as its "coupon rate." - Answer-
False
A useful feature of investment securities is that they can be pledged or used as
collateral. For example, a bank can sell them to another bank with the intent to
repurchase them the next day. - Answer-True
Which of these financial instruments are investment securities that banks typically
invest in? - Answer-Municipal bonds
Corporate bonds
Mortgage-backed securities
Treasury bills
Rank these investment maturity strategies from those that have the highest expected
earnings to the lowest. - Answer-Back end load
Ladder
Front-end load
Using a financial calculator or a spreadsheet, calculate the yield to maturity of the
following bond. Express your answer as a percentage rounded to two decimals, and
use no symbols. For example, 0.0425, which is 4.25%, is entered as 4.25.
A 5-year bond with a face value of $10,000 has a semi-annual coupon of 3.5%. The
bond has 4 years remaining, and the current price is $9,929. The ytm is - Answer-
3.69
A cost of using the stored liquidity management strategy is the - Answer-relatively
low interest earned on the liquid assets relative to loans
The liquidity coverage ratio - Answer-must equal or exceed 1
increases when a bank replaces its mortgage-backed securities with U.S. Treasuries
Starting in 2008, cash has gradually become an important component of stored
liqudity at U.S. banks in part because the Fed began paying interest on reserves. -
Answer-True
Which of the following is NOT a potential cause of increased liquidity risk for a DI? -
Answer-A decrease in the DI's stock price caused by normal fluctuations in the stock
market index.
A liquid bank is one that - Answer-can obtain cash quickly at a reasonable cost when
needed
Asset-side liquidity management involves storing liquid assets on the balance sheet
while liability-side liquidity management involves holding significant levels of
common and preferred stock. - Answer-False
QUESTIONS WITH VERIFIED
ANSWERS
Which of these capital ratios does not adjust for the bank's credit risk. - Answer-Tier
1 leverage ratio
A goal of regulatory capital is to - Answer-absorb losses
provide funds for firms to get started
protect the deposit insurance fund
Match each type of risk with its description. - Answer-Call risk
A bond with a 5% yield is retired early by the issuer when rates fall.
Liquidity risk
A bond needs to be sold quickly, but few buyers can be found.
Inflation risk
A bond's purchasing power erodes over time due to a decline in the purchasing
power of the dollar
Prepayment risk
A mortgage-backed security is paid off early as refinancing surges.
Suppose the price of a tax-free municipal bond and the price of an identical taxable
bond are equal. What will happen in the bond market for these bonds? - Answer-all
these answers are correct
the ultimate adjustments will lead to the bonds having tax-equivalent yields
the yield of the tax-free bond will decrease
the price of the tax-free bond will increase
A bank may use securities investments as "window dressing" by selling securities
with big capital gains in years in which net income is high so that the bank receives
tax credits. - Answer-False
A bank investment portfolio can - Answer-all these answers are correct
be used as collateral for other transactions
provide a source of asset-side liquidity
earn a steady interest income stream, which typically has far less credit risk than the
loan portfolio
A bank is considering selling a three-year bond that it purchased at origination and
held for one year so two years are remaining in the bond's life. All else equal, the
, expected holding period return to the bank will increase as the bond price rises. -
Answer-True
In bond pricing language, a bond's "yield" is the same as its "coupon rate." - Answer-
False
A useful feature of investment securities is that they can be pledged or used as
collateral. For example, a bank can sell them to another bank with the intent to
repurchase them the next day. - Answer-True
Which of these financial instruments are investment securities that banks typically
invest in? - Answer-Municipal bonds
Corporate bonds
Mortgage-backed securities
Treasury bills
Rank these investment maturity strategies from those that have the highest expected
earnings to the lowest. - Answer-Back end load
Ladder
Front-end load
Using a financial calculator or a spreadsheet, calculate the yield to maturity of the
following bond. Express your answer as a percentage rounded to two decimals, and
use no symbols. For example, 0.0425, which is 4.25%, is entered as 4.25.
A 5-year bond with a face value of $10,000 has a semi-annual coupon of 3.5%. The
bond has 4 years remaining, and the current price is $9,929. The ytm is - Answer-
3.69
A cost of using the stored liquidity management strategy is the - Answer-relatively
low interest earned on the liquid assets relative to loans
The liquidity coverage ratio - Answer-must equal or exceed 1
increases when a bank replaces its mortgage-backed securities with U.S. Treasuries
Starting in 2008, cash has gradually become an important component of stored
liqudity at U.S. banks in part because the Fed began paying interest on reserves. -
Answer-True
Which of the following is NOT a potential cause of increased liquidity risk for a DI? -
Answer-A decrease in the DI's stock price caused by normal fluctuations in the stock
market index.
A liquid bank is one that - Answer-can obtain cash quickly at a reasonable cost when
needed
Asset-side liquidity management involves storing liquid assets on the balance sheet
while liability-side liquidity management involves holding significant levels of
common and preferred stock. - Answer-False
