FIN 408 Exam 1 Study Guide questions and
answers 2025\2026 A+ Grade
Define the "maturity" of a bank asset or liability
- correct answer Time before asset or liability expires; time it takes for an asset or liability to be
"repriced" at a new interest rates
How do banks tend to structure the maturities of their assets and liabilities (relative to each other)?
- correct answer Banks tend to hold longer maturity assets and short maturity liabilities. Yield curve
(generally upward sloping) makes this a generally profitable strategy. Structure this way due to
customer demand
How does your answer to "b" differ for a non-bank firm?
- correct answer Match maturities because they are not in the business of assuming i-rate risk (risk is
that interest rates go up and bonds are repriced at higher rates
Which is more profitable, on average, how banks structure the relative maturities of their assets and
liabilities, or how non-bank firms structure the relative maturities of their assets and liabilities? Why?
- correct answer Banks tend to hold longer maturity assets and short maturity liabilities. Yield curve
(generally upward sloping) makes this a generally profitable strategy. Structure this way due to
customer demand
Explain why relatively low levels of equity affect risk-taking incentives for a bank?
- correct answer Low levels of equity make managers more risk loving because there is less to lose for
shareholders on the downside. Shareholders can only lose as much equity as there is. Any remaining
downside losses are borne by: uninsured debt holders assuming no preferred stock (#1), government
deposit insurance fund (#2), taxpayers if deposit fund is bankrupt (#3)
How do low levels of equity (compared to debt) affect equity returns?
- correct answer Low levels of equity increase equity returns; shows up in stock beta, and ROE
Why do banks have lower levels of equity compared to non-bank firms?
- correct answer TBTF—cost of uninsured debt lower
, Deposit insurance lowers cost of capital and makes cost of capital insensitive to asset risk
Who pays for bank deposit insurance? Why is it often said the bank deposits are "government" insured?
- correct answer Banks. If fund runs out taxpayer dollars are used to bail banks out
4) What problems can banks have in complying with the "Community Reinvestment Act"? (Recall, the
CRA requires banks lend a proportion of their deposits in the communities where their branches are
located.)
- correct answer Might not want to lend in certain areas because of high risk profiles: risks are
decreasing property values and general default risk due to high risk borrowers. Demand for loans may
be lacking
What is the primary asset of the unconsolidated balance sheet of a bank holding company?
- correct answer Common stock- shares of stock in subsidiaries
What bank assets and/or liabilities currently or historically have (had) prices that are subject to
regulatory limits? What is (or was) the reason for these pricing limits?
- correct answer Asset- loans, usury laws (current) - to avoid excessive interest (protect the stupid
people from themselves)
Deposits - specifically savings and checking deposits (currently no limit - used to limit, reg Q, to limit
competition among banks. With less competition comes more profitability
Why has the regulatory definition of a "bank" been generalized, over time? Why?
- correct answer To eliminate loopholes that firms could find to use for regulatory arbitrage and avoiding
regulation
Bank-any institution that could qualify for deposit insurance
Why do banks have more difficulty balancing their sources and uses of funds than non-bank firms?
- correct answer Customers from both sides of the balance sheet, in marketing products from both sides
they have difficulty predicting their new sources and uses of funds
A banks uses of funds exceeds its sources of funds. What is one quick way to remedy this imbalance?
- correct answer Purchase liabilities such as CDs from other banks
Borrow from the Fed (as lender of last resort)
answers 2025\2026 A+ Grade
Define the "maturity" of a bank asset or liability
- correct answer Time before asset or liability expires; time it takes for an asset or liability to be
"repriced" at a new interest rates
How do banks tend to structure the maturities of their assets and liabilities (relative to each other)?
- correct answer Banks tend to hold longer maturity assets and short maturity liabilities. Yield curve
(generally upward sloping) makes this a generally profitable strategy. Structure this way due to
customer demand
How does your answer to "b" differ for a non-bank firm?
- correct answer Match maturities because they are not in the business of assuming i-rate risk (risk is
that interest rates go up and bonds are repriced at higher rates
Which is more profitable, on average, how banks structure the relative maturities of their assets and
liabilities, or how non-bank firms structure the relative maturities of their assets and liabilities? Why?
- correct answer Banks tend to hold longer maturity assets and short maturity liabilities. Yield curve
(generally upward sloping) makes this a generally profitable strategy. Structure this way due to
customer demand
Explain why relatively low levels of equity affect risk-taking incentives for a bank?
- correct answer Low levels of equity make managers more risk loving because there is less to lose for
shareholders on the downside. Shareholders can only lose as much equity as there is. Any remaining
downside losses are borne by: uninsured debt holders assuming no preferred stock (#1), government
deposit insurance fund (#2), taxpayers if deposit fund is bankrupt (#3)
How do low levels of equity (compared to debt) affect equity returns?
- correct answer Low levels of equity increase equity returns; shows up in stock beta, and ROE
Why do banks have lower levels of equity compared to non-bank firms?
- correct answer TBTF—cost of uninsured debt lower
, Deposit insurance lowers cost of capital and makes cost of capital insensitive to asset risk
Who pays for bank deposit insurance? Why is it often said the bank deposits are "government" insured?
- correct answer Banks. If fund runs out taxpayer dollars are used to bail banks out
4) What problems can banks have in complying with the "Community Reinvestment Act"? (Recall, the
CRA requires banks lend a proportion of their deposits in the communities where their branches are
located.)
- correct answer Might not want to lend in certain areas because of high risk profiles: risks are
decreasing property values and general default risk due to high risk borrowers. Demand for loans may
be lacking
What is the primary asset of the unconsolidated balance sheet of a bank holding company?
- correct answer Common stock- shares of stock in subsidiaries
What bank assets and/or liabilities currently or historically have (had) prices that are subject to
regulatory limits? What is (or was) the reason for these pricing limits?
- correct answer Asset- loans, usury laws (current) - to avoid excessive interest (protect the stupid
people from themselves)
Deposits - specifically savings and checking deposits (currently no limit - used to limit, reg Q, to limit
competition among banks. With less competition comes more profitability
Why has the regulatory definition of a "bank" been generalized, over time? Why?
- correct answer To eliminate loopholes that firms could find to use for regulatory arbitrage and avoiding
regulation
Bank-any institution that could qualify for deposit insurance
Why do banks have more difficulty balancing their sources and uses of funds than non-bank firms?
- correct answer Customers from both sides of the balance sheet, in marketing products from both sides
they have difficulty predicting their new sources and uses of funds
A banks uses of funds exceeds its sources of funds. What is one quick way to remedy this imbalance?
- correct answer Purchase liabilities such as CDs from other banks
Borrow from the Fed (as lender of last resort)
