FIN 480 LATEST 2026 END OF COURSE QUESTIONS AND
SOLUTIONS GUARANTEE A+
✔✔Balances of Accounts that Banks Hold at Other Banks - ✔✔small banks have
accounts at large banks (correspondent bank deposits), banks want to minimize cash
holdings because they earn less on cash
✔✔Securities - ✔✔- since banks cannot hold stocks, these are only bonds
- split between U.S. govt. & agency securities, other securities (state & local govt.
bonds)
- *about half of all securities are mortgage-backed
- sizable portion are very liquid, sometimes referred to as secondary reserves
✔✔Loans - ✔✔primary assets of modern banks (account for well over 50% of assets), 5
loan types differ in their liquidity
✔✔Five Categories of Loans - ✔✔1. Business loans called commercial & industrial
loans (C&I loans)
2. Real estate loans including both home & commercial mortgages & home equity loans
3. Consumer loans like auto & credit card loans
4. Interbank loans
5. Other types, including loans for purchase of other securities
✔✔Composition of Loan Portfolios - ✔✔Commercial Banks: traditionally made loans
primary to businesses (no longer true), until financial crisis... were involved in real estate
but have now reduced that
Credit Unions and S&Ls: specialize in consumer loans
✔✔Mortgage-Backed Securities - ✔✔meant that banks could sell mortgage loans they
made, which reduced risk of illiquid assets
✔✔Liabilities - ✔✔banks get funds from savers & from borrowing in the financial market
✔✔Types of Deposit Accounts - ✔✔transaction accounts (checkable deposits) & non-
transaction accounts
✔✔Checkable Deposits - ✔✔- demand deposits make up largest part of checkable
deposits
- financial innovation reduced importance of checkable deposits
✔✔Non-transaction Deposits - ✔✔- savings deposit popular for decades, but not so
much today
- time deposits are certificates of deposits (CDs) with a fixed maturity... large CDs have
important role in bank financing
,✔✔Borrowings - ✔✔- banks can borrow through: Federal Reserve (rare) or other banks
- banks with excess reserves will lend their surplus funds to banks that need them
through an interbank market (federal funds market)
✔✔Repurchase Agreement - ✔✔banks finally can borrow using this instrument (repo), a
short-term collateralized loan in which a security is exchanged for cash... parties are to
reserve transaction on specific future date, typically next day
✔✔???
Considering a bank's balance sheet, which of the following statements is false?
A. Assets + Liabilities = Capital
B. Assets = Liabilities + Capital
C. Liabilities = Assets - Capital
D. Capital = Assets - Liabilities - ✔✔A. Assets + Liabilities = Capital
✔✔???
A mortgage loan appears as a ____________ on a bank's balance sheet and as a
___________ on a person's balance sheet. - ✔✔asset; liability
✔✔Equity - ✔✔aka capital or bank capital, owners' stake in the bank, the *cushion*
banks have against depreciating assets (sudden drop in value of assets or unexpected
withdrawal of liabilities)
✔✔Loan Loss Reserves - ✔✔an amount the bank sets aside to cover potential losses
from defaulted loans
✔✔Written Off - ✔✔at some point the bank gives up hope a loan will be repaid and it is
written off, or erased from the bank's balance sheet... usually sold to someone else for
fraction of value
- at this point, loan loss reserve is reduced by amt. of loan that has defaulted
✔✔Bank Capital & Profitability - ✔✔if assets fall, needs to come out of L or E, but L
doesn't usually fall as A falls
✔✔Bank & Risk - ✔✔banks take on risk to increase profits... leverage increases risk
*AND* expected return
✔✔Government Guarantees - ✔✔allows banks to capture the benefits of risk taking
without subjecting depositors to potential losses (ex: deposit insurance)
✔✔Moral Hazard - Deposit Insurance - ✔✔without deposit insurance, depositors would
pay more attention to what their bank was doing with their savings (monitoring)
, ✔✔Measures of Bank Profitability - ✔✔return on assets (ROA), return on equity (ROE),
net interest income
✔✔Return on Assets (ROA) - ✔✔measure of how efficiently a particular bank uses its
assets
✔✔ROA Formula - ✔✔ROA = bank's profit (after taxes) / bank's total assets
✔✔Return on Equity (ROE) - ✔✔measure of bank's return to its owners
✔✔ROE Formula - ✔✔ROE = bank's net profit (after taxes) / bank's capital (equity)
✔✔Large Banks - ROE - ✔✔ROE tends to be higher than for smaller banks... greater
leverage, riskier assets, or benefits economies of scale (therefore, more profitable)
✔✔Net Interest Income - ✔✔interest expenses for deposits & bank borrowings, interest
income for securities & loans... the difference between the two is net interest income
- how much did we receive in interest on our assets vs. how much did we pay out on our
liabilities
✔✔Net Interest Margin - ✔✔interest income generated by assets minus interest
expense from liabilities relative to amount of assets
ex: $100 of loans (assets) payed $5 & paid $2 on deposits
- net interest income = $5-2 = $3
- net interest margin = (5-2)/100 = 3%
✔✔???
One measure of a bank's profitability is "net interest income." This is based on the idea
that... - ✔✔a bank receives higher interest rates on its assets relative to what it pays for
its liabilities
✔✔Off-Balance-Sheet Activities - ✔✔to generate fees, banks engage in a number of
these, types of activities expose a bank to risk that is not readily apparent on their
balance sheet (way of hiding risk):
- lines of credit
- letters of credit
✔✔Lines of Credit - ✔✔similar to limits on credit cards, firm pays bank a fee in return for
ability to borrow whenever necessary, pmt. is made when agreement is signed & firm
receives a *loan commitment*, when firm has drawn down line of credit... transaction
appear on bank's balance sheet
✔✔Letters of Credit - ✔✔guarantee that a customer of the bank will be able to make a
promised payment, customer might request that bank send a commercial letter to an
SOLUTIONS GUARANTEE A+
✔✔Balances of Accounts that Banks Hold at Other Banks - ✔✔small banks have
accounts at large banks (correspondent bank deposits), banks want to minimize cash
holdings because they earn less on cash
✔✔Securities - ✔✔- since banks cannot hold stocks, these are only bonds
- split between U.S. govt. & agency securities, other securities (state & local govt.
bonds)
- *about half of all securities are mortgage-backed
- sizable portion are very liquid, sometimes referred to as secondary reserves
✔✔Loans - ✔✔primary assets of modern banks (account for well over 50% of assets), 5
loan types differ in their liquidity
✔✔Five Categories of Loans - ✔✔1. Business loans called commercial & industrial
loans (C&I loans)
2. Real estate loans including both home & commercial mortgages & home equity loans
3. Consumer loans like auto & credit card loans
4. Interbank loans
5. Other types, including loans for purchase of other securities
✔✔Composition of Loan Portfolios - ✔✔Commercial Banks: traditionally made loans
primary to businesses (no longer true), until financial crisis... were involved in real estate
but have now reduced that
Credit Unions and S&Ls: specialize in consumer loans
✔✔Mortgage-Backed Securities - ✔✔meant that banks could sell mortgage loans they
made, which reduced risk of illiquid assets
✔✔Liabilities - ✔✔banks get funds from savers & from borrowing in the financial market
✔✔Types of Deposit Accounts - ✔✔transaction accounts (checkable deposits) & non-
transaction accounts
✔✔Checkable Deposits - ✔✔- demand deposits make up largest part of checkable
deposits
- financial innovation reduced importance of checkable deposits
✔✔Non-transaction Deposits - ✔✔- savings deposit popular for decades, but not so
much today
- time deposits are certificates of deposits (CDs) with a fixed maturity... large CDs have
important role in bank financing
,✔✔Borrowings - ✔✔- banks can borrow through: Federal Reserve (rare) or other banks
- banks with excess reserves will lend their surplus funds to banks that need them
through an interbank market (federal funds market)
✔✔Repurchase Agreement - ✔✔banks finally can borrow using this instrument (repo), a
short-term collateralized loan in which a security is exchanged for cash... parties are to
reserve transaction on specific future date, typically next day
✔✔???
Considering a bank's balance sheet, which of the following statements is false?
A. Assets + Liabilities = Capital
B. Assets = Liabilities + Capital
C. Liabilities = Assets - Capital
D. Capital = Assets - Liabilities - ✔✔A. Assets + Liabilities = Capital
✔✔???
A mortgage loan appears as a ____________ on a bank's balance sheet and as a
___________ on a person's balance sheet. - ✔✔asset; liability
✔✔Equity - ✔✔aka capital or bank capital, owners' stake in the bank, the *cushion*
banks have against depreciating assets (sudden drop in value of assets or unexpected
withdrawal of liabilities)
✔✔Loan Loss Reserves - ✔✔an amount the bank sets aside to cover potential losses
from defaulted loans
✔✔Written Off - ✔✔at some point the bank gives up hope a loan will be repaid and it is
written off, or erased from the bank's balance sheet... usually sold to someone else for
fraction of value
- at this point, loan loss reserve is reduced by amt. of loan that has defaulted
✔✔Bank Capital & Profitability - ✔✔if assets fall, needs to come out of L or E, but L
doesn't usually fall as A falls
✔✔Bank & Risk - ✔✔banks take on risk to increase profits... leverage increases risk
*AND* expected return
✔✔Government Guarantees - ✔✔allows banks to capture the benefits of risk taking
without subjecting depositors to potential losses (ex: deposit insurance)
✔✔Moral Hazard - Deposit Insurance - ✔✔without deposit insurance, depositors would
pay more attention to what their bank was doing with their savings (monitoring)
, ✔✔Measures of Bank Profitability - ✔✔return on assets (ROA), return on equity (ROE),
net interest income
✔✔Return on Assets (ROA) - ✔✔measure of how efficiently a particular bank uses its
assets
✔✔ROA Formula - ✔✔ROA = bank's profit (after taxes) / bank's total assets
✔✔Return on Equity (ROE) - ✔✔measure of bank's return to its owners
✔✔ROE Formula - ✔✔ROE = bank's net profit (after taxes) / bank's capital (equity)
✔✔Large Banks - ROE - ✔✔ROE tends to be higher than for smaller banks... greater
leverage, riskier assets, or benefits economies of scale (therefore, more profitable)
✔✔Net Interest Income - ✔✔interest expenses for deposits & bank borrowings, interest
income for securities & loans... the difference between the two is net interest income
- how much did we receive in interest on our assets vs. how much did we pay out on our
liabilities
✔✔Net Interest Margin - ✔✔interest income generated by assets minus interest
expense from liabilities relative to amount of assets
ex: $100 of loans (assets) payed $5 & paid $2 on deposits
- net interest income = $5-2 = $3
- net interest margin = (5-2)/100 = 3%
✔✔???
One measure of a bank's profitability is "net interest income." This is based on the idea
that... - ✔✔a bank receives higher interest rates on its assets relative to what it pays for
its liabilities
✔✔Off-Balance-Sheet Activities - ✔✔to generate fees, banks engage in a number of
these, types of activities expose a bank to risk that is not readily apparent on their
balance sheet (way of hiding risk):
- lines of credit
- letters of credit
✔✔Lines of Credit - ✔✔similar to limits on credit cards, firm pays bank a fee in return for
ability to borrow whenever necessary, pmt. is made when agreement is signed & firm
receives a *loan commitment*, when firm has drawn down line of credit... transaction
appear on bank's balance sheet
✔✔Letters of Credit - ✔✔guarantee that a customer of the bank will be able to make a
promised payment, customer might request that bank send a commercial letter to an
