Finance 434 (Management of Financial Institutions)

Professor: Dr. S. C. Hudgins

Exam One
February 26, 2013

HONOR PLEDGE
I pledge to support the Honor System of Old Dominion University. I will refrain from any form of
academic dishonesty or deception, such as cheating or plagiarism. I am aware that as a member
of the academic community it is my responsibility to turn in all suspected violators of the honor
code. I will report to a hearing if summoned.

You are allowed one 8.5 by 11 page of notes- one-side and a financial calculator for this exam
You will turn-in the opscan sheet and problems

Multiple Choice (2.5 points each)

1. Which of the following has been an important trend regarding consolidation and
geographic expansion in banks?
A. Increased bank branching activity
B. The formation of more holding companies to purchase smaller banks
C. Mergers among some of the largest banks in the industry
D. Significant rise in the average size of individual banks
E. All of the options are correct

2. The phenomenon of convergence refers to:

A. financial service firms expanding into other product lines.
B. firms reducing their product lines.
C. bank merger activity.
D. globalization in banking.
E. technological innovation in banking.

3. Wholesale banks are those banks that:

A. sell at a discount relative to all commercial banks.
B. only make loans to the wholesale industry.
C. lend almost exclusively to farmers.
D. serve corporations and government.
E. have only retail customers.
4. The Edmond National Bank serves only the City of Edmond, Oklahoma and
concentrates on providing the best possible service to this city. What type of bank is
this most likely to be?
A. Virtual Bank
B. Mortgage Bank
C. Community Bank
D. Bankers' banks
E. None of the options are correct.

5. The Bank, N.A. accepts deposits from thousands of individuals and lends that
money to (among others) the Stillwater Body Shop to expand their work bays. Which
of the following roles is the bank performing?
A. The intermediation role
B. The payments role
C. The risk management role
D. The guarantor role
E. The policy role

6. The law that set up the federal banking system and provided for the chartering of
national banks was the:
A. National Bank Act.
B. McFadden Act.
C. Glass-Steagall Act.
D. Bank Merger Act.
E. Federal Reserve Act.

7. The 1994 law that allowed bank holding companies to acquire banks anywhere in
the U.S. is:
A. the Glass-Steagall Act.
B. the Federal Deposit Insurance Corporation Improvement Act.
C. the National Bank Act.
D. the Riegle-Neal Interstate Banking and Branching Efficiency Act.
E. None of the options are correct.
8. The law that allows banks to affiliate with insurance companies and securities
firms to form financial services conglomerates is:
A. the National Bank Act.
B. the Glass-Steagall Act.
C. the Garn-St Germain Depository Institutions Act.
D. the Riegle-Neal Interstate Banking Act.
E. the Gramm-Leach-Bliley Act (Financial Services Modernization Act).

9. As per the Gramm-Leach-Bliley Act, one of the ways through which a banking-
insurance-securities affiliation can take place is through:
A. a financial holding company.
B. the state insurance commissions.
C. the European Central Bank.
D. a financial service corporation.
E. a financial modernization organization.

10. Common minimum capital requirements on banks in leading industrialized

nations that are based on the riskiness of their assets is imposed by:
A. the National Banking Act.
B. the Financial Institutions Reform, Recovery and Enforcement Act.
C. the International Banking Act.
D. the Basel Agreement.
E. None of the options are correct.

11. Which federal banking act requires that financial service providers establish the
identity of customers opening new accounts?
A. the Sarbanes-Oxley Act
B. the USA Patriot Act
C. the Check 21 Act
D. the Fair and Accurate Credit Transactions Act
E. the Bankruptcy Abuse Prevention and Consumer Protection Act
12. Which federal banking act requires the Federal Trade Commission to make it
easier for victims of identity theft to file theft reports and requires credit bureaus to
help victims resolve the problem?
A. The Sarbanes-Oxley Act
B. The USA Patriot Act
C. The Check 21 Act
D. The Fair and Accurate Credit Transactions Act
E. The Bankruptcy Abuse Prevention and Consumer Protection Act

13. As per the National Currency and Bank Acts, the comptroller of currency ensures
that every national bank is examined by a team of federal examiners at least:
A. twice in a year.
B. once in 3 months.
C. once every 12 to 18 months.
D. once every 9 to 12 months.
E. once in a month.

14. The concentration of U.S. bank deposits in the hands of the largest banks has
_________ recently.
A. declined
B. increased
C. remained essentially unchanged
D. exhibited large fluctuations in both directions
E. None of the options are correct

15. What is a bank holding company?

A. It is a bank that offers all of its services out of one office
B. It is a bank that offers all of its services out of several offices
C. It is a corporation formed to hold the stock of one or more banks
D. It is a merchant bank
E. None of the options are correct
16. Majority of banks today are:
A. federally chartered.
B. uninsured.
C. state chartered.
D. national banks.
E. All the options are correct.

17. When a bank holding company acquires a nonbank business it must be approved
by the:
A. FDIC.
B. Comptroller of the Currency.
C. Federal Reserve.
D. SEC.
E. All the options are correct

18. Banks depend heavily upon borrowed funds supplied by customers with little
owners' capital invested. This means that banks make heavy use of:
A. financial leverage.
B. capital restructuring.
C. operating leverage.
D. margin borrowing.
E. None of the options are correct.

19. Operational risk includes which of the following?

A. Failure of bank's computer system
B. Closure of a bank for three months due to flooding from a major hurricane
C. Embezzlement of funds of a bank by a teller of the bank
D. Closure of a bank for two weeks due to a fire from a lightning strike
E. All of the options are correct.
20. Forrest Fennell is planning to invest in Capital City Bank. He is examining the
ratios of nonperforming loans to total loans and leases and the provision for loan
losses to total loans and leases. What type of risk is Forrest attempting to measure
with these ratios?
A. Credit risk
B. Liquidity risk
C. Market risk
D. Interest rate risk
E. Operational risk

1. You know the following information about the Miller State Bank:

a. Given this information, what is the value of this firm's net loans?

b. Given this information, what is the value of this firm's depreciation?

c. Given this information, what is the value of this firm's total liabilities?
d. Given this information, what the value of this firm's undivided profits?

e. Given this information, what is the value of this firm's total liabilities plus equity?

2. You know the following information about the Davis National Bank:

a. Given this information, what is the value of this firm's net interest income?

b. Given this information, what is the value of this firm's net noninterest income?

c. Given this information, what is the value of this firm's pretax net operating
income (or net income before extraordinary items)?
d. Given this information, what is the value of this firm's net income?

e. Given this information, what is the value of this firm's increase in undivided
profits?
3. Following is the information listed below for Carter State Bank.

A. What is the bank's ROA?

B. What is the bank's net profit margin?

C. What is the bank's asset utilization ratio?

4. The following financial information pertains to Harrison Bank.

A. What is the bank's ROA?

B. What is the bank's ROE?

C. What is the bank's equity multiplier?

5. A bank has $200 million in assets in the 0 percent risk-weight category. It has
$400 million in assets in the 20 percent risk-weight category. It has $1,000 million in
assets in the 50 percent risk-weight category and has $1,000 million in assets in the
100 percent risk-weight category. This bank has $96 million in Tier 1 capital and $48
million in Tier 2 capital.

A. What is this bank's ratio of Tier 1 capital to risk assets?

B. What is this bank's ratio of Tier 2 capital to risk assets?

C. What is this bank's ratio of total capital to risk assets?

D. If, the bank has no off-balance sheet items, What is the banks leverage ratio?