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FINS3630
BANK FINANCIAL MANAGEMENT
SUPPLEMENTARY
MID-SESSION EXAM - SESSION 2, 2007
INSTRUCTIONS
1. This paper has only ONE PART – the Multiple Choice Paper which is worth 75
marks.
2. Write your name and student I.D. number the right hand side of this paper above and
then sign your name in your usual signature. You are signing that this is all your
own work.
3. Also enter your name and your S.I.D.number in the numbered spaces provided on
the separate marking sheet.
4. Answer all questions on the marking sheet for Part A in pencil (2B or darker).
5. Time Allowed: 1 hours 45 minutes plus 10 minutes reading time.
6. Calculators may be used. (Non-programmable types)
Answer: c
6. Bank regulations:
a. can prevent bank failures.
b. can eliminate economic risk for banks.
c. Serve as guidelines for sound operating policies.
d. guarantee bankers will make sound management decisions.
e. guarantee bankers act in an ethical manner.
Answer: c
9. General purpose finance companies often make all of the following types of
loans except:
a. commercial loans.
b. home improvement loans.
c. first mortgage loans.
d. second mortgage loans.
e. automobile loans.
Answer: c
10. The payment method with the smallest transaction size is:
a. cash.
b. check.
c. debit card.
d. credit card.
e. ACH.
Answer: a
15. Bank assets fall into each of the following categories except:
a. loans.
b. investment securities.
c. demand deposits.
d. noninterest cash and due from banks.
e. other assets.
Answer: c
24. What is the return on equity for a bank that has an equity multiplier of 12, an
interest expense ratio of 5%, and a return on assets of 1.1%?
a. 5.0%
b. 13.2%
c. 8.2%
d. 26.4%
e. 0.66%
Answer: b
ROE = ROA * EM = 1.1% * 12 = 13.2%
Assets $
Cash & Due from Banks 50
Investments 300
Com & State Govt Funds 10
Loans 350
Premises 90
Average Total Assets 800
Income Statement $
Interest Income 100
Interest Expense 75
Non-Interest Income 5
Non-Interest Expense 25
Net Income 5
31. Which type of non-interest cheque account incurs a monthly fee regardless of
the balance, as well as a possible per-check fee?
a. single-balance, single-fee
b. multiple-balance, single fee
c. account fee-only
d. free
e. multiple-balance, multiple-fee
Answer: c
32. Which type of non-interest cheque account imposes no fee of any kind?
a. single-balance, single-fee
b. multiple-balance, single fee
c. account fee-only
d. free
e. multiple-balance, multiple-fee
Answer: d
33. If a bank pays 62 cents in non-interest expense per dollar of net operating
revenue, its _______ is equal to 0.62.
a. burden
b. net non-interest margin
c. efficiency ratio
d. overhead ratio
e. non-interest expense ratio
Answer: c
39. To the nearest dollar, what is the value today of an investment that pays
$15,000 in seven years, assuming an annual opportunity cost of 9%?
a. $7,473
b. $27,421
c. $8,206
d. $7,130
e. None of the above
Answer: c
Financial calculator solution
FV = 15,000
I=9
N=7
PV = ? = 8,205.51
40. If you invested $200 today, another $400 in one year, and another $600 in two
years, how much will your investment be worth in five years, assuming a 7%
annual compound return? (To the nearest dollar.)
a. $1,540
b. $600
c. $720
d. $770
e. None of the above
Answer: a
Financial calculator solution
Step 1
CF0 = 200
CF1 = 400
CF2 = 600
I=7
NPV = ? = 1,097.90
Step 2
PV = 1,097.90
I=7
N=5
FV = ? = 1,539.86
41. At what annual interest rate will you double your money if you invest for 8
years?
a. 10.11%
b. 9.05%
c. 8.19%
d. 7.91%
e. 6.73%
Answer: b
Financial calculator solution
PV = 1
FV = -2
N=8
I = ? = 9.05
42. What is the effective annual cost of a credit card that charges 18%,
compounded monthly?
a. 16.63%
b. 18.00%
c. 18.81%
d. 19.56%
e. 19.61%
Answer: d
Financial calculator solution
P/Y = 12
NOM = 18
EFF = ? = 19.56
Or
43. A bond with a par value of $1,000 and a 13% semi-annual coupon rate has 20
years to maturity. Assuming it is priced to yield 10%, compounded semi-
annually, what is the market value of the bond, to the nearest dollar?
a. $1,187
b. $1,107
c. $1,257
d. $2,373
e. None of the above
Answer: c
Financial calculator solution
P/Y = 2
FV = 1,000
PMT = 13%/2 * 1,000 = 65
I = 10
N = 20 * 2 = 40
PV = ? = 1,257.39
44. Duration:
a. is always greater than maturity.
b. rises as the coupon payment rises.
c. measures how bond prices change with changes in maturity.
d. is a measure of total return.
e. is a measure of how price sensitive a bond is to a change in interest rates.
Answer: e
45. What is the Macaulay’s duration of a 10 year zero-coupon bond with a face
value of $1,000 and a market rate of 8%, compounded annually is:
a. 10 years
b. 11 years
c. 12 years
d. 13 years
e. None of the above
Answer: a
46. A bond that has an annual coupon rate of 15% has two years to maturity. If
the current discount rate is 8%, what is the bond’s Macaulay’s duration?
a. 2.00 years
b. 1.99 years
c. 1.88 years
d. 1.77 years
e. 1.66 years
Answer: c
Discount Rate 8.00%
0 1 2
Cash Flows $ 150 $ 1,150
t*CF $ 150.00 $ 2,300.00
PV(t*CF) $138.89 $1,971.88
ΣPV(t*CF) $2,110.77
Price $1,124.83
Macaulay's Duration = ΣPV(t*CF)/Price 1.88 Years
48. A bond’s Macaulay duration is 7.95 years. If the current annual interest rate is
7%, what is the modified duration of this bond?
a. 7.00 years
b. 7.88 years
c. 7.43 years
d. 7.95 years
e. 8.51 years
Answer: b
Modified Duration = Macaulay’s Duration/(1+i) = 7.95/1.07 = 7.43
50. A bank buys a $10,000 Treasury bill with a maturity of 1 year. Current
market rates are 8%. If interest rates rise to 8.25%, what is the approximate
change in the price of the T-bill?
a. -0.02%
b. -0.23%
c. -2.31%
d. -23.15%
e. -231.15%
Answer: b
∆P/P = -[Duration/(1+i)]*∆i = [1/(1+.08)]*.0025 = -.00231
51. Which of the following are sources of a bond’s total return?
a. Coupon interest
b. Reinvestment income
c. Capital gains or losses realize at maturity
d. All of the above are sources of a bond’s total return
e. a. and c. only
Answer: d
54. Keeping all other factors constant, banks can reduce the volatility of net
interest income by:
a. adjusting the dollar amount of rate-sensitive assets.
b. adjusting the dollar amount of fixed-rate liabilities.
c. using interest rate swaps.
d. Bank can reduce volatility of net interest income by doing all of the above.
e. a. and c. only
Answer: e
55. If a bank has a positive GAP, a decrease in interest rates will cause interest
income to __________, interest expense to__________, and net interest
income to __________.
a. increase, increase, increase
b. increase, decrease, increase
c. increase, increase, decrease
d. decrease, decrease, decrease
e. decrease, increase, increase
Answer: d
56. If rate-sensitive assets equal $500 million and rate-sensitive liabilities equals
$400 million, what is the expected change in net interest income if rates
increase by 1%?
a. Net interest income will increase by $1 million.
b. Net interest income will fall by $1 million.
c. Net interest income will increase by $10 million.
d. Net interest income will fall by $10 million.
e. Net interest income will be unchanged.
Answer: a
($500 million - $400 million) * 1% = $1,000,000
60. If a bank expects interest rates to decrease in the coming year, it should:
a. increase its GAP.
b. issue long-term subordinated debt today.
c. increase the rates paid on long-term deposits.
d. issue more variable rate loans.
e. become more liability sensitive.
Answer: e
65. A bond has a Macaulay's duration of 10.7 years. If rates fall from 7% to 6%,
the bonds price will:
a. increase by approximately 1%.
b. decrease by approximately 1%.
c. increase by approximately 10%.
d. decrease by approximately 10%.
e. Not enough information is given to answer the question.
Answer: c
Modified Duration = Macaulay's duration/(1+i) = 10.7/1.07 = 10
% Change in Price = -Modified duration * Change in interest rates = 10 * 1% = 10%
68. Which of the following allows a security's cash flows to change when interest
rates change?
a. Modified duration
b. Macaulay's duration
c. Effective duration
d. Balance sheet duration
e. Income statement duration
Answer: c
Liabilities
Market Duration and Market Duration
Assets Value Rate (Years) Equity Value Rate (Years)
Time
Cash $ 200 Deposits $ 600 2.0% 1.500
Loans $ 800 8.0% 3.750 CDs $ 500 4.5% 3.125
T-Bonds $ 250 4.0% 7.250 Equity $ 150
Total $ 1,250 $ 1,250
Step 2
Duration Gap = Weighted Avg Duration of Assets – (Liabilities/Total
Assets)Weighted Avg Duration of Liabilities
Duration Gap = 3.85 years – (1,100/1,250)*2.24 years = 1.88 years
73. If interest rates rise 1% for all assets and liabilities, what is the approximate
expected change in the economic value of equity?
a. –$2.56
b. $5.84
c. –$5.84
d. $22.19
e. -$22.19
Answer: d
Step 1
Calculate Weighted Average Return of Assets
(8%*$800/$1,250) + (4%*$250/$1,250) = 5.92%
Step 2
∆EVE = -DGAP[∆y/(1+y)]MVA = -1.88*[-.01/1.0592]*$1,250 = 22.19
74. What are the weaknesses of using static GAP analysis versus duration gap
analysis?
a. Static GAP ignores the time value of money.
b. Static GAP ignores the cumulative impact of interest rate changes on a bank’s
risk profile.
c. Static GAP does not proscribe the treatment of demand deposits.
d. All of the above are weaknesses of using static GAP analysis versus duration
gap analysis.
e. a.and b.
Answer: d
75. If the yield curve is inverted, a portfolio manager can take advantage of this
by:
a. pricing more deposits on a fixed-rate basis.
b. buying more long-term securities
c. making variable-rate, callable loans.
d. increasing the number of rate-sensitive assets.
e. All of the above.
Answer: b