QTNH Test Bank With Answer

BANK MANAGEMENT
MULTIPLE CHOICE QUESTIONS

Chapter 1: Question 1 – 30
Chapter 2: Question 31 - 80
Chapter 3: Question 81 – 140
Chapter Questions and Answers

Chapter 1 1. Which act separated commercial banking, investment banking and insurance into three
separate industries?
a. Glass-Steagall Act
b. Bank Holding Company Act
c. McFadden Act
d. Federal Reserve Act
e. Competitive Equality Banking Act
Answer: a
Chapter 1 2. Which act limited the activities a company could engage in if it owned a bank?
a. Federal Reserve Act
c. McFadden Act
d. Glass-Steagall Act
e. Competitive Equality Banking Act
Answer: b
Chapter 1 3. Which of the following mortgage types were offered to “subprime” borrowers?
a. Interest Only
b. Option Adjustable-Rate
c. Principal Only
d. All of the above
e. a. and b. only
Answer: e
Chapter 1 4. The U.S. government took all of the following actions to address the credit crisis in 2008
except:
a. putting Fannie Mae into conservatorship.
b. passed the Troubled Asset Relief Program (TARP).
c. created the Keep Banks Solvent (KBS) agency.
d. authorized large non-financial firms to sell bonds that were FDIC-insured.
e. temporarily increased FDIC domestic deposit coverage to $250,000.
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Answer: c
Chapter 1 5. At the end of 2008, which of the following investment banks remained independent?
a. Bear Stearns
b. Goldman Sachs
c. Lehman Brothers
d. Merrill Lynch
e. a. and b.
Answer: b
Chapter 1 6. In 2008, the U.S. Treasury financial supported financial institutions by:
a. purchasing troubled assets.
b. buying preferred stock in some financial institutions.
c. issuing guarantees on money market funds.
d. increasing the deposit insurance limit.
e. all of the above.
Answer: e
Chapter 1 7. Which of the following is false regarding community banks?

a. They typically have assets in excess of $1 billion.
b. They typically operate in a limited geographic area.
c. Community banks often focus on lending to small businesses.
d. A bulk of their funding comes from deposits.
e. They tend to grow at a modest rate.
Answer: a
Chapter 1 8. Banks with less than _______ in assets are generally called community banks.
a. more than $1 billion
b. less than $1 billion
c. more than $5 million
d. less than $1 trillion
e. more than $1 trillion
Answer: b
Chapter 1 9. __________ have a large international presence.

a. Global banks
b. Nationwide banks
c. Super regional banks
d. Regional banks
e. Specialty Banks
Answer: a
Chapter 1 10. An “independent” bank is:

a. an “independent” subsidiary of a multi-bank holding company.
b. another name for a one-bank holding company.
c. a bank that is exempt from paying federal income taxes.
d. a bank that is specifically created to underwrite corporate debt issues.
e. not controlled by a multi-bank holding company or any other outside interest.
Answer: e
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Chapter 1 11. At the end of June 2008, there were approximately ______ FDIC–insured banking
organizations in the United States.
a. 1,400
b. 3,400
c. 5,400
d. 7,400
e. 9,400
Answer: d
Chapter 1 12. What is the primary motivation today of forming a financial holding company?
a. To increase speculation.
b. To branch across state lines.
c. To engage in activities not permitted in a bank holding company.
d. To branch within a particular states boundaries.
e. To reduce the risk of bank failures.
Answer: c
Chapter 1 13. Bank holding companies and financial holding companies generally do not pay income tax
because:
a. they are always chartered as non-profit corporations.
b. most of their income is subsidiary paid dividends, of which 80% is tax-exempt.
c. the subsidiaries always operate at a net loss.
d. bank holding companies must carry deposit insurance.
e. bank holding companies are not subject to Internal Revenue Service regulations.
Answer: b
Chapter 1 14. Controlling interest in a bank is defined as ownership or indirect control of ____ of the
voting shares in the bank.
a. 15%
b. 20%
c. 25%
d. 30%
e. 51%
Answer: c
Chapter 1 15. Today, the primary motivation behind forming a bank holding company is:
a. to reduce competition.
b. the ability to circumvent restrictions on branching.
c. to broaden the scope of products the bank can offer.
d. to increase deposit concentration.
e. All of the above are motivating factors today for forming a bank holding company.
Answer: c
Chapter 1 16. __________ control at least two commercial banks.

a. One-bank holding company
b. State holding company
c. National holding company
d. Multibank holding company
e. None of the above
Answer: d
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Chapter 1 17. The _________ gave regulatory responsibility over financial holding companies to the
Federal Reserve..
a. Riegle-Neal Interstate Banking and Branching Efficiency Act
b. Gramm-Leach-Bliley Act
c. Financial Institutions Reform, Recovery and Enforcement Act
d. Federal Deposit Insurance Corporation Improvement Act
e. Depository Institutions Deregulation and Monetary Control Act
Answer: b
Chapter 1 18. Many insurance companies have formed __________ to operate banks as part of their
financial services efforts.
a. one-bank holding companies
b. multibank holding companies
c. retail subsidiaries
d. finance companies
e. financial holding companies
Answer: a
Chapter 1 19. Banks created Section 20 affiliates to:

a. engage in investment banking activities.
b. make international loans.
c. purchase savings and loans.
d. invest in junk bonds.
e. compete with general-purpose finance companies.
Answer: a
Chapter 1 20. The _______________ repealed the restriction son banks affiliating with securities firms
under the Glass-Steagall Act.
a. Sarbanes-Oxley Act
c. Competitive Equality Banking Act
d. Gramm-Leach-Bliley Act
e. Financial Institutions Reform, Recovery and Enforcement Act
Answer: d
Chapter 1 21. The Federal Reserve may prevent the formation of a financial holding company if one of its
insured depository institution subsidiaries:
a. received an unsatisfactory in its most recent Community Reinvestment Act exam.
b. has branches across state lines.
c. is part of a bank holding company.
d. makes subprime loans.
e. is well capitalized.
Answer: a
Chapter 1 22. A financial holding company cannot own which of the following?
a. A bank.
b. A bank holding company.
c. A thrift.
d. A thrift holding company.
e. A financial holding company may own all of the above.
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Answer: e
Chapter 1 23. The parent bank holding company assists bank subsidiaries with all of the following except:
a. asset and liability management.
b. strategic planning.
c. loan review.
d. deposit insurance.
e. business development.
Answer: d
Chapter 1 24. ___-corporations have favorable tax treatment because a qualifying firm does not pay
corporate income taxes.
a. C
b. Q
c. S
d. V
e. Z
Answer: c
Chapter 1 25. S-corporations must have no more than ___ shareholders.

a. 10
b. 50
c. 100
d. 500
e. 1,000
Answer: c
Chapter 1 26. Deposits at credit unions are insured by the:

a. National Credit Union Association.
b. Federal Credit Union Administration.
c. Federal Reserve.
d. Federal Deposit Insurance Corporation.
e. Credit Union Insurance Corporation.
Answer: a
Chapter 1 27. ______________ refers to the process of pooling a group of assts with similar features and
issuing securities that are collateralized by the assets.
a. Originate-to-Resell
b. Securitization
c. Mortgage Collateralization
d. Deposit Origination
e. Loan-to-Distribute
Answer: b
Chapter 1 28. Deposit insurance was temporarily increased to __________ per depositor through 2009.
a. $100,000
b. $150,000
c. $250,000
d. $300,000
e. $500,000
Answer: c
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Chapter 1 29. The primary appeal of online banking is:
a. prevention of identity theft.
b. high-volume traffic.
c. lack of face-to-face interaction.
d. its convenience.
e. the ability to make small dollar purchases.
Answer: d
Chapter 1 30. Which of the following is not a channel for delivering banking services?
a. Mobile banking.
b. Online banking.
c. Automated Teller Machines.
d. Branch banking.
e. Retail banking.
Answer: e
Chapter 2 31. Which of the following led to the sharp decline in bank profits in 2008?
a. Record high loan loss provisions
b. Record gains in trading activities
c. Significant goodwill impairment expenses
d. All of the above.
e. a. & c. only.
Answer: e
Chapter 2 32. Which of the following is not a characteristic of a typical commercial bank?
a. Most banks own few fixed assets.
b. Most banks have a high degree of operating leverage.
c. Most banks have few fixed costs.
d. Many bank liabilities are payable on demand.
e. Banks generally operate with less equity capital than non-financial firms.
Answer: b
Chapter 2 33. 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
Chapter 2 34. Typically, “Call loans” are:
a. residential mortgages.
b. farm loans.
c. demand deposits.
d. payable on demand.
e. automobile loans.
Answer: d
Chapter 2 35. A loan to an individual to purchase a home would be considered a:

a. consumer loan.
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b. commercial loan.
c. agricultural loan.
d. construction loan.
e. real estate loan.
Answer: e
Chapter 2 36. Which of the following would not be considered a commercial loan?
a. An interim construction loan
b. A working capital loan
c. A loans to another financial institution
d. A loan to purchase a piece of industrial equipment
e. A loan to expand a factory
Answer: a
Chapter 2 37. Banks generate their largest portion of income from:

a. loans.
b. short-term investment.
c. demand deposits.
d. long-term investments.
e. certificates of deposit.
Answer: a
Chapter 2 38. Loans typically fall into each of the following categories except:
a. real estate.
b. individual.
c. commercial.
d. agricultural.
e. municipal.
Answer: e
Chapter 2 39. Which of the following adjustments are made to gross loans and leases to obtain net loans
and leases?
a. The loan and lease loss allowance is subtracted from gross loans
b. Unearned income is subtracted from gross interest received
c. Investment income is added to gross interest received
d. a. and b.
e. a. and c.
Answer: d
Chapter 2 40. An example of a contra-asset account is:

a. the loan and lease loss allowance.
b. unearned income.
c. buildings and equipment.
d. revenue bonds.
e. the provision for loan loss.
Answer: a
Chapter 2 41. Which of the following bank assets is the most liquid?
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a. Long-term investments
b. Short-term investments
c. Loans
d. Demand deposits
e. Unearned income
Answer: b
Chapter 2 42. Which of the following would a bank generally classify as a short-term investment?
a. Demand deposits
b. Deposits at the Federal Reserve
c. Repurchase agreements
d. Fed Funds purchased
e. Vault cash
Answer: c
Chapter 2 43. All other things constant, securities that are extremely liquid:
a. earn higher rates of return than securities that are less liquid.
b. have a longer maturity than less liquid securities.
c. have lower risk than less liquid securities.
d. a. and b.
e. b. and c.
Answer: c
Chapter 2 44. Which of the following would a bank generally classify as a long-term investment?
a. Treasury bill
b. Vault cash
c. Cash items in process of collection
d. Municipal bond
e. Repurchase agreements
Answer: d
Chapter 2 45. Securities that are “held-to-maturity” are:

a. trading account securities.
b. recorded on the balance sheet at amortized cost.
c. marked-to-market.
d. a. and b.
e. a. and c.
Answer: b
Chapter 2 46. Securities that require unrealized gains or losses to be recorded as a change in stockholder’s
equity are called:
a. held-to-maturity securities.
b. trading account securities.
c. available-for-sale securities.
d. revenue securities.
e. repurchase agreements
Answer: c
Chapter 2 47. Securities that require unrealized gains or losses to be recorded on the income statement
are called:
a. held-to-maturity securities.
b. trading account securities.
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c. available-for-sale securities.
d. revenue securities.
e. repurchase agreements
Answer: b
Chapter 2 48. A negotiable instrument often used in trading goods that guarantees payment to the owner
the instrument is known as (a):
a. bankers acceptance.
b. payment guarantee.
c. commercial paper.
d. bankers payment.
e. repurchase agreement.
Answer: a
Chapter 2 49. The largest component of “non- interest cash and due from banks” is:
a. cash items in process of collection.
b. deposits held at other financial institutions.
c. federal funds sold.
d. vault cash.
e. loans from the Federal Reserve.
Answer: a
Chapter 2 50. The volume of net deferred credit is commonly referred to as:
a. the burden.
b. NOW balances.
c. reserve requirements.
d. equity.
e. float.
Answer: e
Chapter 2 51. _________ own(s) the bulk of demand deposit accounts.

a. Consumers
b. Businesses
c. State governments
d. The federal government
e. Non-profits
Answer: b
52. Which of the following is are only available to non-commercial customers?

a. Money Market Demand Accounts
b. Demand deposit accounts
c. Mortgage loans
d. Negotiable Orders of Withdrawal (NOW) accounts
e. Auto leases
Answer: d
Chapter 2 53. Checking accounts with unlimited check-writing and pay interest are known as:
a. demand deposit accounts.
b. money market deposit accounts.
c. NOW accounts.
d. certificates of deposit.
e. time deposits.
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Answer: c
Chapter 2 54. Jumbo CDs that a bank obtains from a third-party broker are called:
a. money market demand accounts.
b. time deposit accounts.
c. mortgage loans.
d. brokered deposits.
e. core deposits.
Answer: d
Chapter 2 55. Jumbo certificates of deposit (CDs) typically:

a. have maturities greater than 10 years..
b. are negotiable.
c. are $1 million in size.
d. All of the above
e. b. and c.
Answer: e
Chapter 2 56. Unsecured liabilities created from the exchange of immediately available funds are known
as:
a. federal funds purchased.
b. repurchase agreements.
c. federal funds sold.
d. pledged securities.
e. brokered deposits.
Answer: a
Chapter 2 57. A bank’s core deposits are:
a. vault cash.
b. stable deposits that are not typically withdrawn over short periods of time.
c. the bank’s deposits at the Federal Reserve.
d. the most interest rate sensitive liabilities of a bank.
e. deposits held in foreign offices.
Answer: b
Chapter 2 58. Core deposits consist of all of the following except:

a. demand deposits.
b. NOW accounts.
c. jumbo certificates of deposit.
d. savings accounts.
e. money market demand accounts.
Answer: c
Chapter 2 59. Which of the following is not considered a volatile liability?

a. Jumbo CDs
b. Deposits in foreign offices
d. Federal funds sold
e. All of the above are considered volatile liabilities
Answer: d
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Chapter 2 60. Which of the following would be the least sensitive to changes in interest rates?
a. Demand deposits
b. Repurchase agreements
c. Federal funds purchased
d. Eurodollar liabilities
e. Jumbo CDs
Answer: a
Chapter 2 61. Which of the following is not listed on a bank’s UBPR as non-interest income?
a. Deposit service charges
b. Insurance commission fees
c. Goodwill impairment
d. Net gains on sales of loans.
e. Investment banking fees
Answer: c
Chapter 2 62. Which of the following is not considered a non-interest expense?
a. Wages and salaries
b. Rent
c. Required reserves held at the Federal Reserve
d. Electricity
e. Employee benefits
Answer: c
Chapter 2 63. From the following list, which two are the biggest contributors to non-interest income?
Fiduciary Activities
Deposit Service Charges
Trading Revenue
Investment Banking
Insurance Commission Fees and Income
Other Non-Interest Income
a. Fiduciary Activities & Deposit Service Charges
b. Trading Revenue & Investment Banking

c. Insurance Commission Fees and Income & Other Non-Interest Income
d. Depository Service Charges and Other Non-Interest Income
e. Fiduciary Activities and Investment Banking
Answer: d
Chapter 2 64. All of the following are components of a bank’s non-interest expense except:.
a. deposit service fees.
b. occupancy expense.
c. goodwill impairment.
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d. personnel expense.
e. other intangible amortization.
Answer: a
Chapter 2 65. When two banks that merge have a significant duplication of bank offices such that the
merger leads to the elimination of branches and personnel, this is known as a(n):
a. out-of-market merger.
b. in-market merger.
c. new-market merger.
d. reduced-branch merger.
e. goodwill merger.
Answer: b
Chapter 2 66. For most banks, which of the following is the largest component of non-interest expense?
a. Personnel expenses
b. Rent
c. Required reserves held at the Federal Reserve
d. Electricity
e. Depreciation on buildings and equipment
Answer: a
Chapter 2 67. 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
Chapter 2 68. The operating risk ratio measures:
a. cost controls versus fee generation.
b. fee income versus net interest margin.
c. non-interest expense versus non-interest income.
d. depositors versus employees.
e. depreciation versus required reserves.
Answer: a
Chapter 2 69. Which of the following is considered a measure of bank productivity?
a. Return on assets
b. Return on equity
c. Assets per depositor
d. Assets per employee
e. All of the above are measures of bank productivity
Answer: d
Chapter 2 70. __________ is not a measure of bank productivity?
a. Assets per employee
b. Average personnel expense
c. Loans per employee
d. Net income per employee
e. Number of customers per employee
Answer: e
Chapter 2 71. Return on risk-adjusted capital is defined as:
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a. Income/Allocated Risk Capital.
b. Allocated Risk Capital/Adjusted Income.
c. (Risk – Adjusted Income)/Capital.
d. Capital/Allocated Risk Capital.
e. Expenses + Target Profit.
Answer: a
Chapter 2 72. In general, _______________ are the major non-credit cost for commercial customers.
a. personnel expenses
b. check-processing costs
c. loan administration expenses
d. fraud costs
e. default costs
Answer: b
Chapter 2 73. ______________ is/are the primary revenue source for a majority of banks.
a. Check-processing fees
b. Investment income from deposit balances
c. Loan interest
d. Earnings credits
e. Swaps
Answer: c
Chapter 2 74. ______________ transactions are the highest-cost type of transaction for a bank.
a. Web-based
b. ATM
c. Work station
d. Live teller
e. After-hours
Answer: d
Chapter 2 75. Customer profitability data can be beneficial in helping bank management:
a. develop new products.
b. identify profitable target niches.
c. determine changes in product pricing.
d. All of the above
e. a. and b. only
Answer: d
Chapter 2 76. Profitable bank customers:

a. make up a small fraction of all bank customers.
b. generally shop for the bank with the lowest price.
c. have small loan balances.
d. always avoid service charges.
e. are the most sensitive to changes in price.
Answer: a
Chapter 2 77. Which of the following is not a cost management strategy?

a. Investing in resources to improve long-term profitability
b. Changing pricing such that total revenues increase
c. Identify operating efficiencies
d. Burden identification
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e. Expense reduction
Answer: d
Chapter 2 78. Banks experience economies of scale when:

a. marginal costs increase as total costs decrease.
b. total costs decrease as output decreases.
c. total costs increase as output increases.
d. average unit costs increase as output increases.
e. average unit costs decrease as output increases.
Answer: e
Chapter 2 79. Banks experience diseconomies of scale when:

a. marginal costs increase as total costs decrease.
b. total costs decrease as output decreases.
c. total costs increase as output increases.
d. average unit costs increase as output increases.
e. average unit costs decrease as output increases.
Answer: d
Chapter 2 80. Banks can increase their operating efficiencies by:

a. reducing costs and maintaining the existing level of products and services.
b. reducing costs and reducing the existing level of products and services.
c. decreasing the level of output while maintaining the current level of expenses.
d. increasing the level of output while increasing the level of expenses.
e. decreasing workflow.
Answer: a
Chapter 3 81. When is interest rate risk for a bank greatest?
a. When interest rates are volatile.
b. When interest rates are stable.
c. When inflation is high.
d. When inflation is low.
e. When loan defaults are high.
Answer: a
Chapter 3 82. Interest rate risk:
a. varies inversely with a bank’s GAP.
b. can be measured by the volatility of a bank’s net interest income given changes in the
level of interest rates.
c. can be eliminated by matching fixed rate assets with variable rate liabilities.
d. rarely has an impact on bank earnings.
e. All of the above
Answer: b
Chapter 3 83. A bank’s GAP is defined as:
a. the dollar amount of rate-sensitive assets divided by the dollar amount of rate-sensitive
liabilities.
b. the dollar amount of earning assets divided by the dollar amount of total liabilities.
c. the dollar amount of rate-sensitive assets minus the dollar amount of rate-sensitive
liabilities.
d. the dollar amount of rate-sensitive liabilities minus the dollar amount of rate-sensitive
assets.
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e. the dollar amount of earning assets times the average liability interest rate.
Answer: c
Chapter 3 84. 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
Chapter 3 85. A bank’s periodic GAP:

a. is defined as the dollar amount of rate-sensitive assets divided by the dollar amount of
rate-sensitive liabilities.
b. is defined as the dollar amount of earning assets divided by the dollar amount of total
liabilities.
c. compares rate-sensitive assets with rate-sensitive liabilities across all time buckets.
d. compares rate-sensitive assets with rate-sensitive liabilities across a single time bucket.
e. compares the dollar amount of earning assets times the average liability interest rate.
Answer: d
Chapter 3 86. A bank’s cumulative GAP:

a. is defined as the dollar amount of rate-sensitive assets divided by the dollar amount of
rate-sensitive liabilities.
b. is defined as the dollar amount of earning assets divided by the dollar amount of total
liabilities.
c. compares rate-sensitive assets with rate-sensitive liabilities across all time buckets.
d. compares rate-sensitive assets with rate-sensitive liabilities across a single time bucket.
e. compares the dollar amount of earning assets times the average liability interest rate.
Answer: c
Chapter 3 87. A bank has a 1-year $1,000,000 loan outstanding, payable in four equal quarterly
installments. What dollar amount of the loan would be considered rate sensitive in the 0 –
90 day bucket?
a. $0
b. $250,000
c. $500,000
d. $750,000
e. $1,000,000
Answer: b
Chapter 3 88. Which of the following will cause a bank’s 1-year cumulative GAP to increase, everything
else the same.
a. An increase in 3-month loans and an offsetting decrease in 6-month loans.
b. An increase in 3-month loans and an offsetting increase in 3-month CDs.
c. A decrease in 3-month CD’s and an offsetting increase in 3-year CDs.
d. a. and c.
e. b. and c.
Answer: c
Chapter 3 89. Which of the following will cause a bank’s 1-year cumulative GAP to decrease, everything
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else the same.
a. An increase in 3-month loans and an offsetting increase in 9-month loans.
b. A decrease in 6-month loans and an offsetting increase in 2-year CDs.
c. An increase in 9-month CD’s and an offsetting increase in 5-year CDs.
d. a. and c.
e. b. and c.
Answer: e
Chapter 3 90. If a bank has a positive GAP, an increase 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: a
Chapter 3 91. If a bank has a negative GAP, an increase in interest rates will cause interest income to
Answer: c
Chapter 3 92. If a bank has a positive GAP, a decrease in interest rates will cause interest income to
Answer: d
Chapter 3 93. If a bank has a negative GAP, a decrease in interest rates will cause interest income to
e. decrease, decrease, increase
Answer: e
Chapter 3 94. Put the following steps for conducting a Static GAP analysis in the proper chronological
order.
I. Forecast changes in net interest income for a variety of interest rate scenarios.
II. Select the sequential time intervals for determining when assets and liabilities are rate-
sensitive.
III. Group assets and liabilities into time “buckets.”
IV. Develop interest rate forecasts.
a. I, II, III, IV
b. IV, I, III, II
c. IV, I, II, III
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d. II, III, IV, I
e. IV, II, III, I
Answer: e
Chapter 3 95. An asset would normally be classified as rate-sensitive if:
a. it matures during the examined time period.
b. it represents a partial principal payment.
c. the outstanding principal on a loan can be re-priced when the base rate changes.
e. a. and c. only
Answer: d
Chapter 3 96. Which of the following does not affect net interest income?
a. Changes in the level of interest rates.
b. Changes in the volume of earning assets.
c. Changes in the portfolio mix of earning assets.
d. The yield curve changing from upward sloping to inverted.
e. All of the above affect net interest income.
Answer: e
Chapter 3 97. 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
what is the expected change in net interest income if rates increase by 1%?
Answer: b
($600 million - $800 million) * 1% = -$2,000,000
what is the expected change in net interest income if rates fall by 1%?
Answer: d
($500 million - $400 million) * -1% = $-1,000,000
Chapter 3 100. If rate-sensitive assets equal $600 million and rate-sensitive liabilities equals $800
million, what is the expected change in net interest income if rates fall by 1%?
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Answer: a
($600 million - $800 million) * -1% = $2,000,000
Chapter 3 101. A shift from core deposits to non-core deposits will:

a. always increase the amount of fixed rate assets.
b. always increase the amount of rate-sensitive assets.
c. generally increase the amount of non-earning assets.
d. generally reduce net interest income.
e. b. and d.
Answer: d
Chapter 3 102. What type of GAP analysis directly measures a bank’s net interest sensitivity through the
last day of the analysis period?
a. Earnings
b. Net Income
c. Maturity
d. Periodic
e. Cumulative
Answer: e
Chapter 3 103. A bank’s cumulative GAP will always be:

a. greater than the periodic GAP.
b. less than the periodic GAP.
c. positive.
d. negative.
e. the sum of the interim periodic GAPs.
Answer: e
Chapter 3 104. Which of the following is an advantage of static GAP analysis?

a. Static GAP analysis considers the time value of money.
b. Static GAP analysis indicates the specific balance sheet items that are responsible for the
interest rate risk.
c. Static GAP analysis considers the cumulative impact of interest rate changes on the
bank’s position.
d. Static GAP analysis considers the embedded options in loans, such as mortgage pre-
payments.
e. All of the above are advantages of static GAP analysis.
Answer: b
Chapter 3 105. Which of the following is not a disadvantage of static GAP analysis?
a. Static GAP analysis depends on the forecasted interest rates.
b. Static GAP analysis often considers demand deposits as non-rate sensitive.
c. Static GAP analysis does not consider the cumulative impact of interest rate changes on
the bank’s position.
d. Static GAP analysis does not consider a depositor’s early withdrawal option.
e. All of the above are disadvantages of static GAP analysis.
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Answer: c
Chapter 3 106. The GAP ratio:

a. is always greater than one for bank’s with a negative periodic GAP.
b. is equal to the volume of rate-sensitive liabilities times the volume of rate-sensitive
assets.
c. is equal to the volume of rate-sensitive liabilities divided by the volume of rate-sensitive
assets.
d. is equal to the volume of rate-sensitive assets divided by the volume of rate-sensitive
liabilities.
e. is always less than one for bank’s with a positive cumulative GAP.
Answer: d
Chapter 3 107. A bank has $100 million in earning assets, a net interest margin of 5%, and a 1-year
cumulative GAP of $10 million. Interest rates are expected to increase by 2%. If the bank
does not want net interest income to fall by more than 25% during the next year, how large
can the cumulative GAP be to achieve the allowable change in net interest income.
a. $2 million
b. $12 million
c. $15 million
d. $50 million
e. $62.5 million
Answer: e
Target Gap/Earning Assets =
(Allowable % change in NIM)(Expected NIM)/(Expected % change in interest rates)
Target Gap/$100 = (25%*5%/2%)
Target Gap/$100 = 0.625
Target Gap = $62.5
Chapter 3 108.Earnings sensitivity analysis differs from static GAP analysis by:
a. looking at a wide range of interest rate environments.
b. using perfect interest rate forecasts.
c. calculating a change in net interest income given a change in interest rates.
d. Earnings sensitivity analysis differs from static GAP analysis in all of the above ways.
e. Earnings sensitivity analysis and static GAP analysis do not differ. They are different
names for the exact same analysis.
Answer: a
Chapter 3 109. Which of the following does not have an embedded option?
a. A callable Federal Home Loan Bank bond.
b. Demand deposit accounts.
c. A home mortgage loan.
d. An auto loan.
e. All of the above have embedded options.
Answer: e
Chapter 3 110. Which of the following are likely to occur when interest rates rise sharply?
a. Fixed-rate loans are pre-paid.
b. Bonds are called.
c. Deposits are withdrawn early.
19
d. All of the above occur when interest rates rise sharply.
e. a. and b.
Answer: c
Chapter 3 111. EVE analysis: is essentially a _____________ analysis.

a. profitability
b. quality
c. liquidity
d. liquidation
e. earnings
Answer: d
Chapter 3 112. Duration gap analysis:

a. applies he the concept of duration to the bank’s entire balance sheet.
b. applies he the concept of duration to the bank’s entire income statement.
c. applies he the concept of duration to the bank’s retained earnings.
d. indicates the difference in the GAP in the time it takes to collect on loan payments versus
the time to attract deposits.
e. estimates when embedded options will be exercised.
Answer: a
Chapter 3 113. Macaulay's duration:

a. is a weighted average of the time until cash flows are received.
b. is always greater than maturity.
c. is never equal to maturity.
d. directly indicates how much the price of a security will change given a change in interest
rates.
e. estimates when embedded options will be used.
Answer: a
Chapter 3 114. Modified duration:

a. estimates when embedded options will be used.
b. directly indicates how much the price of a security will change given a change in interest
rates.
c. is always greater than maturity.
d. All of the above
e. a. and b.
Answer: b
Chapter 3 115. Effective duration:
a. estimates when embedded options will be used.
b. directly indicates how much the price of a security will change given a change in interest
rates.
c. is always greater than maturity.
d. is a weighted average of the time until cash flows are received.
e. All of the above
Answer: a
Chapter 3 116. 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%.
20
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%
Chapter 3 117. A bond has a Macaulay's duration of 21 years. If rates rise from 5% to 5.5%, the bonds
price will:
a. increase by approximately 1%.
b. decrease by approximately 1%.
c. increase by approximately 10%.
d. decrease by approximately 10%.
Answer: d
Modified Duration = Macaulay's duration/(1+i) = 21/1.05 = 20
% Change in Price = -Modified duration * Change in interest rates = -20 * 0.5% = -10%
Chapter 3 118. A bond has a Macaulay's duration of 26.56 years. If rates rise from 6.25% to 6.50%, the
bonds price will:
a. increase by approximately 6.25%.
b. decrease by approximately 6.25%.
c. increase by approximately 6.50%.
d. decrease by approximately 6.50%.
Answer: b
Modified Duration = Macaulay's duration/(1+i) = 26.56/1.0625 = 25
% Change in Price = -Modified duration * Change in interest rates = -25 * 0.25% = -6.25%
Chapter 3 119. A 20-year zero coupon bond with a face value of $1,000 is currently selling for $214.55.
Using the bond's modified duration, what is the approximate change in the price of the
bond if interest rates rise by 25 basis points?
a. -49.63%
b. -46.39%
c. -4.96%
d. -4.63%
Answer: d
Step 1
Find current interest rate
PV = -214.55
FV = 1,000
N=20
I=?=8%
Step 2
Since this is a zero coupon bond, Macaulay’s duration = Maturity = 20

Modified Duration = 20/(1+.07) = 18.52
% Change in Price = -Modified duration * Change in interest rates = -18.52 * 0.25% =- 4.63%
Chapter 3 120. A 30-year zero coupon bond with a face value of $10,000 is currently selling for
21
$2,313.77. Using the bond's modified duration, what is the approximate change in the price
of the bond if interest rates rise by 15 basis points?
a. -15.00%
b. -4.29%
c. -0.43%
d. -0.15%
Answer: b
Step 1
Find current interest rate
PV = -2,313.77
FV = 10,000
N=30
I=?=5%
Step 2
Since this is a zero coupon bond, Macaulay’s duration = Maturity = 30

Modified Duration = 30/(1+.05) = 28.57
% Change in Price = -Modified duration * Change in interest rates = -28.57 * 0.15% =- 4.29%
Chapter 3 121. A 10-year annual coupon bond is currently selling for its par value of $1,000 with an
annual yield of 5%. If the bond is callable at par, what is the effective duration of the bond,
assuming rates change by 1%?
a. 10 years
b. 7.36 years
c. 5.52 years
d. 4.60 years
e. 3.68 years
Answer: e
Step 1
Effective Duration = (Pi- - Pi+)/[P0*(i+ - i-)
If rates fall to 4%, the company will call the bond and P i- will be the call price of $1,000
Find Pi+
FV = 1,000
PMT = 50
I=5%+1%=6%
N=10
PV = 926.40
Step 2
Effective Duration = (1,000 – 926.40)/(1,000*(6% - 4%)) = 3.68 years
Chapter 3 122. A 20-year annual coupon bond is currently selling for its par value of $10,000 with an
annual yield of 7%. If the bond is callable at par, what is the effective duration of the bond,
assuming rates change by 2%?
a. 25.00 years
b. 20.00 years
c. 5.52 years
d. 4.56 years
22
e. 3.68 years
Answer: d
Step 1
If rates fall to 5%, the company will call the bond and P i- will be the call price of $10,000
Find Pi+
FV = 10,000
PMT = 700
I=7%+2%=9%
N=20
PV = 8,174.29
Step 2
Effective Duration = (10,000 – 8,174.29)/(10,000*(9% - 5%)) = 4.56 years
Chapter 3 123. Which of the following is likely to have a negative effective duration?
a. A high coupon, interest only mortgage-backed security that is pre-paying at a high rate.
b. A low coupon U.S. Treasury bond.
c. Fed Funds purchased.
d. Demand deposits
e. None of the above can have a negative effective duration.
Answer: a
Chapter 3 124. What does a bank's duration gap measure?

a. The duration of short-term buckets minus the duration of long-term buckets.
b. The duration of the bank's assets minus the duration of its liabilities.
c. The duration of all rate-sensitive assets minus the duration of rate-sensitive liabilities.
d. The duration of the bank's liabilities minus the duration of its assets.
e. The duration of all rate-sensitive liabilities minus the duration of rate-sensitive assets.
Answer: b
Chapter 3 125. 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
Chapter 3 126. Which of the following is true regarding duration gap analysis?
a. The magnitude of the duration gap is related to the amount of interest rate risk a bank is
subject to.
b. Management can adjust the duration gap to speculate on future interest rate changes.
c. A positive duration gap means a bank's market value of equity will decrease with an
increase in interest rates.
d. All of the above are true.
e. a. and c.
Answer: d
Chapter 3 127. Which of the following would generally be considered price sensitive?
23
a. Fed funds purchased
b. Fed funds sold
d. Demand deposits
e. A 20-year zero coupon bond
Answer: e
Chapter 3 128. Put the following steps in duration gap analysis in the proper order.
I. Estimate the economic value of assets, liabilities and equity.
II. Forecast the change in the economic value of equity for various interest rates.
III. Forecast future interest rates.
IV. Estimate the duration of assets and liabilities.
a. III, I, IV, II
b. I, II, III, IV
c. III, IV, I, II
d. IV, I, II, III
e. II, IV, I, III
Answer: a
Chapter 3 129. Which of the following is false regarding duration gap analysis?
a. Duration gap analysis does not classify assets as rate-sensitive.
b. Duration gap analysis indicates the potential change in a bank's net interest income.
c. Duration gap accounts for bank leverage.
d. Duration gap accounts for the present value of cash flows associated with all liabilities.
e. Duration gap analysis indicates the potential change in a bank's market value of equity.
Answer: b
Chapter 3 130.
Use the following bank information for this question:
Assets Market Rate Duration Liabilities Market Rate Duration
Value (Years) and Equity Value (Years)
Cash $150 Time $500 4% 1.25
deposits
Loans $675 10% 2.50 CDs $400 6% 3.00
T- $175 5% 5.00 Equity $100
Bonds
Total $1,000 $1,000
What is the weighted average duration of assets?
a. 2.56 years
b. 3.75 years
c. 4.85 years
d. 5.00 years
e. 7.5 years
Answer: a
(675/1,000)*2.5 years +(175/1,000)*5 years = 2.56 years
Chapter 3 131.
24
Cash $150 Time $500 4% 1.25
deposits
Loans $675 10% 2.50 CDs $400 6% 3.00
T- $175 5% 5.00 Equity $100
Bonds
Total $1,000 $1,000
What is the bank’s duration gap?
a. 0.53
b. 0.73
c. 0.91
d. 2.03
e. 4.58
Answer: b
Step 1
Weighted Average Duration of Liabilities = (500/900)*1.25 years + (400/900)*3 years = 2.03 years
Step 2
Duration Gap = Weighted Avg Duration of Assets – (Liabilities/Total Assets)Weighted Avg

Duration of Liabilities
Duration Gap = 2.56 years – (900/1000)*2.03 years = 0.73
Chapter 3 132.
Cash $150 Time $500 4% 1.25
deposits
Loans $675 10% 2.50 CDs $400 6% 3.00
T- $175 5% 5.00 Equity $100
Bonds
Total $1,000 $1,000
What is the bank’s weighted average cost of liabilities?
a. $44
b. $76
c. $80
d. $94
e. $102
Answer: a
(500* 4%) + (400*6%) = 44
Chapter 3 133.
Cash $150 Time $500 4% 1.25
deposits
Loans $675 10% 2.50 CDs $400 6% 3.00
T- $175 5% 5.00 Equity $100
Bonds
Total $1,000 $1,000
25
What is the bank’s expected economic net interest income?
a. $14.75
b. $32.25
c. $44.00
d. $76.25
e. $120.25
Answer: b
(10%*$675) + (5%*$175) – (4%*$500) – (6%*$400) = $32.25
Chapter 3 134.
Cash $150 Time $500 4% 1.25
deposits
Loans $675 10% 2.50 CDs $400 6% 3.00
T- $175 5% 5.00 Equity $100
Bonds
Total $1,000 $1,000
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. $6.85
e. -$6.85
Answer: e
Step 1
Calculate Weighted Average Return of Assets
(10%*$675/$1,000) + (5%*$175/$1,000) = 7.625% = y
Step 2
EVE = -DGAP[y/(1+y)]MVA = -0.73*[.01/1.07625]*$1,000 = -6.85

Chapter 3 135.
Cash $200 Time $600 2.0% 1.500
deposits
Loans $800 8.0% 3.750 CDs $500 4.5% 3.125
T- $250 4.0% 7.250 Equity $150
Bonds
Total $1,250 $1,250
What is the weighted average duration of assets?
a. 2.56 years
b. 3.85 years
c. 4.85 years
d. 5.00 years
e. 7.5 years
Answer: b
26
(800/1,250)*3.75 years + (250/1,250)*7.25 years = 3.85 years
Chapter 3 136.
Cash $200 Time $600 2.0% 1.500
deposits
Loans $800 8.0% 3.750 CDs $500 4.5% 3.125
T- $250 4.0% 7.250 Equity $150
Bonds
Total $1,250 $1,250
What is the bank’s duration gap?
a. 0.53
b. 0.73
c. 0.91
d. 1.88
e. 4.58
Answer: d
Step 1
Weighted Average Duration of Liabilities = (600/1,100)*1.5 years + (500/1,100)*3.125 years =
2.24 years
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
Chapter 3 137.
Cash $200 Time $600 2.0% 1.500
deposits
Loans $800 8.0% 3.750 CDs $500 4.5% 3.125
T- $250 4.0% 7.250 Equity $150
Bonds
Total $1,250 $1,250
What is the bank’s weighted average cost of liabilities?
a. $24.9
b. $34.5
c. $80.0
d. $94.3
e. $102.1
Answer: b
(600* 2%) + (500*4.5%) = 34.5
Chapter 3 138.
27
Cash $200 Time $600 2.0% 1.500
deposits
Loans $800 8.0% 3.750 CDs $500 4.5% 3.125
T- $250 4.0% 7.250 Equity $150
Bonds
Total $1,250 $1,250
What is the bank’s expected economic net interest income?
a. $34.5
b. $32.3
c. $39.5
d. $44.0
e. $120.5
Answer: c
(8%*$800) + (4%*$250) – (2%*$600) – (4.5%*$500) = $39.5
Chapter 3 139.
Cash $200 Time $600 2.0% 1.500
deposits
Loans $800 8.0% 3.750 CDs $500 4.5% 3.125
T- $250 4.0% 7.250 Equity $150
Bonds
Total $1,250 $1,250
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
Chapter 3 140. For a bank that has a negative duration gap, a decrease in interest rates will cause a(n)
_______ in the economic value of assets, a(n) _______ in the economic value of liabilities,
and a(n) _______ in the economic value of equity.
a. increase, decrease, increase
b. increase, increase, decrease
c. increase, increase, increase
d. decrease, decrease, increase
e. decrease, increase, decrease
Answer: a
Chapter 4 141. Banks with greater capital can do all of the following except:
a. borrow at lower rates.
b. make larger loans.
28
c. expand faster through acquisitions.
d. expand faster through internal growth
e. Banks with greater capital can do all of the above.
Answer: e
Chapter 4 142. Community banks are typically considered those banks with assets:
a. over $100 billion.
b. between $50 billion and $99 billion.
c. between $10 billion and $49 billion.
d. between $1 billion and $9 billion.
e. under $1 billion.
Answer: e
Chapter 4 143. Prior to the Basle Agreement, capital requirements were established without regard to:
a. the bank's liquidity risk.
b. the bank's asset quality.
c. the size of the bank's assets.
d. the bank's operational risk.
e. the bank's interest rate risk.
Answer: c
Chapter 4 144. Prior to the Basle Agreement, primary capital included all of the following except:
a. long-term subordinated debt.
b. common stock.
c. undivided profits.
d. perpetual preferred stock.
e. the allowance for loan losses.
Answer: a
Chapter 4 145. Prior to the Basle Agreement, secondary capital included which of the following?
a. The allowance for loan losses
b. Limited-life preferred stock
c. Long-term subordinated debt
d. All of the above
e. b. and c.
Answer: b
Chapter 4 146. Which of the following was not part of the Basle Agreement?
a. Bank's required capital was linked to its composition of assets.
b. Banks are required to operate with a minimum level of equity.
c. The ownership of equity by banks was prohibited.
d. Capital requirements across countries were standardized.
e. The minimum total capital requirements were set to 8% of risk-adjusted assets.
Answer: c
Chapter 4 147. Under the current capital requirements, assets in Category 2, such as repurchase
agreements, have an effective total capital-to-total-assets ratio of:
a. 1.6%.
b. 2.0%.
c. 4.0%.
d. 8.0%.
e. 8.6%.
29
Answer: a
Chapter 4 148. Under the current capital requirements, assets in Category 3, such as 1-4 family real
estate loans, have an effective total capital-to-total-assets ratio of:
a. 1.6%.
b. 2.0%.
c. 4.0%.
d. 8.0%.
e. 8.6%.
Answer: c
Chapter 4 149. Under current capital requirements, Tier 1 Capital takes of all of the following into
account except:
a. common stockholder's equity.
b. equity in subsidiaries.
c. goodwill.
d. mandatory convertible debt.
e. non-cumulative perpetual preferred stock.
Answer: d
Chapter 4 150. Tier 2 capital consists of all of the following except:
a. 30-year subordinated debt.
b. cumulative perpetual preferred stock.
c. mandatory convertible preferred stock.
d. preferred stock with a maturity of 7 years.
e. equity in subsidiaries.
Answer: e
Chapter 4 151.
Use the following information for this question:
Banks Assets Risk Bank Liabilities
Weight
Cash and $ 2,000 0% Deposit $ 8,000
Treasury
Securities
Repurchase $ 1,000 20% Hot Money $ 6,000
Agreements
Municipal $ 1,500 20% Subordinated $ 250
Bonds Debt
Single $ 2,700 50% Common $ 100
Family Stock
Home
Mortgages
CMOs $ 2,500 50% Surplus $ 300
Commercial $ 1,500 100% Retained $ 350
Loans Earnings
Agricultural $ 2,100 100%
Loans
Allowance $ (300) 0%
for Loan
30
Loss
Bank $ 2,000 100%
Buldings
Total $ 15,000 $ 15,000
How much Tier 1 capital does the bank have?
a. $100
b. $450
c. $700
d. $750
e. $1000
Answer: d
In this case, Tier 1 Capital = Common Stock + Surplus + Retained Earnings
Tier 1 Capital = $100 + $300 + $350 = $750
Chapter 4 152.
Weight
Treasury
Securities
Agreements
Bonds Debt
Single $ 2,700 50% Common $ 100
Family Stock
Home
Mortgages
CMOs $ 2,500 50% Surplus $ 300
Loans Earnings
Loans
for Loan
Loss
Bank $ 2,000 100%
Buldings
Total $ 15,000 $ 15,000
The minimum leverage capital for this bank is:

a. $348
b. $450
c. $509
d. $581
e. $696
31
Answer: b
Minimum Leverage Capital = 3% * (Total Assets – Goodwill) = 3% * ($15,000 - $0) = $450
Chapter 4 153.
Weight
Treasury
Securities
Agreements
Bonds Debt
Single $ 2,700 50% Common $ 100
Family Stock
Home
Mortgages
CMOs $ 2,500 50% Surplus $ 300
Loans Earnings
Loans
for Loan
Loss
Bank $ 2,000 100%
Buldings
Total $ 15,000 $ 15,000
What is the amount of risk-adjusted assets for the bank?

a. $7,700
b. $8,700
c. $9,700
d. $14,700
e. $15,700
Answer: b
Banks Assets Risk Risk-

Weight Adjusted
Assets
Cash and Treasury $ 2,000 0% -
Securities
Repurchase $ 1,000 20% $ 200
Agreements
Municipal Bonds $ 1,500 20% $ 300
Single Family Home $ 2,700 50% $ 1,350
Mortgages
CMOs $ 2,500 50% $ 1,250
32
Commercial Loans $ 1,500 100% $ 1,500
Agricultural Loans $ 2,100 100% $ 2,100
Allowance for Loan $ (300) 0% -
Loss
Bank Buldings $ 2,000 100% $ 2,000
Total $ 15,000 $ 15,000
Chapter 4 154.
Weight
Treasury
Securities
Agreements
Bonds Debt
Single $ 2,700 50% Common $ 100
Family Stock
Home
Mortgages
CMOs $ 2,500 50% Surplus $ 300
Loans Earnings
Loans
for Loan
Loss
Bank $ 2,000 100%
Buldings
Total $ 15,000 $ 15,000
The minimum Tier 1 capital for this bank is:

a. $348
b. $450
c. $509
d. $581
e. $696
Answer: a
Minimum Tier 1 Capital = 4% * Risk-Adjusted Assets = 4% * $8,700 = $348
Chapter 4 155.
Weight
33
Treasury
Securities
Agreements
Bonds Debt
Single $ 2,700 50% Common $ 100
Family Stock
Home
Mortgages
CMOs $ 2,500 50% Surplus $ 300
Loans Earnings
Loans
for Loan
Loss
Bank $ 2,000 100%
Buldings
Total $ 15,000 $ 15,000
The minimum total capital for this bank is:

a. $348
b. $450
c. $509
d. $581
e. $696
Answer: e
Minimum Total Capital = 8% * Risk-Adjusted Assets = 8% * $8,700 = $696
Chapter 4 156.
Weight
Treasury
Securities
Agreements
Bonds Debt
Single $ 2,700 50% Common $ 100
Family Stock
Home
Mortgages
CMOs $ 2,500 50% Surplus $ 300
34
Loans Earnings
Loans
for Loan
Loss
Bank $ 2,000 100%
Buldings
Total $ 15,000 $ 15,000
What is the total amount of the bank's regulatory capital?
a. $500
b. $700
c. $750
d. $1,000
e. $1,300
Answer: d
In this case, Total Regulatory Capital = Common Equity + Subordinate Debt = $750 + $250 =
$1,000.
Chapter 4 157. To be considered well-capitalized, a bank's minimum Tier 1 capital, total capital, and
leverage capital must be:
a. 4%, 8%, and 3%, respectively.
b. 8%, 5%, and 3%, respectively.
c. 10%, 10%, and 10%, respectively.
d. 6%, 10%, and 5%, respectively.
e. 3%, 4%, and 8%, respectively.
Answer: d
Chapter 4 158. To be considered adequately capitalized, a bank's minimum Tier 1 capital, total capital,
and leverage capital must be:
a. 4%, 8%, and 3%, respectively.
b. 8%, 5%, and 3%, respectively.
c. 10%, 10%, and 10%, respectively.
d. 6%, 10%, and 5%, respectively.
e. 3%, 4%, and 8%, respectively.
Answer: a
Chapter 4 159. A bank that does not meet the minimum levels for Tier 1 capital, total capital, and
leverage capital ratios is classified as:
a. well-capitalized.
b. adequately capitalized.
c. undercapitalized.
d. significantly undercapitalized.
e. critically undercapitalized.
Answer: e
Chapter 4 160. How does bank capital reduce bank risk?
a. It provides a cushion for firms to absorb losses.
b. It creates unlimited growth opportunities.
c. It limits access to the financial markets.
35
e. a. and b.
Answer: a
Chapter 4 161. Why do regulators prefer higher capital requirements?

a. It justifies the existence of regulatory agencies.
b. It better protects the deposit insurance fund.
c. It enhances bank asset quality.
d. It decreases bank profitability.
e. It increases bank leverage.
Answer: b
Chapter 4 162. Why do banks generally prefer lower capital requirements?
a. To minimize the impact shareholders have on management decisions.
b. To increase the influence of bank regulators.
c. To increase a bank’s return on equity.
d. To increase depositor protection.
e. To maximize operating leverage.
Answer: c
Chapter 4 163. How do capital requirements constrain bank growth?
a. By discouraging investments in Treasury securities.
b. By disallowing the ownership of mortgage loans.
c. By decreasing a bank’s net interest margin.
d. By limiting the amount of new assets that a bank can acquire through debt financing.
e. By reducing a bank’s CAMELS ratings.
Answer: d
Chapter 4 164. Which of the following is not a weakness of risk-based capital standards?
a. They ignore interest rate risk.
b. They ignore the value of deposit insurance.
c. They ignore changes in the market value of assets.
d. They ignore credit risk.
e. They ignore the value of a bank's charter.
Answer: d
Chapter 4 165. Approximately what percentage of commercial banks are currently considered well
capitalized at the end of 2007?
a. 97%
b. 87%
c. 77%
d. 67%
e. 57%
Answer: a
Chapter 4 166.
A bank currently just meets its total capital requirements of 8%. The bank currently has a
dividend payout ratio of 35%. Assets are expected to grow at 5%.
What is the required ROA to support the growth in assets?
a. 0.62%
b. 0.65%
c. 0.68%
d. 0.72%
36
e. 0.75%
Answer: a
TA/TA ROA(1DR)
EC/TA
EQ/TA
.05 = [ROA*(1-.35) + 0]/.08
.05*.08 = .65ROA
.004/.65 = ROA
ROA = .00615
Chapter 4 167.
If the bank expects its ROA to be .45%, what is the maximum dividend payout ratio to support
the increase in assets?
a. 11.1%
b. 22.2%
c. 33.3%
d. 44.4%
e. 89.9%
Answer: a
EC/TA
EQ/TA
.05 = [.0045*(1-DR) + 0]/.08
.004 = [.0045 - .0045DR]
.0045DR = .0045 - .004
DR = .1111 = 11.11%
Chapter 4 168.
If the bank expects its ROA to be .45% and the bank does not wish to change its dividend payout
ratio from 35%, how much new equity capital (as a percent of total assets) must the bank issue
to support the growth in assets?
a. 0.001075%
b. 0.01075%
c. 0.1075%
d. 1.075%
e. 10.75%
Answer: c
EC/TA
EQ/TA
.05 = [.0045*(1-.35) + ΔEC/TA]/.08
.05 *.08= [.002925 + ΔEC/TA]
.004 - .002925 = ΔEC/TA
ΔEC/TA = .001075
Chapter 4 169. For banks that have insufficient capital, which of the following is not a typical operating
strategy to achieve capital adequacy?
a. Limit asset growth
37
b. Shrink the bank
c. Increase the dollar amount of commercial loans outstanding
d. Shift more bank assets into lower risk categories.
e. Reprice assets to reflect greater equity support
Answer: c
Chapter 4 170. Which of the following is true regarding subordinated debt?

a. Subordinated debt claims come before the claims of depositors.
b. Principal payments are not mandatory.
c. Transaction costs on issuing new debt are lower than when issuing new equity.
d. Interest payments on subordinated debt are tax-deductible.
e. New subordinated debt dilutes existing shareholder equity.
Answer: d
Chapter 5 171. An instrument that derives its value from another underlying asset is known as a(n):
a. hedge.
b. derivative.
c. basis.
d. backdate agreement.
e. original document.
Answer: b
Chapter 5 172. Banks use financial derivatives for all of the following except:
a. hedge asset yields.
b. adjust maturities by creating synthetic liabilities.
c. adjust the sensitivity of earnings to changes in interest rates.
d. lock-in the cost of liabilities.
e. Banks use financial derivatives for all of the above.
Answer: e
Chapter 5 173. When an interest-bearing security is the underlying asset for a futures contract, it is
called:
a. a forward contract.
b. an interest rate futures.
c. a commission futures.
d. a speculative futures.
e. an interest rate swap.
Answer: b
Chapter 5 174. When you sell a futures contract, your futures position is:
a. flat.
b. long.
c. short.
d. the same as the cash position.
e. b. and d.
Answer: c
Chapter 5 175. When you buy a futures contract, your futures position is:
a. flat.
b. long.
c. short.
38
d. the same as the cash position.
e. a. and d.
Answer: b
Chapter 5 176. When you own the underlying security, your spot position is _______.
a. flat.
b. long.
c. short.
d. is also known as your cash position.
e. b. and d.
Answer: e
Chapter 5 177. When you wish to own the underlying security, your spot position is _______.
a. fat.
b. long.
c. short.
d. skinny.
e. a. and c.
Answer: c
Chapter 5 178. Financial futures are:
a. a commitment between two parties to trade a financial instrument at a certain rate at a
specified time in the future.
b. A call option on a standardized asset at a certain price at a specified time in the future.
c. A put option on a standardized asset at a certain price at a specified time in the future.
d. a commitment between two parties on the price of a standardized financial asset with
the final settlement specified time in the future.
e. b. and c.
Answer: d
Chapter 5 179. Which of the following would generally not be considered a speculator?
a. Local
b. Day trader
c. Scalper
d. Position trader
e. Commission broker
Answer: e
Chapter 5 180. Which of the following executes trades for other parties?
a. Local
b. Day trader
c. Scalper
d. Position trader
Answer: e
Chapter 5 181. Which of the following primarily takes futures positions that are outstanding for just
minutes?
a. Scalper
b. Local
c. Day trader
d. Position trader
Answer: a
39
Chapter 5 182. Which of the following wishes to reduce risk?
a. Scalper
b. Local
c. Arbitrageur
d. Hedger
e. Day trader
Answer: d
Chapter 5 183. To buy a futures contract, one must post a(n):
a. maintenance margin.
b. variation margin.
c. market margin.
d. initial margin.
e. marked margin.
Answer: d
Chapter 5 184. The daily change in the value due to the marking-to-market process is know as the:
a. maintenance margin.
b. variation margin.
c. market margin.
d. initial margin.
e. marked margin.
Answer: b
Chapter 5 185. The “initial margin” on a futures contract:
a. is a cash deposit the buyer places with the seller as good faith money.
b. can be cash or U.S. government securities placed with an exchange member.
c. are U.S. government securities the buyer places with the seller for safekeeping.
d. are the first installment on the payment for a futures contract.
e. is the amount by which the futures contract is initially “in the money.”
Answer: b
Chapter 5 186. ____________ of financial futures contracts require physical delivery.
a. Nearly 100%
b. Approximately 75%
c. Approximately 50%
d. Approximately 25%
e. Less than 1%
Answer: e
Chapter 5 187. Which of the following is not a difference between futures and forward contracts?
a. Futures contracts are marked-to-market daily, while futures contracts are not.
b. Buyers and sellers deal directly with each other on forward contracts but go through and
exchange with futures contracts.
c. Futures contracts are standardized, forward contracts generally are not.
d. Delivery rarely occurs on futures contracts but generally occurs with forward contracts.
e. All of the above are differences between futures and forward contracts.
Answer: e
Chapter 5 188. Which of the following is correct about futures contracts?

a. Buyers of futures contracts make a profit when prices fall.
b. Buyers of futures contracts make a profit when interest rates rise.
c. Sellers of futures contracts make a profit when prices fall.
d. Sellers of futures contracts make a profit when prices rise.
40
e. a. and d.
Answer: c
Chapter 5 189. Which of the following is correct about futures contracts?
a. Buyers of futures contracts make a profit when prices rise.
b. Buyers of futures contracts make a profit when interest rates rise.
c. Sellers of futures contracts make a profit when prices rise.
d. Sellers of futures contracts make a profit when prices interest rates fall.
e. b. and d.
Answer: a
Chapter 5 190. The daily settlement process that credits gains or deducts losses from a futures
customer’s account is called:
a. the variation margin.
b. marking-to-market.
c. the initial margin.
d. the maintenance margin.
e. the gain/loss ratio.
Answer: b
Chapter 5 191. The value of a basis point for 90-day Eurodollar Time Deposit futures contract is:
a. $10.
b. $100.
c. $25.
d. $250.
e. $500.
Answer: c
Chapter 5 192. The basis on a futures contract is defined as:

a. the cash price minus the forward price.
b. the forward price minus the cash price.
c. the futures price minus the cash price.
d. the cash price minus the futures price.
e. None of the above.
Answer: d
Chapter 5 193. A trader buys a 90-day Eurodollar futures contract at 95.25. The next day, interest rates
fall 4.5%. Which of the following is true? Assume that the initial and maintenance margins
are $5,000.
a. The trader would have to deposit an additional $62,500 into her account.
b. The trader would have to deposit an additional $2,500 into her account.
c. The trader would have to deposit an additional $625 into her account.
d. The trader could withdraw $2,500 from her margin account.
e. The trader could withdraw $625 from her margin account.
Answer: e
100 – settlement price = futures rate
100 – 95.25 = 4.75
4.75% – 4.50% = 0.25% = 25 basis points
Change in value of contract is 25 basis points * $25/basis point = $625. Since rates fell, the value
of the futures contract rises, and the funds are available for withdrawal.
Chapter 5 194. A trader buys a 90-day Eurodollar futures contract at 95.25. The next day, interest rates
41
rise 5.25%. Which of the following is true? Assume that the initial and maintenance
margins are $5,000.
a. The trader would have to deposit an additional $62,500 into her account.
b. The trader would have to deposit an additional $1,500 into her account.
c. The trader would have to deposit an additional $625 into her account.
d. The trader could withdraw $1,250 from her margin account.
e. The trader could withdraw $625 from her margin account.
Answer: b
100 – settlement price = futures rate
100 – 95.25 = 4.75
5.25% – 4.75% = 0.50% = 50 basis points
Change in value of contract is 50 basis points * $25/basis point = $1,250. Since rates rose, the
value of the futures contract falls, and additional funds would need to be deposited into the
margin account.
Chapter 5 195. A bank anticipates it will need to borrow funds in the Eurodollar market in the future. It
hedges by selling futures contracts. If rates decline, which of the following is true?
a. The bank will profit on the futures contract.
b. The bank will profit in the cash market.
c. The bank will have locked in a low cost of borrowing.
d. The bank will lose in the cash market.
e. a. and d.
Answer: b
Chapter 5 196. An investor anticipates she will have funds to invest in the T-Bill market. If she hedges by
buying futures contracts and rates decline, which of the following is true?
a. The investor will profit on the futures contract.
b. The investor will profit in the spot market.
c. The investor will have locked in a minimum 10% return.
d. The investor will lose in the spot market.
e. a. and d.
Answer: e
Chapter 5 197. Which of the following is not true regarding the basis?
a. The basis systematically declines as expiration approaches.
b. The basis must equal zero at expiration.
c. The basis may not equal zero before expiration.
d. The basis may be positive or negative.
e. both b. and c. are not true regarding the basis.
Answer: c
Chapter 5 198. When the net profit on both the futures and cash position equals zero, this is known as
a(n):
a. cross hedge.
b. perfect hedge.
c. imperfect hedge.
d. basis hedge.
e. return hedge.
Answer: b
Chapter 5 199. What is a microhedge?
a. It is a hedge of the bank’s aggregate portfolio.
b. It is a hedge using just one type of futures contract.
42
c. It is the hedge of a specific asset or liability for which the bank is exposed to interest rate
risk.
d. It is a hedge using two or more types of futures contracts.
e. It is a has that has a duration of less than one month.
Answer: c
Chapter 5 200. What is a macrohedge?
a. It is a hedge of the bank’s aggregate portfolio.
b. It is a hedge using just one type of futures contract.
c. It is the hedge of a specific asset or liability for which the bank is exposed to interest rate
risk.
d. It is a hedge using two or more types of futures contracts.
e. It is a has that has a duration of less than one month.
Answer: a
Chapter 6 201. Which of the following is not considered a cash asset?
a. Marketable securities
b. Cash items in process of collection
c. Demand deposits at private financial institutions
d. Demand deposits at the Federal Reserve
e. Vault cash
Answer: a
Chapter 6 202. Which of the following is not a reason that banks hold cash assets?
a. To meet customer's needs for currency.
b. To meet capital requirements.
c. To meet required reserves.
d. To compensate for correspondent bank services.
e. To assist in the check clearing process.
Answer: b
Chapter 6 203. Which of the following is not considered a viable long-term source of bank liquidity?
a. Federal funds sold
b. Short-term Treasury securities
c. Cash
d. High quality short-term municipal securities
e. Reverse repurchase agreements
Answer: c
Chapter 6 204. In which of the following ways can a bank acquire liquidity?
a. Selling Fed funds
b. Investing in repurchase agreements
c. Increasing the number of loans outstanding
d. Selling Treasury securities
e. Buying back outstanding bank stock
Answer: d
Chapter 6 205. Which of the following is not an advantage of larger cash balances for a bank?
a. Larger cash balances reduce the need to borrow at the discount window.
b. Larger cash balances reduce the risk of bank runs.
c. Larger cash balances reduce the risk of paying penalties to the Federal Reserve.
d. Larger cash balances increase reserve balances.
e. Larger cash balances reduce a bank's interest expense.
Answer: e
43
Chapter 6 206. Which of the following is not considered a monetary policy tool of the Federal Reserve?
a. Changing float requirements
b. Open market operations
c. Changing the discount rate
d. Changing reserve requirements
e. All of the above are considered to be monetary policy tools
Answer: a
Chapter 6 207. The Federal Reserve has reduced the use of reserve requirements as a monetary policy
tool because:
a. the Fed has focused on controlling short-term interest rates.
b. of the increased use of sweep accounts.
c. reserve requirements are a "tax” on banks .
e. a. and c. only.
Answer: d
Chapter 6 208. Which of the following does not directly influence the amount of required reserves a
bank must hold?
a. The required reserve ratio.
b. The dollar amount of cash items in process of collection.
c. The dollar amount of demand deposits outstanding.
d. The dollar amount of money market deposit accounts outstanding.
e. The dollar amount of NOW accounts outstanding.
Answer: d
Chapter 6 209. In determining reserves, the banks and the Federal Reserve currently use:
a. a leading reserve accounting system.
b. a contemporaneous reserve accounting system.
c. a lagging reserve accounting system.
d. an actual reserve accounting system.
e. a holding reserve accounting system.
Answer: c
Chapter 6 210. The two-week period during which a bank must hold sufficient legal reserves is called
the:
a. deposit computation period.
b. deposit maintenance period.
c. vault cash computation period.
d. base computation period.
e. maintenance period.
Answer: e
Chapter 6 211. A bank is currently exactly meeting its reserve requirements of 10%. If the bank has a
deposit inflow of $10,000,000, what is the impact on its required reserve position?
a. It now has excess reserves in the amount of $9,000,000.
b. It now has excess reserves in the amount of $10,000,000.
c. It is now deficient $1,000,000 in required reserves.
d. It is now deficient $9,000,000 in required reserves.
e. There would be no impact on the bank's required reserves.
44
Answer: a
Chapter 6 212. The check-clearing services of correspondent banks are often used because:
a. the respondent bank is required to purchase a minimum amount of services.
b. it reduces required reserves.
c. the correspondent bank may be marketing their own services in a local community.
d. it often reduces float.
e. it decreases interest income.
Answer: d
Chapter 6 213. Which of the following is a discretionary factor that will increase a bank's daily reserves
held at the Federal Reserve?
a. The prior day's immediate cash letter
b. Federal funds purchased
c. Deposits from the U.S. Treasury
d. Currency received from the Federal Reserve
e. Deficits at the local clearinghouse
Answer: b
Chapter 6 214. Which of the following is a discretionary factor that will decrease a bank's daily reserves
held at the Federal Reserve?
a. Remittances charged
b. Federal funds purchased
c. The previous day’s immediate cash letter
d. Currency received from the Federal Reserve
e. Deficits at the local clearinghouse
Answer: d
Chapter 6 215. Which of the following is a non-discretionary factor that will increase a bank's daily
reserves held at the Federal Reserve?
a. Federal funds sold.
b. Receiving a discount window loan
c. Remittances charged
d. Security sales
e. Deposits from the U.S. Treasury
Answer: e
Chapter 6 216. Which of the following is a non-discretionary factor that will decrease a bank's daily
reserves held at the Federal Reserve?
a. Deferred availability items
b. Receiving a discount window loan
c. Remittances charged
d. Excess balances at the local clearing house
e. Federal funds sold
Answer: c
Chapter 6 217. Which of the following indicates the potential demand for new loans?
a. Low business growth and activity
b. A relatively large percentage of demand deposits
c. Large, unused commercial credit lines outstanding
d. Large deposits held by a single customer
e. The level of uninsured deposits
45
Answer: c
Chapter 6 218. Which of the following indicates the potential for deposits leaving a bank?
a. High business activity and growth
b. Deposits that are inelastic to changes in interest rates
c. An aggressive bank loan officer
d. Large deposits held by a single customer
e. Small unused commercial credit lines outstanding
Answer: d
Chapter 6 219. Which of the following is not considered a highly liquid asset?
a. Federal funds sold
b. 90-day Treasury bills
c. AAA-rated commercial paper
d. A Federal Home Loan Bank Board bond with 6 months until maturity
e. Repurchase agreement
Answer: e
Note: A repurchase agreement is a liability.
Chapter 6 220. Which of the following is not a measure of liability liquidity?
a. Total loans to total assets
b. Total deposits to total assets
c. Total equity to total assets
d. Loan losses to net loans
e. Core deposits to total assets
Answer: a
Chapter 6 221. When selling securities to meet liquidity needs, a bank should consider all of the
following except:
a. brokerage fees.
b. lost interest income.
c. the gains or losses on the securities.
d. the impact on taxes.
e. A bank should consider all of the above when selling securities to meet liquidity needs.
Answer: e
Chapter 6 222. When increasing liabilities to meet liquidity needs, a bank should consider all of the
following except:
a. brokerage fees.
b. required reserves.
c. FDIC insurance premiums.
d. lost interest income.
e. A bank should consider all of the above when increasing liabilities to meet liquidity
needs.
Answer: d
Chapter 6 223. Volatile deposits:

a. are the largest source of funds for smaller banks.
b. equal the difference between actual current deposits and the base estimate of core
deposits.
c. reduce reserve requirements.
d. are a low cost source of funds.
46
e. all of the above
Answer: b
Chapter 6 224. The ease of converting an asset to cash with a minimum of loss is known as:
a. asset liquidity.
b. volatile liquidity.
c. core liquidity.
d. liability liquidity.
e. non-core liquidity.
Answer: a
Chapter 6 225. Correspondent banking services would include which of the following?
a. Check collection
b. Data processing services
c. Federal funds trading
d. all of the above
e. a. & c. only
Answer: d
Chapter 6 226. There is a short-run trade-off between a bank’s liquidity and _______.
a. asset quality
b. profitability
c. discount window borrowing
d. all of the above
e. a. & b. only
Answer: b
Chapter 6 227. Which of the following could be used to identify a potential increase in borrowing by
customers that might deplete a bank’s cash reserves?
a. The amount of insured versus uninsured deposits
b. Large deposits held by a single entity
c. Volume of Fed Funds sold
d. The sensitivity of deposits to changes in the level of interest rates
e. Unused commercial credit lines outstanding
Answer: e
Chapter 6 228. Collateral is required against each of the following liabilities except ________.
a. securities sold under agreement to repurchase
b. borrowings from the Federal Reserve discount window
c. U.S. Treasury securities
d. public deposits owned by the U.S. Treasury
e. Federal Home Loan Bank advances
Answer: c
Chapter 6 229. Which of the following is not a measure of liability liquidity?
a. Total equity to total assets
b. Core deposits to total assets
c. Total deposits to total assets
d. Federal funds sold to total assets
e. Loan losses to deposits.
Answer: d
Chapter 6 230. The section of a contingency plan that assesses the impact of potential adverse events on
the bank’s balance sheet is known as the _________ section?
47
a. narrative
b. qualitative
c. quantitative
d. summary
e. descriptive
Answer: c
48

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BANK MANAGEMENT

MULTIPLE CHOICE QUESTIONS

Chapter 3: Question 81 – 140

Chapter 4: Question 141 - 170

Chapter 5: Question 171 - 200

Chapter 6: Question 201 - 230

Chapter Questions and Answers

Chapter 1 7. Which of the following is false regarding community banks?

Chapter 1 9. __________ have a large international presence.

Chapter 1 10. An “independent” bank is:

Chapter 1 16. __________ control at least two commercial banks.

Chapter 1 19. Banks created Section 20 affiliates to:

Chapter 1 25. S-corporations must have no more than ___ shareholders.

Chapter 1 26. Deposits at credit unions are insured by the:

Chapter 2 35. A loan to an individual to purchase a home would be considered a:

Chapter 2 37. Banks generate their largest portion of income from:

Chapter 2 40. An example of a contra-asset account is:

Chapter 2 45. Securities that are “held-to-maturity” are:

Chapter 2 51. _________ own(s) the bulk of demand deposit accounts.

52. Which of the following is are only available to non-commercial customers?

Chapter 2 55. Jumbo certificates of deposit (CDs) typically:

Chapter 2 58. Core deposits consist of all of the following except:

Chapter 2 59. Which of the following is not considered a volatile liability?

Deposit Service Charges

Insurance Commission Fees and Income

Other Non-Interest Income

a. Fiduciary Activities & Deposit Service Charges

b. Trading Revenue & Investment Banking

Chapter 2 76. Profitable bank customers:

Chapter 2 77. Which of the following is not a cost management strategy?

Chapter 2 78. Banks experience economies of scale when:

Chapter 2 79. Banks experience diseconomies of scale when:

Chapter 2 80. Banks can increase their operating efficiencies by:

Chapter 3 85. A bank’s periodic GAP:

Chapter 3 86. A bank’s cumulative GAP:

Chapter 3 101. A shift from core deposits to non-core deposits will:

Chapter 3 103. A bank’s cumulative GAP will always be:

Chapter 3 104. Which of the following is an advantage of static GAP analysis?

Chapter 3 106. The GAP ratio:

Chapter 3 111. EVE analysis: is essentially a _____________ analysis.

Chapter 3 112. Duration gap analysis:

Chapter 3 113. Macaulay's duration:

Chapter 3 114. Modified duration:

Since this is a zero coupon bond, Macaulay’s duration = Maturity = 20

Since this is a zero coupon bond, Macaulay’s duration = Maturity = 30

Chapter 3 124. What does a bank's duration gap measure?

Duration Gap = Weighted Avg Duration of Assets – (Liabilities/Total Assets)Weighted Avg

the economic value of equity?

EVE = -DGAP[y/(1+y)]MVA = -0.73*[.01/1.07625]*$1,000 = -6.85

Duration Gap = Weighted Avg Duration of Assets – (Liabilities/Total Assets)Weighted Avg

the economic value of equity?

The minimum leverage capital for this bank is:

What is the amount of risk-adjusted assets for the bank?

Banks Assets Risk Risk-

The minimum Tier 1 capital for this bank is:

The minimum total capital for this bank is:

Chapter 4 161. Why do regulators prefer higher capital requirements?

Chapter 4 170. Which of the following is true regarding subordinated debt?

Chapter 5 188. Which of the following is correct about futures contracts?

Chapter 5 192. The basis on a futures contract is defined as:

Chapter 6 223. Volatile deposits:

You might also like

EVE = -DGAP[y/(1+y)]MVA = -0.73[.01/1.07625]$1,000 = -6.85