Article

Introduction to Banking Question solution

by Md Kamrul Hassan Tuhin

1

Match the correct description to each of the financial institution categories.

Central Banks

Your Answer

Oversee and manage all the banks in their respective country and set monetary policy

Correct Answer

Oversee and manage all the banks in their respective country and set monetary policy


Retail Banks

Your Answer

Offer products and services to individual consumers including chequing/checking and savings accounts, loans, mortgages, and credit cards

Correct Answer

Offer products and services to individual consumers including chequing/checking and savings accounts, loans, mortgages, and credit cards


Commercial Banks

Your Answer

Work with small, medium, and large businesses to serve their financial needs by offering services such as business loans and trade finance

Correct Answer

Work with small, medium, and large businesses to serve their financial needs by offering services such as business loans and trade finance


Investment Banks

Your Answer

Operate in the capital markets to help clients raise capital through underwriting and issuance of securities

Correct Answer

Operate in the capital markets to help clients raise capital through underwriting and issuance of securities

Explanation

None.


2

Identify the appropriate type of financial institutions for each description below.

Full-service banks that offer retail banking, commercial banking, and investment banking services to any potential client

Your Answer

Universal Banks

Correct Answer

Universal Banks


Financial institutions that serve a specific demographic and are owned by members

Your Answer

Credit Unions

Correct Answer

Credit Unions


Banks that focus on serving individual consumers and owner-operated small companies, and tend to focus on their immediate community

Your Answer

Community Banks

Correct Answer

Community Banks


Banks that offer retail and small business banking services through online platforms

Your Answer

Online Banks

Correct Answer

Online Banks


Banks that focus on helping clients access capital markets and raise capital

Your Answer

Investment Banks

Correct Answer

Investment Banks


Banks that focus on retail banking and commercial banking services and tend to have an international reach, with their main operations based in their home market

Your Answer

Large Banks

Correct Answer

Large Banks

Explanation

None.


3

Which of the following statements about private banking is true?

Your Answer

Private banking is often provided on a personal basis through a dedicated relationship manager.

Correct Answer

Private banking is often provided on a personal basis through a dedicated relationship manager.

Explanation

Private banking caters to high-net-worth and ultra-high-net-worth individuals and offer services on a personal basis by assigning a dedicated relationship manager to each client. They provide traditional deposit and payment products along with asset management and other services.


4

Match the correct descriptions of business, commercial, and corporate banking.

Business Banking

Your Answer

Serves owner-operated businesses with an annual revenue of up to $5 million and have a need for loans of less than $1 million

Correct Answer

Serves owner-operated businesses with an annual revenue of up to $5 million and have a need for loans of less than $1 million


Commercial Banking

Your Answer

Serves medium-sized business with up to 500 employees and multiple operating locations

Correct Answer

Serves medium-sized business with up to 500 employees and multiple operating locations


Corporate Banking

Your Answer

Serve businesses with over $100 million in revenue that are growing through mergers and acquisitions or moving into the publicly traded space

Correct Answer

Serve businesses with over $100 million in revenue that are growing through mergers and acquisitions or moving into the publicly traded space

Explanation

None.


5

Mr. Sampson has $2 million in cash sitting in an operating account and is looking to invest in the stock market and earn profits on a portfolio of equities. He is most likely to seek what service?

Your Answer

Private banking

Correct Answer

Private banking

Explanation

Private banking serves high-net-worth individuals with over $1 million liquid net worth and help them manage their assets. Mr. Sampson is most likely to seek advice from managers in private banking to help him manage his portfolio.


6

Bulge bracket refers to:

Your Answer

Investment banking services provided to multinational corporates in dealing with very large financial transactions

Correct Answer

Investment banking services provided to multinational corporates in dealing with very large financial transactions

Explanation

Bulge Bracket is the first tier of investment banking services which serves multinational corporates regarding large and complex financial transactions.


7

Technology Inc. is a software company based in the United States, with over 600 employees in 10 locations across the country. The company has recently signed a EUR 2 million contract with a European supplier and is looking for foreign exchange service to help facilitate the transaction. This is an example of services which would be provided in:

Your Answer

Commercial Banking

Correct Answer

Commercial Banking

Explanation

Commercial banking provides services in trade finance and foreign exchange to mid-sized companies with over 500 employees and operating in multiple geographic locations. Technology Inc. is most likely to utilize commercial banking services to facilitate the FX transaction.


8

Which of the following is NOT a typical product or service offered in retail banking?

Your Answer

Tax advisory service

Correct Answer

Tax advisory service

Explanation

Typical retail banking products and services include chequing/checking and savings accounts, mortgages, personal loans, and debt and credit cards. Tax advisory is a personal service that is usually offered in private banking to high-net-worth individuals.


9

Which of the following items is NOT found on the asset side of a bank’s balance sheet?

Your Answer

Deposits

Correct Answer

Deposits

Explanation

The asset side of a bank’s balance sheet is usually comprised of loans (both current and non-current), trading assets, and other assets such as property, plant, and equipment. Deposits from either current accounts or term deposits are sources of funding for a bank and are shown on the liabilities and equities side of the balance sheet.


10

Given the following information on a bank’s balance sheet, calculate the net interest income.

Assets

$MM

Yield

Liabilities & Equity

$MM

Yield

Loans to Customers

3,600

4.8%

Client Deposits

2,950

2.0%

Trading Assets

880

3.1%

Trading Liabilities

1,730

2.5%

Deposits with Banks

500

2.5%

Long-term Debt

600

5.0%

Property

470


Equity

170


Total Assets

5,450


Total L&E

5,450


 

Your Answer

$80.33MM

Correct Answer

$80.33MM

Explanation

Interest Income:
Interest on Loans = 3,600 x 4.8% = 172.8
Interest on Trading Assets = 880 x 3.1% = 27.28
Interest on Deposits with Banks = 500 x 2.5% = 12.5

Interest Expense:
Interest on Client Deposits = 2,950 x 2.0% = 59
Interest on Trading Liabilities = 1,730 x 2.5% = 43.25
Interest on Long-term Debt = 600 x 5.0% = 30

Net Interest Income = (172.8 + 27.28 + 12.5) – (59 + 43.25 + 30) = $80.33MM


11

Which of the following formulas is correct?

Your Answer

ROE = (Profit After Tax / Total Assets) x (Total Assets / Equity)

Correct Answer

ROE = (Profit After Tax / Total Assets) x (Total Assets / Equity)

Explanation

The correct formula for calculating ROE is:

ROE = (Profit After Tax / Total Assets) x (Total Assets / Equity) = Return on Assets x Leverage


12

Given the following balance sheet structures of two companies, what is each company’s ROE and which company has the higher ROE figure.


Assets

Return

Debt

Cost

Equity

Company A

1,250

3.5%

750

2.0%

500

Company B

1,250

3.5%

680

2.0%

570

 

Your Answer

Company A; 5.75%

Correct Answer

Company A; 5.75%

Explanation

ROE of Company A = ((1,250 x 3.5% - 750 x 2.0%) / 1,250) x (1,250 / 500) = 5.75%

ROE of Company B = ((1,250 x 3.5% - 680 x 2.0%) / 1,250) x (1,250 / 570) = 5.29%

Company A has a higher ROE of 5.75%.


13

Calculate the operating efficiency ratio using the following information.

Interest Income / Expense

$MM

Net Interest Income

4,680



Bank Salaries

1,275

Travel and Meals Expense

320

Rent and Utilities

1,650

 

Your Answer

69.3%

Correct Answer

69.3%

Explanation

Operating efficiency ratio = Non-interest expense / (Net interest income + Other income) = (1,275 + 320 + 1,650) / 4,680 = 69.3%


14

Which of the following statements about asset-liability matching (ALM) is NOT true?

Your Answer

ALM is the practice of ensuring there are equal amounts of assets and liabilities on a bank’s balance sheet.

Correct Answer

ALM is the practice of ensuring there are equal amounts of assets and liabilities on a bank’s balance sheet.

Explanation

Asset-Liability Matching is the practice of investing, buying, liquidating, and adjusting one’s assets to cover its liabilities when needed. In ALM, treasury managers need to project the timing of cash outflows and make sure there is sufficient income to meet any cash needs. Proper ALM minimizes the interest rate risk and liquidity risk within a bank.


15

Which of the following are the two steps in the securitization process?

Your Answer

(1) The bank combines multiple assets into a single compound asset and determines the return by taking the weighted average of the return offered by each individual asset; (2) the compound asset is sold as securities to third party investors.

Correct Answer

(1) The bank combines multiple assets into a single compound asset and determines the return by taking the weighted average of the return offered by each individual asset; (2) the compound asset is sold as securities to third party investors.

Explanation

The securitization process is broken down into two steps:

First, the bank combines multiple assets into a single compound asset. The return offered by the compound asset will be a weighted average of the return offered by the individual assets it is comprised on. These assets are often debt instruments such as mortgages, loans, credit card debts, and leases.

Next, the bank sells the compound asset to third party investors as securities, which could be in the form of bonds or collateralized debt obligations (CDOs).

 


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