Chapter 3

Banks and Other Financial Institutions

TRUE-FALSE QUESTIONS

1. The structure of the modern banking system includes commercial banks, savings
and loans, mutual savings banks, and credit unions.
Answer: T
Difficulty Level: Easy
Subject Heading: Structure of Banking System

2. An investment bank accepts deposits, makes loans, and issues checking accounts.
Answer: F
Difficulty Level: Easy
Subject Heading: Types of Financial Institutions

3. Commercial banks are aggressive and often assume large amounts of risk.
Answer: F
Difficulty Level: Easy
Subject Heading: Types of Financial Institutions

4. Part of the reason that the Banking Act of 1933 was passed was in response to the
large numbers of bank failures.
Answer: T
Difficulty Level: Medium
Subject Heading: Bank Legislation

5. Credit unions are cooperative nonprofit organizations that exist primarily to provide
member depositors with consumer credit.
Answer: T
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

6. The National Banking Act of 1864 made it possible for banks to receive federal
charters.
Answer: T
Difficulty Level: Medium
Subject Heading: Bank Legislation

7. Today, reserve requirements imposed by the Federal Reserve apply only to

member banks.
Answer: F
Difficulty Level: Medium
Subject Heading: Bank Regulation
 8. The principal assets of all depository institutions are cash, securities, and loans.
Answer: T
Difficulty Level: Easy
Subject Heading: Structure of Financial Institutions

9. Savings and loans were first known as building societies.

Answer: T
Difficulty Level: Easy
Subject Heading: Types of Financial Institutions

10. Branch banks are those banking offices that are controlled by a single parent bank.
Answer: T
Difficulty Level: Easy
Subject Heading: Structure of Financial Institutions

11. The bank holding company may not engage in direct banking activities.
Answer: F
Difficulty Level: Medium
Subject Heading: Bank Regulation

12. Branch banking is permitted on an interstate basis by all state banks.

Answer: F
Difficulty Level: Medium
Subject Heading: Bank Regulation

13. Nonbank financial conglomerates are large corporations that offer various financial
services, such as mortgage insurance, real estate management, and consumer
finance.
Answer: T
Difficulty Level: Easy
Subject Heading: Types of Financial Institutions

14. The main provisions of the Monetary Control Act of 1980 are deregulation and
monetary control.
Answer: T
Difficulty Level: Medium
Subject Heading: Bank Legislation

15. The Monetary Control Act prohibited the Federal Reserve from controlling thrift
institutions.
Answer: F
Difficulty Level: Medium
Subject Heading: Bank Legislation
16. Pension funds receive contributions from employees and/or their employers and
invest the proceeds on behalf of the employees.
Answer: T
Difficulty Level: Easy
Subject Heading: Types of Financial Institutions

17. The Glass-Steagall Act was repealed with the passage of the Gramm-Leach-Bliley
Act of 1999.
Answer: T
Difficulty Level: Medium
Subject Heading: Bank Legislation

18. The Federal Reserve Act of 1913 created a system of central banks in the United
States.
Answer: T
Difficulty Level: Medium
Subject Heading: Bank Legislation

19. The prime rate of interest has been relatively stable during the past twenty-five
years.
Answer: F
Difficulty Level: Medium
Subject Heading: Interest Rates

20. Primary capital consists of owners’ capital, preferred stock, debt convertible into
common stock, and loan loss reserves.
Answer: T
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions

21. International banking exists when banks operate in more than one country.
Answer: T
Difficulty Level: Easy
Subject Heading: International Banking

22. Major types of financial institutions in the U.S. include commercial banks, mutual
funds, insurance companies, and pension funds.
Answer: T
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

23. Investment companies sell shares in their firms to individuals and invest the pooled
proceeds in corporate and government securities.
Answer: T
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions
24. Insurance companies sell shares in their firms to individuals and invest the pooled
proceeds in corporate and government securities.
Answer: F
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

25. Investment banking firms sell shares in their firms to individuals and invest the
pooled proceeds in corporate and government securities.
Answer: F
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

26. Mutual funds are open-end investment companies that can issue an unlimited
number of shares to its investors and use the pooled proceeds to purchase
corporate and government securities.
Answer: T
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

27. Insurance companies receive contributions from employees and/or their employers
and invest the proceeds on behalf of the employees for use during their retirement
years.
Answer: F
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

28. Pension funds receive contributions from employees and/or their employers and
invest the proceeds on behalf of the employees for use during their retirement
years.
Answer: T
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

29. Investment banking firms sell or market new securities issued by businesses to
individual and institutional investors.
Answer: T
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

30. Investment banking firms assist individuals to purchase new or existing securities
issues or to sell previously purchased securities.
Answer: F
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions
31. Mortgage banking firms provide loans directly to consumers and businesses or aid
individuals in obtaining financing of durable goods and homes.
Answer: F
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

32. Commercial banks provide loans directly to consumers and businesses or aid
individuals in obtaining financing of durable goods and homes.
Answer: F
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

33. Commercial banks accept deposits and makes loans to individuals and businesses.
Answer: T
Difficulty Level: Easy
Subject Heading: Types of Financial Institutions

34. Investment banks accept deposits and makes loans to individuals and businesses.
Answer: F
Difficulty Level: Easy
Subject Heading: Types of Financial Institutions

35. The U.S. banking system as it exists today is relatively unchanged since just before
the Civil War.
Answer: F
Difficulty Level: Easy
Subject Heading: Structure of Banking System

36. Credit unions are cooperative nonprofit organizations that exist primarily to provide
member depositors with consumer credit.
Answer: T
Difficulty Level: Easy
Subject Heading: Types of Financial Institutions

37. Savings and loan associations are cooperative nonprofit organizations that exist
primarily to provide member depositors with consumer credit.
Answer: F
Difficulty Level: Easy
Subject Heading: Types of Financial Institutions

38. The primary types of assets on a bank’s balance sheet include cash and deposits.
Answer: F
Difficulty Level: Easy
Subject Heading: Structure of Financial Institutions
39. The primary types of assets on a bank’s balance sheet include cash, securities,
and loans.
Answer: T
Difficulty Level: Easy
Subject Heading: Structure of Financial Institutions

40. The primary type of liability on a bank’s balance sheet is deposits.

Answer: T
Difficulty Level: Easy
Subject Heading: Structure of Financial Institutions

41. The effective rate of interest is generally lower on a standard loan than an
otherwise equivalent discount loan.
Answer: T
Difficulty Level: Medium
Subject Heading: Interest Rates

42. Bank solvency reflects the ability to meet depositor withdrawals and to pay off other
liabilities when due.
Answer: F
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions

43. Bank solvency reflects the ability to keep the value of a bank’s assets greater than
its liabilities.
Answer: T
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions

44. Bank solvency is the likelihood that a bank will be unable to meet depositor
withdrawal demands and other liabilities when due.
Answer: F
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions

45. Credit risk is the likelihood that a bank will be unable to meet depositor withdrawal
demands and other liabilities when due.
Answer: F
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions

46. Credit risk is the chance of nonpayment or delayed payment of interest or principal.
Answer: T
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions
47. Secondary reserves are vault cash and deposits held at other depository
institutions and at Federal Reserve Banks.
Answer: F
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions

48. Interest rate risk results from possible price fluctuations in fixed-rate debt
instruments associated with changes in market interest rates.
Answer: T
Difficulty Level: Medium
Subject Heading: Interest Rates

49. The total capital ratio (TCR) can be computed as total capital divided by total
assets times 100.
Answer: T
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions

50. The Bretton Woods Agreement was an agreement between major central banks to
adopt capital adequacy requirements for internationally involved banks.
Answer: F
Difficulty Level: Medium
Subject Heading: International Banking
MULTIPLE-CHOICE QUESTIONS

1. Which of the following institutions is not part of the modern banking system?
a. credit unions
b. savings and loan associations
c. mutual funds
d. mutual savings banks

Answer: c
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

2. The Bank of North America:

a. was the first incorporated bank in the United States
b. was patterned after the Central Bank of England
c. was established to assist in financing the Civil War
d. all the above
e. none of the above

Answer: a
Difficulty Level: Easy
Subject Heading: History of American Banking

3. The notes of the Bank of North America

a. served as a circulating medium of exchange
b. loaned liberally to the government
c. were redeemed in metallic coins upon demand
d. all the above
e. none of the above

Answer: d
Difficulty Level: Medium
Subject Heading: History of American Banking

4. Early chartered banks included:

a. the Bank of North America
b. the Bank of Massachusetts
c. the Bank of New York
d. All the above

Answer: d
Difficulty Level: Easy
Subject Heading: History of American Banking

5. Which of the following are not thrift institutions?

a. credit unions
 b. savings and loan institutions
c. commercial banks
d. all the above

Answer: c
Difficulty Level: Easy
Subject Heading: Types of Financial Institutions

6. The National Banking Act of 1864 provided for:

a. federally chartered banks
b. the establishment of a system of central banks
c. deregulation and monetary control
d. the establishment of deposit insurance

Answer: a
Difficulty Level: Medium
Subject Heading: Bank Legislation

7. The Depository Institutions Deregulation and Monetary Control Act:

a. established a system of central banks
b. has resulted in more competition among depository institutions
c. increased federal deposit insurance from $40,000 to $80,000 for each
account
d. established minimum capital requirements for banks with federal
charters

Answer: b
Difficulty Level: Medium
Subject Heading: Bank Legislation

8. The Federal Deposit Insurance Corporation Improvement Act of 1991:

a. transferred the reserves and functions of the Federal Savings and Loan
Insurance Corporation to the FDIC
b. required that failed banks be handled in such a way as to provide the
lowest cost to the FDIC
c. increased federal deposit insurance from $40,000 to $100,000 for each
account
d. extended federal deposit insurance to S&L depositors

Answer: b
Difficulty Level: Medium
Subject Heading: Bank Legislation

9. The most basic functions of depository institutions are:

a. safekeeping for depositors
b. record keeping for depositors
 c. efficient and economical transfer of payments
d. accepting deposits and granting loans

Answer: d
Difficulty Level: Easy
Subject Heading: Structure of Banks

10. Which of the following is not an asset of depository institutions?

a. cash
b. unsecured loans
c. time deposits
d. U.S. government securities

Answer: c
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions

11. The First Bank of the United States:

a. is still in operation in Massachusetts
b. transferred funds from region to region
c. was unchartered
d. all the above

Answer: b
Difficulty Level: Medium
Subject Heading: History of American Banking

12. Savings banks have nearly three quarters of their assets in the form of:
a. securities
b. cash
c. unsecured loans
d. real estate mortgages and mortgage-backed securities

Answer: d
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions

13. The principal liabilities of all depository institutions are:

a. certificates of deposits
b. deposits
c. loans
d. all the above

Answer: b
Difficulty Level: Easy
Subject Heading: Structure of Financial Institutions
14. The principal assets of savings banks are:
a. securities
b. vault cash and deposits at other banks
c. real estate mortgages
d. all the above

Answer: c
Difficulty Level: Easy
Subject Heading: Structure of Financial Institutions

15. The first thrift institutions were:

a. The First and Second Banks of the United States
b. savings banks and Savings and Loans
c. credit unions
d. all the above

Answer: b
Difficulty Level: Easy
Subject Heading: History of American Banking

16. The Bank Holding Company Act of 1956:

a. established uniform standards to evaluate the legality of bank holding
company acquisitions
b. allowed bank holding companies to acquire credit card companies
c. defined a bank holding company as one which owns 25% or more of the
voting
shares of each of two or more banks
d. included all the above

Answer: c
Difficulty Level: Medium
Subject Heading: Bank Legislation

17. Credit unions are:

a. for profit organizations
b. made up of individuals who possess common bonds of association
c. institutions that derive funds from investment activities
d. all the above

Answer: b
Difficulty Level: Easy
Subject Heading: Types of Financial Institutions

18. NOW accounts:

 a. are not subject to ceiling rates under Regulation Q
b. enable depository institutions to compete effectively for funds that were
flowing in large amounts to nonblank money market funds
c. typically pay interest rates equal to that paid by money market funds
d. all the above

Answer: b
Difficulty Level: Easy
Subject Heading: Structure of Financial Institutions

19. The adequacy of capital for commercial banks as measured by regulatory

authorities is:
a. a composite of various asset risk categories
b. a measure of investment success
c. based on the total amount of deposits of a bank
d. based on the ratio of federal government obligations to deposits

Answer: a
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions

20. The interest rate charged by banks for short-term unsecured loans to their highest
quality business customers is referred to as the:
a. discount rate
b. federal fund rate
c. prime rate
d. all the above

Answer: c
Difficulty Level: Easy
Subject Heading: Interest Rates

21. The Garn–St. Germain Depository Institutions Act, among other things:
a. extended the Fed’s control to thrift institutions and to commercial banks
that are not members of the Fed
b. enabled depository institutions to issue money market accounts with no
regulated interest rate ceiling
c. was designed to assist the investment banking industry
d. all the above

Answer: b
Difficulty Level: Medium
Subject Heading: Bank Legislation

22. The Resolution Trust Corporation was brought into existence to:
 a. help savings and loan institutions invest funds in a wide range of higher
yielding instruments
b. authorize savings and loan institutions to issue a new money market
account
with no regulated interest rate ceiling
c. take over and liquidate the assets of failed savings and loan institutions
d. all the above

Answer: c
Difficulty Level: Medium
Subject Heading: Bank Regulation

23. The Federal Savings and Loan Insurance Corporation:

a. has ceased operations and has been replaced by the FDIC in its
insuring operations
b. protects credit unions
c. insures money market accounts
d. is responsible for insuring deposits at savings banks

Answer: a
Difficulty Level: Medium
Subject Heading: Bank Regulation

24. The First Bank of the United States ceased operations because:
a. it was superseded by the Second Bank of the United States
b. of the opposition of state banking interests
c. its charter had expired and there was no provision for its renewal
d. the need to provide financing for the Civil War was not supported by
Congress

Answer: b
Difficulty Level: Medium
Subject Heading: Bank History

25. The Second Bank of the United States was created to:
a. replace the First Bank of the United States
b. appease political interests
c. restore order to chaotic banking conditions
d. all the above

Answer: c
Difficulty Level: Medium
Subject Heading: Bank History

26. During the colonial period in the nation’s history, banks depended on:
a. their own issue of paper money
 b. foreign sources for their loanable funds
c. deposits of foreign currency such as the Spanish dollar
d. the investment of their own stockholders

Answer: a
Difficulty Level: Medium
Subject Heading: Bank History

27. There is more of a need for international banking because of:

a. decreased international trade
b. a stable exchange of goods and services among nations
c. the large international trade deficit of the United States
d. national savings and investment rates that dictate small flows of capital
among nations

Answer: c
Difficulty Level: Medium
Subject Heading: International Banking

28. Which of the following statements is false?

a. It is not possible for a bank to invest all of its funds in profitable loans or
securities.
b. All states now permit statewide branch banking.
c. Regulation Q established interest rate ceilings on time and savings
deposits.
d. The depositors of a bank are creditors and hence have a claim that is
superior to that of stockholders in the event of liquidation.

Answer: b
Difficulty Level: Hard
Subject Heading: Complex

29. Which of the following statements is false?

a. Thrift institutions are like commercial banks in that retained earnings and
certificates of deposits add to fund sources.
b. The larger the volume of assets and deposits in relation to the capital
contribution
of the stockholders, the larger the margin of safety for depositors.
c. Capital funds include capital stock, surplus, and undivided profits.
d. All the above statements are correct.

Answer: d
Difficulty Level: Hard
Subject Heading: Complex

30. Which of the following statements is most correct?

a. FDIC membership is required only for banks having national charter.
 b. The First Bank of the United States was the first incorporated bank
created along modern banking lines.
c. Secured loans represent the single most important activity of the
commercial bank.
d. All the above statements are false.

Answer: d
Difficulty Level: Hard
Subject Heading: Complex

31. Which of the following statements is most correct?

a. New capital adequacy standards were established for foreign banking
offices in this country to achieve an 8% risk-based capital ratio by the
end of 1992 in order to conform to domestic bank requirements.
b. The proportion of branch banking offices has doubled since 1951.
c. The National Banking Act provided that national banks could issue their
own
paper money secured either by their own deposits or government bonds.
d. All the above statements are equally correct.

Answer: a
Difficulty Level: Hard
Subject Heading: Complex

32. Which of the following statements is most correct?

a. The National Banking Act of 1894 has long lost any relationships to
modern bank regulation.
b. The Federal Reserve System was created in large measure to force
state
chartered banks into conformity with nationally chartered banks.
c. “Wildcat banking” during the first half of the 1800s referred to risky
banking practices by many state banks, such as excessive note issues,
lack of adequate bank capital, and insufficient reserves against their
notes and deposits.
d. All the above statements are equally correct.

Answer: c
Difficulty Level: Hard
Subject Heading: Bank History

33. In 1989, the Financial Institution Reform, Recovery and Enforcement Act provided
for all but which of the following?
a. strengthening the federal deposit insurance programs
b. the creation of the Resolution Trust Corporation
c. enhanced enforcing powers
d. stronger capital standards for thrift institutions

Answer: b
 Difficulty Level: Medium
Subject Heading: Bank Regulation

34. Capital notes:

a. are subject to reserve requirements
b. are assets of the banks that issue them
c. are always subordinated to the claims of bank depositors
d. reflect short-term borrowing on the part of the bank

Answer: c
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions

35. The Depository Institutions Deregulation and Monetary Control Act of 1980 did not:
a. eliminate all Regulation Q requirements
b. allow all depository institutions to borrow from the Fed on the same
basis
c. increase federal deposit insurance
d. amend the Home Owner’s Loan Act of 1993

Answer: a
Difficulty Level: Medium
Subject Heading: Bank Regulation

36. The holding-company device to control two or more commercial banks:

a. has diminished in importance in recent years
b. has increased in importance in recent years
c. is limited to state chartered banks
d. is sometimes described as chain banking

Answer: b
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions

37. One of the most significant advantages claimed by branch banking is:
a. lower interest rates are usually available from branch bank
b. convenience for customers
c. banking operations are easier to regulate
d. all the above

Answer: b
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions
38. Legislation that permits depository institutions to compete with money market
mutual funds on an equal basis with respect to interest rates offered to investors is
the:
a. Garn–St. Germain Depository Institutions Act
b. National Banking Act
c. Hunt Commission legislation
d. Depository Institutions Deregulation and Monetary Control Act

Answer: a
Difficulty Level: Medium
Subject Heading: Bank Legislation

39. The function of the capital accounts of a commercial bank is to:

a. meet bank reserve requirements
b. provide funds for real estate loans
c. provide a cushion for possible bank losses
d. support the purchase of bank buildings and equipment

Answer: c
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions

40. The Federal Deposit Insurance Corporation:

a. shares its operation with the Federal Reserve System by having the
same
board of directors
b. is owned by member banks of the Federal Reserve System
c. provides strength for insured banks by partial ownership of their stock
d. has as one of its board members the United States Comptroller of the
Currency

Answer: d
Difficulty Level: Medium
Subject Heading: Bank Regulation

41. Unit banking means:

a. a bank may have only one full-service office
b. the bank is owned by a unit trust
c. all branch offices are controlled by a central unit
d. none of the above

Answer: a
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions
42. Limited branch banking:
a. permits banks to located offices within a geographically defined distance
of the main office
b. is controlled by the Federal Reserve system
c. means that banks may only engage in certain limited activities
d. none of the above

Answer: a
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions

43. Statewide branch banking:

a. is prohibited in all 50 states
b. means that branch systems are less likely to fail than independent
systems
c. permits banks to located within a geographically defined distance of the
main office
d. none of the above

Answer: b
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions

44. The principal assets of banks do not include:

a. cash
b. loans
c. time deposits
d. securities owned

Answer: c
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions

45. Foreign banks in the United States:

a. are prohibited in all 50 states
b. need the approval of the Federal Reserve
c. are not subject to federal examination
d. none of the above

Answer: b
Difficulty Level: Medium
Subject Heading: International Banking

46. Capital notes:

a. are the prime assets of commercial banks
 b. reflect long-term of a bank for purposes of bolstering the equity of the
bank
c. current investments of a bank
d. none of the above

Answer: b
Difficulty Level: Easy
Subject Heading: Structure of Financial Institutions

47. Which of the following would not be part of primary bank capital?
a. bank premises
b. common stock of the bank
c. loan loss reserves
d. perpetual preferred stock

Answer: a
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions

48. Legislation that provided for the separation of commercial banking and investment
banking activities in the United States is called
a. Garn–St. Germain Depository Institutions Act
b. Glass-Steagall Act
c. Hunt Commission legislation
d. Depository Institutions Deregulation and Monetary Control Act

Answer: b
Difficulty Level: Medium
Subject Heading: Bank Legislation

49. The National Banking Act of 1864:

a. established minimum capital requirements for federally chartered banks
b. regulated loans with respect to safety and liquidity
c. established minimum reserve requirements
d. all of the above

Answer: d
Difficulty Level: Medium
Subject Heading: Bank Legislation

50. The Monetary Control Act:

a. extended the Fed’s control to thrift institutions and non-member
commercial banks
b. has resulted in more competition among depository institutions
c. increased federal deposit insurance from $40,000 to $80,000 for each
account
d. established minimum capital requirements for banks with federal
charters
 Answer: a
Difficulty Level: Medium
Subject Heading: Bank Legislation

51. The primary purpose of this Act was to aid the savings and loan industry
a. Garn–St. Germain Depository Institutions Act
b. Glass-Steagall Act
c. Hunt Commission legislation
d. Depository Institutions Deregulation and Monetary Control Act

Answer: a
Difficulty Level: Medium
Subject Heading: Bank Legislation

52. In general, the effective rate of interest on a discount loan

a. is lower than that on standard loan
b. is higher than that on a standard loan
c. is identical to that on a standard loan
d. none of the above

Answer: b
Difficulty Level: Medium
Subject Heading: Interest Rates

53. Primary reserves

a. include the cash assets of the firm under the heading “cash and
balances due from depository institutions.
b. are short term securities held by banks that are quickly converted into
cash at little cost to the banks.
c. reflects the bank’s ability to meet depositor withdrawals.
d. reflects the bank’s ability to keep the value of a bank’s assets greater
than its liabilities.

Answer: a
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions

54. Reasons that banks become insolvent include all of the following EXCEPT:
a. excessive credit risk
b. interest rate risk
c. insufficient collateral
d. all of the above are correct

Answer: c
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions
55. Our system of national banks:
a. was designed to destroy state banking
b. was an integral part of the Federal Reserve Act
c. was replaced by Federal Reserve banking
d. came into existence during the Civil War

Answer: d
Difficulty Level: Medium
Subject Heading: History of American Banking

56. Commercial banks obtain the bulk of their loanable funds from:
a. depositors
b. the issue of certificates of deposit
c. sale of bank stock
d. sale of subordinated debenture bonds

Answer: a
Difficulty Level: Easy
Subject Heading: Structure of Financial Institutions

57. The likelihood that borrowers are ill and would not be able to make interest and
principal payments is an example of:
a. interest rate risk
b. credit risk
c. liquidity risk
d. capital adequacy risk

Answer: b
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions

58. Financial institutions include:

a. banks
b. pension funds
c. insurance companies
d. all of the above

Answer: d
Difficulty Level: Easy
Subject Heading: Types of Financial Institutions

59. Another name for an open-end investment company is a:

a. brokerage firm
b. finance company
 c. mutual fund
d. investment bank

Answer: c
Difficulty Level: Easy
Subject Heading: Types of Financial Institutions

60. Major types of financial institutions include all of the following EXCEPT:
a. commercial banks
b. pension funds
c. insurance companies
d. brokerage firms

Answer: d
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

61. Major types of financial institutions include all of the following EXCEPT:
a. commercial banks
b. pension funds
c. insurance companies
d. all of the above are major financial institutions

Answer: d
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

62. An open-end investment company that can issue an unlimited number of its shares
to investors and use the pooled proceeds to purchase corporate and government
securities is called a (n)
a. mutual fund
b. pension fund
c. insurance company
d. brokerage firm

Answer: a
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

63. An organization that sells or markets new securities issued by businesses to

individuals and institutional investors is called a (n)
a. mutual fund
b. investment bank
c. insurance company
d. brokerage firm

Answer: b
Difficulty Level: Medium
 Subject Heading: Types of Financial Institutions

64. An organization that received contributions from employees and/or their employers
and invests the proceeds on behalf of the employees for use during their retirement
years is called a (n)
a. mutual fund
b. savings bank
c. pension fund
d. retirement fund

Answer: c
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

65. An organization that sells shares in their firms to individuals and others and invests
the proceeds in corporate and government securities is called a (n)
a. investment company
b. investment bank
c. insurance company
d. brokerage firm

Answer: a
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

66. An organization that provides loans directly to consumers and businesses or aid
individuals in obtaining financing for durable goods is called a (n)
a. commercial bank
b. investment bank
c. savings and loan
d. finance company

Answer: d
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

67. The _______________________ provided for separation of commercial banking

and investment banking activities in the United States.
a. Glass Steagall Act
b. Gramm-Leach-Bliley Act
c. Garn-Saint Germain Act
d. Depository Institutions Deregulation and Monetary Control Act

Answer: a
Difficulty Level: Medium
Subject Heading: Bank Legislation
68. The _______________________ was designed to reduce or eliminate interest rate
limitations and increase access to various sources of funds available to banks and
thrifts and expand the Federal Reserve’s control over thrifts and non-member
banks.
a. Glass Steagall Act
b. Gramm-Leach-Bliley Act
c. Garn-Saint Germain Act
d. Depository Institutions Deregulation and Monetary Control Act

Answer: d
Difficulty Level: Medium
Subject Heading: Bank Legislation

69. The _______________________ was designed mainly to assist the savings and
loan industry.
a. Glass Steagall Act
b. Gramm-Leach-Bliley Act
c. Garn-Saint Germain Act
d. Depository Institutions Deregulation and Monetary Control Act

Answer: c
Difficulty Level: Medium
Subject Heading: Bank Legislation

70. The three basic ways to clear a check through the U.S. banking system includes all
of the following EXCEPT:
a. through a Federal Reserve Bank
b. through the U.S. Treasury Bank
c. through a bank clearinghouse
d. bank to bank

Answer: b
Difficulty Level: Medium
Subject Heading: Structure of Financial Institutions

71. The _______________________ made it possible for banks to receive federal

charters and provided a basis for national banking laws.
a. Glass Steagall Act
b. National Banking Act
c. Garn-Saint Germain Act
d. Federal Reserve Act

Answer: b
Difficulty Level: Medium
Subject Heading: Bank Legislation
72. The _______________________ established the U.S. central banking system and
increased the effectiveness of commercial banking in general.
a. Glass Steagall Act
b. National Banking Act
c. Garn-Saint Germain Act
d. Federal Reserve Act

Answer: d
Difficulty Level: Medium
Subject Heading: Bank Legislation

73. The item on the liabilities and equity section of a bank’s balance sheet that
represents the smallest proportion of bank’s assets is:
a. deposits
b. owner’s capital
c. securities
d. federal funds

Answer: b
Level: Medium
Subject Heading: Structure of Financial Institutions

74. The item on the liabilities and equity section of a bank’s balance sheet that
represents the largest proportion of a typical bank’s assets is:
a. deposits
b. owner’s capital
c. securities
d. federal funds

Answer: a
Difficulty Level: Medium
Subject Heading: Bank Legislation

75. The item on the assets side of a bank’s balance sheet that represents the largest
proportion of bank assets is:
a. deposits
b. owner’s capital
c. securities
d. loans

Answer: d
Difficulty Level: Medium
Subject Heading: Bank Legislation

76. __________________ is the process by which individual savings are accumulated

in depository institutions and, in turn, lent or invested.
 a. Investing
b. Financial intermediation
c. The multiplier effect
d. Lending
e. none of the above

Answer: b
Difficulty Level: Medium
Subject Heading: Bank Terminology

77. __________________ accept savings from individuals and then lend these pooled
savings to businesses, governments, and individuals.
a. Insurance companies
b. Commercial finance companies
c. Depository institutions
d. Investment banks
e. none of the above

Answer: c
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

78. __________________ accept savings from individuals and then lend these pooled
savings to businesses, governments, and individuals.
a. Insurance companies
b. Commercial finance companies
c. Government institutions
d. Investment banks
e. none of the above

Answer: e
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

79. __________________ collect premiums on insurance policies and

employee/employer contributions from pension fund participants and provide
retirement benefits and insurance against major financial losses.
a. Banks
b. Contractual savings institutions
c. Investment banking firms
d. Brokerage firms
e. none of the above

Answer: b
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions
80. __________________ collect premiums on insurance policies and
employee/employer contributions from pension fund participants and provide
retirement benefits and insurance against major financial losses.
a. Banks
b. Personal service firms
c. Investment banking firms
d. Brokerage firms
e. none of the above

Answer: e
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

81. __________________ are the two important forms of contractual savings

organizations.
a. Insurance companies and pension funds
b. banks and insurance companies
c. Investment banks and pension funds
d. Pension funds and brokerage firms
e. none of the above

Answer: a
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

82. __________________ are the two important forms of contractual savings

organizations.
a. Insurance companies and brokerage firms
b. banks and insurance companies
c. Investment banks and pension funds
d. Pension funds and brokerage firms
e. none of the above

Answer: e
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

83. __________________ accept and invest individual savings and also facilitate the
sale and transfer of securities between investors.
a. Securities firms
b. Pension funds
c. Asset management companies
d. none of the above

Answer: a
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions
84. Investment companies (mutual funds), investment banking firms, and brokerage
firms are the primary types of ____________.
a. banks
b. securities firms
c. pension funds
d. finance companies
e. none of the above

Answer: b
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

85. _______________ provide loans directly to consumers and businesses and help
borrowers obtain mortgage loans on real property.
a. banks
b. securities firms
c. pension funds
d. finance firms
e. none of the above

Answer: d
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

86. _______________ are non-commercial bank depository institutions that include

savings banks and credit unions, which accumulate individual savings and lend
primarily to other individuals.
a. Thrift institutions
b. Securities firms
c. Pension funds
d. Finance firms
e. none of the above

Answer: a
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

87. _______________ are non-commercial bank depository institutions that include

savings banks and credit unions, which accumulate individual savings and lend
primarily to other individuals.
a. Banks
b. Securities firms
c. Pension funds
d. Finance companies
e. none of the above
 Answer: e
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

88. _______________ accept the savings of individuals and lend pooled savings to
individuals primarily in the form of mortgage loans and operate almost entirely in
New England , New York, and New Jersey, with most of their assets continuing to
be invested in mortgage loans.
a. Commercial banks
b. Thrift institutions
c. Savings banks
d. Credit unions
e. none of the above

Answer: c
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

89. _______________ accept the savings of individuals and lend pooled savings to
individuals primarily in the form of mortgage loans and operate almost entirely in
New England , New York, and New Jersey, with most of their assets continuing to
be invested in mortgage loans.
a. Commercial banks
b. Thrift institutions
c. Credit unions
d. Finance companies
e. none of the above

Answer: e
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

90. _______________ are cooperative nonprofit organizations that exist primarily to

provide member depositors with consumer credit, including the financing of
automobiles and the purchase of homes, and derive their funds almost entirely
from the savings of their members.
a. Commercial banks
b. Thrift institutions
c. Savings banks
d. Credit unions
e. none of the above

Answer: d
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions
91. _______________ are cooperative nonprofit organizations that exist primarily to
provide member depositors with consumer credit, including the financing of
automobiles and the purchase of homes, and derive their funds almost entirely
from the savings of their members.
a. Commercial banks
b. Thrift institutions
c. Savings banks
d. Brokerage firms
e. none of the above

Answer: e
Difficulty Level: Medium
Subject Heading: Types of Financial Institutions

92. _______________ sell or market new securities issued by businesses to individual

and institutional investors, whereas ______________ firms assist individuals who
want to purchase new or existing securities issues or who want to sell previously
purchased securities.
a. Brokerage firms, investment banks
b. Investment banks, savings banks
c. savings banks, investment banks
d. Brokerage firms, savings banks
e. none of the above

Answer: e
Difficulty Level: Hard
Subject Heading: Types of Financial Institutions

93. _______________ provide loans directly to consumers and businesses or aid

individuals in obtaining financing of durable goods and homes, whereas
______________ originate mortgage loans on homes and other real property by
bringing together borrowers and institutional investors.
a. thrift institutions, savings and loans
b. thrift institutions, mortgage banking firms
c. finance companies, savings and loans
d. finance companies, mortgage banking firms
e. none of the above

Answer: d
Difficulty Level: Hard
Subject Heading: Types of Financial Institutions

94. _______________ provide loans directly to consumers and businesses or aid

individuals in obtaining financing of durable goods and homes, whereas
______________ originate mortgage loans on homes and other real property by
bringing together borrowers and institutional investors.
a. thrift institutions, savings and loans
 b. thrift institutions, mortgage banking firms
c. property brokers, savings and loans
d. property brokers, mortgage banking firms
e. none of the above

Answer: e
Difficulty Level: Hard
Subject Heading: Types of Financial Institutions

95. If $5,000 is borrowed on a discount basis and the rate is 10 percent, the annual
percentage interest rate on this loan would be:
a. 10%
b. 10.1%
c. 11%
d. 11.1%
e. none of the above

Answer: d
Difficulty Level: Medium
Subject Heading: Bank Loans

96. The Equity Capital Ratio for a bank with owners’ equity of $3 million and total
assets of $50 million would be:
a. 3%
b. 6%
c. 2.83%
d. 5.66%
e. none of the above

Answer: b
Difficulty Level: Hard
Subject Heading: Structure of Financial Institutions

97. A(n) _______________ mortgage is a home loan made to a borrower with a

relatively low credit score indicating the likelihood that loan payments might be
missed when due.
a. adjustable rate
b. subprime
c. credit swap
d. high performance
e. none of the above

Answer: b
Difficulty Level: Medium
Subject Heading: Bank Loans
 98. The process of ______________ which is the process of pooling and packaging
mortgage loans into debt securities resulted in the creation of ______________.
a. securitization, pooled asset loans
b. portfolio composition, mortgage backed securities
c. issuing mortgage backed securities, securitization
d. securitization, mortgage backed securities
e. none of the above

Answer: d
Difficulty Level: Hard
Subject Heading: Bank Terminology

99. The process of ______________ which is the process of pooling and packaging
mortgage loans into debt securities resulted in the creation of ______________.
a. securitization, pooled asset loans
b. portfolio composition, mortgage backed securities
c. issuing mortgage backed securities, securitization
d. specialization, mortgage backed securities
e. none of the above

Answer: e
Difficulty Level: Hard
Subject Heading: Bank Terminology

100. A ________ which is a security backed by mortgage-backed securities could be

“sliced and diced” into different “tranches” are parts such that the different parts
would appeal to different investors.
a. MPO
b. CDO
c. MDS
d. MDO
e. none of the above

Answer: b
Difficulty Level: Medium
Subject Heading: Bank Terminology