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).