Principles of Banking

  1. A finance company owned by a manufacturer to finance dealer inventory and/or to make loans to consumers for the purchase of its products.
    captive finance company
  2. A financing method usually focused on the cash flow of a particular asset or asset group for return on an investment or loan.
    asset-based financing
  3. A loan for which the customer has pledged some form of collateral to protect the lender in case of default
    secured loan
  4. A loan to a business to meet short- or long-term needs. Also known as a commercial loan.
    business loan
  5. A loan whose risk is high given the collateral and the loan’s structure
    substandard loan
  6. A written document with the customer’s (maker’s) promise to pay a certain sum of money to the bank (the payee), with or without interest, on demand or on a fixed or determinable future date.
     promissory note
  7. Negotiable, short-term, unsecured promissory notes in bearer form issued by major corporations with unquestioned credit standing as a means of borrowing.
    commercial paper
  8. Products that are sold in conjunction with loans so that the loan can be paid if the customer dies, is injured or disabled, or loses a source of income.
    payment protection
  9. The process by which a secured party protects its security interest from third parties by possession, certificate of title, control, or filing or recording documentation of the security interest in local or state public records.
  10. The right a lender has to obtain possession of the collateral, sell it, and retain the proceeds (up to the amount of the remaining debt) if the customer is unable to repay the loan.
    security interest
  11. True or False

    A mortgage loan is an example of an open-end line of credit.
  12. True or False

    A working capital loan is used by businesses that need funds immediately and typically has a term of 30 to 90 days.
  13. At what stage in the lending process do banks obtain and evaluate all available information to determine creditworthiness?
  14. True or False

    Character, one of the Five Cs of Credit, is the most important in evaluating creditworthiness.
  15. True or False

    The lending function is usually the most significant source of bank income.
  16. True or False

    Conditions, one of the Five Cs of Credit, are external factors that may affect the customer’s ability to repay a loan.
  17. Which Federal Reserve regulation requires lenders to give borrowers an adverse action notice when a loan request has been denied?
    Regulation B
  18. Which of the following Federal Reserve regulations prescribes uniform methods for calculating the cost of credit?
    Regulation Z
  19. Which of the following is an example of a closed-end credit?
    auto loan
  20. Which of the following typically has the longest term?
    mortgage loan
  21. True or False

    Diversification is recommended to decrease the total investment risk in one’s portfolio.
  22. True or False

    For most investments, the higher the return, the lower the risk.
  23. True or False

    Investments at the top of the risk pyramid are more appropriate for a retiree than a young working adult.
  24. True or False

    Most homeowners have counted on their home to appreciate in value over time.
  25. What is the most appropriate product for empty nesters?
    municipal bond funds
  26. What is the term for the concept that a dollar today is worth more than a dollar in the future because today’s dollar can earn interest until the time the future dollar is received?
    time value of money
  27. Which of the following is a bank product that is FDIC-insured?
    certificate of deposit
  28. Which of the following is NOT a trust service?
  29. Which retirement plan takes in employee contributions, which may be matched by employer contributions, and then invests the contributions as directed by the employee?
    401(k) plan
  30. True or False

    Whole life insurance is a long-term insurance plan with a savings element.
  31. (1) The ability to meet current obligations; (2) the quality that makes an asset quickly and readily convertible to cash without significant loss.
  32. A fiduciary relationship in which one party (a person or a corporation) holds title to property for another party based on a legal agreement and the fiduciary principles of trust law.
  33. A pension plan that guarantees the payment of a specified benefit at retirement.
    defined benefit pension plan
  34. A regulatory principle incorporated in the Gramm-Leach-Bliley Act that requires certain authorized banking activities to fall under the authority of federal and state regulators other than the primary federal bank regulators.
    functional regulation system
  35. A retirement plan fund that takes in employee contributions, which may be matched by employer contributions, and then invests the contributions into one or more investment alternatives determined by the employee.
    defined contribution pension plan
  36. An insurance product that provides a systematic payment for a specified period, usually a number of years. Payments typically are made monthly but can be made quarterly, semiannually, or annually.
  37. Payments made by a corporation to its stockholders. The payments are based on a percentage of the corporation’s after-tax earnings and are usually made quarterly.
  38. The assets (property) a person owns such as real estate, cash, stocks, bonds, and all other personal property, and the person’s liabilities (debts) and other legal obligations.
  39. The beneficiary of an annuity; the person insured under an annuity plan and on whose life expectancy annuity payments are based.
  40. The party legally entitled to receive the proceeds of an annuity, insurance policy, letter of credit, trust fund, retirement account, or will either from an appointment, assignment, disposition, instrument, or contract.
  41. A draft drawn by a company on a bank that contains instructions to pay a designated party a certain sum of money at a specified time is known as a:
    bankers’ acceptance
  42. True or False

    Directors and officers liability insurance provides health insurance coverage for top management.
  43. True or False

    For cash vault services, to keep deposits safe in transit, banks offer safeguards such as tamper-evident deposit bags, video surveillance, and dual custody processing
  44. True or False

    Remote deposit capture uses check imaging technology, allowing business customers to electronically deposit checks to company bank accounts.
  45. what fiduciary role is the bank responsible for paying interest or dividends to the holders of stock or bonds issued by a corporation or government unit?
    paying agent
  46. What is a cash management service where payments are sent directly to a post office box managed by the bank, making funds available to the business faster?
    lockbox service
  47. What law or regulation defines collective investment rules for banks as fiduciaries?
    Regulation 9
  48. Which of the following parties to a trust is the person or entity that takes control of the trust property and administers the trust?
  49. True or False

    With a sweep account, aggregated customer balances are invested in securities on behalf of the customers. Each customer’s earnings are based on the amount contributed.
  50. True or False

    With account reconciliation services, reports can be generated to allow company managers to monitor business operations and determine possible new approaches.
  51. A document given by the shipper of goods to the recipient acknowledging receipt of shipment and the terms of delivery.
    bill of lading
  52. A market for the resale of securities (such as the dealer market, a stock exchange, or the mortgage-backed securities market) where ownership is transferred from one owner to another.
    secondary market
  53. A method for electronically registering and keeping a record of securities ownership without issuing a physical certificate to owners. Securities are not in printed form but exist on the books of the issuer’s agent. Transfer is by electronic debit and credit.
    book entry
  54. A preprinted, unsigned, restricted-payee instrument used to transfer cash from the account of a corporation in one bank to its central account in another bank. Paper-based or electronic, it is used in conjunction with cash concentration account services.
    depository transfer check
  55. A sale of securities with a simultaneous agreement to buy back the same securities at a stated price on a stated date. It is the most common form of overnight investment for corporate funds, supported by securities (usually U.S. Treasury bills) from the bank’s (or broker’s) inventory.
    repurchase agreement
  56. An action taken to compensate or reimburse someone for losses or damages incurred.
  57. An amount owed to and not yet delivered or accepted by a company
  58. The market in which an issuer sells new securities to investors. Among middlemen who aid in the sale of a company’s securities are underwriters, brokers, and dealers.
    primary market
  59. The mathematical determination of rates and premiums for life insurance, disability insurance, and pension benefits based on tables detailing the frequencies of mortality (death) and morbidity (disability).
    actuarial calculation
  60. The packaging of receivables, such as those from credit cards or residential mortgage loans, as a unit to be sold to outside investors. In the case of loans, the loans are then no longer assets of the bank, although the bank may continue to service them for investors.
  61. Bank premises and equipment
  62. Capital stock
    Owner's equity (also known as shareholder equity)
  63. Cash and due from banks
  64. Demand deposits
  65. Equipment expense
  66. Long-term debt
  67. Interest and dividends on U.S. Treasury securities
  68. Interest and fees on loans
  69. Interest on other borrowed funds
  70. Interest on savings and time deposits
  71. Interest and dividends on securities of other U.S. agencies and coporations
  72. Other assets
  73. Other real estate
  74. Pension, profit-sharing, and other employee benefits
  75. Salaries
  76. Securities of U.S. government agencies
  77. Time deposits
  78. Trust department income
  79. U.S. Treasury securities
  80. Undivided profits
    Owner's equity (also known as shareholder equity)
  81. True or False

    Capital ratio measures the rate of return a bank has achieved in relation to funds invested.
  82. True or false

    Longer-term deposits are used to fund 30-year loans to purchase homes.
  83. True or False

    Market risk is the possibility that a borrower will not repay the principal and interest of a loan when due.
  84. True or false

    On the balance sheet, deposit accounts are assets to banks.
  85. True or False

    Stock options are not typically found in a bank’s investment portfolio.
  86. Public companies with gross assets of $1 million or more are required to file what annual financial report(s)?
    Form 10-K and Form 10-Q
  87. What is the ability of a bank or business to meet its current obligations called?
  88. What is the greatest source of bank income?
     lending function
  89. What is the interest rate the Federal Reserve charges banks for the use of its funds?
     discount rate
  90. What measures how well the interest received on loans offsets and exceeds the interest paid on deposits?
     net interest income
  91. A balance sheet (statement of condition) account where retained earnings are set aside to cover possible loan losses. As loan losses occur, they are charged to the reserve account. Also known as loan and lease reserve account.
     loan loss reserve
  92. A financial statement that reports the flow of cash into and out of a company in a given fiscal year. Often part of an annual report, it categorizes cash receipts and disbursements by activities of operations, investments, and financing. Also known as the statement of changes in financial position, or the sources and uses of funds statement
     statement of cash flows
  93. A position where liabilities exceed assets, resulting in the party being unable to meet its debt obligations.
  94. A technique for analyzing a financial statement that examines the relationships between certain values reported in the statement.
    ratio analysis
  95. An asset and liability management technique in which assets are financed with liabilities of the same maturity or duration.
    matched funding
  96. An official examination and verification of accounts and internal controls, usually by an independent accountant, to determine whether financial information is accurate and prepared in conformity with generally accepted accounting principles (GAAP).
  97. The ability and willingness to repay a debt, largely demonstrated by credit history.
  98. The investment interest of all shareholders in a corporation, equaling the excess of assets over liabilities and including common and preferred stock, retained earnings, surplus, and reserves
  99. The risk that the borrower cannot or will not repay a loan with interest as scheduled.
    credit risk
  100. The risk that the market value of a security or other asset will decrease because of interest rate changes and other market conditions.
    market risk
  101. True or False

    A loan officer is making a referral when she suggests to a customer an insurance review with the bank’s insurance subsidiary.
  102. True or False

    During the postpurchase assessment stage of the purchasing process, bankers may call customers to thank them for their business and offer further assistance.
  103. True or False

    Social responsibility is the principle that, even when employees are not serving the customer directly, they are serving someone in the bank who is serving the customer.
  104. True or False

    The marketing function uses advertising to help build relationships.
  105. What federal law governs prescreening prospective customers to receive credit solicitations?
    Fair Credit Reporting Act
  106. What is the process of gathering information about customers and competitors?
  107. What marketing pillar holds that banks that build value into products and services can attract more customers at higher prices?
  108.   True or False

    When a teller acknowledges, greets, and uses the customer’s name, he or she helps the bank fulfill the customer’s expectation of courteous treatment.
  109. Which of the following is an acceptable statement when advertising a bank certificate of deposit?
     “Member FDIC”
  110. Communicating in clear, concise language, written or spoken, that is articulated from the customer’s—not the bank’s—point of view helps the bank meet which customer expectation?
     customer perspective
  111. A characteristic of a product or service, such as the interest rate or the term.
  112. A commercial relationship in which the consumer has purchased, rented, or leased the seller’s goods or services or conducted a financial transaction with the seller within the 18 months immediately preceding a telemarketing call; or has inquired about, or applied for, a product or service offered by the seller within 3 months immediately preceding the call.
    established business relationship
  113. A software program that can sort and analyze customer information and serves as a customer information database
    marketing customer information file
  114. A telemarketing call that is not connected to a sales person within two seconds after the recipient answers the telephone and completes a greeting.
    abandoned call
  115. Advertising a product or service at an attractive price and then informing a consumer who is ready to purchase that the product or service is not available or is of lesser quality and encouraging the consumer to purchase a higher-priced product or service.
  116. Directing a potential customer from one area of the bank, such as consumer lending, to another area, such as insurance, to help the customer obtain information about or purchase another product or service.
  117. In marketing, identifying relevant characteristics of customers to gain insight about the need for a product in the marketplace
  118. One seller’s portion of the total sales of a product, usually measured as a percentage and in reference to deposits in the financial services industry.
    market share
  119. The value that the features of the product or service give to customers to meet their needs, such as earn money, save money, save time, provide convenience, or provide security.
  120. The worth of a product or service that is expressed in money (price) or a quantity of another product or service. It is also the quality that makes something desirable or important.
  121. Contacting a bank employee and pretending to be a customer to gain access to account information.
      pretext calling
  122. Depleting a senior citizen’s joint checking account with fraudulent withdrawals.
    elder financial abuse
  123. Potentially causing a loss far greater than replacement cost.
    laptop theft
  124. Redirecting a bank customer from a bank Web site to a fraudulent Web site for the purpose of obtaining confidential information.
  125. Sending a person an e-mail claiming to represent a foreign civil servant who needs assistance depositing a large sum of money.Correct
    advance fee fraud
  126. Sending a person an e-mail message with a link to a bogus Web site as a pretense for obtaining confidential information.
  127. Sitting outside a bank with a specially equipped laptop trying to access the bank’s computer network.
    wireless hacking
  128. Skimming and dumpster diving are preludes to this crime.
    identity theft
  129. Trying to obtain account information by claiming to represent a credit card company that is offering fraud protection
    credit card protection fraud
  130. Redirecting a bank customer from a bank Web site to a fraudulent Web site for the purpose of obtaining confidential information.
  131. (1) Determination that a message comes from a source authorized to originate the message; (2) a measure designed to protect against a fraudulent transmission by establishing the validity of a transmission, message, station, or person.
  132. 1) Unsolicited junk e-mails sent to large numbers of people to promote products or services or to spread computer viruses; (2) the act of sending such junk e-mail or e-mail containing computer viruses.
  133. A comprehensive plan for reacting to threats to the security of a bank’s data, systems, employees, or facilities.
    incident response program
  134. A plan for ensuring that data and technology systems are not accessed by unauthorized users.
      information security program
  135. Attempts to use the phone to gain access to another’s account information by pretending to be the account holder or an authorized signer on the account.
    pretext calling
  136. Authentication by two or more of the following: something the customer knows, has, or is.
    multifactor authentication
  137. Automated methods of identifying a person based on a physiological or behavioral characteristic, such as a voice or fingerprint pattern.
  138. Computer software that collects personal information about users without their informed consent. (Anti-spyware is computer software that blocks and prevents the use of spyware to invade a personal computer, computer server, or data processing system.)
  139. Derived from a combination of the words “malicious” and “software,” it broadly applies to viruses, Trojan Horses, worms, and any other software programs designed to damage computers and computer systems.
  140. The practice of monitoring the keys struck on a computer keyboard, often done covertly to obtain passwords and other protected information.
    keystroke tracking
  141. True or False

    A bank security officer is primarily responsible for establishing and maintaining policies and procedures for controlling risks.
  142. True or False

    A CAMELS rating of 1 indicates few supervisory concerns.
  143. True or False

    A civil money penalty is a fine imposed by a civil court on an individual, business, or organization that has profited from illegal or unethical activity or has violated a law or a regulation.
  144. True or False

    Banks lose more money to robbery than to insider fraud.
  145. During a bank robbery, what is an employee’s primary objective?
    ensure the safety of customers and other employees
  146. The “S” in the CAMELS rating stands for:
    sensitivity to market risk
  147. True or False

    The Sarbanes-Oxley Act provides protections for whistleblowers.
  148. Which federal law is intended to improve corporate governance by imposing significant new responsibilities on boards of directors, corporate executives, audit committees, and external auditors of public companies?
    Sarbanes-Oxley Act
  149. Which law requires banks to file Currency Transaction Reports (CTRs) on all deposits, withdrawals, and exchanges of currency that exceed $10,000 in a single day?
    Bank Secrecy Act
  150. Which of the following involves moving large amounts of illegally obtained cash through bank accounts to hide the source of the money?
    money laundering
  151. A crime involving the fraudulent use or keeping of money or other property that has been entrusted to one’s care.
  152. A disease spread over a large geographical region and affecting a large portion of the population.
  153. A fine imposed by a civil court on an individual, business, or organization that has profited from illegal or unethical activity or has violated a law or regulation.
    civil money penalty
  154. A plan for maintaining or resuming business operations should unexpected events occur.
    business contingency plan
  155. An auditor that is independent of the bank, usually reporting directly to the board of directors or audit committee.
    external auditor
  156. An intentional misrepresentation made by one person to another whom, believing the misrepresentation, takes some action and suffers a loss of property or a right to the first person.
  157. An internal supervisory tool for evaluating the soundness of financial institutions on a uniform basis and for identifying institutions that require special attention.
    Uniform Financial Institutions Rating System
  158. Factors considered by regulatory authorities in bank examinations. Numerical ratings applied to each factor are combined into a single composite rating.
  159. Fraud perpetrated by someone who works inside an organization.
    insider fraud
  160. Moving large amounts of illegally obtained cash through many bank accounts or to other legal investments or assets in order to hide the source of the money.
    money laundering
  161. What are the 4 main components of an Annual Report?
    • Promotional Information
    • Analysis
    • Financial Statements
    • Audit Report
  162. What is a Statement of Condition?
    Balance Sheet
  163. What is a Profit and Loss Statement?
    Income Statement
  164. What does a Balance Sheet Report?
    • Total Assets
    • Total Liabilities
    • And Capital Accounts
  165. What are the six areas banks are rated with the Uniform Financial Institutions Rating System
    • C - Capital Adequacy
    • A - Asset Quality
    • M - Management
    • E - Earnings
    • L - Liquidity
    • S - Sensitivity to Market Risk
  166. A statement of condition is also known as a(n):
    balance sheet
  167. Advertising is deceptive if it is likely to mislead:
    a reasonable customer
  168. At what stage in the lending process do banks obtain and evaluate all available information to determine creditworthiness?
  169. Besides capital adequacy, asset quality, earnings, and liquidity, what other areas are reviewed in the CAMELS rating system?
    management and sensitivity to market risk
  170. Communicating in clear, concise language, written or spoken, that is articulated from the customer’s—not the bank—point of view helps the bank meet which customer expectation?
    customer perspective
  171. Discriminating against prospective borrowers because of where they live is known as:
  172. During a bank robbery, what is an employee’s primary objective?
    ensure the safety of customers and other employees
  173. For an individual, what do assets, liabilities, and other legal obligations compose?
  174. The red flags of the Red Flag Rules pertain to:
    warning signs of identity theft
  175. The USA PATRIOT Act allowed banks to:
    share employment information of suspected criminal activity
  176. What bank function is primarily responsible for establishing and overseeing risk management processes and safety and soundness policies and procedures?
      board of directors
  177. What business account service provides analytical reports to allow company managers to monitor business operations and determine possible new approaches?
    account reconciliation
  178. What department helps prevent loan losses by taking action when payments are late?
    asset recovery department
  179. What federal agency maintains a list of individuals, organizations, and countries subject to economic sanctions?
    Office of Foreign Assets Control (OFAC)
  180. What federal law protects customers from unsolicited and unwanted e-mail promotions?
    CAN-SPAM Act
  181. What financial report is a detailed list of assets, liabilities, and capital accounts, showing the financial status of the bank as of a given date?
    statement of condition
  182. What form of planning should adults think about so that their assets and legal obligations are managed well and passed on to their selected beneficiaries?
    estate planning
  183. What function is a bank trust department performing when it keeps records of purchases, sales, cancellations, and reissues of bonds or stock?
  184. What highly secure form or system of customer authentication are banks starting to use more frequently to authorize banking transactions?
    a biometric system
  185. What instrument issued by a bank substitutes the credit standing of the bank for the credit standing of the importer (buyer) of goods?
    letter of credit
  186. What is a useful tool to assess one’s complete financial situation?
     net worth worksheet
  187. What is an example of a capital market service provided to corporate customers?
    structuring and distributing debt securities
  188. What is the ability of a bank or business to meet its current obligations called?
  189. What is the ability to quickly convert an asset to cash?
  190. What is the investment practice used to achieve the appropriate combination of liquidity, safety, and income, where banks invest in a variety of instruments with different maturities?
  191. What is the possibility that a borrower will not repay the principal and interest of a loan when due?
    credit risk
  192. What is the process of gathering information about customers and competitors?
  193. What is the return on equity (ROE) for a bank with total equity of $120,000,000 and a net profit of $12,000,000?
     10 percent
  194. What life insurance plan has a savings element?
    whole life insurance
  195. What marketing principle holds that, even when employees are not serving the customer directly, they are serving someone in the bank who is serving the customer?
    total company effort
  196. What should customers request at least annually to check for any unusual activity that may be criminal?
    credit reports
  197. What strategy holds that a business’s objectives are best reached by first identifying customer needs and fulfilling them through an efficient, organization-wide, and management-supported effort?
      market-driven strategy
  198. What type of insurance protects a business from financial loss when an employee critical to company operations dies or suffers a serious disability?
    key person insurance
  199. Which law was passed to protect the financial records of individuals from unwarranted access by the federal government?
    Right to Financial Privacy Act
  200. Which of the following allows customers to elect not to have their “nonpublic personal information” shared with third parties for marketing purposes?
    opt-out privilege
  201. Which of the following are not typically found in a bank investment portfolio?
    stock options
  202. Which of the following Federal Reserve regulations prohibits lenders from discriminating against credit applicants on the basis of age, race, color, religion, national origin, sex, marital status, or receipt of income from public assistance programs?
    Equal Credit Opportunity Act (Regulation B)
  203. Which of the following involves moving large amounts of illegally obtained cash through bank accounts to hide the source of the money?Correct
    money laundering
  204. Which of the following involves replacing one or two ends or corners of a smaller denomination bill with the ends or corners of a larger bill?
    raised currency
  205. Which of the following is a domestic office of a U.S. bank established for the purpose of transacting international business?
    Edge corporation
  206. Which of the following is a security feature that closes an online banking visit after a certain period of inactivity, such as 5 or 10 minutes?
    automatic session expiration
  207. Which of the following is considered a conservative growth investment?
     money market account
  208. Which of the following is considered a low-risk investment?
    government bonds
  209. Which of the following is the most liquid?
  210. Which of the following is the responsibility of a bank board of directors?
    approving lending authority for bank loan officers
  211. Which of the following is usually the most significant source of bank income?
     lending function
  212. Which of the following loans is normally unsecured?
    education loan
  213. Which of the following measures fee earnings?
    noninterest income to assets
  214. Your company imports fabric from Egypt. Each bolt of fabric costs 80 Egyptian pounds. The current exchange rate is: 1 U.S. dollar = 5 Egyptian pounds. How much does each bolt of fabric cost in U.S. dollars?
  215. Fair lending laws prohibit banks from prescreening credit applicants on the basis of:
Card Set
Principles of Banking
Chapters 7- 13