ECON 365 Final Exam - Practice Questions from Teacher

True or False: Sustained credit quality problems can drain an FI's capital and net worth
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Which of the following is NOT characteristic of the real estate portfolio for most banks?
(a) Commercial real estate mortgages have been the fastest growing component of real estate loans.
(b) Adjustable rate mortgages have rates that are periodically adjusted to some index.
(c) Borrowers prefer fixed-rate loans to ARMs during periods of high interest rates.
(d) Residential mortgages are the largest component of the real estate loan portfolio.
(e) The proportion of ARMs to fixed-rate mortgages can vary considerably over the rate cycle.
Confidence Bank has made a loan to Risky Corporation. The loan terms include a default risk-free borrowing rate of 8 percent, a risk premium of 3 percent, an origination fee of 0.1875 percent, and a 9 percent compensating balance requirement. Required reserves at the Fed are 6 percent. What is the expected or promised gross return on the loan?
1. Kansas Bank has a policy of limiting their loans to any single customer so that the maximum loss as a percent of capital will not exceed 20 percent for both secured and unsecured loans. The limit has been adopted under the assumption that if the unsecured loan is defaulted, there will be no recovery of interest or principal payments. For loans that are secured (collateralized), it is expected that 40 percent of interest and principal will be collected.

What is the concentration limit (as a % of capital) for secured loans made by this bank?