Question

chp. 20 (bank's performance)

1- Banks with relatively ________ ROAs often incur ________ noninterest expenses.

a. high; excessive

b. low; few

c. high; few

d. low; excessive

e. Answer [low; excessive] and [high; few] are correct.

2- Market interest rate movements are least likely to affect which of the following income statement items?

a. noninterest income

b. gross interest expenses

c. loan losses

d. gross interest income

e. Market interest rate movements are equally likely to affect all of these.

Answer 1

Sol:

1. Option e - low; excessive and high;few

Explanation: Non-interest expenses for a bank are it's operating expenses. If the operating expenses is less, the returns (profits) will be higher. If the profits are higher, the ROA (returns on assets) will be higher. Hence ROA will be low if non-interest expenses are excessive and ROA will be high if non-interest expenses are few. Hence option e is correct and not the other options.

2. Option a - non-interest income

Explanation: For a bank, a change in market interest rate movements impact the gross interest expenses and gross interest income as the bank would be paying higher interest amounts to the customer and would also be charging higher interest amount from its borrowers. Hence market interest rate movements impact gross interest expenses and gross interest income. With a change in market interest rate movements, loan losses will also be affected. With a decrease in interest rates, loans will be paid by customers as interest charged on the loans is less. With a increase in interest rate, interest amount on loans will increase which could result in a loan loss. Non-interest income for a bank will not be impacted with a market interest rate movement since the income is not dependent on interest rates. Hence option a is the least likely to be affected by market interest rate movements.