Banking Exam Treasury Management 1 — Questions and Answers
Question 1: What is the primary function of a bank's treasury department?
- Originating consumer loans
- Managing liquidity, funding, and interest rate risk (Correct answer)
- Processing customer transactions
- Conducting credit underwriting
Correct answer: Managing liquidity, funding, and interest rate risk
The treasury department manages the bank's overall liquidity position, funding needs, and exposure to interest rate risk on its own balance sheet.
Question 2: Which instrument is most commonly used by banks for overnight short-term liquidity management?
- 30-year Treasury bonds
- Federal funds (Correct answer)
- Subordinated debt
- Mortgage-backed securities
Correct answer: Federal funds
Federal funds are overnight borrowings between depository institutions, making them the most common tool for short-term liquidity management.
Question 3: What does Asset-Liability Management (ALM) primarily seek to manage?
- The bank's loan-to-deposit ratio only
- Interest rate risk and liquidity risk on the bank's balance sheet (Correct answer)
- The creditworthiness of individual borrowers
- The bank's equity capital ratio
Correct answer: Interest rate risk and liquidity risk on the bank's balance sheet
ALM coordinates the bank's assets and liabilities to manage both interest rate risk and liquidity risk simultaneously across the balance sheet.
Question 4: Net Interest Margin (NIM) is calculated as:
- Total interest income divided by total assets
- (Interest income minus interest expense) divided by average earning assets (Correct answer)
- Net income divided by total equity
- Total loans divided by total deposits
Correct answer: (Interest income minus interest expense) divided by average earning assets
NIM measures the spread between interest earned and interest paid, divided by average earning assets, reflecting the profitability of the bank's core lending activities.
Question 5: Which regulatory requirement directly impacts a bank's short-term liquidity management under Basel III?
- Truth in Lending Act (TILA)
- Liquidity Coverage Ratio (LCR) (Correct answer)
- Community Reinvestment Act (CRA)
- Bank Secrecy Act (BSA)
Correct answer: Liquidity Coverage Ratio (LCR)
The LCR requires banks to hold sufficient high-quality liquid assets to cover net cash outflows over a 30-day stress scenario.
Question 6: What is a repurchase agreement (repo) in banking treasury operations?
- A long-term bond issued by the government
- A short-term borrowing where securities are sold with an agreement to repurchase them (Correct answer)
- A type of credit default swap used to hedge loan losses
- A foreign currency exchange forward contract
Correct answer: A short-term borrowing where securities are sold with an agreement to repurchase them
A repurchase agreement involves selling securities with a commitment to buy them back at a specified price, effectively functioning as a short-term collateralized loan.
Question 7: When market interest rates rise, the market value of fixed-rate bonds held by a bank will:
- Increase proportionally
- Remain unchanged
- Decrease (Correct answer)
- Double in value
Correct answer: Decrease
Bond prices move inversely to interest rates; when rates rise, existing fixed-rate bonds become less attractive relative to new higher-yielding bonds, causing their market value to fall.
Banking Exam Treasury Management 1
What is the primary function of a bank's treasury department?