Bcom Bachelor of Commerce Bachelor of Commerce: Banking & Insurance 5 — Questions and Answers
Question 1: What is the 'debt-to-equity ratio' used to assess in banking?
- A company's ability to pay short-term obligations
- The proportion of a firm's financing that comes from debt versus shareholder equity (Correct answer)
- The interest coverage ratio of a borrower
- A bank's ratio of performing to non-performing loans
Correct answer: The proportion of a firm's financing that comes from debt versus shareholder equity
The debt-to-equity ratio indicates how much leverage a company uses by comparing total debt to shareholders' equity, signaling financial risk.
Question 2: Which of the following is an example of a 'non-banking financial institution' (NBFI)?
- A federally chartered commercial bank
- A credit union insured by NCUA
- An insurance company or pension fund (Correct answer)
- A Federal Reserve member bank
Correct answer: An insurance company or pension fund
NBFIs like insurance companies, pension funds, and mutual funds provide financial services but do not hold banking licenses or accept demand deposits.
Question 3: In property insurance, what does 'actual cash value' (ACV) mean?
- Replacement cost minus outstanding mortgage balance
- The original purchase price of the property
- Replacement cost minus depreciation (Correct answer)
- The assessed value determined by local tax authorities
Correct answer: Replacement cost minus depreciation
Actual cash value is calculated as the cost to replace the property with a similar item minus accumulated depreciation, reflecting the item's current market value.
Question 4: What is 'syndicated lending' in commercial banking?
- A loan offered simultaneously to retail and corporate customers
- Multiple banks jointly providing a large loan to a single borrower (Correct answer)
- A central bank offering emergency credit to multiple banks
- A borrower taking loans from multiple banks independently
Correct answer: Multiple banks jointly providing a large loan to a single borrower
In syndicated lending, a group of lenders jointly fund a large loan, spreading the credit risk among participating banks while serving a borrower's large capital need.
Question 5: What is the 'loss ratio' in insurance?
- The ratio of premiums collected to total policyholders
- The percentage of claims paid relative to premiums earned (Correct answer)
- The number of claims filed divided by policies in force
- The insurer's profit margin after administrative expenses
Correct answer: The percentage of claims paid relative to premiums earned
The loss ratio is calculated as incurred losses divided by earned premiums, indicating what proportion of premium income is used to pay claims.
Question 6: Which document legally transfers ownership of an insurance policy to another party?
- An endorsement
- A binder
- An assignment (Correct answer)
- A rider
Correct answer: An assignment
An assignment is a legal document that transfers the policyholder's rights and ownership of an insurance policy to another person or entity.
Question 7: What is 'open market operations' as conducted by the Federal Reserve?
- Allowing foreign banks to operate freely within the US
- The buying and selling of government securities to influence money supply and interest rates (Correct answer)
- Setting the prime rate for commercial banks
- Regulating stock market trading activity
Correct answer: The buying and selling of government securities to influence money supply and interest rates
Open market operations involve the Fed buying or selling U.S. Treasury securities to expand or contract the money supply and influence short-term interest rates.
Bcom Bachelor of Commerce Bachelor of Commerce: Banking & Insurance 5
What is the 'debt-to-equity ratio' used to assess in banking?