Question 1

Credit risk is the risk that

Accepted Answer

A) an insufficient number of borrowers will apply for loans or credit. 
B) interest rates will rise after a loan has been granted. 
C) interest rates will fall after a loan has been granted. 
D) borrowers might default on their loans. 
A) an insufficient number of borrowers will apply for loans or credit. 
B) interest rates will rise after a loan has been granted. 
C) interest rates will fall after a loan has been granted. 
D) borrowers might default on their loans. D

Question 2

Some economists have argued that the competitiveness of Germany and Japan has been improved by

Accepted Answer

A) the low interest rates in those economies. 
B) the low tax rates in those economies. 
C) the small government sectors in those countries. 
D) the close relationship between banks and nonfinancial businesses in those countries. 
A) the low interest rates in those economies. 
B) the low tax rates in those economies. 
C) the small government sectors in those countries. 
D) the close relationship between banks and nonfinancial businesses in those countries. D

Question 3

On a bank's balance sheet, assets are

Accepted Answer

A) the uses of acquired funds. 
B) the sources of acquired funds. 
C) those items owed by the bank to depositors and others. 
D) by definition equal to the bank's liabilities. 
A) the uses of acquired funds. 
B) the sources of acquired funds. 
C) those items owed by the bank to depositors and others. 
D) by definition equal to the bank's liabilities. A

Question 4

For a bank, net worth is equal to

Accepted Answer

A) the value of the capital originally invested in the bank by its owners. 
B) the value of everything the bank owns. 
C) the difference between the value of the bank's assets and the value of its liabilities. 
D) the value of the buildings and other physical assets the bank owns. 
A) the value of the capital originally invested in the bank by its owners. 
B) the value of everything the bank owns. 
C) the difference between the value of the bank's assets and the value of its liabilities. 
D) the value of the buildings and other physical assets the bank owns.

Question 5

The difference between a demand deposit and a NOW account is that

Accepted Answer

A) checks may not be written against NOW account balances. 
B) demand deposits pay no interest. 
C) NOW accounts pay no interest. 
D) checks may not be written against demand deposit balances. 
A) checks may not be written against NOW account balances. 
B) demand deposits pay no interest. 
C) NOW accounts pay no interest. 
D) checks may not be written against demand deposit balances.

Question 6

A checkable deposit that pays no interest is known as a

Accepted Answer

A) demand deposit. 
B) certificate of deposit. 
C) NOW account. 
D) time deposit. 
A) demand deposit. 
B) certificate of deposit. 
C) NOW account. 
D) time deposit.

Question 7

Customers who have long-term relationships with banks

Accepted Answer

A) pose particular problems with respect to adverse selection. 
B) pose particular problems with respect to moral hazard. 
C) often obtain credit at a lower rate or with fewer restrictions. 
D) are more likely to default or violate restrictive covenants. 
A) pose particular problems with respect to adverse selection. 
B) pose particular problems with respect to moral hazard. 
C) often obtain credit at a lower rate or with fewer restrictions. 
D) are more likely to default or violate restrictive covenants.

Question 8

With respect to the period of the last several decades, which of the following statements is true?

Accepted Answer

A) Bank net worth has been relatively stable, but the riskiness of bank assets has increased substantially. 
B) Bank net worth has declined substantially, but the riskiness of bank assets has remained about the same. 
C) Bank net worth has declined substantially and the riskiness of bank assets has increased substantially. 
D) Bank net worth and the riskiness of bank assets have remained relatively stable. 
A) Bank net worth has been relatively stable, but the riskiness of bank assets has increased substantially. 
B) Bank net worth has declined substantially, but the riskiness of bank assets has remained about the same. 
C) Bank net worth has declined substantially and the riskiness of bank assets has increased substantially. 
D) Bank net worth and the riskiness of bank assets have remained relatively stable.

Question 9

Unsecured loans between banks are called

Accepted Answer

A) federal funds. 
B) repurchase agreements. 
C) repos. 
D) discount loans. 
A) federal funds. 
B) repurchase agreements. 
C) repos. 
D) discount loans.

Question 10

Banks use repurchase agreements to

Accepted Answer

A) ensure that payments on consumer loans are made on time. 
B) borrow funds from business firms or other banks. 
C) guard against price fluctuations on long-term bonds. 
D) ensure that they always have enough funds on hand to meet their federal tax liabilities. 
A) ensure that payments on consumer loans are made on time. 
B) borrow funds from business firms or other banks. 
C) guard against price fluctuations on long-term bonds. 
D) ensure that they always have enough funds on hand to meet their federal tax liabilities.

Question 11

A key difference between small-denomination and large-denomination time deposits is that

Accepted Answer

A) small-denomination time deposits pay no interest. 
B) large-denomination time deposits may be bought and sold on secondary markets. 
C) large-denomination time deposits carry a significant penalty for early withdrawal. 
D) small-denomination time deposits carry a significant penalty for early withdrawal. 
A) small-denomination time deposits pay no interest. 
B) large-denomination time deposits may be bought and sold on secondary markets. 
C) large-denomination time deposits carry a significant penalty for early withdrawal. 
D) small-denomination time deposits carry a significant penalty for early withdrawal.

Question 12

When bank loan officers screen loan applicants to eliminate potentially bad risks, they are attempting to mitigate the problem of

Accepted Answer

A) adverse selection. 
B) moral hazard. 
C) interest rate risk. 
D) illiquidity. 
A) adverse selection. 
B) moral hazard. 
C) interest rate risk. 
D) illiquidity.

Question 13

What are the leading financial intermediaries in the United States and most developed countries?

Accepted Answer

A) Pension funds 
B) Stock mutual funds 
C) Banks 
D) Credit unions 
A) Pension funds 
B) Stock mutual funds 
C) Banks 
D) Credit unions

Question 14

The duration of a bank's assets equals

Accepted Answer

A) the asset's market value divided by the market interest rate. 
B) the market interest rate divided by the asset's market value. 
C) the percentage change in the asset's market value divided by the percentage change in the market interest rate. 
D) the percentage change in the market interest rate divided by the percentage change in the asset's market value. 
A) the asset's market value divided by the market interest rate. 
B) the market interest rate divided by the asset's market value. 
C) the percentage change in the asset's market value divided by the percentage change in the market interest rate. 
D) the percentage change in the market interest rate divided by the percentage change in the asset's market value.

Question 15

Suppose First National Bank has $200 million of assets and $20 million of equity capital. If First National has a 2% return on assets (ROA), what is its return on equity (ROE)? Suppose First National's equity capital declines to $10 million, while its assets and ROA are unchanged. What is First National's ROE now?

Accepted Answer

ROE = ROA × (Bank assets/Bank

Question 16

The payments system refers to

Accepted Answer

A) the means of clearing and settling transactions in the economy. 
B) the means by which the government collects taxes. 
C) the system that credit card companies use to collect their payments. 
D) the type of medium of exchange used in the economy. 
A) the means of clearing and settling transactions in the economy. 
B) the means by which the government collects taxes. 
C) the system that credit card companies use to collect their payments. 
D) the type of medium of exchange used in the economy.

Question 17

If you deposit $300 in your bank and the required reserve ratio is 10%, your bank will have

Accepted Answer

A) an increase in required reserves of $300. 
B) an increase in required reserves of $270. 
C) an increase in required reserves of $3000. 
D) an increase in required reserves of $30 and an increase in excess reserves of $270. 
A) an increase in required reserves of $300. 
B) an increase in required reserves of $270. 
C) an increase in required reserves of $3000. 
D) an increase in required reserves of $30 and an increase in excess reserves of $270.

Question 18

Which of the following is a bank asset?

Accepted Answer

A) Checkable deposits 
B) Savings deposits 
C) Borrowings in the federal funds market 
D) Cash items in the process of collection 
A) Checkable deposits 
B) Savings deposits 
C) Borrowings in the federal funds market 
D) Cash items in the process of collection

Question 19

The interest rate on interbank loans is called the

Accepted Answer

A) discount rate. 
B) federal funds rate. 
C) repo rate. 
D) prime rate. 
A) discount rate. 
B) federal funds rate. 
C) repo rate. 
D) prime rate.

Question 20

A loan officer uses a credit scoring system to

Accepted Answer

A) compare the interest rate on a loan to interest rates on other assets with comparable risk. 
B) keep track of the fraction of a bank's assets tied up in loans to a single individual or business. 
C) predict statistically whether an individual is likely to default on a loan. 
D) match any particular loan with the deposits being used to fund it. 
A) compare the interest rate on a loan to interest rates on other assets with comparable risk. 
B) keep track of the fraction of a bank's assets tied up in loans to a single individual or business. 
C) predict statistically whether an individual is likely to default on a loan. 
D) match any particular loan with the deposits being used to fund it.

Exam 13: The Business of Banking

Credit risk is the risk that

Some economists have argued that the competitiveness of Germany and Japan has been improved by

On a bank's balance sheet, assets are

For a bank, net worth is equal to

The difference between a demand deposit and a NOW account is that

A checkable deposit that pays no interest is known as a

Customers who have long-term relationships with banks

With respect to the period of the last several decades, which of the following statements is true?

Unsecured loans between banks are called

Banks use repurchase agreements to

A key difference between small-denomination and large-denomination time deposits is that

When bank loan officers screen loan applicants to eliminate potentially bad risks, they are attempting to mitigate the problem of

What are the leading financial intermediaries in the United States and most developed countries?

The duration of a bank's assets equals

The payments system refers to

If you deposit $300 in your bank and the required reserve ratio is 10%, your bank will have

Which of the following is a bank asset?

The interest rate on interbank loans is called the

A loan officer uses a credit scoring system to

Introducing Money and the Financial System

Money and the Payments System

Overview of the Financial System

Interest Rates and Rates of Return

The Theory of Portfolio Allocation

Determining Market Interest Rates

Risk Structure and Term Structure of Interest Rates

The Foreign-Exchange Market and Exchange Rates

Derivative Securities and Derivative Markets

Information and Financial Market Efficiency

Reducing Transactions Costs and Information Costs

What Financial Institutions Do

The Banking Industry

Banking Regulation: Crisis and Response

Banking in the International Economy

The Money Supply Process

Changes in the Monetary Base

Organization of Central Banks

Monetary Policy Tools

The Conduct of Monetary Policy

The International Financial System and Monetary Policy

The Demand for Money

Linking the Financial System and the Economy: the Is-Lm-Fe Model

Aggregate Demand and Aggregate Supply

Money and Output in the Short Run

Information Problems and Channels for Monetary Policy

Inflation: Causes and Consequences

Filters