Question 1

What is the largest category of bank assets?

Accepted Answer

A) Loans 
B) Reserves 
C) Securities 
D) Cash items in the process of collection 
A) Loans 
B) Reserves 
C) Securities 
D) Cash items in the process of collection

Question 2

Banks experience interest rate risk

Accepted Answer

A) if adverse selection problems are particularly severe. 
B) if moral hazard problems are particularly severe. 
C) on any investment that has high information costs. 
D) if changes in interest rates cause bank profits to fluctuate. 
A) if adverse selection problems are particularly severe. 
B) if moral hazard problems are particularly severe. 
C) on any investment that has high information costs. 
D) if changes in interest rates cause bank profits to fluctuate.

Question 3

Securitization refers to

Accepted Answer

A) changing the mix in a financial portfolio away from stocks and toward bonds. 
B) selling directly to investors loans or securities that were formerly held by financial intermediaries. 
C) banks insisting that collateral be supplied on previously unsecured loans. 
D) reducing the exposure of a bank's portfolio to interest rate risk. 
A) changing the mix in a financial portfolio away from stocks and toward bonds. 
B) selling directly to investors loans or securities that were formerly held by financial intermediaries. 
C) banks insisting that collateral be supplied on previously unsecured loans. 
D) reducing the exposure of a bank's portfolio to interest rate risk.

Question 4

When a bank issues a checkable deposit and loans the funds out to a business, it has transformed

Accepted Answer

A) a financial asset for a saver into a liability for a borrower. 
B) a financial liability for a saver into a financial asset for a borrower. 
C) a short-term liability to a borrower into a long-term asset to a saver. 
D) one liability into another liability. 
A) a financial asset for a saver into a liability for a borrower. 
B) a financial liability for a saver into a financial asset for a borrower. 
C) a short-term liability to a borrower into a long-term asset to a saver. 
D) one liability into another liability.

Question 5

What percentage of bank assets were in security holdings in 2006?

Accepted Answer

A) 3% 
B) 13% 
C) 22% 
D) 37% 
A) 3% 
B) 13% 
C) 22% 
D) 37%

Question 6

On a bank's balance sheet, "borrowings" are

Accepted Answer

A) loans to households. 
B) loans to businesses. 
C) nondeposit liabilities. 
D) U.S. Treasury securities. 
A) loans to households. 
B) loans to businesses. 
C) nondeposit liabilities. 
D) U.S. Treasury securities.

Question 7

Which of the following is NOT an example of off-balance-sheet lending?

Accepted Answer

A) A swap 
B) A standby letter of credit 
C) A loan commitment 
D) A loan sale 
A) A swap 
B) A standby letter of credit 
C) A loan commitment 
D) A loan sale

Question 8

On a bank's balance sheet, liabilities are

Accepted Answer

A) the uses of acquired assets. 
B) the sources of acquired funds. 
C) all those items of value owned by the bank. 
D) by definition equal to the bank's assets. 
A) the uses of acquired assets. 
B) the sources of acquired funds. 
C) all those items of value owned by the bank. 
D) by definition equal to the bank's assets.

Question 9

Which of the following is NOT a bank liability?

Accepted Answer

A) Checkable deposits 
B) CDs 
C) Mortgage loans 
D) Borrowings from the Federal Reserve 
A) Checkable deposits 
B) CDs 
C) Mortgage loans 
D) Borrowings from the Federal Reserve

Question 10

A person takes out a car loan at a bank, but actually uses the money to play the lottery. This situation is an example of which problem banks face in lending?

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 11

Securities that banks sell and agree to repurchase are known as

Accepted Answer

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

Question 12

Which of the following represented the largest liability on the balance sheet of U.S. commercial banks in 2006?

Accepted Answer

A) Checkable deposits 
B) Loans 
C) Nontransaction deposits 
D) Borrowings 
A) Checkable deposits 
B) Loans 
C) Nontransaction deposits 
D) Borrowings

Question 13

Banks use "credit-risk analysis" to

Accepted Answer

A) determine the appropriate interest rate to charge borrowers. 
B) determine whether to invest in the stock of a corporation. 
C) determine the appropriate interest rate to pay depositors. 
D) determine the likelihood of an audit by bank regulators. 
A) determine the appropriate interest rate to charge borrowers. 
B) determine whether to invest in the stock of a corporation. 
C) determine the appropriate interest rate to pay depositors. 
D) determine the likelihood of an audit by bank regulators.

Question 14

Which asset is sometimes referred to as a bank's secondary reserves?

Accepted Answer

A) Vault cash 
B) U.S. government securities 
C) Repurchase agreements 
D) Federal funds 
A) Vault cash 
B) U.S. government securities 
C) Repurchase agreements 
D) Federal funds

Question 15

In what country were the ten largest banks in the world located during the 1980s and early 1990s?

Accepted Answer

A) The United States 
B) Japan 
C) Germany 
D) Canada 
A) The United States 
B) Japan 
C) Germany 
D) Canada

Question 16

A balance sheet

Accepted Answer

A) is a statement showing an individual's or a firm's financial position at a particular point in time. 
B) is a statement showing an individual's or a firm's income over a period of time. 
C) is a statement listing the tax liabilities incurred by an individual or a firm. 
D) can be constructed for any nonfinancial firm, but cannot be constructed for a financial firm. 
A) is a statement showing an individual's or a firm's financial position at a particular point in time. 
B) is a statement showing an individual's or a firm's income over a period of time. 
C) is a statement listing the tax liabilities incurred by an individual or a firm. 
D) can be constructed for any nonfinancial firm, but cannot be constructed for a financial firm.

Question 17

If you deposit a $50 check in the bank, before the check has cleared the change in your bank's balance sheet will be a

Accepted Answer

A) $50 increase in reserves and a $50 increase in checkable deposits. 
B) $50 increase in cash items in the process of collection and a $50 increase in reserves. 
C) $50 increase in cash items in the process of collection and a $50 increase in checkable deposits. 
D) $50 increase in cash and a $50 increase in checkable deposits. 
A) $50 increase in reserves and a $50 increase in checkable deposits. 
B) $50 increase in cash items in the process of collection and a $50 increase in reserves. 
C) $50 increase in cash items in the process of collection and a $50 increase in checkable deposits. 
D) $50 increase in cash and a $50 increase in checkable deposits.

Question 18

Which of the following would NOT be covered by federal deposit insurance?

Accepted Answer

A) A $50,000 demand deposit 
B) A $50,000 NOW account 
C) A $75,000 NOW account 
D) A $200,000 certificate of deposit 
A) A $50,000 demand deposit 
B) A $50,000 NOW account 
C) A $75,000 NOW account 
D) A $200,000 certificate of deposit

Question 19

If a bank decides that it must write off all or part of the value of a loan, what is the corresponding reduction in a liability entry that the bank makes?

Accepted Answer

A) Deposits are reduced by the amount of the loan write off. 
B) Borrowings are reduced by the amount of the loan write off. 
C) Net worth is reduced by the amount of the loan write off. 
D) Cash items in the process of collection are reduced by the amount of the loan write off. 
A) Deposits are reduced by the amount of the loan write off. 
B) Borrowings are reduced by the amount of the loan write off. 
C) Net worth is reduced by the amount of the loan write off. 
D) Cash items in the process of collection are reduced by the amount of the loan write off.

Question 20

In managing its liabilities to deal with liquidity problems, banks trade off

Accepted Answer

A) credit risk against interest rate risk. 
B) adverse selection against moral hazard. 
C) the need for available funds to meet deposit outflows against the desire for greater operating income. 
D) present tax liabilities against future tax liabilities. 
A) credit risk against interest rate risk. 
B) adverse selection against moral hazard. 
C) the need for available funds to meet deposit outflows against the desire for greater operating income. 
D) present tax liabilities against future tax liabilities.

Exam 13: The Business of Banking

What is the largest category of bank assets?

Banks experience interest rate risk

Securitization refers to

When a bank issues a checkable deposit and loans the funds out to a business, it has transformed

What percentage of bank assets were in security holdings in 2006?

On a bank's balance sheet, "borrowings" are

Which of the following is NOT an example of off-balance-sheet lending?

On a bank's balance sheet, liabilities are

Which of the following is NOT a bank liability?

A person takes out a car loan at a bank, but actually uses the money to play the lottery. This situation is an example of which problem banks face in lending?

Securities that banks sell and agree to repurchase are known as

Which of the following represented the largest liability on the balance sheet of U.S. commercial banks in 2006?

Banks use "credit-risk analysis" to

Which asset is sometimes referred to as a bank's secondary reserves?

In what country were the ten largest banks in the world located during the 1980s and early 1990s?

A balance sheet

If you deposit a $50 check in the bank, before the check has cleared the change in your bank's balance sheet will be a

Which of the following would NOT be covered by federal deposit insurance?

If a bank decides that it must write off all or part of the value of a loan, what is the corresponding reduction in a liability entry that the bank makes?

In managing its liabilities to deal with liquidity problems, banks trade off

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

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