Question 1

As the costs associated with deposit outflows ________,the banks willingness to hold excess reserves will ________.

Accepted Answer

A) decrease; increase 
B) increase; decrease 
C) increase; increase 
D) decrease; not be affected 
A) decrease; increase 
B) increase; decrease 
C) increase; increase 
D) decrease; not be affected

Question 2

Which of the following statements are true?

Accepted Answer

A) Checkable deposits are payable on demand. 
B) Checkable deposits do not include NOW accounts. 
C) Checkable deposits are the primary source of bank funds. 
D) Demand deposits are checkable deposits that pay interest. 
A) Checkable deposits are payable on demand. 
B) Checkable deposits do not include NOW accounts. 
C) Checkable deposits are the primary source of bank funds. 
D) Demand deposits are checkable deposits that pay interest.

Question 3

A bank is insolvent when

Accepted Answer

A) its liabilities exceed its assets. 
B) its assets exceed its liabilities. 
C) its capital exceeds its liabilities. 
D) its assets increase in value. 
A) its liabilities exceed its assets. 
B) its assets exceed its liabilities. 
C) its capital exceeds its liabilities. 
D) its assets increase in value.

Question 4

Your bank has the following balance sheet
Assets Liabilities
Rate-sensitive $100 million Rate-sensitive $75 million
Fixed-rate 100 million Fixed-rate 125 million
What would happen to bank profits if the interest rates in the economy go down? Is there anything that you could do to keep your bank from being so vulnerable to interest rate movements?

Accepted Answer

The bank's profits would go down because

Question 5

The share of checkable deposits in total bank liabilities has

Accepted Answer

A) expanded moderately over time. 
B) expanded dramatically over time. 
C) shrunk over time. 
D) remained virtually unchanged since 1960. 
A) expanded moderately over time. 
B) expanded dramatically over time. 
C) shrunk over time. 
D) remained virtually unchanged since 1960.

Question 6

Provisions in loan contracts that prohibit borrowers from engaging in specified risky activities are called

Accepted Answer

A) proscription bonds. 
B) restrictive covenants. 
C) due-on-sale clauses. 
D) liens. 
A) proscription bonds. 
B) restrictive covenants. 
C) due-on-sale clauses. 
D) liens.

Question 7

Assume a bank has $200 million of assets with a duration of 2.5,and $190 million of liabilities with a duration of 1.05.If interest rates increase from 5 percent to 6 percent,the net worth of the bank falls by

Accepted Answer

A) $1 million. 
B) $2.4 million. 
C) $3.6 million. 
D) $4.8 million. 
A) $1 million. 
B) $2.4 million. 
C) $3.6 million. 
D) $4.8 million.

Question 8

Banks that actively manage liabilities will most likely meet a reserve shortfall by

Accepted Answer

A) calling in loans. 
B) borrowing federal funds. 
C) selling municipal bonds. 
D) seeking new deposits. 
A) calling in loans. 
B) borrowing federal funds. 
C) selling municipal bonds. 
D) seeking new deposits.

Question 9

Which of the following are bank assets?

Accepted Answer

A) the building owned by the bank 
B) a discount loan 
C) a negotiable CD 
D) a customer's checking account 
A) the building owned by the bank 
B) a discount loan 
C) a negotiable CD 
D) a customer's checking account

Question 10

If,after a deposit outflow,a bank needs an additional $3 million to meet its reserve requirements,the bank can

Accepted Answer

A) reduce deposits by $3 million. 
B) increase loans by $3 million. 
C) sell $3 million of securities. 
D) repay its discount loans from the Fed. 
A) reduce deposits by $3 million. 
B) increase loans by $3 million. 
C) sell $3 million of securities. 
D) repay its discount loans from the Fed.

Question 11

Which of the following would not be a way to increase the return on equity?

Accepted Answer

A) Buy back bank stock 
B) Pay higher dividends 
C) Acquire new funds by selling negotiable CDs and increase assets with them 
D) Sell more bank stock 
A) Buy back bank stock 
B) Pay higher dividends 
C) Acquire new funds by selling negotiable CDs and increase assets with them 
D) Sell more bank stock

Question 12

Bank reserves include

Accepted Answer

A) deposits at the Fed and short-term treasury securities. 
B) vault cash and short-term Treasury securities. 
C) vault cash and deposits at the Fed. 
D) deposits at other banks and deposits at the Fed. 
A) deposits at the Fed and short-term treasury securities. 
B) vault cash and short-term Treasury securities. 
C) vault cash and deposits at the Fed. 
D) deposits at other banks and deposits at the Fed.

Question 13

A bank will want to hold more excess reserves (everything else equal)when

Accepted Answer

A) it expects to have deposit inflows in the near future. 
B) brokerage commissions on selling bonds increase. 
C) the cost of selling loans falls. 
D) the discount rate decreases. 
A) it expects to have deposit inflows in the near future. 
B) brokerage commissions on selling bonds increase. 
C) the cost of selling loans falls. 
D) the discount rate decreases.

Question 14

Credit risk management tools include

Accepted Answer

A) deductibles. 
B) collateral. 
C) interest rate swaps. 
D) duration analysis. 
A) deductibles. 
B) collateral. 
C) interest rate swaps. 
D) duration analysis.

Question 15

In one sense ________ appears surprising since it means that the bank is not ________ its portfolio of loans and thus is exposing itself to more risk.

Accepted Answer

A) specialization in lending; diversifying 
B) specialization in lending; rationing 
C) credit rationing; diversifying 
D) screening; rationing 
A) specialization in lending; diversifying 
B) specialization in lending; rationing 
C) credit rationing; diversifying 
D) screening; rationing

Question 16

Traders working for banks are subject to the

Accepted Answer

A) principal-agent problem. 
B) free-rider problem. 
C) double-jeopardy problem. 
D) exchange-risk problem. 
A) principal-agent problem. 
B) free-rider problem. 
C) double-jeopardy problem. 
D) exchange-risk problem.

Question 17

In the absence of regulation,banks would probably hold

Accepted Answer

A) too much capital,reducing the efficiency of the payments system. 
B) too much capital,reducing the profitability of banks. 
C) too little capital. 
D) too much capital,making it more difficult to obtain loans. 
A) too much capital,reducing the efficiency of the payments system. 
B) too much capital,reducing the profitability of banks. 
C) too little capital. 
D) too much capital,making it more difficult to obtain loans.

Question 18

Which of the following statements are true?

Accepted Answer

A) A bank's assets are its sources of funds. 
B) A bank's liabilities are its uses of funds. 
C) A bank's balance sheet shows that total assets equal total liabilities plus equity capital. 
D) A bank's balance sheet indicates whether or not the bank is profitable. 
A) A bank's assets are its sources of funds. 
B) A bank's liabilities are its uses of funds. 
C) A bank's balance sheet shows that total assets equal total liabilities plus equity capital. 
D) A bank's balance sheet indicates whether or not the bank is profitable.

Question 19

If the First National Bank has a gap equal to a negative $30 million,then a 5 percentage point increase in interest rates will cause profits to

Accepted Answer

A) increase by $15 million. 
B) increase by $1.5 million. 
C) decline by $15 million. 
D) decline by $1.5 million. 
A) increase by $15 million. 
B) increase by $1.5 million. 
C) decline by $15 million. 
D) decline by $1.5 million.

Question 20

Banks earn profits by selling ________ with attractive combinations of liquidity,risk,and return,and using the proceeds to buy ________ with a different set of characteristics.

Accepted Answer

A) loans; deposits 
B) securities; deposits 
C) liabilities; assets 
D) assets; liabilities 
A) loans; deposits 
B) securities; deposits 
C) liabilities; assets 
D) assets; liabilities

Exam 10: Banking and the Management of Financial Institutions

As the costs associated with deposit outflows ________,the banks willingness to hold excess reserves will ________.

Which of the following statements are true?

A bank is insolvent when

The share of checkable deposits in total bank liabilities has

Provisions in loan contracts that prohibit borrowers from engaging in specified risky activities are called

Assume a bank has $200 million of assets with a duration of 2.5,and $190 million of liabilities with a duration of 1.05.If interest rates increase from 5 percent to 6 percent,the net worth of the bank falls by

Banks that actively manage liabilities will most likely meet a reserve shortfall by

Which of the following are bank assets?

If,after a deposit outflow,a bank needs an additional $3 million to meet its reserve requirements,the bank can

Which of the following would not be a way to increase the return on equity?

Bank reserves include

A bank will want to hold more excess reserves (everything else equal)when

Credit risk management tools include

In one sense ________ appears surprising since it means that the bank is not ________ its portfolio of loans and thus is exposing itself to more risk.

Traders working for banks are subject to the

In the absence of regulation,banks would probably hold

Which of the following statements are true?

If the First National Bank has a gap equal to a negative $30 million,then a 5 percentage point increase in interest rates will cause profits to

Banks earn profits by selling ________ with attractive combinations of liquidity,risk,and return,and using the proceeds to buy ________ with a different set of characteristics.

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behavior of Interest Rates

The Risk and Term Structure of Interest Rates

The Stock Market, the Theory of Rational Expectations, and the Efficient Market Hypothesis

An Economic Analysis of Financial Structure

Financial Crises

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Central Banks and the Federal Reserve System

The Money Supply Process

Tools of Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

Quantity Theory,inflation and the Demand for Money

The Is Curve

The Monetary Policy and Aggregate Demand Curves

Aggregate Demand and Supply Analysis

Monetary Policy Theory

The Role of Expectations in Monetary Policy

Transmission Mechanisms of Monetary Policy

The ISLM Model

Filters

As the costs associated with deposit outflows ,the banks willingness to hold excess reserves will .

In one sense appears surprising since it means that the bank is not its portfolio of loans and thus is exposing itself to more risk.

Banks earn profits by selling with attractive combinations of liquidity,risk,and return,and using the proceeds to buy with a different set of characteristics.