Question 1

Bank's make their profits primarily by issuing ________.

Accepted Answer

A)  equity 
B)  negotiable CDs 
C)  loans 
D)  notice deposits 
A)  equity 
B)  negotiable CDs 
C)  loans 
D)  notice deposits C

Question 2

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 C

Question 3

Credit Atlantic Bank has the following balance sheet:
   The bank's desired reserve ratio is 10 percent and there is a withdrawal of cash from chequable deposits equal to $20. Describe what is likely to happen in the bank's balance sheet and produce the new balance sheet for Credit Atlantic Bank.

Accepted Answer

The students must show that after the $20 withdrawal, chequable deposits and reserves will go down to $100 and $0 respectively. Then, since the desired reserve ratio is 10 percent, the managers of the bank will need $100 × 10 percent = $10 as reserves. The most likely way of increasing their reserves from $0 to $10 would be by selling Canada bonds that worth $10. They will do this instead of calling in loans as this is the most liquid of their assets and also this change will not harm the bank's customers. Thus, the new balance sheet will be:

Question 4

Holding all else constant, when a bank receives the funds for a deposited cheque, ________.

Accepted Answer

A)  cash items in the process of collection fall by the amount of the cheque 
B)  bank assets increase by the amount of the cheque 
C)  bank liabilities decrease by the amount of the cheque 
D)  bank reserves increase by the amount of desired reserves 
A)  cash items in the process of collection fall by the amount of the cheque 
B)  bank assets increase by the amount of the cheque 
C)  bank liabilities decrease by the amount of the cheque 
D)  bank reserves increase by the amount of desired reserves

Question 5

How can specializing in lending help to reduce the adverse selection problem in lending?

Accepted Answer

Reducing the adverse selection problem r

Question 6

In general, banks would prefer to acquire funds quickly by ________ rather than ________.

Accepted Answer

A)  reducing loans; selling securities 
B)  reducing loans; borrowing from the Bank of Canada 
C)  borrowing from the Bank of Canada; reducing loans 
D)  "calling in" loans; selling securities 
A)  reducing loans; selling securities 
B)  reducing loans; borrowing from the Bank of Canada 
C)  borrowing from the Bank of Canada; reducing loans 
D)  "calling in" loans; selling securities

Question 7

The most important category of assets on a bank's balance sheet is ________.

Accepted Answer

A)  other assets 
B)  securities 
C)  loans 
D)  cash items in the process of collection 
A)  other assets 
B)  securities 
C)  loans 
D)  cash items in the process of collection

Question 8

Explain the relationship between return on assets and return on equity. What incentives does this relationship give a bank manager? Is this the desired outcome preferred by regulators? Discuss.

Accepted Answer

For a given return on assets, the greate

Question 9

________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow.

Accepted Answer

A)  Selling securities 
B)  Selling loans 
C)  Calling in loans 
D)  Selling negotiable CDs 
A)  Selling securities 
B)  Selling loans 
C)  Calling in loans 
D)  Selling negotiable CDs

Question 10

If a bank has ________ rate-sensitive assets than liabilities, then ________ in interest rates will increase bank profits.

Accepted Answer

A)  more; a decline 
B)  more; an increase 
C)  fewer; an increase 
D)  fewer; a surge 
A)  more; a decline 
B)  more; an increase 
C)  fewer; an increase 
D)  fewer; a surge

Question 11

Holding large amounts of bank capital helps prevent bank failures because ________.

Accepted Answer

A)  it means that the bank has a higher income 
B)  it makes loans easier to sell 
C)  it can be used to absorb the losses resulting from bad loans 
D)  it makes it easier to call in loans 
A)  it means that the bank has a higher income 
B)  it makes loans easier to sell 
C)  it can be used to absorb the losses resulting from bad loans 
D)  it makes it easier to call in loans

Question 12

Risk that is related to the uncertainty about interest rate movements is called ________.

Accepted Answer

A)  default risk 
B)  interest-rate risk 
C)  the problem of moral hazard 
D)  security risk 
A)  default risk 
B)  interest-rate risk 
C)  the problem of moral hazard 
D)  security risk

Question 13

Bankers' concerns regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Bank of Canada, and borrowings from other banks to deal with deposit outflows is an example of ________.

Accepted Answer

A)  liability management 
B)  liquidity management 
C)  managing interest rate risk 
D)  managing credit risk 
A)  liability management 
B)  liquidity management 
C)  managing interest rate risk 
D)  managing credit risk

Question 14

From the standpoint of ________, specialization in lending is surprising but makes perfect sense when one considers the ________ problem.

Accepted Answer

A)  moral hazard; diversification 
B)  diversification; moral hazard 
C)  adverse selection; diversification 
D)  diversification; adverse selection 
A)  moral hazard; diversification 
B)  diversification; moral hazard 
C)  adverse selection; diversification 
D)  diversification; adverse selection

Question 15

If a banker expects interest rates to fall in the future, her best strategy for the present is ________.

Accepted Answer

A)  to increase the duration of the bank's liabilities 
B)  to buy short-term bonds 
C)  to sell long-term certificates of deposit 
D)  to increase the duration of the bank's assets 
A)  to increase the duration of the bank's liabilities 
B)  to buy short-term bonds 
C)  to sell long-term certificates of deposit 
D)  to increase the duration of the bank's assets

Question 16

Bank capital is listed on the ________ side of the bank's balance sheet because it represents a ________ of funds.

Accepted Answer

A)  liability; use 
B)  liability; source 
C)  asset; use 
D)  asset; source 
A)  liability; use 
B)  liability; source 
C)  asset; use 
D)  asset; source

Question 17

Duration analysis involves comparing the average duration of the bank's ________ to the average duration of its ________.

Accepted Answer

A)  securities portfolio; non-deposit liabilities 
B)  assets; liabilities 
C)  loan portfolio; deposit liabilities 
D)  assets; deposit liabilities 
A)  securities portfolio; non-deposit liabilities 
B)  assets; liabilities 
C)  loan portfolio; deposit liabilities 
D)  assets; deposit liabilities

Question 18

One of the problems in conducting a duration gap analysis is that the duration gap is calculated assuming that interest rates for all maturities are the same. That means that the yield curve is ________.

Accepted Answer

A)  flat 
B)  slightly upward sloping 
C)  steeply upward sloping 
D)  downward sloping 
A)  flat 
B)  slightly upward sloping 
C)  steeply upward sloping 
D)  downward sloping

Question 19

Of the following, which would be the first choice for a bank facing a reserve deficiency?

Accepted Answer

A)  Call in loans 
B)  Borrow from the Bank of Canada 
C)  Sell securities 
D)  Borrow from other banks 
A)  Call in loans 
B)  Borrow from the Bank of Canada 
C)  Sell securities 
D)  Borrow from other banks

Question 20

What is a loan sale and how does it work?

Accepted Answer

The students must explain that the loan

Exam 12: Banking and the Management of Financial Institutions

Bank's make their profits primarily by issuing ________.

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

Credit Atlantic Bank has the following balance sheet: The bank's desired reserve ratio is 10 percent and there is a withdrawal of cash from chequable deposits equal to $20. Describe what is likely to happen in the bank's balance sheet and produce the new balance sheet for Credit Atlantic Bank.

Holding all else constant, when a bank receives the funds for a deposited cheque, ________.

How can specializing in lending help to reduce the adverse selection problem in lending?

In general, banks would prefer to acquire funds quickly by ________ rather than ________.

The most important category of assets on a bank's balance sheet is ________.

Explain the relationship between return on assets and return on equity. What incentives does this relationship give a bank manager? Is this the desired outcome preferred by regulators? Discuss.

________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow.

If a bank has ________ rate-sensitive assets than liabilities, then ________ in interest rates will increase bank profits.

Holding large amounts of bank capital helps prevent bank failures because ________.

Risk that is related to the uncertainty about interest rate movements is called ________.

Bankers' concerns regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Bank of Canada, and borrowings from other banks to deal with deposit outflows is an example of ________.

From the standpoint of ________, specialization in lending is surprising but makes perfect sense when one considers the ________ problem.

If a banker expects interest rates to fall in the future, her best strategy for the present is ________.

Bank capital is listed on the ________ side of the bank's balance sheet because it represents a ________ of funds.

Duration analysis involves comparing the average duration of the bank's ________ to the average duration of its ________.

One of the problems in conducting a duration gap analysis is that the duration gap is calculated assuming that interest rates for all maturities are the same. That means that the yield curve is ________.

Of the following, which would be the first choice for a bank facing a reserve deficiency?

What is a loan sale and how does it work?

Why Study Money, Banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of Interest Rates

The Behaviour 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

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

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

Filters

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

In general, banks would prefer to acquire funds quickly by rather than .

If a bank has rate-sensitive assets than liabilities, then in interest rates will increase bank profits.

From the standpoint of , specialization in lending is surprising but makes perfect sense when one considers the problem.

Bank capital is listed on the side of the bank's balance sheet because it represents a of funds.

Duration analysis involves comparing the average duration of the bank's to the average duration of its .