Question 1

When interest rates fall a bank's capital will usually:

Accepted Answer

A)  not change. 
B)  decrease. 
C)  turn negative. 
D)  increase. 
A)  not change. 
B)  decrease. 
C)  turn negative. 
D)  increase.

Question 2

Suppose that a bank initially has a leverage ratio of 8 to 1. If this bank increases its capital by $1 million and its assets by $10 million, then the bank's:

Accepted Answer

A)  risk increases and its leverage decreases. 
B)  liabilities decrease and its leverage increases. 
C)  leverage decreases and its liabilities increase. 
D)  leverage and risk increases. 
A)  risk increases and its leverage decreases. 
B)  liabilities decrease and its leverage increases. 
C)  leverage decreases and its liabilities increase. 
D)  leverage and risk increases.

Question 3

The federal funds market:

Accepted Answer

A)  is the term used for bank borrowing from the Federal Reserve System. 
B)  is the lending to banks by the U.S. treasury when banks face liquidity emergencies. 
C)  is the inter-bank market where excess reserves from one bank can be loaned to another bank. 
D)  is the borrowing by American banks from foreign lenders. 
A)  is the term used for bank borrowing from the Federal Reserve System. 
B)  is the lending to banks by the U.S. treasury when banks face liquidity emergencies. 
C)  is the inter-bank market where excess reserves from one bank can be loaned to another bank. 
D)  is the borrowing by American banks from foreign lenders.

Question 4

Savings and loans primarily provide:

Accepted Answer

A)  large commercial loans. 
B)  unsecured credit card loans. 
C)  student loans. 
D)  home mortgages. 
A)  large commercial loans. 
B)  unsecured credit card loans. 
C)  student loans. 
D)  home mortgages.

Question 5

Considering the balance sheet for all commercial banks in the U.S., the largest category of assets is:

Accepted Answer

A)  cash items. 
B)  U.S. Government Securities. 
C)  required reserves. 
D)  loans. 
A)  cash items. 
B)  U.S. Government Securities. 
C)  required reserves. 
D)  loans.

Question 6

If the Federal Reserve were to do away with the required reserve regulation, do you think banks would stop holding reserves? Explain.

Accepted Answer

If the Federal Reserve did away with the

Question 7

The primary difference among various kinds of depository institutions is in the composition of their loan portfolios. Agree or disagree? Explain.

Accepted Answer

All depository institutions have deposit

Question 8

The weighted average difference between the interest received on assets and the interest rate paid for liabilities for a bank is the bank's:

Accepted Answer

A)  interest rate spread. 
B)  net interest margin. 
C)  net interest income. 
D)  return on equity. 
A)  interest rate spread. 
B)  net interest margin. 
C)  net interest income. 
D)  return on equity.

Question 9

Considering U.S. commercial banks, loans account for:

Accepted Answer

A)  about one-third of total assets. 
B)  more than one-half of total assets. 
C)  two-thirds of liabilities. 
D)  three-quarters of total assets. 
A)  about one-third of total assets. 
B)  more than one-half of total assets. 
C)  two-thirds of liabilities. 
D)  three-quarters of total assets.

Question 10

Everything else equal, if the ratio of bank assets to bank capital decreases, the bank's return on equity should:

Accepted Answer

A)  decrease. 
B)  remain constant. 
C)  increase. 
D)  cannot be determined from the information provided. 
A)  decrease. 
B)  remain constant. 
C)  increase. 
D)  cannot be determined from the information provided.

Question 11

Regulators require a bank to hold some of its assets as reserves mainly to address:

Accepted Answer

A)  liquidity risk. 
B)  trading risk. 
C)  credit risk. 
D)  operational risk. 
A)  liquidity risk. 
B)  trading risk. 
C)  credit risk. 
D)  operational risk.

Question 12

Money center banks differ from community banks in all of the following ways except:

Accepted Answer

A)  they are usually much smaller. 
B)  they obtain their funds primarily through borrowing and not by deposits. 
C)  they are a much smaller percentage of the total number of banks. 
D)  they are actively engaged in the money market. 
A)  they are usually much smaller. 
B)  they obtain their funds primarily through borrowing and not by deposits. 
C)  they are a much smaller percentage of the total number of banks. 
D)  they are actively engaged in the money market.

Question 13

We saw in Chapter 12 that initially savings and loans were created to make home mortgages, and their main source of funds was deposits from savers. In the late 1970's and into the 1980's, the U.S. experienced rising interest rates that had depositors looking for higher returns. Congress quickly removed the interest rate ceilings that savings and loans could offer. Explain the initial impact this had on the interest rate spread and the net interest margin for the savings and loans.

Accepted Answer

Before the dramatic increase in interest

Question 14

Which of the following statements is most correct for U.S. commercial banks?

Accepted Answer

A)  Net interest margin is much larger than return on equity. 
B)  Net interest margin is about equal to return on equity. 
C)  Net interest margin averages about two times the return on equity. 
D)  Net interest margin is closely related to the return on assets. 
A)  Net interest margin is much larger than return on equity. 
B)  Net interest margin is about equal to return on equity. 
C)  Net interest margin averages about two times the return on equity. 
D)  Net interest margin is closely related to the return on assets.

Question 15

Considering that, on average, the return on assets is the same for small and large banks, and the return on equity is higher for large banks than small banks, what can be one of the explanations for the trend toward bank mergers?

Accepted Answer

The return on assets being the same sugg

Question 16

Information asymmetry that exists in lending creates what type of risk for banks? Discuss the ways for a bank to handle or minimize this risk.

Accepted Answer

Information asymmetry leads to the probl

Question 17

A bank that makes most of its long-term loans at adjustable interest rates is:

Accepted Answer

A)  reducing both interest rate and credit risk. 
B)  increasing credit risk and reducing interest rate risk. 
C)  reducing credit risk and increasing interest-rate risk. 
D)  increasing both interest-rate and credit risk. 
A)  reducing both interest rate and credit risk. 
B)  increasing credit risk and reducing interest rate risk. 
C)  reducing credit risk and increasing interest-rate risk. 
D)  increasing both interest-rate and credit risk.

Question 18

A bank's loan loss reserves are:

Accepted Answer

A)  the amount of loans that have defaulted in the past twelve months. 
B)  the same as equity capital. 
C)  an amount the bank sets aside to cover potential losses from defaulted loans. 
D)  a liability of the bank since it is a source of funds. 
A)  the amount of loans that have defaulted in the past twelve months. 
B)  the same as equity capital. 
C)  an amount the bank sets aside to cover potential losses from defaulted loans. 
D)  a liability of the bank since it is a source of funds.

Question 19

A bank has $100 million in assets and 50 percent of its assets are interest sensitive. The bank has $75 million in liabilities, 50 percent of which are interest sensitive. What is the bank's gap between interest-sensitive assets and liabilities?

Accepted Answer

The amount of assets that are interest s

Question 20

One thing that is common for all bank loans is that they are:

Accepted Answer

A)  securitized. 
B)  liquid. 
C)  part of the banks' assets. 
D)  unsecured. 
A)  securitized. 
B)  liquid. 
C)  part of the banks' assets. 
D)  unsecured.

Exam 12:Depository Institutions: Banks and Bank Management

When interest rates fall a bank's capital will usually:

Suppose that a bank initially has a leverage ratio of 8 to 1. If this bank increases its capital by $1 million and its assets by $10 million, then the bank's:

The federal funds market:

Savings and loans primarily provide:

Considering the balance sheet for all commercial banks in the U.S., the largest category of assets is:

If the Federal Reserve were to do away with the required reserve regulation, do you think banks would stop holding reserves? Explain.

The primary difference among various kinds of depository institutions is in the composition of their loan portfolios. Agree or disagree? Explain.

The weighted average difference between the interest received on assets and the interest rate paid for liabilities for a bank is the bank's:

Considering U.S. commercial banks, loans account for:

Everything else equal, if the ratio of bank assets to bank capital decreases, the bank's return on equity should:

Regulators require a bank to hold some of its assets as reserves mainly to address:

Money center banks differ from community banks in all of the following ways except:

Which of the following statements is most correct for U.S. commercial banks?

Considering that, on average, the return on assets is the same for small and large banks, and the return on equity is higher for large banks than small banks, what can be one of the explanations for the trend toward bank mergers?

Information asymmetry that exists in lending creates what type of risk for banks? Discuss the ways for a bank to handle or minimize this risk.

A bank that makes most of its long-term loans at adjustable interest rates is:

A bank's loan loss reserves are:

A bank has $100 million in assets and 50 percent of its assets are interest sensitive. The bank has $75 million in liabilities, 50 percent of which are interest sensitive. What is the bank's gap between interest-sensitive assets and liabilities?

One thing that is common for all bank loans is that they are:

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange Rate Policy and the Central Bank

Money Growth, Money Demand and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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