Question 1

All of the following are examples of off-balance sheet activities that generate fee income for banks EXCEPT

Accepted Answer

A) foreign exchange trades. 
B) guaranteeing debt securities. 
C) back-up lines of credit. 
D) selling negotiable CDs. 
A) foreign exchange trades. 
B) guaranteeing debt securities. 
C) back-up lines of credit. 
D) selling negotiable CDs.

Question 2

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 3

Collateral requirements lessen the consequences of ________ because the collateral reduces the lender's losses in the case of a loan default and it reduces ________ because the borrower has more to lose from a default.

Accepted Answer

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

Question 4

Which of the following are NOT reported as assets on a bank's balance sheet?

Accepted Answer

A) cash items in the process of collection 
B) deposits with other banks 
C) U)S. Treasury securities 
D) checkable deposits 
A) cash items in the process of collection 
B) deposits with other banks 
C) U)S. Treasury securities 
D) checkable deposits

Question 5

If a bank has $50 million in rate-sensitive assets and $20 million in rate-sensitive liabilities then

Accepted Answer

A) an increase in interest rates will reduce bank profits. 
B) a decrease in interest rates will reduce bank profits. 
C) interest rate changes will not impact bank profits. 
D) a decrease in interest rates will increase bank profits. 
A) an increase in interest rates will reduce bank profits. 
B) a decrease in interest rates will reduce bank profits. 
C) interest rate changes will not impact bank profits. 
D) a decrease in interest rates will increase bank profits.

Question 6

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 7

When $1 million is deposited at a bank,the required reserve ratio is 20 percent,and the bank chooses not to hold any excess reserves but makes loans instead,then,in the bank's final balance sheet

Accepted Answer

A) the assets at the bank increase by $800,000. 
B) the liabilities of the bank increase by $1,000,000. 
C) the liabilities of the bank increase by $800,000. 
D) reserves increase by $160,000. 
A) the assets at the bank increase by $800,000. 
B) the liabilities of the bank increase by $1,000,000. 
C) the liabilities of the bank increase by $800,000. 
D) reserves increase by $160,000.

Question 8

To reduce moral hazard problems,banks include restrictive covenants in loan contracts. In order for these restrictive covenants to be effective,banks must also

Accepted Answer

A) monitor and enforce them. 
B) be willing to rewrite the contract if the borrower cannot comply with the restrictions. 
C) trust the borrower to do the right thing. 
D) be prepared to extend the deadline when the borrower needs more time to comply. 
A) monitor and enforce them. 
B) be willing to rewrite the contract if the borrower cannot comply with the restrictions. 
C) trust the borrower to do the right thing. 
D) be prepared to extend the deadline when the borrower needs more time to comply.

Question 9

All of the following are nontransaction deposits EXCEPT

Accepted Answer

A) savings accounts. 
B) small-denomination time deposits. 
C) checkable deposits. 
D) certificates of deposit. 
A) savings accounts. 
B) small-denomination time deposits. 
C) checkable deposits. 
D) certificates of deposit.

Question 10

All of the following are operating expenses for a bank EXCEPT

Accepted Answer

A) service charges on deposit accounts. 
B) salaries and employee benefits. 
C) rent on buildings. 
D) servicing costs of equipment such as computers. 
A) service charges on deposit accounts. 
B) salaries and employee benefits. 
C) rent on buildings. 
D) servicing costs of equipment such as computers.

Question 11

Which of the following bank assets is the most liquid?

Accepted Answer

A) consumer loans 
B) reserves 
C) state and local government securities 
D) U)S. government securities 
A) consumer loans 
B) reserves 
C) state and local government securities 
D) U)S. government securities

Question 12

The amount of assets per dollar of equity capital is called the

Accepted Answer

A) asset ratio. 
B) equity ratio. 
C) equity multiplier. 
D) asset multiplier. 
A) asset ratio. 
B) equity ratio. 
C) equity multiplier. 
D) asset multiplier.

Question 13

Off-balance sheet activities involving guarantees of securities and back-up credit lines

Accepted Answer

A) have no impact on the risk a bank faces. 
B) greatly reduce the risk a bank faces. 
C) increase the risk a bank faces. 
D) slightly reduce the risk a bank faces. 
A) have no impact on the risk a bank faces. 
B) greatly reduce the risk a bank faces. 
C) increase the risk a bank faces. 
D) slightly reduce the risk a bank faces.

Question 14

In order to reduce the ________ problem in loan markets,bankers collect information from prospective borrowers to screen out the bad credit risks from the good ones.

Accepted Answer

A) moral hazard 
B) adverse selection 
C) moral suasion 
D) adverse lending 
A) moral hazard 
B) adverse selection 
C) moral suasion 
D) adverse lending

Question 15

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 16

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. The duration gap for this bank is

Accepted Answer

A) 0.5 year. 
B) 1 year. 
C) 1.5 years. 
D) 2 years. 
A) 0.5 year. 
B) 1 year. 
C) 1.5 years. 
D) 2 years.

Question 17

Use the following table to answer the question : 
 
-Assuming that the average duration of its assets is four years,while the average duration of its liabilities is three years,then a 5 percentage point increase in interest rates will cause the net worth of First National to ________ by ________ of the total original asset value.

Accepted Answer

A) decline;5 percent 
B) decline;10 percent 
C) decline;15 percent 
D) increase;20 percent 
A) decline;5 percent 
B) decline;10 percent 
C) decline;15 percent 
D) increase;20 percent

Question 18

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 19

Your bank has the following balance sheet:
 
If the required reserve ratio is 10%,what actions should the bank manager take if there is an unexpected deposit outflow of $50 million?

Accepted Answer

After the deposit outflow,the bank will

Question 20

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

Exam 9: Banking and the Management of Financial Institutions

All of the following are examples of off-balance sheet activities that generate fee income for banks EXCEPT

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.

Collateral requirements lessen the consequences of ________ because the collateral reduces the lender's losses in the case of a loan default and it reduces ________ because the borrower has more to lose from a default.

Which of the following are NOT reported as assets on a bank's balance sheet?

If a bank has $50 million in rate-sensitive assets and $20 million in rate-sensitive liabilities then

Bank reserves include

When $1 million is deposited at a bank,the required reserve ratio is 20 percent,and the bank chooses not to hold any excess reserves but makes loans instead,then,in the bank's final balance sheet

To reduce moral hazard problems,banks include restrictive covenants in loan contracts. In order for these restrictive covenants to be effective,banks must also

All of the following are nontransaction deposits EXCEPT

All of the following are operating expenses for a bank EXCEPT

Which of the following bank assets is the most liquid?

The amount of assets per dollar of equity capital is called the

Off-balance sheet activities involving guarantees of securities and back-up credit lines

In order to reduce the ________ problem in loan markets,bankers collect information from prospective borrowers to screen out the bad credit risks from the good ones.

Risk that is related to the uncertainty about interest rate movements is 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. The duration gap for this bank is

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

Your bank has the following balance sheet: If the required reserve ratio is 10%,what actions should the bank manager take if there is an unexpected deposit outflow of $50 million?

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

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

The Meaning of 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

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Financial Crises

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

Financial Crises in Emerging Market Economies

The ISLM Model

Filters

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.

Collateral requirements lessen the consequences of because the collateral reduces the lender's losses in the case of a loan default and it reduces because the borrower has more to lose from a default.

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