Question 1

Bank capital is equal to ________ minus ________.

Accepted Answer

A) total assets;total liabilities 
B) total liabilities;total assets 
C) total assets;total reserves 
D) total liabilities;total borrowings 
A) total assets;total liabilities 
B) total liabilities;total assets 
C) total assets;total reserves 
D) total liabilities;total borrowings

Question 2

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 3

Bruce the Bank Manager can reduce interest rate risk by ________ the duration of the bank's assets to increase their rate sensitivity or,alternatively,________ the duration of the bank's liabilities.

Accepted Answer

A) shortening;lengthening 
B) shortening;shortening 
C) lengthening;lengthening 
D) lengthening;shortening 
A) shortening;lengthening 
B) shortening;shortening 
C) lengthening;lengthening 
D) lengthening;shortening

Question 4

A $100 deposit into my checking account at My Bank increases my checkable deposits by $100,and the bank's ________ by $100.

Accepted Answer

A) reserves 
B) loans 
C) capital 
D) securities 
A) reserves 
B) loans 
C) capital 
D) securities

Question 5

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 6

In general,banks make profits by selling ________ liabilities and buying ________ assets.

Accepted Answer

A) long-term;shorter-term 
B) short-term;longer-term 
C) illiquid;liquid 
D) risky;risk-free 
A) long-term;shorter-term 
B) short-term;longer-term 
C) illiquid;liquid 
D) risky;risk-free

Question 7

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 8

-If interest rates rise by 5 percentage points,say,from 10 to 15%,bank profits (measured using gap analysis)will

Accepted Answer

A) decline by $0.5 million. 
B) decline by $1.5 million. 
C) decline by $2.5 million. 
D) increase by $1.5 million. 
A) decline by $0.5 million. 
B) decline by $1.5 million. 
C) decline by $2.5 million. 
D) increase by $1.5 million.

Question 9

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 10

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 11

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 12

Your bank has the following balance sheet:
Assets Liabilities
Reserves $ 50 million Checkable deposits $200 million
Securities 50 million
Loans 150 million Bank capital 50 million
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 13

Which of the following are primary concerns of the bank manager?

Accepted Answer

A) maintaining sufficient reserves to minimize the cost to the bank of deposit outflows 
B) extending loans to borrowers who will pay low interest rates,but who are poor credit risks 
C) acquiring funds at a relatively high cost,so that profitable lending opportunities can be realized 
D) maintaining high levels of capital and thus maximizing the returns to the owners 
A) maintaining sufficient reserves to minimize the cost to the bank of deposit outflows 
B) extending loans to borrowers who will pay low interest rates,but who are poor credit risks 
C) acquiring funds at a relatively high cost,so that profitable lending opportunities can be realized 
D) maintaining high levels of capital and thus maximizing the returns to the owners

Question 14

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 15

Which of the following are reported as liabilities on a bank's balance sheet?

Accepted Answer

A) reserves 
B) checkable deposits 
C) consumer loans 
D) deposits with other banks 
A) reserves 
B) checkable deposits 
C) consumer loans 
D) deposits with other banks

Question 16

When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank,then

Accepted Answer

A) the liabilities of the First National Bank decrease by $10. 
B) the reserves of the First National Bank increase by $10. 
C) the liabilities of Citibank decrease by $10. 
D) the assets of Citibank decrease by $10. 
A) the liabilities of the First National Bank decrease by $10. 
B) the reserves of the First National Bank increase by $10. 
C) the liabilities of Citibank decrease by $10. 
D) the assets of Citibank decrease by $10.

Question 17

In recent years the interest paid on checkable and nontransaction deposits has accounted for around ________ of total bank operating expenses,while the costs involved in servicing accounts have been approximately ________ of operating expenses.

Accepted Answer

A) 45 percent;55 percent 
B) 55 percent;4 percent 
C) 25 percent;50 percent 
D) 50 percent;30 percent 
A) 45 percent;55 percent 
B) 55 percent;4 percent 
C) 25 percent;50 percent 
D) 50 percent;30 percent

Question 18

Modern liability management has resulted in

Accepted Answer

A) increased sales of negotiable CDs to raise funds. 
B) increase importance of deposits as a source of funds. 
C) reduced borrowing by banks in the overnight loan market. 
D) failure by banks to coordinate management of assets and liabilities. 
A) increased sales of negotiable CDs to raise funds. 
B) increase importance of deposits as a source of funds. 
C) reduced borrowing by banks in the overnight loan market. 
D) failure by banks to coordinate management of assets and liabilities.

Question 19

All else the same,if a bank's liabilities are more sensitive to interest rate fluctuations than are its assets,then ________ in interest rates will ________ bank profits.

Accepted Answer

A) an increase;increase 
B) an increase;reduce 
C) a decline;reduce 
D) a decline;not affect 
A) an increase;increase 
B) an increase;reduce 
C) a decline;reduce 
D) a decline;not affect

Question 20

Because borrowers,once they have a loan,are more likely to invest in high-risk investment projects,banks face the

Accepted Answer

A) adverse selection problem. 
B) lemon problem. 
C) adverse credit risk problem. 
D) moral hazard problem. 
A) adverse selection problem. 
B) lemon problem. 
C) adverse credit risk problem. 
D) moral hazard problem.

Exam 9: Banking and the Management of Financial Institutions

Bank capital is equal to ________ minus ________.

Bank reserves include

Bruce the Bank Manager can reduce interest rate risk by ________ the duration of the bank's assets to increase their rate sensitivity or,alternatively,________ the duration of the bank's liabilities.

A $100 deposit into my checking account at My Bank increases my checkable deposits by $100,and the bank's ________ by $100.

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

In general,banks make profits by selling ________ liabilities and buying ________ assets.

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

-If interest rates rise by 5 percentage points,say,from 10 to 15%,bank profits (measured using gap analysis)will

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

A bank is insolvent when

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

Which of the following are primary concerns of the bank manager?

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

Which of the following are reported as liabilities on a bank's balance sheet?

When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank,then

In recent years the interest paid on checkable and nontransaction deposits has accounted for around ________ of total bank operating expenses,while the costs involved in servicing accounts have been approximately ________ of operating expenses.

Modern liability management has resulted in

All else the same,if a bank's liabilities are more sensitive to interest rate fluctuations than are its assets,then ________ in interest rates will ________ bank profits.

Because borrowers,once they have a loan,are more likely to invest in high-risk investment projects,banks face the

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

Web 1:financial Crises in Emerging Market Economies

Web 2:the Islm Model

Web 3:nonbank Finance

Web 4:financial Derivatives

Web 5:conflicts of Interest in the Financial Services Industry

Filters

Bank capital is equal to minus .

Bruce the Bank Manager can reduce interest rate risk by the duration of the bank's assets to increase their rate sensitivity or,alternatively, the duration of the bank's liabilities.

In general,banks make profits by selling liabilities and buying assets.

In recent years the interest paid on checkable and nontransaction deposits has accounted for around of total bank operating expenses,while the costs involved in servicing accounts have been approximately of operating expenses.

All else the same,if a bank's liabilities are more sensitive to interest rate fluctuations than are its assets,then in interest rates will bank profits.