Question 1

For banks

Accepted Answer

A) return on assets exceeds return on equity. 
B) return on assets equals return on equity. 
C) return on equity exceeds return on assets. 
D) return on equity is another name for net interest margin. 
A) return on assets exceeds return on equity. 
B) return on assets equals return on equity. 
C) return on equity exceeds return on assets. 
D) return on equity is another name for net interest margin.

Question 2

Property promised to the lender as compensation if the borrower defaults is called

Accepted Answer

A) collateral. 
B) deductibles. 
C) restrictive covenants. 
D) contingencies. 
A) collateral. 
B) deductibles. 
C) restrictive covenants. 
D) contingencies.

Question 3

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals times the change in the interest rate is called

Accepted Answer

A) basic gap analysis. 
B) the maturity bucket approach to gap analysis. 
C) the segmented maturity approach to gap analysis. 
D) the segmented maturity approach to interest-exposure analysis. 
A) basic gap analysis. 
B) the maturity bucket approach to gap analysis. 
C) the segmented maturity approach to gap analysis. 
D) the segmented maturity approach to interest-exposure analysis.

Question 4

When a bank suspects that a $1 million loan might prove to be bad debt that will have to be written off in the future the bank

Accepted Answer

A) can set aside $1 million of its earnings in its loan loss reserves account. 
B) reduces its reported earnings by $1,even though it has not yet actually lost the $1 million. 
C) reduces its assets immediately by $1 million,even though it has not yet lost the $1 million. 
D) reduces its reserves by $1 million,so that they can use those funds later. 
A) can set aside $1 million of its earnings in its loan loss reserves account. 
B) reduces its reported earnings by $1,even though it has not yet actually lost the $1 million. 
C) reduces its assets immediately by $1 million,even though it has not yet lost the $1 million. 
D) reduces its reserves by $1 million,so that they can use those funds later.

Question 5

________ 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 6

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 7

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is called

Accepted Answer

A) basic duration analysis. 
B) basic gap analysis. 
C) interest-exposure analysis. 
D) gap-exposure analysis. 
A) basic duration analysis. 
B) basic gap analysis. 
C) interest-exposure analysis. 
D) gap-exposure analysis.

Question 8

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 9

Banks develop statistical models to calculate their maximum loss over a given time period.This approach is known as the

Accepted Answer

A) stress-testing approach. 
B) value-at-risk approach. 
C) trading-loss approach. 
D) doomsday approach. 
A) stress-testing approach. 
B) value-at-risk approach. 
C) trading-loss approach. 
D) doomsday approach.

Question 10

Which of the following has NOT resulted from more active liability management on the part of banks?

Accepted Answer

A) increased bank holdings of cash items 
B) aggressive targeting of goals for asset growth by banks 
C) increased use of negotiable CDs to raise funds 
D) an increased proportion of bank assets held in loans 
A) increased bank holdings of cash items 
B) aggressive targeting of goals for asset growth by banks 
C) increased use of negotiable CDs to raise funds 
D) an increased proportion of bank assets held in loans

Question 11

Because of an expected rise in interest rates in the future,a banker will likely

Accepted Answer

A) make long-term rather than short-term loans. 
B) buy short-term rather than long-term bonds. 
C) buy long-term rather than short-term bonds. 
D) make either short or long-term loans;expectations of future interest rates are irrelevant. 
A) make long-term rather than short-term loans. 
B) buy short-term rather than long-term bonds. 
C) buy long-term rather than short-term bonds. 
D) make either short or long-term loans;expectations of future interest rates are irrelevant.

Question 12

Banks that suffered significant losses in the 1980s made the mistake of

Accepted Answer

A) holding too many liquid assets. 
B) minimizing default risk. 
C) failing to diversify their loan portfolio. 
D) holding only safe securities. 
A) holding too many liquid assets. 
B) minimizing default risk. 
C) failing to diversify their loan portfolio. 
D) holding only safe securities.

Question 13

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

Question 14

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 15

Banks may borrow from or lend to another bank in the Federal Funds market.A loan of excess reserves from one bank to another bank is recorded as a(n)________ for the borrowing bank and a(n)________ for the lending bank.

Accepted Answer

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

Question 16

The amount of checkable deposits that banks are required by regulation to hold are the

Accepted Answer

A) excess reserves. 
B) required reserves. 
C) vault cash. 
D) total reserves. 
A) excess reserves. 
B) required reserves. 
C) vault cash. 
D) total reserves.

Question 17

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

Accepted Answer

A) Call in loans. 
B) Borrow from the Fed. 
C) Sell securities. 
D) Borrow from other banks. 
A) Call in loans. 
B) Borrow from the Fed. 
C) Sell securities. 
D) Borrow from other banks.

Question 18

If a bank needs to acquire funds quickly to meet an unexpected deposit outflow,the bank could

Accepted Answer

A) borrow from another bank in the federal funds market. 
B) buy U.S.Treasury bills. 
C) increase loans. 
D) buy corporate bonds. 
A) borrow from another bank in the federal funds market. 
B) buy U.S.Treasury bills. 
C) increase loans. 
D) buy corporate bonds.

Question 19

If a bank has $10 million of checkable deposits,a required reserve ratio of 10 percent,and it holds $2 million in reserves,then it will not have enough reserves to support a deposit outflow of

Accepted Answer

A) $1.2 million. 
B) $1.1 million. 
C) $1 million. 
D) $900,000. 
A) $1.2 million. 
B) $1.1 million. 
C) $1 million. 
D) $900,000.

Question 20

Banks acquire the funds that they use to purchase income-earning assets from such sources as

Accepted Answer

A) cash items in the process of collection. 
B) savings accounts. 
C) reserves. 
D) deposits at other banks. 
A) cash items in the process of collection. 
B) savings accounts. 
C) reserves. 
D) deposits at other banks.

Exam 9: Banking and the Management of Financial Institutions

For banks

Property promised to the lender as compensation if the borrower defaults is called

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals times the change in the interest rate is called

When a bank suspects that a $1 million loan might prove to be bad debt that will have to be written off in the future the bank

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

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.

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate 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.If interest rates increase from 5 percent to 6 percent,the net worth of the bank falls by

Banks develop statistical models to calculate their maximum loss over a given time period.This approach is known as the

Which of the following has NOT resulted from more active liability management on the part of banks?

Because of an expected rise in interest rates in the future,a banker will likely

Banks that suffered significant losses in the 1980s made the mistake of

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.

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

Banks may borrow from or lend to another bank in the Federal Funds market.A loan of excess reserves from one bank to another bank is recorded as a(n)________ for the borrowing bank and a(n)________ for the lending bank.

The amount of checkable deposits that banks are required by regulation to hold are the

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

If a bank needs to acquire funds quickly to meet an unexpected deposit outflow,the bank could

If a bank has $10 million of checkable deposits,a required reserve ratio of 10 percent,and it holds $2 million in reserves,then it will not have enough reserves to support a deposit outflow of

Banks acquire the funds that they use to purchase income-earning assets from such sources as

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

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.

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.

Banks may borrow from or lend to another bank in the Federal Funds market.A loan of excess reserves from one bank to another bank is recorded as a(n) for the borrowing bank and a(n) for the lending bank.