Question 1

The principal-agent problem that exists for bank trading activities can be reduced through

Accepted Answer

A)  creation of internal controls that combine trading activities with bookkeeping. 
B)  creation of internal controls that separate trading activities from bookkeeping. 
C)  elimination of regulation of banking. 
D)  elimination of internal controls. 
A)  creation of internal controls that combine trading activities with bookkeeping. 
B)  creation of internal controls that separate trading activities from bookkeeping. 
C)  elimination of regulation of banking. 
D)  elimination of internal controls.

Question 2

Which of the following statements most accurately describes the task of bank asset management?

Accepted Answer

A)  Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity. 
B)  Banks seek to have the highest liquidity possible subject to earning a positive rate of return on their operations. 
C)  Banks seek to prevent bank failure at all cost; since a failed bank earns no profit, liquidity needs supersede the desire for profits. 
D)  Banks seek to acquire funds in the least costly way. 
A)  Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity. 
B)  Banks seek to have the highest liquidity possible subject to earning a positive rate of return on their operations. 
C)  Banks seek to prevent bank failure at all cost; since a failed bank earns no profit, liquidity needs supersede the desire for profits. 
D)  Banks seek to acquire funds in the least costly way.

Question 3

Which of the following bank assets is the most liquid?

Accepted Answer

A)  Consumer loans 
B)  Reserves 
C)  Cash items in process of collection 
D)  U.S. government securities 
A)  Consumer loans 
B)  Reserves 
C)  Cash items in process of collection 
D)  U.S. government securities

Question 4

Banks earn profits from off-balance sheet loan sales

Accepted Answer

A)  by foreclosing on delinquent accounts. 
B)  by selling the loans at discounted prices. 
C)  by selling existing loans for more than the original loan amount. 
D)  by calling-in loans before the maturity date. 
A)  by foreclosing on delinquent accounts. 
B)  by selling the loans at discounted prices. 
C)  by selling existing loans for more than the original loan amount. 
D)  by calling-in loans before the maturity date.

Question 5

If a bank has $200,000 of checkable deposits,a required reserve ratio of 20 percent,and it holds $80,000 in reserves,then the maximum deposit outflow it can sustain without altering its balance sheet is

Accepted Answer

A)  $50,000. 
B)  $40,000. 
C)  $30,000. 
D)  $25,000. 
A)  $50,000. 
B)  $40,000. 
C)  $30,000. 
D)  $25,000.

Question 6

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 7

Large-denomination CDs are ________,so that like a bond they can be resold in a ________ market before they mature.

Accepted Answer

A)  nonnegotiable; secondary 
B)  nonnegotiable; primary 
C)  negotiable; secondary 
D)  negotiable; primary 
A)  nonnegotiable; secondary 
B)  nonnegotiable; primary 
C)  negotiable; secondary 
D)  negotiable; primary

Question 8

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.

Question 9

If a bank needs to raise the amount of capital relative to assets,a bank manager might choose to

Accepted Answer

A)  buy back bank stock. 
B)  pay higher dividends. 
C)  shrink the size of the bank. 
D)  sell securities the bank owns and put the funds into the reserve account. 
A)  buy back bank stock. 
B)  pay higher dividends. 
C)  shrink the size of the bank. 
D)  sell securities the bank owns and put the funds into the reserve account.

Question 10

A deposit outflow results in equal reductions in

Accepted Answer

A)  loans and reserves. 
B)  assets and liabilities. 
C)  reserves and capital. 
D)  assets and capital. 
A)  loans and reserves. 
B)  assets and liabilities. 
C)  reserves and capital. 
D)  assets and capital.

Question 11

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 12

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

Accepted Answer

A)  the assets at the bank increase by $1 million. 
B)  the liabilities of the bank decrease by $1 million. 
C)  reserves increase by $200,000. 
D)  liabilities increase by $200,000. 
A)  the assets at the bank increase by $1 million. 
B)  the liabilities of the bank decrease by $1 million. 
C)  reserves increase by $200,000. 
D)  liabilities increase by $200,000.

Question 13

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

Accepted Answer

Reducing the adverse selection problem r

Question 14

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 15

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

Question 16

Which of the following would not be a way to increase the return on equity?

Accepted Answer

A)  Buy back bank stock 
B)  Pay higher dividends 
C)  Acquire new funds by selling negotiable CDs and increase assets with them 
D)  Sell more bank stock 
A)  Buy back bank stock 
B)  Pay higher dividends 
C)  Acquire new funds by selling negotiable CDs and increase assets with them 
D)  Sell more bank stock

Question 17

If a bank has ________ rate-sensitive assets than liabilities,a ________ in interest rates will reduce bank profits,while a ________ in interest rates will raise bank profits.

Accepted Answer

A)  more; rise; decline 
B)  more; decline; rise 
C)  fewer; decline; decline 
D)  fewer; rise; rise 
A)  more; rise; decline 
B)  more; decline; rise 
C)  fewer; decline; decline 
D)  fewer; rise; rise

Question 18

Unanticipated moral hazard contingencies can be reduced by

Accepted Answer

A)  screening. 
B)  long-term customer relationships. 
C)  specialization in lending. 
D)  credit rationing. 
A)  screening. 
B)  long-term customer relationships. 
C)  specialization in lending. 
D)  credit rationing.

Question 19

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 20

Because of their ________ liquidity,________ U.S.government securities are called secondary reserves.

Accepted Answer

A)  low; short-term 
B)  low; long-term 
C)  high; short-term 
D)  high; long-term 
A)  low; short-term 
B)  low; long-term 
C)  high; short-term 
D)  high; long-term

Exam 10: Banking and the Management of Financial Institutions

The principal-agent problem that exists for bank trading activities can be reduced through

Which of the following statements most accurately describes the task of bank asset management?

Which of the following bank assets is the most liquid?

Banks earn profits from off-balance sheet loan sales

If a bank has $200,000 of checkable deposits,a required reserve ratio of 20 percent,and it holds $80,000 in reserves,then the maximum deposit outflow it can sustain without altering its balance sheet is

Large-denomination CDs are ________,so that like a bond they can be resold in a ________ market before they mature.

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

If a bank needs to raise the amount of capital relative to assets,a bank manager might choose to

A deposit outflow results in equal reductions in

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

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

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

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

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

Which of the following would not be a way to increase the return on equity?

If a bank has ________ rate-sensitive assets than liabilities,a ________ in interest rates will reduce bank profits,while a ________ in interest rates will raise bank profits.

Unanticipated moral hazard contingencies can be reduced by

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

Because of their ________ liquidity,________ U.S.government securities are called secondary reserves.

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding 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

Financial Crises

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

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

The ISLM Model

Filters

Large-denomination CDs are ,so that like a bond they can be resold in a market before they mature.

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

If a bank has rate-sensitive assets than liabilities,a in interest rates will reduce bank profits,while a in interest rates will raise bank profits.

Because of their liquidity, U.S.government securities are called secondary reserves.