Question 1

Through correspondent banking,large banks provide services to small banks,including

Accepted Answer

A)  loan guarantees. 
B)  foreign exchange transactions. 
C)  issuing stock. 
D)  debt reduction. 
A)  loan guarantees. 
B)  foreign exchange transactions. 
C)  issuing stock. 
D)  debt reduction.

Question 2

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 3

A $5 million deposit outflow from a bank has the immediate effect of

Accepted Answer

A)  reducing deposits and reserves by $5 million. 
B)  reducing deposits and loans by $5 million. 
C)  reducing deposits and securities by $5 million. 
D)  reducing deposits and capital by $5 million. 
A)  reducing deposits and reserves by $5 million. 
B)  reducing deposits and loans by $5 million. 
C)  reducing deposits and securities by $5 million. 
D)  reducing deposits and capital by $5 million.

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

Bank capital has both benefits and costs for the bank owners. Higher bank capital ________ the likelihood of bankruptcy,but higher bank capital ________ the return on equity for a given return on assets.

Accepted Answer

A)  reduces; reduces 
B)  increases; increases 
C)  reduces; increases 
D)  increases; reduces 
A)  reduces; reduces 
B)  increases; increases 
C)  reduces; increases 
D)  increases; reduces

Question 6

Conditions that likely contributed to a credit crunch during the global financial crisis include:

Accepted Answer

A)  capital shortfalls caused in part by falling real estate prices. 
B)  regulated hikes in bank capital requirements. 
C)  falling interest rates that raised interest rate risk, causing banks to choose to hold more capital. 
D)  increases in reserve requirements. 
A)  capital shortfalls caused in part by falling real estate prices. 
B)  regulated hikes in bank capital requirements. 
C)  falling interest rates that raised interest rate risk, causing banks to choose to hold more capital. 
D)  increases in reserve requirements.

Question 7

A bank's commitment to provide a firm with loans up to pre-specified limit at an interest rate that is tied to a market interest rate is called

Accepted Answer

A)  an adjustable gap loan. 
B)  an adjustable portfolio loan. 
C)  loan commitment. 
D)  pre-credit loan line. 
A)  an adjustable gap loan. 
B)  an adjustable portfolio loan. 
C)  loan commitment. 
D)  pre-credit loan line.

Question 8

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 9

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

Accepted Answer

A)  Reserves 
B)  Checkable deposits 
C)  Loans 
D)  Deposits with other banks 
A)  Reserves 
B)  Checkable deposits 
C)  Loans 
D)  Deposits with other banks

Question 10

Secondary reserves are so called because

Accepted Answer

A)  they can be converted into cash with low transactions costs. 
B)  they are not easily converted into cash, and are, therefore, of secondary importance to banking firms. 
C)  50% of these assets count toward meeting required reserves. 
D)  they rank second to bank vault cash in importance of bank holdings. 
A)  they can be converted into cash with low transactions costs. 
B)  they are not easily converted into cash, and are, therefore, of secondary importance to banking firms. 
C)  50% of these assets count toward meeting required reserves. 
D)  they rank second to bank vault cash in importance of bank holdings.

Question 11

The difference of rate-sensitive liabilities and rate-sensitive assets is known as the

Accepted Answer

A)  duration. 
B)  interest-sensitivity index. 
C)  rate-risk index. 
D)  gap. 
A)  duration. 
B)  interest-sensitivity index. 
C)  rate-risk index. 
D)  gap.

Question 12

One of the problems in conducting a duration gap analysis is that the duration gap is calculated assuming that interest rates for all maturities are the same. That means that the yield curve is

Accepted Answer

A)  flat. 
B)  slightly upward sloping. 
C)  steeply upward sloping. 
D)  downward sloping. 
A)  flat. 
B)  slightly upward sloping. 
C)  steeply upward sloping. 
D)  downward sloping.

Question 13

Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called

Accepted Answer

A)  return on assets. 
B)  return on capital. 
C)  return on equity. 
D)  return on investment. 
A)  return on assets. 
B)  return on capital. 
C)  return on equity. 
D)  return on investment.

Question 14

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 15

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 16

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 17

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 18

Of the following,which would be the first 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 19

Which of the following is not a nontransaction deposit?

Accepted Answer

A)  Savings accounts 
B)  Small-denomination time deposits 
C)  Negotiable order of withdrawal accounts 
D)  Certificate of deposit 
A)  Savings accounts 
B)  Small-denomination time deposits 
C)  Negotiable order of withdrawal accounts 
D)  Certificate of deposit

Question 20

Asset transformation can be described as

Accepted Answer

A)  borrowing long and lending short. 
B)  borrowing short and lending long. 
C)  borrowing and lending only for the short term. 
D)  borrowing and lending for the long term. 
A)  borrowing long and lending short. 
B)  borrowing short and lending long. 
C)  borrowing and lending only for the short term. 
D)  borrowing and lending for the long term.

Exam 10: Banking and the Management of Financial Institutions

Through correspondent banking,large banks provide services to small banks,including

Risk that is related to the uncertainty about interest rate movements is called

A $5 million deposit outflow from a bank has the immediate effect of

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

Bank capital has both benefits and costs for the bank owners. Higher bank capital ________ the likelihood of bankruptcy,but higher bank capital ________ the return on equity for a given return on assets.

Conditions that likely contributed to a credit crunch during the global financial crisis include:

A bank's commitment to provide a firm with loans up to pre-specified limit at an interest rate that is tied to a market interest rate is called

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

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

Secondary reserves are so called because

The difference of rate-sensitive liabilities and rate-sensitive assets is known as the

One of the problems in conducting a duration gap analysis is that the duration gap is calculated assuming that interest rates for all maturities are the same. That means that the yield curve is

Net profit after taxes per dollar of equity capital is a basic measure of bank profitability 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

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

For banks,

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

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

Which of the following is not a nontransaction deposit?

Asset transformation can be described as

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

Bank capital has both benefits and costs for the bank owners. Higher bank capital the likelihood of bankruptcy,but higher bank capital the return on equity for a given return on assets.