Question 1

In the absence of regulation,banks would probably hold

Accepted Answer

A)  too much capital, reducing the efficiency of the payments system. 
B)  too much capital, reducing the profitability of banks. 
C)  too little capital. 
D)  too much capital, making it more difficult to obtain loans. 
A)  too much capital, reducing the efficiency of the payments system. 
B)  too much capital, reducing the profitability of banks. 
C)  too little capital. 
D)  too much capital, making it more difficult to obtain loans.

Question 2

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 3

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 4

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 5

Your bank has the following balance sheet
Assets Liabilities
Rate-sensitive $100 million Rate-sensitive $75 million
Fixed-rate 100 million Fixed-rate 125 million
What would happen to bank profits if the interest rates in the economy go down? Is there anything that you could do to keep your bank from being so vulnerable to interest rate movements?

Accepted Answer

The bank's profits would go down because

Question 6

Which of the following are bank assets?

Accepted Answer

A)  the building owned by the bank 
B)  a discount loan 
C)  a negotiable CD 
D)  a customer's checking account 
A)  the building owned by the bank 
B)  a discount loan 
C)  a negotiable CD 
D)  a customer's checking account

Question 7

When Jane Brown writes a $100 check to her nephew and he cashes the check,Ms.Brown's bank ________ assets of $100 and ________ liabilities of $100.

Accepted Answer

A)  gains; gains 
B)  gains; loses 
C)  loses; gains 
D)  loses; loses 
A)  gains; gains 
B)  gains; loses 
C)  loses; gains 
D)  loses; loses

Question 8

When you deposit a $50 bill in the Security Pacific National Bank,

Accepted Answer

A)  its liabilities decrease by $50. 
B)  its assets increase by $50. 
C)  its reserves decrease by $50. 
D)  its cash items in the process of collection increase by $50. 
A)  its liabilities decrease by $50. 
B)  its assets increase by $50. 
C)  its reserves decrease by $50. 
D)  its cash items in the process of collection increase by $50.

Question 9

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 10

One way for banks to reduce the principal-agent problems associated with trading activities is to

Accepted Answer

A)  set limits on the total amount of a traders' transactions. 
B)  make sure that the person conducting the trades is also the person responsible for recording the transactions. 
C)  encourage traders to take on more risk if the potential rewards are higher. 
D)  reduce the regulations on the traders so that they have more flexibility in conducting trades. 
A)  set limits on the total amount of a traders' transactions. 
B)  make sure that the person conducting the trades is also the person responsible for recording the transactions. 
C)  encourage traders to take on more risk if the potential rewards are higher. 
D)  reduce the regulations on the traders so that they have more flexibility in conducting trades.

Question 11

Traders working for banks are subject to the

Accepted Answer

A)  principal-agent problem. 
B)  free-rider problem. 
C)  double-jeopardy problem. 
D)  exchange-risk problem. 
A)  principal-agent problem. 
B)  free-rider problem. 
C)  double-jeopardy problem. 
D)  exchange-risk problem.

Question 12

Banks hold capital because

Accepted Answer

A)  they are required to by regulatory authorities. 
B)  higher capital increases the returns to the owners. 
C)  it increases the likelihood of bankruptcy. 
D)  higher capital increases the return on equity. 
A)  they are required to by regulatory authorities. 
B)  higher capital increases the returns to the owners. 
C)  it increases the likelihood of bankruptcy. 
D)  higher capital increases the return on equity.

Question 13

A bank that wants to monitor the check payment practices of its commercial borrowers,so that moral hazard can be prevented,will require borrowers to

Accepted Answer

A)  place a bank officer on their board of directors. 
B)  place a corporate officer on the bank's board of directors. 
C)  keep compensating balances in a checking account at the bank. 
D)  purchase the bank's CDs. 
A)  place a bank officer on their board of directors. 
B)  place a corporate officer on the bank's board of directors. 
C)  keep compensating balances in a checking account at the bank. 
D)  purchase the bank's CDs.

Question 14

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 15

Which of the following statements is false?

Accepted Answer

A)  Checkable deposits are usually the lowest cost source of bank funds. 
B)  Checkable deposits are the primary source of bank funds. 
C)  Checkable deposits are payable on demand. 
D)  Checkable deposits include NOW accounts. 
A)  Checkable deposits are usually the lowest cost source of bank funds. 
B)  Checkable deposits are the primary source of bank funds. 
C)  Checkable deposits are payable on demand. 
D)  Checkable deposits include NOW accounts.

Question 16

Of the following methods that banks might use to reduce moral hazard problems,the one not legally permitted in the United States is the

Accepted Answer

A)  requirement that firms keep compensating balances at the banks from which they obtain their loans. 
B)  requirement that firms place on their board of directors an officer from the bank. 
C)  inclusion of restrictive covenants in loan contracts. 
D)  requirement that individuals provide detailed credit histories to bank loan officers. 
A)  requirement that firms keep compensating balances at the banks from which they obtain their loans. 
B)  requirement that firms place on their board of directors an officer from the bank. 
C)  inclusion of restrictive covenants in loan contracts. 
D)  requirement that individuals provide detailed credit histories to bank loan officers.

Question 17

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 18

When banks offer borrowers smaller loans than they have requested,banks are said to

Accepted Answer

A)  shave credit. 
B)  rediscount the loan. 
C)  raze credit. 
D)  ration credit. 
A)  shave credit. 
B)  rediscount the loan. 
C)  raze credit. 
D)  ration credit.

Question 19

As the costs associated with deposit outflows ________,the banks willingness to hold excess reserves will ________.

Accepted Answer

A)  decrease; increase 
B)  increase; decrease 
C)  increase; increase 
D)  decrease; not be affected 
A)  decrease; increase 
B)  increase; decrease 
C)  increase; increase 
D)  decrease; not be affected

Question 20

Banks that actively manage liabilities will most likely meet a reserve shortfall by

Accepted Answer

A)  calling in loans. 
B)  borrowing federal funds. 
C)  selling municipal bonds. 
D)  seeking new deposits. 
A)  calling in loans. 
B)  borrowing federal funds. 
C)  selling municipal bonds. 
D)  seeking new deposits.

Exam 10: Banking and the Management of Financial Institutions

In the absence of regulation,banks would probably hold

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

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

All of the following are operating expenses for a bank except

Which of the following are bank assets?

When Jane Brown writes a $100 check to her nephew and he cashes the check,Ms.Brown's bank ________ assets of $100 and ________ liabilities of $100.

When you deposit a $50 bill in the Security Pacific National Bank,

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

One way for banks to reduce the principal-agent problems associated with trading activities is to

Traders working for banks are subject to the

Banks hold capital because

A bank that wants to monitor the check payment practices of its commercial borrowers,so that moral hazard can be prevented,will require borrowers to

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

Which of the following statements is false?

Of the following methods that banks might use to reduce moral hazard problems,the one not legally permitted in the United States is the

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.

When banks offer borrowers smaller loans than they have requested,banks are said to

As the costs associated with deposit outflows ________,the banks willingness to hold excess reserves will ________.

Banks that actively manage liabilities will most likely meet a reserve shortfall by

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

When Jane Brown writes a $100 check to her nephew and he cashes the check,Ms.Brown's bank assets of $100 and liabilities of $100.

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.

As the costs associated with deposit outflows ,the banks willingness to hold excess reserves will .