Question 1

Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans.

Accepted Answer

A)  adverse selection 
B)  moral hazard 
C)  moral suasion 
D)  intentional fraud 
A)  adverse selection 
B)  moral hazard 
C)  moral suasion 
D)  intentional fraud

Question 2

Modern liability management has resulted in ________.

Accepted Answer

A)  increased sales of certificates of deposits 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 certificates of deposits 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 3

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

Question 4

If a bank's liabilities are more sensitive to interest rate movements than are its assets,then ________.

Accepted Answer

A)  an increase in interest rates will reduce bank profits 
B)  a decrease in interest rates will reduce bank profits 
C)  interest rates changes will not impact bank profits 
D)  an increase in interest rates will increase bank profits 
A)  an increase in interest rates will reduce bank profits 
B)  a decrease in interest rates will reduce bank profits 
C)  interest rates changes will not impact bank profits 
D)  an increase in interest rates will increase bank profits

Question 5

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 6

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 7

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

Accepted Answer

A)  Borrowings 
B)  Reserves 
C)  Notice deposits 
D)  Bank capital 
A)  Borrowings 
B)  Reserves 
C)  Notice deposits 
D)  Bank capital

Question 8

Bank capital is listed on the ________ side of the bank's balance sheet because it represents a ________ of funds.

Accepted Answer

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

Question 9

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 10

Examples of off-balance-sheet activities include ________.

Accepted Answer

A)  loan sales 
B)  extending loans to depositors 
C)  borrowing from other banks 
D)  selling negotiable CDs 
A)  loan sales 
B)  extending loans to depositors 
C)  borrowing from other banks 
D)  selling negotiable CDs

Question 11

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 12

What are the main items in a bank's asset side of the balance sheet? discuss them briefly.

Accepted Answer

commercial,industria

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

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 15

If a banker expects interest rates to fall in the future,her best strategy for the present is ________.

Accepted Answer

A)  to increase the duration of the bank's liabilities 
B)  to buy short-term bonds 
C)  to sell long-term certificates of deposit 
D)  to increase the duration of the bank's assets 
A)  to increase the duration of the bank's liabilities 
B)  to buy short-term bonds 
C)  to sell long-term certificates of deposit 
D)  to increase the duration of the bank's assets

Question 16

The goals of bank asset management include ________.

Accepted Answer

A)  maximizing risk 
B)  minimizing liquidity 
C)  lending at high interest rates regardless of risk 
D)  purchasing securities with high returns and low risk 
A)  maximizing risk 
B)  minimizing liquidity 
C)  lending at high interest rates regardless of risk 
D)  purchasing securities with high returns and low risk

Question 17

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 18

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 19

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 20

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

Exam 13: Banking and the Management of Financial Institutions

Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans.

Modern liability management has resulted in ________.

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

If a bank's liabilities are more sensitive to interest rate movements than are its assets,then ________.

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 ________.

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

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

Bank capital is listed on the ________ side of the bank's balance sheet because it represents a ________ of funds.

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

Examples of off-balance-sheet activities include ________.

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

What are the main items in a bank's asset side of the balance sheet? discuss them briefly.

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

If a banker expects interest rates to fall in the future,her best strategy for the present is ________.

The goals of bank asset management include ________.

All of the following are operating expenses for a bank except ________.

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.

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

Why Study Money, banking, and Financial Markets

An Overview of the Financial System

What Is Money

Understanding Interest Rates

The Behaviour 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

Nonbank Finance

Risk Management With Financial Derivatives

Central Banks and the Bank of Canada

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.

Bank capital is listed on the side of the bank's balance sheet because it represents a of funds.

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.