Question 1

Which of the following statements best completes this sentence: "On a bank's balance sheet…"?

Accepted Answer

A) assets show the sources of funds and the net worth shows the uses of funds. 
B) net worth shows the sources of funds and liabilities show the uses of funds. 
C) assets show the uses of funds and liabilities show the sources of funds. 
D) net worth represents both a source and a use of funds. 
A) assets show the sources of funds and the net worth shows the uses of funds. 
B) net worth shows the sources of funds and liabilities show the uses of funds. 
C) assets show the uses of funds and liabilities show the sources of funds. 
D) net worth represents both a source and a use of funds. C

Question 2

If a bank has $200 million in deposits, the required reserve rate is 10 percent and the bank has $23 million in reserves:

Accepted Answer

A) the bank is short of required reserves. 
B) the bank has excess reserves of $21 million. 
C) the bank has excess reserves of $13 million. 
D) the bank has excess reserves of $3 million. 
A) the bank is short of required reserves. 
B) the bank has excess reserves of $21 million. 
C) the bank has excess reserves of $13 million. 
D) the bank has excess reserves of $3 million. D

Question 3

The trading losses that some banks incurred could be thought to be from trading risk, but in many cases the real cause of the losses could be attributed to moral hazard.Why was this the case?

Accepted Answer

As the chapter points out, in the case of trading, often times the trader (the bank employee) is in a situation where, if the trades turn out profitable, the trader reaps a large portion of the gains; but if the trade generates losses, the bank loses.This is a classic moral hazard problem where the trader has a strong incentive to take significant amounts of risk.This was certainly the case with Nick Leeson and Barings Bank.

Question 4

Which of the following is not a bank asset?

Accepted Answer

A) Securities 
B) Mortgage loans 
C) Reserves 
D) Non-transaction deposits 
A) Securities 
B) Mortgage loans 
C) Reserves 
D) Non-transaction deposits

Question 5

Considering a bank's balance sheet, which of the following statements is false?

Accepted Answer

A) Total Bank Assets + Total Bank Liabilities = Total Bank Capital 
B) Total Bank Assets = Total Bank Liabilities + Total Bank Capital 
C) Total Bank Liabilities = Total Bank Assets - Total Bank Capital 
D) Total Bank Capital = Total Bank Assets - Total Bank Liabilities 
A) Total Bank Assets + Total Bank Liabilities = Total Bank Capital 
B) Total Bank Assets = Total Bank Liabilities + Total Bank Capital 
C) Total Bank Liabilities = Total Bank Assets - Total Bank Capital 
D) Total Bank Capital = Total Bank Assets - Total Bank Liabilities

Question 6

The tendency for large banks to have a higher return on equity than small banks suggests:

Accepted Answer

A) small banks have better management than large banks. 
B) large banks can charge higher interest rates than small banks. 
C) there could be significant economies of scale in banking. 
D) larger banks are better able to escape the cost of regulation. 
A) small banks have better management than large banks. 
B) large banks can charge higher interest rates than small banks. 
C) there could be significant economies of scale in banking. 
D) larger banks are better able to escape the cost of regulation.

Question 7

Which of the following statements regarding checkable deposits is most accurate?

Accepted Answer

A) Checkable deposits are a larger source of bank funds today than in 1970. 
B) Checkable deposits are no longer a source of bank funds. 
C) Checkable deposits are a less important source of bank funds today than in 1970. 
D) Checkable deposits continue to be the largest source of bank funds. 
A) Checkable deposits are a larger source of bank funds today than in 1970. 
B) Checkable deposits are no longer a source of bank funds. 
C) Checkable deposits are a less important source of bank funds today than in 1970. 
D) Checkable deposits continue to be the largest source of bank funds.

Question 8

Information asymmetry that exists in lending creates what type of risk for banks? Discuss the ways for a bank to handle or minimize this risk.

Accepted Answer

Information asymmetry leads to the probl

Question 9

If Bank A sells some its loans to Bank B for cash, everything else equal:

Accepted Answer

A) Bank A's assets decrease and Bank B's assets increase. 
B) Bank A becomes less liquid while Bank B becomes more liquid. 
C) Banks A's total assets do not change, but Bank A is more liquid. 
D) Bank A's liabilities decrease by the amount of the loans that are sold. 
A) Bank A's assets decrease and Bank B's assets increase. 
B) Bank A becomes less liquid while Bank B becomes more liquid. 
C) Banks A's total assets do not change, but Bank A is more liquid. 
D) Bank A's liabilities decrease by the amount of the loans that are sold.

Question 10

A home buyer is presented with two options for financing the purchase of a home: a 20 year fixed rate mortgage or a 20 year adjustable-rate mortgage, where the rate adjusts once a year.Which mortgage would you expect to start at the lowest interest rate and why?

Accepted Answer

The adjustable-rate mortgage should star

Question 11

What are the securities that U.S.banks own and why are they often referred to as secondary reserves?

Accepted Answer

By regulation U.S.banks are not allowed

Question 12

Repurchase agreements are usually used by banks that:

Accepted Answer

A) have a need for long-term financing. 
B) need cash for a very short period of time. 
C) have negative net worth. 
D) cannot obtain financing from any other source. 
A) have a need for long-term financing. 
B) need cash for a very short period of time. 
C) have negative net worth. 
D) cannot obtain financing from any other source.

Question 13

If a bank has a net worth that is negative, what do you know about the relationship between the amounts the bank has in assets and liabilities?

Accepted Answer

If a bank had a negative net w

Question 14

Considering a bank's balance sheet, which of the following statements is true?

Accepted Answer

A) Total Bank Assets = Total Bank Capital - Total Bank Liabilities 
B) Total Bank Assets = Total Bank Liabilities + Total Bank Capital 
C) Total Bank Assets + Total Bank Capital = Total Bank Liabilities 
D) Total Bank Assets + Total Bank Liabilities = Total Bank Capital 
A) Total Bank Assets = Total Bank Capital - Total Bank Liabilities 
B) Total Bank Assets = Total Bank Liabilities + Total Bank Capital 
C) Total Bank Assets + Total Bank Capital = Total Bank Liabilities 
D) Total Bank Assets + Total Bank Liabilities = Total Bank Capital

Question 15

Which of the following is a bank asset?

Accepted Answer

A) Demand deposits 
B) Borrowings from other banks 
C) Mortgage loans 
D) CDs 
A) Demand deposits 
B) Borrowings from other banks 
C) Mortgage loans 
D) CDs

Question 16

Considering the balance sheet for all commercial banks in the U.S., the largest category of liabilities is:

Accepted Answer

A) borrowing from other banks in the U.S. 
B) saving's deposits and time deposits. 
C) checkable deposits. 
D) borrowings from non-banks in the U.S. 
A) borrowing from other banks in the U.S. 
B) saving's deposits and time deposits. 
C) checkable deposits. 
D) borrowings from non-banks in the U.S.

Question 17

One way for a bank to deal with credit risk is to:

Accepted Answer

A) charge all borrowers from the same industry an average rate for that industry. 
B) add a mark-up for a specific borrower based on the borrower's credit history to the cost of funds. 
C) avoid making loans to borrowers from a broad spectrum and to specialize geographically and in specific industries. 
D) increase the number of loans made in any year. 
A) charge all borrowers from the same industry an average rate for that industry. 
B) add a mark-up for a specific borrower based on the borrower's credit history to the cost of funds. 
C) avoid making loans to borrowers from a broad spectrum and to specialize geographically and in specific industries. 
D) increase the number of loans made in any year.

Question 18

A bank's Return on Equity (ROE) is calculated by:

Accepted Answer

A) dividing the bank's net profit after taxes by the bank's capital. 
B) dividing the banks liabilities by the bank's capital. 
C) taking the bank's assets plus the net profit after taxes and dividing this sum by the bank's capital. 
D) dividing the bank's net profit after taxes by the sum of the bank's assets and its liabilities. 
A) dividing the bank's net profit after taxes by the bank's capital. 
B) dividing the banks liabilities by the bank's capital. 
C) taking the bank's assets plus the net profit after taxes and dividing this sum by the bank's capital. 
D) dividing the bank's net profit after taxes by the sum of the bank's assets and its liabilities.

Question 19

What should be the impact on a bank's return on assets and return on equity from increased use of off-balance-sheet activities?

Accepted Answer

Since off-balance-sheet activities gener

Question 20

The primary difference in certificates of deposit (CDs) that are equal to or less than $100,000 and those over $100,000 (other than the amount) is:

Accepted Answer

A) a bank does not have to include CDs equal to or less than $100,000 in its liabilities. 
B) CDs greater than $100,000 are negotiable and therefore can be bought and sold. 
C) CDs equal to or less than $100,000 are issued for only six months or less. 
D) CDs greater than $100,000 are issued for only six months or less. 
A) a bank does not have to include CDs equal to or less than $100,000 in its liabilities. 
B) CDs greater than $100,000 are negotiable and therefore can be bought and sold. 
C) CDs equal to or less than $100,000 are issued for only six months or less. 
D) CDs greater than $100,000 are issued for only six months or less.

Exam 12: Depository Institutions: Banks and Bank Management

Which of the following statements best completes this sentence: "On a bank's balance sheet…"?

If a bank has $200 million in deposits, the required reserve rate is 10 percent and the bank has $23 million in reserves:

The trading losses that some banks incurred could be thought to be from trading risk, but in many cases the real cause of the losses could be attributed to moral hazard.Why was this the case?

Which of the following is not a bank asset?

Considering a bank's balance sheet, which of the following statements is false?

The tendency for large banks to have a higher return on equity than small banks suggests:

Which of the following statements regarding checkable deposits is most accurate?

Information asymmetry that exists in lending creates what type of risk for banks? Discuss the ways for a bank to handle or minimize this risk.

If Bank A sells some its loans to Bank B for cash, everything else equal:

A home buyer is presented with two options for financing the purchase of a home: a 20 year fixed rate mortgage or a 20 year adjustable-rate mortgage, where the rate adjusts once a year.Which mortgage would you expect to start at the lowest interest rate and why?

What are the securities that U.S.banks own and why are they often referred to as secondary reserves?

Repurchase agreements are usually used by banks that:

If a bank has a net worth that is negative, what do you know about the relationship between the amounts the bank has in assets and liabilities?

Considering a bank's balance sheet, which of the following statements is true?

Which of the following is a bank asset?

Considering the balance sheet for all commercial banks in the U.S., the largest category of liabilities is:

One way for a bank to deal with credit risk is to:

A bank's Return on Equity (ROE) is calculated by:

What should be the impact on a bank's return on assets and return on equity from increased use of off-balance-sheet activities?

The primary difference in certificates of deposit (CDs) that are equal to or less than $100,000 and those over $100,000 (other than the amount) is:

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value, and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets, and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange-Rate Policy and the Central Bank

Money Growth, Money Demand, and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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