Question 1

One of the lessons from the 2007-2009 financial crisis regarding the management of risk by financial institution is that:

Accepted Answer

A) many banks lacked real-time information that would allow them to assess their various risk exposures at the bank-wide level. 
B) some banks, especially large ones, overestimated the trading risk associated with mortgage backed securities. 
C) banks were holding too much capital as a protection against market risk. 
D) many of the usual mechanisms for managing liquidity risk actually worked pretty well. 
A) many banks lacked real-time information that would allow them to assess their various risk exposures at the bank-wide level. 
B) some banks, especially large ones, overestimated the trading risk associated with mortgage backed securities. 
C) banks were holding too much capital as a protection against market risk. 
D) many of the usual mechanisms for managing liquidity risk actually worked pretty well.

Question 2

Money Center Banks differ from community banks in all of the following ways except:

Accepted Answer

A) they are usually much smaller. 
B) they obtain their funds primarily through borrowing and not by deposits. 
C) they are a much smaller percentage of the total number of banks. 
D) they are actively engaged in the money market. 
A) they are usually much smaller. 
B) they obtain their funds primarily through borrowing and not by deposits. 
C) they are a much smaller percentage of the total number of banks. 
D) they are actively engaged in the money market.

Question 3

For every $100 in assets, a bank has $30 in interest-rate sensitive assets, and the other $70 in non-interest-rate sensitive assets.The same bank has $60 for every $100 in liabilities in interest-rate sensitive liabilities, the other $40 are in liabilities that are not interest-rate sensitive.If the interest rate on assets decreases from 6 to 5 percent, and the interest rate on liabilities decreases from 4 to 3 percent, the impact on the bank's profits per $100 of assets will be:

Accepted Answer

A) a reduction of $0.30. 
B) an increase of $0.30. 
C) a reduction of $3.00. 
D) zero since the interest rates on assets and liabilities fell by the same amount. 
A) a reduction of $0.30. 
B) an increase of $0.30. 
C) a reduction of $3.00. 
D) zero since the interest rates on assets and liabilities fell by the same amount.

Question 4

Commercial banks differ from credit unions in the following way:

Accepted Answer

A) credit unions focus on consumer loans while commercial banks primarily make loans to businesses. 
B) credit unions make loans and accept deposits while commercial banks just make loans. 
C) commercial banks cannot make auto loans to individuals, just to businesses while credit unions can do both. 
D) credit unions do not have to hold reserves while commercial banks do. 
A) credit unions focus on consumer loans while commercial banks primarily make loans to businesses. 
B) credit unions make loans and accept deposits while commercial banks just make loans. 
C) commercial banks cannot make auto loans to individuals, just to businesses while credit unions can do both. 
D) credit unions do not have to hold reserves while commercial banks do.

Question 5

For every $100 in assets, a bank has $40 in interest-rate sensitive assets, and the other $60 in non-interest-rate sensitive assets.The same bank has $50 for every $100 in liabilities in interest-rate sensitive liabilities, the other $50 are in liabilities that are not interest-rate sensitive.If the interest rate on assets increases from 5 to 6 percent, and the interest rate on liabilities increases from 3 to 4 percent, the impact on the bank's profits per $100 of assets will be:

Accepted Answer

A) an increase of $0.10. 
B) a decrease of $0.10. 
C) a reduction of $1.00. 
D) zero since the interest rates on assets and liabilities increased by the same amount. 
A) an increase of $0.10. 
B) a decrease of $0.10. 
C) a reduction of $1.00. 
D) zero since the interest rates on assets and liabilities increased by the same amount.

Question 6

Banks do not hold a lot of their assets in the form of cash mainly because of:

Accepted Answer

A) regulation. 
B) the fear of being robbed. 
C) the opportunity cost of holding cash; cash does not earn interest. 
D) it can encourage employee theft. 
A) regulation. 
B) the fear of being robbed. 
C) the opportunity cost of holding cash; cash does not earn interest. 
D) it can encourage employee theft.

Question 7

A bank's net interest margin is calculated by taking net interest income and:

Accepted Answer

A) dividing it by the bank's capital. 
B) dividing it by the bank's assets. 
C) dividing it by the sum of the bank's assets and capital. 
D) subtracting taxes. 
A) dividing it by the bank's capital. 
B) dividing it by the bank's assets. 
C) dividing it by the sum of the bank's assets and capital. 
D) subtracting taxes.

Question 8

The procedure that estimates the interest-rate sensitivity of a bank's assets and liabilities is called:

Accepted Answer

A) managing credit risk. 
B) estimating operating risk differential. 
C) trading risk minimization. 
D) gap analysis. 
A) managing credit risk. 
B) estimating operating risk differential. 
C) trading risk minimization. 
D) gap analysis.

Question 9

Considering U.S.commercial banks, loans account for:

Accepted Answer

A) about one-third of total assets. 
B) one-half of total assets. 
C) two-thirds of liabilities. 
D) three-quarters of total assets. 
A) about one-third of total assets. 
B) one-half of total assets. 
C) two-thirds of liabilities. 
D) three-quarters of total assets.

Question 10

A bank has the following assets: Reserves of $15 million; Loans of $150 million; and Securities of $50 million.Their liabilities include Deposits of $150 million; Borrowed funds of $35 million and Bank Capital of $30 million.If the required reserve rate is 10 percent, answer the following: What is the amount of excess reserves the bank is currently holding? What are the options available to the bank if customers decide to withdraw $10 million in deposits?

Accepted Answer

The bank is not holding any excess reser

Question 11

In Chapter 11 we discussed the principal-agent problem as a form of moral hazard.Discuss the unique problems a bank manager faces in terms of trying to please the owners of the bank and at the same time trying to appease regulators.

Accepted Answer

The principal-agent problem arises from

Question 12

Trading risk faced by U.S.banks results from:

Accepted Answer

A) the free-rider problem. 
B) changes in regulations. 
C) adverse selection. 
D) moral hazard. 
A) the free-rider problem. 
B) changes in regulations. 
C) adverse selection. 
D) moral hazard.

Question 13

The credit risk a bank faces is the risk resulting specifically from:

Accepted Answer

A) the economy entering a recession. 
B) interest rates falling. 
C) some of the bank's loans not being repaid. 
D) the bank experiencing a decrease in deposits. 
A) the economy entering a recession. 
B) interest rates falling. 
C) some of the bank's loans not being repaid. 
D) the bank experiencing a decrease in deposits.

Question 14

If a bank has $100 million in assets and a net worth of $10 million, its debt-to-equity ratio is:

Accepted Answer

A) 10 to 1. 
B) 5 to 1. 
C) 9 to 1. 
D) 0.1 to 1. 
A) 10 to 1. 
B) 5 to 1. 
C) 9 to 1. 
D) 0.1 to 1.

Question 15

Net interest income for a bank is:

Accepted Answer

A) the difference between gross income and net income after taxes. 
B) the interest banks earn from uses of funds. 
C) the difference between interest income and interest expense. 
D) the difference between interest income and total expenses. 
A) the difference between gross income and net income after taxes. 
B) the interest banks earn from uses of funds. 
C) the difference between interest income and interest expense. 
D) the difference between interest income and total expenses.

Question 16

A bank's off-balance-sheet activities usually:

Accepted Answer

A) increase both its assets and liabilities while reducing net income. 
B) increase its net income but do not change its assets or liabilities. 
C) increases a bank's liabilities but not its assets. 
D) increases a bank's assets but not its liabilities. 
A) increase both its assets and liabilities while reducing net income. 
B) increase its net income but do not change its assets or liabilities. 
C) increases a bank's liabilities but not its assets. 
D) increases a bank's assets but not its liabilities.

Question 17

A bank has a need for cash for a short period of time to meet its liquidity needs.The bank has significant holding of U.S.treasury securities.The bank really does not want to sell the securities, realizing the liquidity need is a temporary problem.A pension fund has significant cash holdings and would like to earn some return on part of these holdings.The problem is the fund will need this cash in a few days to honor a purchase agreement it made for municipal bonds being issued.Is there any way these two organizations can work together to solve each other's problem?

Accepted Answer

This is a situation that is ideal for a

Question 18

If a bank sells off all of its assets and pays all of its liabilities, the amount remaining would be its:

Accepted Answer

A) net profit. 
B) reserves. 
C) net worth. 
D) excess reserves. 
A) net profit. 
B) reserves. 
C) net worth. 
D) excess reserves.

Question 19

If bank with $100 million in assets and $10 million in equity increases its assets by adding $1 to capital for every $1 added to assets:

Accepted Answer

A) the debt-to-equity ratio will increase. 
B) the debt-to-equity ratio will remain constant. 
C) the debt-to-equity ratio will decrease. 
D) the answer cannot be determined from the information in the question. 
A) the debt-to-equity ratio will increase. 
B) the debt-to-equity ratio will remain constant. 
C) the debt-to-equity ratio will decrease. 
D) the answer cannot be determined from the information in the question.

Question 20

The fact that a bank's assets tend to be long-term while its liabilities are short-term creates:

Accepted Answer

A) interest-rate risk. 
B) credit risk. 
C) lower risk for the bank, this is why they follow this strategy. 
D) trading risk. 
A) interest-rate risk. 
B) credit risk. 
C) lower risk for the bank, this is why they follow this strategy. 
D) trading risk.

One of the lessons from the 2007-2009 financial crisis regarding the management of risk by financial institution is that:

Money Center Banks differ from community banks in all of the following ways except:

Commercial banks differ from credit unions in the following way:

Banks do not hold a lot of their assets in the form of cash mainly because of:

A bank's net interest margin is calculated by taking net interest income and:

The procedure that estimates the interest-rate sensitivity of a bank's assets and liabilities is called:

Considering U.S.commercial banks, loans account for:

In Chapter 11 we discussed the principal-agent problem as a form of moral hazard.Discuss the unique problems a bank manager faces in terms of trying to please the owners of the bank and at the same time trying to appease regulators.

Trading risk faced by U.S.banks results from:

The credit risk a bank faces is the risk resulting specifically from:

If a bank has $100 million in assets and a net worth of $10 million, its debt-to-equity ratio is:

Net interest income for a bank is:

A bank's off-balance-sheet activities usually:

If a bank sells off all of its assets and pays all of its liabilities, the amount remaining would be its:

If bank with $100 million in assets and $10 million in equity increases its assets by adding $1 to capital for every $1 added to assets:

The fact that a bank's assets tend to be long-term while its liabilities are short-term creates:

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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Exam 12: Depository Institutions: Banks and Bank Management

One of the lessons from the 2007-2009 financial crisis regarding the management of risk by financial institution is that:

Money Center Banks differ from community banks in all of the following ways except:

Commercial banks differ from credit unions in the following way:

Banks do not hold a lot of their assets in the form of cash mainly because of:

A bank's net interest margin is calculated by taking net interest income and:

The procedure that estimates the interest-rate sensitivity of a bank's assets and liabilities is called:

Considering U.S.commercial banks, loans account for:

In Chapter 11 we discussed the principal-agent problem as a form of moral hazard.Discuss the unique problems a bank manager faces in terms of trying to please the owners of the bank and at the same time trying to appease regulators.

Trading risk faced by U.S.banks results from:

The credit risk a bank faces is the risk resulting specifically from:

If a bank has $100 million in assets and a net worth of $10 million, its debt-to-equity ratio is:

Net interest income for a bank is:

A bank's off-balance-sheet activities usually:

If a bank sells off all of its assets and pays all of its liabilities, the amount remaining would be its:

If bank with $100 million in assets and $10 million in equity increases its assets by adding $1 to capital for every $1 added to assets:

The fact that a bank's assets tend to be long-term while its liabilities are short-term creates:

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

Filters