Question 1

Holding large amounts of bank capital helps prevent bank failures because

Accepted Answer

A) it means that the bank has a higher income. 
B) it makes loans easier to sell. 
C) it can be used to absorb the losses resulting from bad loans. 
D) it makes it easier to call in loans. 
A) it means that the bank has a higher income. 
B) it makes loans easier to sell. 
C) it can be used to absorb the losses resulting from bad loans. 
D) it makes it easier to call in loans. C

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. B

Question 3

From the standpoint of ________,specialization in lending is surprising but makes perfect sense when one considers the ________ problem.

Accepted Answer

A) moral hazard; diversification 
B) diversification; moral hazard 
C) adverse selection; diversification 
D) diversification; adverse selection 
A) moral hazard; diversification 
B) diversification; moral hazard 
C) adverse selection; diversification 
D) diversification; adverse selection D

Question 4

Banks' asset portfolios include state and local government securities because

Accepted Answer

A) their interest payments are tax deductible for federal income taxes. 
B) banks consider them helpful in attracting accounts of Federal employees. 
C) the Federal Reserve requires member banks to buy securities from state and local governments located within their respective Federal Reserve districts. 
D) there is no default-risk with state and local government securities. 
A) their interest payments are tax deductible for federal income taxes. 
B) banks consider them helpful in attracting accounts of Federal employees. 
C) the Federal Reserve requires member banks to buy securities from state and local governments located within their respective Federal Reserve districts. 
D) there is no default-risk with state and local government securities.

Question 5

When banks calculate the losses the institution would incur if an unusual combination of bad events happened,the bank is using the ________ approach.

Accepted Answer

A) stress-test 
B) value-at-risk 
C) trading-loss 
D) maximum value 
A) stress-test 
B) value-at-risk 
C) trading-loss 
D) maximum value

Question 6

When you deposit $50 in currency at Old National Bank,

Accepted Answer

A) its assets increase by less than $50 because of reserve requirements. 
B) its reserves increase by less than $50 because of reserve requirements. 
C) its liabilities increase by $50. 
D) its liabilities decrease by $50. 
A) its assets increase by less than $50 because of reserve requirements. 
B) its reserves increase by less than $50 because of reserve requirements. 
C) its liabilities increase by $50. 
D) its liabilities decrease by $50.

Question 7

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 8

Which of the following would a bank not hold as insurance against the highest cost of deposit outflow-bank failure?

Accepted Answer

A) Excess reserves 
B) Secondary reserves 
C) Bank capital 
D) Mortgages 
A) Excess reserves 
B) Secondary reserves 
C) Bank capital 
D) Mortgages

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

If a bank has excess reserves greater than the amount of a deposit outflow,the outflow will result in equal reductions in

Accepted Answer

A) deposits and reserves. 
B) deposits and loans. 
C) capital and reserves. 
D) capital and loans. 
A) deposits and reserves. 
B) deposits and loans. 
C) capital and reserves. 
D) capital and loans.

Question 11

The quantity interest income minus interest expenses divided by assets is a measure of bank performance known as

Accepted Answer

A) operating income. 
B) net interest margin. 
C) return on assets. 
D) return on equity. 
A) operating income. 
B) net interest margin. 
C) return on assets. 
D) return on equity.

Question 12

Bank loans from the Federal Reserve are called ________ and represent a ________ of funds.

Accepted Answer

A) discount loans; use 
B) discount loans; source 
C) fed funds; use 
D) fed funds; source 
A) discount loans; use 
B) discount loans; source 
C) fed funds; use 
D) fed funds; source

Question 13

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 14

When banks involved in trading activities attempt to outguess markets,they are

Accepted Answer

A) forecasting. 
B) diversifying. 
C) speculating. 
D) engaging in riskless arbitrage. 
A) forecasting. 
B) diversifying. 
C) speculating. 
D) engaging in riskless arbitrage.

Question 15

Bankers' concerns regarding the optimal mix of excess reserves,secondary reserves,borrowings from the Fed,and borrowings from other banks to deal with deposit outflows is an example of

Accepted Answer

A) liability management. 
B) liquidity management. 
C) managing interest rate risk. 
D) managing credit risk. 
A) liability management. 
B) liquidity management. 
C) managing interest rate risk. 
D) managing credit risk.

Question 16

A reason why rogue traders have bankrupt their banks is due to

Accepted Answer

A) the separation of trading activities from the bookkeepers. 
B) stringent supervision of trading activities by bank management. 
C) accounting errors. 
D) a failure to maintain proper internal controls. 
A) the separation of trading activities from the bookkeepers. 
B) stringent supervision of trading activities by bank management. 
C) accounting errors. 
D) a failure to maintain proper internal controls.

Question 17

When you deposit $50 in your account at First National Bank and a $100 check you have written on this account is cashed at Chemical Bank,then

Accepted Answer

A) the assets of First National rise by $50. 
B) the assets of Chemical Bank rise by $50. 
C) the reserves at First National fall by $50. 
D) the liabilities at Chemical Bank rise by $50. 
A) the assets of First National rise by $50. 
B) the assets of Chemical Bank rise by $50. 
C) the reserves at First National fall by $50. 
D) the liabilities at Chemical Bank rise by $50.

Question 18

In recent years the interest paid on checkable and time deposits has accounted for around ________ of total bank operating expenses,while the costs involved in servicing accounts have been approximately ________ of operating expenses.

Accepted Answer

A) 45 percent; 55 percent 
B) 55 percent; 4 percent 
C) 25 percent; 50 percent 
D) 50 percent; 30 percent 
A) 45 percent; 55 percent 
B) 55 percent; 4 percent 
C) 25 percent; 50 percent 
D) 50 percent; 30 percent

Question 19

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 20

When a lender refuses to make a loan,although borrowers are willing to pay the stated interest rate or even a higher rate,the bank is said to engage in

Accepted Answer

A) coercive bargaining. 
B) strategic holding out. 
C) credit rationing. 
D) collusive behavior. 
A) coercive bargaining. 
B) strategic holding out. 
C) credit rationing. 
D) collusive behavior.

Exam 10: Banking and the Management of Financial Institutions

Holding large amounts of bank capital helps prevent bank failures because

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

From the standpoint of ________,specialization in lending is surprising but makes perfect sense when one considers the ________ problem.

Banks' asset portfolios include state and local government securities because

When banks calculate the losses the institution would incur if an unusual combination of bad events happened,the bank is using the ________ approach.

When you deposit $50 in currency at Old National Bank,

The goals of bank asset management include

Which of the following would a bank not hold as insurance against the highest cost of deposit outflow-bank failure?

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

If a bank has excess reserves greater than the amount of a deposit outflow,the outflow will result in equal reductions in

The quantity interest income minus interest expenses divided by assets is a measure of bank performance known as

Bank loans from the Federal Reserve are called ________ and represent a ________ of funds.

All of the following are operating expenses for a bank except

When banks involved in trading activities attempt to outguess markets,they are

Bankers' concerns regarding the optimal mix of excess reserves,secondary reserves,borrowings from the Fed,and borrowings from other banks to deal with deposit outflows is an example of

A reason why rogue traders have bankrupt their banks is due to

When you deposit $50 in your account at First National Bank and a $100 check you have written on this account is cashed at Chemical Bank,then

In recent years the interest paid on checkable and time deposits has accounted for around ________ of total bank operating expenses,while the costs involved in servicing accounts have been approximately ________ of operating expenses.

Traders working for banks are subject to the

When a lender refuses to make a loan,although borrowers are willing to pay the stated interest rate or even a higher rate,the bank is said to engage in

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 and the Subprime Meltdown

Economic Analysis of Financial Regulation

Banking Industry: Structure and Competition

Central Banks and the Federal Reserve System

The Money Supply Process

Tools for Monetary Policy

The Conduct of Monetary Policy: Strategy and Tactics

The Foreign Exchange Market

The International Financial System

The Demand for Money

The Islm Model

Monetary and Fiscal Policy in the ISLM Model

Aggregate Demand and Supply Analysis

Transmission Mechanisms of Monetary Policy: The Evidence

Money and Inflation

Rational Expectations: Implications for Policy

Filters

From the standpoint of ,specialization in lending is surprising but makes perfect sense when one considers the problem.

Bank loans from the Federal Reserve are called and represent a of funds.

In recent years the interest paid on checkable and time deposits has accounted for around of total bank operating expenses,while the costs involved in servicing accounts have been approximately of operating expenses.