Question 1

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.

Question 2

The principal-agent problem that exists for bank trading activities can be reduced through

Accepted Answer

A) creation of internal controls that combine trading activities with bookkeeping. 
B) creation of internal controls that separate trading activities from bookkeeping. 
C) elimination of regulation of banking. 
D) elimination of internal controls. 
A) creation of internal controls that combine trading activities with bookkeeping. 
B) creation of internal controls that separate trading activities from bookkeeping. 
C) elimination of regulation of banking. 
D) elimination of internal controls.

Question 3

With a 10% reserve requirement ratio,a $100 deposit into New Bank means that the maximum amount New Bank could lend is

Accepted Answer

A) $90. 
B) $100. 
C) $10. 
D) $110. 
A) $90. 
B) $100. 
C) $10. 
D) $110.

Question 4

The share of checkable deposits in total bank liabilities has

Accepted Answer

A) expanded moderately over time. 
B) expanded dramatically over time. 
C) shrunk over time. 
D) remained virtually unchanged since 1960. 
A) expanded moderately over time. 
B) expanded dramatically over time. 
C) shrunk over time. 
D) remained virtually unchanged since 1960.

Question 5

Assume a bank has $200 million of assets with a duration of 2.5,and $190 million of liabilities with a duration of 1.05.If interest rates increase from 5 percent to 6 percent,the net worth of the bank falls by

Accepted Answer

A) $1 million. 
B) $2.4 million. 
C) $3.6 million. 
D) $4.8 million. 
A) $1 million. 
B) $2.4 million. 
C) $3.6 million. 
D) $4.8 million.

Question 6

If a bank has $100,000 of checkable deposits,a required reserve ratio of 20 percent,and it holds $40,000 in reserves,then the maximum deposit outflow it can sustain without altering its balance sheet is

Accepted Answer

A) $30,000. 
B) $25,000. 
C) $20,000. 
D) $10,000. 
A) $30,000. 
B) $25,000. 
C) $20,000. 
D) $10,000.

Question 7

The difference of rate-sensitive liabilities and rate-sensitive assets is known as the

Accepted Answer

A) duration. 
B) interest-sensitivity index. 
C) rate-risk index. 
D) gap. 
A) duration. 
B) interest-sensitivity index. 
C) rate-risk index. 
D) gap.

Question 8

Unanticipated moral hazard contingencies can be reduced by

Accepted Answer

A) screening. 
B) long-term customer relationships. 
C) specialization in lending. 
D) credit rationing. 
A) screening. 
B) long-term customer relationships. 
C) specialization in lending. 
D) credit rationing.

Question 9

Bank's make their profits primarily by issuing ________.

Accepted Answer

A) equity 
B) negotiable CDs 
C) loans 
D) NOW accounts 
A) equity 
B) negotiable CDs 
C) loans 
D) NOW accounts

Question 10

How can specializing in lending help to reduce the adverse selection problem in lending?

Accepted Answer

Reducing the adverse selection problem r

Question 11

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 12

Banks hold excess and secondary reserves to

Accepted Answer

A) reduce the interest-rate risk problem. 
B) provide for deposit outflows. 
C) satisfy margin requirements. 
D) achieve higher earnings than they can with loans. 
A) reduce the interest-rate risk problem. 
B) provide for deposit outflows. 
C) satisfy margin requirements. 
D) achieve higher earnings than they can with loans.

Question 13

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 14

Use the following table to answer the questions: 
 
-If interest rates rise by 5 percentage points,say from 10 to 15%,bank profits (measured using gap analysis)will

Accepted Answer

A) decline by $0.5 million. 
B) decline by $1.5 million. 
C) decline by $2.5 million. 
D) increase by $2.0 million. 
A) decline by $0.5 million. 
B) decline by $1.5 million. 
C) decline by $2.5 million. 
D) increase by $2.0 million.

Question 15

If,after a deposit outflow,a bank needs an additional $3 million to meet its reserve requirements,the bank can

Accepted Answer

A) reduce deposits by $3 million. 
B) increase loans by $3 million. 
C) sell $3 million of securities. 
D) repay its discount loans from the Fed. 
A) reduce deposits by $3 million. 
B) increase loans by $3 million. 
C) sell $3 million of securities. 
D) repay its discount loans from the Fed.

Question 16

Net profit after taxes per dollar of assets 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 17

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 18

Holding all else constant,when a bank receives the funds for a deposited check,

Accepted Answer

A) cash items in the process of collection fall by the amount of the check. 
B) bank assets increase by the amount of the check. 
C) bank liabilities decrease by the amount of the check. 
D) bank reserves increase by the amount of required reserves. 
A) cash items in the process of collection fall by the amount of the check. 
B) bank assets increase by the amount of the check. 
C) bank liabilities decrease by the amount of the check. 
D) bank reserves increase by the amount of required reserves.

Question 19

Banks earn profits by selling ________ with attractive combinations of liquidity,risk,and return,and using the proceeds to buy ________ with a different set of characteristics.

Accepted Answer

A) loans; deposits 
B) securities; deposits 
C) liabilities; assets 
D) assets; liabilities 
A) loans; deposits 
B) securities; deposits 
C) liabilities; assets 
D) assets; liabilities

Question 20

When a new depositor opens a checking account at the First National Bank,the bank's assets ________ and its liabilities ________.

Accepted Answer

A) increase; increase 
B) increase; decrease 
C) decrease; increase 
D) decrease; decrease 
A) increase; increase 
B) increase; decrease 
C) decrease; increase 
D) decrease; decrease

Exam 10: Banking and the Management of Financial Institutions

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

The principal-agent problem that exists for bank trading activities can be reduced through

With a 10% reserve requirement ratio,a $100 deposit into New Bank means that the maximum amount New Bank could lend is

The share of checkable deposits in total bank liabilities has

Assume a bank has $200 million of assets with a duration of 2.5,and $190 million of liabilities with a duration of 1.05.If interest rates increase from 5 percent to 6 percent,the net worth of the bank falls by

If a bank has $100,000 of checkable deposits,a required reserve ratio of 20 percent,and it holds $40,000 in reserves,then the maximum deposit outflow it can sustain without altering its balance sheet is

The difference of rate-sensitive liabilities and rate-sensitive assets is known as the

Unanticipated moral hazard contingencies can be reduced by

Bank's make their profits primarily by issuing ________.

How can specializing in lending help to reduce the adverse selection problem in lending?

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 hold excess and secondary reserves to

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

Use the following table to answer the questions: -If interest rates rise by 5 percentage points,say from 10 to 15%,bank profits (measured using gap analysis)will

If,after a deposit outflow,a bank needs an additional $3 million to meet its reserve requirements,the bank can

Net profit after taxes per dollar of assets is a basic measure of bank profitability called

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

Holding all else constant,when a bank receives the funds for a deposited check,

Banks earn profits by selling ________ with attractive combinations of liquidity,risk,and return,and using the proceeds to buy ________ with a different set of characteristics.

When a new depositor opens a checking account at the First National Bank,the bank's assets ________ and its liabilities ________.

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

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.

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

Banks earn profits by selling with attractive combinations of liquidity,risk,and return,and using the proceeds to buy with a different set of characteristics.

When a new depositor opens a checking account at the First National Bank,the bank's assets and its liabilities .