Question 1

A bank manager has which of the following concerns?

Accepted Answer

A) to acquire funds at low cost 
B) to minimize risk by diversifying asset holdings 
C) to have enough ready cash to meet deposit outflows 
D) all of the above 
A) to acquire funds at low cost 
B) to minimize risk by diversifying asset holdings 
C) to have enough ready cash to meet deposit outflows 
D) all of the above D

Question 2

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

Accepted Answer

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

Question 3

Explain the off-balance-sheet activities banks engage in, the risks they face from undertaking these activities, and the controls they put in place to restrict bank employees from taking on too much risk.

Accepted Answer

Off-balance-sheet activities refer to financial transactions or arrangements that do not appear on a company's balance sheet but still have an impact on its financial position. Banks engage in off-balance-sheet activities to generate additional revenue and manage risk.

Some common off-balance-sheet activities for banks include loan commitments, letters of credit, and derivatives trading. These activities carry risks for banks, including credit risk, market risk, and operational risk. For example, if a bank has issued loan commitments and the borrower defaults, the bank may suffer financial losses. Similarly, if a bank engages in derivatives trading and the market moves against its position, it could incur significant losses.

To restrict bank employees from taking on too much risk in off-balance-sheet activities, banks implement various controls and risk management practices. These may include setting limits on the amount of off-balance-sheet exposure a bank can take on, conducting regular stress tests to assess the potential impact of adverse market conditions, and implementing robust internal controls to monitor and manage off-balance-sheet activities. Additionally, banks may have policies in place to ensure that employees are adequately trained and informed about the risks associated with off-balance-sheet activities, and they may also incentivize prudent risk-taking through compensation structures and performance metrics.

Overall, while off-balance-sheet activities can provide opportunities for banks to enhance their profitability and offer valuable financial services to clients, they also carry inherent risks. By implementing effective controls and risk management practices, banks can mitigate these risks and ensure that their off-balance-sheet activities contribute to their overall financial stability and success.

Question 4

A bank

Accepted Answer

A) obtains funds by borrowing and by issuing liabilities. 
B) makes profits by charging an interest rate on their asset holdings of securities and loans that is lower than the interest and other expenses on their liabilities. 
C) does both A and B of the above. 
D) does neither A nor B of the above. 
A) obtains funds by borrowing and by issuing liabilities. 
B) makes profits by charging an interest rate on their asset holdings of securities and loans that is lower than the interest and other expenses on their liabilities. 
C) does both A and B of the above. 
D) does neither A nor B of the above.

Question 5

The most important category of assets on a bank's balance sheet is

Accepted Answer

A) discount loans. 
B) securities. 
C) loans. 
D) cash items in the process of collection. 
A) discount loans. 
B) securities. 
C) loans. 
D) cash items in the process of collection.

Question 6

If a bank has $10 million of deposits, a required reserve ratio of 10 percent, and $2 million in reserves, then it does not have enough reserves to support a deposit outflow of

Accepted Answer

A) $1.2 million. 
B) $1.1 million. 
C) $1 million. 
D) either A or B of the above. 
A) $1.2 million. 
B) $1.1 million. 
C) $1 million. 
D) either A or B of the above.

Question 7

Which of the following statements is false?

Accepted Answer

A) A bank's assets are its uses of funds. 
B) A bank issues liabilities to acquire funds. 
C) A bank's assets provide the bank with income. 
D) Bank capital is an asset on the bank balance sheet. 
A) A bank's assets are its uses of funds. 
B) A bank issues liabilities to acquire funds. 
C) A bank's assets provide the bank with income. 
D) Bank capital is an asset on the bank balance sheet.

Question 8

Deposits that banks keep in accounts at the Federal Reserve less vault cash is called reserves.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements is an accurate description of modern liability management?

Accepted Answer

A) Greater flexibility in liability management has allowed banks to increase the proportion of their assets held in loans. 
B) New financial instruments enable banks to acquire funds quickly. 
C) The introduction of negotiable CDs have significantly reduced the percentage of funds that banks borrow from one another to finance loans. 
D) All of the above have occurred since 1960. 
E) Only A and B of the above have occurred since 1960. 
A) Greater flexibility in liability management has allowed banks to increase the proportion of their assets held in loans. 
B) New financial instruments enable banks to acquire funds quickly. 
C) The introduction of negotiable CDs have significantly reduced the percentage of funds that banks borrow from one another to finance loans. 
D) All of the above have occurred since 1960. 
E) Only A and B of the above have occurred since 1960.

Question 10

If a bank has $100,000 of deposits, a required reserve ratio of 20 percent, and $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 11

Loan loss reserves are an asset on a bank's balance sheet.

Accepted Answer

A) True 
 B)False

Question 12

On a bank's income statement, the provision for loan losses is an ________ item and represents the amount of ________ in the bank's loan loss reserves.

Accepted Answer

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

Question 13

Because passbook savings are ________ liquid for the depositor than checking accounts, they earn ________ interest rates.

Accepted Answer

A) less; higher 
B) less; lower 
C) more; higher 
D) more; lower 
A) less; higher 
B) less; lower 
C) more; higher 
D) more; lower

Question 14

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

Accepted Answer

A) borrowings 
B) reserves 
C) savings deposits 
D) bank capital 
E) only A and B of the above 
A) borrowings 
B) reserves 
C) savings deposits 
D) bank capital 
E) only A and B of the above

Question 15

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

Accepted Answer

A) cash items in process of collection fall by the amount of the check. 
B) bank assets remain unchanged. 
C) bank liabilities decrease by the amount of the check. 
D) all of the above occur. 
E) only A and B of the above occur. 
A) cash items in process of collection fall by the amount of the check. 
B) bank assets remain unchanged. 
C) bank liabilities decrease by the amount of the check. 
D) all of the above occur. 
E) only A and B of the above occur.

Question 16

Which of the following would substitute for discount loans?

Accepted Answer

A) loans to businesses 
B) repurchase agreements 
C) investing in Eurodollars 
D) loans to bank holding companies 
E) reverse repurchase agreements 
A) loans to businesses 
B) repurchase agreements 
C) investing in Eurodollars 
D) loans to bank holding companies 
E) reverse repurchase agreements

Question 17

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

Accepted Answer

A) reserves 
B) checkable deposits 
C) loans 
D) deposits with other banks 
A) reserves 
B) checkable deposits 
C) loans 
D) deposits with other banks

Question 18

When a $10 check written on the First National Bank is deposited in an account at the Second National Bank, then

Accepted Answer

A) the liabilities of the First National Bank decrease by $10. 
B) the reserves of the First National Bank increase by $10. 
C) the liabilities of the Second National Bank decrease by $10. 
D) the assets of Second National Bank decrease by $10. 
A) the liabilities of the First National Bank decrease by $10. 
B) the reserves of the First National Bank increase by $10. 
C) the liabilities of the Second National Bank decrease by $10. 
D) the assets of Second National Bank decrease by $10.

Question 19

Which of the following is checkable deposits?

Accepted Answer

A) savings accounts 
B) Small-denomination time deposits 
C) Money market deposit accounts 
D) Certificates of deposit 
A) savings accounts 
B) Small-denomination time deposits 
C) Money market deposit accounts 
D) Certificates of deposit

Question 20

The largest source of bank income is

Accepted Answer

A) interest on loans. 
B) interest on securities. 
C) service charges on deposit accounts. 
D) noninterest income. 
A) interest on loans. 
B) interest on securities. 
C) service charges on deposit accounts. 
D) noninterest income.

Exam 17: Banking and the Management of Financial Institutions

A bank manager has which of the following concerns?

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

Explain the off-balance-sheet activities banks engage in, the risks they face from undertaking these activities, and the controls they put in place to restrict bank employees from taking on too much risk.

A bank

The most important category of assets on a bank's balance sheet is

If a bank has $10 million of deposits, a required reserve ratio of 10 percent, and $2 million in reserves, then it does not have enough reserves to support a deposit outflow of

Which of the following statements is false?

Deposits that banks keep in accounts at the Federal Reserve less vault cash is called reserves.

Which of the following statements is an accurate description of modern liability management?

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

Loan loss reserves are an asset on a bank's balance sheet.

On a bank's income statement, the provision for loan losses is an ________ item and represents the amount of ________ in the bank's loan loss reserves.

Because passbook savings are ________ liquid for the depositor than checking accounts, they earn ________ interest rates.

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

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

Which of the following would substitute for discount loans?

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

When a $10 check written on the First National Bank is deposited in an account at the Second National Bank, then

Which of the following is checkable deposits?

The largest source of bank income is

Why Study Financial Markets and Institutions

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation

Why Do Interest Rates Change

How Do Risk and Term Structure Affect Interest Rates

Are Financial Markets Efficient

Why Do Financial Institutions Exist

Why Do Financial Crises Occur and Why Are They so Damaging to the Economy

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Risk Management in Financial Institutions

Hedging With Financial Derivatives

Savings Associations and Credit Unions

Finance Companies

Filters

On a bank's income statement, the provision for loan losses is an item and represents the amount of in the bank's loan loss reserves.

Because passbook savings are liquid for the depositor than checking accounts, they earn interest rates.