Question 1

Banks develop statistical models to calculate their maximum loss over a given time period.This approach is known as the

Accepted Answer

A) stress-testing approach. 
B) value-at-risk approach. 
C) trading-loss approach. 
D) doomsday approach.

Question 2

In general,banks make profits by selling ________ liabilities and buying ________ assets.

Accepted Answer

A) long-term; shorter-term 
B) short-term; longer-term 
C) illiquid; liquid 
D) risky; risk-free

Question 3

The amount of checkable deposits that banks are required by regulation to hold are the

Accepted Answer

A) excess reserves. 
B) required reserves. 
C) vault cash. 
D) total reserves.

Question 4

Bank capital has both benefits and costs for the bank owners.Higher bank capital ________ the likelihood of bankruptcy,but higher bank capital ________ the return on equity for a given return on assets.

Accepted Answer

A) reduces; reduces 
B) increases; increases 
C) reduces; increases 
D) increases; reduces

Question 5

When $1 million is deposited at a bank,the required reserve ratio is 20 percent,and the bank chooses not to make any loans but to hold excess reserves instead,then,in the bank's final balance sheet,

Accepted Answer

A) the assets at the bank increase by $1 million. 
B) the liabilities of the bank decrease by $1 million. 
C) reserves increase by $200,000. 
D) liabilities increase by $200,000.

Question 6

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.

Question 7

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

Question 8

When banks offer borrowers smaller loans than they have requested,banks are said to

Accepted Answer

A) shave credit. 
B) rediscount the loan. 
C) raze credit. 
D) ration credit.

Question 9

Unanticipated moral hazard contingencies can be reduced by

Accepted Answer

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

Question 10

Assuming that the average duration of its assets is four years,while the average duration of its liabilities is three years,then a 5 percentage point increase in interest rates will cause the net worth of First National to ________ by ________ of the total original asset value.

Accepted Answer

A) decline; 5 percent 
B) decline; 10 percent 
C) decline; 15 percent 
D) increase; 20 percent

Question 11

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.

Question 12

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.

Question 13

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

Accepted Answer

A) $1.2 million. 
B) $1.1 million. 
C) $1 million. 
D) $900,000.

Question 14

Through correspondent banking,large banks provide services to small banks,including

Accepted Answer

A) loan guarantees. 
B) foreign exchange transactions. 
C) issuing stock. 
D) debt reduction.

Question 15

For banks,

Accepted Answer

A) return on assets exceeds return on equity. 
B) return on assets equals return on equity. 
C) return on equity exceeds return on assets. 
D) return on equity is another name for net interest margin.

Question 16

Banks earn profits from off-balance sheet loan sales

Accepted Answer

A) by foreclosing on delinquent accounts. 
B) by selling the loans at discounted prices. 
C) by selling existing loans for more than the original loan amount. 
D) by calling-in loans before the maturity date.

Question 17

Which of the following statements is false?

Accepted Answer

A) Checkable deposits are usually the lowest cost source of bank funds. 
B) Checkable deposits are the primary source of bank funds. 
C) Checkable deposits are payable on demand. 
D) Checkable deposits include NOW accounts.

Question 18

Long-term customer relationships ________ the cost of information collection and make it easier to ________ credit risks.

Accepted Answer

A) reduce; screen 
B) increase; screen 
C) reduce; increase 
D) increase; increase

Question 19

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) The bank's assets provide the bank with income. 
D) Bank capital is recorded as an asset on the bank balance sheet.

Question 20

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.

Exam 10: Banking and the Management of Financial Institutions

Banks develop statistical models to calculate their maximum loss over a given time period.This approach is known as the

In general,banks make profits by selling liabilities and buying assets.

The amount of checkable deposits that banks are required by regulation to hold are the

Bank capital has both benefits and costs for the bank owners.Higher bank capital the likelihood of bankruptcy,but higher bank capital the return on equity for a given return on assets.

When $1 million is deposited at a bank,the required reserve ratio is 20 percent,and the bank chooses not to make any loans but to hold excess reserves instead,then,in the bank's final balance sheet,

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

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.

When banks offer borrowers smaller loans than they have requested,banks are said to

Unanticipated moral hazard contingencies can be reduced by

Assuming that the average duration of its assets is four years,while the average duration of its liabilities is three years,then a 5 percentage point increase in interest rates will cause the net worth of First National to by of the total original asset value.

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

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

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

Through correspondent banking,large banks provide services to small banks,including

For banks,

Banks earn profits from off-balance sheet loan sales

Which of the following statements is false?

Long-term customer relationships the cost of information collection and make it easier to credit risks.

Which of the following statements is false?

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