Question 1

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 2

Modern liability management has resulted in ________.

Accepted Answer

A)  increased sales of certificates of deposits to raise funds 
B)  increase importance of deposits as a source of funds 
C)  reduced borrowing by banks in the overnight loan market 
D)  failure by banks to coordinate management of assets and liabilities

Question 3

The amount of assets per dollar of equity capital is called the ________.

Accepted Answer

A)  asset ratio 
B)  equity ratio 
C)  equity multiplier 
D)  asset multiplier

Question 4

When $1 million is deposited at a bank, the desired 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 5

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

Question 6

Net profit after taxes per dollar of equity capital 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

Question 7

If, after a deposit outflow, a bank needs an additional $3 million to meet its desired reserves, 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 advances from the Bank of Canada

Question 8

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

Question 9

Which of the following is not an example of a backup line of credit?

Accepted Answer

A)  Loan commitments 
B)  Overdraft privileges 
C)  Standby letters of credit 
D)  Mortgages

Question 10

If a bank's liabilities are more sensitive to interest rate movements than are its assets, then ________.

Accepted Answer

A)  an increase in interest rates will reduce bank profits 
B)  a decrease in interest rates will reduce bank profits 
C)  interest rates changes will not impact bank profits 
D)  an increase in interest rates will increase bank profits

Question 11

In the absence of regulation, banks would probably hold ________.

Accepted Answer

A)  too much capital, reducing the efficiency of the payments system 
B)  too much capital, reducing the profitability of banks 
C)  too little capital 
D)  too much capital, making it more difficult to obtain loans

Question 12

Which of the following statements are true?

Accepted Answer

A)  A bank's assets are its sources of funds. 
B)  A bank's liabilities are its uses of funds. 
C)  A bank's balance sheet shows that total assets equal total liabilities plus capital. 
D)  A bank's balance sheet indicates whether or not the bank is profitable.

Question 13

If a bank has $10 million of demand deposits, a desired 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

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

Accepted Answer

A)  Reserves 
B)  Demand and notice deposits 
C)  Loans 
D)  Deposits with other banks

Question 15

Your bank has the following balance sheet:
Assets Liabilities
Rate-sensitive $100 million Rate-sensitive $75 million
Fixed-rate 100 million Fixed-rate 125 million
What would happen to bank profits if the interest rates in the economy go down? Is there anything that you could do to keep your bank from being so vulnerable to interest rate movements?

Accepted Answer

The answer of Your bank has the following balance sheet:
Assets...

Question 16

When a new depositor opens a chequing 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

Question 17

Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the ________.

Accepted Answer

A)  adverse selection problem 
B)  lemon problem 
C)  adverse credit risk problem 
D)  moral hazard problem

Question 18

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

Question 19

Bank capital is equal to ________ minus ________.

Accepted Answer

A)  total assets; total liabilities 
B)  total liabilities; total assets 
C)  total assets; total reserves 
D)  total liabilities; total borrowings

Question 20

A bank's commitment to provide a firm with loans up to pre-specified limit at an interest rate that is tied to a market interest rate is called ________.

Accepted Answer

A)  an adjustable gap loan 
B)  an adjustable portfolio loan 
C)  loan commitment 
D)  pre-credit loan line

Exam 12: Banking and the Management of Financial Institutions

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