Question 1

Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans.

Accepted Answer

A)  adverse selection 
B)  moral hazard 
C)  moral suasion 
D)  intentional fraud

Question 2

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 as a percentage of assets would ________ by approximately ________.

Accepted Answer

A)  increase; 1.8% 
B)  decrease; 1.8% 
C)  increase; 1.4% 
D)  decrease; 1.4%

Question 3

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

Question 4

Which of the following statements is false?

Accepted Answer

A)  Chequable deposits are usually the lowest cost source of bank funds. 
B)  Demand deposits are the primary source of bank funds. 
C)  Chequable deposits are payable on demand. 
D)  Chequable deposits include notice deposits.

Question 5

When a $10 cheque written on the First National Bank is deposited in an account at CIBC, then ________.

Accepted Answer

A)  the liabilities of the First National Bank increase by $10 
B)  the reserves of the First National Bank increase by $ 10 
C)  the liabilities of CIBC increase by $10 
D)  the assets of CIBC fall by $10

Question 6

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 7

When a $10 cheque written on the First National Bank is deposited in an account at CIBC, then ________.

Accepted Answer

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

Question 8

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

Question 9

In one sense ________ appears surprising since it means that the bank is not ________ its portfolio of loans and thus is exposing itself to more risk.

Accepted Answer

A)  specialization in lending; diversifying 
B)  specialization in lending; rationing 
C)  credit rationing; diversifying 
D)  screening; rationing

Question 10

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

Question 11

Bank reserves include ________.

Accepted Answer

A)  deposits at the Bank of Canada and short-term securities 
B)  vault cash and short-term securities 
C)  vault cash and deposits at the Bank of Canada 
D)  deposits at other banks and deposits at the Bank of Canada

Question 12

Examples of off-balance-sheet activities include ________.

Accepted Answer

A)  loan sales 
B)  extending loans to depositors 
C)  borrowing from other banks 
D)  selling negotiable CDs

Question 13

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

Question 14

Credit risk management tools include ________.

Accepted Answer

A)  deductibles 
B)  collateral 
C)  interest rate swaps 
D)  duration analysis

Question 15

Because of their ________ liquidity, ________ government securities are called secondary reserves.

Accepted Answer

A)  low; short-term 
B)  low; long-term 
C)  high; short-term 
D)  high; long-term

Question 16

If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to ________.

Accepted Answer

A)  buy back bank stock 
B)  pay higher dividends 
C)  sell bank stock 
D)  sell securities the bank owns and put the funds into the reserve account

Question 17

The quantity defined as 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

Question 18

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

Question 19

Using T-accounts show what happens to reserves at New National Bank if one individual deposits $1000 in cash into her chequing account and another individual withdraws $750 in cash from her chequing account.

Accepted Answer

The answer of Using T-accounts show what happens to reserves...

Question 20

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

Exam 12: Banking and the Management of Financial Institutions

Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans.

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 as a percentage of assets would by approximately .

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

Which of the following statements is false?

When a $10 cheque written on the First National Bank is deposited in an account at CIBC, then ________.

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

When a $10 cheque written on the First National Bank is deposited in an account at CIBC, then ________.

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

In one sense appears surprising since it means that the bank is not its portfolio of loans and thus is exposing itself to more risk.

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

Bank reserves include ________.

Examples of off-balance-sheet activities include ________.

Traders working for banks are subject to the ________.

Credit risk management tools include ________.

Because of their liquidity, government securities are called secondary reserves.

If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to ________.

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

Banks hold excess and secondary reserves to ________.

Using T-accounts show what happens to reserves at New National Bank if one individual deposits $1000 in cash into her chequing account and another individual withdraws $750 in cash from her chequing account.

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