Question 1

The goals of bank asset management include

Accepted Answer

A) maximizing risk. 
B) minimizing liquidity. 
C) lending at high interest rates regardless of risk. 
D) purchasing securities with high returns and low risk.

Question 2

When banks involved in trading activities attempt to outguess markets,they are

Accepted Answer

A) forecasting. 
B) diversifying. 
C) speculating. 
D) engaging in riskless arbitrage.

Question 3

Modern liability management has resulted in

Accepted Answer

A) increased sales of negotiable CDs 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 4

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 5

When you deposit $50 in your account at First National Bank and a $100 check you have written on this account is cashed at Chemical Bank,then

Accepted Answer

A) the assets of First National rise by $50. 
B) the assets of Chemical Bank rise by $50. 
C) the reserves at First National fall by $50. 
D) the liabilities at Chemical Bank rise by $50.

Question 6

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.

Question 7

Use the following table to answer the question :

-Assuming that the average duration of its assets is five 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 decline by ________ of the total original asset value.

Accepted Answer

A) 5 percent 
B) 10 percent 
C) 15 percent 
D) 25 percent

Question 8

As the costs associated with deposit outflows ________,the banks willingness to hold excess reserves will ________.

Accepted Answer

A) decrease;increase 
B) increase;decrease 
C) increase;increase 
D) decrease;not be affected

Question 9

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.

Question 10

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.

Question 11

Banks acquire the funds that they use to purchase income-earning assets from such sources as

Accepted Answer

A) cash items in the process of collection. 
B) savings accounts. 
C) reserves. 
D) deposits at other banks.

Question 12

If a bank has ________ rate-sensitive assets than liabilities,a ________ in interest rates will reduce bank profits,while a ________ in interest rates will raise bank profits.

Accepted Answer

A) more;rise;decline 
B) more;decline;rise 
C) fewer;decline;decline 
D) fewer;rise;rise

Question 13

If a bank has $200,000 of checkable deposits,a required reserve ratio of 20 percent,and it holds $80,000 in reserves,then the maximum deposit outflow it can sustain without altering its balance sheet is

Accepted Answer

A) $50,000. 
B) $40,000. 
C) $30,000. 
D) $25,000.

Question 14

Property promised to the lender as compensation if the borrower defaults is called

Accepted Answer

A) collateral. 
B) deductibles. 
C) restrictive covenants. 
D) contingencies.

Question 15

Because of an expected rise in interest rates in the future,a banker will likely

Accepted Answer

A) make long-term rather than short-term loans. 
B) buy short-term rather than long-term bonds. 
C) buy long-term rather than short-term bonds. 
D) make either short or long-term loans;expectations of future interest rates are irrelevant.

Question 16

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 that the bank currently owns. 
D) repay its discount loans from the Fed.

Question 17

Bank ________ is/are listed on the liability side of the bank's balance sheet.

Accepted Answer

A) reserves 
B) capital 
C) securities 
D) cash items

Question 18

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 19

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 20

Based on the Net Interest Margin the poor bank performance in the late 1980s

Accepted Answer

A) was not the result of interest-rate movements. 
B) was not the result of risky loans made in the early 1980s. 
C) resulted from a narrowing of the gap between interest earned on assets and inters paid on liabilities. 
D) resulted from a huge decrease in provisions for loan losses.

Exam 9: Banking and the Management of Financial Institutions