Question 1

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is called

Accepted Answer

A) basic duration analysis. 
B) basic gap analysis. 
C) interest-exposure analysis. 
D) gap-exposure analysis.

Question 2

Banks that suffered significant losses in the 1980s made the mistake of

Accepted Answer

A) holding too many liquid assets. 
B) minimizing default risk. 
C) failing to diversify their loan portfolio. 
D) holding only safe securities.

Question 3

Secondary reserves include

Accepted Answer

A) deposits at Federal Reserve Banks. 
B) deposits at other large banks. 
C) short-term U.S. government securities. 
D) state and local government securities.

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

Of the following methods that banks might use to reduce moral hazard problems,the one not legally permitted in the United States is the

Accepted Answer

A) requirement that firms keep compensating balances at the banks from which they obtain their loans. 
B) requirement that firms place on their board of directors an officer from the bank. 
C) inclusion of restrictive covenants in loan contracts. 
D) requirement that individuals provide detailed credit histories to bank loan officers.

Question 6

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

Accepted Answer

A) cash items in the process of collection fall by the amount of the check. 
B) bank assets increase by the amount of the check. 
C) bank liabilities decrease by the amount of the check. 
D) bank reserves increase by the amount of required reserves.

Question 7

From the standpoint of ________,specialization in lending is surprising but makes perfect sense when one considers the ________ problem.

Accepted Answer

A) moral hazard;diversification 
B) diversification;moral hazard 
C) adverse selection;diversification 
D) diversification;adverse selection

Question 8

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 9

When a bank suspects that a $1 million loan might prove to be bad debt that will have to be written off in the future the bank

Accepted Answer

A) can set aside $1 million of its earnings in its loan loss reserves account. 
B) reduces its reported earnings by $1,even though it has not yet actually lost the $1 million. 
C) reduces its assets immediately by $1 million,even though it has not yet lost the $1 million. 
D) reduces its reserves by $1 million,so that they can use those funds later.

Question 10

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 11

If interest rates increase from 9 percent to 10 percent,a bank with a duration gap of 2 years would experience a decrease in its net worth of

Accepted Answer

A) 0.9 percent of its assets. 
B) 0.9 percent of its liabilities. 
C) 1.8 percent of its liabilities. 
D) 1.8 percent of its assets.

Question 12

If a bank has excess reserves greater than the amount of a deposit outflow,the outflow will result in equal reductions in

Accepted Answer

A) deposits and reserves. 
B) deposits and loans. 
C) capital and reserves. 
D) capital and loans.

Question 13

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 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

Question 15

If a banker expects interest rates to fall in the future,her best strategy for the present is

Accepted Answer

A) to increase the duration of the bank's liabilities. 
B) to buy short-term bonds. 
C) to sell long-term certificates of deposit. 
D) to increase the duration of the bank's assets.

Question 16

If a bank has $100,000 of checkable deposits,a required reserve ratio of 20 percent,and it holds $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.

Question 17

A bank is insolvent when

Accepted Answer

A) its liabilities exceed its assets. 
B) its assets exceed its liabilities. 
C) its capital exceeds its liabilities. 
D) its assets increase in value.

Question 18

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) reduce the bank's assets by making fewer loans. 
D) sell securities the bank owns and put the funds into the reserve account.

Question 19

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

Accepted Answer

A) discount loans 
B) reserves 
C) U)S. Treasury securities 
D) real estate loans

Question 20

When banks calculate the losses the institution would incur if an unusual combination of bad events happened,the bank is using the ________ approach.

Accepted Answer

A) stress-test 
B) value-at-risk 
C) trading-loss 
D) maximum value

Exam 9: Banking and the Management of Financial Institutions