Question 1

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 2

How can specializing in lending help to reduce the adverse selection problem in lending?

Accepted Answer

The answer of How can specializing in lending help to...

Question 3

All else the same,if a bank's liabilities are more sensitive to interest rate fluctuations than are its assets,then ________ in interest rates will ________ bank profits.

Accepted Answer

A)  an increase; increase 
B)  an increase; reduce 
C)  a decline; reduce 
D)  a decline; not affect

Question 4

The share of chequable 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 5

Which of the following are primary concerns of the bank manager?

Accepted Answer

A)  Maintaining sufficient reserves to minimize the cost to the bank of deposit outflows 
B)  Extending loans to borrowers who will pay low interest rates, but who are poor credit risks 
C)  Acquiring funds at a relatively high cost, so that profitable lending opportunities can be realized 
D)  Maintaining high levels of capital and thus maximizing the returns to the owners

Question 6

One of the problems in conducting a duration gap analysis is that the duration gap is calculated assuming that interest rates for all maturities are the same.That means that the yield curve is ________.

Accepted Answer

A)  flat 
B)  slightly upward sloping 
C)  steeply upward sloping 
D)  downward sloping

Question 7

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 8

If a bank has ________ rate-sensitive assets than liabilities,then ________ in interest rates will increase bank profits.

Accepted Answer

A)  more; a decline 
B)  more; an increase 
C)  fewer; an increase 
D)  fewer; a surge

Question 9

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 10

Which of the following is not a source of borrowings for a bank?

Accepted Answer

A)  Overnight funds 
B)  Eurodollars 
C)  Time deposits 
D)  Advances

Question 11

Conditions that likely contributed to a credit crunch in 2008 include ________.

Accepted Answer

A)  capital shortfalls caused in part by falling real estate prices 
B)  regulated hikes in bank capital requirements 
C)  falling interest rates that raised interest rate risk, causing banks to choose to hold more capital 
D)  increases in reserve requirements

Question 12

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 13

Duration analysis involves comparing the average duration of the bank's ________ to the average duration of its ________.

Accepted Answer

A)  securities portfolio; non-deposit liabilities 
B)  assets; liabilities 
C)  loan portfolio; deposit liabilities 
D)  assets; deposit liabilities

Question 14

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 15

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 16

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 17

Asset transformation can be described as ________.

Accepted Answer

A)  borrowing long and lending short 
B)  borrowing short and lending long 
C)  borrowing and lending only for the short term 
D)  borrowing and lending for the long term

Question 18

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 19

Banks earn profits by selling ________ with attractive combinations of liquidity,risk,and return,and using the proceeds to buy ________ with a different set of characteristics.

Accepted Answer

A)  loans; deposits 
B)  securities; deposits 
C)  liabilities; assets 
D)  assets; liabilities

Question 20

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

Exam 13: Banking and the Management of Financial Institutions