Question 1

Which of the following statements most accurately describes the task of bank asset management?

Accepted Answer

A) Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity. 
B) Banks seek to have the highest liquidity possible subject to earning a positive rate of return on their operations. 
C) Banks seek to prevent bank failure at all cost; since a failed bank earns no profit, liquidity needs supersede the desire for profits. 
D) Banks seek to acquire funds in the least costly way.

Question 2

Which of the following statements is true?

Accepted Answer

A) Chequable deposits are payable on demand. 
B) Chequable deposits do not include notice deposits. 
C) Chequable deposits are the primary source of bank funds. 
D) Chequable deposits are chequable deposits that pay interest.

Question 3

Off-balance sheet activities involving guarantees of securities and back-up credit lines ________.

Accepted Answer

A) have no impact on the risk a bank faces 
B) does not change the risk a bank faces 
C) increase the risk a bank faces 
D) slightly reduce the risk a bank faces

Question 4

What are the main items in a bank's asset side of the balance sheet? Discuss them briefly.

Accepted Answer

The answer of What are the main items in a...

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

A reason why rogue traders have bankrupt their banks is due to ________.

Accepted Answer

A) the separation of trading activities from the bookkeepers 
B) stringent supervision of trading activities by bank management 
C) accounting errors 
D) a failure to maintain proper internal controls

Question 7

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 8

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 9

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 10

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 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

Explain the relationship between return on assets and return on equity. What incentives does this relationship give a bank manager? Is this the desired outcome preferred by regulators? Discuss.

Accepted Answer

The answer of Explain the relationship between return on assets...

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

When you deposit $50 in your account at First National Bank and a $100 cheque 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 15

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 16

Because ________ are less liquid for the depositor than ________, they earn higher interest rates.

Accepted Answer

A) money market deposit accounts; time deposits 
B) chequable deposits; savings account 
C) savings account; chequable deposits 
D) savings account; time deposits

Question 17

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 18

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

Accepted Answer

A) Advances 
B) Reserves 
C) Securities 
D) Loans

Question 19

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 20

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

Exam 12: Banking and the Management of Financial Institutions

Which of the following statements most accurately describes the task of bank asset management?

Which of the following statements is true?

Off-balance sheet activities involving guarantees of securities and back-up credit lines ________.

What are the main items in a bank's asset side of the balance sheet? Discuss them briefly.

The difference of rate-sensitive liabilities and rate-sensitive assets is known as the ________.

A reason why rogue traders have bankrupt their banks is due to ________.

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

For banks, ________.

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

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

Bank reserves include ________.

Explain the relationship between return on assets and return on equity. What incentives does this relationship give a bank manager? Is this the desired outcome preferred by regulators? Discuss.

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 ________.

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

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, ________.

Because are less liquid for the depositor than , they earn higher interest rates.

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.

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

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

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