Question 1

Bank capital is equal to ________ minus ________.

Accepted Answer

A) total assets; total liabilities 
B) total liabilities; total assets 
C) total assets; total reserves 
D) total liabilities; total borrowings

Question 2

For a given return on assets,the lower is bank capital,

Accepted Answer

A) the lower is the return for the owners of the bank. 
B) the higher is the return for the owners of the bank. 
C) the lower is the credit risk for the owners of the bank. 
D) the lower the possibility of bank failure.

Question 3

Long-term customer relationships ________ the cost of information collection and make it easier to ________ credit risks.

Accepted Answer

A) reduce; screen 
B) increase; screen 
C) reduce; increase 
D) increase; increase

Question 4

When $1 million is deposited at a bank,the required reserve ratio is 20 percent,and the bank chooses not to hold any excess reserves but makes loans instead,then,in the bank's final balance sheet,

Accepted Answer

A) the assets at the bank increase by $800,000. 
B) the liabilities of the bank increase by $1,000,000. 
C) the liabilities of the bank increase by $800,000. 
D) reserves increase by $160,000.

Question 5

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 6

Most of a bank's operating income results from

Accepted Answer

A) interest on assets. 
B) service charges on deposit accounts. 
C) off-balance-sheet activities. 
D) fees from standby lines of credit.

Question 7

Which of the following is not an example of a backup line of credit?

Accepted Answer

A) loan commitments 
B) overdraft privileges 
C) standby letters of credit 
D) mortgages

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

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

Accepted Answer

A) money market deposit accounts; time deposits 
B) checkable deposits; passbook savings 
C) passbook savings; checkable deposits 
D) passbook savings; time deposits

Question 10

Credit risk management tools include

Accepted Answer

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

Question 11

Which of the following would not be a way to increase the return on equity?

Accepted Answer

A) Buy back bank stock 
B) Pay higher dividends 
C) Acquire new funds by selling negotiable CDs and increase assets with them 
D) Sell more bank stock

Question 12

When $1 million is deposited at a bank,the required 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 13

Bank reserves include

Accepted Answer

A) deposits at the Fed and short-term treasury securities. 
B) vault cash and short-term Treasury securities. 
C) vault cash and deposits at the Fed. 
D) deposits at other banks and deposits at the Fed.

Question 14

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 15

When banks offer borrowers smaller loans than they have requested,banks are said to

Accepted Answer

A) shave credit. 
B) rediscount the loan. 
C) raze credit. 
D) ration credit.

Question 16

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.The duration gap for this bank is

Accepted Answer

A) 0.5 year. 
B) 1 year. 
C) 1.5 years. 
D) 2 years.

Question 17

When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank,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 Citibank increase by $10. 
D) the assets of Citibank fall by $10.

Question 18

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 19

If the First National Bank has a gap equal to a negative $30 million,then a 5 percentage point increase in interest rates will cause profits to

Accepted Answer

A) increase by $15 million. 
B) increase by $1.5 million. 
C) decline by $15 million. 
D) decline by $1.5 million.

Question 20

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.

Exam 10: Banking and the Management of Financial Institutions

Bank capital is equal to minus .