Quiz 10: Banking and the Management of Financial Institutions

The Economics of Money, Banking, and Financial Markets

Business
139
Questions
0
True/False
135
Choices
4
Essay
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Questions

Q1
Free

Which of the following statements are true?

Multiple Choice
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A) A bankʹs assets are its sources of funds.
B) A bankʹs liabilities are its uses of funds.
C) A bankʹs balance sheet shows that total assets equal total liabilities plus equity capital.
D) A bankʹs balance sheet indicates whether or not the bank is profitable.
Answer:
C) A bankʹs balance sheet shows that total assets equal total liabilities plus equity capital.
Q2
Free

Which of the following statements is false?

Multiple Choice
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A) A bankʹs assets are its uses of funds.
B) A bank issues liabilities to acquire funds.
C) The bankʹs assets provide the bank with income.
D) Bank capital is recorded as an asset on the bank balance sheet.
Answer:
D) Bank capital is recorded as an asset on the bank balance sheet.
Q3
Free

Which of the following are reported as liabilities on a bankʹs balance sheet?

Multiple Choice
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A) Reserves
B) Checkable deposits
C) Loans
D) Deposits with other banks
Answer:
B) Checkable deposits
Q4

Which of the following are reported as liabilities on a bankʹs balance sheet?

Multiple Choice
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A) Discount loans
B) Reserves
C) U.S. Treasury securities
D) Loans
Answer:

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Q5

The share of checkable deposits in total bank liabilities has

Multiple Choice
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A) expanded moderately over time.
B) expanded dramatically over time.
C) shrunk over time.
D) remained virtually unchanged since 1960.
Answer:

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Q6

Which of the following statements is false?

Multiple Choice
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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.
Answer:

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Q7

In recent years the interest paid on checkable and time deposits has accounted for around ________ of total bank operating expenses, while the costs involved in servicing accounts have been approximately ________ of operating expenses.

Multiple Choice
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A) 45 percent; 55 percent
B) 55 percent; 4 percent
C) 25 percent; 50 percent
D) 50 percent; 30 percent
Answer:

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Q8

Which of the following statements are true?

Multiple Choice
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A) Checkable deposits are payable on demand.
B) Checkable deposits do not include NOW accounts.
C) Checkable deposits are the primary source of bank funds.
D) Demand deposits are checkable deposits that pay interest.
Answer:

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Q9

Because checking accounts are ________ liquid for the depositor than passbook savings, they earn ________ interest rates.

Multiple Choice
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A) less; higher
B) less; lower
C) more; higher
D) more; lower
Answer:

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Q10

Which of the following are transaction deposits?

Multiple Choice
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A) Savings accounts
B) Small-denomination time deposits
C) Negotiable order of withdraw accounts
D) Certificates of deposit
Answer:

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Q11

Which of the following is not a nontransaction deposit?

Multiple Choice
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A) Savings accounts
B) Small-denomination time deposits
C) Negotiable order of withdrawal accounts
D) Certificate of deposit
Answer:

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Q12

Large-denomination CDs are ________, so that like a bond they can be resold in a ________ market before they mature.

Multiple Choice
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A) nonnegotiable; secondary
B) nonnegotiable; primary
C) negotiable; secondary
D) negotiable; primary
Answer:

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Q13

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

Multiple Choice
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A) money market deposit accounts; time deposits
B) checkable deposits; passbook savings
C) passbook savings; checkable deposits
D) passbook savings; time deposits
Answer:

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Q14

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

Multiple Choice
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A) passbook savings; time deposits
B) money market deposit accounts; time deposits
C) money market deposit accounts; passbook savings
D) time deposits; passbook savings
Answer:

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Q15

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

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

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Q16

Bank loans from the Federal Reserve are called ________ and represent a ________ of funds.

Multiple Choice
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A) discount loans; use
B) discount loans; source
C) fed funds; use
D) fed funds; source
Answer:

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Q17

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

Multiple Choice
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A) Federal funds
B) Eurodollars
C) Transaction deposits
D) Discount loans
Answer:

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Q18

Bank capital is equal to ________ minus ________.

Multiple Choice
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A) total assets; total liabilities
B) total liabilities; total assets
C) total assets; total reserves
D) total liabilities; total borrowings
Answer:

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Q19

Bank capital is listed on the ________ side of the bankʹs balance sheet because it represents a ________ of funds.

Multiple Choice
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A) liability; use
B) liability; source
C) asset; use
D) asset; source
Answer:

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Q20

Bank reserves include

Multiple Choice
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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.
Answer:

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Q21

The fraction of checkable deposits that banks are required by regulation to hold are

Multiple Choice
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A) excess reserves.
B) required reserves.
C) vault cash.
D) total reserves.
Answer:

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Q22

Which of the following are reported as assets on a bankʹs balance sheet?

Multiple Choice
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A) Borrowings
B) Reserves
C) Savings deposits
D) Bank capital
Answer:

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Q23

Which of the following are not reported as assets on a bankʹs balance sheet?

Multiple Choice
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A) Cash items in the process of collection
B) Deposits with other banks
C) U.S. Treasury securities
D) Checkable deposits
Answer:

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Q24

Through correspondent banking, large banks provide services to small banks, including

Multiple Choice
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A) loan guarantees.
B) foreign exchange transactions.
C) issuing stock.
D) debt reduction.
Answer:

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Q25

The largest percentage of banksʹ holdings of securities consist of

Multiple Choice
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A) Treasury and government agency securities.
B) tax-exempt municipal securities.
C) state and local government securities.
D) corporate securities.
Answer:

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Q26

Which of the following bank assets is the most liquid?

Multiple Choice
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A) Consumer loans
B) Reserves
C) Cash items in process of collection
D) U.S. government securities
Answer:

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Q27

Secondary reserves include

Multiple Choice
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A) deposits at Federal Reserve Banks.
B) deposits at other large banks.
C) short-term Treasury securities.
D) state and local government securities.
Answer:

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Q28

Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves.

Multiple Choice
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A) low; short-term
B) low; long-term
C) high; short-term
D) high; long-term
Answer:

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Q29

Secondary reserves are so called because

Multiple Choice
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A) they can be converted into cash with low transactions costs.
B) they are not easily converted into cash, and are, therefore, of secondary importance to banking firms.
C) 50% of these assets count toward meeting required reserves.
D) they rank second to bank vault cash in importance of bank holdings.
Answer:

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Q30

Banksʹ asset portfolios include state and local government securities because

Multiple Choice
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A) their interest payments are tax deductible for federal income taxes.
B) banks consider them helpful in attracting accounts of Federal employees.
C) the Federal Reserve requires member banks to buy securities from state and local governments located within their respective Federal Reserve districts.
D) there is no default-risk with state and local government securities.
Answer:

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Q31

Bankʹs make their profits primarily by issuing ________.

Multiple Choice
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A) equity
B) negotiable CDs
C) loans
D) NOW accounts
Answer:

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Q32

The most important category of assets on a bankʹs balance sheet is

Multiple Choice
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A) discount loans.
B) securities.
C) loans.
D) cash items in the process of collection.
Answer:

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Q33

Which of the following are bank assets?

Multiple Choice
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A) the building owned by the bank
B) a discount loan
C) a negotiable CD
D) a customerʹs checking account
Answer:

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Q34

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.

Multiple Choice
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A) loans; deposits
B) securities; deposits
C) liabilities; assets
D) assets; liabilities
Answer:

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Q35

In general, banks make profits by selling ________ liabilities and buying ________ assets.

Multiple Choice
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A) long-term; shorter-term
B) short-term; longer-term
C) illiquid; liquid
D) risky; risk-free
Answer:

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Q36

Asset transformation can be described as

Multiple Choice
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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.
Answer:

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Q37

When a new depositor opens a checking account at the First National Bank, the bankʹs assets ________ and its liabilities ________.

Multiple Choice
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A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer:

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Q38

When Jane Brown writes a $100 check to her nephew (who lives in another state), Ms. Brownʹs bank ________ assets of $100 and ________ liabilities of $100.

Multiple Choice
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A) gains; gains
B) gains; loses
C) loses; gains
D) loses; loses
Answer:

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Q39

When you deposit a $50 bill in the Security Pacific National Bank,

Multiple Choice
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A) its liabilities decrease by $50.
B) its assets increase by $50.
C) its reserves decrease by $50.
D) its cash items in the process of collection increase by $50.
Answer:

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Q40

When you deposit $50 in currency at Old National Bank,

Multiple Choice
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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.
Answer:

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Q41

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

Multiple Choice
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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.
Answer:

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Q42

When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then

Multiple Choice
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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.
Answer:

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Q43

When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then

Multiple Choice
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A) the liabilities of the First National Bank decrease by $10.
B) the reserves of the First National Bank increase by $10.
C) the liabilities of Citibank decrease by $10.
D) the assets of Citibank decrease by $10.
Answer:

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Q44

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

Multiple Choice
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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.
Answer:

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Q45

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 bankʹs final balance sheet,

Multiple Choice
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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.
Answer:

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Q46

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 bankʹs final balance sheet,

Multiple Choice
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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.
Answer:

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Q47

With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is

Multiple Choice
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A) $90.
B) $100.
C) $10.
D) $110.
Answer:

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Q48

Using T-accounts show what happens to reserves at Security National Bank if one individual deposits $1000 in cash into her checking account and another individual withdraws $750 in cash from her checking account.

Essay
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Answer:

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Q49

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

Multiple Choice
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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.
Answer:

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Q50

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

Multiple Choice
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A) $30,000.
B) $25,000.
C) $20,000.
D) $10,000.
Answer:

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Q51

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

Multiple Choice
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A) $50,000.
B) $40,000.
C) $30,000.
D) $25,000.
Answer:

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Q52

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

Multiple Choice
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A) $1.2 million.
B) $1.1 million.
C) $1 million.
D) $900,000.
Answer:

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Q53

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

Multiple Choice
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A) deposits and reserves.
B) deposits and loans.
C) capital and reserves.
D) capital and loans.
Answer:

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Q54

A $5 million deposit outflow from a bank has the immediate effect of

Multiple Choice
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A) reducing deposits and reserves by $5 million.
B) reducing deposits and loans by $5 million.
C) reducing deposits and securities by $5 million.
D) reducing deposits and capital by $5 million.
Answer:

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Q55

Bankersʹ concerns regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Fed, and borrowings from other banks to deal with deposit outflows is an example of

Multiple Choice
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A) liability management.
B) liquidity management.
C) managing interest rate risk.
D) managing credit risk.
Answer:

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Q56

If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can

Multiple Choice
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A) reduce deposits by $3 million.
B) increase loans by $3 million.
C) sell $3 million of securities.
D) repay its discount loans from the Fed.
Answer:

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Q57

A bank with insufficient reserves can increase its reserves by

Multiple Choice
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A) lending federal funds.
B) calling in loans.
C) buying short-term Treasury securities.
D) buying municipal bonds.
Answer:

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Q58

Of the following, which would be the first choice for a bank facing a reserve deficiency?

Multiple Choice
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A) Call in loans
B) Borrow from the Fed
C) Sell securities
D) Borrow from other banks
Answer:

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Q59

In general, banks would prefer to acquire funds quickly by ________ rather than ________.

Multiple Choice
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A) reducing loans; selling securities
B) reducing loans; borrowing from the Fed
C) borrowing from the Fed; reducing loans
D) ʺcalling inʺ loans; selling securities
Answer:

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Q60

________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow.

Multiple Choice
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A) Selling securities
B) Selling loans
C) Calling in loans
D) Selling negotiable CDs
Answer:

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Q61

Banks hold excess and secondary reserves to

Multiple Choice
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A) reduce the interest-rate risk problem.
B) provide for deposit outflows.
C) satisfy margin requirements.
D) achieve higher earnings than they can with loans.
Answer:

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Q62

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

Multiple Choice
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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.
Answer:

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Q63

The goals of bank asset management include

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

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Q64

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

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

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Q65

A bank will want to hold more excess reserves (everything else equal) when

Multiple Choice
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A) it expects to have deposit inflows in the near future.
B) brokerage commissions on selling bonds increase.
C) the cost of selling loans falls.
D) the discount rate decreases.
Answer:

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Q66

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

Multiple Choice
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A) decrease; increase
B) increase; decrease
C) increase; increase
D) decrease; not be affected
Answer:

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Q67

Which of the following would a bank not hold as insurance against the highest cost of deposit outflow-bank failure?

Multiple Choice
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A) Excess reserves
B) Secondary reserves
C) Bank capital
D) Mortgages
Answer:

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Q68

Which of the following has not resulted from more active liability management on the part of banks?

Multiple Choice
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A) Increased bank holdings of cash items
B) Aggressive targeting of goals for asset growth by banks
C) Increased use of negotiable CDs to raise funds
D) An increased proportion of bank assets held in loans
Answer:

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Q69

Banks that actively manage liabilities will most likely meet a reserve shortfall by

Multiple Choice
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A) calling in loans.
B) borrowing federal funds.
C) selling municipal bonds.
D) seeking new deposits.
Answer:

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Q70

Modern liability management has resulted in

Multiple Choice
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A) increased sales of certificates of deposits 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.
Answer:

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Q71

A bank failure occurs whenever

Multiple Choice
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A) a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements.
B) a bank suffers a large deposit outflow.
C) a bank has to call in a large volume of loans.
D) a bank is not allowed to borrow from the Fed.
Answer:

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Q72

A bank is insolvent when

Multiple Choice
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A) its liabilities exceed its assets.
B) its assets exceed its liabilities.
C) its capital exceeds its liabilities.
D) its assets increase in value.
Answer:

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Q73

Holding large amounts of bank capital helps prevent bank failures because

Multiple Choice
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A) it means that the bank has a higher income.
B) it makes loans easier to sell.
C) it can be used to absorb the losses resulting from bad loans.
D) it makes it easier to call in loans.
Answer:

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Q74

Net profit after taxes per dollar of assets is a basic measure of bank profitability called

Multiple Choice
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A) return on assets.
B) return on capital.
C) return on equity.
D) return on investment.
Answer:

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Q75

Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called

Multiple Choice
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A) return on assets.
B) return on capital.
C) return on equity.
D) return on investment.
Answer:

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Q76

The amount of assets per dollar of equity capital is called the

Multiple Choice
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A) asset ratio.
B) equity ratio.
C) equity multiplier.
D) asset multiplier.
Answer:

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Q77

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

Multiple Choice
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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.
Answer:

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Q78

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.

Multiple Choice
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A) reduces; reduces
B) increases; increases
C) reduces; increases
D) increases; reduces
Answer:

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Q79

In the absence of regulation, banks would probably hold

Multiple Choice
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A) too much capital, reducing the efficiency of the payments system.
B) too much capital, reducing the profitability of banks.
C) too little capital.
D) too much capital, making it more difficult to obtain loans.
Answer:

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Q80

Conditions that likely contributed to a credit crunch in 2008 include:

Multiple Choice
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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.
Answer:

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Q81

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

Multiple Choice
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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
Answer:

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Q82

If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to

Multiple Choice
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A) buy back bank stock.
B) pay higher dividends.
C) shrink the size of the bank.
D) sell securities the bank owns and put the funds into the reserve account.
Answer:

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Q83

Your bank has the following balance sheet: If the required reserve ratio is 10%, what actions should the bank manager take if there is an unexpected deposit outflow of $50 million?

Essay
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Answer:

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Q84

Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans.

Multiple Choice
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A) adverse selection
B) moral hazard
C) moral suasion
D) intentional fraud
Answer:

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Q85

If borrowers with the most risky investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects, banks are said to face the problem of

Multiple Choice
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A) adverse credit risk.
B) adverse selection.
C) moral hazard.
D) lemon lenders.
Answer:

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Q86

Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the

Multiple Choice
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A) adverse selection problem.
B) lemon problem.
C) adverse credit risk problem.
D) moral hazard problem.
Answer:

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Q87

In order to reduce the ________ problem in loan markets, bankers collect information from prospective borrowers to screen out the bad credit risks from the good ones.

Multiple Choice
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A) moral hazard
B) adverse selection
C) moral suasion
D) adverse lending
Answer:

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Q88

In one sense ________ appears surprising since it means that the bank is not ________ its portfolio of loans and thus is exposing itself to more risk.

Multiple Choice
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A) specialization in lending; diversifying
B) specialization in lending; rationing
C) credit rationing; diversifying
D) screening; rationing
Answer:

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Q89

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

Multiple Choice
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A) moral hazard; diversification
B) diversification; moral hazard
C) adverse selection; diversification
D) diversification; adverse selection
Answer:

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Q90

Provisions in loan contracts that prohibit borrowers from engaging in specified risky activities are called

Multiple Choice
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A) proscription bonds.
B) restrictive covenants.
C) due-on-sale clauses.
D) liens.
Answer:

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Q91

To reduce moral hazard problems, banks include restrictive covenants in loan contracts. In order for these restrictive covenants to be effective, banks must also

Multiple Choice
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A) monitor and enforce them.
B) be willing to rewrite the contract if the borrower cannot comply with the restrictions.
C) trust the borrower to do the right thing.
D) be prepared to extend the deadline when the borrower needs more time to comply.
Answer:

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Q92

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

Multiple Choice
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A) reduce; screen
B) increase; screen
C) reduce; increase
D) increase; increase
Answer:

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Q93

Unanticipated moral hazard contingencies can be reduced by

Multiple Choice
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A) screening.
B) long-term customer relationships.
C) specialization in lending.
D) credit rationing.
Answer:

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Q94

A bankʹs 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

Multiple Choice
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A) an adjustable gap loan.
B) an adjustable portfolio loan.
C) loan commitment.
D) pre-credit loan line.
Answer:

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Q95

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

Multiple Choice
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A) collateral
B) deductibles
C) restrictive covenants
D) contingencies
Answer:

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Q96

A bank that wants to monitor the check payment practices of its commercial borrowers, so that moral hazard can be prevented, will require borrowers to

Multiple Choice
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A) place a bank officer on their board of directors.
B) place a corporate officer on the bankʹs board of directors.
C) keep compensating balances in a checking account at the bank.
D) purchase the bankʹs CDs.
Answer:

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Q97

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

Multiple Choice
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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.
Answer:

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Q98

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

Multiple Choice
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A) coercive bargaining.
B) strategic holding out.
C) credit rationing.
D) collusive behavior.
Answer:

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Q99

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

Multiple Choice
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A) shave credit.
B) rediscount the loan.
C) raze credit.
D) ration credit.
Answer:

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Credit risk management tools include

Multiple Choice
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A) deductibles.
B) collateral.
C) interest rate swaps.
D) duration analysis.
Answer:

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

Essay
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Answer:

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Risk that is related to the uncertainty about interest rate movements is called

Multiple Choice
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A) default risk.
B) interest-rate risk.
C) the problem of moral hazard.
D) security risk.
Answer:

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

Multiple Choice
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A) an increase; increase
B) an increase; reduce
C) a decline; reduce
D) a decline; not affect
Answer:

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

Multiple Choice
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A) more; a decline
B) more; an increase
C) fewer; an increase
D) fewer; a surge
Answer:

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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.

Multiple Choice
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A) more; rise; decline
B) more; decline; rise
C) fewer; decline; decline
D) fewer; rise; rise
Answer:

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If a bankʹs liabilities are more sensitive to interest rate movements than are its assets, then

Multiple Choice
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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.
Answer:

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

Multiple Choice
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A) duration.
B) interest-sensitivity index.
C) rate-risk index.
D) gap.
Answer:

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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

Multiple Choice
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A) increase by $15 million.
B) increase by $1.5 million.
C) decline by $15 million.
D) decline by $1.5 million.
Answer:

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

Multiple Choice
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A) basic duration analysis.
B) basic gap analysis.
C) interest-exposure analysis.
D) gap-exposure analysis.
Answer:

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

Multiple Choice
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A) basic gap analysis.
B) the maturity bucket approach to gap analysis.
C) the segmented maturity approach to gap analysis.
D) the segmented maturity approach to interest-exposure analysis.
Answer:

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If interest rates rise by 5 percentage points, say, from 10 to 15%, bank profits (measured using gap analysis) will

Multiple Choice
expand_more
A) decline by $0.5 million.
B) decline by $1.5 million.
C) decline by $2.5 million.
D) increase by $1.5 million.
Answer:

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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.

Multiple Choice
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A) 5 percent
B) 10 percent
C) 15 percent
D) 25 percent
Answer:

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If interest rates rise by 5 percentage points, say from 10 to 15%, bank profits (measured using gap analysis) will

Multiple Choice
expand_more
A) decline by $0.5 million.
B) decline by $1.5 million.
C) decline by $2.5 million.
D) increase by $2.0 million.
Answer:

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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.

Multiple Choice
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A) decline; 5 percent
B) decline; 10 percent
C) decline; 15 percent
D) increase; 20 percent
Answer:

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Duration analysis involves comparing the average duration of the bankʹs ________ to the average duration of its ________.

Multiple Choice
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A) securities portfolio; non-deposit liabilities
B) assets; liabilities
C) loan portfolio; deposit liabilities
D) assets; deposit liabilities
Answer:

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

Multiple Choice
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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.
Answer:

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

Multiple Choice
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A) to increase the duration of the bankʹs liabilities.
B) to buy short-term bonds.
C) to sell long-term certificates of deposit.
D) to increase the duration of the bankʹs assets.
Answer:

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Bruce the Bank Manager can reduce interest rate risk by ________ the duration of the bankʹs assets to increase their rate sensitivity or, alternatively, ________ the duration of the bankʹs liabilities.

Multiple Choice
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A) shortening; lengthening
B) shortening; shortening
C) lengthening; lengthening
D) lengthening; shortening
Answer:

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Your bank has the following balance sheet What would happen to bank profits if the interest rates in the economy go down? Is there anything that you could do to keep your bank from being so vulnerable to interest rate movements?

Essay
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Answer:

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Examples of off-balance-sheet activities include

Multiple Choice
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A) loan sales.
B) extending loans to depositors.
C) borrowing from other banks.
D) selling negotiable CDs.
Answer:

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All of the following are examples of off-balance sheet activities that generate fee income for banks except

Multiple Choice
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A) foreign exchange trades.
B) guaranteeing debt securities.
C) back-up lines of credit.
D) selling negotiable CDs.
Answer:

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

Multiple Choice
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A) loan commitments
B) overdraft privileges
C) standby letters of credit
D) mortgages
Answer:

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

Multiple Choice
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A) have no impact on the risk a bank faces.
B) greatly reduce the risk a bank faces.
C) increase the risk a bank faces.
D) slightly reduce the risk a bank faces.
Answer:

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

Multiple Choice
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A) forecasting.
B) diversifying.
C) speculating.
D) engaging in riskless arbitrage.
Answer:

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Traders working for banks are subject to the

Multiple Choice
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A) principal-agent problem.
B) free-rider problem.
C) double-jeopardy problem.
D) exchange-risk problem.
Answer:

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

Multiple Choice
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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.
Answer:

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One way for banks to reduce the principal-agent problems associated with trading activities is to

Multiple Choice
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A) set limits on the total amount of a tradersʹ transactions.
B) make sure that the person conducting the trades is also the person responsible for recording the transactions.
C) encourage traders to take on more risk if the potential rewards are higher.
D) reduce the regulations on the traders so that they have more flexibility in conducting trades.
Answer:

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The principal-agent problem that exists for bank trading activities can be reduced through

Multiple Choice
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A) creation of internal controls that combine trading activities with bookkeeping.
B) creation of internal controls that separate trading activities from bookkeeping.
C) elimination of regulation of banking.
D) elimination of internal controls.
Answer:

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Banks develop statistical models to calculate their maximum loss over a given time period. This approach is known as the

Multiple Choice
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A) stress-testing approach.
B) value-at-risk approach.
C) trading-loss approach.
D) doomsday approach.
Answer:

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

Multiple Choice
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A) stress-test
B) value-at-risk
C) trading-loss
D) maximum value
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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. If interest rates increase from 5 percent to 6 percent, the net worth of the bank falls by

Multiple Choice
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A) $1 million.
B) $2.4 million.
C) $3.6 million.
D) $4.8 million.
Answer:

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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

Multiple Choice
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A) 0.5 year.
B) 1 year.
C) 1.5 years.
D) 2 years.
Answer:

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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

Multiple Choice
expand_more
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.
Answer:

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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

Multiple Choice
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A) flat.
B) slightly upward sloping.
C) steeply upward sloping.
D) downward sloping.
Answer:

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Most of a bankʹs operating income results from

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

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All of the following are operating expenses for a bank except

Multiple Choice
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A) service charges on deposit accounts.
B) salaries and employee benefits.
C) rent on buildings.
D) servicing costs of equipment such as computers.
Answer:

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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

Multiple Choice
expand_more
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.
Answer:

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For banks,

Multiple Choice
expand_more
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.
Answer:

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The quantity interest income minus interest expenses divided by assets is a measure of bank performance known as

Multiple Choice
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A) operating income.
B) net interest margin.
C) return on assets.
D) return on equity.
Answer:

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