ch 10 economics

7/26/2019 ch 10 economics

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Chapter10Banking

and

the

Management

of

Financial

Institutions

10.1 The

Bank

Balance

Sheet1) Whichofthefollowingstatementsaretrue?

A) Abanksassetsareitssourcesoffunds.

B) Abanksliabilitiesareitsusesoffunds.

C) Abanksbalancesheetshowsthattotalassetsequaltotalliabilitiesplusequitycapital.

D) Abanksbalancesheetindicateswhetherornotthebankisprofitable.

Answer: CQues

Status: Previous

Edition

2) Whichofthefollowingstatementsisfalse?

A) Abanksassetsareitsusesoffunds.

B) Abankissuesliabilitiestoacquirefunds.

C) Thebanksassetsprovidethebankwithincome.

D) Bankcapitalisrecordedasanassetonthebankbalancesheet.

Answer: DQues

Status: Previous

Edition

3) Whichofthefollowingarereportedasliabilitiesonabanksbalancesheet?

A) Reserves

B) Checkabledeposits

C) Loans

D) Depositswithotherbanks

Answer: BQuesStatus: PreviousEdition

4) Whichofthefollowingarereportedasliabilitiesonabanksbalancesheet?

A) Discountloans

B) Reserves

C) U.S.Treasurysecurities

D) Loans

Answer: AQuesStatus: PreviousEdition

5) Theshareofcheckabledepositsintotalbankliabilitieshas

A) expandedmoderatelyovertime.

B) expandeddramaticallyovertime.

C) shrunkovertime.

D) remainedvirtuallyunchangedsince1960.

Answer: CQues

Status: Previous

Edition


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182 MishkinTheEconomicsofMoney,Banking,andFinancialMarkets,9thEdition

6) Whichofthefollowingstatementsisfalse?

A) Checkabledepositsareusuallythelowestcostsourceofbankfunds.

B) Checkabledepositsaretheprimarysourceofbankfunds.

C) Checkabledepositsarepayableondemand.

D) CheckabledepositsincludeNOWaccounts.


7) Inrecentyearstheinterestpaidoncheckableandtimedepositshasaccountedforaround

________oftotalbankoperatingexpenses,whilethecostsinvolvedinservicingaccountshave

beenapproximately________ofoperatingexpenses.

A) 45percent;55percent

B) 55percent;4percent

C) 25percent;50percent

D) 50percent;30percent

Answer: CQuesStatus: PreviousEdition

8) Whichofthefollowingstatementsaretrue?

A) Checkabledepositsarepayableondemand.

B) CheckabledepositsdonotincludeNOWaccounts.

C) Checkabledepositsaretheprimarysourceofbankfunds.

D) Demanddepositsarecheckabledepositsthatpayinterest.


9) Becausecheckingaccountsare________liquidforthedepositorthanpassbooksavings,they

earn________interestrates.

A) less;higher

B) less;lower

C) more;higher

D) more;lower

Answer: DQues

Status: Previous

Edition

10) Whichofthefollowingaretransactiondeposits?

A) Savingsaccounts

B) Small-denominationtimedeposits

C) Negotiableorderofwithdrawaccounts

D) Certificatesofdeposit

Answer: CQues

Status: Previous

Edition

11) Whichofthefollowingisnotanontransactiondeposit?

A) Savingsaccounts

B) Small-denominationtimedeposits

C) Negotiableorderofwithdrawalaccounts

D) Certificateofdeposit



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Chapter10 BankingandtheManagementofFinancialInstitutions 183

12) Large-denominationCDsare________,sothatlikeabondtheycanberesoldina________

marketbeforetheymature.

A) nonnegotiable;secondary

B) nonnegotiable;primary

C) negotiable;secondary

D) negotiable;primaryAnswer: CQues

Status: Previous

Edition

13) Because________arelessliquidforthedepositorthan________,theyearnhigherinterestrates.

A) moneymarketdepositaccounts;timedeposits

B) checkabledeposits;passbooksavings

C) passbooksavings;checkabledeposits

D) passbooksavings;timedeposits

Answer: CQues

Status: Previous

Edition

14) Because________arelessliquidforthedepositorthan________,theyearnhigherinterestrates.A) passbooksavings;timedeposits

B) moneymarketdepositaccounts;timedeposits

C) moneymarketdepositaccounts;passbooksavings

D) timedeposits;passbooksavings

Answer: DQues

Status: Previous

Edition

15) Banksacquirethefundsthattheyusetopurchaseincome-earningassetsfromsuchsourcesas

A) cashitemsintheprocessofcollection

B) savingsaccounts.

C) reserves.

D) depositsatotherbanks.

Answer: BQues

Status: Previous

Edition

16) BankloansfromtheFederalReservearecalled________andrepresenta________offunds.

A) discountloans;use

B) discountloans;source

C) fedfunds;use

D) fedfunds;source


17) Whichofthefollowingisnotasourceofborrowingsforabank?A) Federalfunds

B) Eurodollars

C) Transactiondeposits

D) Discountloans



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18) Bankcapitalisequalto________minus________.

A) totalassets;totalliabilities

B) totalliabilities;totalassets

C) totalassets;totalreserves

D) totalliabilities;totalborrowings


19) Bankcapitalislistedonthe________sideofthebanksbalancesheetbecauseitrepresentsa

________offunds.

A) liability;use

B) liability;source

C) asset;use

D) asset;source


20) BankreservesincludeA) depositsattheFedandshort-termtreasurysecurities.

B) vaultcashandshort-termTreasurysecurities.

C) vaultcashanddepositsattheFed.

D) depositsatotherbanksanddepositsattheFed.


21) Thefractionofcheckabledepositsthatbanksarerequiredbyregulationtoholdare

A) excessreserves.

B) requiredreserves.

C) vaultcash.

D) totalreserves.

Answer: BQues

Status: Previous

Edition

22) Whichofthefollowingarereportedasassetsonabanksbalancesheet?

A) Borrowings

B) Reserves

C) Savingsdeposits

D) Bankcapital

Answer: BQues

Status: Previous

Edition

23) Whichofthefollowingarenotreportedasassetsonabanksbalancesheet?

A) Cashitemsintheprocessofcollection

B) Depositswithotherbanks

C) U.S.Treasurysecurities

D) Checkabledeposits

Answer: DQuesStatus: PreviousEdition


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24) Throughcorrespondentbanking,largebanksprovideservicestosmallbanks,including

A) loanguarantees.

B) foreignexchangetransactions.

C) issuingstock.

D) debtreduction.


25) Thelargestpercentageofbanks holdingsofsecuritiesconsistof

A) Treasuryandgovernmentagencysecurities.

B) tax-exemptmunicipalsecurities.

C) stateandlocalgovernmentsecurities.

D) corporatesecurities.

Answer: AQues

Status: Previous

Edition

26) Whichofthefollowingbankassetsisthemostliquid?

A) ConsumerloansB) Reserves

C) Cashitemsinprocessofcollection

D) U.S.governmentsecurities

Answer: BQues

Status: Previous

Edition

27) Secondaryreservesinclude

A) depositsatFederalReserveBanks.

B) depositsatotherlargebanks.

C) short-termTreasurysecurities.

D) stateandlocalgovernmentsecurities.


28) Becauseoftheir________liquidity,________U.S.governmentsecuritiesarecalledsecondary

reserves.

A) low;short-term

B) low;long-term

C) high;short-term

D) high;long-term


29) SecondaryreservesaresocalledbecauseA) theycanbeconvertedintocashwithlowtransactionscosts.

B) theyarenoteasilyconvertedintocash,andare,therefore,ofsecondaryimportanceto

bankingfirms.

C) 50%oftheseassetscounttowardmeetingrequiredreserves.

D) theyranksecondtobankvaultcashinimportanceofbankholdings.



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30) Banks assetportfoliosincludestateandlocalgovernmentsecuritiesbecause

A) theirinterestpaymentsaretaxdeductibleforfederalincometaxes.

B) banksconsiderthemhelpfulinattractingaccountsofFederalemployees.

C) theFederalReserverequiresmemberbankstobuysecuritiesfromstateandlocal

governmentslocatedwithintheirrespectiveFederalReservedistricts.

D) thereisnodefault-riskwithstateandlocalgovernmentsecurities.

Answer: AQues

Status: Previous

Edition

31) Banksmaketheirprofitsprimarilybyissuing________.

A) equity

B) negotiableCDs

C) loans

D) NOWaccounts


32) ThemostimportantcategoryofassetsonabanksbalancesheetisA) discountloans.

B) securities.

C) loans.

D) cashitemsintheprocessofcollection.


33) Whichofthefollowingarebankassets?

A) thebuildingownedbythebank

B) adiscountloan

C) anegotiableCD

D) acustomerscheckingaccount

Answer: AQues

Status: New

10.2 BasicBanking

1) Banksearnprofitsbyselling________withattractivecombinationsofliquidity,risk,andreturn,

andusingtheproceedstobuy________withadifferentsetofcharacteristics.

A) loans;deposits

B) securities;deposits

C) liabilities;assets

D) assets;liabilities

Answer: CQues

Status: Previous

Edition


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2) Ingeneral,banksmakeprofitsbyselling________liabilitiesandbuying________assets.

A) long-term;shorter-term

B) short-term;longer-term

C) illiquid;liquid

D) risky;risk-free


3) Assettransformationcanbedescribedas

A) borrowinglongandlendingshort.

B) borrowingshortandlendinglong.

C) borrowingandlendingonlyfortheshortterm.

D) borrowingandlendingforthelongterm.

Answer: BQues

Status: Previous

Edition

4) WhenanewdepositoropensacheckingaccountattheFirstNationalBank,thebanksassets

________anditsliabilities________.A) increase;increase

B) increase;decrease

C) decrease;increase

D) decrease;decrease

Answer: AQues

Status: Previous

Edition

5) WhenJaneBrownwritesa$100checktohernephew(wholivesinanotherstate),Ms.Browns

bank________assetsof$100and________liabilitiesof$100.

A) gains;gains

B) gains;loses

C) loses;gainsD) loses;loses


6) Whenyoudeposita$50billintheSecurityPacificNationalBank,

A) itsliabilitiesdecreaseby$50.

B) itsassetsincreaseby$50.

C) itsreservesdecreaseby$50.

D) itscashitemsintheprocessofcollectionincreaseby$50.


7) Whenyoudeposit$50incurrencyatOldNationalBank,

A) itsassetsincreasebylessthan$50becauseofreserverequirements.

B) itsreservesincreasebylessthan$50becauseofreserverequirements.

C) itsliabilitiesincreaseby$50.

D) itsliabilitiesdecreaseby$50.



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8) Holdingallelseconstant,whenabankreceivesthefundsforadepositedcheck,

A) cashitemsintheprocessofcollectionfallbytheamountofthecheck.

B) bankassetsincreasebytheamountofthecheck.

C) bankliabilitiesdecreasebytheamountofthecheck.

D) bankreservesincreasebytheamountofrequiredreserves.


9) Whena$10checkwrittenontheFirstNationalBankofChicagoisdepositedinanaccountat

Citibank,then

A) theliabilitiesoftheFirstNationalBankincreaseby$10.

B) thereservesoftheFirstNationalBankincreaseby$10.

C) theliabilitiesofCitibankincreaseby$10.

D) theassetsofCitibankfallby$10.


10) Whena$10checkwrittenontheFirstNationalBankofChicagoisdepositedinanaccountatCitibank,then

A) theliabilitiesoftheFirstNationalBankdecreaseby$10.

B) thereservesoftheFirstNationalBankincreaseby$10.

C) theliabilitiesofCitibankdecreaseby$10.

D) theassetsofCitibankdecreaseby$10.


11) Whenyoudeposit$50inyouraccountatFirstNationalBankanda$100checkyouhavewritten

onthisaccountiscashedatChemicalBank,then

A) theassetsofFirstNationalriseby$50.

B) theassetsofChemicalBankriseby$50.

C) thereservesatFirstNationalfallby$50.

D) theliabilitiesatChemicalBankriseby$50.

Answer: CQues

Status: Previous

Edition

12) When$1millionisdepositedatabank,therequiredreserveratiois20percent,andthebank

choosesnottoholdanyexcessreservesbutmakesloansinstead,then,inthebanksfinalbalance

sheet,

A) theassetsatthebankincreaseby$800,000.

B) theliabilitiesofthebankincreaseby$1,000,000.

C) theliabilitiesofthebankincreaseby$800,000.

D) reservesincreaseby$160,000.

Answer: BQues

Status: Previous

Edition


9/27


13) When$1millionisdepositedatabank,therequiredreserveratiois20percent,andthebank

choosesnottomakeanyloansbuttoholdexcessreservesinstead,then,inthebanksfinal

balancesheet,

A) theassetsatthebankincreaseby$1million.

B) theliabilitiesofthebankdecreaseby$1million.

C) reservesincreaseby$200,000.D) liabilitiesincreaseby$200,000.


14) Witha10%reserverequirementratio,a$100depositintoNewBankmeansthatthemaximum

amountNewBankcouldlendis

A) $90.

B) $100.

C) $10.

D) $110.

Answer: A

Ques

Status: New

15) UsingT-accountsshowwhathappenstoreserves atSecurityNationalBankifoneindividual

deposits$1000incashintohercheckingaccountandanotherindividualwithdraws$750incash

fromhercheckingaccount.

Answer: SecurityNationalBank

Assets Liabilities

Reserves+$250 Checkabledeposits+$250Ques

Status: Previous

Edition

10.3 GeneralPrinciplesofBankManagement

1) Whichofthefollowingareprimaryconcernsofthebankmanager?A) Maintainingsufficientreservestominimizethecosttothebankofdepositoutflows

B) Extendingloanstoborrowerswhowillpaylowinterestrates,butwhoarepoorcredit

risks

C) Acquiringfundsatarelativelyhighcost,sothatprofitablelendingopportunitiescanbe

realized

D) Maintaininghighlevelsofcapitalandthusmaximizingthereturnstotheowners.

Answer: AQues

Status: Previous

Edition

2) Ifabankhas$100,000ofcheckabledeposits,arequiredreserveratioof20percent,anditholds

$40,000inreserves,thenthemaximumdepositoutflowitcansustainwithoutalteringits

balancesheetisA) $30,000.

B) $25,000.

C) $20,000.

D) $10,000.

Answer: BQues

Status: Previous

Edition


10/27


3) Ifabankhas$200,000ofcheckabledeposits,arequiredreserveratioof20percent,anditholds

$80,000inreserves,thenthemaximumdepositoutflowitcansustainwithoutalteringits

balancesheetis

A) $50,000.

B) $40,000.

C) $30,000.D) $25,000.


4) Ifabankhas$10millionofcheckabledeposits,arequiredreserveratioof10percent,andit

holds$2millioninreserves,thenitwillnothaveenoughreservestosupportadepositoutflow

of

A) $1.2million.

B) $1.1million.

C) $1million.

D) $900,000.

Answer: AQues

Status: Previous

Edition

5) Ifabankhasexcessreservesgreaterthantheamountofadepositoutflow,theoutflowwill

resultinequalreductionsin

A) depositsandreserves.

B) depositsandloans.

C) capitalandreserves.

D) capitalandloans.


6) A$5milliondepositoutflowfromabankhastheimmediateeffectof

A) reducingdepositsandreservesby$5million.

B) reducingdepositsandloansby$5million.

C) reducingdepositsandsecuritiesby$5million.

D) reducingdepositsandcapitalby$5million.

Answer: AQues

Status: Previous

Edition

7) Bankers concernsregardingtheoptimalmixofexcessreserves,secondaryreserves,borrowings

fromtheFed,andborrowingsfromotherbankstodealwithdepositoutflowsisanexampleof

A) liabilitymanagement.

B) liquiditymanagement.

C) managinginterestraterisk.

D) managingcreditrisk.

Answer: BQues

Status: Previous

Edition


11/27


8) If,afteradepositoutflow,abankneedsanadditional$3milliontomeetitsreserve

requirements,thebankcan

A) reducedepositsby$3million.

B) increaseloansby$3million.

C) sell$3millionofsecurities.

D) repayitsdiscountloansfromtheFed.Answer: CQues

Status: Revised

9) Abankwithinsufficientreservescanincreaseitsreservesby

A) lendingfederalfunds.

B) callinginloans.

C) buyingshort-termTreasurysecurities.

D) buyingmunicipalbonds.

Answer: BQues

Status: Previous

Edition

10) Ofthefollowing,whichwouldbethefirstchoiceforabankfacingareservedeficiency?A) Callinloans

B) BorrowfromtheFed

C) Sellsecurities

D) Borrowfromotherbanks

Answer: DQues

Status: Previous

Edition

11) Ingeneral,bankswouldprefertoacquirefundsquicklyby________ratherthan________.

A) reducingloans;sellingsecurities

B) reducingloans;borrowingfromtheFed

C) borrowingfromtheFed;reducingloans

D) callingin loans;sellingsecurities

Answer: CQues

Status: Revised

12) ________mayantagonizecustomersandthuscanbeaverycostlywayofacquiringfundsto

meetanunexpecteddepositoutflow.

A) Sellingsecurities

B) Sellingloans

C) Callinginloans

D) SellingnegotiableCDs


13) Banksholdexcessandsecondaryreservesto

A) reducetheinterest-rateriskproblem.

B) providefordepositoutflows.

C) satisfymarginrequirements.

D) achievehigherearningsthantheycanwithloans.



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14) Whichofthefollowingstatementsmostaccuratelydescribesthetaskofbankasset

management?

A) Banksseekthehighestreturnspossiblesubjecttominimizingriskandmakingadequate

provisionsforliquidity.

B) Banksseektohavethehighestliquiditypossiblesubjecttoearningapositiverateofreturn

ontheiroperations.C) Banksseektopreventbankfailureatallcost;sinceafailedbankearnsnoprofit,liquidity

needssupersedethedesireforprofits.

D) Banksseektoacquirefundsintheleastcostlyway.

Answer: AQues

Status: Previous

Edition

15) Thegoalsofbankassetmanagementinclude

A) maximizingrisk.

B) minimizingliquidity.

C) lendingathighinterestratesregardlessofrisk.

D) purchasingsecuritieswithhighreturnsandlowrisk.

Answer: DQues

Status: Previous

Edition

16) Banksthatsufferedsignificantlossesinthe1980smadethemistakeof

A) holdingtoomanyliquidassets.

B) minimizingdefaultrisk.

C) failingtodiversifytheirloanportfolio.

D) holdingonlysafesecurities.


17) Abankwillwanttoholdmoreexcessreserves(everythingelseequal)when

A) itexpectstohavedepositinflowsinthenearfuture.

B) brokeragecommissionsonsellingbondsincrease.

C) thecostofsellingloansfalls.

D) thediscountratedecreases.


18) Asthecostsassociatedwithdepositoutflows________,thebankswillingnesstoholdexcess

reserveswill________.

A) decrease;increase

B) increase;decrease

C) increase;increase

D) decrease;notbeaffected

Answer: CQues

Status: Previous

Edition


13/27


19) Whichofthefollowingwouldabanknotholdasinsuranceagainstthehighestcostofdeposit

outflow-bankfailure?

A) Excessreserves

B) Secondaryreserves

C) Bankcapital

D) MortgagesAnswer: DQues

Status: Previous

Edition

20) Whichofthefollowinghasnotresultedfrommoreactiveliabilitymanagementonthepartof

banks?

A) Increasedbankholdingsofcashitems

B) Aggressivetargetingofgoalsforassetgrowthbybanks

C) IncreaseduseofnegotiableCDstoraisefunds

D) Anincreasedproportionofbankassetsheldinloans

Answer: AQues

Status: Previous

Edition

21) Banksthatactivelymanageliabilitieswillmostlikelymeetareserveshortfallby

A) callinginloans.

B) borrowingfederalfunds.

C) sellingmunicipalbonds.

D) seekingnewdeposits.

Answer: BQues

Status: Previous

Edition

22) Modernliabilitymanagementhasresultedin

A) increasedsalesofcertificatesofdepositstoraisefunds.

B) increaseimportanceofdepositsasasourceoffunds.

C) reducedborrowingbybanksintheovernightloanmarket.D) failurebybankstocoordinatemanagementofassetsandliabilities.


23) Abankfailureoccurswhenever

A) abankcannotsatisfyitsobligationstopayitsdepositorsandhaveenoughreservesto

meetitsreserverequirements.

B) abanksuffersalargedepositoutflow.

C) abankhastocallinalargevolumeofloans.

D) abankisnotallowedtoborrowfromtheFed.

Answer: AQues

Status: Previous

Edition

24) Abankisinsolventwhen

A) itsliabilitiesexceeditsassets.

B) itsassetsexceeditsliabilities.

C) itscapitalexceedsitsliabilities.

D) itsassetsincreaseinvalue.



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25) Holdinglargeamountsofbankcapitalhelpspreventbankfailuresbecause

A) itmeansthatthebankhasahigherincome.

B) itmakesloanseasiertosell.

C) itcanbeusedtoabsorbthelossesresultingfrombadloans.

D) itmakesiteasiertocallinloans.

Answer: CQuesStatus: Revised

26) Netprofitaftertaxesperdollarofassetsisabasicmeasureofbankprofitabilitycalled

A) returnonassets.

B) returnoncapital.

C) returnonequity.

D) returnoninvestment.


27) Netprofitaftertaxesperdollarofequitycapitalisabasicmeasureofbankprofitabilitycalled

A) returnonassets.B) returnoncapital.

C) returnonequity.

D) returnoninvestment.

Answer: CQues

Status: Previous

Edition

28) Theamountofassetsperdollarofequitycapitaliscalledthe

A) assetratio.

B) equityratio.

C) equitymultiplier.

D) assetmultiplier.

Answer: CQues

Status: Previous

Edition

29) Foragivenreturnonassets,thelowerisbankcapital,

A) theloweristhereturnfortheownersofthebank.

B) thehigheristhereturnfortheownersofthebank.

C) theloweristhecreditriskfortheownersofthebank.

D) thelowerthepossibilityofbankfailure.

Answer: BQues

Status: Previous

Edition

30) Bankcapitalhasbothbenefitsandcostsforthebankowners. Higherbankcapital________the

likelihoodofbankruptcy,buthigherbankcapital________thereturnonequityforagiven

returnonassets.

A) reduces;reduces

B) increases;increases

C) reduces;increases

D) increases;reduces

Answer: AQues

Status: New


15/27


31) Intheabsenceofregulation,bankswouldprobablyhold

A) toomuchcapital,reducingtheefficiencyofthepaymentssystem.

B) toomuchcapital,reducingtheprofitabilityofbanks.

C) toolittlecapital.

D) toomuchcapital,makingitmoredifficulttoobtainloans.


32) Conditionsthatlikelycontributedtoacreditcrunchin2008include:

A) capitalshortfallscausedinpartbyfallingrealestateprices.

B) regulatedhikesinbankcapitalrequirements.

C) fallinginterestratesthatraisedinterestraterisk,causingbankstochoosetoholdmore

capital.

D) increasesinreserverequirements.

Answer: AQues

Status: Revised

33) Whichofthefollowingwouldnotbeawaytoincreasethereturnonequity?A) Buybackbankstock

B) Payhigherdividends

C) AcquirenewfundsbysellingnegotiableCDsandincreaseassetswiththem

D) Sellmorebankstock

Answer: DQues

Status: Previous

Edition

34) Ifabankneedstoraisetheamountofcapitalrelativetoassets,abankmanagermightchooseto

A) buybackbankstock.

B) payhigherdividends.

C) shrinkthesizeofthebank.

D) sellsecuritiesthebankownsandputthefundsintothereserveaccount.

Answer: CQues

Status: Previous

Edition

35) Yourbankhasthefollowingbalancesheet:

Assets Liabilities

Reserves $ 50million Checkabledeposits $200million

Securities 50million

Loans 150million Bankcapital 50million

Iftherequiredreserveratiois10%,whatactionsshouldthebankmanagertakeifthereisan

unexpecteddepositoutflowof$50million?

Answer: Afterthedepositoutflow,thebankwillhaveareserveshortfallof$15million. Thebank

managercouldtrytoborrowintheFederalFundsmarket,takeoutadiscountloanfrom

theFederalReserve,sell$15millionofthesecuritiesthebankowns,selloff$15millionof

theloansthebankowns,orlastlycall-in$15millionofloans. Alloftheactionswillbe

costlytothebank. Thebankmanagershouldtrytoacquirethefundswiththeleast

costlymethod.Ques

Status: Previous

Edition


16/27


10.4 ManagingCreditRisk

1) Banksfacetheproblemof________inloanmarketsbecausebadcreditrisksaretheonesmost

likelytoseekbankloans.

A) adverseselection

B) moralhazardC) moralsuasion

D) intentionalfraud

Answer: AQues

Status: Previous

Edition

2) Ifborrowerswiththemostriskyinvestmentprojectsseekbankloansinhigherproportionto

thoseborrowerswiththesafestinvestmentprojects,banksaresaidtofacetheproblemof

A) adversecreditrisk.

B) adverseselection.

C) moralhazard.

D) lemonlenders.

Answer: BQues

Status: Previous

Edition

3) Becauseborrowers,oncetheyhavealoan,aremorelikelytoinvestinhigh-riskinvestment

projects,banksfacethe

A) adverseselectionproblem.

B) lemonproblem.

C) adversecreditriskproblem.

D) moralhazardproblem.


4) Inordertoreducethe________probleminloanmarkets,bankerscollectinformationfromprospectiveborrowerstoscreenoutthebadcreditrisksfromthegoodones.

A) moralhazard

B) adverseselection

C) moralsuasion

D) adverselending


5) Inonesense________appearssurprisingsinceitmeansthatthebankisnot________its

portfolioofloansandthusisexposingitselftomorerisk.

A) specializationinlending;diversifying

B) specializationinlending;rationingC) creditrationing;diversifying

D) screening;rationing



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6) Fromthestandpointof________,specializationinlendingissurprisingbutmakesperfectsense

whenoneconsidersthe________problem.

A) moralhazard;diversification

B) diversification;moralhazard

C) adverseselection;diversification

D) diversification;adverseselectionAnswer: DQues

Status: Previous

Edition

7) Provisionsinloancontractsthatprohibitborrowersfromengaginginspecifiedriskyactivities

arecalled

A) proscriptionbonds.

B) restrictivecovenants.

C) due-on-saleclauses.

D) liens.

Answer: BQues

Status: Previous

Edition

8) Toreducemoralhazardproblems,banksincluderestrictivecovenantsinloancontracts. In

orderfortheserestrictivecovenantstobeeffective,banksmustalso

A) monitorandenforcethem.

B) bewillingtorewritethecontractiftheborrowercannotcomplywiththerestrictions.

C) trusttheborrowertodotherightthing.

D) bepreparedtoextendthedeadlinewhentheborrowerneedsmoretimetocomply.

Answer: AQues

Status: New

9) Long-termcustomerrelationships________thecostofinformationcollectionandmakeiteasier

to________creditrisks.

A) reduce;screenB) increase;screen

C) reduce;increase

D) increase;increase

Answer: AQues

Status: Previous

Edition

10) Unanticipatedmoralhazardcontingenciescanbereducedby

A) screening.

B) long-termcustomerrelationships.

C) specializationinlending.

D) creditrationing.

Answer: BQues

Status: Previous

Edition


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11) Abankscommitmenttoprovideafirmwithloansuptopre-specifiedlimitataninterestrate

thatistiedtoamarketinterestrateiscalled

A) anadjustablegaploan.

B) anadjustableportfolioloan.

C) loancommitment.

D) pre-creditloanline.

Answer: CQues

Status: Previous

Edition

12) Propertypromisedtothelenderascompensationiftheborrowerdefaultsiscalled________.

A) collateral

B) deductibles

C) restrictivecovenants

D) contingencies


13) Abankthatwantstomonitorthecheckpaymentpracticesofitscommercialborrowers,sothatmoralhazardcanbeprevented,willrequireborrowersto

A) placeabankofficerontheirboardofdirectors.

B) placeacorporateofficeronthebanksboardofdirectors.

C) keepcompensatingbalancesinacheckingaccountatthebank.

D) purchasethebanksCDs.


14) Ofthefollowingmethodsthatbanksmightusetoreducemoralhazardproblems,theonenot

legallypermittedintheUnitedStatesisthe

A) requirementthatfirmskeepcompensatingbalancesatthebanksfromwhichtheyobtain

theirloans.

B) requirementthatfirmsplaceontheirboardofdirectorsanofficerfromthebank.

C) inclusionofrestrictivecovenantsinloancontracts.

D) requirementthatindividualsprovidedetailedcredithistoriestobankloanofficers.


15) Whenalenderrefusestomakealoan,althoughborrowersarewillingtopaythestatedinterest

rateorevenahigherrate,thebankissaidtoengagein

A) coercivebargaining.

B) strategicholdingout.

C) creditrationing.

D) collusivebehavior.

Answer: CQues

Status: Previous

Edition


19/27


16) Whenbanksofferborrowerssmallerloansthantheyhaverequested,banksaresaidto

A) shavecredit.

B) rediscounttheloan.

C) razecredit.

D) rationcredit.


17) Creditriskmanagementtoolsinclude

A) deductibles.

B) collateral.

C) interestrateswaps.

D) durationanalysis.

Answer: BQues

Status: Previous

Edition

18) Howcanspecializinginlendinghelptoreducetheadverseselectionprobleminlending?

Answer: Reducingtheadverseselectionproblemrequiresthebankstoacquireinformationto

screenbadcreditrisksfromgoodcreditrisks. Itiseasierforbankstoobtaininformation

aboutlocalbusinesses. Alsoifthebanklendstofirmsinafewspecificindustriesthey

willbecomemoreknowledgeableaboutthoseindustriesandabetterjudgeof

creditworthinessinthoseindustries.Ques

Status: Previous

Edition

10.5 ManagingInterest-RateRisk

1) Riskthatisrelatedtotheuncertaintyaboutinterestratemovementsiscalled

A) defaultrisk.

B) interest-raterisk.

C) theproblemofmoralhazard.D) securityrisk.


2) Allelsethesame,ifabanksliabilitiesaremoresensitivetointerestratefluctuationsthanareits

assets,then________ininterestrateswill________bankprofits.

A) anincrease;increase

B) anincrease;reduce

C) adecline;reduce

D) adecline;notaffect

Answer: BQues

Status: Previous

Edition


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3) Ifabankhas________rate-sensitiveassetsthanliabilities,then________ininterestrateswill

increasebankprofits.

A) more;adecline

B) more;anincrease

C) fewer;anincrease

D) fewer;asurge

Answer: BQues

Status: Revised

4) Ifabankhas________rate-sensitiveassetsthanliabilities,a________ininterestrateswill

reducebankprofits,whilea________ininterestrateswillraisebankprofits.

A) more;rise;decline

B) more;decline;rise

C) fewer;decline;decline

D) fewer;rise;rise


5) Ifabanksliabilitiesaremoresensitivetointerestratemovementsthanareitsassets,then

A) anincreaseininterestrateswillreducebankprofits.

B) adecreaseininterestrateswillreducebankprofits.

C) interestrateschangeswillnotimpactbankprofits.

D) anincreaseininterestrateswillincreasebankprofits.

Answer: AQuesStatus: New

6) Thedifferenceofrate-sensitiveliabilitiesandrate-sensitiveassetsisknownasthe

A) duration.

B) interest-sensitivityindex.

C) rate-riskindex.

D) gap.


7) IftheFirstNationalBankhasagapequaltoanegative$30million,thena5percentagepoint

increaseininterestrateswillcauseprofitsto

A) increaseby$15million.

B) increaseby$1.5million.

C) declineby$15million.

D) declineby$1.5million.

Answer: DQues

Status: Previous

Edition


21/27


8) Measuringthesensitivityofbankprofitstochangesininterestratesbymultiplyingthegap

timesthechangeintheinterestrateiscalled

A) basicdurationanalysis.

B) basicgapanalysis.

C) interest-exposureanalysis.

D) gap-exposureanalysis.Answer: BQues

Status: Previous

Edition

9) Measuringthesensitivityofbankprofitstochangesininterestratesbymultiplyingthegapfor

severalmaturitysubintervalstimesthechangeintheinterestrateiscalled

A) basicgapanalysis.

B) thematuritybucketapproachtogapanalysis.

C) thesegmentedmaturityapproachtogapanalysis.

D) thesegmentedmaturityapproachtointerest-exposureanalysis.

Answer: BQues

Status: Previous

Edition

FirstNationalBank

Assets Liabilities

Rate-sensitive $20million $50million

Fixed-rate $80million $50million

10) Ifinterestratesriseby5percentagepoints,say,from10to15%,bankprofits(measuredusing

gapanalysis)will

A) declineby$0.5million.

B) declineby$1.5million.

C) declineby$2.5million.

D) increaseby$1.5million.

Answer: BQues

Status: Previous

Edition

11) Assumingthattheaveragedurationofitsassetsisfiveyears,whiletheaveragedurationofits

liabilitiesisthreeyears,thena5percentagepointincreaseininterestrateswillcausethenet

worthofFirstNationaltodeclineby________ofthetotaloriginalassetvalue.

A) 5percent

B) 10percent

C) 15percent

D) 25percent

Answer: BQues

Status: Previous

Edition


22/27


FirstNationalBank

Assets Liabilities

Rate-sensitive $40million $50million

Fixed-rate $60million $50million

12) Ifinterestratesriseby5percentagepoints,sayfrom10to15%,bankprofits(measuredusing

gapanalysis)will

A) declineby$0.5million.

B) declineby$1.5million.

C) declineby$2.5million.

D) increaseby$2.0million.


13) Assumingthattheaveragedurationofitsassetsisfouryears,whiletheaveragedurationofits

liabilitiesisthreeyears,thena5percentagepointincreaseininterestrateswillcausethenet

worthofFirstNationalto________by________ofthetotaloriginalassetvalue.

A) decline;5percent

B) decline;10percent

C) decline;15percent

D) increase;20percent

Answer: AQues

Status: Previous

Edition

14) Durationanalysisinvolvescomparingtheaveragedurationofthebanks________tothe

averagedurationofits________.

A) securitiesportfolio;non-depositliabilities

B) assets;liabilities

C) loanportfolio;depositliabilities

D) assets;depositliabilities


15) Becauseofanexpectedriseininterestratesinthefuture,abankerwilllikely

A) makelong-termratherthanshort-termloans.

B) buyshort-termratherthanlong-termbonds.

C) buylong-termratherthanshort-termbonds.

D) makeeithershortorlong-termloans;expectationsoffutureinterestratesareirrelevant.


16) Ifabankerexpectsinterestratestofallinthefuture,herbeststrategyforthepresentis

A) toincreasethedurationofthebanksliabilities.

B) tobuyshort-termbonds.

C) toselllong-termcertificatesofdeposit.

D) toincreasethedurationofthebanksassets.



23/27


17) BrucetheBankManagercanreduceinterestrateriskby________thedurationofthebanks

assetstoincreasetheirratesensitivityor,alternatively,________thedurationofthebanks

liabilities.

A) shortening;lengthening

B) shortening;shortening

C) lengthening;lengtheningD) lengthening;shortening


18) Yourbankhasthefollowingbalancesheet

Assets Liabilities

Rate-sensitive $100million Rate-sensitive $75million

Fixed-rate 100million Fixed-rate 125million

Whatwouldhappentobankprofitsiftheinterestratesintheeconomygodown? Isthere

anythingthatyoucoulddotokeepyourbankfrombeingsovulnerabletointerestratemovements?

Answer: Thebanksprofitswouldgodownbecauseithasmoreinterest-ratesensitiveassetsthan

liabilities. Inordertoreduceinterest-ratesensitivity,thebankmanagercoulduse

financialderivativessuchasinterest-rateswaps,options,orfutures. Thebankmanager

couldalsotrytoadjustthebalancesheetsothatthebanksprofitsarenotvulnerableto

themovementoftheinterestrate.QuesStatus: PreviousEdition

10.6 Off-Balance-SheetActivities

1) Examplesofoff-balance-sheetactivitiesinclude

A) loansales.B) extendingloanstodepositors.

C) borrowingfromotherbanks.

D) sellingnegotiableCDs.

Answer: AQues

Status: Previous

Edition

2) Allofthefollowingareexamplesofoff-balancesheetactivitiesthatgeneratefeeincomefor

banksexcept

A) foreignexchangetrades.

B) guaranteeingdebtsecurities.

C) back-uplinesofcredit.

D) sellingnegotiableCDs.



24/27


3) Whichofthefollowingisnotanexampleofabackuplineofcredit?

A) loancommitments

B) overdraftprivileges

C) standbylettersofcredit

D) mortgages


4) Off-balancesheetactivitiesinvolvingguaranteesofsecuritiesandback-upcreditlines

A) havenoimpactontheriskabankfaces.

B) greatlyreducetheriskabankfaces.

C) increasetheriskabankfaces.

D) slightlyreducetheriskabankfaces.


5) Whenbanksinvolvedintradingactivitiesattempttooutguessmarkets,theyare

A) forecasting.B) diversifying.

C) speculating.

D) engaginginrisklessarbitrage.

Answer: CQues

Status: Previous

Edition

6) Tradersworkingforbanksaresubjecttothe

A) principal-agentproblem.

B) free-riderproblem.

C) double-eopardyproblem.

D) exchange-riskproblem.

Answer: AQues

Status: Previous

Edition

7) Areasonwhyroguetradershavebankrupttheirbanksisdueto

A) theseparationoftradingactivitiesfromthebookkeepers.

B) stringentsupervisionoftradingactivitiesbybankmanagement.

C) accountingerrors.

D) afailuretomaintainproperinternalcontrols.

Answer: DQues

Status: Previous

Edition

8) Onewayforbankstoreducetheprincipal-agentproblemsassociatedwithtradingactivitiesis

to

A) setlimitsonthetotalamountofatraders transactions.

B) makesurethatthepersonconductingthetradesisalsothepersonresponsiblefor

recordingthetransactions.

C) encouragetraderstotakeonmoreriskifthepotentialrewardsarehigher.

D) reducetheregulationsonthetraderssothattheyhavemoreflexibilityinconducting

trades.



25/27


9) Theprincipal-agentproblemthatexistsforbanktradingactivitiescanbereducedthrough

A) creationofinternalcontrolsthatcombinetradingactivitieswithbookkeeping.

B) creationofinternalcontrolsthatseparatetradingactivitiesfrombookkeeping.

C) eliminationofregulationofbanking.

D) eliminationofinternalcontrols.


10) Banksdevelopstatisticalmodelstocalculatetheirmaximumlossoveragiventimeperiod.This

approachisknownasthe

A) stress-testingapproach.

B) value-at-riskapproach.

C) trading-lossapproach.

D) doomsdayapproach.

Answer: BQues

Status: Previous

Edition

11) Whenbankscalculatethelossestheinstitutionwouldincurifanunusualcombinationofbadeventshappened,thebankisusingthe________approach.

A) stress-test

B) value-at-risk

C) trading-loss

D) maximumvalue

Answer: AQues

Status: Previous

Edition

10.7 WebAppendix1:DurationGapAnalysis

1) Assumeabankhas$200millionofassetswithadurationof2.5,and$190millionofliabilities

withadurationof1.05.Ifinterestratesincreasefrom5percentto6percent,thenetworthofthebankfallsby

A) $1million.

B) $2.4million.

C) $3.6million.

D) $4.8million.

Answer: DQues

Status: Previous

Edition

2) Assumeabankhas$200millionofassetswithadurationof2.5,and$190millionofliabilities

withadurationof1.05.Thedurationgapforthisbankis

A) 0.5year.

B) 1year.C) 1.5years.

D) 2years.



26/27


3) Ifinterestratesincreasefrom9percentto10percent,abankwithadurationgapof2years

wouldexperienceadecreaseinitsnetworthof

A) 0.9percentofitsassets.

B) 0.9percentofitsliabilities.

C) 1.8percentofitsliabilities.

D) 1.8percentofitsassets.

Answer: DQues

Status: Previous

Edition

4) Oneoftheproblemsinconductingadurationgapanalysisisthatthedurationgapiscalculated

assumingthatinterestratesforallmaturitiesarethesame. Thatmeansthattheyieldcurveis

A) flat.

B) slightlyupwardsloping.

C) steeplyupwardsloping.

D) downwardsloping.


10.8 WebAppendix2:MeasuringBankPerformance

1) Mostofabanksoperatingincomeresultsfrom

A) interestonassets.

B) servicechargesondepositaccounts.

C) off-balance-sheetactivities.

D) feesfromstandbylinesofcredit.


2) Allofthefollowingareoperatingexpensesforabankexcept

A) servicechargesondepositaccounts.B) salariesandemployeebenefits.

C) rentonbuildings.

D) servicingcostsofequipmentsuchascomputers.


3) Whenabanksuspectsthata$1millionloanmightprovetobebaddebtthatwillhavetobe

writtenoffinthefuturethebank

A) cansetaside$1millionofitsearningsinitsloanlossreservesaccount.

B) reducesitsreportedearningsby$1,eventhoughithasnotyetactuallylostthe$1million.

C) reducesitsassetsimmediatelyby$1million,eventhoughithasnotyetlostthe$1million.

D) reducesitsreservesby$1million,sothattheycanusethosefundslater.



27/27


4) Forbanks,

A) returnonassetsexceedsreturnonequity.

B) returnonassetsequalsreturnonequity.

C) returnonequityexceedsreturnonassets.

D) returnonequityisanothernamefornetinterestmargin.


5) Thequantityinterestincomeminusinterestexpensesdividedbyassetsisameasureofbank

performanceknownas

A) operatingincome.

B) netinterestmargin.

C) returnonassets.

D) returnonequity.

Answer: BQues

Status: Previous

Edition

6) LookingattheNetInterestMarginindicatesthatthepoorbankperformanceinthelate1980sA) wasnottheresultofinterest-ratemovements.

B) wasnottheresultofriskyloansmadeintheearly1980s.

C) resultedfromanarrowingofthegapbetweeninterestearnedonassetsandinterspaidon

liabilities.

D) resultedfromahugedecreaseinprovisionsforloanlosses.

Answer: AQues

Status: New

ch 10 economics

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