Finance 320 Chapter 10

On a​ bank’s balance​ sheet, assets areA.by definition equal to the​ bank’s liabilities.B.the uses of acquired funds.C.those items owed by the bank to depositors and others.D.the sources of acquired funds. B
Which of the following is NOT a bank​ liability?A.mortgage loansB.checkable depositsC.borrowings from the Federal ReserveD.CDs A
Which of the following is a bank​ liability?A.securitiesB.reservesC.consumer loansD.nontransaction deposits D
The interest rate on interbank loans is called theA.discount rate.B.prime rate.C.repo rate.D.federal funds rate. D
Securities that banks sell and agree to repurchase are known asA.repurchase agreements.B.federal funds.C.NOW accounts.D.discount loans. A
Which of the following statements about checkable deposits is​ correct?A.All checkable deposits pay interest.B.Checkable deposits are a larger fraction of​ banks’ funds today than in 1973.C.Checkable deposits are a smaller fraction of​ banks’ funds today than in 1973.D.No checkable deposits pay interest. C
A key difference between small−denomination and large−denomination time deposits is thatA.small−denomination time deposits pay no interest.B.large−denomination time deposits carry a significant penalty for early withdrawal.C.small−denomination time deposits carry a significant penalty for early withdrawal.D.large−denomination time deposits may be bought and sold on secondary markets. D
Loans by the Federal Reserve to banks are known asA.repurchase agreements.B.Federal funds.C.cash items in the process of collection.D.discount loans. D
Federal funds areA.short−term loans between banks.B.loans by banks to the Federal Reserve.C.loans by the Federal Reserve to banks.D.the tax revenues of the Federal government. A
Required reserves areA.zero on demand deposits.B.the portion of demand deposits and NOW accounts banks must hold.C.imposed on all deposits at commercial banks.D.zero on NOW accounts. B
About what percentage of bank assets is made up of cash items in​ 2012?A.​20%B.​8%C.​50%D.​37% B
Which asset is sometimes referred to as a​ bank’s secondary​ reserves?A.vault cashB.repurchase agreementsC.federal fundsD.U.S. government securities D
What is the largest category of bank​ assets?A.reservesB.loansC.cash items in the process of collectionD.securities B
Bank capital isA.the capital contributed by the​ bank’s shareholders plus accumulated retained profits.B.the current market value of the​ bank’s physical assets.C.the sum of the value of the​ bank’s assets plus the value of the​ bank’s liabilities.D.the historical or original value of the​ bank’s physical assets. A
If the value of​ bank’s loans​ declines, what is the corresponding reduction in a liability entry that the bank​ makes?A.Cash items in the process of collection are reduced by the amount of the decline in the value of the loan.B.Borrowings are reduced by the amount of the decline in the value of the loan.C.Deposits are reduced by the amount of the decline in the value of the loan.D.Net worth is reduced by the amount of the decline in the value of the loan. D
Which of the following statements about checking deposits is​ true?A.It is a liability for both households and banks.B.It is an asset for both households and banks.C.It is an asset for households but a liability for a bank.D.It is a liability for households but an asset for a bank. C
In​ banking, the spread refers to the difference between theA.interest rate on long−term bonds and the interest rate on short−term bonds.B.average interest rate earned on assets and the average interest rate paid on liabilities.C.interest rate on car loans and the interest rate on home mortgages.D.bid and asked prices on a bond. B
When a bank issues a checkable deposit and loans the funds out to a​ business, it has transformedA.a short-term liability to a borrower into a long−term asset to a saver.B.a financial asset for a saver into a liability for a borrower.C.a financial liability for a saver into a financial asset for a borrower.D.one liability into another liability. B
If you deposit a​ $50 check in the​ bank, the immediate impact on your​ bank’s balance sheet will be aA.​$50 decrease in liabilities and a​ $50 increase in checkable deposits.B.​$50 increase in reserves and a​ $50 increase in checkable deposits.C.​$50 increase in reserves and a​ $50 decrease in checkable deposits.D.​$50 decrease in reserves and a​ $50 increase in checkable deposits. B
In what way did the​ Dodd-Frank Act reduce bank​ revenue?A.It reduced the amount of interest banks could charge on mortgages.B.It reduced fees banks could charge when customers took out loans.C.It capped the fees that banks could charge stores for debit card transactions.D.It increased the amount banks had to pay on interest to depositors. C
Which of the following is the source of funds for bank​ loans? A.excess reservesB.required reservesC.marketable securitiesD.bank capital A
The difference between the interest a bank earns on loans and securities and the interest paid on deposits and debt divided by the total value of its assets is calledA.return on assets.B.net interest margin.C.return on equity.D.interest spread. B
The ratio of a​ bank’s after-tax profit to bank capital is known asA.net interest margin.B.return on equity.C.return on capital.D.spread. B
If a bank has a leverage ratio of 0.1 and a return on capital of​ 2%, what is its return on​ equity?A.​0.2%B.​2.1%C.​5%D.​20% D
In order to reduce the likelihood of excessive leverage in the banking​ system, governments have traditionallyA.imposed capital requirement on investment banks.B.imposed capital requirements on commercial banks.C.imposed capital requirements on both commercial and investment banks.D.imposed asset requirements on all banks. B
Banks have responded to new regulations resulting from the​ Dodd-Frank Act in all of the following ways​ EXCEPT:A.raising overdraft feesB.closing branches in​ low-income neighborhoodsC.raising minimum balances on free checking accountsD.increased marketing of securities and financial advice to​ high-income customers A
Limits on the value of the assets that commercial banks can acquire relative to their capital is known​ as:A.asset requirementsB.equity requirementsC.capital requirementsD.required reserves C
In managing its liabilities to deal with liquidity​ problems, banks trade offA.present tax liabilities against future tax liabilities.B.credit risk against interest rate risk.C.the need for available funds to meet deposit outflows against the desire for greater profit.D.adverse selection against moral hazard. C
Banks make use of the federal funds market in part toA.deal with moral hazard.B.manage liquidity risk.C.deal with adverse selection.D.pay their tax liabilities. B
A person takes out a car loan at a​ bank, but actually uses the money to play the lottery. This situation is an example of which problem banks face in​ lending?A.adverse selectionB.illiquidityC.interest rate riskD.moral hazard D
When bank loan officers screen loan applicants to eliminate potentially bad​ risks, they are attempting to mitigate the problem ofA.moral hazard.B.interest rate risk.C.adverse selection.D.illiquidity. C
A loan officer uses a credit scoring system toA.match any particular loan with the deposits being used to fund it.B.predict statistically whether an individual is likely to default on a loan.C.compare the interest rate on a loan to interest rates on other assets with comparable risk.D.keep track of the fraction of a​ bank’s assets tied up in loans to a single individual or business. B
The prime interest rate is theA.interest rate that banks charge high−quality borrowers.B.Federal funds rate.C.interest rate on six−month U.S. Treasury bills.D.discount rate. A
Collateral isA.the interest rate that banks charge high−quality borrowers.B.the difference between the value of a​ bank’s assets and the value of a​ bank’s liabilities.C.assets pledged to the bank in the event the borrower defaults.D.required reserves minus excess reserves. C
Banks use credit rationing rather than simply raising the interest rate charged borrowers with higher default risks becauseA.of fear of adverse selection problems.B.of fear of offending the loan applicants.C.of interest rate ceilings in many states.D.use of credit rationing is encouraged by the Federal Reserve. A
Banks experience interest rate riskA.if moral hazard problems are particularly severe.B.on any investment that has high information costs.C.if changes in interest rates cause bank profits to fluctuate.D.if adverse selection problems are particularly severe. C
Since most banks have positive gaps and negative duration​ gaps, an increase in market interest rates willA.increase bank profits and increase bank capital.B.decrease bank profits and increase bank capital.C.increase bank profits and decrease bank capital.D.decrease bank profits and decrease bank capital. D
Which of the following can be described as when a bank buying securities owned by a business while agreeing to sell them back at a later​ date?A.federal fundsB.repurchase agreementC.reverse repurchase agreementD.discount loans C
Bank borrowing from the Fed is referred to​ as:A.discount loansB.reverse repurchase agreementsC.federal fundsD.repurchase agreements A
Explicit provisions in a loan agreement that prohibit the borrower from engaging in certain activities is​ called:A.adverse selectionB.restrictive covenantsC.credit−risk analysisD.credit rationing B
By​ 2012, what share of U.S. assets were held by the 10 largest banks in the United​ States?A.​10%B.​29%C.​55%D.​68% C
What is the primary reason for the differences between the U.S. banking system and those in other major industrial​ countries?A.the National Bank.B.legislation that led to the development of state and national banks.C.Economies of scale are greater in banking in the United States than in banking in other countries.D.the Federal Reserve System. B
Securitization refers toA.banks insisting that collateral be supplied on previously unsecured loans.B.reducing the exposure of a​ bank’s portfolio to interest rate risk.C.changing the mix in a financial portfolio away from stocks and toward bonds.D.selling directly to investors loans or securities that were formerly held by financial intermediaries. D
Congress introduced deposit insurance in response toA.the demise of the Second Bank of the United States in 1836.B.the savings−and−loan crisis of the 1980s.C.the demise of the First Bank of the United States in 1811.D.the banking crisis of the 1930s. D
The Federal Reserve System was created in response toA.difficulties of the free−banking era.B.the stock market crash of 1929.C.the banking panic of 1907.D.the ending of the Civil War. C
The McFadden Act of 1927A.put a tax on the issuance of bank notes by state banks.B.prohibited national banks from operating branches outside their home states.C.separated commercial banking from investment banking.D.established the Federal Reserve System. B
During a banking​ panic, a lender of last resort willA.purchase banks which are having difficulty but appear sound.B.make loans to any banks which request them.C.make loans to solvent but temporality illiquid banks.D.make loans to insolvent but liquid banks. C
In the current U.S.​ economy, who plays the role of lender of last​ resort?A.The Federal Reserve SystemB.The Social Security AdministrationC.The Securities and Exchange CommissionD.The Federal Deposit Insurance Corporation A
If you have​ $2 million in a CD at a commercial bank that is a member of the​ FDIC, how much of your funds are​ uninsured?A.​$1.75 millionB.​$0C.​$1 millionD.​$2 million A
Where do the​ FDIC’s funds come​ from?A.The FDIC earns income through the insurance premiums paid by insured banks and from investment earnings.B.The FDIC sells bonds in the financial markets.C.Congress appropriates money for the​ FDIC, just as it does for other federal agencies.D.The FDIC relies on voluntary contributions from the banking community. A
Geographic restrictions on banksA.reduce their exposure to credit risk.B.reduce their ability to take advantage of economies of scale.C.raise the costs of their providing risk−​sharing, ​liquidity, and information services.D.reduce the amount of local lending they undertake. B
As of​ 2012, the bank portion of​ TARP:A.cost​ $266 billionB.earned a profit of​ $245 billionC.cost​ $700 billionD.earned a profit of​ $21 billion D

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