Financial Markets test

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.

• A) loans; deposits.

• B) securities; deposits.

• C) liabilities; assets.

• D) assets; liabilities

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

• A) long-term; shorter-term.

• B) short-term; longer-term.

• C) illiquid; liquid.

• D) risky; risk-free.

Which of the following is NOT a tool used by corporations to reduce PRINCIPAL-AGENT PROBLEMS

• A) Stockholders engage in costly state verification by auditing an observing management.

• B) Venture capital firms provide funds to new firms in exchange for equity and membership

  on the board of directors.

• C) Firms issue equity instead of debt because principal-agent problems are smaller with

  equity.

• D) Governments regulate firms by imposing standard accounting principles and punishing

  fraud

PRINCIPAL-AGENT PROBLEMS are said to occur in financial markets when

• A) ownership of assets is separated from the control of these assets.

• B) people who do not pay for information take advantage of the information that other people have paid for by observing their behavior.

• C) high-risk borrowers are successfully able to pass themselves off as low-risk borrowers when applying for loans.

• D) the cost per dollar loaned declines as the size of the loan increases

Duration analysis involves comparing the average duration of the bank's _____ to the average duration of its _____.

• securities portfolio; non-deposit liabilities

• loan portfolio; non-deposit liabilities

• loan portfolio; deposit liabilities

• assets; liabilities

The most important category of assets on a bank's balance sheet is

• discount loans

• securities

• loans

• cash items in the process of collection

All else the same, if a bank has more rate-sensitive liabilities than assets, then a(n) _____ in interest rates will _____ bank profits.

• increase; increase

• increase; reduce

• decline; reduce

• decline; not affect

Examples of off-balance-sheet activities include

• loan sales

• foreign exchange market transactions

• trading in financial futures

• all of the above

Which of the following statements is true?

• A bank's assets are its uses of funds

• A bank's assets are its sources of funds

• A bank's liabilities are its uses of funds

• Only (B) and (C) of the above are true

Some of the key reasons why banks and other financial intermediaries are able to reduce or eliminate information problems and transaction costs include:

• banks can spread their loan costs over large pools of depositors (lenders)

• bank loans are typically made in private, which gives bankers a greater incentive to engage in costly information gathering

• banks can include collateral requirements in loan contracts, which can act as a signal regarding the type of borrower (high or low risk)

• all of the above