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WorksheetsBanking and Financial Institutions Quiz
Total questions: 123
Worksheet time: 1hrs 2mins
Which of the following statements are true?
A bankʹs assets are its sources of funds.
A bankʹs liabilities are its uses of funds.
A bankʹs balance sheet shows that total assets equal total liabilities plus equity capital.
A bankʹs balance sheet indicates whether or not the bank is profitable.
Which of the following statements is false?
A bankʹs assets are its uses of funds.
A bank issues liabilities to acquire funds.
The bankʹs assets provide the bank with income.
Bank capital is recorded as an asset on the bank balance sheet.
Which of the following are reported as liabilities on a bankʹs balance sheet?
Reserves
Checkable deposits
Loans
Deposits with other banks
Which of the following are reported as liabilities on a bankʹs balance sheet?
Discount loans
Reserves
U.S. Treasury securities
Loans
The share of checkable deposits in total bank liabilities has
expanded moderately over time.
expanded dramatically over time.
shrunk over time.
remained virtually unchanged since 1960.
Which of the following statements is false?
Checkable deposits are usually the lowest cost source of bank funds.
Checkable deposits are the primary source of bank funds.
Checkable deposits are payable on demand.
Checkable deposits include NOW accounts.
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.
45 percent; 55 percent
55 percent; 4 percent
25 percent; 50 percent
50 percent; 30 percent
Which of the following statements are true?
Checkable deposits are payable on demand.
Checkable deposits do not include NOW accounts.
Checkable deposits are the primary source of bank funds.
Demand deposits are checkable deposits that pay interest.
Because checking accounts are ________ liquid for the depositor than passbook savings, they earn ________ interest rates.
less; higher
less; lower
more; higher
more; lower
Which of the following are transaction deposits?
Savings accounts
Small-denomination time deposits
Negotiable order of withdraw accounts
Certificates of deposit
Which of the following is not a nontransaction deposit?
Savings accounts
Small-denomination time deposits
Negotiable order of withdrawal accounts
Certificate of deposit
Large-denomination CDs are ________, so that like a bond they can be resold in a ________ market before they mature.
nonnegotiable; secondary
nonnegotiable; primary
negotiable; secondary
negotiable; primary
Because ________ are less liquid for the depositor than ________, they earn higher interest rates.
money market deposit accounts; time deposits
checkable deposits; passbook savings
passbook savings; checkable deposits
passbook savings; time deposits
Because ________ are less liquid for the depositor than ________, they earn higher interest rates.
passbook savings; time deposits
money market deposit accounts; time deposits
money market deposit accounts; passbook savings
time deposits; passbook savings
Banks acquire the funds that they use to purchase income-earning assets from such sources as
cash items in the process of collection
savings accounts.
reserves.
deposits at other banks.
Bank loans from the Federal Reserve are called ________ and represent a ________ of funds.
discount loans; use
discount loans; source
fed funds; use
fed funds; source
Which of the following is not a source of borrowings for a bank?
Federal funds
Eurodollars
Transaction deposits
Discount loans
Bank capital is equal to ________ minus ________.
total assets; total liabilities
total liabilities; total assets
total assets; total reserves
total liabilities; total borrowings
Bank capital is listed on the ________ side of the bankʹs balance sheet because it represents a ________ of funds.
liability; use
liability; source
asset; use
asset; source
Bank reserves include
deposits at the Fed and short-term treasury securities.
vault cash and short-term Treasury securities.
vault cash and deposits at the Fed.
deposits at other banks and deposits at the Fed.
The fraction of checkable deposits that banks are required by regulation to hold are
excess reserves.
required reserves.
vault cash.
total reserves.
Which of the following are reported as assets on a bankʹs balance sheet?
Borrowings
Reserves
Savings deposits
Bank capital
Which of the following are not reported as assets on a bankʹs balance sheet?
Cash items in the process of collection
Deposits with other banks
U.S. Treasury securities
Checkable deposits
Through correspondent banking, large banks provide services to small banks, including
loan guarantees.
foreign exchange transactions.
issuing stock.
debt reduction.
The largest percentage of banks' holdings of securities consist of
Treasury and government agency securities.
tax-exempt municipal securities.
state and local government securities.
corporate securities.
Which of the following bank assets is the most liquid?
Consumer loans
Reserves
Cash items in process of collection
U.S. government securities
Secondary reserves include
deposits at Federal Reserve Banks.
deposits at other large banks.
short-term Treasury securities.
state and local government securities.
Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves.
low; short-term
low; long-term
high; short-term
high; long-term
Secondary reserves are so called because
they can be converted into cash with low transactions costs.
they are not easily converted into cash, and are, therefore, of secondary importance to banking firms.
50% of these assets count toward meeting required reserves.
they rank second to bank vault cash in importance of bank holdings.
Banks' asset portfolios include state and local government securities because
their interest payments are tax deductible for federal income taxes.
banks consider them helpful in attracting accounts of Federal employees.
the Federal Reserve requires member banks to buy securities from state and local governments located within their respective Federal Reserve districts.
there is no default-risk with state and local government securities.
Bank's make their profits primarily by issuing ________.
equity
negotiable CDs
loans
NOW accounts
The most important category of assets on a bank's balance sheet is
discount loans.
securities.
loans.
cash items in the process of collection.
Which of the following are bank assets?
the building owned by the bank
a discount loan
a negotiable CD
a customer's checking account
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.
loans; deposits
securities; deposits
liabilities; assets
assets; liabilities
In general, banks make profits by selling ________ liabilities and buying ________ assets.
long-term; shorter-term
short-term; longer-term
illiquid; liquid
risky; risk-free
Asset transformation can be described as
borrowing long and lending short.
borrowing short and lending long.
borrowing and lending only for the short term.
borrowing and lending for the long term.
When a new depositor opens a checking account at the First National Bank, the bank's assets ________ and its liabilities ________.
increase; increase
increase; decrease
decrease; increase
decrease; decrease
When Jane Brown writes a $100 check to her nephew (who lives in another state), Ms. Brown's bank ________ assets of $100 and ________ liabilities of $100.
gains; gains
gains; loses
loses; gains
loses; loses
When you deposit a $50 bill in the Security Pacific National Bank,
its liabilities decrease by $50.
its assets increase by $50.
its reserves decrease by $50.
its cash items in the process of collection increase by $50.
When you deposit $50 in currency at Old National Bank,
its assets increase by less than $50 because of reserve requirements.
its reserves increase by less than $50 because of reserve requirements.
its liabilities increase by $50.
its liabilities decrease by $50.
Holding all else constant, when a bank receives the funds for a deposited check,
cash items in the process of collection fall by the amount of the check.
bank assets increase by the amount of the check.
bank liabilities decrease by the amount of the check.
bank reserves increase by the amount of required reserves.
When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then
the liabilities of the First National Bank increase by $10.
the reserves of the First National Bank increase by $10.
the liabilities of Citibank increase by $10.
the assets of Citibank fall by $10.
When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then
the liabilities of the First National Bank decrease by $10.
the reserves of the First National Bank increase by $10.
the liabilities of Citibank decrease by $10.
the assets of Citibank decrease by $10.
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
the assets of First National rise by $50.
the assets of Chemical Bank rise by $50.
the reserves at First National fall by $50.
the liabilities at Chemical Bank rise by $50.
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,
the assets at the bank increase by $800,000.
the liabilities of the bank increase by $1,000,000.
the liabilities of the bank increase by $800,000.
reserves increase by $160,000.
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,
the assets at the bank increase by $1 million.
the liabilities of the bank decrease by $1 million.
reserves increase by $200,000.
liabilities increase by $200,000.
With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is
$90.
$100.
$10.
$110.
Which of the following are primary concerns of the bank manager?
Maintaining sufficient reserves to minimize the cost to the bank of deposit outflows
Extending loans to borrowers who will pay low interest rates, but who are poor credit risks
Acquiring funds at a relatively high cost, so that profitable lending opportunities can be realized
Maintaining high levels of capital and thus maximizing the returns to the owners.
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
$30,000.
$25,000.
$20,000.
$10,000.
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
$50,000.
$40,000.
$30,000.
$25,000.
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
$1.2 million.
$1.1 million.
$1 million.
$900,000.
If a bank has excess reserves greater than the amount of a deposit outflow, the outflow will result in equal reductions in
deposits and reserves.
deposits and loans.
capital and reserves.
capital and loans.
A $5 million deposit outflow from a bank has the immediate effect of
reducing deposits and reserves by $5 million.
reducing deposits and loans by $5 million.
reducing deposits and securities by $5 million.
reducing deposits and capital by $5 million.
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
liability management.
liquidity management.
managing interest rate risk.
managing credit risk.
If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can
reduce deposits by $3 million.
increase loans by $3 million.
sell $3 million of securities.
repay its discount loans from the Fed.
A bank with insufficient reserves can increase its reserves by
lending federal funds.
calling in loans.
buying short-term Treasury securities.
buying municipal bonds.
Of the following, which would be the first choice for a bank facing a reserve deficiency?
Call in loans
Borrow from the Fed
Sell securities
Borrow from other banks
In general, banks would prefer to acquire funds quickly by ________ rather than ________.
reducing loans; selling securities
reducing loans; borrowing from the Fed
borrowing from the Fed; reducing loans
ʺcalling inʺ loans; selling securities
________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow.
Selling securities
Selling loans
Calling in loans
Selling negotiable CDs
Banks hold excess and secondary reserves to
reduce the interest-rate risk problem.
provide for deposit outflows.
satisfy margin requirements.
achieve higher earnings than they can with loans.
Which of the following statements most accurately describes the task of bank asset management?
Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity.
Banks seek to have the highest liquidity possible subject to earning a positive rate of return on their operations.
Banks seek to prevent bank failure at all cost; since a failed bank earns no profit, liquidity needs supersede the desire for profits.
Banks seek to acquire funds in the least costly way.
The goals of bank asset management include
maximizing risk.
minimizing liquidity.
lending at high interest rates regardless of risk.
purchasing securities with high returns and low risk.
Banks that suffered significant losses in the 1980s made the mistake of
holding too many liquid assets.
minimizing default risk.
failing to diversify their loan portfolio.
holding only safe securities.
A bank will want to hold more excess reserves (everything else equal) when
it expects to have deposit inflows in the near future.
brokerage commissions on selling bonds increase.
the cost of selling loans falls.
the discount rate decreases.
As the costs associated with deposit outflows ________, the banks willingness to hold excess reserves will ________.
decrease; increase
increase; decrease
increase; increase
decrease; not be affected
Which of the following would a bank not hold as insurance against the highest cost of deposit outflow - bank failure?
Excess reserves
Secondary reserves
Bank capital
Mortgages
Which of the following has not resulted from more active liability management on the part of banks?
Increased bank holdings of cash items
Aggressive targeting of goals for asset growth by banks
Increased use of negotiable CDs to raise funds
An increased proportion of bank assets held in loans
Banks that actively manage liabilities will most likely meet a reserve shortfall by
calling in loans.
borrowing federal funds.
selling municipal bonds.
seeking new deposits.
Modern liability management has resulted in
increased sales of certificates of deposits to raise funds.
increase importance of deposits as a source of funds.
reduced borrowing by banks in the overnight loan market.
failure by banks to coordinate management of assets and liabilities.
A bank failure occurs whenever
a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements.
a bank suffers a large deposit outflow.
a bank has to call in a large volume of loans.
a bank is not allowed to borrow from the Fed.
A bank is insolvent when
its liabilities exceed its assets.
its assets exceed its liabilities.
its capital exceeds its liabilities.
its assets increase in value.
Holding large amounts of bank capital helps prevent bank failures because
it means that the bank has a higher income.
it makes loans easier to sell.
it can be used to absorb the losses resulting from bad loans.
it makes it easier to call in loans.
Net profit after taxes per dollar of assets is a basic measure of bank profitability called
return on assets.
return on capital.
return on equity.
return on investment.
Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called
return on assets.
return on capital.
return on equity.
return on investment.
For a given return on assets, the lower is bank capital,
the lower is the return for the owners of the bank.
the higher is the return for the owners of the bank.
the lower is the credit risk for the owners of the bank.
the lower the possibility of bank failure.
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.
reduces; reduces
increases; increases
reduces; increases
increases; reduces
In the absence of regulation, banks would probably hold
too much capital, reducing the efficiency of the payments system.
too much capital, reducing the profitability of banks.
too little capital.
too much capital, making it more difficult to obtain loans.
Conditions that likely contributed to a credit crunch in 2008 include:
capital shortfalls caused in part by falling real estate prices.
regulated hikes in bank capital requirements.
falling interest rates that raised interest rate risk, causing banks to choose to hold more capital.
increases in reserve requirements.
Which of the following would not be a way to increase the return on equity?
Buy back bank stock
Pay higher dividends
Acquire new funds by selling negotiable CDs and increase assets with them
Sell more bank stock
If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to
buy back bank stock.
pay higher dividends.
shrink the size of the bank.
sell securities the bank owns and put the funds into the reserve account.
Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans.
adverse selection
moral hazard
moral suasion
intentional fraud
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
adverse credit risk.
adverse selection.
moral hazard.
lemon lenders.
Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the
adverse selection problem.
lemon problem.
adverse credit risk problem.
moral hazard problem.
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.
moral hazard
adverse selection
moral suasion
adverse lending
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.
specialization in lending; diversifying
specialization in lending; rationing
credit rationing; diversifying
screening; rationing
From the standpoint of ________, specialization in lending is surprising but makes perfect sense when one considers the ________ problem.
moral hazard; diversification
diversification; moral hazard
adverse selection; diversification
diversification; adverse selection
Provisions in loan contracts that prohibit borrowers from engaging in specified risky activities are called
proscription bonds.
restrictive covenants.
due-on-sale clauses.
liens.
To reduce moral hazard problems, banks include restrictive covenants in loan contracts. In order for these restrictive covenants to be effective, banks must also
monitor and enforce them.
be willing to rewrite the contract if the borrower cannot comply with the restrictions.
trust the borrower to do the right thing.
be prepared to extend the deadline when the borrower needs more time to comply.
Long-term customer relationships ________ the cost of information collection and make it easier to ________ credit risks.
reduce; screen
increase; screen
reduce; increase
increase; increase
Unanticipated moral hazard contingencies can be reduced by
screening.
long-term customer relationships.
specialization in lending.
credit rationing.
A bank's 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
an adjustable gap loan.
an adjustable portfolio loan.
loan commitment.
pre-credit loan line.
Property promised to the lender as compensation if the borrower defaults is called ________.
collateral
deductibles
restrictive covenants
contingencies
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
place a bank officer on their board of directors.
place a corporate officer on the bank's board of directors.
keep compensating balances in a checking account at the bank.
purchase the bank's CDs.
Of the following methods that banks might use to reduce moral hazard problems, the one not legally permitted in the United States is the
requirement that firms keep compensating balances at the banks from which they obtain their loans.
requirement that firms place on their board of directors an officer from the bank.
inclusion of restrictive covenants in loan contracts.
requirement that individuals provide detailed credit histories to bank loan officers.
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
coercive bargaining.
strategic holding out.
credit rationing.
collusive behavior.
When banks offer borrowers smaller loans than they have requested, banks are said to
shave credit.
rediscount the loan.
raze credit.
ration credit.
Credit risk management tools include
deductibles.
collateral.
interest rate swaps
duration analysis.
Risk that is related to the uncertainty about interest rate movements is called
default risk.
interest-rate risk.
the problem of moral hazard.
security risk.
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.
an increase; increase
an increase; reduce
a decline; reduce
a decline; not affect
If a bank has ________ rate-sensitive assets than liabilities, then ________ in interest rates will increase bank profits.
more; a decline
more; an increase
fewer; an increase
fewer; a surge
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.
more; rise; decline
more; decline; rise
fewer; decline; decline
fewer; rise; rise
If a bankʹs liabilities are more sensitive to interest rate movements than are its assets, then
an increase in interest rates will reduce bank profits.
a decrease in interest rates will reduce bank profits
interest rates changes will not impact bank profits.
an increase in interest rates will increase bank profits.
The difference of rate-sensitive liabilities and rate-sensitive assets is known as the
duration.
interest-sensitivity index.
rate-risk index.
gap.
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
increase by $15 million.
increase by $1.5 million.
decline by $15 million.
decline by $1.5 million.
If interest rates rise by 5 percentage points, say, from 10 to 15%, bank profits (measured using gap analysis) will
decline by $0.5 million.
decline by $1.5 million.
decline by $2.5 million.
increase by $1.5 million.
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.
5 percent
10 percent
15 percent
25 percent
If interest rates rise by 5 percentage points, say from 10 to 15%, bank profits (measured using gap analysis) will
decline by $0.5 million.
decline by $1.5 million.
decline by $2.5 million.
increase by $2.0 million.
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.
decline; 5 percent
decline; 10 percent
decline; 15 percent
increase; 20 percent
Duration analysis involves comparing the average duration of the bankʹs ________ to the average duration of its ________.
securities portfolio; non-deposit liabilities
assets; liabilities
loan portfolio; deposit liabilities
assets; deposit liabilities
Because of an expected rise in interest rates in the future, a banker will likely
make long-term rather than short-term loans.
buy short-term rather than long-term bonds.
buy long-term rather than short-term bonds.
make either short or long-term loans; expectations of future interest rates are irrelevant.
If a banker expects interest rates to fall in the future, her best strategy for the present is
to increase the duration of the bankʹs liabilities.
to buy short-term bonds.
to sell long-term certificates of deposit.
to increase the duration of the bankʹs assets.
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.
shortening; lengthening
shortening; shortening
lengthening; lengthening
lengthening; shortening
Examples of off-balance-sheet activities include
loan sales.
extending loans to depositors.
borrowing from other banks.
selling negotiable CDs.
All of the following are examples of off-balance sheet activities that generate fee income for banks except
foreign exchange trades.
guaranteeing debt securities.
back-up lines of credit.
selling negotiable CDs.
Which of the following is not an example of a backup line of credit?
loan commitments
overdraft privileges
standby letters of credit
mortgages
Off-balance sheet activities involving guarantees of securities and back-up credit lines
have no impact on the risk a bank faces.
greatly reduce the risk a bank faces.
increase the risk a bank faces.
slightly reduce the risk a bank faces.
When banks involved in trading activities attempt to outguess markets, they are
forecasting.
diversifying.
speculating
engaging in riskless arbitrage.
Traders working for banks are subject to the
principal-agent problem.
free-rider problem.
double-jeopardy problem.
exchange-risk problem.
A reason why rogue traders have bankrupt their banks is due to
the separation of trading activities from the bookkeepers.
stringent supervision of trading activities by bank management.
accounting errors.
a failure to maintain proper internal controls.
One way for banks to reduce the principal-agent problems associated with trading activities is to
set limits on the total amount of a tradersʹ transactions.
make sure that the person conducting the trades is also the person responsible for recording the transactions.
encourage traders to take on more risk if the potential rewards are higher.
reduce the regulations on the traders so that they have more flexibility in conducting trades.
The principal-agent problem that exists for bank trading activities can be reduced through
creation of internal controls that combine trading activities with bookkeeping.
creation of internal controls that separate trading activities from bookkeeping.
elimination of regulation of banking.
elimination of internal controls.
Banks develop statistical models to calculate their maximum loss over a given time period. This approach is known as the
stress-testing approach.
value-at-risk approach.
trading-loss approach.
doomsday approach.
When banks calculate the losses the institution would incur if an unusual combination of bad events happened, the bank is using the ________ approach.
stress-test
value-at-risk
trading-loss
maximum value
