Chapter 12
Suppose Brian wants to open a European designer clothes store downtown. She goes to Italy to purchase a collection of clothes, but nobody knows her in Italy. Brian goes to her local bank and asks it to back up her transaction. What kind of support can Brian get from her bank?
A commercial letter of credit
A certificate of deposit will get you:
A higher rate of return than most savings accounts
Debbie has owned her home for several years and has been paying her mortgage on time every month. She is building equity in her home, which can then be used for what type of personal loan?
A second mortgage
A money market deposit account is:
A type of savings account
A certificate of deposit is:
A type of savings account with a higher rate of return than most
Which of the following currently makes up the largest share of bank assets?
Business and consumer loans
Lisa runs a commercial bank and wants to hedge her interest rate risk. Which off balance sheet transaction is Lisa going to engage in on behalf of the bank?
Credit default swap
In 1968 the Worcester Five Cent Savings Bank hired Ronald Haselton to be its new president and chief executive officer. One thing that Haselton did was change the name of the bank to Consumers Savings Bank. What else did Haselton do that later was considered one of the biggest innovations in the banking industry in the 20th century?
Developed and put into effect NOW accounts
Why and when were NOW accounts created?
In the 1970s as a way to get around restrictive banking regulations
Payments for installment loans
Include some interest and some principal
Asset transformation converts what into what?
Liabilities into assets
Installment loans differ from balloon payment loans in that:
Payments on installment loans are the same each month for the life of the loan
Money market means:
Short-term instead of long-term like in the debt market
Which of the following securities typically held by banks have the lowest default risk?
U.S. Treasury securities
bonds
assets
cash/reserves
assets
Who transforms assets?
banks
Which of the following is the most liquid of a banks' assets?
cash
Demand deposit and NOW accounts are commonly referred to as:
checking accounts
Tevye owns a shoe store in the United States and wants to buy some shoes from Aldo, an Italian shoe manufacturer. Aldo is unsure of Tevye's ability to make payment and so is leery of selling the shoes to him. In order to make this transaction, Tevye might go to his bank to get a(n) __________ letter of credit.
commercial
By far, the largest liability on the banking system's balance sheet is
deposits
Which is currently the largest liability of banks?
deposits
Credit Default Swaps are regulated in the same way bank deposits are regulated.
false
Banks will often use derivative contracts to
hedge exchange rate risk
bank capital
liabilities
business and consumer loans
liabilities
demand deposits
liabilities
loans from other banks
liabilities
saving account
liabilities
Agricultural loans
long term business loans
Fixed asset or blind-spot loans
long term business loans
Leveraged buyouts (LBOs)
long term business loans
A mortgage loan is an example of a __________ loan.
long term consumer
Certificates of Deposit, CD
non-transaction accounts
Savings, or Passbook Accounts
non-transaction accounts
The Dodd-Frank Act allowed banks, for the first time, to
pay interest on demand deposits.
If a bank made a self-liquidating inventory loan, it would be making a __________ loan.
short term business
Seasonal loans
short term business loans
Securities dealer loans
short term business loans
Self-liquidating inventory loans
short term business loans
Demand Deposits
transactions accounts
Money Market Deposit Accounts
transactions accounts
NOW accounts
transactions accounts
All banks, regardless of size, perform asset transformation.
true
Banks must weigh the risk versus the return in deciding
what to hold in their portfolio of assets.
The business of banking can be described as
the business of asset transformation.
