exam 3 review

A

A $5 million deposit outflow from a bank has the immediate effect of: A. reducing deposits and reserves by $5 million B. reducing deposits and securities by $5 million C. reducing deposits and loans by $5 million D. reducing deposits and capital by $5 million

D

A clause in a mortgage loan contract requiring the borrower to purchase homeowner's insurance is an example of A. proscriptive covenant B. prescriptive covenant C. constraint-imposed covenant D. restrictive covenant

C

All of the following are consequences of adverse selection on good firms EXCEPT: A. firms need to rely more on accumulated profits B. firms need to rely more on internal funds C. firms will only be able to attain financing form the government D. the cost of external financing increases

A

Any reserves beyond what is required are called A. excess reserves B. bank capital C. secondary reserves D. required reserves

C

Assuming that the average duration of its assets is five years, while the average duration of its liabilities is three years, then a 5% point increase in interest rates will cause the net worth of this bank to decline by ________ of the original asset value. A. 15% B. 25% C. 10% D. 5%

B

Bank customers perceive Internet-only banks as being A. more secure than physical banks B. prone to many more technical problems C. a better method for the purchase of long-term savings products D. better at keeping customer information private

B

Bank loans from the Federal Reserve are called ______ and represent a _____ of funds. A. fed funds, use B. discount loans, source C. discount loans, use D. fed funds, source

A

Banks are required to file ________ usually quarterly that list information on the bank's assets and liabilities, income and dividends, and so forth A. call reports B. examiner updates C. balance reports D. regulatory sheets

A

Because information is scarce, A. monitoring managers gives rise to costly state verification B. government regulations such as standard accounting principles have no impact on problems such as moral hazard C. developing nations do not rely heavily on banks for business finance D. helps explain why contracts are used so much more frequently to raise capital than are debt contracts

C

Because of asymmetric information, the failure of one bank can lead to runs on other banks, this is the _______. A. moral hazard problem B. adverse selection problem C. contagion effect D. to-big-to-fall effect

C

Because of the abuses by state banks and the clear need for a central bank to help the federal government raise funds during the War of 1812, Congress created the ________ A. Second Bank of North America in 1815 B. Bank of North America in 1814 C. Second Bank of the United States in 1816 D. Bank of the United States in 1812

B

Before 1863, A. federally-chartered banks had regulatory advantages not granted to state-chartered banks B. banks acquired funds by issuing bank notes C. banks were required to maintain 100% of their deposits as reserves D. the number of federally-chartered banks grew at a much faster rate than at any other time since the end of the civil war

B

During the boom years of the 1920's , bank failures were quite A. common, averaging about 1000 per year B. common, averaging about 60 per year C. uncommon, averaging less than 30 per year D. uncommon, averaging less than 100 per year

B

For a given return on assets, the lower the bank capital, the A. lower the possibility of bank failure B. higher the return for the owners of the bank C. lower the credit risk for owners of the bank D. lower the return for the owners of the bank

C

If a bank has _________ rate-sensitive assets than liabilities, then __________ in interest rates will increase bank profits. A. fewer, a surge B. fewer, an increase C. more, an increase D. more, a decline

A

If a bank has excess reserves greater than the amount of a deposit outflow, the outflow result in equal reductions in ________ and _____. A. deposits and reserves B. capital and loans C. capital and reserves D. deposits and loans

A

If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can: A. sell $3 million of securities B. reduce deposits by $3 million C. repay its discount loans from the FED D. increase loans by $3 million

B

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. A. adverse lending B. adverse selection C. moral hazard D. moral suasion

C

Individual investors can reduce transaction costs by A. purchasing common stocks directly, rather than through a mutual fund B. buying common stocks rather than bonds C. combining their purchases through an intermediary D. making loans directly, rather than depositing funds in a bank.

C

Long-term customer relationships ______ the cost of information collection and make it easier to __________ credit risks. A. increase, increase B. increase, screen C. reduce, screen D. reduce, increase

B

Provisions in loan contracts that prohibit borrowers from engaging in specified risky activites are called: A. liens B. restrictive covenants C. proscription bonds D. due-on-sale-clause

B

Regulations designed to provide information to the marketplace so that investors can make informed decisions are called: A. capital requirements B. disclosure requirements C. asset restrictions D. efficient market requirements

D

Rising interest-rate risk: A. increased the cost of financial innovation B. reduced the cost of financial innovation C. reduced the demand for financial innovation D. increased the demand for financial innovation

B

State banking authorities have sole jurisdiction over state banks A. that are not members of the federal reserve system B. without FDIC insurance C. operating as bank holding companies D. chartered in the 21st century

C

The Federal Reserve Act of 1913 required all __________ banks to become members of the Federal Reserve System, while ___________ banks could choose to become member of the system. A. state, municipal B. national, municipal C. national, state D. state, national

A

The Glass-Steagall Act, before its repeal in 1999, prohibited commercial banks from ___________ A. engaging in underwriting and dealing of corporate securities B. selling new issues of government securities C. issuing equity to finance bank expansion D. purchasing any debt securities

B

The _________ problem helps to explain why private production and sale of information cannot eliminate ___________. A. principal-agent, adverse selection B. free-rider, adverse selection C. free-rider, moral hazard D. principal-agent, moral hazard

C

The analysis of how asymmetric information problems affect economic behavior is called ________ theory A. uneven B. parallel C. agency D. principal

A

The declining cost of computer technology has made __________ a reality. A. virtual banking B. commercial banking C. brick and mortar banking D. investment banking

A

The existence of deposit insurance can increase the likelihood that depositors will need deposit protection, as banks with deposit insurance A. Are likely to take on greater risks than they otherwise would B. are likely to be too conservative, reducing the probability of turning a profit C. are likely to regard deposits as an unattractive source of funds, due to depositors demands for safety D. are placed at a competitive disadvantage in acquiring funds

B

The government institution that has the responsibility for the amount of money and credit supplied in the economy as a whole is the _______ A. bank of settlement B. central bank C. monetary fund D. commercial bank

B

The government safety net creates ________ problem because risk-loving entrepreneurs might find banking an attractive industry. A. a moral hazard B. an adverse selection C. a revenue D. a lemons

B

The modern commercial banking system began in America when the ______ A. Bank of the U.S. was chartered in New York in 1801 B. Bank of North America was chartered in Philadelphia in 1782 C. Bank of U.S. was chartered in Philadelphia in 1801 D. Bank of North America was chartered in New York in 1782

B

The predominant form of household debt is A. consumer installment debt B. collateralized debt C. unrestricted debt D. unsecure debt

D

The reduction in average cost resulting from an increase in the volume of a good or service produced is called: A. information cost B. diminishing returns C. transactions cost D. economies of scale

C

The reduction in transaction cost per dollar of investment as the size of transactions increases is A. discounting B. economies of trade C. economies of scale D. diversification

A

The result of the too-big-to-fall policy is that _______ banks will take on ____ risks, making bank failures more likely. A. big, greater B. small, fewer C. big, fewer D. small, greater

C

What is the largest category of bank assest? A. cash items in the process of collection B. reserves C. loans D. securities

B

When your 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 A. The assets of First National Bank rise by $50 B. The reserves of First National Bank fall by $50 C. The liabilities of Chemical Bank rise by $50 D. The assets of Chemical Bank rise by $50

B

Which of the following are primary concerns of the bank manager? A. Acquiring funds a relatively high cost, so that profitable lending opportunities can be realized. B. Maintaining sufficient reserves to minimize the cost to the bank of deposit outflows C. extending loans to borrowers who will pay low interest rates, but who are poor credit risks D. maintaining high levels of capital and thus maximizing the returns to owners

C

Which of the following is NOT an example of adverse selection? A. A company in serious financial trouble offers to pay you 30% on a loan B. A family with a home ten feet from a large river buys flood insurance C. A company uses the proceeds of a new stock sale to build an unnecessarily luxurious new HQ D. A terminal cancer patient buys life insurance

B

Which of the following is NOT one of the eight basic puzzles about financial structure? A. Banks are the most important source of external funds to finance businesses. B. Stocks are the most important source of finance for American businesses C. Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets D. issuing marketable securities is not the primary way businesses finance their operations

A

Which of the following is NOT true of adverse selection? A. it describes a lender's problem in verifying borrowers are using their funds as intended B. it describes a lender's problem of distinguishing the good-risk applicants from the bad C. it would not exist in a world of perfect communication D. it arises because borrowers typically know more than their lenders

C

Which of the following is not an example of a backup line of credit? A. standby letters of credit B. overdraft privileges C. mortgages D. loan commitments

B

Which of the following statements most accurately describes the task of bank asset management? A. banks seek to acquire funds in the least costly way B. banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity C. banks seek to prevent bank failure at all costs, since a failed bank earns no profit, liquidity needs supersede the desire for profits D. banks seek to have the highest liquidity possible subject to earning a positive ROR on their operations

A

Which regulatory body charters national banks? A. the comptroller of the currency B. u.s treasury C. the FDIC D. The federal reserve

C

Why are U.S. Government securities referred to as a bank's secondary reserves? A. Their current value may count toward meeting a bank's legal reserve requirement B. They are the same thing as vault cash C. they are very liquid D. banks are legally required to hold a certain amount of these securities

B

With _____, firms value assets on their balance sheet at what what they would sell it for in the market. A. historical-cost accounting B. mark-to-market accounting C. off-balance sheet accounting D. book-value accounting

B

You own a 2007 Ford Explorer. Although it has high-mileage, you have maintained it very well. You want to sell it, but after checking prices other owners of 2007 Ford Explorers are able to get for their cars in the used car market, you decide the prices are too low and you decide not to sell. This is an example of: A. low information costs B. the lemons problem C. economies of scale D. moral hazard

B

which of the following is a bank asset A. checkable deposits B. cash items in the process of collection C. borrowings in the federal fund market D. savings deposits