FINC 409 - Chapter 3

29. Investment banks accept deposits and makes loans to individuals and businesses

: F p 50 (48) commercial banks do this

20. Investment banking firms sell shares in their firms to individuals and invest the pooled proceeds in corporate and government securities.

: F p 50 (48), Figure 3.2, slides 5&6 they sell or market new securities issued by other businesses to individuals and corporate investors

26. Mortgage banking firms provide loans directly to consumers and businesses or aid individuals in obtaining financing of durable goods and homes

: F p 51 (48) they don't provide loans directly to consumers and businesses, finance companies do this

9. The bank holding company may not engage in direct banking activities

: F p 62 (58) they may or may not

12. Pension funds receive contributions from employees and/or their employers and invest the proceeds on behalf of the employees

: T p 50 (46

18. Investment companies sell shares in their firms to individuals and invest the pooled proceeds in corporate and government securities

: T p 50 (47) definition of investment companies

. During the colonial period in the nation's history, banks depended on: a. their own issue of paper money b. foreign sources for their loanable funds c. deposits of foreign currency such as the Spanish dollar d. the investment of their own stockholders

: a p 55 (52

2. The Bank of North America: a. was the first incorporated bank in the United States b. was patterned after the Central Bank of England c. was established to assist in financing the Civil War d. all the above e. none of the above

: a p 55 (52)

The primary purpose of this Act was to aid the savings and loan industry a. Garn-St. Germain Depository Institutions Act b. Glass-Steagall Act c. Hunt Commission legislation d. Depository Institutions Deregulation and Monetary It allowed depository institutions to Control Act issue new money market deposit accounts with no interest-rate ceiling

: a p 58 (55

. Unit banking means: a. a bank may have only one full-service office b. the bank is owned by a unit trust c. all branch offices are controlled by a central unit d. none of the above

: a p 61 (58) definition of unit banking

Commercial banks obtain the bulk of their loanable funds from: a. depositors b. the issue of certificates of deposit c. sale of bank stock d. sale of subordinated debenture bond

: a p 66 (59-63) and Fig 3.5

. Multiple Answer Question: Select ALL of the following that are liabilities or owners' capital of commercial banks: a. certificates of deposit liability b. demand deposits liability c. loans secured by real estate asset d. investments in mutual funds asset e. retained earnings owners' equity

: a, b, and e p 63-67 (59, 63) and Fig 3.5

The Depository Institutions Deregulation and Monetary Control Act: a. established a system of central banks b. has resulted in more competition among depository institutions c. increased federal deposit insurance from $40,000 to $80,000 for each account d. established minimum capital requirements for banks with federal charters

: b p 57-58 (54)

Statewide branch banking: a. is prohibited in all 50 states b. means that branch systems are less likely to fail than independent systems c. permits banks to be located within a geographically defined distance of the main office d. none of the above

: b p 61 (58

. Foreign banks in the United States: a. are prohibited in all 50 states b. need the approval of the Federal Reserve c. are not subject to federal examination d. none of the above

: b p 71 (67-68)

An organization that receives contributions from employees and/or their employers and invests the proceeds on behalf of the employees for use during their retirement years is called a (n) a. mutual fund b. savings bank c. pension fund d. retirement fund

: c p 50 (46)

The principal assets of banks do not include: a. cash b. loans c. time deposits liability d. securities owned

: c p 63-67 (59-60) and Figure 3.5

The interest rate charged by banks for short-term unsecured loans to their highest quality business customers is referred to as the: a. discount rate b. federal funds rate c. prime rate d. all the above

: c p 64 (61

The most basic functions of depository institutions are: a. safekeeping for depositors b. record keeping for depositors c. efficient and economical transfer of payments d. accepting deposits and granting loans

: d p 47 (45)

32. Savings and loan associations are cooperative nonprofit organizations that exist primarily to provide member depositors with consumer credit

F p 40 (46) definition of credit union

27. Commercial banks provide loans directly to consumers and businesses or aid individuals in obtaining financing of durable goods and homes

F p 48 (46) finance companies provide loans directly to consumers and businesses

An investment bank accepts deposits, makes loans, and issues checking accounts

F p 48, 50 (48) this is the definition of a commercial bank

22. Insurance companies receive contributions from employees and/or their employers and invest the proceeds on behalf of the employees for use during their retirement years

F p 50 (46) pension fund

19. Insurance companies sell shares in their firms to individuals and invest the pooled proceeds in corporate and government securities

F p 50 (46-47) definition of investment companies

25. Investment banking firms assist individuals to purchase new or existing securities issues or to sell previously purchased securities

F p 50 (48) definition of brokerage firms

30. The U.S. banking system as it exists today is relatively unchanged since just before the Civil War

F p 55-59 (51-57

11. The Monetary Control Act prohibited the Federal Reserve from controlling thrift institutions

F p 58 (55)

6. Today, reserve requirements imposed by the Federal Reserve apply only to member banks

F p 58 (55) Monetary Control Act

33. The primary types of assets on a bank's balance sheet include cash and deposits

F p 63-66 (59-60, 63) and Fig 3.5 loans are 59% of assets, deposits are a liability not an asset

15. The prime rate of interest represents, in theory, the highest business loan rate available at a particular point in time and is sometimes called the ceiling rate

F p 64 (61-62) and Fig 3.6

40. Secondary reserves are vault cash and deposits held at other depository institutions and at Federal Reserve Banks

F p 68 (64) definition of primary reserves

38. Credit risk is the likelihood that a bank will be unable to meet depositor withdrawal demands and other liabilities when due

F p 68 (65) liquidity risk

Depository institutions include commercial banks, savings and loans, savings banks, and credit unions

T p 47 (46)

17. The major types of financial institutions (intermediaries) in the U.S. include commercial banks, mutual funds, insurance companies, and pension funds.

T p 47-48 (46-47) and Fig 3.1

28. Commercial banks accept deposits and makes loans to individuals and businesses

T p 48 (46) two of the things mentioned in the definition of commercial banks

31. Credit unions are cooperative nonprofit organizations that exist primarily to provide member depositors with consumer credit.

T p 49 (46)

4. Credit unions are cooperative nonprofit organizations that exist primarily to provide member depositors with consumer credit.

T p 49 (46)

23. Pension funds receive contributions from employees and/or their employers and invest the proceeds on behalf of the employees for use during their retirement years

T p 50 (46)

21. Mutual funds are open-end investment companies that can issue an unlimited number of shares to its investors and use the pooled proceeds to purchase corporate and government securities.

T p 50 (47)

24. Investment banking firms sell or market new securities issued by businesses to individual and institutional investors

T p 50 (48) definition of investment banking firms

3. Part of the reason that the Banking Act of 1933 (Glass-Steagall Act) was passed was in response to the large numbers of bank failures.

T p 52-57 (53-54)

14. The Federal Reserve Act of 1913 created a system of central banks in the United States

T p 57 (53)

5. The National Banking Act of 1864 made it possible for banks to receive federal charters

T p 57 (53) statement on this page

10. The main provisions of the Monetary Control Act of 1980 are deregulation and monetary control.

T p 57-58 (54) the Depository Institutions Deregulation and Monetary Control Act 1980 is often referred to simply and the Monetary Control Act of 1980

13. The Glass-Steagall Act was repealed with the passage of the Gramm-Leach-Bliley Act of 1999

T p 57-59 (49)

8. Branch banks are those banking offices that are controlled by a single parent bank.

T p 61 (58) branch banking allows a bank to have more than one full-service office

7. The principal assets of depository institutions are cash, securities, loans, and fixed assets

T p 63 (60

34. The largest type of assets on a bank's balance sheet is loans

T p 64 (61) and Fig 3.5

The prime rate is the interest rate charged by banks for short-term unsecured loans to a bank's highestquality business customers.

T p 64 (61) definition of prime rate

36. The effective rate of interest is generally lower on a standard loan than an otherwise equivalent discount loan.

T p 65 (62) on a discount loan you pay the interest upfront

35. The largest type of liabilities on a bank's balance sheet is deposits

T p 65-66 (63) and Fig 3.5

37. Bank solvency reflects the ability to keep the value of a bank's assets greater than its liabilities

T p 67 (63)

39. Credit risk is the chance of nonpayment or delayed payment of interest or principal

T p 68 (65)

41. Interest rate risk results from possible price fluctuations in fixed-rate debt instruments associated with changes in market interest rates. if interest rates decrease, the price/value of debt instruments increase

T p 69 (65) and footnote 4 (3

42. As a result of the Basel Accord, the Bank for International Settlements established capital adequacy requirements for internationally involved bank

T p 70 (66)

16. International banking exists when banks operate in more than one country

T p 71 (67)

An open-end investment company that can issue an unlimited number of its shares to investors and use the pooled proceeds to purchase corporate and government securities is called a (n) a. mutual fund b. pension fund c. insurance company d. brokerage firm definition of mutual fund

a p 50 (47

An organization that sells shares in their firms to individuals and others and invests the proceeds in corporate and government securities is called a (n) a. investment company b. investment bank c. insurance company d. brokerage firm

a p 50 (47)

The _______________________ provided for separation of commercial banking and investment banking activities in the United States. a. Glass Steagall Act b. Gramm-Leach-Bliley Act c. Garn-Saint Germain Act d. Depository Institutions Deregulation and Monetary Control Act

a p 52, 57 (49

The National Banking Act of 1864 provided for: a. federally chartered banks b. the establishment of a system of central banks c. deregulation and monetary control d. the establishment of deposit insurance

a p 57 (53)

The Monetary Control Act: a. extended the Fed's control to thrift institutions and non-member commercial banks b. has resulted in more competition among depository institutions c. increased federal deposit insurance from $40,000 to $80,000 for each account d. established minimum capital requirements for banks with federal charters

a p 58 (55

Legislation that permits depository institutions to compete with money market mutual funds on an equal basis with respect to interest rates offered to investors is the: a. Garn-St. Germain Depository Institutions Act b. National Banking Act c. Hunt Commission legislation d. Depository Institutions Deregulation and Monetary Control Act

a p 58 (55) Garn-St. Germain allowed depository institutions to issue new money market deposit accounts with no ceiling on the interest rate paid on these accounts

Limited branch banking: a. permits banks to locate offices within a geographically defined distance of the main office b. is controlled by the Federal Reserve system c. means that banks may only engage in certain limited activities d. none of the above

a p 61 (58

Which of the following would not be part of a bank's Stockholders' Equity? a. bank premises asset b. common stock of the bank c. retained earnings d. all of the above are part of a bank's Stockholders' Equity

a p 66-67 (59, 63) and Fig 3.5

Primary reserves a. include the cash assets of the bank. b. are short term securities held by banks that are quickly converted into cash at little cost to the banks. c. include securities sold in primary markets. d. include securities sold in secondary markets.

a p 68 (64)

The adequacy of capital for commercial banks as measured by regulatory authorities is: a. a composite of equity capital and total assets b. a measure of investment success c. based on the total amount of deposits of a bank d. based on the ratio of federal government 𝐄𝐪𝐮𝐢𝐭𝐲 𝐂𝐚𝐩𝐢𝐭𝐚𝐥 obligations to deposits Equity Capital Ratio = 𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬 ×𝟏𝟎𝟎

a p 69 (66) and Eq 3.3

. Multiple Answer Question: Select ALL of the following that are an asset of commercial banks: a. cash asset b. loans to individuals asset c. time deposits liability d. U.S. government securities asset e. demand deposits liability

a, b, and d p 63-67 (59-62) and Fig 3.5

4. Multiple Answer Question: Select ALL of the following that are not thrift institutions: a. credit unions b. savings and loan associations c. commercial banks d. investment banking firms

and d are not thrift institutions p 48 (46) definition of thrift institutions

Credit unions are: a. for profit organizations b. made up of individuals who possess common bonds of association c. institutions that derive funds from investment activities d. all the above

b p 49 (46)

An organization that sells or markets new securities issued by businesses to individuals and institutional investors is called a (n) a. mutual fund b. investment bank c. insurance company d. brokerage firm

b p 50 (49) and Fig 3.3

. Legislation that provided for the separation of commercial banking and investment banking activities in the United States is called a. Garn-St. Germain Depository Institutions Act b. Glass-Steagall Act c. Hunt Commission legislation d. Depository Institutions Deregulation and Monetary Control Act

b p 52, 57 (53, 55

. NOW accounts: a. are not subject to ceiling rates under Regulation Q b. enable depository institutions to compete effectively for funds that were flowing in large amounts to money market funds c. typically pay interest rates equal to that paid by money market funds more competitive than before d. all the above

b p 58 (54) statement on this page

The Garn-St. Germain Depository Institutions Act, among other things: a. extended the Fed's control to thrift institutions and to commercial banks that are not members of the Fed b. enabled depository institutions to issue money market accounts with no regulated interest rate ceiling c. was designed to assist the investment banking industry d. all the abov

b p 58 (55)

. One of the advantages claimed by branch banking is: a. lower interest rates are usually available from branch banks b. convenience for customers c. banking operations are easier to regulate d. all the above

b p 62 (58)

The holding-company device to control two or more commercial banks: a. has diminished in importance in recent years b. has increased in importance in recent years c. is limited to state chartered banks d. is sometimes described as chain banking

b p 62 (58)

. In general, the effective rate of interest on a discount loan a. is lower than that on standard loan b. is higher than that on a standard loan c. is identical to that on a standard loan d. none of the above

b p 65 (62) see example 5.0% compared to 5.26%

The likelihood that borrowers are ill and would not be able to make interest and principal payments is an example of: a. interest rate risk b. credit (default) risk c. liquidity risk d. capital adequacy risk

b p 68 (65

1. Multiple Answer Question: Select ALL of the following that are not depository institutions: a. credit unions b. savings and loan associations c. mutual funds a type of securities firm, not a depository institution d. savings banks e. brokerage firms a type of securities firm, not a depository institution

c and e are not depository institutions p 48-50 (45-48) and Figure 3.1

Another name for an open-end investment company is a: a. brokerage firm b. finance company c. mutual fund d. investment bank

c p 50 (47)

Reasons that banks become insolvent include all of the following EXCEPT: a. excessive credit risk b. interest rate risk c. a bank's assets exceeding its liabilities d. all of the above are reasons that banks become insolvent

c p 67 (63-65

The function of adequate bank capital for a commercial bank is to: a. meet bank reserve requirements b. provide funds for real estate loans c. provide a cushion against credit risk and interest rate risk d. support the purchase of bank buildings and equipment

c p 69 (66)

Which of the following statements is correct? a. The Gramm-Leach-Bliley Act of 1999 allowed commercial banks to again participate in investment banking activities. p 52 (49) and Figure 3.3 b. The Federal Reserve System brought the American economy a system of central banks. p 57 (53) c. "Wildcat banking" during the first half of the 1800s referred to risky banking practices by many state banks, such as excessive note issues, lack of adequate bank capital, and insufficient reserves against their notes and deposits. p 56 (52) footnote 1 d. All the above statements are correct

d

Types of financial institutions include all of the following EXCEPT: a. commercial banks b. pension funds c. insurance companies d. all of the above are types of financial institutions

d p 437-51 (45-46) and Fig 3.1

. Financial institutions include: a. banks b. pension funds c. insurance companies d. all of the above

d p 47-51 (45-47) and Fig 3.1

An organization that provides loans directly to consumers and businesses or aid individuals in obtaining financing for durable goods is called a (n) a. commercial bank b. investment bank c. savings and loan d. finance company

d p 51 (48

3. The notes of the Bank of North America a. served as a circulating medium of exchange b. were loaned liberally to the government c. were redeemed in metallic coins upon demand d. all the above e. none of the above

d p 55 (52

The First Bank of the United States ceased operations because: a. the need to provide financing for the Civil War was not supported by Congress b. of the opposition of state banking interests c. its charter had expired and there was no provision for its renewal d. both b and c

d p 55 (52

The National Banking Act of 1864: a. established minimum capital requirements for federally chartered banks b. regulated loans with respect to safety and liquidity c. established minimum reserve requirements d. all of the above

d p 57 (53)

The _______________________ was designed to reduce or eliminate interest rate limitations and increase access to various sources of funds available to banks and thrifts and expand the uses of the funds of S&Ls. a. Glass Steagall Act b. Gramm-Leach-Bliley Act c. Garn-Saint Germain Act d. Depository Institutions Deregulation and Monetary Control Act

d p 57-58 (54-55)

Types of financial institutions include all of the following EXCEPT: a. commercial banks depository institution b. pension funds contractual savings organization c. insurance companies contractual savings organization d. brokerage firms securities firm e. all of the above are types of financial institutions

e p 47-51 (45-48) and Fig 3.1

The principal assets of savings banks are: a. securities b. vault cash and deposits at other banks c. mortgage loans d. all the above

p 49, 63 (46, 59) definition of savings banks, primarily mortgage loans