Ch.3 Banks and Other Financial Institutions

If $1,500 is deposited today in a bank for one year and at the end of the year the depositor receives $1,531.50 from the bank, the standard annual interest rate paid was: (Pick the closest answer.)

$1,531.50 - $1,500 = $31.50 $31.50 ÷ $1,500 = 2.1% or $1,531.50 ÷ 1,500 = 1.021 → 2.1%

If $12,500 is borrowed for one year at a standard interest rate of 4.2 percent per year, at the end of the year the borrower would repay a total of to the lender. (Pick the closest answer.)

$12,500(0.042) = $525 $12,500 + $525 = $13,025 or $12,500(1.042) = $13,025

The Equity Capital Ratio for a bank with equity capital of $3 million and total assets of $50 million would be: (Pick the closest answer.)

6% $3,000,000 ÷ $50,000,000 = 6%

The item on the assets side of a bank's balance sheet that represents the largest proportion of bank assets is:

loans

The _______________________ made it possible for banks to receive federal charters and provided a basis for national banking laws.

National Banking Act

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

- certificates of deposit liability - demand deposits liability - retained earnings owners' equity

If $18,200 is borrowed for one year and at the end of the year the borrower repays $18,837 to the lender, the standard annual interest rate paid was: (Pick the closest answer.)

$18,837 - $18,200 = $637 $637 ÷ $18,200 = 3.5% or $18,837 ÷ 18,200 = 1.035 → 3.5%

The Equity Capital Ratio for a bank with owners' equity of $3 million is 6 percent. This bank's total assets would be:

$3,000,000 ÷ 0.06 = $50,000,000

If $45,000 is borrowed for one year at a standard interest rate of 4.25 percent per year, at the end of the year the borrower would repay in interest to the lender. (Pick the closest answer.)

$45,000(0.0425) = $1,912.50

If $5,200 is deposited today in a bank for one year at a standard interest rate of 3.15 percent per year, at the end of the year the depositor would receive in interest from the bank. (Pick the closest answer.)

$5,200(0.0315) = $163.80

The Equity Capital Ratio for a bank with total assets of $50 million is 6 percent. This bank's equity capital would be:

$50,000,000 × 0.06 = $3,000,000

If $6,800 is borrowed for one year at a standard interest rate of 5 percent per year, at the end of the year the borrower would repay in interest to the lender. (Pick the closest answer.)

$6,800(0.05) = $340

If $6,800 is borrowed for one year at a standard interest rate of 5 percent per year, at the end of the year the borrower would repay a total of to the lender. (Pick the closest answer.)

$6,800(0.05) = $340 $6,800 + $340 = $7,140 or $6,800(1.05) = $7,140

If $6,800 is borrowed for one year and at the end of the year the borrower repays $7,140 to the lender, the standard annual interest rate paid was: (Pick the closest answer.)

$7,140 - $6,800 = $340 $340 ÷ $6,800 = 5%

If $8,300 is deposited today in a bank for one year at a standard interest rate of 3.7 percent per year, at the end of the year the depositor would receive a total of from the bank. (Pick the closest answer.)

$8,300(0.037) = $307.10 $8,300 + $307.10 = $8,607.10 or $8,300(1.037) = $8,607.10

If you received $7,990 today on a discount loan and had to repay $8,500 one year later, the actual annual percentage interest rate on this loan would be: (Pick the closest answer.)

$8,500 - $7,990 = $510 $510 ÷ $7,990 = 6.4% actual annual percentage interest rate $510 ÷ $8,500 = 6.0% standard annual percentage interest rate

If $8,500 is borrowed on a discount basis and the rate is 6 percent, the actual annual percentage interest rate on this loan would be: (Pick the closest answer.)

$8,500(0.06) = $510 $8,500 - $510 = $7,99 $510 ÷ $7,990 = 6.4%

Which of the following statements is correct?

- The Gramm-Leach-Bliley Act of 1999 allowed commercial banks to again participate in investment banking activities. p 52 (49) and Figure 3.3 - The Federal Reserve System brought the American economy a system of central banks. p 57 (53) - "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

Financial institutions include:

- banks - pension funds - insurance companies - all of the above

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

- cash - loans to individuals - U.S. government securities

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

- commercial banks - investment banking firms (the above are not thrift institutions)

The National Banking Act of 1864:

- established minimum capital requirements for federally chartered banks - regulated loans with respect to safety and liquidity - established minimum reserve requirements - all of the above

The First Bank of the United States ceased operations because:

- of the opposition of state banking interests - its charter had expired and there was no provision for its renewal

The risk associated with changing market interest rates on the value of underlying debt instruments is

. interest rate risk

If $5,000 is borrowed on a discount basis and the rate is 10 percent, the actual annual percentage interest rate on this loan would be: (Pick the closest answer.)

11.1% $5,000(0.10) = $500 $5,000 - $500 = $4,500 $500 ÷ $4,500 = 11.1%

________________ collect premiums on insurance policies and employee/employer contributions from pension fund participants and provide retirement benefits and insurance against major financial losses.

Contractual savings organizations

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.

Depository Institutions Deregulation and Monetary Control Act

__________________ accept savings from individuals and then lend these pooled savings to businesses, governments, and individuals.

Depository institutions

The _______________________ established the U.S. central banking system and increased the effectiveness of commercial banking in general.

Federal Reserve Act

_________________ is the process by which individual savings are accumulated in depository institutions and, in turn, lent or invested.

Financial intermediation

The _______________________ was designed mainly to assist the savings and loan industry

Garn-Saint Germain Act

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:

Garn-St. Germain Depository Institutions Act (Garn-St. Germain allowed depository institutions to issue new money market deposit accounts with no ceiling on the interest rate paid on these accounts)

The primary purpose of this Act was to aid the savings and loan industry

Garn-St. Germain Depository Institutions Act It allowed depository institutions to issue new money market deposit accounts with no interest-rate ceiling

The _______________________ provided for separation of commercial banking and investment banking activities in the United States.

Glass Steagall Act

Legislation that provided for the separation of commercial banking and investment banking activities in the United States is called

Glass-Steagall Act

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)

investment company

Unit banking means:

a bank may have only one full-service office

Reasons that banks become insolvent include all of the following EXCEPT:

a bank's assets exceeding its liabilities

The adequacy of capital for commercial banks as measured by regulatory authorities is:

a composite of equity capital and total assets Equity Capital Ratio = 𝐄𝐪𝐮𝐢𝐭𝐲 𝐂𝐚𝐩𝐢𝐭𝐚𝐥/𝐓𝐨𝐭𝐚𝐥 𝐀𝐬𝐬𝐞𝐭𝐬× 𝟏𝟎0

__________________ are the two important forms of contractual savings organizations. a. Insurance companies and pension funds b. Banks and insurance companies c. Investment banks and pension funds d. Pension funds and brokerage firms

a. Insurance companies and pension funds

64. __________________ accept and invest individual savings and also facilitate the sale and transfer of securities between investors. a. Securities firms b. Pension funds c. Asset management companies d. none of the above

a. Securities firms

67. _______________ are non-commercial bank depository institutions that include savings banks and credit unions, which accumulate individual savings and lend primarily to other individuals. a. Thrift institutions b. Securities firms c. Pension funds d. Finance firms e. none of the above

a. Thrift institutions

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

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

In general, the effective rate of interest on a discount loan

is higher than that on a standard loan

Select ALL of the following that are ways to clear a check through the U.S. banking system: a. through a Federal Reserve Bank b. through the U.S. Treasury Bank c. through a bank clearinghouse d. bank to bank

a. through a Federal Reserve Bank c. through a bank clearinghouse d. bank to bank

The most basic functions of depository institutions are:

accepting deposits and granting loans

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

all of the above

65. Investment companies (mutual funds), investment banking firms, and brokerage firms are the primary types of ____________. a. banks b. securities firms c. pension funds d. finance companies e. none of the above

b. securities firms

Which of the following would not be part of a bank's Stockholders' Equity?

bank premises asset

Checks may be cleared by: a. the Federal Reserve b. banks in the banking system c. both a and b d. neither a nor b

both a and b

69. _______________ accept the savings of individuals and lend pooled savings to individuals primarily in the form of mortgage loans and operate almost entirely in New England , New York, and New Jersey, with most of their assets continuing to be invested in mortgage loans. a. Commercial banks b. Thrift institutions c. Savings banks d. Credit unions e. none of the above

c. Savings banks

A depository institution that accepts deposits, issues checking-writing accounts, and makes loans to businesses and individuals is called a (n)

commercial bank

One of the advantages claimed by branch banking is:

convenience for customers

The likelihood that borrowers are ill and would not be able to make interest and principal payments is an example of:

credit (default) risk

71. _______________ are cooperative nonprofit organizations that exist primarily to provide member depositors with consumer credit, including the financing of automobiles and the purchase of homes, and derive their funds almost entirely from the savings of their members. a. Commercial banks b. Thrift institutions c. Savings banks d. Credit unions e. none of the above Answer: d p 49 (46) definition of credit unions and discussion of them

d. Credit unions

66. _______________ provide loans directly to consumers and businesses and help borrowers obtain mortgage loans on real property. a. Banks b. Securities firms c. Pension funds d. Finance firms e. none of the above

d. Finance firms

Commercial banks obtain the bulk of their loanable funds from:

depositors

The item on the liabilities and equity section of a bank's balance sheet that represents the largest proportion of a typical bank's liabilities and stockholders' equity is:

deposits

68. _______________ are non-commercial bank depository institutions that include savings banks and credit unions, which accumulate individual savings and lend primarily to other individuals. a. Banks b. Securities firms c. Pension funds d. Finance companies e. none of the above

e. none of the above

The likelihood that a bank will be unable to meet its depositor withdrawal demands and/or other liabilities when they are due is

liquidity risk

70. _______________ accept the savings of individuals and lend pooled savings to individuals primarily in the form of mortgage loans and operate almost entirely in New England , New York, and New Jersey, with most of their assets continuing to be invested in mortgage loans. a. Commercial banks b. Thrift institutions c. Credit unions d. Finance companies e. none of the above

e. none of the above

72. _______________ are cooperative nonprofit organizations that exist primarily to provide member depositors with consumer credit, including the financing of automobiles and the purchase of homes, and derive their funds almost entirely from the savings of their members. a. Commercial banks b. Thrift institutions c. Savings banks d. Brokerage firms e. none of the above

e. none of the above

73. _______________ sell or market new securities issued by businesses to individual and institutional investors, whereas ______________ assist individuals who want to purchase new or existing securities issues or who want to sell previously purchased securities. a. Brokerage firms, investment banks brokerage firms assist individuals b. Investment banks, savings banks investment banks sell or market c. Savings banks, investment banks savings banks make loans d. Brokerage firms, savings banks e. none of the above Answer: e p 48-51 (46-48)

e. none of the above

75. _______________ provide loans directly to consumers and businesses or aid individuals in obtaining financing of durable goods and homes, whereas ______________ help individuals obtain mortgage loans on homes and other real property by bringing together borrowers and institutional investors. a. thrift institutions, savings and loans b. thrift institutions, mortgage banking firms c. property brokers, savings and loans d. property brokers, mortgage banking firms e. none of the above

e. none of the above

_________________ accept savings from individuals and then lend these pooled savings to businesses, governments, and individuals. a. Insurance companies b. Commercial finance companies c. Government institutions d. Investment banks e. none of the above

e. none of the above

_________________ are the two important forms of contractual savings organizations. a. Insurance companies and brokerage firms b. Banks and insurance companies c. Investment banks and pension funds d. Pension funds and brokerage firms e. none of the above

e. none of the above

__________________ collect premiums on insurance policies and employee/employer contributions from pension fund participants and provide retirement benefits and insurance against major financial losses. a. Banks b. Finance companies c. Investment banking firms d. Brokerage firms e. none of the above

e. none of the above

NOW accounts:

enable depository institutions to compete effectively for funds that were flowing in large amounts to money market funds (NOW: negotiable order of withdrawal)

The Garn-St. Germain Depository Institutions Act, among other things:

enabled depository institutions to issue money market accounts with no regulated interest rate ceiling

The Monetary Control Act:

extended the Fed's control to thrift institutions and non-member commercial banks

The National Banking Act of 1864 provided for:

federally chartered banks

74. _______________ provide loans directly to consumers and businesses or aid individuals in obtaining financing of durable goods and homes, whereas ______________ help individuals obtain mortgage loans on homes and other real property by bringing together borrowers and institutional investors. a. thrift institutions, savings and loans b. thrift institutions, mortgage banking firms c. finance companies, savings and loans d. finance companies, mortgage banking firms e. none of the above

finance companies, mortgage banking firms

An organization that provides loans directly to consumers and businesses or aid individuals in obtaining financing for durable goods is called a (n)

finance company

The holding-company device to control two or more commercial banks:

has increased in importance in recent years

The Depository Institutions Deregulation and Monetary Control Act:

has resulted in more competition among depository institutions

Primary reserves

include the cash assets of the bank.

When market interest rates decrease, debt instruments (bonds) in value

increase there is an inverse relationship between market interest rates and the value of debt instrument

An organization that sells or markets new securities issued by businesses to individuals and institutional investors is called a (n)

investment bank

Credit unions are:a. 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

made up of individuals who possess common bonds of association

Statewide branch banking:

means that branch systems are less likely to fail than independent systems

The principal assets of savings banks are:

mortgage loan ( definition of savings banks, primarily mortgage loans)

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)

mutual fund

Another name for an open-end investment company is a:

mutual fund

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

mutual funds brokerage firms (both of these are securities firm, not a depository institution)

Foreign banks in the United States:

need the approval of the Federal Reserve

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)

pension fund

Limited branch banking:

permits banks to locate offices within a geographically defined distance of the main office

The interest rate charged by banks for short-term unsecured loans to their highest quality business customers is referred to as the:

prime rate

The function of adequate bank capital for a commercial bank is to:

provide a cushion against credit risk and interest rate risk

The item on the liabilities and equity section of a bank's balance sheet that represents the smallest proportion of a typical bank's liabilities and stockholders' equity is:

stockholders' equity 8%

The Resolution Trust Corporation was brought into existence to

take over and liquidate the assets of failed savings and loan institutions

During the colonial period in the nation's history, banks depended on:

their own issue of paper money

The principal assets of banks do not include:

time deposits liability

The Bank of North America:

was the first incorporated bank in the United States