Quiz #4

Assume a bank has $200 million of assets with a duration of 2.5, and $190 million of liabilities with a duration of 1.05. If interest rates increase from 5 percent to 6 percent, the net worth of the bank falls by $1 million. $2.4 million. $3.6 million. $3 million.

$3 million

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.

$50,000

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 assets; liabilities liabilities; assets

Liabilities; Assets

Which of the following are reported as assets on a bank's balance sheet? Bank capital Borrowings Reserves Savings deposits

Reserves

Bank capital is equal to ________ minus ________. total liabilities; total borrowings total assets; total reserves total assets; total liabilities total liabilities; total assets

Total Assets; Total Liabilities

If a bank has $50 million in rate-sensitive assets and $20 million in rate-sensitive liabilities then -interest rate changes will not impact bank profits. -a decrease in interest rates will increase bank profits. -an increase in interest rates will reduce bank profits. -a decrease in interest rates will reduce bank profits.

a decrease in interest rates will reduce bank profits.

All else the same, if a bank's liabilities are more sensitive to interest rate fluctuations than are its assets, then ________ in interest rates will ________ bank profits. a decline; reduce an increase; reduce a decline; not affect an increase; increase

an increase; reduce

What are Discount Loans?

A loan that collects interest from the amount of the loan at the time the loan is made. Interest collected is called the discount. Discount loans will have higher interest than a normal simple interest loan. Interest can be calculated on the discount loan with I=Prt I=Interest P=Net principal amount (after discount) r=rate t=time in years

Which of the following are reported as liabilities on a bank's balance sheet? Reserves Loans U.S. Treasury securities Discount loans

Discount Loans

Bank's make their profits primarily by issuing negotiable CDs. NOW accounts. equity. loans.

Loans

In general, banks make profits by selling ________ liabilities and buying ________ assets. short-term; longer-term risky; risk-free illiquid; liquid long-term; shorter-term

Short-term; longer-term

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is called interest-exposure analysis. basic gap analysis. basic duration analysis. gap-exposure analysis.

basic gap analysis

In general, banks would prefer to acquire funds quickly by ________ rather than ________. "calling in" loans; selling securities borrowing from the Fed; reducing loans reducing loans; borrowing from the Fed reducing loans; selling securities

borrowing from the Fed; reducing loans

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 bank's final balance sheet, liabilities increase by $200,000. reserves increase by $200,000. the liabilities of the bank decrease by $1 million. the assets at the bank increase by $1 million.

the assets at the bank increase by $1 million.

For a given return on assets, the lower is bank capital, -the lower is the credit risk for the owners of the bank. -the lower the possibility of bank failure. -the lower is the return for the owners of the bank. -the higher is the return for the owners of the bank.

the higher is the return for the owners of the bank.

Bank reserves include -vault cash and short-term Treasury securities. -deposits at the Fed and short-term treasury securities. -vault cash and deposits at the Fed. -deposits at other banks and deposits at the Fed.

vault cash and deposits at the fed

Because of an expected rise in interest rates in the future, a banker will likely -buy short-term rather than long-term bonds. -make either short or long-term loans; expectations of future interest rates are irrelevant. -make long-term rather than short-term loans. -buy long-term rather than short-term bonds.

buy short-term rather than long-term bonds

Which of the following are reported as liabilities on a bank's balance sheet? Deposits with other banks Checkable deposits Loans Reserves

checkable deposits

First National Bank Assets Liabilities Rate-sensitive $20 million $50 million Fixed-rate $80 million $50 million If interest rates rise by 5 percentage points, say, from 10 to 15%, bank profits (measured using gap analysis) will increase by $1.5 million. decline by $1.5 million. decline by $0.5 million. decline by $2.5 million.

decline by 1.5 million

First National Bank Assets Liabilities Rate-sensitive $40 million $50 million Fixed-rate $60 million $50 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; 10 percent decline; 15 percent increase; 20 percent decline; 5 percent

decline; 5percent

As the costs associated with deposit outflows ________, the banks willingness to hold excess reserves will ________. increase; decrease increase; increase decrease; increase decrease; not be affected

increase; increase

When a new depositor opens a checking account at the First National Bank, the bank's assets ________ and its liabilities ________. increase; decrease decrease; decrease increase; increase decrease; increase

increase; increase

When you deposit a $50 bill in the Security Pacific National Bank, its assets increase by $50. its liabilities decrease by $50. its cash items in the process of collection increase by $50. its reserves decrease by $50.

its assets increase by $50

A bank is insolvent when its assets exceed its liabilities. its liabilities exceed its assets. its assets increase in value. its capital exceeds its liabilities.

its liabilities exceed its assets.

When you deposit $50 in currency at Old National Bank, -its assets increase by less than $50 because of reserve requirements. -its liabilities decrease by $50. -its liabilities increase by $50. -its reserves increase by less than $50 because of reserve requirements.

its liabilities increase by $50

Bank capital is listed on the ________ side of the bank's balance sheet because it represents a ________ of funds. liability; source liability; use asset; use asset; source

liability; source

Long-term customer relationships ________ the cost of information collection and make it easier to ________ credit risks. increase; screen reduce; screen reduce; increase increase; increase

reduce; screen

Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called return on investment. return on equity. return on assets. return on capital.

return on equity

Bruce the Bank Manager can reduce interest rate risk by ________ the duration of the bank's assets to increase their rate sensitivity or, alternatively, ________ the duration of the bank's liabilities. lengthening; shortening lengthening; lengthening shortening; shortening shortening; lengthening

shortening; lengthening