Ch 9 HW

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Required reserves Excess reserves T-bills Loans Checkable deposits Bank capital (Required reserves=checkable deposits ×required reserve ratio Excess reserves​ = total reserves−required reserves)

$20 Million $29 Million $320 Million $47 Million $259 Million $157 Million

Suppose ​$25,000 is deposited at a bank. The required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but makes loans instead. What are the​ bank's total​ reserves?

$25,000*.20=$5,000

Suppose that a​ bank's balance sheet consists of the​ following: On the liability side it has ​$93 of deposits and ​$7 of​ capital, while on the asset side it has ​$10 of reserves and ​$90 of loans. This bank can then sustain ​$__________of bad loans before it becomes solvent.

$7

X-Bank reported an ROE of 16​% and an ROA of 1.38​%. What is the equity​ multiplier?

.16*.0138=11.60

Using the​ T-accounts of the First National Bank and the Second National​ Bank, describe what happens when Jane Brown writes a check for ​$55 on her account at the First National Bank to pay her friend Joe​ Green, who in turn deposits the check in his account at the Second National Bank. ​T-account for the First National​ Bank:

1st National Bank Assets (Reserves)-55 Liabilities (Checkable deposits) -55 2nd National Bank Assets (Reserves)+55 Liabilities (Checkable deposits) +55

In recent years the interest paid on checkable and nontransaction deposits has accounted for around​ ________ of total bank operating​ expenses, while the costs involved in servicing accounts have been approximately​ ________ of operating expenses.

25​ percent; 50 percent

NewBank started its first day of operations with ​$157 million in capital. A total of ​$259 million in checkable deposits is received. The bank makes a ​$21 million commercial loan and another ​$26 million in mortgage loans. Required reserves are 7.8​%. NewBank decides to invest $320 million in​ 30-day T-bills. The​ T-bills are currently trading at ​$4,983 ​(including commissions) for a ​$5,040 face value instrument. How many​ T-bills do they​ purchase? ​(​Note:Information is based on​ NewBank's first month of​ operations.) NewBank will purchase ________ ​T-bills.

320 million / $4,983=64,218

Which of the following statements are​ true?

A​ bank's balance sheet shows that total assets equal total liabilities plus equity capital.

Why has noninterest income been growing as a source of bank operating​ income?

Banks can increase profits by engaging in noninterest​ income, or​ off-balance-sheet activities.

Which of the following are transaction​ deposits?

Checkable deposits

Rank the following bank assets from most liquid (1) to least liquid​ (4). ​

Commercial loans (3) Securities (2) Reserves (1) Physical capital (4)

A bank almost always insists that the firms it lends to keep compensating balances at the bank.​ Why?

Compensating balances can act as collateral Compensating balances help establish​ long-term customer​ relationships, which make it easier for the bank to collect information about prospective​ borrowers, thus reducing the adverse selection problem Compensating balances help the bank monitor the activities of a borrowing​ firm, which reduces the moral hazard problem

Which of the following are reported as liabilities on a​ bank's balance​ sheet?

Discount loans

If a bank doubles the amount of its capital and ROA stays​ constant, what will happen to​ ROE?

Given the​ ROA, if bank capital​ doubles, then ROE will fall by half

If the bank you own has no excess reserves and a sound customer comes in asking for a​ loan, should you automatically turn the customer​ down, explaining that you​ don't have any excess reserves to lend​ out? Why or why​ not? What options are available for you to provide the funds your customer​ needs?

No. There are several ways that reserves can be acquired. For​ example, the bank can borrow at the discount window or in the federal funds​ market, or it can acquire funds by issuing negotiable CDs

Which of the following are reported as assets on a​ bank's balance​ sheet?

Reserves

How well capitalized is this​ bank?

This is a​ well-capitalized bank because its​ equity/asset ratio exceeds the minimum required level.

The largest percentage of​ banks' holdings of securities consist of

Treasury and government agency securities

The bank you own has the following balance sheet Reserves ​ $75 million Loans $525 million Deposits $500 million Bank Cap $100 million If the bank suffers a deposit outflow of​ $50 million with a required reserve ratio on deposits of​ 10%, what actions can you take to keep your bank from​ failing?

You can borrow reserves in the federal funds market. You can go to the discount window. You can call in or sell off loans

The process of asset transformation is frequently described by saying that banks are in the business of

borrowing short and lending long

Bank​ ________ is/are listed on the liability side of the​ bank's balance sheet

capital

Which of the following is the greatest source of funds to commercial banks in the past

checkable deposits

The volume of checkable deposits relative to total bank liabilities has

declined over time.

When you deposit your ​$5000 paycheck in your​ bank, which was written on an account at a different​ bank, the immediate impact on your​ bank's balance sheet is that your​ bank's cash items in the process of collection rise by $5000 and your​ bank's

deposits rise by ​$5000

Banks also obtain funds by borrowing from the Federal Reserve System. These borrowings are known as

discount loans

Bank loans from the Federal Reserve are called​ ________ and represent a​ ________ of funds.

discount​ loans; source

Which of the following is NOT true regarding how banks manage their​ assets? Banks seek assets that

have no default risk

Because of their​ ________ liquidity,​ ________ U.S. government securities are called secondary reserves.

high; short−term

Risk that is related to the uncertainty about future​ interest-rate movements is​ called:

interest-rate risk

A bank with excess reserves can economize on these reserves​ by:

lending reserves in the federal funds market

Bank's make their profits primarily by issuing​ ________.

loans

In order to reduce the​ ________ problem in loan​ markets, banks often insist on collateral from potential borrowers.

moral hazard

Banks often specialize in providing loans to firms in a particular industry because this activity

reduces the cost of acquiring and analyzing information about the borrower

The portion of checkable deposits that banks are required to hold is​ called:

required reserves.

Because​ ________ are less liquid for the depositor than​ ________, they earn higher interest rates.

savings​ accounts; checkable deposits

Which of the following is not a method by which banks reduce their credit​ risk?

use gap analysis to help balance a​ bank's rate-sensitive assets and liabilities


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