Econ Exam 2

Which of the following is the correct equation for a bank's return on equity? A) ROE = profits / capital

ROE = profits / capital

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Community banks have less than ________ in assets. A) $1 billion B) $500 thousand C) $100 million D) $500 million

A) $1 billion

Consider a bank with the following income statement It has $100 in loans with an interest rate of 5 percent; $50 in security holdings, paying 10 percent; noninterestincome of $10; $100 in savings accounts that have an interest rate of 2.5 percent; and other expenses of $15. Its total income is ________, total expense is ________,and profit is ________. A) $20; $17.50; $2.50 B) $160; $115; $45 C) $100; $100; $0 D) $5; $5; $0

A) $20; $17.50; $2.50

In 1930, the ________ failed, and because of its name it led to ________. A) Bank of the United States; falling confidence in the whole U.S. bank system. B) Bank of New York; falling confidence in the U.S. financial system. C) Federal Reserve Bank of St. Louis; a sharp decline in agricultural prices. D) People's Bank; numerous worker strikes

A) Bank of the United States; falling confidence in the whole U.S. bank system.

Which of following are required for bank charter application? I. expected earnings II. initial bank capital III. list of new customers A) I and II B) I only C) II only D) II and II

A) I and II

Deposit insurance increases which of the following? I. moral hazard II. decreased risk taking III. lower interest rates A) I only B) II only C) III only D) I and II

A) I only

Suppose that the mortgage default rate turns out to be higher than the bank expected. How does this fact affect a bank's net worth? A) It reduces it because the bank must write off the value of the loan. B) It reduces it because the bank now has lower liabilities. C) It increases net worth because the bank earns a higher interest rate on riskier mortgages. D) It has no impact.

A) It reduces it because the bank must write off the value of the loan.

________ banks are required to join the Federal Reserve System; for ________ banks it is ________. A) National; state; optional B) Federal; national; mandatory C) State; federal; optional D) National; investment; mandatory

A) National; state; optional

Suppose a bank has an equity ratio equal to 20 percent, and assets totaling $100. Which of the following events will make this bank insolvent? A) The bank writes off loans for $25. B) The bank writes off loans for $15. C) The bank writes off loans for $10. D) The bank writes off loans for $5

A) The bank writes off loans for $25.

Banks often have to sell their loans at fire-sale prices A) because they know more about the borrower than the institution buying the loan. B) when their assets exceed their net worth. C) because they wish to increase their profits. D) they wish to increase their borrowing from the Federal Reserve

A) because they know more about the borrower than the institution buying the loan

Prior to 1980, ________ loans were the largest component of commercial bank loans A) commercial and industrial B) federal fund C) real estate D) consumer

A) commercial and industrial

The largest bank failure rate occurred during the A) early 1930s. B) late 1970s .C) early 1890s. D) mid-2000s.

A) early 1930s.

In the process of granting a bank charter, bank regulators usually A) examine applicant's careers and interview past employers. B) do not care about the background of anyone buying large shares of a bank. C) do not investigate prospective bank managers. D) focus on the business plan of the bank only

A) examine applicant's careers and interview past employers.

A commercial letter of credit guarantees a payment for A) goods or services. B) bonds. C) stocks. D) mortgage-backed securities.

A) goods or services.

Which of the following do banks refer to as "purchased funds"? A) large-time deposits B) checking deposits C) savings deposits D) small-time deposits

A) large-time deposits

Suppose you take out a loan to buy a small plane for your aerial sightseeing company and you pledge the plane as collateral. When the bank requires that the plane cannot be used in acrobatic competitions, it is effectively including a ______ in the loan contract. A) negative covenant B) negative collateral C) positive covenant D) positive collateral

A) negative covenant

Though an IMF/World Bank study found that ________, the results depend on the ________. A) negative effects of deposit insurance outweighed the positive effects; amount of bank regulation B) positive effects of deposit insurance outweighed the negative effects; size of the bank C) larger banks fail less than small ones; size of risky loans D) risky loans are more likely to be made by large banks; value of checkable deposits

A) negative effects of deposit insurance outweighed the positive effects; amount of bank regulation

Which of the following is the largest liability on the consolidated balance sheet of U.S. banks? A) nontransaction deposits B) checking deposits C) borrowings D) "other" liabilities

A) nontransaction deposits

The adverse selection problem arises because A) of asymmetric information. B) of symmetric information. C) bond prices are volatile. D) stock prices are volatile

A) of asymmetric information.

You have $100 and are thinking about how you might go about saving it. You pick up the Wall Street Journal and see the following information A project that pays $125 with a probability of 0.75, or it pays $75.A project that pays $200 with a probability of 0.25, or it pays $50.Alternatively, you could put the $100 in a CD account and earn $110 at the end of the year. Which strategy would be most advantageous to you? And, if you put it intoaction, how much would you take home? A) project A; $112.50 B) the CD; $110 C) project B; $162.50 D) There is not enough information provided to answer the question.

A) project A; $112.50

Banks mitigate moral hazard by A) requiring borrowers to have collateral. B) screening potential borrowers. C) charging high interest rates. D) requiring borrowers to open a checking account

A) requiring borrowers to have collateral.

Congress passed the Credit Card Accountability and Responsibility, and Disclosure Act in order to A) restrict the fees imposed on credit card users. B) require credit card users to reduce the use of their credit cards. C) require the banks to provide credit cards to students and other customers with a low income. D) prevent banks from imposing a fee when transferring a balance from another credit card.

A) restrict the fees imposed on credit card users.

In the 1980s, many S&Ls gambled for ________ by ________. A) resurrection; making high-risk loans. B) solvency; increasing mortgage loans. C) forbearance; "cooking" their books D) higher CAMELS ratings; reducing their risky loans

A) resurrection; making high-risk loans.

The return on equity is A) the ratio of a bank's profits to its capital. B) the ratio of a bank's profits to its expenses. C) equal to its after-tax income. D) equal to net income

A) the ratio of a bank's profits to its capital.

The Basel Accords failed to prevent the financial crisis of 2007-2009 because A) the rules were too easy to circumvent. B) countries did not have time to adopt the modified Basel 2 rules. C) the United States and European countries did not agree on the rules. D) banks did not have sufficient flexibility to meet the capital requirements.

A) the rules were too easy to circumvent.

A bank can safely reduce its amount of reserves if A) there is little chance that its depositors will make large withdrawals. B) it is balanced by a large amount of loans. C) the federal funds rate is very high. D) interest rates fall

A) there is little chance that its depositors will make large withdrawals.

By insuring bank deposits up to ________, the FDIC reduced the probability of ________. A) $1 million; a liquidity crisis. B) $100,000; a bank run. C) $100,000; banks making risky loans. D) $1000; depositors leaving large amounts of money in their checkable deposit accounts

B) $100,000; a bank run

Suppose the short-term interest rates rises from 2 percent to 5 percent. The change in profits for a bank with a rate-sensitive gap of -$50 is A) -$1.00. B) -$1.50. C) -$2.50. D) $2.50.

B) -$1.50.

By 2007, over ________ of all mortgages were securitized. A) 50 percent B) 25 percent C) 75 percent D) 10 percent

B) 25 percent

Which of the following statements about regional and superregional banks is true? A) There are around 3500 regional and superregional banks in the United States. B) A superregional bank operates across most of the United States. C) Their assets are valued at below $500 million. D) They conduct businesses only in the state in which they are chartered

B) A superregional bank operates across most of the United States.

Which of the following statements about bank runs or panics in the United States is true? A) Bank panics were common during the second half of the twentieth century. B) Bank panics were the result of the contagious effect of bank runs. C) Around 2 percent of all U.S. banks failed in 1933. D) Bank panics only occurred in the 1940s

B) Bank panics were the result of the contagious effect of bank runs.

Which of the following statements about structured investment vehicles (SIVs) is true? A) The primary purpose of SIVs was to increase capital requirements. B) Before the 2007-2009 crisis, SIVs created a steady stream of profits for sponsoring banks. C) SIVs were completely independent from the banks that created them. D) SIVs are safer than U.S. Treasury bonds.

B) Before the 2007-2009 crisis, SIVs created a steady stream of profits for sponsoring banks

Which of the following statements about community banks in the United States is true? A) Due to the consolidation process in the banking industry, fewer than 500 community banks are still in business. B) Community banks have a niche in small-business lending. C) Economists agree that community banks will soon completely disappear. D) Community banks will exist as long as the big corporations they lend to are in business

B) Community banks have a niche in small-business lending.

You take a small loan to buy a new car; it's not a great car so you only need to borrow $2,500. What happens to the balance sheet of the bank you borrowed from? A) Its assets decrease by $2500. B) Its assets increase by $2500. C) Its reserves fall by $2500. D) Its liabilities fall by $2500

B) Its assets increase by $2500.

Poor information about a bank's balance sheet can lead to A) high interest rates. B) a bank run. C) high inflation rates. D) a bank takeover

B) a bank run.

The increased use of credit cards has led to A) an increased use of ATM cards. B) a decline in consumer loans. C) an increase in consumer loans. D) higher rates of inflation

B) a decline in consumer loans.

Basel 2 differs from the original Basel Accords in that Basel 2 A) gives banks the chance to own stocks. B) allows different risk weights for the same kind of bond. C) no longer has a capital requirement. D) requires bank to provide full disclosure.

B) allows different risk weights for the same kind of bond.

When bank regulators investigated the First National Bank of Keystone in West Virginia, the bank's executives A) burned fraudulent loan applications. B) buried two truckloads of documents on a ranch. C) sold off nonperforming loans for cents on the dollar. D) staged a fake bank robbery

B) buried two truckloads of documents on a ranch

A bank's net worth is also called its A) revenue. B) capital. C) loans. D) deposits

B) capital.

When Walmart applied for an ILC charter in 2005, the strongest opposition came from A) labor unions. B) community banks. C) state regulators. D) health care advocates

B) community banks

Everything else being the same, a bank that pays large dividends to stockholders might be _____ its capital, causing its CAMELS rating to _____. A) depleting; improve B) depleting; get worse C) increasing; improve D) increasing; get worse

B) depleting; get worse

To find a bank's return on its equity, we A) divide its profits by its total assets. B) divide its profits by its capital. C) subtract its bank capital from its total income. D) subtract its bank capital from its profits

B) divide its profits by its capital.

A commercial bank or savings institution can be chartered by A) the Federal Reserve System only. B) either the Office of the Comptroller of the Currency or by a state chartering agency. C) the Office of the Comptroller of the Currency only. D) states chartering agencies only

B) either the Office of the Comptroller of the Currency or by a state chartering agency.

A bank's insolvency risk is measured by its A) interest income ratio. B) equity ratio. C) loan ratio. D) noninterest income ratio

B) equity ratio.

Loans from one bank to another are called A) discount loans. B) federal funds. C) long-term loans. D) nonrefundable loans

B) federal funds.

Overnight bank-to-bank loans are called A) certificates of deposit. B) federal funds. C) discount loans. D) overnight repurchase agreements.

B) federal funds.

The cost to a bank of holding too many liquid assets is A) a very high reserve rate. B) interest lost on loans and holding securities. C) not having cash in the vault. D) leaving it exposed to default risk

B) interest lost on loans and holding securities.

When banks made loans, they traditionally ____; in recent years, they have ________ the loans. A) sold the loan to another financial institution; deposited B) kept the loan on their own books; securitized C) lent money at very low rates; set high-interest rates on D) took deposits; originated

B) kept the loan on their own books; securitized

Common off-balance-sheet activities include A) borrowing from other banks. B) lines of credit. C) loans to new corporations. D) mortgage loans

B) lines of credit.

By law, banks are restricted to holding securities with _____ risk, for example, ______. A) low; junk bonds B) low; Treasury bonds C) high; Treasury bonds D) high; junk bonds

B) low; Treasury bonds

The "sensitivity" grade in the CAMELS rating measures sensitivity to A) market risk. B) market and interest rate risk. C) inflation risk. D) a bank run.

B) market and interest rate risk.

George Mason University economist Gordon Tullock once suggested that to make people drive more safely automobile manufacturers should put a spike in the middle of the steering wheel. This is one way of getting rid of A) adverse selection. B) moral hazard. C) bad drivers. D) Darwinism.

B) moral hazard.

A private equity firm is a financial institution that A) operates like a commercial bank. B) owns large shares in private companies. C) is used to trade stocks and bonds. D) conducts open-market operations

B) owns large shares in private companies

Subprime lenders include A) commercial banks. B) pawnshops. C) credit unions. D) All of the answers are correct

B) pawnshops.

Both the return on assets (ROA) and the return on equity (ROE) have the same numerator A) off-balance-sheet income. B) profits. C) interest income. D) noninterest income.

B) profits.

A system of deposit insurance prevents bank runs primarily by A) paying off depositors at insolvent banks after a bank run. B) reassuring depositors their money is safe, so the bank run never occurs. C) paying off depositors at solvent banks after a bank run. D) closing banks when there are rumors about a bank's insolvency.

B) reassuring depositors their money is safe, so the bank run never occurs.

The most liquid form of assets on a bank's balance sheet are A) checking deposits. B) reserves. C) loans. D) federal funds

B) reserves.

If a bank has $50 of rate-sensitive assets and $45 in rate-sensitive liabilities, and the interest rate falls from 5 percent to 3 percent, a bank's profits ________ by________. A) fall; $0.10 B) rise; $0.10 C) fall; $1.00 D) There is not enough information provided to answer the question.

B) rise; $0.10

Structured investment vehicles ran into difficulties in the financial crisis of 2007-2009 when A) the SIVs became independent companies. B) they were not able to roll over their debt. C) banks brought the SIVs onto their balance sheets. D) the U.S. government refused to provide it with assistance under the Troubled Asset Relief Program

B) they were not able to roll over their debt

Banks seek to expand their commercial and industrial loans because A) they are more profitable than consumer loans. B) they wish to establish an ongoing relationship with firms. C) there is little competition for commercial loans among banks. D) they can securitize the loans in the junk-bond marke

B) they wish to establish an ongoing relationship with firms.

The fall in housing prices during the financial crisis caused many homeowners to A) have a mortgage whose value was worth less than the house. B) walk away from their houses. C) decide to take out a home equity loan. D) All of the answers are correct

B) walk away from their houses.

The Federal Deposit Insurance Corporation (FDIC) raised the insurance limit on bank account deposits from ____ to _____ in ______. A) zero; $25,000; 1932 B) $25,000; $100,000; 1933 C) $100,000; $250,000; 2008 D) $250,000; $1,000,000; 200

C) $100,000; $250,000; 2008

U.S. capital requirements mandate a ________ minimum capital-assets ratio. A) 0 percent B) 10 percent C) 5 percent D) 50 percent

C) 5 percent

When ________ was Secretary of the Treasury, he argued for ________. A) John Adams; state-chartered banks B) Thomas Jefferson; a gold standard C) Alexander Hamilton; a central bank D) George Washington; low interest rates

C) Alexander Hamilton; a central bank

Which of the following statements about interest rate risk is true? A) An increase in interest rates usually raises banks' profits. B) Banks' liabilities are not rate sensitive. C) Banks' assets typically have long maturities. D) Bank's assets are not rate sensitive.

C) Banks' assets typically have long maturities.

The "grades" that regulators give banks are called ________ ratings. A) LION B) FDIC C) CAMELS D) MONEY

C) CAMELS

Finance companies are not as heavily regulated as commercial banks, which enables them to make subprime loans. Reason(s) for this light regulation include(s) which of the following? A) The adverse selection problem is not as bad in the subprime lending industry. B) Finance companies are better than banks at solving asymmetric information problems. C) Finance companies do not accept deposits. D) All of the answers are correct

C) Finance companies do not accept deposits.

Which of the following statements about off-balance-sheet activities is true? A) The Dodd-Frank Act of 2010 encouraged banks to trade derivative securities. B) Commercial banks are allowed to buy common stock. C) Investment banking activities are an important source of income for large banks. D) Commercial banks are not allowed to conduct off-balance-sheet activities

C) Investment banking activities are an important source of income for large banks.

The Walt Disney movie ________ gives us a little insight into how a bank run can begin. A) The Lady and the Tramp B) Wizard of Oz C) Mary Poppins D) Wall Street

C) Mary Poppins

In 2007, the British bank ________ experienced the first bank run to occur in the United Kingdom in over 100 years. A) the First National Bank of Keystone B) Indymac C) Northern Rock D) Barclays Bank, PLC

C) Northern Rock

If a bank's assets are $200 and the value of its weighted assets is $100, which is the more restrictive capital requirement, the U.S. minimum equity ratio or the BaselAccord requirement? A) The Basel Accord is the more restrictive. B) They are the same. C) The U.S. ratio is the more restrictive. D) There is not enough information provided to answer the question.

C) The U.S. ratio is the more restrictive.

Regulators address the problem of bank runs by A) requiring banks to increase their reserves to cover all deposits. B) increasing payments C) allowing banks to suspend payments. D) refusing to compensate depositors

C) allowing banks to suspend payments.

The Basel Accord set international standards for A) interest rate volatility. B) reserve ratios. C) bank capital requirements. D) loan risk

C) bank capital requirements.

Which of the following is a risk faced by banks? A) free-rider risk B) adverse risk C) credit (or default) risk D) moral risk

C) credit (or default) risk

Banks may have difficulty selling mortgages when A) most of their liabilities are in checking accounts rather than in savings accounts. B) the federal funds rate is unusually high. C) credit scores do not provide good information about credit risk. D) they have difficulty arranging syndication

C) credit scores do not provide good information about credit risk.

A bank charter is a A) contract between a bank and a depositor. B) set of rules a bank must follow. C) government license to operate a bank. D) set of guidelines for repaying a loan

C) government license to operate a bank.

To calculate a bank's profits, we use its A) profit margins. B) balance sheet. C) income statement. D) return on liabilities.

C) income statement.

Holding profits and assets constant, an increase in a bank's capital ____ the bank's equity ratio and _____ the bank's return on equity. A) reduces; reduces B) reduces; increases C) increases; reduces D) increases; increases

C) increases; reduces

When the FDIC uses the purchase and assumption method A) it advertises the deal two weeks before revoking the bank charter. B) it pays off depositors and closes the failed bank. C) it usually tries to close the failed bank on a Friday afternoon so that it can reopen on a Monday morning. D) small depositors lose 75 percent of their deposits

C) it usually tries to close the failed bank on a Friday afternoon so that it can reopen on a Monday morning.

The creation of ________ in the late 1970s allowed firms to avoid taking ________ loans from commercial banks. A) AAA bonds; federal fund B) stocks; commercial C) junk bonds; commercial and industrial D) discount loans; consume

C) junk bonds; commercial and industrial

If many of a bank's depositors wish to withdraw large sums of money at one point in time, the bank faces A) a bank run. B) default. C) liquidity risk. D) much more government oversight.

C) liquidity risk.

After a bank receives a charter, it is regulated to prevent A) liquidity risk. B) adverse selection. C) moral hazard. D) aggressive borrowing

C) moral hazard.

Deposit insurance increases the effect of A) interest rate risk. B) selective depositing. C) moral hazard. D) adverse selection

C) moral hazard.

The largest liabilities held by banks are A) loans. B) securities. C) nontransaction deposits. D) vault cash.

C) nontransaction deposits.

The rate-sensitivity gap is equal to A) total income minus total expense. B) quantity of assets minus quantity of liabilities. C) rate-sensitive assets minus rate-sensitive liabilites. D) rate-senitive assets divided by rate-sensitive liabilities

C) rate-sensitive assets minus rate-sensitive liabilites.

With the decline in commercial and investment loans has come an increase in A) federal fund loans. B) car loans. C) real estate loans. D) All of the answers are correct.

C) real estate loans.

The Gramm-Leach-Bliley Act, which fully repealed the ________ was passed in 1999. A) use of creative corporate accounting B) restriction on finance companies to take deposits C) separation of commercial banks and securities firms D) restrictions placed upon shareholder

C) separation of commercial banks and securities firms

The Treasury Department helped keep the banking system ________ during the financial crisis by ________. A) liquid; providing equity B) liquid; increasing deposit insurance C) solvent; injecting capital D) solvent; closing insolvent banks

C) solvent; injecting capital

When ________ was repealed, commercial banks were allowed to conduct ________ . A) the Luxemburg-Engel Act; risk-free loans B) the reserve requirement; zero-reserve loans C) the Glass-Steagall Act; investment-banking services D) Sherman Antitrust Act; monetary policy

C) the Glass-Steagall Act; investment-banking services

Losses on real estate loans were lower for banks than for finance companies during the financial crisis because A) the banks did not make real estate loans. B) the finance companies were more tightly regulated than the banks. C) the banks rationed credit by screening out risky borrowers. D) the banks did not securitize their loans

C) the banks rationed credit by screening out risky borrowers.

Empirical evidence about the link between deposit insurance and banking crisis found that A) deposit insurance always decreases the chance of a banking crisis. B) deposit insurance always increases the chance of a banking crisis. C) the effects of deposit insurance on a banking crisis depend on other bank regulations. D) weak bank supervision makes deposit insurance less likely to produce a banking crisis

C) the effects of deposit insurance on a banking crisis depend on other bank regulations

When assessing a bank's asset quality, bank regulators consider which of the following? A) the term structure of loans B) whether a bank's reserves are mostly composed of cash or checks in the process of collection C) the general policy for loan approvals D) whether the bank is raising funds by offering mostly checking or savings account

C) the general policy for loan approvals

A bank's reserves are equal to A) deposits at the Fed. B) vault cash. C) vault cash plus deposits at the Fed. D) saving deposits plus checkable deposits

C) vault cash plus deposits at the Fed

A bank run is the sudden A) accumulation of bank capital. B) withdrawal by the depositors of all banks. C) withdrawal by the depositors of a single bank. D) increase in bank liquidit

C) withdrawal by the depositors of a single bank.

A common goal of strategies to deal with interest rate risk is to drive the rate-sensitive gap close to A) a large negative number. B) a large positive number. C) zero. D) the amount of total assets.

C) zero.

(Table 9.1 Bob's Bank) Bob's Bank's net worth is A) $50. B) $0. C) $10. D) $5.

D) $5.

Consider a bank with the following income statement It has $100 in loans with an interest rate of 5 percent; $50 in security holdings, paying 10 percent; reserves of $10;$100 in savings accounts that earn an interest rate of 2.5 percent; checking deposits equal to $30, a net worth of $30, and other expenses of $15. This bank gets a returnon its assets of about A) 7.5 percent. B) 25 percent. C) 10 percent. D) 4.8 percent

D) 4.8 percent

Screening for home mortgages relies most heavily on A) debt-income ratio. B) collateral. C) credit scores. D) All of the answers are correct

D) All of the answers are correct

To minimize moral hazard, many banks require A) collateral B) covenants in a loan contract. C) compensating balances. D) All of the answers are correct

D) All of the answers are correct

Which of the following are ways for a bank to borrow? A) issuing bonds B) federal funds C) discount loans D) All of the answers are correct

D) All of the answers are correct

Banks often merge A) after they have suffered large losses. B) to create an empire for the bank managers. C) to avoid failure. D) All of the answers are correct.

D) All of the answers are correct.

Deposit insurance creates a moral hazard because it A) eliminates depositors' incentives to monitor banks. B) reduces the cost of a bank failure for depositors. C) encourages depositors to leave their funds in a weak bank. D) All of the answers are correct.

D) All of the answers are correct.

Which of the following include(s) common misuse of deposits? A) looting B) making loans to risky projects C) speculating with high-risk off-balance-sheet activities (e.g., derivatives) D) All of the listed options include common misuses.

D) All of the listed options include common misuses.

Bank failures are costly because A) managers lose their jobs. B) bank owners lose any chance for future profits. C) depositors lose their uninsured funds. D) All of these make bank failures costly

D) All of these make bank failures costly

Which of the following securities are banks allowed to hold? A) Treasury bonds B) municipal bonds C) bonds issued by government agencies D) Banks are allowed to hold all of these securities

D) Banks are allowed to hold all of these securities

If bank regulators find evidence of criminal activity in a bank, such as embezzlement, they turn the case over to the A) Banking Commission. B) Secret Service. C) Federal Reserve Board. D) FBI

D) FBI

A suspension of payments I. is an opportunity for depositors to calm down. II. gives the bank time to increase its liquid assets. III. gives depositors the opportunity to reassure themselves their bank is solvent. A) I only B) II only C) III only D) I, II, and II

D) I, II, and II

A bank has failed when the following occurs I. It must sell its assets at fire-sale prices. II. Its liabilities exceed its assets. III. It faces a liquidity crisis. A) I only B) II only C) I and II only D) I, II, and III

D) I, II, and III

A banking panic like the one that occurred in the 1930s is not likely to happen again because A) depositors are no longer allowed to withdraw their funds simultaneously. B) the Glass-Steagall Act that separated commercial and investment banking was repealed. C) the Riegle-Neal Act was passed to prohibit nationwide banking. D) None of the answers are correct

D) None of the answers are correct

On a bank's balance sheet, which of the following is an asset? A) checking deposits B) small-time deposits C) savings accounts D) None of the answers are correct.

D) None of the answers are correct.

When a national bank is closed down, the ________ calls in the ________, which becomes a receiver for the bank. A) RTC; FHLBB B) Federal Reserve; FSLIC C) FDIC; FSLIC D) Office of the Comptroller of the Currency; FDIC

D) Office of the Comptroller of the Currency; FDIC

If a bank's assets are $200, what are the capital requirements under the U.S. minimum equity ratio and the Basel Accord requirement? A) the United States $10; the Basel Accord $16 B) the United States $16; the Basel Accord $10 C) the United States $10; the Basel Accord $10 D) There is not enough information provided to answer the question.

D) There is not enough information provided to answer the question.

_______ firms buy ownership shares (i.e., a substantial share) in a new company, which is used to finance the company's expansion. A) Speculative B) Takeover C) Predatory D) Venture capital

D) Venture capital

Bank regulators gather information about banks through A) bank examinations. B) call reports. C) analysis of a bank's purchases of securities. D) bank examinations and call reports

D) bank examinations and call reports

Because of the McFadden Act, each state had its own A) kind of money. B) real estate supervision. C) rules regulating stock exchanges. D) banking industry.

D) banking industry.

Eurodollars are A) Europe's single currency. B) dollars deposited in European banks. C) units of foreign currency. D) dollars deposited in banks outside of the United States

D) dollars deposited in banks outside of the United States

Deposit insurance _______ depositors' incentives to monitor banks, thereby ______ moral hazard problems. A) eliminates; eliminating B) increases; increasing C) increases; eliminating D) eliminates; increasing

D) eliminates; increasing

The financial crisis of 2007-2009 led to A) a reinstatement of the Glass-Steagall Act. B) a relaxation of the restrictions on interstate banking. C) a nationalization of the banking system. D) new regulations designed to limit risk taking by banks.

D) new regulations designed to limit risk taking by banks.

Regulators did not allow Walmart to ____ but they did allow Walmart to ___. A) enter the banking business in Canada; enter the banking business in Mexico B) do business in Utah; do business in California C) cash checks inside the store; open a bank account D) obtain a charter for an Industrial Loan Corporation; create a partnership with a bank

D) obtain a charter for an Industrial Loan Corporation; create a partnership with a bank

Money-center banks' largest loans are to A) large corporations. B) the U.S. government. C) credit card firms. D) private equity firms taking over companies

D) private equity firms taking over companies

One of the Securities and Exchange Commission's main goals is to A) underwrite IPOs. B) ensure maximum returns to shareholders. C) set short-term interest rates. D) reduce information asymmetries

D) reduce information asymmetries

SEC efforts are mainly aimed at A) reducing insider trading. B) increasing the flow of information in financial markets. C) protecting corporations from a decrease in the price of their securities. D) reducing insider trading and increasing the flow of information in financial markets.

D) reducing insider trading and increasing the flow of information in financial markets.

When you deposit $100 in your savings account, your bank's A) assets increase by $100. B) liabilities fall by $100. C) capital increases by $100. D) reserves increase by exactly $100

D) reserves increase by exactly $100

A state-chartered bank, which is not a member of the Federal Reserve System, is regulated by A) the Office of the Comptroller of the Currency. B) the state agency that chartered it. C) the FDIC. D) the state agency that chartered it and the FDIC.

D) the state agency that chartered it and the FDIC.

The adverse selection problem helps to explain why sometimes firms issue _____ rather than _____. A) bonds; stocks B) long-term bonds; short-term bonds C) stocks; bonds D) stocks; short-term bond

A) bonds; stocks

Money-center banks finance their lending primarily through A) borrowing from other banks. B) taking deposits. C) borrowing from the Federal Reserve System. D) All of the answers are correct

A) borrowing from other banks.

Banks that are considered too big to fail A) could disrupt the entire financial system if allowed to fail. B) have no links with other financial institutions. C) are usually small community banks. D) usually have assets of less than $1 billion.

A) could disrupt the entire financial system if allowed to fail.

When banks merge they benefit from ________ which reduces ________. A) economies of scale; transaction costs B) empire building; bank monopolies C) more risk; negative returns D) prestige; the number of bank customers

A) economies of scale; transaction costs

If a large number of savers want to buy a certain stock, they should each contribute to the cost of ________, however, they likely won't. This is called ________. A) gathering information; the free-rider problem B) hiring a trader; the asymmetric information problem C) vetting the firm; moral hazard D) paying trader fees; imperfect competition

A) gathering information; the free-rider problem

A bank charter is a A) government license to operate a bank. B) set of rules set up by individual banks. C) list of possible interest rates charged by banks. D) list of bank operating processes.

A) government license to operate a bank.

Securitization benefits for banks include A) increased liquidity. B) decreased diversification. C) increased risk of default on individual loans. D) None of the answers are correct

A) increased liquidity

The government abolished the _____ program in 2010 in favor of a _____ program to reduce the government's cost to help students finance their education. A) loan guarantee; direct loan B) Sallie Mae; Stafford loan C) government-sponsored; private-lending D) private-lending; government-sponsored

A) loan guarantee; direct loan

When seatbelts became mandatory by law, the number of accidents increased; this is likely due to A) moral hazard. B) adverse selection. C) more young drivers on the road. D) poorer road quality

A) moral hazard.

Hostile takeovers reduce ________ because if a company is poorly managed, there is an incentive to ________. A) moral hazard; change things B) adverse selection; split the firm's stock C) free-riding; pay for better information D) adverse selection; reduce externalitie

A) moral hazard; change things

A credit union is different from a savings and loan because it A) restricts membership to a common group of people. B) restricts the maximum balance a depositor must have. C) only makes mortgage loans. D) will not accept checking deposits.

A) restricts membership to a common group of people.

In direct finance, A) savers buy securities from investors in financial markets B) savers buy securities directly from investors. C) savers buy securities from banks. D) investors borrow directly from banks

A) savers buy securities from investors in financial markets

The Sarbanes-Oxley Act created ________ to monitor accounting auditors' performance. A) the Accounting Oversight Board B) the Securities and Exchange Commission C) the firm Arthur Anderson D) Moody's

A) the Accounting Oversight Board

Reasons why indirect finance is so important include A) the fact that banks provide liquidity to depositors. B) the fact that banks increase transaction costs for savers. C) the fact that banks increase transaction costs for investors. D) the persistent increase in the cost of stocks

A) the fact that banks provide liquidity to depositors

Because gathering information is costly, when many people buy the same stock ________ arise(s). A) the free-rider problem B) irrational exuberance C) adverse selection D) pecuniary externalities

A) the free-rider problem

Which is the preferred method used by loan sharks to deal with default risk? A) threat of appropriate violence. B) resorting to the appropriate court of justice if the borrower defaults C) increaseing interest rates D) collecting the collateral pledged by the borrower

A) threat of appropriate violence.

When a small firm borrows from a commercial bank instead of an investment bank, it reduces its A) transaction costs. B) collateral. C) interest rate. D) default risk.

A) transaction costs

Because a large part of Enron's managers' pay was ________, there was an incentive to ________. A) cash; not pay taxes B) in stock options; lie about losses C) in dividend payments; lower profit expectations D) in kind; to produce a lot of output

B) in stock options; lie about losses

In securities markets, we can see evidence for the free-rider problem because A) every saver pays for a portion of the costs of gathering information. B) individual savers can observe others' actions and do the same. C) stock prices are correctly valued. D) information is costless

B) individual savers can observe others' actions and do the same.

The moral hazard problem in stock markets, in which ______ fear that managers will misuse their funds, makes it _____ for firms to raise funds by selling stocks. A) principals; easier B) principals; harder C) agents; harder D) agents; easier

B) principals; harder

The rating agencies argue that their opinions are A) priced fairly in the market. B) protected by the First Amendment. C) divided into accurate risk categories, e.g., triple A. D) designed to be used only by sophisticated investors

B) protected by the First Amendment.

In 2008 the Federal Government ________ Fannie Mae and Freddie Mac. A) privatized B) put into conservatorship C) released from private ownership D) None of the answers are correct

B) put into conservatorship

When conflicts of interest arise in the bond-rating industry, A) bond-rating firms issue low ratings to bad-quality securities. B) savers can potentially lose a lot of money. C) the quality of securities traded in securities markets increases. D) savers benefit from these conflicts of interest

B) savers can potentially lose a lot of money.

Banks mitigate adverse selection by A) requiring borrowers to have collateral. B) screening potential borrowers. C) charging high interest rates. D) requiring borrowers to open a checking account

B) screening potential borrowers.

The process of transforming loans into securities is called A) collateralization. B) securitization. C) subordination. D) hypothecation.

B) securitization.

The U.S. government encourages home ownership by A) seizing homes that have been vacant for more than a year. B) tax incentives. C) building homes and assigning them to low-income families. D) buying homes for the poor.

B) tax incentives.

Which of the following act, forbade banks to operate in more than one state? A) the Federal Reserve acts (1913) B) the McFadden Act (1927) C) the Glass-Steagall Act (1933) D) the Riegle-Neal Act (1994)

B) the McFadden Act (1927)

Transaction costs are defined as A) the cost of transporting goods and services for exchange. B) the costs in time and money of exchange. C) the time spent determining a market price. D) effort required to produce a good or service

B) the costs in time and money of exchange.

Credit ratings reduce A) credit rationing. B) moral hazard. C) adverse selection. D) venture capital.

C) adverse selection

Which of the following deposits are called Eurodollars? A) euros deposited in a London bank. B) dollars deposited in Bank of America. C) dollars deposited in a foreign branch of Chase Manhattan located in Paris. D) yen deposited in a Japanese bank

C) dollars deposited in a foreign branch of Chase Manhattan located in Paris.

Banks can offer small firms smaller transaction costs because of A) lower default risk. B) constant returns to scale. C) economies of scale. D) higher rates of return

C) economies of scale

Savings institutions focus primarily on A) underwriting securities. B) making loans to private equity firms. C) making home mortgage loans. D) making loans to big corporations

C) making home mortgage loans.

Companies that make small loans to people who need cash urgently are called A) ATMs. 'B) credit unions. C) payday lenders. D) community banks

C) payday lenders.

The interest rate offered by banks to their highest quality borrowers is called the A) discount rate. B) federal funds rate. C) prime rate. D) None of the answers are correct

C) prime rate.

The country with the largest number of banks is A) Japan. B) China. C) the United States. D) Germany.

C) the United States.

Subprime lenders include A) pawnshops. B) finance companies. C) title loan companies. D) All of the answers are correct.

D) All of the answers are correct.

The U.S. government encourages home ownership by A) guaranteeing mortgages. B) providing tax breaks. C) supporting Fannie Mae and Freddie Mac. D) All of the answers are correct.

D) All of the answers are correct.

Methods to reduce information asymmetries include using A) information-gathering firms. B) boards of directors of publicly traded companies. C) private equity firms. D) All of these are methods

D) All of these are methods

Banks' strategies designed to solve moral hazard problems include A) setting net worth requirements. B) including restrictive covenants. C) monitoring borrowers' activities. D) All of these are strategies.

D) All of these are strategies.

The result of the populists' belief that risky bank behavior helped cause the Great Depression was the A) Sarbanes-Oxley Act. B) First Bank of the United States. C) Sherman Antitrust Act. D) Glass-Steagall Act.

D) Glass-Steagall Act.

When buyers have less information than sellers do about the quality of the product, a situation of ____ exists. A) asymmetric information B) moral hazard C) seller greed D) None of the answers are correct

A) asymmetric information

According to a study by economists at Harvard and the University of Chicago, stock market activity is highest with ________ legal systems. A) English B) German C) French D) Russian

A) English

Recipients of Stafford student loans receive their funding from one of two different programs A) Ford Direct Loan Program or Federal Family Education Loan Program. B) PLUS loan or FHA loan. C) Marks loan or Spencer loan. D) Sarbans loan or Oxley loan.

A) Ford Direct Loan Program or Federal Family Education Loan Program

The foreign city with the most U.S. banks is A) London. B) Frankfurt. C) Beijing. D) Tokyo

A) London.

Which of the following statements about money-center banks is true? A) Their headquarters are located in a major financial center. B) They finance their lending primarily by accepting deposits. C) Usually their assets amount to around $10 billion. D) Their assets amount to less than $1 billion

A) Their headquarters are located in a major financial center.

Which of the following statements about thrifts institutions is true? A) Thrifts are divided into credit unions and savings institutions. B) Assets of a typical thrift exceed $1 billion. C) Thrifts specialize in underwriting securities. D) Thrifts specialize in trading currencies.

A) Thrifts are divided into credit unions and savings institutions.

To encourage long-term relationships with good borrowers, banks often offer A) a line of credit. B) interest rates below the federal funds rate. C) a free checking account. D) no collateral loans

A) a line of credit.

Traditional mortgages require ________ while many subprime mortgages were offered with ________. A) a substantial down payment; "zero down." B) high interest rates; low interest rates. C) no down payment; "zero down." D) low interest rates; substantial down paymen

A) a substantial down payment; "zero down."

Suppose that you have the same amount of information as the firms that are trying to raise funds to invest in a project. Your firm can issue a $100 bond that promises topay 25 percent in a year. Suppose there are two firms that are trying to raise funds to pay for a project. Firm A's project is safe and is guaranteed to produce $130 inrevenue. Firm B's project is risky and has a two-thirds probability of producing $180 a year, and a one-third chance it produces nothing. What is the expected return oneach project, and which firm will receive financing? A) $125; $120; Firm A B) $130; $120; Firm A C) $130; $180; Firm B D) There is not enough information to answer the question.

B) $130; $120; Firm A

The creation of the financial holding company Citigroup was made possible by the passage of the A) Glass-Steagall Act. B) Gramm-Leach-Bliley Act. C) Sarbanes-Oxley Act. D) Sherman Antitrust Act.

B) Gramm-Leach-Bliley Act.

Which of the following statements about international banking is true? A) U.S. banks are not allowed to open branches in foreign countries. B) Hundreds of foreign banks now have subsidiaries in the United States. C) Eurodollars refer to dollar deposits inside the United States only. D) Foreign banks are not allowed to open branches in the United States

B) Hundreds of foreign banks now have subsidiaries in the United States.

Famous entrepreneur and "lifestyle adviser" ________ was found guilty of ________. A) Oprah Winfrey; offshore investments B) Martha Stewart; insider trading C) Rosie O'Donnell; tax evasion D) Phil Donahue; under-reporting profits

B) Martha Stewart; insider trading

_______ firms buy an entire company, make it profitable, and then resell it after a few years. A) Speculative B) Takeover C) Predatory D) Venture capital

B) Takeover

Which of the following statements about the SEC is true? A) The SEC makes sure no firm that issues securities loses money. B) The SEC requires that firms that issue securities disclose information to buyers of their securities. C) The SEC is part of the Federal Reserve System. D) The SEC cannot monitor the behavior of firms that issue securities

B) The SEC requires that firms that issue securities disclose information to buyers of their securities.

Which of the following statements about a Ponzi scheme is true? A) The fund manager wisely uses savers' funds. B) The schemer sends clients false statements showing that their wealth is increasing. C) The scheme's growth is in fact financed by the schemer's contributions. D) The schemer's last name is always Ponzi

B) The schemer sends clients false statements showing that their wealth is increasing.

Characteristics of payday lenders include which of the following? A) Everybody agrees that payday lenders provide a great service to subprime borrowers. B) They charge very high interest rates. C) Potential borrowers have to provide more information about themselves than if they are borrowing from a bank. D) They charge lower rates than commercial banks

B) They charge very high interest rates.

Which of the following allowed Fannie Mae and Freddie Mac to pay relatively low interest on their bonds? A) They were engaged in a highly risky line of business. B) They were implicitly backed by the U.S. government. C) Most of their mortgage portfolio was composed of subprime mortgages. D) Mortgage loans historically had high rates of defaul

B) They were implicitly backed by the U.S. government

As a result of the subprime lending crisis, what happened to Fannie Mae and Freddie Mac? A) They were privatized. B) They were put into conservativeship. C) They were sold to a foreign central bank. D) The Fed seized their assets and auctioned them off

B) They were put into conservativeship.

Firms that overissue new stocks could be accused of selling A) a derivative. B) a "lemon." C) "junk." D) a mutual fund

B) a "lemon."

Consequences of the adverse selection problem in securities markets include A) an increase in the quality of securities issued. B) a decrease in the overall number of good-quality securities issued. C) an increase in the average price of securities issued. D) an increase in the volume of securities traded.

B) a decrease in the overall number of good-quality securities issued.

Banks are reluctant to lend to borrowers with weak credit histories because of _____; they rely on ______ to reduce this problem. A) high default risk; high interest rates B) adverse selection; credit reports C) adverse selection; low interest rates D) asymmetric information; expanding credit

B) adverse selection; credit reports

To minimize the problem of ________ before purchasing a stock, you should ________. A) moral hazard; monitor the firm B) adverse selection; gather information about the firm whose stock you are interested in C) irrational exuberance; put all your money in savings D) moral hazard; gather information

B) adverse selection; gather information about the firm whose stock you are interested in

Because of ________, banks prefer to develop ________ with customers. A) moral hazard; short-term relationships B) adverse selection; long-term relationships C) fraud; a polite relationship D) insider trading; friendship

B) adverse selection; long-term relationships

Applying the principal-agent terminology to financial markets, firms are the ____ and savers are the _____. A) principals; agents B) agents; principals C) free riders; lemons D) lemons; free riders

B) agents; principals

The two main types of banks are A) commercial and investment. B) commercial and thrifts. C) investment and credit unions. D) savings and loans and pensions

B) commercial and thrifts.

One of Andrew Jackson's primary goals when elected president was to A) eradicate slavery. B) eliminate the Second Bank of United States. C) increase trade with the Middle East. D) abolish Congress

B) eliminate the Second Bank of United States.

To reduce moral hazard after buying a stock or bond, individual savers should examine a firm's I. past earnings. II. future projects. III. managers. A) I only B) II only C) II and III D) III only

C) II and III

Which of the following statements about the Sarbanes-Oxley Act is true? A) It allows corporations to conduct their own audits. B) It is clear to all individuals that it is the best way to reduce asymmetric information problems. C) It established the Accounting Oversight Board, to monitor the performance of corporations' auditors.' D) It increased the incentives for conflicts of interests in the investment banking industry.

C) It established the Accounting Oversight Board, to monitor the performance of corporations' auditors.'

The _____ Act restricts banks from holding more than ____ percent of all commercial bank deposits. A) Glass-Steagall; 10 B) McFadden; 5 C) Riegle-Neal; 10 D) Gramm-Leach-Bliley; 5

C) Riegle-Neal; 10

The largest provider of loans from the Federal Family Education Loans Program is A) Fannie Mae. B) Freddie Mac. C) Sallie Mae. D) the Ford Direct Loan Program

C) Sallie Mae.

Which of the following statements about banks and transactions costs is true? A) Banks usually increase transaction costs for small investors. B) Small investors usually raise funds by issuing bonds or stock to get funds. C) Small savers resort to banks because of the benefit of liquidity and the low cost of acquiring assets. D) Banks increase transaction costs by exploiting economies of scale

C) Small savers resort to banks because of the benefit of liquidity and the low cost of acquiring assets.

Which of the following statements about community banks is true? A) They have assets of more than $10 billion. B) They operate all across the country. C) They usually raise funds from local depositors and lend to consumers and small businesses. D) They only conduct businesses with other banks

C) They usually raise funds from local depositors and lend to consumers and small businesses.

In Akerlof's "lemons" model, which of the following completes the following sentence? Because all used cars in the market are priced based on the average quality ofall cars, I. owners of high-quality cars are not willing to sell their cars. II. owners of poor-quality cars want to sell their cars. III. buyers will only have access to high-quality cars. A) I only B) II only C) III only D) I and II

D) I and II

Which of the following are among the "Five Ps" of business lending? A) profit B) production C) preferred D) There is no such thing as the "Five Ps" of business lending

D) There is no such thing as the "Five Ps" of business lending

Banks are careful at screening potential borrowers because they are A) concerned about bank runs. B) lending savers' deposits. C) under the scrutiny of the Federal Government. D) the sole recipient of the benefits of loans

D) the sole recipient of the benefits of loans