M & B CH. 9

11) With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is A) $90. B) $100. C) $110. D) $10.

A) $90.

20) If borrowers with the most risky investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects, banks are said to face the problem of A) adverse selection. B) moral hazard. C) adverse credit risk. D) lemon lenders.

A) adverse selection.

2) Which of the following are reported as liabilities on a bank's balance sheet? A) checkable deposits B) reserves C) consumer loans D) deposits with other banks

A) checkable deposits

27) If interest rates rise by 5 percentage points, say, from 10 to 15%, bank profits (measured using gap analysis) will A) decline by $1.5 million. B) decline by $2.5 million. C) decline by $0.5 million. D) increase by $1.5 million.

A) decline by $1.5 million.

28) Off-balance sheet activities involving guarantees of securities and back-up credit lines A) increase the risk a bank faces. B) slightly reduce the risk a bank faces. C) greatly reduce the risk a bank faces. D) have no impact on the risk a bank faces.

A) increase the risk a bank faces.

8) Banks may borrow from or lend to another bank in the Federal Funds market. A loan of excess reserves from one bank to another bank is recorded as a(n) ________ for the borrowing bank and a(n) ________ for the lending bank. A) liability; asset B) asset; liability C) asset; asset D) liability; liability

A) liability; asset

13) A $5 million deposit outflow from a bank has the immediate effect of A) reducing deposits and reserves by $5 million. B) reducing deposits and capital by $5 million. C) reducing deposits and loans by $5 million. D) reducing deposits and securities by $5 million.

A) reducing deposits and reserves by $5 million.

7) Which of the following bank assets is the most liquid? A) reserves B) consumer loans C) U.S. government securities D) state and local government securities

A) reserves

16) A bank is insolvent when A) its capital exceeds its liabilities. B) its liabilities exceed its assets. C) its assets exceed its liabilities. D) its assets increase in value.

B) its liabilities exceed its assets.

21) Long-term customer relationships ________ the cost of information collection and make it easier to ________ credit risks. A) reduce; increase B) reduce; screen C) increase; increase D) increase; screen

B) reduce; screen

18) Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called A) return on investment. B) return on equity. C) return on assets. D) return on capital.

B) return on equity.

4) Which of the following is NOT a source of borrowings for a bank? A) Eurodollars B) transaction deposits C) discount loans D) federal funds

B) transaction deposits

12) If a bank has $100,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $30,000. B) $10,000. C) $25,000. D) $20,000.

C) $25,000.

5) Bank ________ is/are listed on the liability side of the bank's balance sheet. A) securities B) cash items C) capital D) reserves

C) capital

25) The difference of rate-sensitive liabilities and rate-sensitive assets is known as the A) interest-sensitivity index. B) rate-risk index. C) gap. D) duration.

C) gap.

6) Which of the following are reported as assets on a bank's balance sheet? A) borrowings B) bank capital C) reserves D) savings deposits

C) reserves

24) 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) a decline; reduce B) a decline; not affect C) an increase; increase D) an increase; reduce

D) an increase; reduce

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

D) basic gap analysis.

15) Banks that actively manage liabilities will most likely meet a reserve shortfall by A) selling municipal bonds. B) seeking new deposits. C) calling in loans. D) borrowing federal funds.

D) borrowing federal funds.

3) Bank loans from the Federal Reserve are called ________ and represent a ________ of funds. A) discount loans; use B) fed funds; use C) fed funds; source D) discount loans; source

D) discount loans; source

14) Banks hold excess and secondary reserves to A) reduce the interest-rate risk problem. B) achieve higher earnings than they can with loans. C) satisfy margin requirements. D) provide for unexpected deposit outflows.

D) provide for unexpected deposit outflows.

9) When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then A) the liabilities of Citibank increase by $10. B) the reserves of the First National Bank increase by $ 10. C) the liabilities of the First National Bank increase by $10. D) the assets of Citibank fall by $10.

A) the liabilities of Citibank increase by $10.

10) When $1 million 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, then, in the bank's final balance sheet A) the liabilities of the bank increase by $1,000,000. B) reserves increase by $160,000. C) the liabilities of the bank increase by $800,000. D) the assets at the bank increase by $800,000.

A) the liabilities of the bank increase by $1,000,000.

1) Which of the following statements are TRUE? A) A bank's balance sheet indicates whether or not the bank is profitable. B) A bank's assets are its sources of funds. C) A bank's balance sheet shows that total assets equal total liabilities plus equity capital. D) A bank's liabilities are its uses of funds.

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

22) Collateral requirements lessen the consequences of ________ because the collateral reduces the lender's losses in the case of a loan default and it reduces ________ because the borrower has more to lose from a default. A) moral hazard; adverse selection B) adverse selection; diversification C) adverse selection; moral hazard D) diversification; moral hazard

C) adverse selection; moral hazard

23) Credit risk management tools include A) interest rate swaps. B) duration analysis. C) collateral. D) deductibles.

C) collateral.

19) Bank capital has both benefits and costs for the bank owners. Higher bank capital ________ the likelihood of bankruptcy, but higher bank capital ________ the return on equity for a given return on assets. A) increases; reduces B) reduces; increases C) reduces; reduces D) increases; increases

C) reduces; reduces

17) Net profit after taxes per dollar of assets is a basic measure of bank profitability called A) return on capital. B) return on equity. C) return on assets. D) return on investment.

C) return on assets.