Money & Banking Final

Suppose you buy a 60-day T-bill with a face value of $1000 at a price of $990. Your discount rate yield (DRY) would be

((1000-990/1000)(360/60)) = 6.0%

Suppose you buy a 60 day T-bill with a face value of $1000 at a price of $990. Your investment return yield (IRY) would be

((1000-990/1000)(365/60)) = 6.1%

Suppose you buy a 120-day T-bill will a face value of $10000 at a price of $9900. Your investment return yield (IRY) would be

((10000-9900/10000)(365/120)) = 3.0%

The key to solving the adverse selection problem that banks face hinges on

A better flow of informaton

Mr. Zhou had been a customer at the Worcester Five Cent Savings Bank in Massachusetts since 1957. In 1968, he saw the name of the bank change to Consumers Savings Bank. What else did Mr. Zhou discover about his bank at that time?

A new type of a savings account that pay interest

is a financial arrangement whereby one party sells an asset with the agreement to repurchase it at a specific date in the future.

A repurchase agreement

is a municipal bond to raise funds that will be used for a specific income-generating project.

A revenue bond

Suppose that Becky, a customer at North Bank, owns a company and considers issuing commercial paper to meet short-term debt obligations. What kind of support could North Bank provide to Becky?

A standby letter of credit

What information do bank managers need to perform interest rate gap analysis?

Amount of interest rate-sensitive liabilities Amount of interest rate-sensitive assets

Which of the following are sources of liquidity risk?

An unexpected increase in payoffs of liabilities that come due An unexpected increase in withdrawals by depositors

Duration analysis is sometimes done to understand the sensitivity of a bank's position to changes in risk. This is most often done by calculating the duration gap, which is

Asset duration - Liability duration(Liability / Asset)

are promises by one party to pay another party in the future, which is guaranteed by a bank.

Banker's acceptances

Which of the following most accurately explains the need for government-sponsored deposit insurance?

Banks do not disclose to whom they have made loans and for how much.

The _________attempt to set international standards for bank capital

Basel Accords

Which of the following is a characteristic of a Treasury Bill auction?

Bidders submit competitive bids between Thursday and Monday. No one bidder is allowed to purchase more than 35% of any issue. Everyone whose bid was accepted pays the same price. The Treasury announces on Thursday how many and what types of T-bills it will sell the following Monday.

Which of the following currently makes up the largest share of bank assets?

Business and consumer loans

CAMELS

Capital, Assets, Management, Earnings, Liquidity, Sensitivity

are unsecured IOUs issued by large, well-known, and trusted corporations.

Commercial papers

Which of the following currently makes up the largest share of bank liabilities?

Demand deposits

When the FDIC decides to deal with a failed bank using the payoff and liquidate policy, what is being paid off?

Deposit balances to the bank's depositors

Which of the following bank assets is most liquid?

Deposits at the Federal Reserve

In 1968 the Worcester Five Cent Savings Bank hired Ronald Haselton to be its new president and chief executive officer. One thing that Haselton did was change the name of the bank to Consumers Savings Bank. What else did Haselton do that later was considered one of the biggest innovations in the banking industry in the 20th century?

Developed and put into effect NOW accounts

The banking legislation that created the Bureau of Consumer Financial Protection is the _________ Act.

Dodd-Frank Wall Street Reform and Consumer Protection

are bank accounts denominated in a currency other than the currency of the country in which the depository institution resides.

Eurodollars accounts

All large banks and some small banks chosen by the Federal Reserve perform asset transformation.

False

True or False: The formula implies that if a bank's ROA is decreasing, the bank is poorly run. True

False

Which of the following is an accurate description of government-sponsored deposit insurance?

Government protection from losses may occur if a bank becomes insolvent or fails.

Which of the following are potential solutions to the liquidity problem?

Increase interest rates on deposits to increase the level of deposits Raising cash by issuing commercial paper

Which of the following are characteristics of T-bills?

Institutional investors can purchase T-bills T-bills have maturities of 28, 91, and 182 days The government doesn't pay interest on T-bills T-bills are sold at discount

Which of the following are accurate statements about interest rate risk?

Lately, it has increased due to the growing volatility of interest rates. It arises because the value of an asset changes when interest rates change. Banks must manage interest rate risk because it affects banks' interest income. Changes in interest rates affect bank assets. Changes in interest rates affect bank liabilities. Banks must manage interest rate risk because it affects banks' expenses.

Which type of risk became a major problem with the financial crisis that began in 2008?

Market risk

are large CDs sold in lots of $1 million each with interest rates determined by negotiations between banks and their depositors.

Negotiable certificates of deposits

Which of the following is an accurate formula of a bank's return on assets (ROA)?

Net Income/Total Assets

Suppose Mr. Cuttner, a successful motivational speaker, wants to buy $450 thousand worth of highly liquid, short-term IOUs. Would such a transaction take place in the money market?

No

For much of US history, banks have been limited in how much they could pay in interest in deposits by

Reg Q

____________ do not make periodic interest payments; instead, they are sold at a discount from their face value.

STRIPS

Which of the following was the goal of the Basel Accords?

Setting international standards for bank capital

Suppose Nash Bank is a local bank in Tennessee. According to the CAMELS rating system, it is failing and liquidation of the bank's assets would not be enough to pay off the depositors. Which of the following scenarios is most likely to take place?

The FDIC will pay off the insured depositors to the stated maximum. Uninsured depositors would obtain pennies on the dollar of deposits they had. Subordinated debt holders would be paid only after all of the depositors were paid in full, if possible.

Which of the following is NOT a supplier of financial instruments in the primary market

The Federal Reserve

Which of the following most accurately explains why the bank requires Ms. Garibaldi to provide information about her past, current, and likely future income and the sources of this income?

The bank needs to assess Ms. Garibaldi's capacity to evaluate her credit risk.

Which of the following accurately defines interest rate gap analysis?

The difference between the amount of assets and the amount of liabilities and the amount of assets on which interest rates are due to reset during a specific time period

Which of the following most accurately explains why the bank chartering system of the United States is known as the reason for a dual banking system?

The government grants charters to banks.

Which of the following best explains the importance of bank capital?

The level of bank capital should be high enough to write down nonperforming assets.

Which of the following accurately defines duration analysis?

The weighted average of time until repayment of the price of a bond for a bond with a fixed cash flow

What information do bank managers need to perform duration analysis?

The weighted average of times until payment as a function of the present value of the payment Market values of assets and liabilities

Which of the following is an accurate description of a dual banking system?

There exists a system in which bank charters are granted by both the government and private licensing organizations.

Which of the following accurately explains why the Federal Reserve established a price floor in the federal funds market?

To guarantee that interest rates do not fall so low as to cause deflation

What is true about negotiable certificates of deposits (CDs)?

To open a negotiable CD, savers must have large amounts of savings, usually at least $100,000

Which of the following are characteristics of money markets?

Trade in instruments with high levels of liquidity A wholesale market Trade in instruments with low default risk Trade in short term debt instruments

Which of the following accurately describes the difference between Treasury notes and Treasury bonds?

Treasury notes mature in 1 to 10 years, whereas Treasury bonds mature in more than 10 years.

All banks, regardless of size, perform asset transformation.

True

True or False: Revenue bonds are usually viewed as having a higher default risk than general obligation bonds.

True

Which of the following accurately states the difference between a standby letter of credit and a commercial letter of credit?

Unlike a commercial letter of credit, a standby letter of credit is not tied to any specific transaction.

Which of the following best describes the difference between interest rate gap analysis and duration analysis?

Unlike duration analysis, interest rate gap analysis does not account for the fact that some assets or liabilities are more sensitive to interest rate changes than others.

Which of the following best describes the difference between duration analysis and interest rate gap analysis?

Unlike interest rate gap analysis, duration analysis takes into account that some assets or liabilities are more sensitive to interest rate changes.

asset transformation

When Right Bank creates long-term loans from short-term deposits, we say that it performs

Suppose Silver Bag, a commercial bank, seeks to trade $15 million worth of short-term, highly liquid IOUs. Would such a transaction take place in the money market?

Yes

The principle characteristic of a dual banking system is that

a bank charter may be obtained from either the national or the state/ provincial government

Which of the following allows the issuer to set aside a pool of money for repayment of a bond?

a sinking fund

Liquidity is important to banks because it

allows them to meet the cash needs of their depositors

Miserly Bank finds itself short of reserves at the end of the day. One solution to this dilemma would be for Miserly Bank to

borrow in the federal funds market.

In order to open a bank, you must apply to the government for a bannk

charter

Bonds with a call provision normally pay a lower call price the

closer the bond is to its maturity date

Short-term, unsecured debt, which matures in less than 270 days, issued by established corporations is called

commercial paper

Among the assets on a bank's balance sheet are

consumer loans

For a bank, the risk that a borrower will not pay interest or a premium as promised is known as _________ risk

credit

If a bank has a positive interest rate gape and interest rates decline, then the bank will experience a

decline in revenue

Banks would like to have a negative gap if they expect that future interest rates will ________ . This means that banks should hold __________ interest rate-sensitive assets than interest rate-sensitive liabilities.

decrease; less

The duration formula implies that if interest rates increase, duration will ____________ . The duration gap formula implies that, ceteris paribus, the gap will increase, if the interest rate change affects the value of the bank's assets __________ than it affects the value of its liabilities.

decrease; more

As rates of inflation increase, the real rate of return on government bonds

decreases

The biggest gross interest expense for banks is interest paid on

deposits

Cameron is looking to buy $1000 worth of T-bills. She can purchase them at all of the following places EXCEPT

directly from her bank

Two approaches banks may use to evaluate a consumer's capacity to handle more debt include the ________ approach and the ________ approach.

fixed payments; debt-to-income ratio

Commercial banks often buy money market instruments for the purpose of

generating interest income

Because a bank's depositors also suffer from asymmetric information in that it is difficult for them to know if a bank is being run well, the US government created

government-sponsored deposit insurance

A measure that can be used to determine whether banks have sufficient liquidity is the liquidity coverage ratio. A banks is considered to have sufficient liquidity when this ratio is

greater than 1

The income generated from federal funds sold is counted on a bank's income statement as

gross interest income

Banks will often use derivative contracts to

hedge exchange between risk.

When the economy expands, government tax revenues _________ and the government needs to borrow ________ . As a consequence, the government issues _______Treasury bills.

increase less less

The widely held belief that whatever benefits the financial industry must also be beneficial to all of society is known as

intellectual capture

Regulation Q, part of the Banking Act of 1933, prohibited banks from paying

interest on checking accounts

For bank executives, the level of bank capital and the level of executive compensation are

inversely related

A standby letter of credit differs from a commercial letter of credit in that it

is not tied to a specific transaction so is more general in nature.

A major automobile manufacturer typically has slow sales during the winter months, creating a cash flow problem for meeting payroll. In a situation like this, the automobile manufacturer may

issue commercial paper

Banks face liquidity risk because they have ____________ assets and __________ liabilities.

long term; short term

A mortgage loan is an example of a _____________ loan.

long-term consumer

A potentially important difference between NOW accounts and demand deposits is that NOW accounts

may reserve the right to require seven days' notice prior to making a withdrawal.

When the federal government runs a budget deficit, or spends more money than they take in, they

must borrow the difference

Ethan is planning to enter a noncompetitive bid for a T-bill next Monday. In order to do so, Ethan will include in his bid

only the amount of Treasury bills he wishes to buy.

ABC Bank acquires XYZ Bank through a merger but subsequently fails due to some unforeseen incompatibilities resulting from their widely different cultures. This is an example of ________ risk.

operational

A money market has a ___________ market, where a given IOU is issued for the first time, and a much larger ____________ market.

primary; secondary

In the too big to fail policy, there is an inherent tension between _______ and _______

reducing systematic risk, and increasing moral hazard.

Having multiple entities responsible for issuing bank charters in the United States has given rise to the problem of

regulator shopping

If a bank made a self-liquidating inventory loan, it would be making a ____________ loan.

short-term business

An unsecured personal loan is an example of a ____________ loan.

short-term consumer

The net stable funding ratio is one way of determining whether a bank is

sufficiently liquid

The idea that the failure of one megabank could result in the collapse of the entire financial system is known as __________ risk.

systemic

The business of banking can be described as

the business of asset transformation

The purpose behind Reg Q was

to limit competition between banks

The liquid bank accounts most often used by account holders to transfer funds to other parties are known as

transaction deposit accounts