Quizes

With a 10% reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is

$90

Both one-year and two-years bonds currently pays 5% interest. The two-year term premium is 0.2%. What is the expected interest rate on one-year bond next year according to the liquidity premium theory?

4.6%

If 1-year interest rates for the next five years are expected to be 4, 2, 5, 4, and 5 percent, and the 5-year term premium is 1 percent, than the 5-year bond rate will be

5%

If the expected path of one-year interest rates over the next five years is 4 percent, 5 percent, 7 percent, 8 percent, and 6 percent, then the expectations theory predicts that today's interest rate on the five-year bond is

6%

according to the liquidity premium theory of the term structure A)if yield curves are downward sloping, then short-term interest rates are expected to fall by so much that, even when the positive term premium is added, long-term rates fall below short-term rates. B)interest rates on bonds of different maturities do not move together over time. C)bonds of different maturities are not substitutes. D)yield curves should never slope downward.

A) If yield curves are downward sloping, then short-term interest rates are expected to fall by so much that, even when the positive term premium is added, long term rates fall

Which of the following is NOT true of an insolvent bank? A) The value of its assets is less than the value of its liabilities. B) It must have no more deposits. C) Its net worth is negative. D) It may be unable to pay off its depositors.

B) it must have no more deposits

A venture capital firm protects its equity investment from moral hazard through which of the following means?

It places people on the board of directors to better monitor the borrowing firm's activities.

The largest percentage of banks' holdings of securities consist of

Treasury and government agency securities

When the yield curve is flat or downward-sloping, it suggest that the economy is more likely to enter

a recession

Standby letters of credit

are a promise by a bank to lend the borrower funds to pay off its maturing commercial paper.

Of the following, which would be the last choice for a bank facing a reserve deficiency?

call in loans

If you default on your auto loan, your car will be repossessed because it has been pledged as ________ for the loan.

collateral

Net worth can perform a similar role to

collateral

Since they require less monitoring of firms, ________ contracts are used more frequently than ________ contracts to raise capital.

debt; equity

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

discount loans

If bonds with different maturities are perfect substitutes, then the ________ on these bonds must be equal.

expected return

The original intention of the Fed's role as lender of last resort was to make loans to banks that were

illiquid, but not insolvent

When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then

liabilities of Citibank increase by $10

The principal-agent problem would not occur if ________ of a firm had complete information about actions of the _______

owners; managers

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.

reduces; reduces

A $5 million deposit outflow from a bank has the immediate effect of

reducing deposits and reserves by $5 million.

Professional athletes often have contract clauses prohibiting risky activities such as skiing and motorcycle riding. These clauses are

restrictive covenants

Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called

return on equity

If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can

sell $3 million of securities.

When yield curves are flat

short term interest rates are about the same as long-term interest rates

If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to

shrink the size of the bank

Of the following sources of external finance for American nonfinancial businesses, the least important is

stocks

Banks have a maturity mismatch since

the borrow short term, but lend long term

Banks hold capital because

they are required to by regulatory authorities

An inverted yield curve predicts that short-term interest rates

will fall in the future