Chapter 12

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Suppose Brian wants to open a European designer clothes store downtown. She goes to Italy to purchase a collection of clothes, but nobody knows her in Italy. Brian goes to her local bank and asks it to back up her transaction. What kind of support can Brian get from her bank?

A commercial letter of credit

A certificate of deposit will get you:

A higher rate of return than most savings accounts

Debbie has owned her home for several years and has been paying her mortgage on time every month. She is building equity in her home, which can then be used for what type of personal loan?

A second mortgage

A money market deposit account is:

A type of savings account

A certificate of deposit is:

A type of savings account with a higher rate of return than most

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

Business and consumer loans

Lisa runs a commercial bank and wants to hedge her interest rate risk. Which off balance sheet transaction is Lisa going to engage in on behalf of the bank?

Credit default swap

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

Why and when were NOW accounts created?

In the 1970s as a way to get around restrictive banking regulations

Payments for installment loans

Include some interest and some principal

Asset transformation converts what into what?

Liabilities into assets

Installment loans differ from balloon payment loans in that:

Payments on installment loans are the same each month for the life of the loan

Money market means:

Short-term instead of long-term like in the debt market

Which of the following securities typically held by banks have the lowest default risk?

U.S. Treasury securities

bonds

assets

cash/reserves

assets

Who transforms assets?

banks

Which of the following is the most liquid of a banks' assets?

cash

Demand deposit and NOW accounts are commonly referred to as:

checking accounts

Tevye owns a shoe store in the United States and wants to buy some shoes from Aldo, an Italian shoe manufacturer. Aldo is unsure of Tevye's ability to make payment and so is leery of selling the shoes to him. In order to make this transaction, Tevye might go to his bank to get a(n) __________ letter of credit.

commercial​

By far, the largest liability on the banking system's balance sheet is

deposits

Which is currently the largest liability of banks?

deposits

Credit Default Swaps are regulated in the same way bank deposits are regulated.

false

Banks will often use derivative contracts to

hedge exchange rate risk

bank capital

liabilities

business and consumer loans

liabilities

demand deposits

liabilities

loans from other banks

liabilities

saving account

liabilities

Agricultural loans

long term business loans

Fixed asset or blind-spot loans

long term business loans

Leveraged buyouts (LBOs)

long term business loans

A mortgage loan is an example of a __________ loan.

long term consumer

Certificates of Deposit, CD

non-transaction accounts

Savings, or Passbook Accounts

non-transaction accounts

The Dodd-Frank Act allowed banks, for the first time, to

pay interest on demand deposits.

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

short term business

Seasonal loans

short term business loans

Securities dealer loans

short term business loans

Self-liquidating inventory loans

short term business loans

Demand Deposits

transactions accounts

Money Market Deposit Accounts

transactions accounts

NOW accounts

transactions accounts

All banks, regardless of size, perform asset transformation.

true

Banks must weigh the risk versus the return in deciding

what to hold in their portfolio of assets.

The business of banking can be described as

​the business of asset transformation.


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