chapter 9

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 $30,000. $25,000. $20,000. $10,000.

$25,000

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

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

Of the following, which would be the last choice for a bank facing a reserve deficiency? Call in loans. Borrow from the Fed. Sell securities. Borrow from other banks.

Call in loans.

Which of the following statements is FALSE? Checkable deposits are usually the lowest cost source of bank funds. Checkable deposits are the primary source of bank funds. Checkable deposits are payable on demand. Checkable deposits include NOW accounts.

Checkable deposits are the primary source of bank funds.

Which of the following is NOT a source of funds for a bank? Treasury bills MMDAs transaction deposits discount loans

Treasury bills

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. an increase; increase an increase; reduce a decline; reduce a decline; not affect

an increase; reduce

A deposit outflow results in equal reductions in loans and reserves. assets and liabilities. reserves and capital. assets and capital.

assets and liabilities.

Duration analysis involves comparing the average duration of the bank's ________ to the average duration of its ________. securities portfolio; non-deposit liabilities assets; liabilities loan portfolio; deposit liabilities assets; deposit liabilities

assets; liabilities

Which of the following are reported as liabilities on a bank's balance sheet? discount loans reserves U.S. Treasury securities real estate loans

discount loans

Through correspondent banking, large banks provide services to small banks, including loan guarantees. foreign exchange transactions. issuing stock. debt reduction.

foreign exchange transactions.

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

increase the risk a bank faces.

Commercial bank's make their profits primarily by issuing equity. gains on stock market transactions. issuing loans. charging fees for services.

issuing loans.

Holding large amounts of bank capital helps prevent bank failures because it means that the bank has a higher income. it makes loans easier to sell. it can be used to absorb the losses resulting from bad loans. it makes it easier to call in loans.

it can be used to absorb the losses resulting from bad loans.

Banks earn profits by selling ________ with attractive combinations of liquidity, risk, and return, and using the proceeds to buy ________ with a different set of characteristics. loans; deposits securities; deposits liabilities; assets assets; liabilities

liabilities; assets

Bankers' concerns regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Fed, and borrowings from other banks to deal with deposit outflows is an example of liability management. liquidity management. managing interest rate risk. managing credit risk.

liquidity management.

Large-denomination CDs are ________, so that like a bond they can be resold in a ________ market before they mature. nonnegotiable; secondary nonnegotiable; primary negotiable; secondary negotiable; primary

negotiable; secondary

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

provide for unexpected deposit outflows.

Long-term customer relationships ________ the cost of information collection and make it easier to ________ credit risks. reduce; screen increase; screen reduce; increase increase; increase

reduce; screen

Which of the following bank assets is the most liquid? consumer loans reserves state and local government securities U.S. government securities

reserves

If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve requirements, the bank can reduce deposits by $3 million. increase loans by $3 million. sell $3 million of securities. repay its discount loans from the Fed.

sell $3 million of securities.

Secondary reserves include deposits at Federal Reserve Banks. deposits at other large banks. short-term U.S. government securities. state and local government securities.

short-term U.S. government securities.

For a given return on assets, the lower is bank capital the lower is the return for the owners of the bank. the higher is the return for the owners of the bank. the lower is the credit risk for the owners of the bank. the lower the possibility of bank failure.

the higher is the return for the owners of the bank.

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 the assets at the bank increase by $800,000. the liabilities of the bank increase by $1,000,000. the liabilities of the bank increase by $800,000. reserves increase by $160,000.

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

One reason banks' asset portfolios include state and local government securities because they help to attract business from these government entities. banks consider them helpful in attracting accounts of Federal employees. the Federal Reserve requires member banks to buy securities from state and local governments located within their respective Federal Reserve districts. there is no default-risk with state and local government securities.

they help to attract business from these government entities.

Because ________ are less liquid for the depositor than ________, they earn higher interest rates. savings accounts; time deposits money market deposit accounts; time deposits money market deposit accounts; savings accounts time deposits; savings accounts

time deposits; savings accounts