chapter 9 money and banking

Bank capital is equal to a. the value of the buildings and other physical assets the bank owns. b. the difference between the value of the bank's assets and the value of its liabilities. c. the value of everything the bank owns. d. the value of the capital originally invested in the bank by its owners.

b

Required reserves are a. imposed on all deposits at commercial banks. b. the portion of demand deposits and NOW accounts banks must hold. c. zero on demand deposits. d. zero on NOW accounts.

b

When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to make any loans but to hold excess reserves instead, then, in the bank's final balance sheet, a. reserves increase by $200,000. b. the assets at the bank increase by $1 million. c. liabilities increase by $200,000. d. the liabilities of the bank decrease by $1 million.

b

When banks calculate the losses the institution would incur if an unusual combination of bad events happened, the bank is using the ________ approach. a. maximum value b. stress-test c. trading-loss d. value-at-risk

b

Which of the following are transaction deposits? a. Savings accounts b. Negotiable order of withdraw accounts c. Certificates of deposit d. Small-denomination time deposits

b

A bank failure occurs whenever a. a bank has to call in a large volume of loans. b. a bank suffers a large deposit outflow. c. a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements. d. a bank is not allowed to borrow from the Fed.

c

Banks earn profits from off-balance sheet loan sales a. by selling the loans at discounted prices. b. by foreclosing on delinquent accounts. c. by selling existing loans for more than the original loan amount. d. by calling-in loans before the maturity date.

c

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

c

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

c

The amount of checkable deposits that banks are required by regulation to hold are the a. total reserves. b. excess reserves. c. required reserves. d. vault cash.

c

The largest percentage of banks' holdings of securities consist of a. state and local government securities. b. tax-exempt municipal securities. c. Treasury and government agency securities. d. corporate securities.

c

All of the following are examples of off-balance sheet activities that generate fee income for banks except a. guaranteeing debt securities. b. back-up lines of credit. c. foreign exchange trades. d. selling negotiable CDs.

d

Any reserves beyond what is required are called a. bank capital. b. secondary reserves. c. required reserves. d. excess reserves.

d

Banks use repurchase agreements to a. ensure that payments on consumer loans are made on time. b. guard against price fluctuations on long-term bonds. c. ensure that they always have enough funds on hand to meet their federal tax liabilities. d. borrow funds from business firms or other banks.

d

Because checking accounts are ________ liquid for the depositor than passbook savings, they earn ________ interest rates. a. less; higher b. more; higher c. less; lower d. more; lower

d

Examples of off-balance-sheet activities include a. selling negotiable CDs. b. extending loans to depositors. c. borrowing from other banks. d. loan sales.

d

If the value of bank's loans declines, what is the corresponding reduction in a liability entry that the bank makes? a. Borrowings are reduced by the amount of the decline in the value of the loan. b. Deposits are reduced by the amount of the decline in the value of the loan. c. Cash items in the process of collection are reduced by the amount of the decline in the value of the loan. d. Net worth (bank capital) is reduced by the amount of the decline in the value of the loan.

d

Which of the following bank assets is the most liquid? a. Cash items in process of collection b. Consumer loans c. U.S. government securities d. Reserves

d

Bank's make their profits primarily by issuing a. negotiable CDs. b. NOW accounts. c. equity. d. loans.

a

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

a

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. adverse selection; moral hazard b. diversification; moral hazard c. moral hazard; adverse selection d. adverse selection; diversification

a

Federal funds are a. short-term loans between banks. b. loans by the Federal Reserve to banks. c. the tax revenues of the federal government. d. loans by banks to the Federal Reserve.

a

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

a

A bank's commitment to provide a firm with loans up to pre-specified limit at an interest rate that is tied to a market interest rate is called a. loan commitment. b. an adjustable portfolio loan. c. pre-credit loan line. d. an adjustable gap loan

a

The interest rate on interbank loans is called the a. repo rate. b. prime rate. c. ederal funds rate. d. discount rate.

c

On a bank's balance sheet, bank capital is considered a. the total amount of funds banks have available to make loans. b. the difference between a firm's assets and it's shareholder's equity. c. an asset. d. a liability.

d

The difference of rate-sensitive liabilities and rate-sensitive assets is known as the a. duration. b. interest-sensitivity index. c. rate-risk index. d. gap.

d

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

d

Traders working for banks are subject to the a. exchange-risk problem. b. double-jeopardy problem. c. free-rider problem. d. principal-agent problem.

d

When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to make any loans but to hold excess reserves instead, then, in the bank's final balance sheet, a. reserves increase by $200,000. b. liabilities increase by $200,000. c. the liabilities of the bank decrease by $1 million. d. the assets at the bank increase by $1 million.

d