Ch 9

B) its liabilities exceed its assets.

A bank is insolvent when A) its capital exceeds its liabilities. B) its liabilities exceed its assets. C) its assets exceed its liabilities. D) its assets increase in value.

D) discount loans; source

Bank loans from the Federal Reserve are called ________ and represent a ________ of funds. A) discount loans; use B) fed funds; use C) fed funds; source D) discount loans; source

D) provide for unexpected deposit outflows.

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

C) adverse selection; moral hazard

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) moral hazard; adverse selection B) adverse selection; diversification C) adverse selection; moral hazard D) diversification; moral hazard

A) adverse selection.

If borrowers with the most risky investment projects seek bank loans in higher proportion to those borrowers with the safest investment projects, banks are said to face the problem of A) adverse selection. B) moral hazard. C) adverse credit risk. D) lemon lenders.

A) decline by $1.5 million.

If interest rates rise by 5 percentage points, say, from 10 to 15%, bank profits (measured using gap analysis) will A) decline by $1.5 million. B) decline by $2.5 million. C) decline by $0.5 million. D) increase by $1.5 million.

B) reduce; screen

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

D) basic gap analysis.

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is called A) basic duration analysis. B) gap-exposure analysis. C) interest-exposure analysis. D) basic gap analysis.

B) return on equity.

Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called A) return on investment. B) return on equity. C) return on assets. D) return on capital.

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

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 A) the liabilities of the bank increase by $1,000,000. B) reserves increase by $160,000. C) the liabilities of the bank increase by $800,000. D) the assets at the bank increase by $800,000.

A) the liabilities of Citibank increase by $10.

When a $10 check written on the First National Bank of Chicago is deposited in an account at Citibank, then A) the liabilities of Citibank increase by $10. B) the reserves of the First National Bank increase by $ 10. C) the liabilities of the First National Bank increase by $10. D) the assets of Citibank fall by $10.

C) reserves

Which of the following are reported as assets on a bank's balance sheet? A) borrowings B) bank capital C) reserves D) savings deposits

A) checkable deposits

Which of the following are reported as liabilities on a bank's balance sheet? A) checkable deposits B) reserves C) consumer loans D) deposits with other banks

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

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