Ch17- Practice Questions

15) A bank's largest source of funds is its A) nontransaction deposits. B) checking deposits. C) borrowing from the Fed. D) federal funds.

A

24) If a bank has $10 million of deposits, a required reserve ratio of 10 percent, and $2 million in reserves, then it does not have enough reserves to support a deposit outflow of A) $1.2 million. B) $1.1 million. C) $1 million. D) either A or B of the above.

A

27) Which is the least costly way for a bank to handle deposit outflows? A) Hold excess reserves. B) Borrow from other banks. C) Sell securities. D) Call in loans.

A

32) The largest source of bank income is A) interest on loans. B) interest on securities. C) service charges on deposit accounts. D) noninterest income.

A

33) Of the following, the largest operating expense for a bank is A) salaries and employee benefits. B) interest paid on discount loans. C) interest paid on federal funds borrowed from other banks. D) interest paid on checkable deposits.

A

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

A

5) Because passbook savings are ________ liquid for the depositor than checking accounts, they earn ________ interest rates. A) less; higher B) less; lower C) more; higher D) more; lower

A

13) Which of the following bank assets are the least liquid? A) reserves B) mortgage loans C) cash items in process of collection D) deposits with other banks

B

14) Which of the following bank assets are the most liquid? A) consumer loans B) reserves C) cash items in process of collection D) U.S. government securities

B

16) In general, banks make profits by selling ________ liabilities and buying ________ assets. A) long-term; shorter-term B) short-term; longer-term C) illiquid; liquid D) risky; risk-free

B

20) Bankers' concern 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 A) liability management. B) liquidity management. C) managing interest-rate risk. D) none of the above.

B

23) If a bank has $100,000 of deposits, a required reserve ratio of 20 percent, and $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is A) $30,000. B) $25,000. C) $20,000. D) $10,000.

B

38) For a given return on assets, the lower the bank capital is, A) the lower the return for the owners of the bank will be. B) the higher the return for the owners of the bank will be. C) the lower the credit risk for the owners of the bank will be. D) both A and C of the above will happen.

B

4) Which of the following statements is false? A) Checkable deposits are usually the lowest-cost source of bank funds. B) Checkable deposits are the primary source of bank funds. C) Checkable deposits are payable on demand. D) Checkable deposits include NOW accounts.

B

40) An argument that supports a regulated minimum capital requirement is that banks that hold too little capital A) are unprofitable. B) impose costs on other banks because they are more likely to fail. C) have an unfair competitive advantage over savings and loans. D) includes all of the above.

B

44) Discount loans are also known as ________. A) interest-free loans B) advances C) credits D) market loans

B

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

B

9) Which of the following are reported as assets on a bank's balance sheet? A) discount loans from the Fed B) loans C) borrowings D) only A and B of the above

B

11) Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves. A) low; short-term B) low; long-term C) high; short-term D) high; long-term

C

12) The most important category of assets on a bank's balance sheet is A) discount loans. B) securities. C) loans. D) cash items in the process of collection.

C

21) 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 instead makes loans, then in the bank's final balance sheet, A) the assets at the bank increase by $200,000. B) the liabilities of the bank increase by $200,000. C) reserves increase by $200,000. D) all of the above occur.

C

26) In general, banks would prefer to meet deposit outflows by ________ rather than ________ A) selling loans; selling securities. B) selling loans; borrowing from the Fed. C) borrowing from the Fed; selling loans. D) "calling in" loans; selling securities.

C

3) The share of checkable deposits in total bank liabilities has A) expanded moderately over time. B) expanded dramatically over time. C) shrunk over time. D) remained virtually unchanged since 1960.

C

30) Banks fail when the value of bank ________ falls below the value of ________, causing the bank to become insolvent. A) reserves; required reserves B) loans; secondary reserves C) assets; liabilities D) income; expenses

C

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

C

37) The amount of assets per dollar of equity capital is called the A) asset ratio. B) equity ratio. C) equity multiplier. D) asset multiplier. E) return on equity.

C

39) In the absence of regulation, banks would probably hold A) too much capital, reducing the efficiency of the payments system. B) too much capital, reducing the profitability of banks. C) too little capital, increasing the return on equity. D) none of the above.

C

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

C

1) Which of the following statements is false? A) A bank's assets are its uses of funds. B) A bank issues liabilities to acquire funds. C) A bank's assets provide the bank with income. D) Bank capital is an asset on the bank balance sheet.

D

10) Which of the following are not reported as assets on a bank's balance sheet? A) cash items in the process of collection B) deposits with other banks C) U.S. Treasury securities D) checkable deposits

D

19) Which of the following are primary concerns of a bank manager? A) maintaining sufficient reserves to minimize the cost to the bank of deposit outflows B) extending loans to borrowers who will pay high interest rates, but who are also good credit risks C) acquiring funds at a relatively low cost, so that profitable lending opportunities can be realized D) all of the above

D

22) If a bank has $1 million of deposits, a required reserve ratio of 20 percent, and $300,000 in reserves, it need not rearrange its balance sheet if there is a deposit outflow of A) $50,000. B) $75,000. C) $150,000. D) either A or B of the above.

D

25) Banks can protect themselves from the disruption caused by deposit outflows by A) holding excess reserves. B) selling securities. C) "calling in" loans. D) doing all of the above. E) doing only A and B of the above.

D

31) A bank failure is more likely to occur when A) a bank holds less in U.S. government securities. B) a bank suffers large deposit outflows. C) a bank holds less equity capital. D) all of the above occur. E) only A and B of the above occur.

D

34) On a bank's income statement, the provision for loan losses is an ________ item and represents the amount of ________ in the bank's loan loss reserves. A) income; decrease B) income; increase C) expense; decrease D) expense; increase

D

41) Examples of off-balance-sheet activities include A) loan sales. B) foreign exchange market transactions. C) trading in financial futures. D) all of the above. E) only A and B of the above.

D

42) The danger of banks engaging in activities such as trading in financial futures and interest-rate swaps is that these activities allow banks to A) increase profits. B) decrease risks. C) avoid bank regulations. D) engage in speculation.

D

45) Bank capital A) is raised by selling new equity. B) is a cushion against a drop in the value of its assets. C) comes from retained earnings. D) is all of the above.

D

46) With large banks beginning to explore ways in which the liabilities on their balance sheets could provide them with reserves and liquidity, this led to A) the expansion of overnight loan markets. B) the development of negotiable CDs. C) the ability of money center banks to acquire funds quickly. D) all of the above occurring.

D

17) When a $10 check written on the First National Bank is deposited in an account at the Second National Bank, then A) the liabilities of the First National Bank decrease by $10. B) the liabilities of the Second National Bank increase by $10. C) the reserves of the First National Bank increase by $10. D) all of the above occur. E) only A and B of the above occur.

E

18) Holding all else constant, when a bank receives the funds for a deposited check, A) cash items in process of collection fall by the amount of the check. B) bank assets remain unchanged. C) bank liabilities decrease by the amount of the check. D) all of the above occur. E) only A and B of the above occur.

E

2) A bank's balance sheet A) shows that total assets equal total liabilities plus equity capital. B) lists sources and uses of bank funds. C) indicates whether or not the bank is profitable. D) does all of the above. E) does only A and B of the above.

E

28) A bank can reduce its total amount of loans outstanding by A) "calling in" loans; that is, by not renewing some loans when they come due. B) selling loans to other banks. C) selling loans to the Federal Reserve. D) doing all of the above. E) doing only A and B of the above.

E

29) Which of the following statements is an accurate description of modern liability management? A) Greater flexibility in liability management has allowed banks to increase the proportion of their assets held in loans. B) New financial instruments enable banks to acquire funds quickly. C) The introduction of negotiable CDs have significantly reduced the percentage of funds that banks borrow from one another to finance loans. D) All of the above have occurred since 1960. E) Only A and B of the above have occurred since 1960.

E

43) When a bank sells all or part of the cash stream from a specific loan, A) it removes the loan from its balance sheet. B) it decreases its reserves. C) it increases its reserves. D) both A and B of the above occur. E) both A and C of the above occur.

E

6) Which of the following are not checkable deposits? A) savings accounts B) small-denomination time deposits C) negotiable order of withdrawal accounts D) all of the above E) only A and B of the above

E