ECON 330 - CH.10 HW

Why was it​ created? A. TARP was established in 1913 in conjunction with the Fed. B. TARP was created to restore the market for​ mortgage-backed securities and other toxic assets in order to provide relief to financial firms that had trillions of dollars worth of these assets on their balance sheets. C. It was established after a series of bank failures during the Great Depression. D. It was established to ameliorate bank runs by the public.

B. TARP was created to restore the market for​ mortgage-backed securities and other toxic assets in order to provide relief to financial firms that had trillions of dollars worth of these assets on their balance sheets.

When was TARP​ created? A. 2007. B. 1934. C. 2008. D. 1913.

C. 2008.

Why was it​ established? A. The FDIC was established to ameliorate bank runs. B. The FDIC was established in 1913 together with Fed C. The FDIC was established in 1934 after a series of bank failures. D. A and C are correct.

D. A and C are correct.

How do banks manage credit​ risk? A. Banks can manage credit risk by performing credit risk​ analysis, requiring borrowers to put up​ collateral, and using credit rationing. B. Banks can manage credit risk by diversifying their assets. C. Banks can manage risk by creating​ long-term business relationships by which the bank could acquire information about the creditor. D. All of the above are correct.

D. All of the above are correct.

How do banks manage liquidity​ risk? ​(Check all that apply.​) A. Banks manage this risk by keeping some funds very​ liquid, such as in the federal funds market. B. Banks manage this risk by keeping some funds very​ liquid, such as a reverse repurchase agreement. C. Banks can increase their borrowings to cover liquidity risk. D. Banks can increase their assets to cover liquidity risk.

A, B, C

The key accounting equation on which balance sheets are based is given by A. Assets​ = Liabilities​ + Shareholders' Equity. B. Assets​ = Liabilities minus− ​Shareholders' Equity. C. Assets​ + Shareholders' Equity​ = Liabilities. D. Assets​ = Liabilities.

A. Assets​ = Liabilities​ + Shareholders' Equity.

b. Does a​ bank's capital appear on the left side of the​ bank's balance​ sheet? A. Bank capital appears on the right side of the balance​ sheet, because it is the difference between assets and liabilities. B. Bank capital appears on the left side of the balance​ sheet, because it is the difference between liabilities and assets. C. Bank capital appears on the left side of the balance sheet because it is the difference between assets and liabilities. D. Bank's capital does not appear in the balance sheet.

A. Bank capital appears on the right side of the balance​ sheet, because it is the difference between assets and liabilities.

Which from the following are​ off-balance-sheet activities? ​(Check all that​ apply.) A. Increase in reserve requirements. B. Loan sales. C. Trading activities. D. Standby letters of credit. E. Loan commitment. F. Issuing credits.

B, C, D, E

How do banks manage​ interest-rate risk? ​(Check all that apply.​) A. Banks can increase their borrowings to manage​ interest-rate risk. B. Banks can reduce​ interest-rate risk by making more floating rate​ loans, or ARMs. C. Banks can manage​ interest-rate risk by keeping some funds as repurchase agreements. D. Interest-rate swaps can reduce​ interest-rate risk exposure.

B, D

What is the difference between a​ bank's return on assets​ (ROA) and its return on equity​ (ROE)? A. A​ bank's return on assets​ (ROA) is the ratio of a​ bank's gross profit to the value of its assets. Return on equity​ (ROE) is the ratio of the value of a​ bank's after-tax profit to the value of its capital. B. A​ bank's return on assets​ (ROA) is the ratio of a​ bank's after-tax profit to the value of its assets. Return on equity​ (ROE) is the ratio of the value of a​ bank's after-tax profit to the value of its capital. C. A​ bank's return on assets​ (ROA) is the ratio of a​ bank's after-tax profit to the value of its assets. Return on equity​ (ROE) is the ratio of the value of a​ bank's gross profit to the value of its capital. D. A​ bank's return on assets​ (ROA) is the ratio of a​ bank's gross profit to the value of its assets. Return on equity​ (ROE) is the ratio of the value of a​ bank's gross profit to the value of its capital.

B. A​ bank's return on assets​ (ROA) is the ratio of a​ bank's after-tax profit to the value of its assets. Return on equity​ (ROE) is the ratio of the value of a​ bank's after-tax profit to the value of its capital.

Would a loan from the Treasury be counted as part of a​ bank's capital? A. No. A​ bank's capital excludes loans from government entities. B. No, a loan from the treasury would not be counted as bank capital. C. Yes, a loan from the treasury would be counted as bank capital. D. Yes, any kind of loan is counted as bank capital.

B. No, a loan from the treasury would not be counted as bank capital.

How are they​ related? A. ROE is equal to ROA multiplied by the ratio of bank capital to bank assets. B. ROE is equal to ROA multiplied by the ratio of bank assets to bank capital. C. ROA is equal to ROE multiplied by the ratio of bank assets to bank capital. D. ROA is equal to ROE divided by the ratio of bank capital to bank assets.

B. ROE is equal to ROA multiplied by the ratio of bank assets to bank capital.

Loan sales is A. a promise by a bank to lend​ funds, if​ necessary, to the seller of commercial paper at the time that the commercial paper matures. B. a financial contract in which a bank agrees to sell the expected future returns from an underlying bank loan to a third party. C. activities that include trading in the​ futures, options, or swaps market. D. a​ bank's consent to provide a borrower with a stated amount of funds during some specified time.

B. a financial contract in which a bank agrees to sell the expected future returns from an underlying bank loan to a third party.

Standby letters of credit are A. activities that include trading in the​ futures, options, or swaps market. B. a promise by a bank to lend​ funds, if​ necessary, to the seller of commercial paper at the time that the commercial paper matures. C. a​ bank's consent to provide a borrower with a stated amount of funds during some specified time. D. a financial contract in which a bank agrees to sell the expected future returns from an underlying bank loan to a third party.

B. a promise by a bank to lend​ funds, if​ necessary, to the seller of commercial paper at the time that the commercial paper matures.

​Off-balance-sheet activities are A. activities that do not affect a​ bank's balance sheet because they do not increase a​ bank's profit. B. activities that do not affect a​ bank's balance sheet because they do not change either the​ bank's assets or its liabilities. C. activities that are illegal and cannot be reflected in a​ bank's balance sheet. D. activities that take place outside the​ bank, such as operations with​ ATMs, electronic banking and so on.

B. activities that do not affect a​ bank's balance sheet because they do not change either the​ bank's assets or its liabilities.

Loan commitment is A. activities that include trading in the​ futures, options, or swaps market. B. a​ bank's consent to provide a borrower with a stated amount of funds during some specified time. C. a promise by a bank to lend​ funds, if​ necessary, to the seller of commercial paper at the time that the commercial paper matures. D. a financial contract in which a bank agrees to sell the expected future returns from an underlying bank loan to a third party.

B. a​ bank's consent to provide a borrower with a stated amount of funds during some specified time.

​"If a bank manager expects interest rates to fall in the​ future, he should increase the duration of his​ bank's liabilities." Do you agree with this​ statement? A. Agree. The manager should increase the duration of his​ bank's liabilities. B. Disagree. The manager should not change the duration of his​ bank's liabilities. C. Disagree. Higher duration of its liabilities will reduce the value of the​ bank's capital. D. There is not enough information to evaluate the​ manager's actions.

C. Disagree. Higher duration of its liabilities will reduce the value of the​ bank's capital.

​"A bank that expects interest rates to fall will want the duration of its assets to be greater than the duration of its liabilities​ - a positive duration​ gap." Do you agree with this​ statement? A. Disagree. The bank does not care about the duration gap during interest movements. B. Agree. A fall in interest rates with a positive duration gap will increase the number of deposits. C. Disagree. A fall in interest rates with a positive duration gap will decrease profits. D. Agree. A fall in interest rates with a positive duration gap will increase a​ bank's capital.

D. Agree. A fall in interest rates with a positive duration gap will increase a​ bank's capital.

​"A bank that expects interest rates to increase in the future will want to hold more​ rate-sensitive assets and fewer​ rate-sensitive liabilities." Do you agree with this​ statement? A. Agree.​ Rate-sensitive assets will increase in value thus holding more of them as​ assets, while reducing them as​ liabilities, will decrease​ interest-rate risk. B. Disagree. In any​ case, it is more profitable for banks to reduce the number of​ rate-sensitive assets and​ liabilities, and increase assets and liabilities with fixed interest. C. Disagree.​ Rate-sensitive assets will increase in value thus holding more of them as​ assets, while reducing them as​ liabilities, will decrease bank profits. D. Agree.​ Rate-sensitive assets will increase in value thus holding more of them as​ assets, while reducing them as​ liabilities, will increase bank profits.

D. Agree.​ Rate-sensitive assets will increase in value thus holding more of them as​ assets, while reducing them as​ liabilities, will increase bank profits.

The most important bank assets are A. Real estate loans and​ Commercial/industrial loans. B. Reserves and Real estate loans. C. Consumer loans and Reserves. D. Real estate loans and U.S.​ government/agency securities.

D. Real estate loans and U.S.​ government/agency securities.

The most important bank liabilities are A. Checkable deposits and Bank capital. B. Borrowings and​ Small-denomination time deposits. C. ​Large-denomination time deposits and Checkable deposits. D. Small-denomination time deposits and Checkable deposits.

D. Small-denomination time deposits and Checkable deposits.

Trading activities are A. a financial contract in which a bank agrees to sell the expected future returns from an underlying bank loan to a third party. B. a​ bank's consent to provide a borrower with a stated amount of funds during some specified time. C. a promise by a bank to lend​ funds, if​ necessary, to the seller of commercial paper at the time that the commercial paper matures. D. activities that include trading in the​ futures, options, or swaps market.

D. activities that include trading in the​ futures, options, or swaps market.

The FDIC stands for A. the Foreign Direct Investment Corporation. B. the Federal Debt Insurance Corporation. C. the Federal Deposit Investment Corporation. D. the Federal Deposit Insurance Corporation.

D. the Federal Deposit Insurance Corporation.