Money and Banking 2

Which of the following statements concerning external sources of financing for non-financial businesses in the United States is true? A) Stocks are the least important source of finance for their activities. B) Bonds are the least important source of finance for their activities. C) Issuing marketable securities is the primary source of finance for their activities. D) Selling bonds directly to American households is the primary source of finance for their activities.

A) Stocks are the least important source of finance for their activities.

If debt contracts are denominated in foreign currency, then an unanticipated decline in the value of the domestic currency results in A) a decline in a firm's net worth B) an increase in a firm's net worth C) a decrease in adverse selection and moral hazard D) an increase in willingness to lend

A) a decline in a firm's net worth

Prior to 1980, the FED set an interest rate ________ on the interest rate that banks could pay on time deposits. A) ceiling B) wall C) floor D) window

A) ceiling

Suppose a bank has rate-sensitive assets of $30 million and rate-sensitive liabilities of $60 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) increase by $1.5 million. C) decline by $2.5 million. D) decline by $0.5 million.

A) decline by $1.5 million.

When a financial institution reduces the size of its balance sheet by reducing lending and borrowing, this process is called A) deleveraging. B) deflation. C) releveraging. D) capitulation.

A) deleveraging.

Regulations designed to provide information to the marketplace so that investors can make informed decisions are called A) disclosure requirements. B) asset restrictions. C) efficient market requirements. D) capital requirements.

A) disclosure requirements.

The McFadden Act of 1927 A) effectively prohibited banks form branching across state lines. B) separated commercial and investment banking. C) effectively required that banks maintain a correspondent relationship with large money center banks. D) required that banks maintain bank capital equal to at least 6 percent of their assets.

A) effectively prohibited banks form branching across state lines.

The National Bank Act of 1863 A) established the Office of the Comptroller of the Currency. B) created insurance on deposit accounts. C) broadened the regulatory powers of the Federal Reserve. D) created a banking system of state-chartered banks.

A) established the Office of the Comptroller of the Currency.

Today the United States has a dual banking system in which banks supervised by the ________ and by the ________ operate side by side. A) federal government; state governments B) municipal governments; state governments C) federal government; municipal governments D) state governments; municipal governments

A) federal government; state governments

Analysis of adverse selection indicates that financial intermediaries, especially banks, A) have advantages in overcoming the free-rider problem, helping to explain why indirect finance is a more important source of business finance than is direct finance. B) despite their success in overcoming free-rider problems, nevertheless play a minor role in moving funds to corporations. C) provide better-known and larger corporations a higher percentage of their external funds than they do to newer and smaller corporations which rely to a greater extent on the new issues market for funds. D) must buy securities from corporations to diversify the risk that results from holding non-tradable loans.

A) have advantages in overcoming the free-rider problem, helping to explain why indirect finance is a more important source of business finance than is direct finance.

When you deposit a $50 bill in the Pacific National Bank, A) its assets increase by $50. B) its reserves decrease by $50. C) its cash items in the process of collection increase by $50. D) its liabilities decrease by $50.

A) its assets increase by $50.

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

A) its debt exceed its assets.

Solutions to the moral-hazard problem include A) monitoring and enforcement of restrictive covenants. B) greater reliance on debt contracts than financial intermediaries. C) low net worth. D) greater reliance on equity contracts and less on debt contracts.

A) monitoring and enforcement of restrictive covenants.

A well-capitalized financial institution has ________ to lose if it fails and thus is ________ likely to pursue risky activities. A) more; less B) less; less C) more; more D) less; more

A) more; less

Which of the following is a bank asset? A) the building owned by the bank B) a negotiable CD C) a discount loan D) a customer's checking account

A) the building owned by the bank

Because ________ are less liquid from the perspective of the depositor than ________, the former earn higher interest rates. A) time deposits; savings deposits B) money market deposit accounts; time deposits C) checking deposits; savings deposits D) savings deposits; time deposits

A) time deposits; savings deposits

State banks that are not members of the Federal Reserve System are most likely to be examined by the A) FHLBS. B) FDIC. C) Comptroller of the Currency. D) Federal Reserve System.

B) FDIC.

Which investment bank filed for bankruptcy on September 15, 2008 making it the largest bankruptcy filing in U.S. history? A) JP Morgan Chase B) Lehman Brothers C) Merrill Lynch D) Goldman Sachs

B) Lehman Brothers

________ is a process of bundling together smaller loans (like mortgages) into standard debt securities. A) Debt deflation B) Securitization C) Distribution D) Origination

B) Securitization

Which of the following is not a basic fact about financial structure? A) Collateral is a prevalent feature of debt contracts for both households and business. B) There is very little regulation of the financial system. C) Indirect finance, which involves the activities of financial intermediaries, is many times more important than direct finance, in which businesses raise funds directly from lenders in financial markets . D) Debt contracts are typically extremely complicated legal documents that place substantial restrictions on the behavior of the borrower.

B) There is very little regulation of the financial system.

A serious consequence of a financial crisis is A) an increase in asset prices. B) a contraction in economic activity. C) financial globalization. D) financial engineering.

B) a contraction in economic activity.

The presence of ________ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets. A) costly state verification B) asymmetric information C) free riding D) noncollaterallized risk

B) asymmetric information

In bank panic, a source of the contagion effect is the A) transactions cost problem. B) asymmetric-information problem. C) too-big-to-fail problem. D) free-rider problem.

B) asymmetric-information problem.

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

B) discount loans; source

Agency problems in the subprime mortgage market included all of the following except A) the evaluators of the securities by the credit-rating agencies were subject to conflicts of interest. B) homeowners could refinance their houses with larger loans when their homes appreciated in value. C) mortgage originators had little incentives to make sure that the mortgage is a good credit risk. D) underwriters of mortgage-backed securities had weak incentives to make sure that the holders of the securities would be paid back.

B) homeowners could refinance their houses with larger loans when their homes appreciated in value.

Rising interest-rate risk beginning in the 1970's A) increased the cost of financial innovation. B) increased the demand for financial innovation. C) reduced the cost of financial innovation. D) reduced the demand for financial innovation.

B) increased the demand for financial innovation.

A too-big-to-fail policy ________ the ________ problems of large banks. A) decreases; adverse selection B) increases; moral hazard C) decreases; moral hazard D) increase; adverse selection

B) increases; moral hazard

Finding the optimal mix of excess reserves, secondary reserves, borrowings from the FED, and borrowings from other banks to deal with deposits outflows describes the process of A) managing interest rate risk. B) liquidity management. C) managing credit risk. D) liability management.

B) liquidity management.

Financial crisis in advanced economies might start from a A) debt deflation. B) mismanagement of financial innovations. C) currency mismatch. D) currency crisis.

B) mismanagement of financial innovations.

An example of the ________ problem would be if Brian borrowed money from Sean in order to purchase a used car (for his pizza-delivery business) and then decided instead to use the funds to take a trip to Las Vegas. A) agency B) moral hazard C) adverse selection D) costly state verification

B) moral hazard

Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentive to maximize profits than the stockholders do. A) free-rider B) principal-agent C) debt-deflation D) adverse-selection

B) principal-agent

The development of money market mutual funds contributed to the growth of ________ because money market mutual funds need to hold liquid, high-quality, short-term financial assets. A) the corporate bond market B) the commercial paper market C) the junk bond market D) the municipal bond market

B) the commercial paper market

The ________ which required separation of commercial and investment banking, was repealed in 1999. A) Bank Holding Company Act. B) Monetary Control Act. C) Glass-Steagall Act. D) Federal Reserve Act.

C) Glass-Steagall Act.

The original Basel Accord requires banks to hold as capital an amount that is at least 8% of: A) Their total liabilities B) Their total assets C) Their risk-weighted assets D) Their risk-weighted liabilities

C) Their risk-weighted assets

An unanticipated decline in the price level increases the relative debt burden on borrowing firms. The result is A) an increase in the real net worth of borrowing firms. B) an increase in lending. C) a decrease in the real net worth of borrowing firms. D) that adverse selection and moral hazard problems are reduced.

C) a decrease in the real net worth of borrowing firms.

The analysis of how asymmetric information problems affect economic behavior is called ________ theory. A) parallel B) principal C) agency D) asymmetric

C) agency

Banks are examined at least once a year and given a CAMELS rating by examiners. The C stands for ________. A) collateral B) customer service C) capital D) cash on hand

C) capital

The fact that banks operate on a "sequential service constraint" means that A). all depositors share equally in the bank's funds during a crisis. B) banks randomly select the depositors who will receive all of their funds. C) depositors arriving first have the best chance of withdrawing their funds. D) depositors arriving last are just as likely to receive their funds as those arriving first.

C) depositors arriving first have the best chance of withdrawing their funds.

A conflict of interest can occur for accounting firms when they both A) enter data and record data. B) monitor data and record data. C) provide auditing services and non-auditing consulting services. D) record data and provide tax advice.

C) provide auditing services and non-auditing consulting services.

The goals of bank asset management include A) minimizing liquidity. B) lending at high interest rates regardless of risk. C) purchasing securities with high returns and low risk. D) maximizing risk.

C) purchasing securities with high returns and low risk.

Acquiring information on a bank's activities in order to determine a bank's risk is difficult for depositors; this difficulty is an argument for government _________. A) ownership B) recall C) regulation D) forbearance

C) regulation

Although deposit insurance prevents bank failures, its existence effectively drives banks to A) open too many branches. B) buy too much stock. C) take too much risk. D) hold too much capital.

C) take too much risk.

A driving force behind the securitization of mortgages and automobile loans has been A) the relaxation of regulatory restrictions on credit card operations. B) the desire of mortgage and auto lenders to exit this field of lending. C) the improvement in computer technology. D) the rising regulatory constraints on substitute financial instruments.

C) the improvement in computer technology.

Prior to 2008 (when the FED began to pay banks interest on banks' excess reserves), a bank's cost of holding reserves equaled A) the interest paid on deposits times the amount of reserves. B) the interest paid on deposits times the amount of deposits. C) the interest earned on loans times the amount of reserves. D) the interest earned on loans times the amount of loans.

C) the interest earned on loans times the amount of reserves.

The concept of adverse selection helps to explain all of the following except A) why firms are more likely to obtain funds from banks and other financial intermediaries, rather than from the securities markets. B) why the financial system is so heavily regulated. C) why direct finance is more important than indirect finance as a source of business finance. D) why indirect finance is more important than direct finance as a source of business finance.

C) why direct finance is more important than indirect finance as a source of business finance.

Which of the following are reported as liabilities on a bank's balance sheet? A) Loans B) Reserves C) Deposits with other banks D) Checkable deposits

D) Checkable deposits

Both ________ and ________ were financial innovations that occurred because of interest rate volatility. A) sweep accounts; financial derivatives B) adjustable-rate mortgages; commercial paper C) sweep accounts; commercial paper D) adjustable-rate mortgages; financial derivatives

D) adjustable-rate mortgages; financial derivatives

When bad drivers line up to purchase collision insurance, automobile insurers are subject to the A) ill queue problem. B) assigned risk problem. C) moral hazard problem. D) adverse selection problem.

D) adverse selection problem.

Asset transformation in traditional banking can be described broadly as A) borrowing long and lending short. B) borrowing and lending short. C) borrowing and lending long. D) borrowing short and lending long.

D) borrowing short and lending long.

A financial crisis occurs when an increase in asymmetric information from a disruption in the financial system A) reduces uncertainty in the economy and increases market efficiency. B) allows for a more efficient use of funds. C) increases economic activity. D) causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds.

D) causes severe adverse selection and moral hazard problems that make financial markets incapable of channeling funds.

Nonfinancial businesses in Germany, Japan, and Canada raise most of their funds A) by issuing stock. B) by issuing bonds. C) from nonbank loans. D) from bank loans.

D) from bank loans.

Banks engage in regulatory arbitrage by A) keeping low-risk assets on their books while removing high-risk assets with the same capital requirement. B) buying risky assets from arbitragers. C) hiding risky assets from regulators. D) keeping high-risk assets on their books while removing low-risk assets with the same capital requirement.

D) keeping high-risk assets on their books while removing low-risk assets with the same capital requirement.

Capital is listed on the ________ side of the bank's balance sheet because it represents a ________ of funds. A) asset; source B) asset; use C) liability; use D) liability; source

D) liability; source

American businesses get their external funds primarily from A) stock issues. B) bonds and commercial paper issues. C) bank loans. D) loans from nonbank financial intermediaries.

D) loans from nonbank financial intermediaries.

The Federal Reserve Act required all ________ banks to become members of the Federal Reserve System and allowed ________ banks to choose whether or not to become members. A) national; municipal B) state; national C) state; municipal D) national; state

D) national; state

The original-to-distribute business model, in which lenders underwrite, securitize, and sell mortgages, has a serious ________ problem because mortgage underwriters have little incentive to make sure that the borrower is creditworthy. A) debt deflation B) democratization of credit C) collateralized debt D) principal-agent

D) principal-agent

Deposit insurance is one example of a government safety net. All but one of the following transactions are also examples of government safety nets. The exception is A) borrowing from the treasury department. B) nationalizing financial institutions and guaranteeing that their creditors will be repaid in full. C) borrowing from the central bank. D) raising personal income taxes.

D) raising personal income taxes.

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

D) return on assets.

During the subprime crisis, mortgage brokers often did not make a strong effort to evaluate whether potential borrowers could pay off the loans for which they applied. This lack of effort created a A) call to deregulate the industry. B) decrease in the demand for houses. C) decline in mortgage applications. D) severe adverse-selection problem.

D) severe adverse-selection problem.

The current supervisory practice toward risk management most emphasizes A) fee structures. B) the quality of a bank's balance sheet. C) eliminating all risk. D) the soundness of a bank's risk-management process.

D) the soundness of a bank's risk-management process.