ECON 353 CH9 2/2

28) If a bank has $10 million of checkable deposits, a required reserve ratio of 10 percent, and it holds $2 million in reserves, then it will not have enough reserves to support a deposit outflow of A) $1.2 million. B) $1.1 million. C) $1 million. D) $900,000.

A) $1.2 million.

40) Assuming that the average duration of its assets is five years, while the average duration of its liabilities is three years, then a 5 percentage point increase in interest rates will cause the net worth of First National to decline by ________ of the total original asset value. A) 10 percent B) 15 percent C) 25 percent D) 5 percent

A) 10 percent

46) A reason why rogue traders have bankrupt their banks is due to A) a failure to maintain proper internal controls. B) the separation of trading activities from the bookkeepers. C) stringent supervision of trading activities by bank management. D) accounting errors.

A) a failure to maintain proper internal controls.

50) The principal-agent problem that exists for bank trading activities can be reduced through A) creation of internal controls that separate trading activities from bookkeeping. B) elimination of regulation of banking. C) creation of internal controls that combine trading activities with bookkeeping. D) elimination of internal controls

A) creation of internal controls that separate trading activities from bookkeeping.

31) When banks offer borrowers smaller loans than they have requested, banks are said to A) ration credit. B) raze credit. C) shave credit. D) rediscount the loan.

A) ration credit.

43) Duration analysis involves comparing the average duration of the bank's ________ to the average duration of its ________. A) assets; deposit liabilities B) assets; liabilities C) loan portfolio; deposit liabilities D) securities portfolio; non-deposit liabilities

B) assets; liabilities

41) If a bank has ________ rate-sensitive assets than liabilities, a ________ in interest rates will reduce bank profits, while a ________ in interest rates will raise bank profits. A) fewer; decline; decline B) more; decline; rise C) fewer; rise; rise D) more; rise; decline

B) more; decline; rise

49) Which of the following is NOT an example of a backup line of credit? A) loan commitments B) mortgages C) overdraft privileges D) standby letters of credit

B) mortgages

34) Of the following methods that banks might use to reduce moral hazard problems, the one not legally permitted in the United States is the A) requirement that firms keep compensating balances at the banks from which they obtain their loans. B) requirement that firms place on their board of directors an officer from the bank. C) requirement that individuals provide detailed credit histories to bank loan officers. D) inclusion of restrictive covenants in loan contracts

B) requirement that firms place on their board of directors an officer from the bank.

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

B) return on assets.

38) Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals times the change in the interest rate is called A) the segmented maturity approach to interest-exposure analysis. B) the maturity bucket approach to gap analysis. C) the segmented maturity approach to gap analysis. D) basic gap analysis

B) the maturity bucket approach to gap analysis.

39) If the First National Bank has a gap equal to a negative $30 million, then a 5 percentage point increase in interest rates will cause profits to A) increase by $1.5 million. B) decline by $15 million. C) decline by $1.5 million. D) increase by $15 million

C) decline by $1.5 million.

37) The difference of rate-sensitive liabilities and rate-sensitive assets is known as the A) duration. B) rate-risk index. C) gap. D) interest-sensitivity index

C) gap.

48) Traders working for banks are subject to the A) double-jeopardy problem. B) free-rider problem. C) principal-agent problem. D) exchange-risk problem.

C) principal-agent problem.

26) A $5 million deposit outflow from a bank has the immediate effect of A) reducing deposits and loans by $5 million. B) reducing deposits and securities by $5 million. C) reducing deposits and reserves by $5 million. D) reducing deposits and capital by $5 million.

C) reducing deposits and reserves by $5 million.

44) One way for banks to reduce the principal-agent problems associated with trading activities is to A) reduce the regulations on the traders so that they have more flexibility in conducting trades. B) encourage traders to take on more risk if the potential rewards are higher. C) set limits on the total amount of a traders' transactions. D) make sure that the person conducting the trades is also the person responsible for recording the transactions

C) set limits on the total amount of a traders' transactions.

45) Banks develop statistical models to calculate their maximum loss over a given time period. This approach is known as the A) stress-testing approach. B) doomsday approach. C) value-at-risk approach. D) trading-loss approach.

C) value-at-risk approach.

32) In order to reduce the ________ problem in loan markets, bankers collect information from prospective borrowers to screen out the bad credit risks from the good ones. A) moral suasion B) moral hazard C) adverse lending D) adverse selection

D) adverse selection

35) Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans. A) moral suasion B) intentional fraud C) moral hazard D) adverse selection

D) adverse selection

42) Because of an expected rise in interest rates in the future, a banker will likely A) make long-term rather than short-term loans. B) buy long-term rather than short-term bonds. C) make either short or long-term loans; expectations of future interest rates are irrelevant. D) buy short-term rather than long-term bonds.

D) buy short-term rather than long-term bonds.

47) Banks earn profits from off-balance sheet loan sales A ) by foreclosing on delinquent accounts. B) by selling the loans at discounted prices. C) by calling-in loans before the maturity date. D) by selling existing loans for more than the original loan amount

D) by selling existing loans for more than the original loan amount

29) A bank that wants to monitor the check payment practices of its commercial borrowers, so that moral hazard can be reduced, will require borrowers to A) purchase the bank's CDs. B) place a bank officer on their board of directors. C) place a corporate officer on the bank's board of directors. D) keep compensating balances in a checking account at the bank.

D) keep compensating balances in a checking account at the bank.

30) 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) pre-credit loan line. B) an adjustable portfolio loan. C) an adjustable gap loan. D) loan commitment.

D) loan commitment.

36) If a bank has ________ rate-sensitive assets than liabilities, then ________ in interest rates will increase bank profits. A) fewer; an increase B) fewer; a surge C) more; a decline D) more; an increase

D) more; an increase

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

D) reduce; screen