Money and Banking Chapter 12
If interest rates increase from 3% to 4%, a $100,000 10 year bond with a duration of 8 years would ________ in price by approximately ________. A) increase; 7.8% B) decrease; 7.8% C) increase; 9.7% D) decrease; 9.7%
Answer: B
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 hazard B) adverse selection C) moral suasion D) adverse lending
Answer: B
Which of the following is not an example of a backup line of credit? A) Loan commitments B) Overdraft privileges C) Standby letters of credit D) Mortgages
Answer: D
If a bank has $200,000 of demand deposits, a desired reserve ratio of 20 percent, and it holds $80000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is ________. A) $50000 B) $40000 C) $30000 D) $25000
Answer: A
Which of the following are reported as liabilities on a bank's balance sheet? A) Advances B) Reserves C) Securities D) Loans
Answer: A
Which of the following bank assets is the most liquid? A) Consumer loans B) Reserves C) Cash items in process of collection D) Government securities
Answer: B
Which of the following statements is false? A) Chequable deposits are usually the lowest cost source of bank funds. B) Demand deposits are the primary source of bank funds. C) Chequable deposits are payable on demand. D) Chequable deposits include notice deposits.
Answer: B
When you deposit $50 in your account at First National Bank and a $100 cheque you have written on this account is cashed at Chemical Bank, then ________. A) the assets of First National rise by $50 B) the assets of Chemical Bank rise by $50 C) the reserves at First National fall by $50 D) the liabilities at Chemical Bank rise by $50
Answer: C
Which of the following is not a source of borrowings for a bank? A) Overnight funds B) Eurodollars C) Time deposits D) Advances
Answer: C
Which of the following are not reported as assets on a bank's balance sheet? A) Cash items in the process of collection B) Loans C) Securities D) Demand deposits
Answer: D
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) The bank's assets provide the bank with income. D) Bank capital is recorded as an asset on the bank balance sheet.
Answer: D
Which of the following would a bank not hold as insurance against the highest cost of deposit outflow-bank failure? A) Excess reserves B) Secondary reserves C) Bank capital D) Mortgages
Answer: D
What are the main items in a bank's asset side of the balance sheet? Discuss them briefly.
Answer: The students must answer that the main items in a bank's asset side of the balance sheet are: - Cash reserves: vault cash, settlement balances - Deposits at other banks: interbank deposits - Cash items in process of collection: items in transit or bank float - Securities: government of Canada, provincial and municipal, and other securities - Loans: commercial, industrial, real estate - Fixed and other assets: physical capital, etc.
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
Answer: B
All of the following are operating expenses for a bank except ________. A) service charges on deposit accounts B) salaries and employee benefits C) rent on buildings D) servicing costs of equipment such as computers
Answer: A
Bruce the Bank Manager can reduce interest rate risk by ________ the duration of the bank's assets to increase their rate sensitivity or, alternatively, ________ the duration of the bank's liabilities. A) shortening; lengthening B) shortening; shortening C) lengthening; lengthening D) lengthening; shortening
Answer: A
Examples of off-balance-sheet activities include ________. A) loan sales B) extending loans to depositors C) borrowing from other banks D) selling negotiable CDs
Answer: A
One of the problems in conducting a duration gap analysis is that the duration gap is calculated assuming that interest rates for all maturities are the same. That means that the yield curve is ________. A) flat B) slightly upward sloping C) steeply upward sloping D) downward sloping
Answer: A
One way for banks to reduce the principal-agent problems associated with trading activities is to ________. A) set limits on the total amount of a traders' transactions B) make sure that the person conducting the trades is also the person responsible for recording the transactions C) encourage traders to take on more risk if the potential rewards are higher D) reduce the regulations on the traders so that they have more flexibility in conducting trades
Answer: A
Traders working for banks are subject to the ________. A) principal-agent problem B) free-rider problem C) double-jeopardy problem D) exchange-risk problem
Answer: A
When a bank suspects that a $1 million loan might prove to be bad debt that will have to be written off in the future the bank ________. A) can set aside $1 million of its earnings in its loan loss reserves account B) reduces its reported earnings by $1, even though it has not yet actually lost the $1 million C) reduces its assets immediately by $1 million, even though it has not yet lost the $1 million D) reduces its reserves by $1 million, so that they can use those funds later
Answer: A
When banks calculate the losses the institution would incur if an unusual combination of bad events happened, the bank is using the ________ approach. A) stress-test B) value-at-risk C) trading-loss D) maximum value
Answer: A
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) value-at-risk approach C) trading-loss approach D) doomsday approach
Answer: B
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 short-term rather than long-term bonds C) buy long-term rather than short-term bonds D) make either short or long-term loans; expectations of future interest rates are irrelevant
Answer: B
The principal-agent problem that exists for bank trading activities can be reduced through ________. A) creation of internal controls that combine trading activities with bookkeeping B) creation of internal controls that separate trading activities from bookkeeping C) elimination of regulation of banking D) elimination of internal controls
Answer: B
The quantity defined as interest income minus interest expenses divided by assets is a measure of bank performance known as ________. A) operating income B) net interest margin C) return on assets D) return on equity
Answer: B
Assume a bank has $200 million of assets with a duration of 2.5, and $190 million of liabilities with a duration of 1.05. The duration gap for this bank is ________. A) 0.5 year B) 1 year C) 1.5 years D) 2 years
Answer: C
Because ________ are less liquid for the depositor than ________, they earn higher interest rates. A) money market deposit accounts; time deposits B) chequable deposits; savings account C) savings account; chequable deposits D) savings account; time deposits
Answer: C
For banks, ________. A) return on assets exceeds return on equity B) return on assets equals return on equity C) return on equity exceeds return on assets D) return on equity is another name for net interest margin
Answer: C
Off-balance sheet activities involving guarantees of securities and back-up credit lines ________. A) have no impact on the risk a bank faces B) does not change the risk a bank faces C) increase the risk a bank faces D) slightly reduce the risk a bank faces
Answer: C
When banks involved in trading activities attempt to outguess markets, they are ________. A) forecasting B) diversifying C) speculating D) engaging in riskless arbitrage
Answer: C
A reason why rogue traders have bankrupt their banks is due to ________. A) the separation of trading activities from the bookkeepers B) stringent supervision of trading activities by bank management C) accounting errors D) a failure to maintain proper internal controls
Answer: D
All of the following are examples of off-balance sheet activities that generate fee income for banks except ________. A) foreign exchange trades B) guaranteeing debt securities C) back-up lines of credit D) selling negotiable CDs
Answer: D
Assume a bank has $200 million of assets with a duration of 2.5, and $190 million of liabilities with a duration of 1.05. If interest rates increase from 5 percent to 6 percent, the net worth as a percentage of assets would ________ by approximately ________. A) increase; 1.8% B) decrease; 1.8% C) increase; 1.4% D) decrease; 1.4%
Answer: D
Assume a bank has $200 million of assets with a duration of 2.5, and $190 million of liabilities with a duration of 1.05. What is its duration gap? A) 0.95 years B) 1.15 years C) 1.35 years D) 1.50 years
Answer: D
If a banker expects interest rates to fall in the future, her best strategy for the present is ________. A) to increase the duration of the bank's liabilities B) to buy short-term bonds C) to sell long-term certificates of deposit D) to increase the duration of the bank's assets
Answer: D
If interest rates increase from 3% to 4%, a $100,000 25 year bond with a duration of 21 years would ________ in price by approximately ________. A) increase; 24.3% B) decrease; 24.3% C) increase; 20.4% D) decrease; 20.4%
Answer: D
If interest rates increase from 9 percent to 10 percent, a bank with a duration gap of 2 years would experience a decrease in its net worth of ________. A) 0.9 percent of its assets B) 0.9 percent of its liabilities C) 1.8 percent of its liabilities D) 1.8 percent of its assets
Answer: D
What is a loan sale and how does it work?
Answer: The students must explain that the loan sale is an off-balance-sheet activity that has grown in importance in recent years and it generates income for banks. A loan sale is also called a secondary loan participation and involves a contract that sells all or part of the cash stream from a specific loan and thereby it removes it from the bank's balance sheet. Banks earn profit by selling the loans for an amount slightly higher than the original loan amount. The high interest rate for these loans makes them attractive and institutions are willing to buy them at the higher price which means that they earn a slightly lower interest rate than the original loan usually on the order of 0.15 percentage points.
A $5 million deposit outflow from a bank has the immediate effect of ________. A) reducing deposits and reserves by $5 million B) reducing deposits and loans by $5 million C) reducing deposits and securities by $5 million D) reducing deposits and capital by $5 million
Answer: A
A T-account represents ________. A) a simplified balance sheet B) asset transformation C) T-bills D) term deposits
Answer: A
A bank failure occurs whenever ________. A) a bank cannot satisfy its obligations to pay its depositors and have enough reserves to meet its reserve requirements B) a bank suffers a large deposit outflow C) a bank has to call in a large volume of loans D) a bank is not allowed to borrow from the Bank of Canada
Answer: A
A bank is insolvent when ________. A) its liabilities exceed its assets B) its assets exceed its liabilities C) its capital exceeds its liabilities D) its assets increase in value
Answer: A
Bank capital has both benefits and costs for the bank owners. Higher bank capital ________ the likelihood of bankruptcy, but higher bank capital ________ the return on equity for a given return on assets. A) reduces; reduces B) increases; increases C) reduces; increases D) increases; reduces
Answer: A
Modern liability management has resulted in ________. A) increased sales of certificates of deposits to raise funds B) increase importance of deposits as a source of funds C) reduced borrowing by banks in the overnight loan market D) failure by banks to coordinate management of assets and liabilities
Answer: A
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 on investment
Answer: A
Property promised to the lender as compensation if the borrower defaults is called ________. A) collateral B) deductibles C) restrictive covenants D) contingencies
Answer: A
Secondary reserves are so called because ________. A) they can be converted into cash with low transactions costs B) they are not easily converted into cash, and are, therefore, of secondary importance to banking firms C) 50 percent of these assets count toward meeting desired reserves D) they rank second to bank vault cash in importance of bank holdings
Answer: A
To reduce moral hazard problems, banks include restrictive covenants in loan contracts. In order for these restrictive covenants to be effective, banks must also ________. A) monitor and enforce them B) be willing to rewrite the contract if the borrower cannot comply with the restrictions C) trust the borrower to do the right thing D) be prepared to extend the deadline when the borrower needs more time to comply
Answer: A
When $1 million is deposited at a bank, the desired reserve ratio is 20 percent, and the bank chooses not to make any loans but to hold excess reserves instead, then, in the bank's final balance sheet, ________. A) the assets at the bank increase by $1 million B) the liabilities of the bank decrease by $1 million C) reserves increase by $200,000 D) liabilities increase by $200,000
Answer: A
When a $10 cheque written on the First National Bank is deposited in an account at CIBC, then ________. A) the reserves of the First National Bank decrease by $10 B) the reserves of the First National Bank increase by $10 C) the reserves of CIBC decrease by $10 D) the assets of CIBC decrease by $10
Answer: A
Which of the following are bank assets? A) The building owned by the bank B) A discount loan C) A negotiable CD D) A customer's chequing account
Answer: A
Bank loans from the Bank of Canada are called ________ and represent a ________ of funds. A) advances; use B) advances; source C) overnight funds; use D) overnight funds; source
Answer: B
Bankers' concerns regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Bank of Canada, 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) managing credit risk
Answer: B
If a bank has $100,000 of demand deposits, a desired reserve ratio of 20 percent, and it holds $40000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is ________. A) $30000 B) $25000 C) $20000 D) $10000
Answer: B
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) more; rise; decline B) more; decline; rise C) fewer; decline; decline D) fewer; rise; rise
Answer: B
In general, banks would prefer to acquire funds quickly by ________ rather than ________. A) reducing loans; selling securities B) reducing loans; borrowing from the Bank of Canada C) borrowing from the Bank of Canada; reducing loans D) "calling in" loans; selling securities
Answer: C
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 D) too much capital, making it more difficult to obtain loans
Answer: C
The amount of assets per dollar of equity capital is called the ________. A) asset ratio B) equity ratio C) equity multiplier D) asset multiplier
Answer: C
The goals of bank asset management include ________. A) maximizing risk B) minimizing liquidity C) lending at high interest rates regardless of risk D) purchasing securities with high returns and low risk
Answer: D
When Jane Brown writes a $100 cheque to her nephew (who lives in another province), Ms. Brown's bank ________ assets of $100 and ________ liabilities of $100. A) gains; gains B) gains; loses C) loses; gains D) loses; loses
Answer: D
When banks offer borrowers smaller loans than they have requested, banks are said to ________. A) shave credit B) rediscount the loan C) raze credit D) ration credit
Answer: D
A bank will want to hold more excess reserves (everything else equal) when ________. A) it expects to have deposit inflows in the near future B) brokerage commissions on selling bonds increase C) the cost of selling loans falls D) the discount rate decreases
Answer: B
A bank with insufficient reserves can increase its reserves by ________. A) lending overnight funds B) calling in loans C) buying short-term securities D) buying provincial bonds
Answer: B
Bank capital is listed on the ________ side of the bank's balance sheet because it represents a ________ of funds. A) liability; use B) liability; source C) asset; use D) asset; source
Answer: B
If a bank has ________ rate-sensitive assets than liabilities, then ________ in interest rates will increase bank profits. A) more; a decline B) more; an increase C) fewer; an increase D) fewer; a surge
Answer: B
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 credit risk B) adverse selection C) moral hazard D) lemon lenders
Answer: B
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) basic gap analysis B) the maturity bucket approach to gap analysis C) the segmented maturity approach to gap analysis D) the segmented maturity approach to interest-exposure analysis
Answer: B
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) basic gap analysis C) interest-exposure analysis D) gap-exposure analysis
Answer: B
Bank capital is equal to ________ minus ________. A) total assets; total liabilities B) total liabilities; total assets C) total assets; total reserves D) total liabilities; total borrowings
Answer: A
Because of their ________ liquidity, ________ government securities are called secondary reserves. A) low; short-term B) low; long-term C) high; short-term D) high; long-term
Answer: C
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 $15 million B) increase by $1.5 million C) decline by $15 million D) decline by $1.5 million
Answer: D
Of the following, which would be the first choice for a bank facing a reserve deficiency? A) Call in loans B) Borrow from the Bank of Canada C) Sell securities D) Borrow from other banks
Answer: D
The difference of rate-sensitive liabilities and rate-sensitive assets is known as the ________. A) duration B) interest-sensitivity index C) rate-risk index D) gap
Answer: D
Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans. A) adverse selection B) moral hazard C) moral suasion D) intentional fraud
Answer: A
Long-term customer relationships ________ the cost of information collection and make it easier to ________ credit risks. A) reduce; screen B) increase; screen C) reduce; increase D) increase; increase
Answer: A
Explain the relationship between return on assets and return on equity. What incentives does this relationship give a bank manager? Is this the desired outcome preferred by regulators? Discuss.
Answer: For a given return on assets, the greater the amount of capital, the lower is the return on equity. Bank managers who seek to increase the return on equity must increase the asset base, purchase riskier assets, or reduce the amount of capital by paying dividends or buying back stock. Regulators (and depositors) prefer higher capital for bank safety. Managers typically prefer lower equity than regulators, resulting in regulatory bank capital requirements.
How can specializing in lending help to reduce the adverse selection problem in lending?
Answer: Reducing the adverse selection problem requires the banks to acquire information to screen bad credit risks from good credit risks. It is easier for banks to obtain information about local businesses. Also if the bank lends to firms in a few specific industries they will become more knowledgeable about those industries and a better judge of creditworthiness in those industries.
Conditions that likely contributed to a credit crunch in 2008 include ________. A) capital shortfalls caused in part by falling real estate prices B) regulated hikes in bank capital requirements C) falling interest rates that raised interest rate risk, causing banks to choose to hold more capital D) increases in reserve requirements
Answer: A
Bank's make their profits primarily by issuing ________. A) equity B) negotiable CDs C) loans D) notice deposits
Answer: C
Holding all else constant, when a bank receives the funds for a deposited cheque, ________. A) cash items in the process of collection fall by the amount of the cheque B) bank assets increase by the amount of the cheque C) bank liabilities decrease by the amount of the cheque D) bank reserves increase by the amount of desired reserves
Answer: A
When $1 million is deposited at a bank, the desired 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 assets at the bank increase by $800,000 B) the liabilities of the bank increase by $1,000,000 C) the liabilities of the bank increase by $800,000 D) reserves increase by $160,000
Answer: B
When you deposit a $50 bill in the New National Bank, ________. A) its liabilities decrease by $50 B) its assets increase by $50 C) its reserves decrease by $50 D) its cash items in the process of collection increase by $50
Answer: B
Which of the following are reported as assets on a bank's balance sheet? A) Borrowings B) Reserves C) Notice deposits D) Bank capital
Answer: B
Which of the following are reported as liabilities on a bank's balance sheet? A) Reserves B) Demand and notice deposits C) Loans D) Deposits with other banks
Answer: B
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) an adjustable gap loan B) an adjustable portfolio loan C) loan commitment D) pre-credit loan line
Answer: C
As the costs associated with deposit outflows ________, the banks willingness to hold excess reserves will ________. A) decrease; increase B) increase; decrease C) increase; increase D) decrease; not be affected
Answer: C
If, after a deposit outflow, a bank needs an additional $3 million to meet its desired reserves, the bank can ________. A) reduce deposits by $3 million B) increase loans by $3 million C) sell $3 million of securities D) repay its advances from the Bank of Canada
Answer: C
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
Answer: C
Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called ________. A) return on assets B) return on capital C) return on equity D) return on investment
Answer: C
The most important category of assets on a bank's balance sheet is ________. A) advances B) securities C) loans D) cash items in the process of collection
Answer: C
The share of chequable 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
Answer: C
When a lender refuses to make a loan, although borrowers are willing to pay the stated interest rate or even a higher rate, the bank is said to engage in ________. A) coercive bargaining B) strategic holding out C) credit rationing D) collusive behavior
Answer: C
Which of the following would not be a way to increase the return on equity? A) Buy back bank stock B) Pay higher dividends C) Acquire new funds by selling negotiable CDs and increase assets with them D) Sell more bank stock
Answer: D
Which of the following statements is true? A) Chequable deposits are payable on demand. B) Chequable deposits do not include notice deposits. C) Chequable deposits are the primary source of bank funds. D) Chequable deposits are chequable deposits that pay interest.
Answer: A
Which of the following statements most accurately describes the task of bank asset management? A) Banks seek the highest returns possible subject to minimizing risk and making adequate provisions for liquidity. B) Banks seek to have the highest liquidity possible subject to earning a positive rate of return on their operations. C) Banks seek to prevent bank failure at all cost; since a failed bank earns no profit, liquidity needs supersede the desire for profits. D) Banks seek to acquire funds in the least costly way.
Answer: A
With a 10 percent reserve requirement ratio, a $100 deposit into New Bank means that the maximum amount New Bank could lend is ________. A) $90 B) $100 C) $10 D) $110
Answer: A
All else the same, if a bank's liabilities are more sensitive to interest rate fluctuations than are its assets, then ________ in interest rates will ________ bank profits. A) an increase; increase B) an increase; reduce C) a decline; reduce D) a decline; not affect
Answer: B
Asset transformation can be described as ________. A) borrowing long and lending short B) borrowing short and lending long C) borrowing and lending only for the short term D) borrowing and lending for the long term
Answer: B
Which of the following statements are true? A) A bank's assets are its sources of funds. B) A bank's liabilities are its uses of funds. C) A bank's balance sheet shows that total assets equal total liabilities plus capital. D) A bank's balance sheet indicates whether or not the bank is profitable.
Answer: C
If a bank has $10 million of demand deposits, a desired 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
Answer: A
If a bank has excess reserves greater than the amount of a deposit outflow, the outflow will result in equal reductions in ________. A) deposits and reserves B) deposits and loans C) capital and reserves D) capital and loans
Answer: A
If a bank's liabilities are more sensitive to interest rate movements than are its assets, then ________. A) an increase in interest rates will reduce bank profits B) a decrease in interest rates will reduce bank profits C) interest rates changes will not impact bank profits D) an increase in interest rates will increase bank profits
Answer: A
In one sense ________ appears surprising since it means that the bank is not ________ its portfolio of loans and thus is exposing itself to more risk. A) specialization in lending; diversifying B) specialization in lending; rationing C) credit rationing; diversifying D) screening; rationing
Answer: A
When a new depositor opens a chequing account at the First National Bank, the bank's assets ________ and its liabilities ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease
Answer: A
Which of the following are primary concerns of the bank manager? A) Maintaining sufficient reserves to minimize the cost to the bank of deposit outflows B) Extending loans to borrowers who will pay low interest rates, but who are poor credit risks C) Acquiring funds at a relatively high cost, so that profitable lending opportunities can be realized D) Maintaining high levels of capital and thus maximizing the returns to the owners
Answer: A
Which of the following has not resulted from more active liability management on the part of banks? A) Increased bank holdings of cash items B) Aggressive targeting of goals for asset growth by banks C) Increased use of negotiable CDs to raise funds D) An increased proportion of bank assets held in loans
Answer: A
Banks hold excess and secondary reserves to ________. A) reduce the interest-rate risk problem B) provide for deposit outflows C) satisfy margin requirements D) achieve higher earnings than they can with loans
Answer: B
Credit risk management tools include ________. A) deductibles B) collateral C) interest rate swaps D) duration analysis
Answer: B
For a given return on assets, the lower is bank capital, ________. A) the lower is the return for the owners of the bank B) the higher is the return for the owners of the bank C) the lower is the credit risk for the owners of the bank D) the lower the possibility of bank failure
Answer: B
Provisions in loan contracts that prohibit borrowers from engaging in specified risky activities are called ________. A) proscription bonds B) restrictive covenants C) due-on-sale clauses D) liens
Answer: B
Risk that is related to the uncertainty about interest rate movements is called ________. A) default risk B) interest-rate risk C) the problem of moral hazard D) security risk
Answer: B
Through correspondent banking, large banks provide services to small banks, including ________. A) loan guarantees B) foreign exchange transactions C) issuing stock D) debt reduction
Answer: B
Unanticipated moral hazard contingencies can be reduced by ________. A) screening B) long-term customer relationships C) specialization in lending D) credit rationing
Answer: B
When a $10 cheque written on the First National Bank is deposited in an account at CIBC, then ________. A) the liabilities of the First National Bank increase by $10 B) the reserves of the First National Bank increase by $ 10 C) the liabilities of CIBC increase by $10 D) the assets of CIBC fall by $10
Answer: C
When you deposit $50 in currency at Old National Bank, ________. A) its assets increase by less than $50 because of reserve requirements B) its reserves increase by less than $50 because of reserve requirements C) its liabilities increase by $50 D) its liabilities decrease by $50
Answer: C
________ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow. A) Selling securities B) Selling loans C) Calling in loans D) Selling negotiable CDs
Answer: C
From the standpoint of ________, specialization in lending is surprising but makes perfect sense when one considers the ________ problem. A) moral hazard; diversification B) diversification; moral hazard C) adverse selection; diversification D) diversification; adverse selection
Answer: D
Duration analysis involves comparing the average duration of the bank's ________ to the average duration of its ________. A) securities portfolio; non-deposit liabilities B) assets; liabilities C) loan portfolio; deposit liabilities D) assets; deposit liabilities
Answer: B
Because ________ are less liquid for the depositor than ________, they earn higher interest rates. A) savings account; time deposits B) money market deposit accounts; time deposits C) money market deposit accounts; savings account D) time deposits; savings account
Answer: D
Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the ________. A) adverse selection problem B) lemon problem C) adverse credit risk problem D) moral hazard problem
Answer: D
Most of a bank's operating income results from ________. A) interest on assets B) service charges on deposit accounts C) off-balance-sheet activities D) fees from standby lines of credit
Answer: A
The fraction of chequable deposits that banks choose to hold are ________. A) excess reserves B) desired reserves C) vault cash D) total reserves
Answer: B
Bank reserves include ________. A) deposits at the Bank of Canada and short-term securities B) vault cash and short-term securities C) vault cash and deposits at the Bank of Canada D) deposits at other banks and deposits at the Bank of Canada
Answer: C
Banks earn profits by selling ________ with attractive combinations of liquidity, risk, and return, and using the proceeds to buy ________ with a different set of characteristics. A) loans; deposits B) securities; deposits C) liabilities; assets D) assets; liabilities
Answer: C
Banks that suffered significant losses in the 1980s made the mistake of ________. A) holding too many liquid assets B) minimizing default risk C) failing to diversify their loan portfolio D) holding only safe securities
Answer: C
Holding large amounts of bank capital helps prevent bank failures because ________. A) it means that the bank has a higher income B) it makes loans easier to sell C) it can be used to absorb the losses resulting from bad loans D) it makes it easier to call in loans
Answer: C
If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to ________. A) buy back bank stock B) pay higher dividends C) sell bank stock D) sell securities the bank owns and put the funds into the reserve account
Answer: C
