question

An Investment bank is financial institution that?

answer

helps corporations raise funds.

question

The Glass-Steagall Act

answer

1)Separated commercial and investment banking 2)made it illegal for a commercial bank to buy or sell securities on behalf of its customers.

question

Investment banks sell___ securities to the public, and brokerage firms sell___ securities to the public.

answer

new; existing

question

The primary function of investment banks is to?

answer

help corporations issue new securites

question

which is not an activity of investment banks?

answer

Underwriting new securities of federal government bonds

question

Tasks tat investment bankers perform when acting as underwriters to sell securities to the public include:

answer

1)pricing the security 2)preparing the filings required by the securities and exchange commission. 3)arranging for the security to be rated

question

Investment banks find it less difficult to price securities if the firm has prior issues currently selling in the market, called?

answer

Seasoned issues

question

The process of underwriting a stock or bond issue requires that the investment bank

answer

Purchase the entire issue at a predetermined price and then resell it in the market

question

SEC registration is

answer

not required for securities that are sold through a private placement

question

By law, investors must be given a portion of the registration statement before they can invest in a new security. This document is called a ________.

answer

Prospectus

question

Investment banks advertise upcoming securities offerings with block ads in the Wall Street Journal. Such an ad is called a ________.

answer

Tombstone

question

Most investment banks are attached to

answer

large brokerage houses

question

From an investment banker's perspective, the best outcome occurs when a new issue is ________.

answer

fully subscribed

question

Investment banks may lose ________ if new securities issues are ________.

answer

future business; oversubscribed

question

Often investment bankers will form a group, each one buying only a portion of the new securities to be issued. Such a group is called an underwriting ________.

answer

syndicate

question

In a ________ agreement, the investment banker makes no guarantee regarding the price the issuing firm will receive, but agrees to sell the securities on a commission basis.

answer

best eefforts

question

Private placements

answer

1) do not require the services of investment bankers. 2) need not be registered with the SEC

question

The buyers of private placement securities are most likely to be ________.

answer

1) insurance companies 2) pension funds and mutual funds

question

Which of the following statements about private placements are true?

answer

1) private placements are more common for the sale of bonds than for stocks 2)investment bankers, though not required for a private placement, often facilitate the transaction.

question

Investment bankers have been active in the mergers and acquisitions market since the 1960s. Their contributions have included

answer

A) helping firms that want to acquire another firm locate a firm to pursue. B) helping would-be acquirers solicit shareholders through a tender offer. C) helping target firms ward off undesired takeover attempts.

question

Which of the following is not a step in the process by which an investment bank assists in the sale of a company or corporate division?

answer

forming a syndicate of purchasers

question

________ perform their main function in the primary market for securities and ________ perform their main function in the secondary market.

answer

Investment banks; securities brokers and dealers

question

Which of the following best explains the difference between brokers and dealers?

answer

Brokers are pure middlemen; dealers make markets by standing ready to buy and sell at given prices.

question

Securities dealers

answer

A) sell securities out of their inventories to customers who want to buy. B) buy securities, which they add to their inventories, from customers who want to sell. C) are largely responsible for the health and growth of small businesses in the United States.

question

By making a market in thinly traded stocks, securities dealers solve the ________ trading problem, which is of particular benefit to ________ businesses.

answer

nonsynchronous; small

question

Which of the following is not a service securities brokers offer their clients

answer

providing insurance against loss of value of the securities

question

An instruction to a securities agent to buy or sell the security at the current market price is called a ________.

answer

market order

question

An instruction to a securities agent to sell a stock when it reaches a specific price is a ________.

answer

stop loss order

question

An instruction to a securities agent to purchase a stock as long as its price does not exceed a specified level is a ________.

answer

limit order

question

To take advantage of anticipated stock price decreases, an investor would use ________

answer

a short sell

question

Which of the following statements about cash management accounts (CMAs) are true?

answer

A) The cash management account was developed in 1977 by Merrill Lynch. B) The advantage of brokerage-based cash management accounts is that they make it easier to buy and sell securities.

question

A full-service broker offers its clients all of the following except

answer

low transaction fees

question

A ________ is a specialized firm that finances young, start-up companies.

answer

venture capital firm

question

Which of the following provides funds to companies not yet ready to sell securities to the public

answer

venture capital firms

question

Venture capital firms are usually organized as ________.

answer

limited ppartnerships

question

Which of the following is not a characteristic feature of venture capital firms?

answer

funding just one or a small number of firms

question

The sources of venture capital funding have

answer

shifted from wealthy individuals to pension funds and corporations

question

A typical venture capital firm has a ________ number of investors who each contribute a ________ amount of money to the fund.

answer

small; large

question

Which of the following statements about venture capital funding is not correct?

answer

Firms hope to exit a start-up firm in 3-5 years.

question

The 20-year average return of venture capital firms has been about ________.

answer

20%

question

Which of the following is an advantage to a private equity buyout?

answer

The CEOs frequently have more time and flexibility to enact changes need to turn around subpar companies.

question

When taking a particular course of action for a private equity firm, the CEO of a privately held company needs to convince ________ that it is a good decision.

answer

the managing partners

question

Which of the following is a description of a private equity firm?

answer

A) Public shares are retired. B) A public company goes private. C) The firm is no longer subject to controls and oversight required of publicly held companies

question

If borrowers with the most risky investment projects are more likely to seek bank loans than borrowers with the safest investment projects, banks face the problem of ________.

answer

adverse selection

question

Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the

answer

moral hazard

question

Banks' attempts to solve adverse selection and moral hazard problems help explain loan management principles such as

answer

A) screening and monitoring of loan applicants. B) collateral and compensating balances. C) credit rationing

question

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.

answer

specialization in lending; diversifying

question

Provisions in loan contracts that proscribe borrowers from engaging in specified risky activities are called ________.

answer

restrictive covenants

question

Banks attempt to screen good credit risks from bad to reduce the incidence of loan defaults. To do this, banks

answer

A) specialize in lending to certain industries or regions. B) write restrictive covenants into loan contracts. C) expend resources to acquire accurate credit histories of their potential loan customers.

question

Lines of credit and long-term relationships between banks and their customers

answer

A) reduce the costs of information collection. B) make it easier for banks to screen good risks from bad. C) enable banks to deal with moral hazard contingencies that are neither anticipated nor specified in restrictive covenants.

question

Compensating balances

answer

A) are a particular form of collateral commonly required on commercial loans. B) are a required minimum amount of funds that a borrower (i.e., a firm receiving a loan) must keep in a checking account at the bank. C) allow banks to monitor firms' check payment practices, which can yield information about their borrowers' financial conditions.

question

Credit rationing occurs when a bank

answer

A) refuses to make a loan of any amount to a borrower, even when she is willing to pay a higher interest rate. B) restricts the amount of a loan to less than the borrower would like

question

Because larger loans create greater incentives for borrowers to engage in undesirable activities that make it less likely they will repay the loans, banks

answer

ration credit, granting borrowers smaller loans than they have requested.

question

When banks offer borrowers smaller loans than they have requested, banks are said to ________.

answer

ration credit

question

Liabilities that are partially, but not fully, rate-sensitive include ________.

answer

checkable deposits

question

If a bank has more rate-sensitive liabilities than rate-sensitive assets, then a(n) ________ in interest rates will ________ bank profits.

answer

increase; reduce

question

The difference between rate-sensitive liabilities and rate-sensitive assets is known as the ________.

answer

gap

question

Duration gap analysis

answer

is a complement to basic gap analysis that accounts for the effect of interest rate changes on market value.

question

Duration analysis involves comparing the average duration of the bank's ________ to the average duration of its ________.

answer

assets; liabilities

question

To use the concept of duration to analyze the effect of changes in interest rates on the market value of an asset, a bank manager would multiply

answer

the negative of the duration of the asset by Δi /(1 + i).

question

If a bank has a duration gap of 2 years, then a rise in interest rates from 6 percent to 9 percent will lead to

answer

a fall in the market value of its net worth of 5.66 percent.

question

If a decline in interest rates causes the market value of a bank's net worth to rise, then the bank must have a ________.

answer

positive duration gap

question

One problem with duration gap analysis is that it

answer

is calculated assuming that the yield curve is flat.

question

One problem with basic gap analysis is that it

answer

is calculated assuming interest rates on all maturities change by equal amounts.

question

A bank manager concerned about interest income who expects interest rates to rise and who knows the bank currently has a positive gap should ________ rate-sensitive assets and ________ rate-sensitive liabilities.

answer

increase; decrease

question

A bank manager concerned about interest income who expects interest rates to fall and who knows the bank currently has a positive gap should ________ rate-sensitive assets and ________ rate-sensitive liabilities.

answer

decrease; increase

question

The certainty equivalent for risk-averse people who buy insurance is the

answer

insurance premium they pay.

question

The problem of ________ occurs when those most likely to get large insurance payoffs are the ones who want to purchase insurance the most.

answer

moral hazard

question

To prevent adverse selection, health and life insurance companies may do all the following except

answer

charge the same premiums to all policyholders.

question

Some automobile owners will drive faster knowing that they are covered by health and automobile insurance. This behavior creates the problem of ________.

answer

moral hazard

question

In the case of an insurance policy, ________ occurs when the existence of insurance encourages the insured party to take risks that increase the likelihood of an insurance payoff; ________ occurs when those most likely to get large insurance payoffs are the ones who want to purchase insurance the most.

answer

moral hazard; adverse selection

question

To prevent the moral hazard problem, health and life insurance companies may write policies

answer

A) for which premiums increase dramatically once the policyholder is discovered to have contracted an illness. B) containing provisions which either reduce or eliminate benefits to persons who contract prespecified illnesses. C) limiting the amount the companies will pay in the event that claims are submitted by policyholders

question

Insurance management tools that give policyholders incentives to avoid accidents insured against include ________.

answer

A) deductibles B) risk-based premiums C) coinsurance

question

Which is not a management practice for reducing the problems of adverse selection and moral hazard in insurance?

answer

reinsurance

question

Insurance companies employ underwriters

answer

to control the risk incurred on their behalf by agents

question

________ companies get a tax advantage; most new insurance companies organize as ________ companies.

answer

Mutual insurance; stock

question

(I) A majority of life insurance companies are organized as mutual companies. (II) State governments have the major responsibility for regulating insurance companies

answer

(I) is false, (II) true

question

Which of the following do not help people during their retirement?

answer

term life insurance

question

A term life insurance policy provides

answer

insurance benefits only.

question

Which of the following is true of life insurance companies?

answer

1) Payouts to policyholders are relatively predictable. 2)They primarily hold long-term assets that are not particularly liquid.

question

Of the following financial intermediaries, which holds the least liquid assets?

answer

life insurance companies

question

The largest share of life insurance companies' assets are ________.

answer

corporate bonds

question

The federal regulatory agency responsible for regulating the activities of life insurance companies is

answer

none of the above; there is no such federal regulatory agency

question

Which of the following is not a feature of the Terrorism Risk Insurance Act of 2002?

answer

Government pays 50 percent of losses in excess of $100 billion

question

Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices?

answer

A) risk-assessment screening B) risk-based premiums C) restrictive provisions

question

Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices?

answer

A) collection of information and screening of potential policyholders B) risk-based premiums C) cancellation of insurance

question

Insurance companies' attempts to minimize adverse selection and moral hazard explain which of the following insurance practices?

answer

A) collection of information and screening of potential policyholders B) risk-based premiums C) deductibles and coinsurance

question

If automobile insurance companies were prevented from charging risk-based premiums, but could selectively screen potential policyholders, the likely effect would be to

answer

decrease the number of young men obtaining insurance coverage relative to young women.

question

The fact that insurance companies charge young males higher automobile insurance premiums than young females is an example of

answer

A) risk-based premiums. B) an attempt to minimize adverse selection

question

Insurance management tools that give policyholders incentives to avoid accidents insured against include ________.

answer

A) deductibles B) risk-based premiums C) coinsurance

question

Clauses in life insurance policies that eliminate death benefits if the insured person commits suicide are an example of a ________.

answer

restrictive provision

question

The fastest growing financial intermediary is ________.

answer

pension plans

question

A company's pension plan promises employees a specific amount of income when they retire. However, the plan does not have the assets to meet these future obligations to employees. This plan represents a defined-________ plan that is ________.

answer

benefit; underfunded

question

Social Security is a

answer

"pay-as-you-go" system.

question

The Social Security system is an example of a public pension plan that is ________.

answer

underfunded

question

Which of the following is not a proposal for insuring that sufficient funds will be available to provide Social Security benefits to future retirees?

answer

Provide more generous annual cost of living increases.

question

Fraudulent practices and other abuses of private pension funds led Congress to enact the ________.

answer

Employee Retirement Income Security Act

question

Keogh plans and IRAs are

answer

individual pension plans

question

Private pension plan assets are invested mainly in ________.

answer

stock

question

Which of the following pensions does not promise employees a specific retirement benefit?

answer

defined-contribution plan

question

All insurance is subject to several basic principles, including all of the following except that

answer

the insured is to profit as a result of insurance coverage

question

A basic product of life insurance companies is ________.

answer

A) disability insurance B) annuities C) health insurance

question

________ is an insurance product that will help if you live longer than you expect. For an initial fixed sum or stream of payments, the insurance company agrees to pay you a fixed amount for as long as you live.

answer

An annuity

question

The broad categories of life insurance products including which of the following?

answer

A) term B) whole life C) universal life

question

Which life insurance policy usually requires the insured to pay a level premium for the duration of the policy, and the overpayment accumulates as a cash value that can be borrowed by the insured at reasonable rates?

answer

whole life

question

What insurance protects against liability for harm the insured may cause to others as a result of product failure or accidents?

answer

casualty insurance

question

A credit default swap, or CDS, is essentially

answer

insurance against default on a financial instrument.

question

Between 1995 and 2009, the amount of credit default swaps (CDSs) exploded, along with the marketing of securitized mortgages. By their peak in 2008, there were about ________ of CDSs outstanding.

answer

$62 trillion

question

During the 2007-2009 financial crisis, state and local governments now found their interest costs rising. Which of the following were causes of this?

answer

A) lower tax revenues because of the weaker economy B) weakened value of monoline insurance guarantees on their debt

question

Mutual funds hold about ________ of financial intermediaries' total assets.

answer

one-sixth

question

________ intermediation means that small investors can pool their funds with other investors to purchase high face value securities.

answer

Denomination

question

Mutual funds offer investors all of the following except

answer

greater-than-average returns.

question

At the end of 2009 there were over ________ separate mutual funds with total assets over ________.

answer

7,000; $11 trillion

question

Most mutual funds are structured in two ways. The most common structure is a(n) ________ fund, from which shares can be redeemed at any time at a price that is tied to the asset value of the fund. A(n) ________ fund has a fixed number of nonredeemable shares that are traded in the over-the-counter market.

answer

open-end; closed-end

question

Which of the following is an advantage to investors of an open-end mutual fund?

answer

The fund agrees to redeem shares at any time

question

The net asset value of a mutual fund is

answer

determined by subtracting the fund's liabilities from its assets and dividing by the number of shares outstanding.

question

________ funds are the simplest type of investment funds to manage.

answer

Index

question

The majority of mutual fund assets are now owned by

answer

individual investors.

question

Capital appreciation funds select stocks of ________ and tend to be ________ risky than total return funds.

answer

companies expected to grow rapidly; more

question

From largest to smallest in terms of total assets, the four classes of mutual funds are

answer

equity funds, bond funds, money market funds, hybrid funds.

question

Measured by assets, the most popular type of bond fund is the ________ bond fund

answer

strategic income

question

People who take their money out of insured bank deposits to invest in uninsured money market mutual funds have ________ risk because money market funds invest in ________ assets.

answer

low; short-term

question

The largest share of assets held by money market mutual funds is

answer

U.S. government securities

question

Which of the following is a feature of index funds?

answer

A) They have lower fees. B) They select and hold stocks to match the performance of a stock index. C) They do not require managers to select stocks and decide when to buy and sell.

question

A deferred-load mutual fund charges a commission

answer

when shares are redeemed by the investor

question

Over the past twenty years, mutual fund fees have ________, largely because ________.

answer

fallen; SEC fee disclosure rules have led to greater competition

question

When investors switch between funds within the same fund family, mutual funds may charge

answer

exchange fee

question

The largest share of total investment in mutual funds is in

answer

stock funds

question

The near collapse of Long Term Capital Management was caused by

answer

a sharp increase in the spread between corporate bonds and Treasury bonds.

question

Conflicts arise in the mutual funds industry because ________ cannot effectively monitor ________

answer

shareholders; investment advisers

question

Late trading is the practice of allowing orders received ________ to trade at the ________ net asset value.

answer

after 4:00 PM; 4:00 PM

question

Market timing

answer

takes advantage of arbitrage opportunities in foreign stocks.

question

Late trading and market timing

answer

A) allow large, favored investors in a mutual fund to profit at the expense of other investors in the fund. B) hurt ordinary investors by increasing the number of fund shares and diluting the fund's net asset value.

question

Which of the following is not a proposal to deal with abuses in the mutual fund industry?

answer

Increase the number of dependent directors.

question

________ means the investors can convert their investment into cash quickly at a low cost.

answer

Liquidity intermediation

question

Mutual fund companies frequently offer a number of separate mutual funds called ________.

answer

complexes

question

Equity funds can be placed in which class according to the Investment Company Institute?

answer

A) capital appreciation funds B) world funds C) total return funds

question

Government bonds are essentially default risk-free, ________ returns.

answer

but will have relatively low

question

________ funds combine bonds and stocks into one fund.

answer

Hybrid

question

All ________ are open-end investment funds that invest only in money market securities.

answer

Money market mutual funds

question

When one party to a transaction has incentives to engage in activities detrimental to the other party, there exists a problem of

answer

moral hazard

question

Although the FDIC was created to prevent bank failures, its existence encourages banks to

answer

take too much risk

question

Deposit insurance

answer

A) attracts risk-prone entrepreneurs to the banking industry. B) encourages bank managers to take on greater risks than they otherwise would C) reduces the incentives of depositors to monitor the riskiness of their banks' asset portfolios.

question

The possibility that the failure of one bank can hasten the failure of other banks is called the

answer

contagion effect.

question

If the FDIC decides that a bank is too big to fail, it will use the ________ method, effectively ensuring that ________ depositors will suffer losses.

answer

purchase and assumption; no

question

If the FDIC uses the purchase and assumption method to handle a failed bank,

answer

all deposits will be paid in full.

question

The result of the too-big-to-fail policy is that ________ banks will take on ________ risks, making bank failures more likely.

answer

large;greater

question

The too-big-to-fail policy

answer

1) exacerbates moral hazard problems 2) treats large depositors of small banks inequitably when compared to depositors of large banks.

question

The primary difference between the "payoff" and the "purchase and assumption" methods of handling failed banks is that the FDIC

answer

B) guarantees all deposits, not just those under the $250,000 limit, when it uses the "purchase and assumption" method. C) is less likely to use the "payoff" method when the bank is large and it fears that depositor losses may spur business bankruptcies and other bank failures.

question

Regulators attempt to reduce the riskiness of banks' asset portfolios by

answer

A) limiting the amount of loans in particular categories or to individual borrowers. B) prohibiting banks from holding risky assets such as common stocks.

question

Banks do not want to hold too much capital because

answer

A) they do not bear fully the costs of bank failures. B) higher returns on equity are earned when bank capital is smaller, all else equal.

question

The increased integration of financial markets across countries and the need to make the playing field equal for banks from different countries led to the Basel Accord agreement to

answer

standardize bank capital requirements internationally

question

Under the Basel plan,

answer

A) assets and off-balance sheet activities are assigned to various categories to reflect the degree of credit risk. B) a bank's total capital must equal or exceed 8 percent of total risk-weighted assets.

question

Of the following assets, the one which has the highest capital requirement under the Basel Accord is

answer

commercial paper.

question

Which of the following is not true regarding the Basel 2 proposal to reform the original 1988 Basel Accord?

answer

It has been well received by banks and national regulatory agencies.

question

Ways in which bank regulations reduce the adverse selection and moral hazard problems in banking include

answer

A) a chartering process designed to prevent crooks from getting control of a bank. B) restrictions that prevent banks from acquiring certain risky assets, such as common stocks. C) high bank capital requirements to increase the cost of bank failure to the owners

question

Regular bank examinations and restrictions on asset holdings indirectly help to ________ the adverse selection problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be ________ from entering the banking industry.

answer

reduce; discouraged

question

The legislation that separated commercial banking from the securities industry is known as the ________.

answer

Glass-Steagall Act

question

The Depository Institutions Deregulation and Monetary Control Act of 1980

answer

A) approved NOW accounts nationwide. B) imposed uniform reserve requirements. C) mandated the phase out of interest-rate ceilings on deposits.

question

As a way of stemming the decline in the number of savings and loans and mutual savings banks, the Garn-St. Germain Act of 1982 allowed

answer

money market deposit accounts.

question

Moral hazard and adverse selection problems increased in prominence in the 1980s

answer

A) as deregulation opened up more avenues for savings and loans and mutual savings banks to take on more risk. B) following a burst of financial innovation in the 1970s and early 1980s that produced new financial instruments and markets, thereby widening the scope for risk taking.

question

The Federal Deposit Insurance Corporation Improvement Act of 1991

answer

A) reduced the scope of deposit insurance in several ways. B) limited the FDIC's ability to use the "too-big-to-fail" policy. C) requires the FDIC to intervene earlier when a bank gets into trouble.

question

Which of the following is least likely to accompany financial consolidation and the development of large, complex banking organizations?

answer

Moral hazard problems will become less important.

question

World Bank research on the effects of deposit insurance concludes that

answer

adoption of explicit government deposit insurance is associated with a higher incidence of banking crises.

question

Just prior to the 2007 financial crisis, mortgage loans known as NINJA loans were issued to borrowers. What is a NINJA loan?

answer

A loan issued to borrowers with no income, employment, nor assets to speak of.

question

Which of the following categories is not part of the Dodd-Frank legislation of 2010?

answer

capital requirements

question

In an effort to control the use of derivatives by financial institutions, the Dodd-Frank legislation of 2010 requires ________.

answer

standardized derivatives products

question

An SIV, or structured investment vehicle, is an off-balance-sheet entity that shields a sponsoring institution from risk. What happened to some of these SIVs when they ran into financial problems?

answer

Troubled SIVs became an asset of the sponsoring institution -- the off-balance-sheet status was meaningless.

question

What role did the credit-rating agencies play leading up to the start of the financial crisis in 2007?

answer

Inaccurate ratings provided by credit-rating agencies helped promote risk taking throughout the financial system

question

Which of the following statements is false?

answer

Bank capital is an asset on the bank balance sheet.

question

A bank's balance sheet

answer

A) shows that total assets equal total liabilities plus equity capital. B) lists sources and uses of bank funds.

question

Which of the following statements is false?

answer

Checkable deposits are the primary source of bank funds.

question

The share of checkable deposits in total bank liabilities has

answer

shrunk over time.

question

Because passbook savings are ________ liquid for the depositor than checking accounts, they earn ________ interest rates.

answer

less; higher

question

Which of the following are not checkable deposits?

answer

A) savings accounts B) small-denomination time deposits

question

Large-denomination CDs are ________, so that like a bond they can be resold in a ________ market before they mature.

answer

negotiable; secondary

question

Bank loans from the Federal Reserve are called ________ and represent a ________ of funds.

answer

discount loans; source

question

Which of the following are reported as assets on a bank's balance sheet?

answer

loans

question

Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves.

answer

high; short-term

question

Which of the following are not reported as assets on a bank's balance sheet?

answer

checkable deposits

question

The most important category of assets on a bank's balance sheet is

answer

loans.

question

Which of the following bank assets are the least liquid?

answer

mortgage loans

question

Which of the following bank assets are the most liquid?

answer

reserves

question

A bank's largest source of funds is its

answer

nontransaction deposits.

question

In general, banks make profits by selling ________ liabilities and buying ________ assets.

answer

short-term; longer-term

question

When a $10 check written on the First National Bank is deposited in an account at the Second National Bank, then

answer

A) the liabilities of the First National Bank decrease by $10. B) the liabilities of the Second National Bank increase by $10.

question

Holding all else constant, when a bank receives the funds for a deposited check,

answer

A) cash items in process of collection fall by the amount of the check. B) bank assets remain unchanged.

question

Which of the following are primary concerns of a bank manager?

answer

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

question

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

answer

liquidity management

question

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,

answer

reserves increase by $200,000.

question

Banks can protect themselves from the disruption caused by deposit outflows by

answer

A) holding excess reserves. B) selling securities. C) "calling in" loans.

question

In general, banks would prefer to meet deposit outflows by ________ rather than ________

answer

borrowing from the Fed; selling loans.

question

Which is the least costly way for a bank to handle deposit outflows?

answer

Hold excess reserves.

question

A bank can reduce its total amount of loans outstanding by

answer

A) "calling in" loans; that is, by not renewing some loans when they come due. B) selling loans to other banks

question

Which of the following statements is an accurate description of modern liability management?

answer

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 Only A and B of the above have occurred since 1960.

question

Banks fail when the value of bank ________ falls below the value of ________, causing the bank to become insolvent.

answer

assets; liabilities

question

A bank failure is more likely to occur when

answer

A) a bank holds less in U.S. government securities. B) a bank suffers large deposit outflows. C) a bank holds less equity capital.

question

The largest source of bank income is

answer

interest on loans.

question

Of the following, the largest operating expense for a bank is

answer

salaries and employee benefits.

question

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.

answer

expense; increase

question

Net profit after taxes per dollar of equity capital is a basic measure of bank profitability called

answer

return on equity.

question

Net profit after taxes per dollar of assets is a basic measure of bank profitability called

answer

return on assets

question

The amount of assets per dollar of equity capital is called the

answer

equity multiplier

question

For a given return on assets, the lower the bank capital is,

answer

the higher the return for the owners of the bank will be.

question

In the absence of regulation, banks would probably hold

answer

too little capital, increasing the return on equity.

question

An argument that supports a regulated minimum capital requirement is that banks that hold too little capita

answer

impose costs on other banks because they are more likely to fail

question

Examples of off-balance-sheet activities include

answer

A) loan sales. B) foreign exchange market transactions. C) trading in financial futures.

question

The danger of banks engaging in activities such as trading in financial futures and interest-rate swaps is that these activities allow banks to

answer

engage in speculation.

question

When a bank sells all or part of the cash stream from a specific loan,

answer

1) it removes the loan from its balance sheet. 2) it usually does so at a profit.

question

Discount loans are also known as ________.

answer

advances

question

Bank capital

answer

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.

question

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

answer

A) the expansion of overnight loan markets. B) the development of negotiable CDs. C) the ability of money center banks to acquire funds quickly.

question

In recent years, the interest paid on checkable and time deposits has accounted for around ________ of total bank operating expenses, while the costs involved in running the bank have been approximately ________ of total operating expenses.

answer

30%; 50%

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