Quiz 3 Flashcards
1) 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 equity capital.
D) A bank’s balance sheet indicates whether or not the bank is profitable.
C
2) 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.
D
3) Which of the following are reported as liabilities on a bank’s balance sheet?
A) reserves
B) checkable deposits
C) consumer loans
D) deposits with other banks
B
4) Which of the following are reported as liabilities on a bank’s balance sheet?
A) discount loans
B) reserves
C) U.S. Treasury securities
D) real estate loans
A
9) Because checking accounts are ________ liquid for the depositor than savings accounts, they
earn ________ interest rates.
A) less; higher
B) less; lower
C) more; higher
D) more; lower
D
14) Because ________ are less liquid for the depositor than ________, they earn higher interest
rates.
A) savings accounts; time deposits
B) money market deposit accounts; time deposits
C) money market deposit accounts; savings accounts
D) time deposits; savings accounts
D
16) Bank loans from the Federal Reserve are called ________ and represent a ________ of
funds.
A) discount loans; use
B) discount loans; source
C) fed funds; use
D) fed funds; source
B
18) 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
A
20) Bank reserves include
A) deposits at the Fed and short-term treasury securities.
B) vault cash and short-term Treasury securities.
C) vault cash and deposits at the Fed.
D) deposits at other banks and deposits at the Fed.
C
26) Which of the following bank assets is the most liquid?
A) consumer loans
B) reserves
C) state and local government securities
D) U.S. government securities
B
30) Banks’ asset portfolios include state and local government securities because
A) they help to attract business from these government entities.
B) banks consider them helpful in attracting accounts of Federal employees.
C) the Federal Reserve requires member banks to buy securities from state and local
governments located within their respective Federal Reserve districts.
D) there is no default-risk with state and local government securities.
A
31) Bank’s make their profits primarily by issuing
A) equity.
B) negotiable CDs.
C) loans.
D) NOW accounts
C
1) 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
C
3) 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.
B
4) When a new depositor opens a checking 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
A) increase; increase
5) When Jane Brown writes a $100 check to her nephew and he cashes the check, Ms. Brown’s
bank ________ assets of $100 and ________ liabilities of $100.
A) gains; gains
B) gains; loses
C) loses; gains
D) loses; loses
D) loses; loses
5) 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
A) deposits and reserves.
8) If, after a deposit outflow, a bank needs an additional $3 million to meet its reserve
requirements, the bank can
A) reduce deposits by $3 million.
B) increase loans by $3 million.
C) sell $3 million of securities that the bank currently owns.
D) repay its discount loans from the Fed.
C
14) If a bank needs to acquire funds quickly to meet an unexpected deposit outflow, the bank
could
A) borrow from another bank in the federal funds market.
B) buy U.S. Treasury bills.
C) increase loans.
D) buy corporate bonds
A
15) 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.
A
if the bank you own has no excess reserves and a sound customer comes in asking
for a loan, should you automatically turn the customer down, explaining that you
don’t have any excess reserves to lend out? Why or why not? What options are
available that will enable you to provide the funds your customer needs
No you do not turn down the customer, you try and get liquidity from another source from another bank or borrowing from the fed (last resort) or selling securities
if a bank is falling short of meeting its capital requirements by $1 million, what
three things can it do to rectify the situation?
- it can issue more shares which would increase capital stock
- it can decrease dividend payments to share holders, not as good of an option because it would decrease profitability for shareholders which makes it less enticing for people to borrow from them
- bank can reduce its assets
What are the benefits and costs for a bank when it decides to increase the amount of
its bank capital?
the benefits of the bank increasing it capital are that higher capital means higher safety for the bank should anything go wrong
the costs of increasing capital is that is decreases returns on equity making it less attractive for shareholders to invest
If the president of a bank told you that the bank was so well run that it has never
had to call in loans, sell securities, or borrow as a result of a deposit outflow, would you be willing to buy stock in that bank? Why or why not?
No because it means the bank is prob miss managing its money and not profiting enough by loaning out money
