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Quiz 2
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1
A bank's capital equals:
A)total bank assets + total bank liabilities.
B)total bank liabilities – total bank assets.
C)total bank assets – total bank liabilities.
D)None of the above is correct.
2
Bank capital accounts for approximately ________ of the liabilities of commercial banks.
A)1%
B)10%
C)50%
D)100%
E)1000%
3
The assets of a bank directly represents its:
A)sources of funds.
B)uses of funds.
C)net worth.
D)total profits.
4
The sources of a bank's funds is represented by its:
A)assets.
B)liabilities.
C)profits.
D)vault cash.
5
Vault cash is a(n):
A)asset of a bank.
B)liability of a bank.
C)measure of the capital of the bank.
D)measure of the bank's profits.
6
A bank's reserves includes:
A)checkable deposits.
B)loans.
C)government securities.
D)deposits at the Fed.
7
The term "secondary reserves" is sometimes used to refer to a bank's:
A)mortgage loans.
B)capital.
C)vault cash.
D)cash items in the process of collection.
E)holdings of government securities.
8
Which of the following is not held by commercial banks as a component of their assets?
A)U.S. government bonds
B)common stock
C)mortgage loans
D)consumer loans
9
A bank may meet its short-term borrowing needs by:
A)engaging in repurchase agreements.
B)buying government securities.
C)issuing more mortgage loans.
D)None of the above is correct.
10
If a bank has $400 million in assets and a net worth of $50 million, its debt to equity ratio is:
A)10 to 1.
B)7 to 1.
C)8.75 to 1.
D)8 to 1.
11
Over the past 40 years, checking account balances, as a proportion of a bank's liabilities, have:
A)declined as depositors have shifted their funds into interest-bearing assets.
B)increased since more of these accounts now pay interest.
C)not changed as a share of a bank's liabilities.
D)remained a trivial share of a bank's liabilities because most checking account balances are part of bank assets, not bank liabilities.
12
Banks with reserve shortfalls may:
A)borrow reserves from the Fed in the form of discount loans.
B)borrow money from other banks in the federal funds market.
C)sell securities to acquire additional reserves.
D)All of the above are correct.
13
An increase in a bank's capital, holding its assets and net profits constant:
A)reduces the return on equity.
B)increases the return on equity.
C)has no effect on the return on equity.
D)has an unpredictable effect on a bank's return on equity.
14
If a bank's interest-rate spread increases, its profits will:
A)increase.
B)decrease.
C)remain unchanged.
D)change in an unpredictable manner.
15
Suppose that a bank has deposits of $400 million and reserves that total $45 million. If the bank has a required reserve rate of 10 percent, then this bank has:
A)no excess reserves.
B)excess reserves of $5 million.
C)excess reserves of $10 million.
D)a reserve shortfall of $5 million.
E)a reserve shortfall of $10 million.
16
A bank may reduce its liquidity risk by:
A)primarily issuing long-term mortgage loans.
B)reducing its holdings of securities and increasing its loans.
C)holding more excess reserves.
D)offering more loan commitments.
17
A bank may reduce its credit risk by:
A)diversifying its loan portfolio.
B)charging a high interest rate to all loan customers.
C)only making consumer loans.
D)None of the above is correct.
18
A bank is subject to more interest-rate risk when:
A)it possesses a large gap (either positive or negative) between its interest-rate sensitive assets and interest-rate sensitive liabilities.
B)its holding of interest-rate sensitive assets matches its holding of interest-rate sensitive liabilities.
C)it holds a large (and equal) volume of both interest-rate sensitive assets and interest-rate sensitive liabilities.
D)None of the above is correct.
19
If a bank has more interest-rate sensitive assets than interest-rate sensitive liabilities, a 1% increase in the interest rate on interest-rate sensitive assets and interest-rate sensitive liabilities will cause its profits to:
A)increase.
B)decrease.
C)remain unchanged.
D)either increase or decrease depending upon the size of the interest-rate increase.





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