Deck 12: Bank Management

Question 1

Regulation Q, part of the Banking Act of 1933, prohibited banks from paying

A)interest on checking accounts.
B)interest on savings accounts.
C)higher interest on checking accounts than they did on savings accounts.
D)higher interest on savings accounts than they did on checking accounts.

Answer 1

A

Question 2

Liquidity is important to banks because it

A)allows them to earn a high rate of return.
B)allows them to meet the cash needs of their depositors.
C)lowers their cost of doing business.
D)increases their profits.

Answer 2

B

Question 3

Which of these are among the assets on a bank's balance sheet?

A)Cash and savings accounts
B)Consumer loans and demand deposits
C)Consumer loans and cash
D)Demand deposits and savings accounts

Answer 3

C

Question 4

One advantage that nontransaction accounts have over transaction accounts is that they

A)pay more interest.
B)are more liquid.
C)are more secure.
D)are less risky.

Question 5

If a bank made a self-liquidating inventory loan, it would be making a __________ loan.

A)long-term business
B)long-term consumer
C)short-term business
D)short-term consumer

Question 6

Which of these categories describes the largest group of liabilities for banks-by far?

A)Borrowing
B)Demand and long-term deposits
C)Trading
D)Loans from other banks

Question 7

Which two of these activities define the essence of how a bank functions?

A)Banks take deposits and disperse funds.
B)Banks disperse funds and make loans.
C)Banks take deposits and buy US Treasury securities.
D)Banks take deposits and make loans.

Question 8

Systemic risk is a factor in the current banking system. What does this mean?

A)The collapse of the largest ten banks worldwide could result in the collapse of the entire financial system.
B)The collapse of a single megabank could result in the collapse of the entire financial system.
C)The collapse of the entire community banking system could result in the collapse of the megabanks.
D)The collapse of the larger megabanks could result in the collapse of the community banks.

Question 9

The Dodd-Frank Act allowed banks, for the first time, to

A)issue certificates of deposit.
B)pay interest on savings accounts.
C)pay interest on demand deposits.
D)purchase junk bonds.

Question 10

Money market deposit accounts came about in response to what other financial option?

A)Interest-bearing checking accounts
B)NOW accounts
C)NEW accounts
D)Money market mutual funds

Question 11

Which of these are among the liabilities on a bank's balance sheet?

A)Cash and savings accounts
B)Bonds and cash
C)Consumer loans and demand deposits
D)Demand deposits and savings accounts

Question 12

Which of the following is the most liquid of a bank's assets?

A)Business loans
B)Consumer loans
C)Securities
D)Cash

Question 13

Savings accounts and certificates of deposit are commonly referred to as __________ accounts.

A)transaction
B)nontransaction
C)liquidity
D)interest rate

Question 14

Why are US Treasury securities an attractive asset for banks?

A)They are backed by the global banking system.
B)They have a short term to maturity.
C)They offer a high rate of return.
D)They have a low default risk.

Question 15

Banks must weigh the risk versus the return in deciding

A)what to hold in their portfolio of assets.
B)what interest rate to pay on deposit accounts.
C)whether to become a Federal Reserve bank.
D)what portion of their deposits to hold in the form of reserves.

Question 16

Banks want to hold as little cash as possible because holding cash

A)provides very little liquidity.
B)offers a minimal rate of return.
C)is risky.
D)provides too much liquidity.

Question 17

The business of banking can best be described in which of these ways?

A)Converting short-term liabilities into short-term assets
B)Converting long-term liabilities into long-term assets
C)Converting monetary deposits into loans
D)Creating new liabilities

Question 18

The liquid bank accounts most often used by accountholders to transfer funds to other parties are known as

A)transaction deposit accounts.
B)passbook accounts.
C)certificates of deposit.
D)savings accounts.

Question 19

A potentially important difference between NOW accounts and demand deposits is that NOW accounts

A)pay interest.
B)may reserve the right to require seven days' notice prior to making a withdrawal.
C)have no maturity.
D)allow unlimited transactions.

Question 20

What are two common names for smaller banks?

A)Community or retail banks
B)State or community banks
C)Mini or retail banks
D)Local or state banks

Question 21

Banks will sometimes use derivative contracts for which of these purposes?

A)To improve their liquidity position
B)To balance their asset portfolio
C)To speculate on interest rate movements
D)To bolster their reserve position

Question 22

What do economists mean when they say that banks perform the function of asset transformation?

Question 23

How is a standby letter of credit different from a commercial letter of credit?

A)A standby letter of credit is more limited in the value of the transactions that it will guarantee.
B)A standby letter of credit is tied to a much narrower range of transactions.
C)A standby letter of credit is not tied to a specific transaction.
D)A standby letter of credit has a longer maturity.

Question 24

What are transaction accounts? Give examples.

Question 25

Tevye owns a shoe store in the United States and wants to buy some shoes from Aldo, an Italian shoe manufacturer. Aldo is unsure of Tevye's ability to make payment and so is leery of selling the shoes to him. In order to make this transaction, Tevye might go to his bank to get a(n)__________ letter of credit.

A)import
B)standby
C)transactional
D)commercial

Question 26

Explain the dilemma that bank managers face in trying to balance risk and return.

Question 27

One very important function that banks perform in a society is matching savers with borrowers.

Question 28

Banks will most often use financial derivatives, known as derivative contracts, for which of these purposes?

A)To improve their liquidity position
B)To hedge exchange rate or interest rate risk
C)To balance a risky loan portfolio
D)To bolster their reserve position

Question 29

A mortgage loan is an example of a __________ loan.

A)long-term business
B)long-term consumer
C)short-term business
D)short-term consumer

Question 30

Over the past several decades, shrinking interest rate spreads have led banks to turn to fee-based services to generate revenue.

Question 31

An unsecured personal loan is an example of a __________ loan.

A)long-term business
B)long-term consumer
C)short-term business
D)short-term consumer

Question 32

What is the term for mortgages that are pooled together and then sold to investors?

A)Mortgage-backed securities
B)Pooled mortgages
C)Mortgage-backed assets
D)Risk-free mortgage securities

Question 33

US government securities are the most liquid assets that banks hold.

Question 34

Bank certificates of deposit, commonly known as CDs, are a nice, virtually risk-free way to build savings.

Question 35

A leveraged buyout is an example of a __________ loan.

A)long-term business
B)long-term consumer
C)short-term business
D)short-term consumer