TEST BANK, CHAPTER 9 BANKING
AND MANAGEMENT OF FINANCIAL
INSTITUTIONS EXAM QUESTIONS
AND CORRECTANSWERS ALREADY
GRADEDA+
Banks hold capital because
A) they are required to by regulatory authorities.
B) higher capital increases the returns to the owners.
C) it increases the likelihood of bankruptcy.
D) higher capital increases the return on equity. - ANSWER-A) they are required to by
regulatory authorities.
Conditions that likely contributed to a credit crunch during the global financial crisis
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) capital shortfalls caused in part by
falling real estate prices.
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) Sell more bank stock.
,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) shrink the size of the bank.
D) sell securities the bank owns and put the funds into the reserve account. - ANSWER-
C) shrink the size of the bank.
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) adverse selection
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) adverse selection.
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) adverse selection
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) moral hazard problem.
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) specialization in lending; diversifying
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) diversification; adverse selection
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) restrictive covenants.
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) reduce; screen
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) monitor and enforce them.
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) loan commitment.
Unanticipated moral hazard contingencies can be reduced by
A) screening.
B) long-term customer relationships.
C) specialization in lending.
D) credit rationing. - ANSWER-B) long-term customer relationships.
Property promised to the lender as compensation if the borrower defaults is called
A) collateral.
B) deductibles.
C) restrictive covenants.
D) contingencies. - ANSWER-A) collateral.
, Collateral requirements lessen the consequences of ________ because the collateral
reduces the lender's losses in the case of a loan default and it reduces ________
because the borrower has more to lose from a default.
A) adverse selection; moral hazard
B) moral hazard; adverse selection
C) adverse selection; diversification
D) diversification; moral hazard - ANSWER-A) adverse selection; moral hazard
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. - ANSWER-C)
A bank's balance sheet shows that total assets equal total liabilities plus equity capital.
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) Bank
capital is recorded as an asset on the bank balance sheet.
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 - ANSWER-B) checkable deposits
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 - ANSWER-A) discount loans
The share of checkable 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) shrunk over time.
AND MANAGEMENT OF FINANCIAL
INSTITUTIONS EXAM QUESTIONS
AND CORRECTANSWERS ALREADY
GRADEDA+
Banks hold capital because
A) they are required to by regulatory authorities.
B) higher capital increases the returns to the owners.
C) it increases the likelihood of bankruptcy.
D) higher capital increases the return on equity. - ANSWER-A) they are required to by
regulatory authorities.
Conditions that likely contributed to a credit crunch during the global financial crisis
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) capital shortfalls caused in part by
falling real estate prices.
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) Sell more bank stock.
,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) shrink the size of the bank.
D) sell securities the bank owns and put the funds into the reserve account. - ANSWER-
C) shrink the size of the bank.
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) adverse selection
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) adverse selection.
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) adverse selection
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) moral hazard problem.
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) specialization in lending; diversifying
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) diversification; adverse selection
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) restrictive covenants.
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) reduce; screen
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) monitor and enforce them.
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) loan commitment.
Unanticipated moral hazard contingencies can be reduced by
A) screening.
B) long-term customer relationships.
C) specialization in lending.
D) credit rationing. - ANSWER-B) long-term customer relationships.
Property promised to the lender as compensation if the borrower defaults is called
A) collateral.
B) deductibles.
C) restrictive covenants.
D) contingencies. - ANSWER-A) collateral.
, Collateral requirements lessen the consequences of ________ because the collateral
reduces the lender's losses in the case of a loan default and it reduces ________
because the borrower has more to lose from a default.
A) adverse selection; moral hazard
B) moral hazard; adverse selection
C) adverse selection; diversification
D) diversification; moral hazard - ANSWER-A) adverse selection; moral hazard
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. - ANSWER-C)
A bank's balance sheet shows that total assets equal total liabilities plus equity capital.
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) Bank
capital is recorded as an asset on the bank balance sheet.
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 - ANSWER-B) checkable deposits
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 - ANSWER-A) discount loans
The share of checkable 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) shrunk over time.
