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Multiple Choice Quiz
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1
Banks do not hold many of their assets in the form of cash mainly because of:
A)Regulation.
B)The fear of being robbed.
C)The opportunity cost of holding cash; cash does not earn interest.
D)It can encourage employee theft.
2
Secondary reserves for banks are:
A)The same as the bank's net worth.
B)Mainly the bank's liquid securities.
C)Vault cash.
D)Deposits the bank has at the Federal Reserve.
3
Checkable deposits have decreased since the 1970's mainly because:
A)Regulators allowed higher rates to be paid on these accounts and banks found them to be highly unprofitable.
B)People prefer to use credit cards rather than writing checks.
C)These deposit accounts offer little or no interest so depositors find them to be expensive.
D)As banks added fees to these accounts people increased their holdings of currency.
4
A bank's loan loss reserves are:
A)The amount of loans that have defaulted in the past twelve months.
B)The same as equity capital.
C)An amount the bank sets aside to cover potential losses from defaulted loans.
D)A liability of the bank since it is a source of funds.
5
The tendency for large banks to have a higher return on equity than small banks suggests:
A)Small banks have better management than large banks.
B)Large banks can charge higher interest rates than small banks.
C)There could be significant economies of scale in banking.
D)Larger banks are better able to escape the cost of regulation.
6
A bank's off-balance-sheet activities usually:
A)Increase both its assets and liabilities while reducing net income.
B)Increase its net income but do not change its assets or liabilities.
C)Increases a bank's liabilities but not its assets.
D)Increases a bank's assets but not its liabilities.
7
A late-night news report says the president of a local bank is about to be arrested for embezzling money from the bank at which he works. This causes most of the depositors to line up in front of the bank the next morning wanting to withdraw their deposits. This is an example of:
A)Liquidity risk.
B)Operational risk.
C)Interest rate risk.
D)Credit risk.
8
The credit risk a bank faces is the risk resulting specifically from:
A)The economy entering a recession.
B)Interest rates falling.
C)Some of the bank's loans not being repaid.
D)The bank experiencing a decrease in deposits.
9
The fact that a bank's assets tend to be long-term while its liabilities are short-term creates:
A)Interest-rate risk.
B)Credit risk.
C)Lower risk for the bank, this is why they follow this strategy.
D)Trading risk.
10
A bank faces foreign exchange risk when:
A)It has assets denominated in one currency and liabilities in another.
B)It lends to foreign borrowers because they are less likely to repay a U. S. bank.
C)Foreign governments restrict dollar-denominated payments.
D)It has branches in other countries.
11
Which of the following is a bank asset?
A)Demand deposits.
B)Borrowings from other banks.
C)Mortgage loans.
D)CDs.
12
Which of the following is not a bank liability?
A)Reserves.
B)Demand deposits.
C)Non-transaction deposits.
D)Federal fund borrowings.
13
Capital is the cushion banks have against:
A)Sudden drops in the value of their assets.
B)An unexpected decrease in liabilities.
C)Liquidity risk.
D)Moral hazard.
14
If a bank has $100 million in assets and a net worth of $10 million, its debt-to-equity ratio is:
A)10 to 1
B)5 to 1
C)9 to 1
D)0.1 to 1
15
A bank's Return on Assets (ROA) is calculated by dividing:
A)The bank's assets by its net worth.
B)The bank's net profits after taxes by its assets.
C)The bank's net worth by its assets.
D)The bank's assets less its net profit after taxes by its net worth.





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