The quantity interest income minus expenses divided by assets is a measure of bank performance known as _______
net interest margin
decline by 1.5 million
The difference of rate-sensitive liabilities and rate-sensitive assets is known as the
if a bank has more ________ rate-sensitive assets that liabilities, a ________ in interest rates will reduce bank profits, while a _____ in interest rates will raise bank profits
more, decline, rise
When banks offer borrowers smaller loans than they have requested, banks are said to
Property promised to the lender as compensation if the borrower defaults is called
Long-term customer relationships _____ the cost of information and make it easier to ______ credit risks.
Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the
moral hazard problem
If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to
Shrink the size of the bank
holding large amounts of capital helps prevent bank failures because
it can be used to absorb the losses resulting from a deposit outflow
banks that actively manage liabilities will most likely meet a reserve shortfall by
borrowing federal funds
bankers' concerns regarding the optimal mix of excess reserves, secondary reserves,borrowing from the Fed, and borrowings from other banks to deal with deposit outflows is an example of
______ may antagonize customers and thus can be a very costly way of acquiring funds to meet an unexpected deposit outflow.
Calling in loans
If a bank has $200,000 of checkable deposits, a required reserve ratio of 20 percent, and it holds $80,000 in reserves. then the maximum deposit outflow it can sustain without altering its balance sheet is
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 balance sheet
Which of the following are reported on a bank's balance sheet?
not reserves, Loans, Deposits with other banks
Because _______ are less liquid for the depositor than ______, they earn higher interest rates.
Passbook savings, checkable deposits.
Banks acquire the funds that they use to purchase income-earning assets from such sources as
Bank loans from the Federal Reserve are called________ and represent a ________ of funds
discount loans, source of funds
Bank capital is listed on the _______ side of the bank's balance shee because it represents a _________ of funds
Which of the following assets is the most liquid
Because of their ______ liquidity, ______ U.S. government securities are called secondary reserves
Banks make their profits primarily by issuing
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
In general, banks make profits by selling________liabilities and buying _____ assets
When a $10 check written on the First national Bank is deposited in an account at Citibank, then
the liabilities of First National Bank decrease by $10
Bonds with no default risk are calles
An increase in the riskiness of corporate bonds will ___ the price of corporate bonds and ____ the price of U.S. treasury bonds, everything else held constant.
As expected risk increases, the expected return on corporate bonds ______, and the return becomes _________ uncertain, everything else held constant.
Everything else held constant, if the federal government were to guarantee today that it will pay creditors if a corporation goes bankrupt in the future, the interest rate on corporate bonds will _______ and the interest rate on Treasury securities will
Bonds with relatively high risk of default are called
Bonds with relatively low risk of default are called _____ securities and have a rating of Baa or BBB and above; bonds with ratings below Baa or BBB have a higher default risk and are called _______
investment grade, junk bonds
Risk premiums on corporate bonds tend to _______ during business cycle expansions and ______ during recessions, everything else held constant.
A plot of the interest rates on default-free government bonds with different terms to maturity is called
a yield curve,dummy.
When yield curves are downward sloping.
Short-term interest rates are above long-term interest rates.
According to the expectations theory of term structure
interest rates on bonds of different maturities move together over time.
If the expected path of one-year interest rates over the next five years is 4 percent, 5 percent, 7 percent, 8 percent, and 6 percent, the the expectations theory predict that today's interest rate on the five-year bond is
if the expected path of 1-year interest rates over the next five years is 2, 4, 1, 4, 3, the expectations theory predicts that the bond with the lowerest interest rate today is the one with a maturity of
According to the segmented markets theory of the term structure
interest rates on bonds of different maturities do no move together over time
According to the liquidity premium theory of the term structure
the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium.
the additional incentive that the purchaser of a treasury security requires to buy a long-term security rather than a short-term security is called the
If 1-year interest rates for the next three years are expected to be 4, 2, and 3 percent, and the 3-year term premium is 1 percent, than the 3-year bond rate will be
If the yield curve is flat for the short maturities and then slopes downward for longer maturities, the liquidity premium theory (assuming mild preference for shorter-term bonds) indicates that the market is predicting
a decline in short-term interest rates in the near future and an even steeper decline further out in the future.
according to the liquidity premium theory of the term structure, a steeply upward sloping yield curve indicates that the short-term interest rates are expected to
rise in the future
An inverted yield curve predicts that short-term interest rates
will fall in the future
The Fed recently intervened in the commercial paper market, which of the following does not describe the current commercial paper market
The treasury department will set up a s"special purpose vehicle" to buy commercial paper.
The following DO descriibe the commercial paper market:
Prime MMMF have reduced their purchases of commercial paper. The Failure of the Lehman Brothersand recessionary fears have reduced the demand for commercial paper. Commercial paper is used by firms to fund large investment projects The Treasury department is borrowing funds to place "special deposits" with the Fed.
Net Economic Value, NEV, is best described by which of the following?
Present value of assets minus present value of liabilities.
Basis risk is best described by which of the following?
The risk that there will be a poor correlation between interest rates of assets and liabilities.
Which of the following explains why a financial institution with a growing deposit base will have higher earnings than a financial institution with a stagnant deposit base?
Lower operating expense-to-asset ratio.
Which of the following is not a recently enacted policy tool to address the current credit crisis?
Inject treasury deposits directly into commercial banking system.
The following ARE recently enacted policies:
Guarantee new senior unsecured bank debt buy 3-month commercial paper buy distressed mortgage/MBS Inject capital directly into banking system
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