978-0133427073 Test Bank Chapter 17 Part 3

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73) When a bank sells all or part of the cash stream from a specific loan,

A) it removes the loan from its balance sheet.

B) it usually does so at a loss.

C) it usually does so at a profit.

D) both A and B of the above occur.

E) both A and C of the above occur.

74) A bank

A) obtains funds by borrowing and by issuing liabilities.

B) makes profits by charging an interest rate on their asset holdings of securities and loans that is

lower than the interest and other expenses on their liabilities.

C) does both A and B of the above.

D) does neither A nor B of the above.

75) ________ were once the most common type of nontransaction deposit.

A) Checking accounts

B) Time deposits

C) Savings accounts

D) none of the above

76) Discount loans are also known as ________.

A) interest-free loans

B) advances

C) credits

D) market loans

77) Bank capital

A) is raised by selling new equity.

B) is a cushion against a drop in the value of its assets.

C) comes from retained earnings.

D) is all of the above.

78) Before the 1960s,

A) over half of the sources of bank funds were obtained through checkable deposits that by law

could not pay any interest.

B) banks mostly borrowed from other banks to meet their reserve needs.

C) both A and B occurred.

D) neither A nor B occurred.

79) With large banks beginning to explore ways in which the liabilities on their balance sheets

could provide them with reserves and liquidity, this led to

A) the expansion of overnight loan markets.

B) the development of negotiable CDs.

C) the ability of money center banks to acquire funds quickly.

D) all of the above occurring.

80) In the late 1960s,

A) money market banks no longer needed to depend on checkable deposits as the primary source

of bank funds.

B) banks aggressively set target goals for their asset growth.

C) the new management of liabilities created more flexibility.

D) all of the above.

81) In 2009 provisions for loan losses reached a new peak of ________ of total operating

expenses.

A) 60%

B) 50%

C) 33%

D) 13%

17.2 True/False

1) Since their introduction in 1961, negotiable CDs have become an important source of bank

funds.

2) Deposits that banks keep in accounts at the Federal Reserve less vault cash is called reserves.

3) When a bank receives additional deposits, it gains an equal amount of reserves; when it loses

deposits, it loses an equal amount of reserves.

4) To keep enough cash on hand to meet depositors’ demand for withdrawals, banks must engage

in liquidity management.

5) Required reserves are insurance against the costs associated with deposit outflows. The higher

the costs associated with deposit outflows, the more required reserves banks will want to hold.

6) A bank maintains bank capital to lessen the chance that it will become insolvent.

7) Given a bank’s return on assets, the higher the bank capital, the higher the return for the

owners of the bank.

8) Loan loss reserves are an asset on a bank’s balance sheet.

9) Off-balance-sheet activities consist of trading financial instruments and generating income

from fees and loan sales, all of which affect bank profits but are not visible on bank balance

sheets.

10) The value-at-risk method for estimating a bank‘s risk exposure measures the losses a bank

could incur under a worst-case scenario.

11) The share of bank operating income earned from off-balance-sheet activities has increased

over the past two decades.

12) Since a bank’s assets exceed its equity capital, the return on assets always exceeds the return

on equity.

13) A loan commitment is an agreement to provide a loan up to a certain dollar amount if a

customer requests the loan during a specific time period.

14) Nontransaction deposits are the primary source of bank funds.

15) Owners cannot write checks on nontransaction deposits, but the interest rate paid on these

deposits are usually higher than those on checkable deposits.

17.3 Essay

1) What is the major focus of each of the following bank management concerns: asset

management, liability management, liquidity management, and capital adequacy management?

Topic: Chapter 17.3 General Principles of Bank Management