1.Hank is confused as to what banks do.He reads that banks "transform assets,"

but he has no idea what that means.How would you explain asset transformation

to Hank?

2.Banks usually hold a very small percentage of their assets in the for of cash.

Recently, however, banks have been holding on to larger amounts of cash.What

impact does this have on the other categories of a bank's balance sheet?

3.Which is currently the largest liability of banks?

a.Cash

b.Loans

c.Deposits

d.Bank capital

4.Financial innovationscan have dramatic effects.Explain how and why NOW

accounts came about and the impact they have had on financial markets.

5.Not all financial assets are the right vehicle for everyone.Give an example of

someone for whom a certificate of deposit would be useful.Also give an example

of someonefor whom a certificate of deposit would be a bad choice.

6.Demand deposit and NOW accounts are commonly referred to as:

a.Savings accounts

b.Passbook accounts

c.Checking accounts

d,nontransaction accounts

7.Explain the trade-offs banks face when they consider holding high - yield securities.

8.Banks offer a wide variety of business loans.Explain why banks try to seek a balance between short term and long term loans in their loan portfolio.What are the advantages and disadvantages of offering short term loans versus long term loans?

9.Debbie has owned her home for several yearsand has been paying her mortgage on time every month.She is building equity in her home, which can then be used for what type of personal loan?

a.A first mortgage

b.A second mortgage

c.RV Loan

d.Unsecured loan

10. Commercial letters of credit and standby letters of credit tend to be very profitable for banks, yet they seldom require banks to lend money.Explain why.

11.Many argue that when banks started to issue credit default swaps, they started to become insurance companies.Explain this argument.

12.Lisa runs a commercial bank and wants to hedge her interest rate risk.Which off balance sheet transaction is Lisa going to engage in on behalf of the bank?

a.Standby letter of credit

b. Credit default swap

c. Commercial letter of credit

d. Financial derivative