1. The balance sheets of savings institutions consist mostly of:

A. Consumer loans and High quality corporate bonds

B. Residential mortgages and time deposits

C. Commercial loans and small time deposits

D. Residential mortgages and corporate bonds

2. Bank assets consist mostly of

A. Demand and time deposits

B. Holdings of investment securities

C. Savings deposits

D. Real estate and commercial loans

E. Corporate stock

3. The bulk of commercial bank income comes from:

A. Interest on deposits

B. Interest and fees on loans

C. Interest on Federal Funds and repos

D. Service charges on deposits

E. Income from investment securities

4. The number one expense item for banks, in general, is:

A. wages and salaries of employees

B. interest on deposits

C. interest paid on nondeposit borrowings

D. federal income taxes

E. none of the above

5. FOR THIS AND NEXT 2. A Treasury bond has the following trading data: Coupon rate = 7 1/4%; Current price = 107.78125% of par; Maturity = 2 years. Bonds such this pay interest semiannually. Calculate the yield-to-maturity (YTM) on this bond

A. Less than 4%

B. Exactly 4.45%

C. Greater than 7%

D. Exactly 5.25%

E. None of the above

6. If interest rates fell by 300 basis points below the bond's coupon rate, what will be the new price of this bond?

A. $1,000

B. $1,077.81

C. $1,083.67

D. $1,056.94

E. None of the above

7. Based on the current trading data, calculate the duration of this bond.

A. 1.934 years

B. 1.987 years

C. 1.852 years

D. None of the above

8. Zero-coupon bonds or a loan paid off in one lump sum for any maturity have a duration of one year. (True/False)

9. When the investor's desired holding period equals the duration of the security he or she holds, the investor's total dollar return is immunized against changes in interest rates. (True/False)

10. If a bond has a high convexity,

A. its price will rise rapidly with rising interest rates

B. its price will fall rapidly with rising interest rates

C. its price will fall more slowly as rates rise but rise more quickly as rates fall ***

D. its price will rise more slowly as rates fall but fall more quickly as rates rise

E. None of the above

11. Which of the following statements is 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. All of the above are true.

12. Which of the following statements is true?

A. A bank's assets are its uses of funds.

B. A bank's assets are its sources of funds.

C. A bank's liabilities are its uses of funds.

D. Only B and C of the above are true.

13. 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. A bank's assets provide the bank with income.

D. Bank capital is an asset on the bank balance sheet.

14. Which of the following are reported as liabilities on a bank's balance sheet?

A. reserves

B. checkable deposits

C. loans

D. deposits with other banks

15. Which of the following are reported as liabilities on a bank's balance sheet?

A. discount loans

B. cash items in the process of collection

C. state government securities

D. all of the above

E. only B and C of the above

16. 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.

17. Checkable deposits and money market deposit accounts are [I] payable on demand [II] liabilities of the banks [III] assets of the banks [IV] part of a bank's capital

A. I and II

B. II and III

C. III and IV

D. None of the above

18. Which of the following is a checkable deposit?

A. savings accounts

B. Small-denomination time deposits

C. Money market deposit accounts

D. Certificates of deposit

19. Which of the following are reported as assets on a bank's balance sheet?

A. discount loans from the Fed

B. loans

C. borrowings

D. only A and B of the above

20. Because of their ________ liquidity, ________ U.S. government securities are called secondary reserves.

A. low; short-term

B. low; long-term

C. high; short-term

D. high; long-term

21. The most important category of assets on a bank's balance sheet is

A. discount loans.

B. securities.

C. loans.

D. cash items in the process of collection.

22.When you deposit $50 in the First National Bank,

A. its liabilities decrease by $50.

B. its assets increase by $50.

C. its reserves decrease by $50.

D. only B and C of the above occur.

23. When you deposit $50 in currency at the Old National Bank,

A. its assets increase by $50.

B. its reserves increase by less than $50 because of reserve requirements.

C. its liabilities decrease by $50.

D. only A and B of the above occur.

24. When you deposit $50 in currency at the Old National Bank,

A. its assets increase by less than $50 because of reserve requirements.

B. its reserves increase by less than $50 because of reserve requirements.

C. its liabilities increase by $50.

D. only A and B of the above occur.

25. When a $10 check written on the First National Bank is deposited in an account at the Second National Bank, then

A. the liabilities of the First National Bank decrease by $10.

B. the reserves of the First National Bank increase by $10.

C. the liabilities of the Second National Bank decrease by $10.

D. the assets of Second National Bank decrease by $10.

26. When a $10 check written on the First National Bank is deposited in an account at the Second National Bank, then [I] the liabilities of the First National Bank decrease by $10 [II] the liabilities of the Second National Bank increase by $10 [III] the reserves of the First National Bank increase by $10 [IV] new Treasury bonds equal to $10 are issued

A. I and II

B. I and III

C. II and IV

D. III and IV

27. When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but instead makes loans, then in the bank's final balance sheet,

A. the assets at the bank increase by $200,000.

B. the liabilities of the bank increase by $200,000.

C. reserves increase by $200,000.

D. all of the above occur.

28. When $1 million is deposited at a bank, the required reserve ratio is 20 percent, and the bank chooses not to hold any excess reserves but instead makes loans, then in the bank's final balance sheet,

A. the assets at the bank increase by $800,000.

B. the liabilities of the bank increase by $1,000,000.

C. the liabilities of the bank increase by $800,000.

D. reserves increase by $160,000.

29. If a bank has $100,000 of deposits, a required reserve ratio of 20 percent, and $40,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is

A. $30,000.

B. $25,000.

C. $20,000.

D. $10,000.

30. If a bank has $200,000 of deposits, a required reserve ratio of 20 percent, and $80,000 in reserves, then the maximum deposit outflow it can sustain without altering its balance sheet is

A. $50,000.

B. $40,000.

C. $30,000.

D. $25,000.

31. If a bank has $10 million of deposits, a required reserve ratio of 10 percent, and $2 million in reserves, then it does not have enough reserves to support a deposit outflow of

A. $1.2 million.

B. $1.1 million.

C. $1 million.

D. either A or B of the above.

32. Which of the following do banks hold as insurance against the high cost of deposit outflows?

A. excess reserves

B. secondary reserves

C. bank equity capital

D. all of the above

E. only A and B of the above

33. Banks fail when the value of bank ________ falls below the value of ________, causing the bank to become insolvent.

A. reserves; required reserves

B. loans; secondary reserves

C. assets; liabilities

D. income; expenses

34. The largest source of bank income is

A. interest on loans.

B. interest on securities.

C. service charges on deposit accounts.

D. noninterest income.

35. The largest operating expense item for a bank is typically