FIN 350 Week 8 Quiz – Strayer

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Quiz 7 Chapter 16 and 17

Chapter 16—Foreign Exchange Derivative Markets

1. At any given point in time, the price at which banks will buy a currency is ____ the price at which they sell it.

a. higher than

b. lower than

c. the same as

d. none of the above

2. Which of the following is most likely to provide currency forward contracts to their customers?

a. commercial banks

b. international mutual funds

c. brokerage firms

d. insurance companies

3. The ____ allowed for the devaluation of the dollar in 1971.

a. Bretton Woods Agreement

b. Louvre Accord

c. Smithsonian Agreement

d. none of the above

4. The Bretton Woods Era was the era

a. of free-floating exchange rates.

b. of floating rates without boundaries, but subject to government intervention.

c. in which governments maintained exchange rates within 1 percent of a specified rate.

d. in which exchange rates were maintained within 10 percent of a specified rate.

5. A system whereby exchange rates are market determined without boundaries but subject to government intervention is called

a. a dirty float.

b. a free float.

c. the gold standard.

d. the Bretton Woods era.

6. A system whereby one currency is maintained within specified boundaries of another currency or unit of account is a

a. pegged system.

b. free float.

c. dirty float.

d. managed float.

7. A country that pegs its currency is still able to maintain complete control over its local interest rates.a. Trueb. False

8. If the demand for British pounds ____, the pound will ____, other things being equal.

a. increases; appreciate

b. decreases; appreciate

c. increases; depreciate

d. B and C

9. A(n) ____ in the supply of euros for sale will cause the euro to ____.

a. increase; appreciate

b. increase; depreciate

c. decrease; depreciate

d. none of the above

10. Beginning with an equilibrium situation, if European inflation suddenly ____ than U.S. inflation, this forced ____ pressure on the value of the euro.

a. becomes much higher; upward

b. becomes much higher; downward

c. becomes much less; upward

d. becomes much less; downward

e. B and C

11. Purchasing Power Parity suggests that the exchange rate will on average change by a percentage that reflects the ____ differential between two countries.

a. income

b. interest rate

c. inflation

d. tax

12. In reality, exchange rates do not always change as suggested by purchasing power parity.a. Trueb. False

13. If U.S. interest rates suddenly become much higher than European interest rates (and if it does not cause concern about higher inflation there), the U.S. demand for euros would ____, and the supply of euros to be exchanged for dollars would ____, other factors held constant.

a. increase; increase

b. increase; decrease

c. decrease; increase

d. decrease; decrease

14. Assume interest rate parity exists. If the spot rate on the British pound is $2 and the 1-year British interest rate is 7 percent, and the 1-year U.S. interest rate is 11 percent, what is the pound's forward discount or premium?

a. 3.74 percent premium

b. 3.74 percent discount

c. 3.60 percent premium

d. 3.60 percent discount

15. When a government influences factors, such as inflation, interest rates, or income, in order to affect currency's value, this is an example of

a. direct intervention.

b. indirect intervention.

c. a freely floating system.

d. a pegged system.

16. Which of the following statements is incorrect?

a. Central banks often consider adjusting a currency's value to influence economic conditions.

b. If the U.S. central bank wishes to stimulate the economy, it could weaken the dollar.

c. A weaker dollar could cause U.S. inflation by reducing foreign competition.

d. Direct intervention occurs when the central bank influences the factors that determine the dollar's value.

17. Direct intervention is always extremely effective.a. Trueb. False

18. If the U.S. government imposed trade restrictions on U.S. imports, this would ____ the U.S. demand for foreign currencies, and would place ____ pressure on the values of foreign currencies (with respect to the dollar).

a. increase; upward

b. increase, downward

c. limit; upward

d. limit; downward

19. If a commercial bank expects the euro to appreciate against the dollar, it may take a ____ position in euros and a ____ position in dollars.

a. short; short

b. long; short

c. short; long

d. long; long

20. Generally, a ____ home currency can ____ domestic economic growth.

a. weak; dampen

b. strong; stimulate

c. strong; dampen

d. A and B

21. A ____ home currency can ____ domestic inflation.

a. strong; increase

b. weak; decrease

c. strong; decrease

d. A and B

22. If the forward rate of a foreign currency ____ the existing spot rate, the forward rate will exhibit a ____.

a. exceeds; discount

b. is below; premium

c. is below; discount

d. A and B

23. ____ forecasting involves the use of historical exchange rate data to predict future values.

a. Technical

b. Fundamental

c. Market-based

d. Mixed

24. ____ forecasting is usually based on either the spot rate or the forward rate.

a. Technical

b. Fundamental

c. Market-based

d. Mixed

25. Fundamental forecasting has been found to be consistently superior to the other forecasting techniques.a. Trueb. False

26. Which of the following is not a method of forecasting exchange rate volatility?

a. using the volatility of historical exchange rate movements

b. using a time series of volatility patterns in previous periods

c. using the volatility of future exchange rate movements

d. using the exchange rate's implied standard deviation

27. Assume the following information.

• Interest rate on borrowed euros is 5 percent annualized

• Interest rate on dollars loaned out is 6 percent annualized

• Spot rate for €0.83 per dollar (one € = $1.20)

• Expected spot rate in five days is €0.85 per dollar

• Alonso Bank can borrow €10 million

What is the euro profit to Alonso Bank over the five-day period from shorting euros and going long on dollars?

a. €200,311.11

b. €207,111.11

c. €201,555.56

d. none of the above

28. Which of the following statements is incorrect?

a. Forward contracts are contracts typically negotiated with a commercial bank that allow the purchase or sale of a specified amount of a particular foreign currency at a specified exchange rate on a specified future date.

b. The forward market is located in New York City.

c. Many of the commercial banks that offer foreign exchange on a spot basis also offer forward transactions for the widely traded currencies.

d. Forward contracts can hedge a corporation's risk that a currency's value may appreciate over time.

29. If the spot rate of the British pound is $2, and the 180-day forward rate is $2.05, what is the annualized premium or discount?

a. 2.5 percent discount

b. 2.5 percent premium

c. 10 percent premium

d. 5 percent discount

e. 5 percent premium

30. Currency futures contracts differ from forward contracts in that they

a. are an obligation.

b. are not an obligation.

c. are standardized.

d. can specify any amount and maturity date.

31. If the spot rate ____ the exercise price, a currency ____ option would not be exercised.

a. remains below; call

b. remains below; put

c. remains below; put

d. A and B

32. The pegged exchange rate system is no longer used by any countries.a. Trueb. False

33. If a firm planning to hedge receivables is certain of the future direction a spot rate will move, and requires a tailor-made hedge in terms of amount and maturity date, it should use a

a. call options contract traded on an exchange.

b. futures contract traded on an exchange.

c. forward contract.

d. put options contract traded on an exchange.

34. Assume that a British pound put option has a premium of $.03 per unit, and an exercise price of $1.60. The present spot rate is $1.61. The expected future spot rate on the expiration date is $1.52. The option will be exercised on this date if at all. What is the expected per unit net gain (or loss) resulting from purchasing the put option?

a. $.01 loss

b. $.09 loss

c. $.09 gain

d. $.05 gain

35. The speculative risk of purchasing a ____ is that the foreign currency value ____ over time.

a. put option; increases

b. put option; decreases

c. call option; increases

d. futures contract; increases

36. Bank A asks $.555 for Swiss francs and Banks B and C are willing to pay $.557 for francs. An institution could capitalize on these differences by engaging in

a. covered interest arbitrage.

b. triangular arbitrage.

c. locational arbitrage.

d. witching hour arbitrage.

37. According to interest rate parity, if the interest rate in a foreign country is ____ than in the home country, the forward rate of the foreign country will have a ____.

a. higher; discount

b. lower; premium

c. higher; premium

d. A and B

38. ____ serve as financial intermediaries in the foreign exchange market by buying or selling currencies to accommodate customers.

a. Pension funds

b. International mutual funds

c. Insurance companies

d. Commercial banks

e. None of the above

39. In the Wall Street Journal, you observe that the British pound (£) is quoted for $1.65. The Australian dollar (A$) is quoted for $0.60. What is the value of the Australian dollar in British pounds?

a. A$2.75

b. A$0.36

c. £2.75

d. £0.36

e. none of the above

40. If European inflation suddenly becomes much higher than U.S. inflation, the U.S. demand for European goods will ____. In addition, the supply of euros to be sold for dollars will ____; both forces will place ____ pressure on the value of the euro.

a. increase; decline; upward

b. increase; decline; downward

c. decrease; increase; upward

d. decrease; increase; downward

e. none of the above

41. If British interest rates suddenly increase substantially relative to U.S. interest rates, the demand by U.S. investors for British pounds ____, the supply of British pounds to be sold in exchange for dollars ____, and the British pound will ____.

a. increases; decreases; appreciate

b. increases; decreases; depreciate

c. decreases; increases; appreciate

d. decreases; increases; depreciate

e. none of the above

42. Assume the following information.

• Interest rate on borrowed euros is 5 percent annualized.

• Interest rate on dollars loaned out is 6 percent annualized.

• Spot rate is 1.10 euros per dollar (one euro = $0.909).

• Expected spot rate in five days is 1.15 euros per dollar.

• Fabrizio Bank can borrow 10 million euros.

If Fabrizio Bank attempts to capitalize on the above information, its profit over the five-day period is

a. 2,653,597.22 euros.

b. 455,266.81 euros.

c. 452,426.04 euros.

d. none of the above

43. A country that pegs its exchange rate to another exchange rate does not have complete

control over its interest rates.a. Trueb. False

44. The euro is presently pegged to the British pound in order to stabilize international payments between European countries.a. Trueb. False

45. Financial institutions rarely use the forward market.a. Trueb. False

46. If the quoted cross rate between two foreign currencies is not aligned with the two corresponding exchange rates, investors can profit from triangular arbitrage.a. Trueb. False

47. The indirect exchange rate specifies the value of the currency in U.S. dollars.a. Trueb. False

48. The forward rate premium is dictated by the national income differential of the two currencies.a. Trueb. False

49. The potential benefits from using foreign exchange derivatives are independent of the expected exchange rate movements.a. Trueb. False

50. The forward rate is the exchange rate for immediate delivery.a. Trueb. False

51. The Smithsonian Agreement allowed for a devaluation of the dollar and for a widening of the boundaries within which currencies were allowed to fluctuate.a. Trueb. False

52. A country that pegs its currency does not have complete control over its local interest rates, as its interest rates must be aligned with the interest rates of the currency to which it is tied.a. Trueb. False

53. Exchange rates usually change precisely as suggested by the purchasing power parity (PPP) theory.a. Trueb. False

54. Central bank intervention can be overwhelmed by market forces and may not always succeed in reversing exchange rate movements.a. Trueb. False

55. When countries experience substantial net outflows of funds, they commonly use indirect intervention by raising interest rates to discourage excessive outflows of funds and therefore limit any downward pressure on the value of their currency.a. Trueb. False

56. The forward rate premium reflects the percentage by which the spot rate exceeds the forward rate on an annualized basis.a. Trueb. False

57. The primary advantage of currency options over forward and futures contracts is that they provide a right rather than an obligation to purchase or sell a particular currency at a specified price within a given period.a. Trueb. False

58. A speculator who expects a foreign currency to appreciate could purchase the currency forward and, when received, sell it in the spot market.a. Trueb. False

59. The following information refers to Fresno Bank and Champaign Bank.

Bid Rate on Euros Ask Rate on Euros

Fresno Bank $1.002 $1.009

Champaign Bank $0.997 $1.000

Based on this information, locational arbitrage would be profitable.a. Trueb. False

60. Purchasing power parity suggests that the forward rate premium (or discount) should be about equal to the differential in interest rates between the countries of concern.a. Trueb. False

61. ____ are not foreign exchange derivatives.

a. Forward contracts

b. Currency futures contracts

c. Currency swaps

d. Currency options

e. All of the above are foreign exchange derivatives.

62. ____ serve as financial intermediaries in the foreign exchange market by buying or selling currencies to accommodate customers.

a. Commercial banks

b. International mutual funds

c. Insurance companies

d. Pension funds

e. All of the above

63. In the Wall Street Journal, you observe that the British pound (£) is quoted for $1.67. The Australian dollar (A$) is quoted for $0.62. What is the value of the Australian dollar in

British pounds?

a. A$2.69

b. £0.37

c. £2.69

d. A$0.37

e. none of the above

64. In a(n) ____ exchange rate system, the foreign exchange market is totally free from government intervention.

a. pegged

b. dirty floating

c. freely floating

d. Bretton Woods

e. none of the above

65. The supply and demand for a currency are influenced by all of the following, except

a. differential interest rates.

b. differential inflation rates.

c. direct government intervention.

d. indirect government intervention.

e. The supply and demand for a currency are affected by all of the above.

66. If U.S. inflation suddenly becomes much higher than European inflation, the U.S. demand for European goods will ____. In addition, the supply of euros to be sold for dollars will ____; both forces will place ____ pressure on the value of the euro.

a. increase; decline; upward

b. increase; decline; downward

c. decrease; increase; upward

d. decrease; increase; downward

e. none of the above

67. Assume an equilibrium state in which European inflation and U.S. inflation are both 4 percent. If U.S. inflation suddenly decreased to 2 percent, the euro will ____ against the dollar by approximately ____ percent, according to purchasing power parity.

a. appreciate; 2

b. depreciate; 2

c. appreciate; 4

d. depreciate; 4

e. none of the above

68. Which of the following is the least feasible strategy for a speculator who expects the Australian dollar to depreciate?

a. sell Australian dollars forward and then purchase them in the spot market just before fulfilling the forward obligation

b. sell futures contracts on Australian dollar; purchase Australian dollars in the spot market just before fulfilling the futures obligation

c. purchase put options on Australian dollars, at some point before the expiration date, when the spot rate is less than the exercise price, purchase Australian dollars in the spot market and then exercise the put option

d. purchase call options on Australian dollars; at some point before the expiration date, exercise the call option and then sell the Australian dollars received in the spot market

e. All of the above are possible strategies for a speculator who expects the Australian dollar to depreciate.

69. The act of capitalizing on the discrepancy between the forward rate premium and the interest rate differential is called

a. triangular arbitrage.

b. locational arbitrage.

c. covered interest arbitrage.

d. interest rate parity.

70. The indirect exchange rate is always the reciprocal of the direct exchange rate.

a. Trueb. False

71. The exchange rate between two foreign (nondollar) currencies is known as a(n):

a. indirect dollar rate.

b. forward rate.

c. cross-exchange rate.

d. derived exchange rate.

72. The devaluation of a country’s currency:

a. makes foreign products more expensive for consumers in that country.

b. increases foreign demand for that country’s exports.

c. can lead to deflation in that country.

d. A and B

73. Currency futures contracts are standardized, whereas forward contracts are more flexible and can specify whatever amount and maturity date are desired.

a. True

b. False

74. When the Federal Reserve attempt to lower interest rates by increasing the U.S. money supply, it puts upward pressure on the value of the dollar.

a. Trueb. False

75. A speculator who expects the euro to depreciate might:

a. sell euros forward and then purchase them in the spot market just before fulfilling the forward obligation.

b. purchase euros forward and, when they are received, sell them in the spot market.

c. purchase futures contracts on euros and, when the euros are received, sell them in the spot market.

d. all of the above

Chapter 17—Commercial Bank Operations

1. Which of the following statements is incorrect?

a. Banks have expanded their business across services over time.

b. Acquisitions have been a convenient method for banks to grow quickly and capitalize on economies of scale.

c. The banking industry has become less concentrated in recent years.

d. All of the statements above are correct.

2. Commercial banks have expanded in recent years not only by acquiring other banks but also by acquiring other types of financial service firms.a. True

b. False

3. Commercial banks can be a lender or a borrower when using repurchase agreements and loans in the federal funds market.a. Trueb. False

4. The operations, management, and regulation of a financial conglomerate are the same irrespective of the types of services offered.a. Trueb. False

5. ____ are offered to bank customers who desire to write checks against their account.

a. Time deposit accounts

b. CDs

c. Demand deposit accounts

d. Money market deposit accounts

6. Which type of savings account transfers funds to a checking account when checks are written?

a. ATS

b. passbook savings

c. CDs

d. MMDAs

7. A(n) ____ account provides checking services as well as interest.

a. demand deposit

b. negotiable order of withdrawal (NOW)

c. passbook savings

d. time deposit

8. Protective covenants impose conditions in which the bank must provide additional loans to a borrower to protect the borrower from going bankrupt.a. Trueb. False

9. A ____ is a time deposit offered by some large banks to corporations, with a specific maturity date, minimum deposit of $100,000 or more, and a secondary market.

a. retail CD

b. negotiable CD

c. market CD

d. protective CD

10. A bank's sources of funds represent liabilities or equity of the bank.a. Trueb. False

11. Money market deposit accounts differ from conventional time deposits in that they

a. specify a maturity.

b. offer limited check writing privileges.

c. are less liquid.

d. none of the above

12. The intent of federal funds transactions is to

a. correct short-term fund imbalances experienced by banks.

b. correct long-term fund imbalances experienced by banks.

c. serve as a permanent source of bank capital.

d. serve as the primary depository source of funds.

13. For any given bank, federal funds ____ represent a(n) ____.

a. purchased; asset

b. sold; liability

c. purchased; liability

d. A and B

14. The federal funds rate is ____ the yield on a Treasury security with a similar term remaining until maturity.

a. substantially above

b. substantially below

c. close to

d. none of the above; the rate is much higher than the Treasury yield in some periods, and much lower than the Treasury yield in other periods

15. Obtaining funds through ____ is not a common source of funds for banks to satisfy a temporary deficiency of funds?

a. issuing bonds

b. the federal funds market

c. repurchase agreements

d. borrowing from the Federal Reserve

16. Which of the following is true?

a. The primary credit lending rate is set by the president of the United States.

b. The federal funds rate is set by the president of the United States.

c. The primary credit lending rate is set by commercial banks.

d. The primary credit lending rate is now set at a level above the federal funds rate.

e. A and B

17. The Federal Reserve provides loans to banks in order to

a. resolve permanent shortages of funds experienced by banks.

b. resolve temporary shortages of funds experienced by banks.

c. finance the shortages of funds of finance companies.

d. none of the above

18. When a bank in need of funds for a few days sells some of its government securities to a corporation with a temporary excess of funds, then buys them back shortly thereafter, this is a

a. federal funds loan.

b. discount window loan.

c. repurchase agreement.

d. commercial paper transaction.

19. When banks need funding for just a few days, they would most likely

a. issue bonds and then call them.

b. issue stock and then repurchase it.

c. borrow in the federal funds market.

d. issue NCDs.

20. Because U.S. dollars are widely used as an international medium of exchange, the Eurodollar market is very active.a. Trueb. False

21. Subordinated notes and debentures are examples of

a. primary capital.

b. secondary capital.

c. depository sources of funds.

d. repurchase agreements.

22. All other things equal, when banks issue new stock, they

a. increase reported earnings per share.

b. decrease their ability to absorb operating losses.

c. dilute the ownership of the bank.

d. A and B

23. As a source of funds, small banks rely more heavily on ____, and larger banks rely more heavily on ____.

a. time deposits and foreign deposits; savings deposits and short-term borrowings

b. savings deposits and short-term borrowings; foreign deposits and time deposits

c. savings and time deposits; foreign deposits and short-term borrowings

d. foreign deposits and short-term borrowings; savings and time deposits

24. Cash held ____ represents the major portion of a bank's required reserves.

a. at other commercial banks

b. in a bank's vault

c. on deposit at the federal funds window

d. on deposit with the Board of Governors

25. The main use of bank funds is for

a. loans.

b. investment securities.

c. fixed assets.

d. repurchase agreements.

26. Bank loans designed to support a firm's ongoing business operations are called

a. term loans.

b. working capital loans.

c. direct lease loans.

d. revolving credit loans.

27. ____ loans are primarily used to finance the purchase of fixed assets.

a. Term

b. Working capital

c. Informal line of credit

d. Revolving credit

28. Which of the following is most appropriate for a business that may experience a sudden need for funds but does not know precisely when?

a. working capital loan

b. direct lease loan

c. term loan

d. informal line of credit

29. A ____ loan may be especially appropriate when the bank wishes to avoid adding more debt to its balance sheet.

a. term

b. bullet

c. direct lease

d. revolving credit

30. The interest rate banks charge their most creditworthy customers is known as the

a. federal funds rate.

b. primary credit lending rate.

c. prime rate.

d. call money rate.

31. Transaction deposits do not include

a. demand deposits.

b. NCDs.

c. NOW accounts.

d. all of the above are transactions deposits

32. Commercial banks are not allowed to invest in

a. Treasury securities.

b. Freddie Mac securities.

c. Fannie Mae securities.

d. Banks can invest in all securities mentioned above.

33. Money market deposit accounts (MMDAs)

a. require a maturity of 6 months or longer.

b. allow a limited number of checks to be written against the account.

c. pay a higher interest rate than CDs.

d. none of the above

34. Which of the following accounts does not allow checks (at least a limited amount) to be written?

a. NOW accounts

b. money market deposit accounts (MMDAs)

c. retail CDs

d. all of the above allow checks to be written

35. Banks sometimes need funds and sometimes have excess funds available. Which of the following is commonly a source of bank funds and a use of bank funds?

a. MMDAs

b. federal funds

c. the discount window

d. retail CDs

36. The bank holding company structure allows more flexibility to borrow funds, issue stock, repurchase the company's own stock, and acquire other firms.a. Trueb. False

37. Like other market interest rates, the primary credit lending rate moves in reaction to changes in demand or supply of funds or both.a. Trueb. False

38. The yield on repurchase agreements is slightly higher than the federal funds rate at any given point in time.a. Trueb. False

39. Bank regulators are concerned that banks may maintain a higher level of capital than they should and have therefore imposed capital requirements on them.a. Trueb. False

40. In a revolving credit loan, the bank typically charges businesses a commitment fee on any unused funds.a. Trueb. False

41. Bank rates on credit card balances are usually not very different from the rate charged on business loans.a. Trueb. False

42. While U.S. banks have expanded into non-U.S. markets, few non-U.S. banks have entered U.S. markets.a. Trueb. False

43. ____ is (are) not a major source of funds for commercial banks.

a. Deposit accounts

b. Borrowed funds

c. Commercial loans

d. Bank capital

e. All of the above are commercial banks sources of funds.

44. Which of the following statements is incorrect with respect to the federal funds market?

a. It allows depository institutions to accommodate the short-term liquidity needs of other financial institutions.

b. Federal funds purchased represent an asset to the borrowing bank and a liability to the lending bank that sells them.

c. The federal funds market is typically most active on Wednesday, because that is the final day of each particular settlement period for which each bank must maintain a specified volume of reserves required by the Fed.

d. All of the above are true with respect to the federal funds market.

45. The federal funds rate is typically ____ the primary credit lending rate.

a. greater than

b. less than

c. equal to

d. none of the above

46. ____ are the largest bank source of funds as a percentage of total liabilities.

a. Small-denomination time deposits

b. Money market deposit accounts (MMDAs)

c. Transaction deposits

d. Borrowed funds

e. Savings deposits (including MMDAs)

47. ____ do not specify a maturity and provide limited check-writing ability (they allow only a limited number of transactions per month).

a. Money market deposit accounts (MMDAs)

b. Negotiable CDs (NCDs)

c. Retail CDs

d. Callable CDs

e. Negotiable order of withdrawal (NOW) accounts

48. ____ loans are extended primarily to finance the purchase of fixed assets such as machinery.

a. Term

b. Working capital

c. Federal fund

d. Direct lease

49. Which of the following is not an off-balance sheet activity for commercial banks?

a. consumer loans

b. loan commitments

c. standby letters of credit

d. swap contracts

e. All of the above are off-balance sheet activities.

50. A ____ is a type of loan commitment.

a. standby letter of credit (SLC)

b. note issuance facility (NIF)

c. forward contract

d. swap contract

e. none of the above

51. When a bank obtains funds through a ____, the provider of the funds receives collateral.

a. retail CD

b. NOW account

c. repurchase agreement

d. money market deposit account

52. When banks obtain funds in the federal funds market, the providers of the funds are

a. other depository institutions.

b. nonfinancial corporations.

c. consumers.

d. the Federal Reserve.

53. A single loan in the federal funds market is usually for ____; when a bank sells a single repurchase agreement, the maturity is usually ____.

a. just a few days; one year or more

b. several weeks; one year or more

c. several weeks; just a few days

d. just a few days; just a few days

54. The interest rate charged on loans between depository institutions is commonly referred to as the

a. federal funds rate.

b. discount rate.

c. primary credit lending rate.

d. none of the above

55. The interest rate charged on loans from the Federal Reserve to banks is commonly referred to as the

a. federal funds rate.

b. primary credit lending rate.

c. repo rate.

d. none of the above

56. The primary credit lending rate is determined by

a. the Federal Reserve.

b. Congress.

c. the Treasury.

d. the President of the United States.

57. Bank capital represents funds obtained through ____ and through ____.

a. issuing stock; offering long-term CDs

b. issuing repurchase agreements; issuing bonds

c. issuing stock; retaining earnings

d. offering long-term CDs; issuing bonds

58. Banks sometimes prefer to minimize their amount of capital since

a. interest payments must be paid by the bank on all capital that is held.

b. they try to avoid diluting ownership of the bank.

c. A and B

d. none of the above

59. When a bank obtains funds through ____, households are not a common provider of the funds.

a. NOW accounts

b. retail CDs

c. passbook savings accounts

d. NCDs

60. Which of the following is not an off-balance sheet activity?

a. highly leveraged transactions (HLTs)

b. standby letters of credit

c. forward contracts

d. swap contracts

61. A bank's uses of funds represent liabilities of a bank.a. Trueb. False

62. ____ are the largest bank source of funds (as a percentage of total liabilities).

a. Small-denomination time deposits

b. Large-denomination time deposits

c. Transaction deposits

d. Savings deposits (including MMDAs)

63. The five largest banks in the United States account for about one-tenth of all assets in U.S.

banks.

a. Trueb. False

STA: DISC.FMAI.MADU.15.03

64. From a bank manager’s perspective, the differential in interest between a bank’s loans and its deposits;

a. must not exceed the federal funds rate.

b. is called the primary credit lending rate.

c. must be sufficient to cover the bank’s other expenses and generate a reasonable profit for the bank’s owners.

d. must be sufficient to cover the bank’s deposit insurance premiums and its reserve requirements at the Federal Reserve.

65. In a loan participation arrangement, normally all of the participating banks are exposed to

credit (default) risk.

a. Trueb. False

66. Banks will not accept intangible assets, such as patents and brand names, as collateral for

commercial loans.

a. Trueb. False

67. Proprietary trading is generally less risky than a bank’s lending operations.

a. Trueb. False

68. When a bank engages in proprietary trading, it:

a. uses its own funds to make investments.

b. is not subject to regulations.

c. lends the funds in the federal funds market.

d. normally uses the funds to build its capital.

69. In a standby letter of credit, a bank agrees to:

a. charge a fixed interest rate for a line of credit for a specified period.

b. back a customer’s obligation to a third party.

c. provide a customer with funds up to a specified maximum amount over a specified period.

d. service credit card loans originated by another bank.

70. A forward contract on currency:

a. is a way to hedge credit (default) risk.

b. is used to to swap fixed interest payments in euros for variable interest payments in dollars.

c. is an agreement between a customer and a bank to exchange one currency for another on a specified date at a specified exchange rate.

d. is an agreement between a customer and a bank to exchange one currency for another on a specified date at whatever the exchange rate is on that day.

71. Before the credit crisis, _________ were heavily used to protect against the credit (default) risk from investing in mortgage-backed securities.

a. standby letters of credit

b. interest rate swap contracts

c. credit default swap contracts

d. forward contracts on mortgages

72. Before establishing foreign branches, a U.S. bank must obtain the approval of the:

a. U.S. Treasury.

b. U.S. Commerce Department.

c. Federal Deposit Insurance Corporation.

d. Federal Reserve.