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Money, Banking, and Financial Markets Practice Test: Banking and the Management of Financial Institutions
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Banking is the management of financial systems, while finance is the management of money. Banks are financial institutions that accept deposits, pay interest, clear checks, make loans, and act as intermediaries in financial transactions. They are a major source of financing for private capital investment in a country.  Risk management is an important part of banking, as it involves assessing potential risks involved in any given transaction or investment. Banks face risks from every angle, including changing customer behaviors, fraud, uncertain markets, and regulatory compliance.  Some... Show more
Money, Banking, and Financial Markets Practice Test: Banking and the Management of Financial Institutions
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25 Questions

1. A bank failure occurs whenever
2. Secondary reserves include
3. Provisions in loan contracts that prohibit borrowers from engaging in specified risky activities are called
4. Which of the following statements most accurately describes the task of bank asset management?
5. Of the following, which would be the first choice for a bank facing a reserve deficiency?
6. Bank capital is equal to ________ minus ________.
7. For a given return on assets, the lower is bank capital,
8. In general, banks make profits by selling ________ liabilities and buying ________ assets.
9. If a bank has excess reserves greater than the amount of a deposit outflow, the outflow will result in equal reductions in
10. Banks hold excess and secondary reserves to
11. Because ________ are less liquid for the depositor than ________, they earn higher interest rates.
12. When you deposit $50 in your account at First National Bank and a $100 check you have written on this account is cashed at Chemical Bank, then
13. Through correspondent banking, large banks provide services to small banks, including
14. Bankersʹ concerns regarding the optimal mix of excess reserves, secondary reserves, borrowings from the Fed, and borrowings from other banks to deal with deposit outflows is an example of
15. Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the
16. A bank that wants to monitor the check payment practices of its commercial borrowers, so that moral hazard can be prevented, will require borrowers to
17. 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 makes loans instead, then, in the bankʹs final balance sheet,
18. If a bank needs to raise the amount of capital relative to assets, a bank manager might choose to
19. Examples of off-balance-sheet activities include
20. Bank capital has both benefits and costs for the bank owners. Higher bank capital ________ the likelihood of bankruptcy, but higher bank capital ________ the return on equity for a given return on assets.
21. The amount of assets per dollar of equity capital is called the
22. Bank reserves include
23. To reduce moral hazard problems, banks include restrictive covenants in loan contracts. In order for these restrictive covenants to be effective, banks must also
24. Of the following methods that banks might use to reduce moral hazard problems, the one not legally permitted in the United States is the
25. If a bank has ________ rate-sensitive assets than liabilities, a ________ in interest rates will reduce bank profits, while a ________ in interest rates will raise bank profits.

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