1. In banking, the spread refers to the difference between the A) interest rate
ID: 1109713 • Letter: 1
Question
1. In banking, the spread refers to the difference between the
A) interest rate on long-term bonds and the interest rate on short-term bonds.
B) interest rate on consumer loans and the interest rate on home mortgages.
C) return earned from lending and the cost of the needed funds.
D) the difference between asset value and liability value.
2. Customers who have long-term relationships with banks
A) pose particular problems with respect to adverse selection.
B) pose particular problems with respect to moral hazard.
C) reduce the moral hazard problem for the bank.
D) reduce the adverse selection and moral hazard problem for the bank.
3. Which of the following is not a source of funds for commercial banks?
A) Non-deposit Borrowing. B) Savings Deposits. C) Treasury Securities. D) Bank Capital (net worth)
4. As a source of funds, checkable deposits have
A) expanded moderately over time.
B) expanded dramatically over time.
C) shrunk over time.
D) remained virtually unchanged since 1960.
5. If Bank A sells some its loans to Bank B for cash, everything else equal:
A) Banks A's total assets do not change, but Bank A is more liquid.
B) Bank A becomes less liquid while Bank B becomes more liquid.
C) Bank A's assets decrease and Bank B's assets increase.
D) Bank A's liabilities decrease by the amount of the loans that are sold.
6. Banks earn a profit by
A) increasing transactions costs such as interest rates.
B) charging savers and borrowers fees for reducing transactions costs.
C) passing transactions costs on to the borrowers.
D) eliminating transactions costs.
7. U.S. bank consolidation will likely result in
A) a shift in assets from larger banks to smaller banks.
B) increased competition.
C) less international competition.
D) the elimination of small state banks.
8. Unanticipated moral hazard contingencies can be reduced by
A) screening. B) long-term customer relationships.
C) specialization in lending. D) credit rationing.
Explanation / Answer
C) Return earned from lending and the cost of the needed funds. Reason: spread refers to difference b/w interest earned on lending the money and cost paid to customer for supply the fund. D) Reduce the adverse selection and moral hazard problem for the bank. Reason long term relationship with bank will have benefits in form of reduction in adverse selection and moral hazard problem for the bank as customer will take care of carelessness, ignorance for which bank has to compensate, both will take care of each other interest. C) Treasury Securities. Reason sources of fund for a commercial bank will include saving deposit, bank capital and non deposit borrowing but treasury security is liability for bank. C) shrunk over time Reason checkable deposit shrink due to non stability of money market due to business cycles. A) Banks A's total assets do not change, but Bank A is more liquid. Reason: selling loan will not change assets of the firm but it increase the liquidity in terms of cash and bank deposit. B) Charging savers and borrowers fees for reducing transactions costs. Reason profit earn by bank is different between paying less to saver and charging high from borrower, this will leads to spread and adjusting the expenses bank itself remaining amount will be profit. B) Increased competition. Reason consolidation between the banks will give pace to rise in competition among the existing bank who are ready to give .qualitative services in financial and consumer market. D) Credit rationing. Reason credit rationing will not increase the risk of large amount of loan offered. So less moral hazard for bank would be there.
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