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1Copyright©2010PearsonEducationInc.PublishingasPrenticeHallFoundationsofFinancialMarketsandInstitutions,4e(Fabozzi/Modigliani/Jones)Chapter3DepositoryInstitutions:ActivitiesandCharacteristicsMultipleChoiceQuestions1Asset/LiabilityProblemofDepositoryInstitutions1)WhichofthebelowstatementsisTRUE?A)Adepositoryinstitutionseekstoearnapositivespreadbetweentheassetsitinvestsin(depositsandothersources)andthecostofitsfunds(loansandsecurities).B)InterestrateriskreferstotheriskthataborrowerwilldefaultonaloanobligationtothedepositoryinstitutionorthattheissuerofasecuritythatthedepositoryinstitutionholdswilldefaultonitsobligationC)Regulatoryriskistheriskthatregulatorswillchangetherulessoastoadverselyimpacttheearningsoftheinstitution.D)Ifthespreadwillbepositive,itwillcostthedepositoryinstitutionmoretofinancethegovernmentsecuritiesthanitwillearnonthefundsinvestedinthosesecurities.Answer:CComment:Adepositoryinstitutionseekstoearnapositivespreadbetweentheassetsitinvestsin(loansandsecurities)andthecostofitsfunds(depositsandothersources).Creditrisk,alsocalleddefaultrisk,referstotheriskthataborrowerwilldefaultonaloanobligationtothedepositoryinstitutionorthattheissuerofasecuritythatthedepositoryinstitutionholdswilldefaultonitsobligation.Ifthespreadwillbenegative,itwillcostthedepositoryinstitutionmoretofinancethegovernmentsecuritiesthanitwillearnonthefundsinvestedinthosesecurities.Diff:2Topic:3.1Asset/LiabilityProblemofDepositoryInstitutionsObjective:3.1theroleofdepositoryinstitutions2)WhichofthebelowstatementsisFALSE?A)Absentfromanybalancesheetofadepositoryinstitutionisinterestrateriskexposure.B)Managersmustbewillingtoacceptsomeexposure,buttheycantakevariousmeasurestoaddresstheinterestratesensitivityoftheinstitution'sliabilitiesanditsassets.C)Regulatorsimposerestrictionsonthedegreeofinterestrateriskadepositoryinstitutionmaybeexposedto.D)Adepositoryinstitutionwillhaveanasset/liabilitycommitteethatisresponsibleformonitoringtheinterestrateriskexposure.Answer:AComment:Inherentinanybalancesheetofadepositoryinstitutionisinterestrateriskexposure.Diff:2Topic:3.1Asset/LiabilityProblemofDepositoryInstitutionsObjective:3.1theroleofdepositoryinstitutions2Copyright©2010PearsonEducationInc.PublishingasPrenticeHall3)WhichofthebelowstatementsisTRUE?A)Depositoryinstitutionsdonotincludecommercialbanks(orsimplybanks),savingsandloanassociations(S&Ls),savingsbanks,andcreditunions.B)Sincetheirfundsareraisedthroughdepositsandotherfundingsources,depositoryinstitutionscannotmakedirectloanstovariousentitiesorinvestinsecurities.C)Depositoryinstitutionsderivetheirincomefromtwosources:(1)theincomegeneratedfromtheloanstheymakeandthesecuritiestheypurchase,and(2)feeincome.D)ItisuncommontorefertoS&Ls,savingsbanks,andcreditunionsasthrifts,whicharespecializedtypesofdepositoryinstitutions.Answer:CComment:Depositoryinstitutionsincludecommercialbanks(orsimplybanks),savingsandloanassociations(S&Ls),savingsbanks,andcreditunions.Allarefinancialintermediariesthatacceptdeposits.Thesedepositsrepresenttheliabilities(debt)ofthedeposit-acceptinginstitution.Withthefundsraisedthroughdepositsandotherfundingsources,depositoryinstitutionsbothmakedirectloanstovariousentitiesandinvestinsecurities.ItiscommontorefertoS&Ls,savingsbanks,andcreditunionsasthrifts,whicharespecializedtypesofdepositoryinstitutions.Diff:2Topic:3.1Asset/LiabilityProblemofDepositoryInstitutionsObjective:3.2howadepositoryinstitutiongeneratesincome4)WhichofthebelowstatementsisFALSE?A)Atonetime,thriftswerepermittedtoacceptdepositstransferablebycheck(negotiable),or,astheyaremorepopularlyknown,checkingaccounts.B)Depositoryinstitutionsarehighlyregulatedbecauseoftheimportantrolethattheyplayinthecountry'sfinancialsystem.C)Demanddepositaccountsaretheprincipalmeansthatindividualsandbusinessentitiesuseformakingpayments,andgovernmentmonetarypolicyisimplementedthroughthebankingsystem.D)Securitiesheldforthepurposeofsatisfyingnetwithdrawalsandcustomerloandemandsaresometimesreferredtoassecondaryreserves.Answer:AComment:Atonetime,thriftswerenotpermittedtoacceptdepositstransferablebycheck(negotiable),or,astheyaremorepopularlyknown,checkingaccounts.Diff:2Topic:3.1Asset/LiabilityProblemofDepositoryInstitutionsObjective:3.2howadepositoryinstitutiongeneratesincome3Copyright©2010PearsonEducationInc.PublishingasPrenticeHall5)Depositoryinstitutionsare________becauseoftheimportantrolethattheyplayinthecountry'sfinancialsystem.A)lowlyregardedB)highlyregulatedC)highlyderegulatedD)lowlyregulatedAnswer:BDiff:2Topic:3.1Asset/LiabilityProblemofDepositoryInstitutionsObjective:3.1theroleofdepositoryinstitutions6)Becauseoftheirimportantrole,________areaffordedspecialprivilegessuchasaccesstofederaldepositinsuranceandaccesstoagovernmententitythatprovidesfundsforliquidityoremergencyneeds..A)NOWaccountsB)repositoryinstitutionsC)depositoryinvitationsD)depositoryinstitutionsAnswer:DDiff:2Topic:3.1Asset/LiabilityProblemofDepositoryInstitutionsObjective:3.4theasset/liabilityproblemalldepositoryinstitutionsface2CommercialBanks1)Priorto1863,bankswereregul