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Choose the statement that is incorrect.

A) A financial institution's net worth is the market value of what it has lent minus the market value of what it has borrowed.

B) If a financial institution's net worth is positive, the institution must be solvent and liquid.

C) A financial institution can be solvent but illiquid.

D) A financial institution is illiquid if it has made long-term loans with borrowed funds and is faced with a sudden demand to repay more of what it has borrowed than its available cash.

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Darryn D'Souza
Darryn D'SouzaLv10
28 Sep 2019

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Related questions

1. The market in which loans are bought and sold is called the:

   

loan market.
   

money market.
   

secondary loan market.
   

primary loan market.

2. Which of the following is omitted in a barter transaction?

   

trade
   

medium of exchange
   

store of value
   

money

3. If Bill performs plumbing upgrades for Alice in exchange for her incorporating his business, then their _________________________ will be satisfied.

   

balance of trade
   

double coincidence of wants
   

convenience of exchange
   

division of labour

4. If loans become far less available, then sectors of the economy that ______________ like business investment, home construction, and car manufacturing can be dealt a crushing blow.

   

depend on borrowed money
   

typically generate extraordinary gains
   

make loans to financial capital markets
   

failed to diversify risk

5. Stealth bank has deposits of $600 million. It holds reserves of $30 million and government bonds worth $80 million. If the bank sells its loans at the market value of $400 million, what will its total assets equal?

   

$110 million
   

$710 million
   

$480 million
   

$510 million

6. Lance paid $175,000 for his house in 2003 and sold it for $325,000 in 2006. What function did the house serve during the time Lance owned it?

   

medium of exchange
   

unit of account
   

store of value
   

unit of exchange

7.Which of the following terms is considered to be a narrow definition of the money supply that includes, among other things, currency?

   

savings
   

money
   

M2
   

M1

8. Which of the following institutions determines the quantity of money in the economy as its most important task?

   

U.S. Department of the Treasury
   

Federal Open Market Committee
   

Central Bank
   

Federal Reserve Board of Governors

9. How are the specific interest rates for the lending and borrowing markets determined?

   

U.S. Treasury Department Board policy
   

by the forces of supply and demand
   

through open market operations
   

by altering the discount rate

10.When the central bank lowers the reserve requirement on deposits:

   

the money supply increases and interest rates decrease.
   

the money supply and interest rates decrease.
   

the money supply and interest rates increase.
   

the money supply decreases and interest rates increase.

APPLICATION

Suppose that the reserve requirement is 10% on all deposits and the balance sheet of People’s National Bank looks like the following (in billions):

Assets

Vault Cash $555

Reserves at the Fed $545

Loans Outstanding $657

Securities $1100

Buildings & Equipment $1400

Other Assets $2115

Liabilities

Demand Deposits $545

Savings Deposits $7245

Time Deposits $2210

Other Liabilities $785

Net Worth ??

What is the “Net Worth” of the bank?

2. What is the dollar value of required reserves for People’s National Bank?

3. Does the bank have any excess reserves?

4. What is the maximum amount of new loans the bank can extend?

5. Indicate how the bank’s balance sheet would be altered if it made these new loans.

6. Suppose that the required reserves were 20 percent; if this were the case, would the bank be in a position to extend any additional loans? Would it satisfy the reserve requirement?

2. Imaging the FED engages in an open market sale of $25 million; using a balance sheet for both the bank and the FED, illustrate the changes.

3. If an individual moves $500 from their checking to their savings, how will this affect M), M1, M2, and M3? What about moving funds from savings to checking?

1-Principal __________________ fall into three categories: depository institutions (banks), contractual savings institutions, and investment intermediaries.

Financial markets security exchanges financial intermediaries’ investment funds

Savings institutions

bitcoin/annuity payments securities/investment advice

2-Deposits that are payable on demand but do not allow their owner to write checks are called _______________.

Restricted deposits savings deposits time sensitive deposits non-checkable deposits demand deposits

3-Deposit with fixed terms to maturity are called ___________.

Relative deposits term deposits fixed deposits restricted deposits time deposits

4-Commercial banks ___________ primarily by issuing checking deposits, savings accounts, and time deposits.

Increase profits decrease cost attract investors raise funds increase assets

5-A type of depository institution that over time has become more like commercial banks and are now more competitive with each other are called ______________ associations and mutual savings banks.

savings and loan contractual savings institutions, investment intermediaries

crowd funding sites deposit and loan

6-Credit unions are typically very small cooperative lending institutions organized around a particular _____________________: members of the same union, employees of a particular firm, and members of the same profession, such as teachers.

Type of investment corporation financial strategy risk avoidance strategy

group that have something in common

7-Insurance companies and pension funds are examples of ________________ institutions.

contractual savings depository institutions (banks), investment intermediaries entrepreneurial at risk

8-Contractual savings institutions (CSI’s) acquire funds at _______________ on a contractual basis.

Estate sales periodic intervals bankruptcy auctions liquidations initial offerings

9-CSI’s do not worry as much as banks about losing funds quickly because they can predict with reasonable accuracy how much they will have to pay out in ___________ in coming years.

Interest payments dividends bank notes benefits IOU’s

10-_______________ is not as important a consideration for CSI’s as it is for banks.

Types of customers adverse selection Liquidity of assets portfolio diversification liabilities

11-CSI investments are typically ____________ such as corporate bonds, stocks, and mortgages.

Short-term securities long-term securities 3-month term securities overnight securities short-term assets

12-Companies that insure people against financial hazards following a death and sell annuities are called ________________________.

Predatory companies over-the-counter companies risky companies life insurance companies depository companies

13-_________________ that people pay to keep their policies in force constitute the funds life insurance companies use to buy corporate bonds and mortgages.

Interest dividends installments late fees Premiums

14-Companies that ___________ their policyholders against loss from theft, fire, and accidents are called fire and casualty insurance companies.

Insure Hold harmless guarantee advise oversee

15-Fire and casualty insurance companies acquire funds through the _________________ for their policies.

Sale of stock liquidation of collection of premiums interest payments dividends

16-Because of the greater possibility of loss of funds if major disasters occur, fire and casualty companies buy more ________________ than life insurance companies do.

Comprehensive insurance liquid assets risky assets corporate insurance bankruptcy insurance

17-Private pension funds and state and local retirement funds provide _______________ in the form of annuities to employees who are covered by a pension plan.

Dividends revenue stock options retirement income loans

18-Pension funds acquire funds from _____________ from employers and employees.

Fees pledges contributions garnishments payroll deductions

19-The largest ______________ of pension funds are corporate bonds and stocks.

Liability holdings asset holdings interest payments dividend payments fees

20-_________________________ include; finance companies, mutual funds and money market mutual funds.

depository institutions (banks), contractual savings institutions, stock markets

bond markets Investment intermediaries

21-Finance companies raise funds by ___________ commercial paper and by ____________ stocks and bonds.

Issuing/selling selling/buying selling/ issuing buying/issuing discounting/shorting

22-Finance companies lend these funds to __________, who make purchases of such items as furniture, automobiles, and home improvements, and to small businesses.

-depository institutions (banks), consumers contractual savings institutions,

investment intermediaries corporations

23-It is common for a finance company to be organized by a parent corporation to help _______________, such as; ford motor credit company.

Diversify its portfolio acquire assets liquidate liabilities sell its product off set profits

24-Selling shares to many individuals and using the proceeds to purchase diversified portfolios of stocks and bonds describes how _______________ acquire funds.

depository institutions (banks), mutual funds contractual savings institutions

stock markets bond markets

25-Shareholders can sell shares at any time but shares are subject to value fluctuations therefore mutual fund investments can be _______.

risky Subject to high returns certain investments interest rate neutral misunderstood

26-Money market funds sell _______ like mutual funds and offer checking accounts like ___________.

Deposits/insurance companies bonds/banks shares/insurance companies

Shares/ banks stock options/crowd sourcing sites

27-Money market funds invest in ________ and very ____________ and interest on these assets is paid out to the shareholders.

High risk/non-liquid junk bonds/risky assets low risk/ liquid assets low risk/junk bonds sub-prime securities/liquid assets

28-Money market funds have experienced extraordinary growth primarily because people like the idea of having a checking account that ____________________.

Has no fees pays them interest offers overdraft protection pays dividends

always has money in it

29-Investment banks help a ______________ issue securities.

Person foreign country stock market corporation bond market

30-Investment banks advises the corporation on which type of ______________ to issue; stocks or bonds.

Insurance loans interest rates dividends products securities

31-Investment banks help sell the corporations securities by purchasing them from the corporation and _______ them in the market.

Discounting re-selling insuring advertising financing

32-Investment banks also act as ___________ and earn enormous fees by helping corporations acquire other companies through mergers or acquisitions.

Depositories money launders deal makers insurance companies entrepreneurs

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