Q: A bank’s balance sheet must always satisfy which of the following relationships?

$$\text{Assets} = \text{Liabilities} + \text{Bank\ Capital}$$

Question 1

Which of the following best explains the origin of paper money according to the historical development of banking?

Accepted Answer

Paper money began as a warehouse receipt for gold, issued by goldsmiths and made payable to the bearer.

Question 2

A bank’s balance sheet must always satisfy which of the following relationships?

Accepted Answer

$$	ext{Assets} = 	ext{Liabilities} + 	ext{Bank\ Capital}$$

Question 3

Suppose a bank has the following balance sheet: Reserves = 20, Loans = 40, Securities = 60, Deposits = 100, Borrowing = 20, Bank Capital = 0. What is the bank’s financial status?

Accepted Answer

The bank is insolvent because bank capital is zero, meaning assets do not exceed liabilities.

Question 4

If a bank experiences a negative shock such as a rise in interest rates, which of the following is the most likely sequence of effects?

Accepted Answer

Interest rates rise $$\rightarrow$$ Bond values fall $$\rightarrow$$ Asset values fall $$\rightarrow$$ Bank capital shrinks.

Question 5

A bank issues a loan of $$P$$ dollars to a borrower, who must repay $$F$$ dollars in the future. What is the formula for the interest rate $$r on $$this loan?

Accepted Answer

$$r = \frac{F}{P} - 1$$

Question 6

Which of the following best describes the inverse relationship between bond prices and interest rates?

Accepted Answer

When interest rates rise, bond prices fall because the present value of future payments decreases.

Question 7

Given a bond with a face value $$F$$ and a market price $$P$$, what is the formula for the yield (interest rate) $$r$$?

Accepted Answer

$$r = \frac{F}{P} - 1$$

Question 8

Which of the following is NOT a typical liability on a modern bank’s balance sheet?

Accepted Answer

Securities such as government bonds

Question 9

Why do banks maintain reserves, and what is the main regulatory reason for doing so?

Accepted Answer

To meet daily customer withdrawals and to comply with reserve requirements set by regulators.

Question 10

A bank holds $$20 in $$reserves, $$40 in $$loans, and $$60 in $$securities. It has $$70 in $$deposits, $$20 in $$borrowings, and $$10 in $$bank capital. If $$10 of $$its loans default and become worthless, what is the new value of bank capital?

Accepted Answer

$$0$$

Question 11

Which of the following is a primary reason for government regulation of banks?

Accepted Answer

To protect public savings and prevent systemic crises caused by bank failures.

Question 12

Which of the following is an example of a bank asset that is typically illiquid but profitable?

Accepted Answer

Loans to businesses and individuals

Question 13

If a bank’s assets fall below its liabilities due to a sudden drop in the value of its securities, what is the bank’s status?

Accepted Answer

The bank is insolvent and cannot cover what it owes to depositors and lenders.

Question 14

Which of the following regulatory tools is designed specifically to prevent panic-driven bank runs?

Accepted Answer

Deposit insurance (e.g., FDIC)

Question 15

A bank purchases a government bond with a face value of $$1000$$ that matures in one year. If the market interest rate is $$5\%$$, what price should the bank pay for the bond?

Accepted Answer

$$\952.38$

Question 16

Which of the following best describes the difference between loans and securities on a bank’s balance sheet?

Accepted Answer

Loans are direct, illiquid agreements with borrowers, while securities are marketable and can be easily sold.

Question 17

If a bank’s assets are $$130$$ and its liabilities (excluding capital) are $$120$$, what is the bank’s capital?

Accepted Answer

$$10$$

Question 18

Which of the following is a plausible consequence if a bank fails to maintain adequate reserves?

Accepted Answer

It may be unable to meet customer withdrawals, increasing the risk of a bank run.

Question 19

Which of the following is a key reason why commercial banks have historically been restricted from holding volatile assets like shares?

Accepted Answer

To prevent rapid balance sheet collapse due to market volatility.

Question 20

A bank’s share price rises sharply after news of a new technology partnership. According to the study materials, what does this reflect?

Accepted Answer

The market’s expectation of higher future profitability for the bank.

Banking, Balance Sheets, and Financial System Fundamentals

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