1. During a “flight to quality”

a. The spread between Treasury bonds and Baa bonds increases.

b. The change in the spread between Treasury bonds and Baa bonds cannot to be predicted

c. The spread between Treasury bonds and Baa bonds decreases

d. The spread between Treasury bonds and Baa bonds is not affected

2. The collapse of the subprime mortgage market increased the spread between Baa and default-free U.S. Treasury bonds. This is due to

a. A reduction in risk

b. A reduction in maturity

c. A flight to quality

d. A flight to liquidity

3. Banks earn profits by selling _____ with attractive combinations of liquidity, risk, and return, and using the proceeds to buy _______ with a different set of characteristics.

a. Securities; deposits

b. Loans; deposits

c. Assets; liabilities

d. Liabilities; assets

4. Which of the following bank assets is the most liquid?

a. Reserves

b. Consumer loans

c. Cash items in process of collection

d. U.S. government securities