ch20 Student: ___________________________________________________________________________ 1. Capital is the primary protection for an FI against the risk of insolvency and failure. True False 2. The primary role of capital for an FI is to assure the highest possible return on equity for its shareholders. True False 3. Protecting FI insurance funds in the event of an FI failure is the responsibility of taxpayers. True False 4. One function of bank capital is to protect uninsured depositors, bondholders, and creditors in the event of insolvency and liquidation. True False 5. The book value of bank equity is the present value of assets minus the present value of liabilities. True False 6. One function of capital is to provide funding for real assets, such as branches and technology, that are necessary to provide financial services. True False 7. The function of capital to serve as a source of funds is critical to regulators in setting risk-based deposit insurance premiums. True False 8. The economic definition of the value of an FI's equity is the book value of assets minus the market value of liabilities. True False 9. Market value of equity is better than book value of equity at reflecting changes in the credit risk and interest rate risk of an FI. True False 10. If the value of equity is less than zero on a mark-to-market accounting basis, liquidation of the FI would result in losses to the shareholders. True False 11. If the value of equity is less than zero on a mark-to-market accounting basis, liquidation of the FI may result in losses to the depositors or creditors. True False 12. The market value of capital is equal to market value of assets minus the market value of liabilities. True False 13. The book value of equity is seldom equal to the market value of equity. True False 14. An FI may be insolvent in market value terms even if the book value of equity is positive. True False 15. Equity holders absorb credit losses on the asset portfolio because liability holders are senior claimants. True False