Question 1

What information does the net liquidity statement provide?

Accepted Answer

A) A long-term focus on liquidity. 
B) Sources and uses of liquidity. 
C) Net asset value. 
D) Liquidity index information. 
E) Peer group ratio comparison. 
A) A long-term focus on liquidity. 
B) Sources and uses of liquidity. 
C) Net asset value. 
D) Liquidity index information. 
E) Peer group ratio comparison.

Question 2

Purchased liquidity management carries the potential risk of significant increases in the cost of funds during periods of high interest rate volatility.

Accepted Answer

A) True 
 B)False

Question 3

Unlike DIs, there is never a need for a life insurance company to have a liquidity plan for a "run" resulting from concerns about its solvency.

Accepted Answer

A) True 
 B)False

Question 4

Liquidity risk for an FI includes the possibility of an unexpected inflow of funds.

Accepted Answer

A) True 
 B)False

Question 5

What is the asset adjustment to a bank's balance sheet if the bank sold a five-year, 7 percent annual coupon $100,000 bond acquired at par, but now yielding 8 percent? The bond was not in the mark-to-market portfolio.

Accepted Answer

A) A $96,007 reduction in assets. 
B) A $96,007 increase in assets. 
C) A $100,000 reduction in assets. 
D) A $100,000 increase in assets. 
E) A $100,000 increase in liabilities. 
A) A $96,007 reduction in assets. 
B) A $96,007 increase in assets. 
C) A $100,000 reduction in assets. 
D) A $100,000 increase in assets. 
E) A $100,000 increase in liabilities.

Question 6

The Fed discount window maintains three lending programs to assist DIs in managing liquidity problems.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following is NOT used as a method of measuring liquidity risk?

Accepted Answer

A) Liquidity coverage ratio. 
B) Liquidity index. 
C) Financing gap and financing requirement. 
D) Peer group ratio comparison. 
E) Current ratio. 
A) Liquidity coverage ratio. 
B) Liquidity index. 
C) Financing gap and financing requirement. 
D) Peer group ratio comparison. 
E) Current ratio.

Question 8

Hedge funds are not susceptible to liquidity risk or a liquidity crisis.

Accepted Answer

A) True 
 B)False

Question 9

An expected net deposit drain on any given day means that deposit withdrawals are less than deposit inflows.

Accepted Answer

A) True 
 B)False

Question 10

A DI's financing requirement is defined as its financing gap plus the DI's liquid asset holdings.

Accepted Answer

A) True 
 B)False

Question 11

For life insurance companies, the distribution of premium income minus policyholder liquidations is unpredictable.

Accepted Answer

A) True 
 B)False

Question 12

A bank's net deposit drain

Accepted Answer

A) is negative if deposits exceed withdrawals. 
B) is positive if deposits exceed withdrawals. 
C) decreases during holiday and vacation periods. 
D) in unaffected by holiday and vacation periods. 
E) fluctuates unpredictably on any given day. 
A) is negative if deposits exceed withdrawals. 
B) is positive if deposits exceed withdrawals. 
C) decreases during holiday and vacation periods. 
D) in unaffected by holiday and vacation periods. 
E) fluctuates unpredictably on any given day.

Question 13

Even with liquidity planning, net deposit withdrawals and/or the exercise of loan commitments can pose significant liquidity problems for banks.

Accepted Answer

A) True 
 B)False

Question 14

Abnormally large and unexpected deposit withdrawals can occur because of concerns by depositors about a bank's solvency relative to other banks.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is NOT true?

Accepted Answer

A) Stored liquidity management involves liquidation of assets. 
B) Traditionally DIs have stored cash reserves at the Federal Reserve and in their vaults to overcome liquidity risk. 
C) When the DI uses its cash as the liquidity adjustment mechanism, both sides of its balance sheet contract. 
D) DIs hold cash reserves in excess of the minimum required to meet liquidity drains. 
E) A DI sustains no cost under stored liquidity risk management. 
A) Stored liquidity management involves liquidation of assets. 
B) Traditionally DIs have stored cash reserves at the Federal Reserve and in their vaults to overcome liquidity risk. 
C) When the DI uses its cash as the liquidity adjustment mechanism, both sides of its balance sheet contract. 
D) DIs hold cash reserves in excess of the minimum required to meet liquidity drains. 
E) A DI sustains no cost under stored liquidity risk management.

Question 16

Open-end mutual funds issue a fixed number of shares classified as liabilities.

Accepted Answer

A) True 
 B)False

Question 17

How does purchased liquidity management affect profitability?

Accepted Answer

A) By its impact on the interest rate sensitivity of assets. 
B) By its impact on the interest rate sensitivity of liabilities. 
C) By determining the default risk of investment securities. 
D) By its impact on the cost of purchased funds. 
E) By enhancing the liquidity of assets held. 
A) By its impact on the interest rate sensitivity of assets. 
B) By its impact on the interest rate sensitivity of liabilities. 
C) By determining the default risk of investment securities. 
D) By its impact on the cost of purchased funds. 
E) By enhancing the liquidity of assets held.

Question 18

In a crisis, which of the following are more likely to withdraw funds quickly from banks and thrifts?

Accepted Answer

A) Correspondent banks. 
B) Small business corporations. 
C) Individual depositors. 
D) Mutual funds. 
E) Foreign depositors. 
A) Correspondent banks. 
B) Small business corporations. 
C) Individual depositors. 
D) Mutual funds. 
E) Foreign depositors.

Question 19

Asset-side liquidity risk may be a result of off-balance sheet (OBS) lending commitments.

Accepted Answer

A) True 
 B)False

Question 20

When banks use stored liquidity management, they

Accepted Answer

A) must pay interest on the funds that are stored. 
B) store the funds at the U.S.Treasury. 
C) necessarily increase the asset side of the balance sheet. 
D) may shrink the balance sheet if cash is used as the liquidity adjustment mechanism. 
E) threaten the capital position of the institution. 
A) must pay interest on the funds that are stored. 
B) store the funds at the U.S.Treasury. 
C) necessarily increase the asset side of the balance sheet. 
D) may shrink the balance sheet if cash is used as the liquidity adjustment mechanism. 
E) threaten the capital position of the institution.

Exam 12: Liquidity Risk

What information does the net liquidity statement provide?

Purchased liquidity management carries the potential risk of significant increases in the cost of funds during periods of high interest rate volatility.

Unlike DIs, there is never a need for a life insurance company to have a liquidity plan for a "run" resulting from concerns about its solvency.

Liquidity risk for an FI includes the possibility of an unexpected inflow of funds.

What is the asset adjustment to a bank's balance sheet if the bank sold a five-year, 7 percent annual coupon $100,000 bond acquired at par, but now yielding 8 percent? The bond was not in the mark-to-market portfolio.

The Fed discount window maintains three lending programs to assist DIs in managing liquidity problems.

Which of the following is NOT used as a method of measuring liquidity risk?

Hedge funds are not susceptible to liquidity risk or a liquidity crisis.

An expected net deposit drain on any given day means that deposit withdrawals are less than deposit inflows.

A DI's financing requirement is defined as its financing gap plus the DI's liquid asset holdings.

For life insurance companies, the distribution of premium income minus policyholder liquidations is unpredictable.

A bank's net deposit drain

Even with liquidity planning, net deposit withdrawals and/or the exercise of loan commitments can pose significant liquidity problems for banks.

Abnormally large and unexpected deposit withdrawals can occur because of concerns by depositors about a bank's solvency relative to other banks.

Which of the following statements is NOT true?

Open-end mutual funds issue a fixed number of shares classified as liabilities.

How does purchased liquidity management affect profitability?

In a crisis, which of the following are more likely to withdraw funds quickly from banks and thrifts?

Asset-side liquidity risk may be a result of off-balance sheet (OBS) lending commitments.

When banks use stored liquidity management, they

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Fintech Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters