Question 1

In the event of financial distress, open-ended mutual fund investors

Accepted Answer

A) have an incentive to cash in their shares quickly since they are paid on a first come, first served basis. 
B) have an incentive to avoid a run since that will deplete the fund net asset value. 
C) have an incentive to cash in their shares quickly since that will increase the fund's net asset value. 
D) will switch into low risk bank deposits. 
E) have an incentive to avoid a run since the Federal Reserve guarantees mutual fund holdings. 
A) have an incentive to cash in their shares quickly since they are paid on a first come, first served basis. 
B) have an incentive to avoid a run since that will deplete the fund net asset value. 
C) have an incentive to cash in their shares quickly since that will increase the fund's net asset value. 
D) will switch into low risk bank deposits. 
E) have an incentive to avoid a run since the Federal Reserve guarantees mutual fund holdings.

Question 2

The net stable funds ratio (NSFR) is a longer-term measure than the liquidity coverage ratio (LCR).

Accepted Answer

A) True 
 B)False

Question 3

The price at which an open-end investment fund stands ready to redeem existing shares is the

Accepted Answer

A) strike price. 
B) face value. 
C) book value. 
D) net asset value. 
E) net worth. 
A) strike price. 
B) face value. 
C) book value. 
D) net asset value. 
E) net worth.

Question 4

Which of the following statements is true?

Accepted Answer

A) Closed-end funds issue an unlimited number of shares as liabilities. 
B) Open-end funds supply limited number of shares to investors. 
C) Open-end funds need not stand ready to buy back previously issued shares from investors at the current market price for the fund's shares. 
D) At a given market price, the supply of open-end fund shares is perfectly inelastic. 
E) The number of outstanding shares of a closed-ended fund may change when the issuing fund chooses to repurchase them. 
A) Closed-end funds issue an unlimited number of shares as liabilities. 
B) Open-end funds supply limited number of shares to investors. 
C) Open-end funds need not stand ready to buy back previously issued shares from investors at the current market price for the fund's shares. 
D) At a given market price, the supply of open-end fund shares is perfectly inelastic. 
E) The number of outstanding shares of a closed-ended fund may change when the issuing fund chooses to repurchase them.

Question 5

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.

Question 6

The cost of stored liquidity management is the interest that must be paid on the stored funds.

Accepted Answer

A) True 
 B)False

Question 7

The future liquidity position of a DI cannot be forecasted.

Accepted Answer

A) True 
 B)False

Question 8

The greater the difference between fair market prices and fire-sale prices for assets, the less liquid the DTI's portfolio of assets.

Accepted Answer

A) True 
 B)False

Question 9

Liquidity risk for a life insurance company only occurs when asset returns do not provide sufficient cash flows to meet policyholder liquidations.

Accepted Answer

A) True 
 B)False

Question 10

Core deposits represent a relatively short-term source of funds.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is NOT a potential causes of liquidity risk for a DTI?

Accepted Answer

A) A decrease in the DTI's stock price caused by market factors. 
B) An increase in requests to fund large amounts of loan commitments. 
C) A decrease in the availability of short-term borrowed funds. 
D) An increase in requests by depositors to withdrawal large amounts of deposits. 
E) A decrease in asset prices of securities held in the investment portfolio. 
A) A decrease in the DTI's stock price caused by market factors. 
B) An increase in requests to fund large amounts of loan commitments. 
C) A decrease in the availability of short-term borrowed funds. 
D) An increase in requests by depositors to withdrawal large amounts of deposits. 
E) A decrease in asset prices of securities held in the investment portfolio.

Question 12

Insurance companies have had to deal with liability runs by policyholders.

Accepted Answer

A) True 
 B)False

Question 13

In a crisis, which of the following are relatively less likely to withdraw funds quickly from banks and savings institutions?

Accepted Answer

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

Question 14

The surrender value of an insurance policy is

Accepted Answer

A) its promised payoff. 
B) normally a portion of the contract's face value. 
C) its value upon bankruptcy. 
D) the value of the junk bonds in the insurance company's portfolio. 
E) its holdup value. 
A) its promised payoff. 
B) normally a portion of the contract's face value. 
C) its value upon bankruptcy. 
D) the value of the junk bonds in the insurance company's portfolio. 
E) its holdup value.

Question 15

When liquidity risk problems occur at a DTI, they often threaten the solvency of the institution.

Accepted Answer

A) True 
 B)False

Question 16

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 17

A contagious run, or bank panic, differs from a run on a bank in that a contagious run involves loss of faith in the entire banking system as opposed to just one bank.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is NOT true?

Accepted Answer

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

Question 19

A DI has two assets: 50 percent in one-month Treasury bills and 50 percent in real estate loans. If the DI must liquidate its T-bills today, it receives $98 per $100 of face value; if it can wait to liquidate them on maturity (in one month's time), it will receive $100 per $100 of face value. If the DI has to liquidate its real estate loans today, it receives $90 per $100 of face value liquidation at the end of one month will produce $92 per $100 of face value. The one-month liquidity index value for this DI's asset portfolio is

Accepted Answer

A) .973. 
B) .940. 
C) .979. 
D) 1.06. 
E) 1.10. 
A) .973. 
B) .940. 
C) .979. 
D) 1.06. 
E) 1.10.

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 12: Liquidity Risk

In the event of financial distress, open-ended mutual fund investors

The net stable funds ratio (NSFR) is a longer-term measure than the liquidity coverage ratio (LCR).

The price at which an open-end investment fund stands ready to redeem existing shares is the

Which of the following statements is true?

When banks use stored liquidity management, they

The cost of stored liquidity management is the interest that must be paid on the stored funds.

The future liquidity position of a DI cannot be forecasted.

The greater the difference between fair market prices and fire-sale prices for assets, the less liquid the DTI's portfolio of assets.

Liquidity risk for a life insurance company only occurs when asset returns do not provide sufficient cash flows to meet policyholder liquidations.

Core deposits represent a relatively short-term source of funds.

Which of the following is NOT a potential causes of liquidity risk for a DTI?

Insurance companies have had to deal with liability runs by policyholders.

In a crisis, which of the following are relatively less likely to withdraw funds quickly from banks and savings institutions?

The surrender value of an insurance policy is

When liquidity risk problems occur at a DTI, they often threaten the solvency of the institution.

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

A contagious run, or bank panic, differs from a run on a bank in that a contagious run involves loss of faith in the entire banking system as opposed to just one bank.

Which of the following statements is NOT true?

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

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