Question 1

The amount that a policyholder receives when he or she cashes in an insurance policy is called the

Accepted Answer

A) cash value. 
B) surrender value. 
C) face value. 
D) policy value. 
E) fair market value. 
A) cash value. 
B) surrender value. 
C) face value. 
D) policy value. 
E) fair market value.

Question 2

The financing gap is defined as average core deposits minus average borrowed funds.

Accepted Answer

A) True 
 B)False

Question 3

Why might a bank face abnormal deposit drains?

Accepted Answer

If depositors believe the bank is facing

Question 4

When calculating the liquidity index,the larger the discount from fair value,the ______________ the liquidity index; and the _________________ the liquidity risk the FI faces.

Accepted Answer

A) larger; greater 
B) smaller; greater 
C) larger; lower 
D) smaller; lower 
A) larger; greater 
B) smaller; greater 
C) larger; lower 
D) smaller; lower

Question 5

Discount window borrowing is available to
I. banks.
II. thrifts.
III. investment banks.
IV. nonfinancial corporations.

Accepted Answer

A) I and II only 
B) I and III only 
C) I,II,and III only 
D) II,III,and IV only 
E) I,II,III,and IV 
A) I and II only 
B) I and III only 
C) I,II,and III only 
D) II,III,and IV only 
E) I,II,III,and IV

Question 6

If a bank meets a net deposit drain by borrowing money in the fed funds market,it is using purchased liquidity.

Accepted Answer

A) True 
 B)False

Question 7

Insurance industry guarantee funds do not eliminate runs on insurers because
I. the funds are not backed by the federal government.
II. the funds lack permanent reserves to back policies.
III. the funds have low maximum annual contribution amounts that limit insurers' liability.

Accepted Answer

A) I only 
B) II only 
C) III only 
D) I and III only 
E) I,II,and III 
A) I only 
B) II only 
C) III only 
D) I and III only 
E) I,II,and III

Question 8

Relying on purchased liquidity is more risky than relying on stored liquidity.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following can create liquidity risk for a life insurer?
I. Unexpectedly high number of policy surrenders
II. Unexpectedly low number of new policies sold
III. Unexpectedly high insurance claims filed by policyholders

Accepted Answer

A) I only 
B) II only 
C) I and II only 
D) II and III only 
E) I,II,and III 
A) I only 
B) II only 
C) I and II only 
D) II and III only 
E) I,II,and III

Question 10

Repos and fed funds borrowed are examples of stored liquidity.

Accepted Answer

A) True 
 B)False

Question 11

An increasingly positive financing gap can indicate ________________ liquidity risk because it may indicate _______________ deposits and/or rising loan commitments.

Accepted Answer

A) increasing; increasing 
B) decreasing; decreasing 
C) increasing; decreasing 
D) decreasing; increasing 
A) increasing; increasing 
B) decreasing; decreasing 
C) increasing; decreasing 
D) decreasing; increasing

Question 12

Explain how liquidity risk can lead to insolvency risk.

Accepted Answer

If an FI has to sell nonliquid assets to

Question 13

Runs on insurance firms are more likely to occur than runs on banks even in states with guaranty funds for insurers because these funds generally

Accepted Answer

A) lack a permanent reserve fund. 
B) do not repay insurance policyholders immediately. 
C) lack federal government backing. 
D) all of the options. 
A) lack a permanent reserve fund. 
B) do not repay insurance policyholders immediately. 
C) lack federal government backing. 
D) all of the options.

Question 14

A bank's financing gap is calculated as average loans minus average deposits plus liquid assets.

Accepted Answer

A) True 
 B)False

Question 15

The fear that liquidity problems at one bank may cause depositors to worry about the solvency of other banks is called the disease effect.

Accepted Answer

A) True 
 B)False

Question 16

A bank meets a deposit withdrawal with one of the following alternatives. Which one of the following is an example of using stored liquidity to meet a deposit withdrawal?

Accepted Answer

A) Increasing Eurodollar deposits 
B) Contacting an investment banker to find new corporate deposits 
C) Increasing fed funds borrowed 
D) Issuance of a negotiable CD 
E) Selling the bank's holdings of T-bills 
A) Increasing Eurodollar deposits 
B) Contacting an investment banker to find new corporate deposits 
C) Increasing fed funds borrowed 
D) Issuance of a negotiable CD 
E) Selling the bank's holdings of T-bills

Question 17

If a bank relies solely on purchased liquidity,the bank will likely

Accepted Answer

A) maintain large amounts of liquid assets. 
B) fund its loan commitments with asset sales. 
C) be required to borrow money at short notice. 
D) be required to raise equity capital quickly. 
E) be forced to liquidate liabilities at fire sale prices. 
A) maintain large amounts of liquid assets. 
B) fund its loan commitments with asset sales. 
C) be required to borrow money at short notice. 
D) be required to raise equity capital quickly. 
E) be forced to liquidate liabilities at fire sale prices.

Question 18

The BIS maturity ladder approach to managing liquidity includes which of the following?
I. Assessing expected cash inflows and outflows in different time periods.
II. Calculating daily and cumulative funding requirements.
III. Estimating funding requirements under different scenarios.
IV. Minimizing the securities holdings to increase the bank's ROE.

Accepted Answer

A) I and II only 
B) II and III only 
C) I,II,and IV only 
D) I,II,and III only 
E) I,II,III,and IV 
A) I and II only 
B) II and III only 
C) I,II,and IV only 
D) I,II,and III only 
E) I,II,III,and IV

Question 19

In the absence of deposit insurance,a deposit is a _______________ to the bank's assets.

Accepted Answer

A) pro rata claim 
B) first come/first serve claim 
C) full pay or no pay claim 
D) pro rata claim and first come/first serve claim 
E) first come/first serve claim and full pay or no pay claim 
A) pro rata claim 
B) first come/first serve claim 
C) full pay or no pay claim 
D) pro rata claim and first come/first serve claim 
E) first come/first serve claim and full pay or no pay claim

Question 20

Which of the following statements,if any,is (are)true?
I. Mutual funds never have runs.
II. Funds invested with insurers are as safe as deposits at a bank.
III. Pension funds generally have less liquidity risk than banks.

Accepted Answer

A) All three are true. 
B) Only I is true. 
C) Only II and III are true. 
D) Only III is true. 
E) None are true. 
A) All three are true. 
B) Only I is true. 
C) Only II and III are true. 
D) Only III is true. 
E) None are true.

Exam 21: Managing Liquidity Risk on the Balance Sheet

The amount that a policyholder receives when he or she cashes in an insurance policy is called the

The financing gap is defined as average core deposits minus average borrowed funds.

Why might a bank face abnormal deposit drains?

When calculating the liquidity index,the larger the discount from fair value,the ______________ the liquidity index; and the _________________ the liquidity risk the FI faces.

Discount window borrowing is available to I. banks. II. thrifts. III. investment banks. IV. nonfinancial corporations.

If a bank meets a net deposit drain by borrowing money in the fed funds market,it is using purchased liquidity.

Insurance industry guarantee funds do not eliminate runs on insurers because I. the funds are not backed by the federal government. II. the funds lack permanent reserves to back policies. III. the funds have low maximum annual contribution amounts that limit insurers' liability.

Relying on purchased liquidity is more risky than relying on stored liquidity.

Which of the following can create liquidity risk for a life insurer? I. Unexpectedly high number of policy surrenders II. Unexpectedly low number of new policies sold III. Unexpectedly high insurance claims filed by policyholders

Repos and fed funds borrowed are examples of stored liquidity.

An increasingly positive financing gap can indicate ________________ liquidity risk because it may indicate _______________ deposits and/or rising loan commitments.

Explain how liquidity risk can lead to insolvency risk.

Runs on insurance firms are more likely to occur than runs on banks even in states with guaranty funds for insurers because these funds generally

A bank's financing gap is calculated as average loans minus average deposits plus liquid assets.

The fear that liquidity problems at one bank may cause depositors to worry about the solvency of other banks is called the disease effect.

A bank meets a deposit withdrawal with one of the following alternatives. Which one of the following is an example of using stored liquidity to meet a deposit withdrawal?

If a bank relies solely on purchased liquidity,the bank will likely

In the absence of deposit insurance,a deposit is a _______________ to the bank's assets.

Which of the following statements,if any,is (are)true? I. Mutual funds never have runs. II. Funds invested with insurers are as safe as deposits at a bank. III. Pension funds generally have less liquidity risk than banks.

Introduction

Determinants of Interest Rates

Interest Rates and Security Valuation

The Federal Reserve System, Monetary Policy, and Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Stock Markets

Foreign Exchange Markets

Derivative Securities Markets

Commercial Banks: Industry Overview

Commercial Banks Financial Statements and Analysis

Regulation of Commercial Banks

Other Lending Institutions: Savings Institutions, Credit Unions, and Finance Companies

Insurance Companies

Securities Firms and Investment Banks

Investment Companies

Pension Funds

Types of Risks Incurred by Financial Institutions

Managing Credit Risk on the Balance Sheet

Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

Managing Risk Off the Balance Sheet With Derivative Securities

Managing Risk Off the Balance Sheet With Loan Sales and Securitization

Filters

When calculating the liquidity index,the larger the discount from fair value,the the liquidity index; and the ___ the liquidity risk the FI faces.

An increasingly positive financing gap can indicate __ liquidity risk because it may indicate _ deposits and/or rising loan commitments.