Question 1

Which of the following is a measure of the potential losses an FI could suffer as the result of fire-sale disposal of assets?

Accepted Answer

A) Quick ratio. 
B) Liquidity index. 
C) Financing gap and financing requirement. 
D) Peer group ratio. 
A) Quick ratio. 
B) Liquidity index. 
C) Financing gap and financing requirement. 
D) Peer group ratio.

Question 2

The liquidity index should be a number that is either greater than one or less than zero.

Accepted Answer

A) True 
 B)False

Question 3

Surrender value is the amount of cash a life insurance policy holder can receive by turning in the policy before it expires or matures.

Accepted Answer

A) True 
 B)False

Question 4

What is the impact of a 50 basis point increase in interest rates on the net asset value of an open-end bond mutual fund holding a seven year,$100 million face value 7 percent annual coupon bond selling at par? The fund has 10 million shares.

Accepted Answer

A) An increase of $0.24 per share. 
B) A decrease of $0.265 per share. 
C) An increase of $0.05 per share. 
D) A decrease of $0.05 per share. 
A) An increase of $0.24 per share. 
B) A decrease of $0.265 per share. 
C) An increase of $0.05 per share. 
D) A decrease of $0.05 per share.

Question 5

The liquidity coverage ratio (LCR)and net stable funding ratio (NSFR)proposed by the Bank for International Settlements are scheduled to take effect in

Accepted Answer

A) 2011 for LCR and 2014 for NSFR. 
B) 2012 for both LCR and NSFR. 
C) 2015 for LCR and 2018 for NSFR. 
D) 2013 for LCR and 2016 for NSFR. 
A) 2011 for LCR and 2014 for NSFR. 
B) 2012 for both LCR and NSFR. 
C) 2015 for LCR and 2018 for NSFR. 
D) 2013 for LCR and 2016 for NSFR.

Question 6

$\begin{array}{l}
\begin{array}{l}
\text { Assets} & \text {  Liabilities and Equity}\
\text { Cash Required Reserves}&\$ 2 \text { million Deposits } \
\text {  Loans}&\$ 10 \text { million Longterm Debt } \
&\text { Equity } \
\text { Total}&\$ 12 \text { million Total }
\end{array}
\begin{array}{l}
\
\$ 8 \text { million } \
\$ 2 \text { million } \
\$ 2 \text { million } \
\$ 12 \text { million }
\end{array}
\end{array}$ The average interest earned on the loans is 6 percent and the average cost of deposits is 5 percent.Rising interest rates are expected to reduce the deposits by $3 million.Borrowing more debt will cost the bank 5.5 percent in the short term.
What will be the cost of using a strategy of purchased liquidity management to meet the expected decline in deposits? Assume that the bank intends to keep $2 million in cash as liquidity precaution.

Accepted Answer

A) $10,000. 
B) $15,000. 
C) $30,000. 
D) $40,000. 
A) $10,000. 
B) $15,000. 
C) $30,000. 
D) $40,000.

Question 7

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 8

The net stable funds ratio (NSFR)attempts to ensure illiquid assets and securities are funded with a minimum amount of stable liabilities for at least a one year time horizon.

Accepted Answer

A) True 
 B)False

Question 9

Government securities represent the reserve asset fund for life insurance companies.

Accepted Answer

A) True 
 B)False

Question 10

In general,money center banks are exposed to less liquidity risk than smaller,regional banks.

Accepted Answer

A) True 
 B)False

Question 11

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. 
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.

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

Net asset value is the current value of a mutual fund's assets divided by the number of shares outstanding.

Accepted Answer

A) True 
 B)False

Question 14

Mutual funds tend to have more exposure to liquidity risk than banks and thrifts.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

Which of the following observations concerning the Fed's discount window is true?

Accepted Answer

A) The facility is provided to meet DIs' permanent liquidity needs. 
B) Four lending programs are offered through the Fed's discount window. 
C) Primary credit is available to sound depository institutions on a very short-term basis. 
D) Secondary credit is available only to depository institutions that are eligible for primary credit. 
A) The facility is provided to meet DIs' permanent liquidity needs. 
B) Four lending programs are offered through the Fed's discount window. 
C) Primary credit is available to sound depository institutions on a very short-term basis. 
D) Secondary credit is available only to depository institutions that are eligible for primary credit.

Question 17

Liquidity planning primarily is designed to assist management in dealing with relatively predictable events.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is NOT a primary source of liquidity?

Accepted Answer

A) Excess cash reserves over and above regulatory reserve requirements. 
B) Borrowings in the money market. 
C) Borrowings in the purchased funds market. 
D) Capital notes and other long-term financing alternatives. 
A) Excess cash reserves over and above regulatory reserve requirements. 
B) Borrowings in the money market. 
C) Borrowings in the purchased funds market. 
D) Capital notes and other long-term financing alternatives.

Question 19

In the event of a bank run,depositor claims on the bank are satisfied on a pro rata basis.

Accepted Answer

A) True 
 B)False

Question 20

If stored liquidity is used by a DI to fund an exercised loan commitment

Accepted Answer

A) the balance sheet will decrease by the amount of the new loan. 
B) only the asset side of the balance sheet will increase. 
C) the balance sheet will increase by the amount of the new loan. 
D) only the liability side of the balance sheet will increase. 
E) there will be no effect on the balance sheet. 
A) the balance sheet will decrease by the amount of the new loan. 
B) only the asset side of the balance sheet will increase. 
C) the balance sheet will increase by the amount of the new loan. 
D) only the liability side of the balance sheet will increase. 
E) there will be no effect on the balance sheet.

Exam 12: Liquidity Risk

Which of the following is a measure of the potential losses an FI could suffer as the result of fire-sale disposal of assets?

The liquidity index should be a number that is either greater than one or less than zero.

Surrender value is the amount of cash a life insurance policy holder can receive by turning in the policy before it expires or matures.

What is the impact of a 50 basis point increase in interest rates on the net asset value of an open-end bond mutual fund holding a seven year,$100 million face value 7 percent annual coupon bond selling at par? The fund has 10 million shares.

The liquidity coverage ratio (LCR)and net stable funding ratio (NSFR)proposed by the Bank for International Settlements are scheduled to take effect in

Which of the following statements is NOT true?

The net stable funds ratio (NSFR)attempts to ensure illiquid assets and securities are funded with a minimum amount of stable liabilities for at least a one year time horizon.

Government securities represent the reserve asset fund for life insurance companies.

In general,money center banks are exposed to less liquidity risk than smaller,regional banks.

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

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

Net asset value is the current value of a mutual fund's assets divided by the number of shares outstanding.

Mutual funds tend to have more exposure to liquidity risk than banks and thrifts.

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

Which of the following observations concerning the Fed's discount window is true?

Liquidity planning primarily is designed to assist management in dealing with relatively predictable events.

Which of the following is NOT a primary source of liquidity?

In the event of a bank run,depositor claims on the bank are satisfied on a pro rata basis.

If stored liquidity is used by a DI to fund an exercised loan commitment

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