Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

When comparing banks and mutual funds,

Accepted Answer

A) mutual funds have more liquidity risk than banks because all shareholders share the loss of value on a pro rata basis. 
B) mutual funds have less liquidity risk than banks because all shareholders share the loss of value on a pro rata basis. 
C) mutual funds have more liquidity risk than banks because all shareholders have the ability to withdraw their money on a first-come first basis. 
D) mutual funds have less liquidity risk than banks because all shareholders have the ability to withdraw their money on a first-come first basis. 
A) mutual funds have more liquidity risk than banks because all shareholders share the loss of value on a pro rata basis. 
B) mutual funds have less liquidity risk than banks because all shareholders share the loss of value on a pro rata basis. 
C) mutual funds have more liquidity risk than banks because all shareholders have the ability to withdraw their money on a first-come first basis. 
D) mutual funds have less liquidity risk than banks because all shareholders have the ability to withdraw their money on a first-come first basis.

Question 3

Demand deposits pose a liquidity risk for FIs because funds may be withdrawn at any time.

Accepted Answer

A) True 
 B)False

Question 4

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 5

If the bank decides to cut down on interest expenses by reducing its dependence upon borrowed funds,what policy must the bank follow?

Accepted Answer

A) Manage liquidity risk exclusively through reserve asset management. 
B) Manage liquidity risk exclusively through liability management. 
C) Reduce the bank's dependence upon demand deposits. 
D) Increase interest income by increasing lending. 
A) Manage liquidity risk exclusively through reserve asset management. 
B) Manage liquidity risk exclusively through liability management. 
C) Reduce the bank's dependence upon demand deposits. 
D) Increase interest income by increasing lending.

Question 6

A problem exists with the net stable funds ratio (NSFR)in that it does not include off-balance-sheet activities.

Accepted Answer

A) True 
 B)False

Question 7

What are the possible ways that the bank can meet an expected net deposit drain of +4 percent using purchased liquidity management techniques?

Accepted Answer

A) Utilize further the Fed funds market. 
B) Utilize repurchase agreements. 
C) Liquidate all cash holdings. 
D) All of the options. 
E) Utilize further the Fed funds market and repurchase agreements. 
A) Utilize further the Fed funds market. 
B) Utilize repurchase agreements. 
C) Liquidate all cash holdings. 
D) All of the options. 
E) Utilize further the Fed funds market and repurchase agreements.

Question 8

The future liquidity position of a DI cannot be forecasted.

Accepted Answer

A) True 
 B)False

Question 9

$\begin{array}{l}
\begin{array}{l}
\text { Assets} & \text {  Liabilities and Equity}\
\text { Cash Required Reserves}&\$ 2 \text { million Deposits } \
\text {  Loans}&\$ 10 \text { million Longterm Debt } \
&\text { Equity } \
\text { Total}&\$ 12 \text { million Total }
\end{array}
\begin{array}{l}
\
\$ 8 \text { million } \
\$ 2 \text { million } \
\$ 2 \text { million } \
\$ 12 \text { million }
\end{array}
\end{array}$ 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 size of the bank if a purchased liquidity management strategy is adopted?

Accepted Answer

A) $9 million. 
B) $11 million. 
C) $12 million. 
D) $14 million. 
A) $9 million. 
B) $11 million. 
C) $12 million. 
D) $14 million.

Question 10

An open-end bond mutual fund is holding a three-year,$1 million face value 5 percent annual coupon bond selling at par.What is the impact on the total asset value of the fund of a 1 percent decrease in interest rates?

Accepted Answer

A) A decrease of $10,000. 
B) An increase of $10,000. 
C) A decrease of $26,730. 
D) An increase of $27,751. 
A) A decrease of $10,000. 
B) An increase of $10,000. 
C) A decrease of $26,730. 
D) An increase of $27,751.

Question 11

Which of the following is NOT included as high-quality liquid assets when computing a liquidity coverage ratio?

Accepted Answer

A) Sovereign debt. 
B) Bank capital. 
C) Government guaranteed mortgage-backed securities. 
D) Central bank reserves. 
A) Sovereign debt. 
B) Bank capital. 
C) Government guaranteed mortgage-backed securities. 
D) Central bank reserves.

Question 12

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

Accepted Answer

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

Question 13

If purchased 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. 
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.

Question 14

Because cash reserves at the Federal Reserve do not earn interest,DIs do not hold any excess cash reserves beyond the minimum requirements.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

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

Question 17

When using peer group comparisons to determine liquidity risk of a DI,peer groups are defined by the Federal Reserve.

Accepted Answer

A) True 
 B)False

Question 18

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 19

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

Accepted Answer

A) True 
 B)False

Question 20

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

Exam 12: Liquidity Risk

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

When comparing banks and mutual funds,

Demand deposits pose a liquidity risk for FIs because funds may be withdrawn at any time.

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

If the bank decides to cut down on interest expenses by reducing its dependence upon borrowed funds,what policy must the bank follow?

A problem exists with the net stable funds ratio (NSFR)in that it does not include off-balance-sheet activities.

What are the possible ways that the bank can meet an expected net deposit drain of +4 percent using purchased liquidity management techniques?

The future liquidity position of a DI cannot be forecasted.

An open-end bond mutual fund is holding a three-year,$1 million face value 5 percent annual coupon bond selling at par.What is the impact on the total asset value of the fund of a 1 percent decrease in interest rates?

Which of the following is NOT included as high-quality liquid assets when computing a liquidity coverage ratio?

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

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

Because cash reserves at the Federal Reserve do not earn interest,DIs do not hold any excess cash reserves beyond the minimum requirements.

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

What information does the net liquidity statement provide?

When using peer group comparisons to determine liquidity risk of a DI,peer groups are defined by the Federal Reserve.

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

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

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.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Firms and Investment Banks

Financial Services: Mutual Fund and Hedge Fund Companies

Financial Services: Insurance Companies

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

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