Question 1

A bank must be ready to pay out all demand deposit liabilities on any given day.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

Which of the following is NOT a potential cause of liquidity risk for a DI?

Accepted Answer

A) A decrease in the DI'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. 
A) A decrease in the DI'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.

Question 4

A disadvantage of using stored liquidity management to manage a FI's liquidity risk is

Accepted Answer

A) the resulting shrinkage of the FI's balance sheet. 
B) the high cost of purchased liabilities. 
C) the accessibility of international money markets. 
D) tax considerations. 
A) the resulting shrinkage of the FI's balance sheet. 
B) the high cost of purchased liabilities. 
C) the accessibility of international money markets. 
D) tax considerations.

Question 5

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. 
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.

Question 6

An FI has $5 million in cash reserves with the Fed in excess of its reserve requirements,$5 million in T-Bills,and a credit line of $10 million to borrow in the repo market.It currently has lent $2 million in the Fed Funds market and borrowed $1 million from the Federal discount window to meet its seasonal needs. 
What are the bank's total available sources of liquidity?

Accepted Answer

A) $17 million. 
B) $18 million. 
C) $20 million. 
D) $21 million. 
E) $22 million. 
A) $17 million. 
B) $18 million. 
C) $20 million. 
D) $21 million. 
E) $22 million.

Question 7

For a DI,what does a high ratio of loans to deposits indicate?

Accepted Answer

A) DI relies heavily on the short-term money market to fund loans. 
B) High degree of loan commitments. 
C) DI has large amounts of asset-side liquidity. 
D) Liquidity concerns are at a bare minimum for the FI. 
A) DI relies heavily on the short-term money market to fund loans. 
B) High degree of loan commitments. 
C) DI has large amounts of asset-side liquidity. 
D) Liquidity concerns are at a bare minimum for the FI.

Question 8

An FI has $5 million in cash reserves with the Fed in excess of its reserve requirements,$5 million in T-Bills,and a credit line of $10 million to borrow in the repo market.It currently has lent $2 million in the Fed Funds market and borrowed $1 million from the Federal discount window to meet its seasonal needs. 
What are the bank's current total uses of liquidity?

Accepted Answer

A) $1 million. 
B) $3 million. 
C) $8 million. 
D) $10 million. 
A) $1 million. 
B) $3 million. 
C) $8 million. 
D) $10 million.

Question 9

During the financial crisis of 2008,there were large deposit outflows from the banking system.

Accepted Answer

A) True 
 B)False

Question 10

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 11

$\begin{array}{lcc}
\text { Assets} & \text {  Liabilities and Equity}\
\text { Cash Required Reserves  } & \text { 21,000 Demand Deposits } & 550,000 \
\text { Short-term Securities } &369,000 \text { Fed FundsBorrowed } & 151,000 \
\text { Loans } &400,000 \text { Equity } & 89,000 \
\text { Total } &790,000 \text { Total } & 790,000
\end{array}$ If the bank's expected net deposit drain is +4 percent,what is the bank's expected liquidity requirement?

Accepted Answer

A) $7,560. 
B) $6,040. 
C) $16,000. 
D) $22,000. 
A) $7,560. 
B) $6,040. 
C) $16,000. 
D) $22,000.

Question 12

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 13

During the financial crisis of 2008,liquidity problems were avoided as banks continued to provide lending to each other.

Accepted Answer

A) True 
 B)False

Question 14

It is impossible for money market mutual fund share prices to fall below $1.00.

Accepted Answer

A) True 
 B)False

Question 15

Managing asset-side liquidity risk can involve either purchased liquidity management or stored liquidity management.

Accepted Answer

A) True 
 B)False

Question 16

An FI has $5 million in cash reserves with the Fed in excess of its reserve requirements,$5 million in T-Bills,and a credit line of $10 million to borrow in the repo market.It currently has lent $2 million in the Fed Funds market and borrowed $1 million from the Federal discount window to meet its seasonal needs. What is the net liquidity of the bank?

Accepted Answer

A) $7 million. 
B) $12 million. 
C) $17 million. 
D) $21 million. 
A) $7 million. 
B) $12 million. 
C) $17 million. 
D) $21 million.

Question 17

$\begin{array}{l}
\begin{array}{l}
\text { Assets} & \text {  Liabilities and Equity}\
\text { Cash Required Reserves}&\$ 2 \text { million Deposits } \
\text {  Loans}&\$ 10 \text { million Longterm Debt } \
&\text { Equity } \
\text { Total}&\$ 12 \text { million Total }
\end{array}
\begin{array}{l}
\
\$ 8 \text { million } \
\$ 2 \text { million } \
\$ 2 \text { million } \
\$ 12 \text { million }
\end{array}
\end{array}$ 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 stored 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 18

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

Accepted Answer

A) True 
 B)False

Question 19

What is a fire-sale price?

Accepted Answer

A) Market value of an asset. 
B) Price received for an asset that has to be liquidated immediately. 
C) Maximum price that will be received on sale of an asset irrespective of the time of sale. 
D) Replacement value of an asset. 
A) Market value of an asset. 
B) Price received for an asset that has to be liquidated immediately. 
C) Maximum price that will be received on sale of an asset irrespective of the time of sale. 
D) Replacement value of an asset.

Question 20

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

Exam 12: Liquidity Risk

A bank must be ready to pay out all demand deposit liabilities on any given day.

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

Which of the following is NOT a potential cause of liquidity risk for a DI?

A disadvantage of using stored liquidity management to manage a FI's liquidity risk is

The surrender value of an insurance policy is

For a DI,what does a high ratio of loans to deposits indicate?

During the financial crisis of 2008,there were large deposit outflows from the banking system.

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

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

During the financial crisis of 2008,liquidity problems were avoided as banks continued to provide lending to each other.

It is impossible for money market mutual fund share prices to fall below $1.00.

Managing asset-side liquidity risk can involve either purchased liquidity management or stored liquidity management.

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

What is a fire-sale price?

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

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