Exam 18: Liability and Liquidity Management

Property-casualty insurance companies can reduce their exposure to liquidity risk by diversifying coverage across different types of disasters.

The minimum average daily reserves required in a maintenance period is a percentage of the daily average demand deposits held by a bank during the computation period.

For reserve calculation purposes, the period that begins on a Tuesday and ends on a Monday 14 days later is known as

One method that may be employed by banks to lower required reserves is to

Because of the collateral feature, RPs typically have a higher interest rate than fed funds.

A bank has an average balance of transactions accounts, August 10 to 23, of $824.46 million. The average balance in the cash account is $42.014 million over this period. The bank is carrying forward a deficit of $1.276 million from the last reserve period. The rules require no reserves to be maintained for the first $8.5 million, 3 percent for amounts between $8.5 million and $45.8 million, and 10 percent thereafter. -What is the gross reserve requirement?

In the U.S., a subsidiary bank can issue commercial paper to meet short-term liquidity needs, but the bank's parent holding company cannot.

A NOW account requires a minimum monthly balance of $500 if annual interest of 5 percent is to be earned monthly on its deposits. An account holder has maintained an average balance of $300 for the first nine months of the year and $800 for the last three months of the year. She has written an average of 20 checks a month and is not charged for these services. However, it costs the bank $0.02 to process each check. -What is the average return earned (both explicit and implicit) by the account holder over the full year if the minimum balance is reduced to $200?

Demand deposits are a costless source of funds and have a high degree of withdrawal risk.

Which of the following rankings of liabilities is correct if they are ranked by funding costs from lowest cost to highest cost?

Which of the following observations concerning the federal funds rate is NOT true?

The advantage to a lender in a repurchase agreement transaction versus a fed funds sale is the collateral of government securities or other acceptable liquid assets provided by the borrowing FI.

One reason FIs such as depository institutions and life insurance companies are exposed to liquidity risk is the relatively illiquid nature of their liabilities.

Which of the following observations concerning repurchase agreements is NOT true?

The contemporaneous reserve accounting system requires the maintenance period to occur simultaneously with the computation period.

The minimum reserves that may be maintained toward the next reserve maintenance period, September 23 to October 6, is

In situations where the required reserve shortfall exceeds 4 percent, the bank may be

The establishment of minimum required reserves by regulators is a method of extracting taxes from FIs.

Which of the following is a mechanism used by DI managers to reduce demand deposit withdrawal rates?

NOW accounts allow the explicit payment of interest.