Question 1

For a DI in the U.S. with $200 in assets and $180 in deposits, a liquid assets ratio of 15 percent

Accepted Answer

A) would require $27.00 in cash and liquid government securities. 
B) would require $27.00 in liquid government securities. 
C) would require $30.00 in cash and liquid government securities. 
D) would require $30.00 in liquid government securities. 
E) None of the above. 
A) would require $27.00 in cash and liquid government securities. 
B) would require $27.00 in liquid government securities. 
C) would require $30.00 in cash and liquid government securities. 
D) would require $30.00 in liquid government securities. 
E) None of the above.

Question 2

Because MMDAs are in direct competition with MMMFs, the withdrawal rate is affected by the relative amount of explicit interest paid on these accounts.

Accepted Answer

A) True 
 B)False

Question 3

One method of reducing the risk of a liquidity crisis for an FI to efficiently manage liquid asset positions.

Accepted Answer

A) True 
 B)False

Question 4

Michelle has maintained an average balance of $300 per month for the first three months of the year, $800 per month for the next three months, and $1,000 per month for the final six months of the year in a NOW account. It requires a minimum balance of $500 to be maintained if annual interest of 5 percent is to be earned. She writes an average of 25 checks per month but the account does not have a service charge for checks although it costs the bank 10 cents to process each check.
-What is the average return earned (explicit and implicit) by her over the year?

Accepted Answer

A) 6.33%. 
B) 9.67%. 
C) 8.39%. 
D) 9.53%. 
E) 7.01%. 
A) 6.33%. 
B) 9.67%. 
C) 8.39%. 
D) 9.53%. 
E) 7.01%.

Question 5

In the U.S., excess reserves held at the central bank pay interest to the DI.

Accepted Answer

A) True 
 B)False

Question 6

The increased securitization of bank loans has reduced the liquidity of bank assets.

Accepted Answer

A) True 
 B)False

Question 7

What is the average daily reserve required to be held by the bank for their demand deposits during the maintenance period? Suppose that the rules require no reserves for the first $11.5 million, 3 percent for amounts between $11.5 million and $71.0 million, and 10 percent thereafter.

Accepted Answer

A) $24.285 million. 
B) $28.862 million. 
C) $29.555 million. 
D) $31.561 million. 
E) $32.069 million. 
A) $24.285 million. 
B) $28.862 million. 
C) $29.555 million. 
D) $31.561 million. 
E) $32.069 million.

Question 8

Required reserve ratios in the U.S. for demand deposits are

Accepted Answer

A) 0 percent, 3 percent, and 10 percent. 
B) 10 percent on all deposits. 
C) 3 percent on all deposits. 
D) 0 percent on all deposits. 
E) 0 percent and 3 percent. 
A) 0 percent, 3 percent, and 10 percent. 
B) 10 percent on all deposits. 
C) 3 percent on all deposits. 
D) 0 percent on all deposits. 
E) 0 percent and 3 percent.

Question 9

Managing liabilities as a means of managing liquidity risk involves the tradeoff between lower funding cost and higher risk of withdrawals.

Accepted Answer

A) True 
 B)False

Question 10

Since 1998, interest rate variability in the fed funds market has decreased because

Accepted Answer

A) fewer institutions were allowed to participate in the fed funds market. 
B) of the introduction of lagged reserve accounting. 
C) new securities were approved that participants can use instead of fed funds to meet liquidity needs. 
D) of the introduction of contemporaneous reserve accounting. 
E) more participants were allowed to enter the fed funds market. 
A) fewer institutions were allowed to participate in the fed funds market. 
B) of the introduction of lagged reserve accounting. 
C) new securities were approved that participants can use instead of fed funds to meet liquidity needs. 
D) of the introduction of contemporaneous reserve accounting. 
E) more participants were allowed to enter the fed funds market.

Question 11

If the fees charged on demand deposit accounts do not cover the cost of providing demand deposit services, the bank receives a subsidy or implicit interest payment.

Accepted Answer

A) True 
 B)False

Question 12

The weekend game is

Accepted Answer

A) a strategy to reduce bank interest rate risk exposure. 
B) a strategy to reduce bank liquidity risk exposure. 
C) a strategy to reduce the cost of meeting reserve requirements. 
D) the buying and selling of Fed funds late Friday afternoon. 
E) the triple witching effect on the third Friday of the month. 
A) a strategy to reduce bank interest rate risk exposure. 
B) a strategy to reduce bank liquidity risk exposure. 
C) a strategy to reduce the cost of meeting reserve requirements. 
D) the buying and selling of Fed funds late Friday afternoon. 
E) the triple witching effect on the third Friday of the month.

Question 13

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 (both explicit and implicit) earned by the account holder if the bank pays interest on only the amounts in excess of the required minimum of $200?

Accepted Answer

A) 2.01 percent. 
B) 2.65 percent. 
C) 3.78 percent. 
D) 5.35 percent. 
E) 6.13 percent. 
A) 2.01 percent. 
B) 2.65 percent. 
C) 3.78 percent. 
D) 5.35 percent. 
E) 6.13 percent.

Question 14

Excessive amounts of liquid asset holdings can penalize the earnings of a DI.

Accepted Answer

A) True 
 B)False

Question 15

If over the first 12 days of the current reserve maintenance period the average daily reserve held were $37 million, what does the bank need to hold as reserves over the last two days to meet the minimum reserve?

Accepted Answer

A) $33.92 million. 
B) $41.23 million. 
C) $51.19 million. 
D) $47.23 million. 
E) $46.05 million. 
A) $33.92 million. 
B) $41.23 million. 
C) $51.19 million. 
D) $47.23 million. 
E) $46.05 million.

Question 16

Passbook savings accounts normally receive a lower interest rate than NOW accounts.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is an outcome of an increase in the reserve requirement ratio?

Accepted Answer

A) DIs may hold fewer reserves against their transaction accounts. 
B) DIs are able to lend out a greater percentage of their deposits. 
C) Increased credit availability in the economy. 
D) DIs are only able to lend a smaller percentage of their deposits than before. 
E) A multiplier effect on the supply of DI deposits and thus the money supply. 
A) DIs may hold fewer reserves against their transaction accounts. 
B) DIs are able to lend out a greater percentage of their deposits. 
C) Increased credit availability in the economy. 
D) DIs are only able to lend a smaller percentage of their deposits than before. 
E) A multiplier effect on the supply of DI deposits and thus the money supply.

Question 18

The maximum reserves that will count toward the next reserve maintenance period, September 23 to October 6, is

Accepted Answer

A) $44.565 million. 
B) $42.406 million. 
C) $45.565 million. 
D) $40.406 million. 
E) $41.406 million. 
A) $44.565 million. 
B) $42.406 million. 
C) $45.565 million. 
D) $40.406 million. 
E) $41.406 million.

Question 19

Reliance on purchased or borrowed funds will largely eliminate the liquidity risk faced by a bank.

Accepted Answer

A) True 
 B)False

Question 20

Federal funds are excess reserves held by the Federal Reserve Banks that are loaned to banks that have liquidity needs.

Accepted Answer

A) True 
 B)False

Exam 18: Liability and Liquidity Management

For a DI in the U.S. with $200 in assets and $180 in deposits, a liquid assets ratio of 15 percent

Because MMDAs are in direct competition with MMMFs, the withdrawal rate is affected by the relative amount of explicit interest paid on these accounts.

One method of reducing the risk of a liquidity crisis for an FI to efficiently manage liquid asset positions.

In the U.S., excess reserves held at the central bank pay interest to the DI.

The increased securitization of bank loans has reduced the liquidity of bank assets.

What is the average daily reserve required to be held by the bank for their demand deposits during the maintenance period? Suppose that the rules require no reserves for the first $11.5 million, 3 percent for amounts between $11.5 million and $71.0 million, and 10 percent thereafter.

Required reserve ratios in the U.S. for demand deposits are

Managing liabilities as a means of managing liquidity risk involves the tradeoff between lower funding cost and higher risk of withdrawals.

Since 1998, interest rate variability in the fed funds market has decreased because

If the fees charged on demand deposit accounts do not cover the cost of providing demand deposit services, the bank receives a subsidy or implicit interest payment.

The weekend game is

Excessive amounts of liquid asset holdings can penalize the earnings of a DI.

If over the first 12 days of the current reserve maintenance period the average daily reserve held were $37 million, what does the bank need to hold as reserves over the last two days to meet the minimum reserve?

Passbook savings accounts normally receive a lower interest rate than NOW accounts.

Which of the following is an outcome of an increase in the reserve requirement ratio?

The maximum reserves that will count toward the next reserve maintenance period, September 23 to October 6, is

Reliance on purchased or borrowed funds will largely eliminate the liquidity risk faced by a bank.

Federal funds are excess reserves held by the Federal Reserve Banks that are loaned to banks that have liquidity needs.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

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