Question 1

In most countries, regulators often set minimum liquid reserve requirements on FIs.

Accepted Answer

A) True 
 B)False

Question 2

MMDAs are considered to be more liquid than demand deposits and NOW accounts.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following observations is true of the contemporaneous reserve accounting system?

Accepted Answer

A) The reserve computation and reserve maintenance periods do not overlap. 
B) The maintenance period does not begin until seventeen days after the end of the computation period. 
C) It results in a two-day window during which required reserves are known with certainty. 
D) It increases the accuracy of information on aggregate required reserve balances. 
E) It may be used instead of the lagged reserve accounting system. 
A) The reserve computation and reserve maintenance periods do not overlap. 
B) The maintenance period does not begin until seventeen days after the end of the computation period. 
C) It results in a two-day window during which required reserves are known with certainty. 
D) It increases the accuracy of information on aggregate required reserve balances. 
E) It may be used instead of the lagged reserve accounting system.

Question 4

Recently banks have changed the liability structure towards instruments that have less withdrawal risk and higher explicit interest costs.

Accepted Answer

A) True 
 B)False

Question 5

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 Michelle's annual gross interest return?

Accepted Answer

A) $35. 
B) $65. 
C) $70. 
D) $30. 
E) $55. 
A) $35. 
B) $65. 
C) $70. 
D) $30. 
E) $55.

Question 6

Managing the reserve position of a U.S. bank requires knowing

Accepted Answer

A) the target reserve ratio. 
B) the time period over which average deposits are calculated. 
C) the time period over which average reserves must be maintained. 
D) the asset and liability methods that may be used to meet required reserves. 
E) All of the above. 
A) the target reserve ratio. 
B) the time period over which average deposits are calculated. 
C) the time period over which average reserves must be maintained. 
D) the asset and liability methods that may be used to meet required reserves. 
E) All of the above.

Question 7

Currently the reserve maintenance period begins 30 days after the end of the reserve computation period.

Accepted Answer

A) True 
 B)False

Question 8

The following demand deposits and cash reserves at the Fed have been documented by a bank for the computation of reserve requirements (in millions). Note that reserves are vault cash and reserves at the Fed.  
-What are the average daily demand deposit balances over the reserve computation period beginning the week of June 12?

Accepted Answer

A) $286 million. 
B) $296 million. 
C) $306 million. 
D) $326 million. 
E) $352 million. 
A) $286 million. 
B) $296 million. 
C) $306 million. 
D) $326 million. 
E) $352 million.

Question 9

Which of the following observations is NOT true of a liquid asset?

Accepted Answer

A) It can be turned into cash quickly. 
B) Conversion to cash entails low transaction costs. 
C) Conversion to cash happens with little or no loss in principal value. 
D) It is traded in an active market. 
E) Large transactions may move its market price substantially. 
A) It can be turned into cash quickly. 
B) Conversion to cash entails low transaction costs. 
C) Conversion to cash happens with little or no loss in principal value. 
D) It is traded in an active market. 
E) Large transactions may move its market price substantially.

Question 10

Property-casualty insurance companies typically have greater liquidity risk than life insurance companies.

Accepted Answer

A) True 
 B)False

Question 11

Buffer reserves at DIs are

Accepted Answer

A) reserves in excess of the minimum required reserves. 
B) government securities that do not qualify as required reserves, but that can be converted to cash quickly. 
C) the portion of reserves that are calculated at a rate of ten percent of deposits. 
D) non-government securities and loans that must be converted into cash. 
E) the portion of life insurance company assets that require minimum reserves. 
A) reserves in excess of the minimum required reserves. 
B) government securities that do not qualify as required reserves, but that can be converted to cash quickly. 
C) the portion of reserves that are calculated at a rate of ten percent of deposits. 
D) non-government securities and loans that must be converted into cash. 
E) the portion of life insurance company assets that require minimum reserves.

Question 12

The Fed discount window is an appropriate place to borrow reserve shortfalls because of its lower than market rates.

Accepted Answer

A) True 
 B)False

Question 13

A strategy to increase reservable deposits on a Friday and decrease reservable deposits on the following Monday is called the weekend game.

Accepted Answer

A) True 
 B)False

Question 14

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.
-The bank would like to limit the average return (both explicit and implicit) earned by the account holder to 5 percent per year. How much should it charge for processing each check to this Account holder assuming that it will pay annual interest of 5 percent and minimum balances of $200 are maintained?

Accepted Answer

A) 1 cent per check. 
B) 2 cent per check. 
C) 3 cent per check. 
D) 4 cent per check. 
E) 5 cent per check. 
A) 1 cent per check. 
B) 2 cent per check. 
C) 3 cent per check. 
D) 4 cent per check. 
E) 5 cent per check.

Question 15

What is the major distinction between NOW accounts and traditional demand deposits?

Accepted Answer

A) Minimum account balance requirement to earn interest for NOW accounts. 
B) Zero explicit interest on NOW accounts. 
C) Noncheckable nature of NOW accounts. 
D) NOW accounts usually involve physical presence at the institution for withdrawal. 
E) Legal power to delay payment on NOW accounts. 
A) Minimum account balance requirement to earn interest for NOW accounts. 
B) Zero explicit interest on NOW accounts. 
C) Noncheckable nature of NOW accounts. 
D) NOW accounts usually involve physical presence at the institution for withdrawal. 
E) Legal power to delay payment on NOW accounts.

Question 16

Because of penalties imposed for early withdrawal, a CD depositor is unlikely to withdrawal the CD funds from the bank before maturity.

Accepted Answer

A) True 
 B)False

Question 17

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 maximum reserve?

Accepted Answer

A) $125.552 million. 
B) $111.453 million. 
C) $135.690 million. 
D) $141.914 million. 
E) $129.110 million. 
A) $125.552 million. 
B) $111.453 million. 
C) $135.690 million. 
D) $141.914 million. 
E) $129.110 million.

Question 18

By definition, all transaction accounts at U.S. FIs allow account holders to make unlimited withdrawals.

Accepted Answer

A) True 
 B)False

Question 19

What is the average implicit interest rate on a $100,000 account if the bank's average management costs are $2,500 and annual fees average $1,750?

Accepted Answer

A) 4.25 percent. 
B) 2.50 percent. 
C) 1.75 percent. 
D) 0.75 percent. 
E) -0.75 percent. 
A) 4.25 percent. 
B) 2.50 percent. 
C) 1.75 percent. 
D) 0.75 percent. 
E) -0.75 percent.

Question 20

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 exactly meet the reserve requirement?

Accepted Answer

A) $86.42 million. 
B) $91.46 million. 
C) $79.63 million. 
D) $99.14 million. 
E) $87.11 million. 
A) $86.42 million. 
B) $91.46 million. 
C) $79.63 million. 
D) $99.14 million. 
E) $87.11 million.

Exam 18: Liability and Liquidity Management

In most countries, regulators often set minimum liquid reserve requirements on FIs.

MMDAs are considered to be more liquid than demand deposits and NOW accounts.

Which of the following observations is true of the contemporaneous reserve accounting system?

Recently banks have changed the liability structure towards instruments that have less withdrawal risk and higher explicit interest costs.

Managing the reserve position of a U.S. bank requires knowing

Currently the reserve maintenance period begins 30 days after the end of the reserve computation period.

Which of the following observations is NOT true of a liquid asset?

Property-casualty insurance companies typically have greater liquidity risk than life insurance companies.

Buffer reserves at DIs are

The Fed discount window is an appropriate place to borrow reserve shortfalls because of its lower than market rates.

A strategy to increase reservable deposits on a Friday and decrease reservable deposits on the following Monday is called the weekend game.

What is the major distinction between NOW accounts and traditional demand deposits?

Because of penalties imposed for early withdrawal, a CD depositor is unlikely to withdrawal the CD funds from the bank before maturity.

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 maximum reserve?

By definition, all transaction accounts at U.S. FIs allow account holders to make unlimited withdrawals.

What is the average implicit interest rate on a $100,000 account if the bank's average management costs are $2,500 and annual fees average $1,750?

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 exactly meet the reserve requirement?

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

Filters