Exam 18: Liability and Liquidity Management

An FI offers a $2,500 minimum balance NOW account paying 4 percent annual interest, and there are no service charges as long as the customer maintains the minimum balance. The customer maintains a balance of $5,000, and averages 750 checks per year. Each check has a processing cost to the FI of $0.15. What is the annual gross interest return on this account to the customer?

Under the lagged reserve accounting system, the

The interbank funds market is a potential source for increasing reserves to meet required reserves.

A DI offers a $500 minimum balance NOW account paying 5.5 percent annual interest. The account has a service charge of $0.05 per check, and processing costs per check are $0.15. The customer maintains a balance of $1,000, and averages 150 checks per year. What is the annual gross interest return on this account to the customer?

Passbook savings accounts are less liquid than demand deposit accounts.

Wholesale certificates of deposit

In the U.S., MMDAs typically are transaction accounts without limitations on the size or number of checks or transfers that can occur each month.

Which of the following is considered to be the most liquid asset?

Funding costs generally are positively related to the period of time the liability remains on the balance sheet.

Regulators in the U.S. do not allow government securities to perform the role of a required reserve.

Deposits with low withdrawal risk typically are the lowest cost deposits for a DI.

One method of increasing reserves to meet a reserve target is to sell liquid assets.

The interest rate paid on money market deposit accounts by U.S. DIs must directly reflect the rates earned on investments in commercial paper, bankers acceptances, repurchase agreement, and T-bills.

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?

The negotiable instrument characteristic of large wholesale CDs effectively eliminates the adverse withdrawal risk for the bank.

A liquid asset can be converted to cash quickly, but will require a discount from market value.

Why are passbook savings generally less liquid than demand deposits and NOW accounts?

The penalty for undershooting the minimum reserve requirements may include explicit interest rate charges as well as implicit costs in the form of more frequent monitoring and examinations.

Most large banks in the U.S. directly issue commercial paper to meet their liquidity needs.

Fed funds are subject to settlement risk, but have little or no early withdrawal risk.