Question 1

Because the minimum amount of a negotiable wholesale CD is $100,000, holders of these CDs are fully covered by FDIC insurance.

Accepted Answer

A) True 
 B)False

Question 2

Over the past 30 years in the DI industry

Accepted Answer

A) the loan portfolio has become more liquid because of increased securitization. 
B) lower amounts of very liquid assets need to be held to manage withdrawal risk. 
C) more opportunities exist for raising funds that are not deposit related. 
D) DIs have intentionally managed liabilities to reduce withdrawal risk. 
E) All of the above. 
A) the loan portfolio has become more liquid because of increased securitization. 
B) lower amounts of very liquid assets need to be held to manage withdrawal risk. 
C) more opportunities exist for raising funds that are not deposit related. 
D) DIs have intentionally managed liabilities to reduce withdrawal risk. 
E) All of the above.

Question 3

Because investment banks typically buy and sell securities on a regular basis; they have no need for a liability management plan.

Accepted Answer

A) True 
 B)False

Question 4

The concept of constrained optimization facing an FI manager involving the minimum amount of liquid reserve assets required by regulators may

Accepted Answer

A) penalize the FI if the minimum amount is less than the amount warranted by the actual withdrawal risk. 
B) benefit the FI if the minimum amount is more than is warranted by actual withdrawal risk. 
C) lead to increased withdrawals by depositors that do not meet the minimum requirement. 
D) assist the FI manager by providing an optimal target amount of reserves that will exactly match withdrawal expectations. 
E) None of the above. 
A) penalize the FI if the minimum amount is less than the amount warranted by the actual withdrawal risk. 
B) benefit the FI if the minimum amount is more than is warranted by actual withdrawal risk. 
C) lead to increased withdrawals by depositors that do not meet the minimum requirement. 
D) assist the FI manager by providing an optimal target amount of reserves that will exactly match withdrawal expectations. 
E) None of the above.

Question 5

Which of the following liabilities have a high degree of withdrawal risk?

Accepted Answer

A) Passbook savings. 
B) NOW Accounts. 
C) Demand deposits. 
D) Time deposits. 
E) Wholesale CDs. 
A) Passbook savings. 
B) NOW Accounts. 
C) Demand deposits. 
D) Time deposits. 
E) Wholesale CDs.

Question 6

NOW accounts are potentially less prone to withdrawal risk than demand deposits.

Accepted Answer

A) True 
 B)False

Question 7

Implicit interest involves the process of crediting the interest payment directly to a deposit account as opposed to sending an explicit interest check to the customer.

Accepted Answer

A) True 
 B)False

Question 8

The minimum daily average reserve requirement is computed by

Accepted Answer

A) multiplying the reserve ratio by the daily closing deposit balance. 
B) multiplying the reserve ratio by the daily average closing deposit balance. 
C) dividing the reserve ratio by the daily average closing deposit balance. 
D) dividing the reserve ratio by the daily closing deposit balance. 
E) adding up daily closing deposit balances and dividing by 14. 
A) multiplying the reserve ratio by the daily closing deposit balance. 
B) multiplying the reserve ratio by the daily average closing deposit balance. 
C) dividing the reserve ratio by the daily average closing deposit balance. 
D) dividing the reserve ratio by the daily closing deposit balance. 
E) adding up daily closing deposit balances and dividing by 14.

Question 9

In October 2008, the opportunity cost of holding excess reserves for U.S. DIs

Accepted Answer

A) increased because new reserve requirements imposed by the Federal Reserve as a result of the financial crisis. 
B) decreased because subsidiary DIs were first allowed to issue commercial paper directly, rather than through the parent holding company. 
C) decreased because the Federal Reserve began to pay interest to DIs on excess reserves held at the Fed. 
D) increased because the Federal Reserve no longer accepted government securities as meeting excess reserve requirements. 
E) None of the above. 
A) increased because new reserve requirements imposed by the Federal Reserve as a result of the financial crisis. 
B) decreased because subsidiary DIs were first allowed to issue commercial paper directly, rather than through the parent holding company. 
C) decreased because the Federal Reserve began to pay interest to DIs on excess reserves held at the Fed. 
D) increased because the Federal Reserve no longer accepted government securities as meeting excess reserve requirements. 
E) None of the above.

Question 10

Which of the following liability products does NOT include transaction privileges?

Accepted Answer

A) Demand deposit accounts. 
B) NOW accounts. 
C) Passbook savings accounts. 
D) Money market deposit accounts. 
E) All of the above have transaction privileges. 
A) Demand deposit accounts. 
B) NOW accounts. 
C) Passbook savings accounts. 
D) Money market deposit accounts. 
E) All of the above have transaction privileges.

Question 11

Is the bank in compliance with the requirements?

Accepted Answer

A) No, it does not meet the minimum reserve requirements. 
B) Yes, it meets the minimum reserve requirements. 
C) Yes, it meets the minimum requirement only after using the 2 percent carryover allowance. 
D) Yes, it meets the minimum requirement only after using the 4 percent carryover allowance. 
E) No, it does not meet the minimum reserve requirements even after using the 4 percent carryover allowance. 
A) No, it does not meet the minimum reserve requirements. 
B) Yes, it meets the minimum reserve requirements. 
C) Yes, it meets the minimum requirement only after using the 2 percent carryover allowance. 
D) Yes, it meets the minimum requirement only after using the 4 percent carryover allowance. 
E) No, it does not meet the minimum reserve requirements even after using the 4 percent carryover allowance.

Question 12

Up to six percent of excess reserves may be carried forward to the next reserve maintenance period.

Accepted Answer

A) True 
 B)False

Question 13

Under contemporaneous reserve accounting, there is a seven day reserve maintenance period.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following is a mechanism used by DI managers to impact withdrawal rates of NOW accounts.

Accepted Answer

A) Implicit interest payments. 
B) Minimum balance requirements. 
C) Explicit interest payments. 
D) All of the above. 
E) There is no way to impact withdrawal rates. 
A) Implicit interest payments. 
B) Minimum balance requirements. 
C) Explicit interest payments. 
D) All of the above. 
E) There is no way to impact withdrawal rates.

Question 15

Because retail CDs have fixed maturities, FI managers always should have perfect information regarding the scheduling of interest and principal payments.

Accepted Answer

A) True 
 B)False

Question 16

Banks often convert on-balance-sheet bankers acceptances into off-balance-sheet letters of credit for the purpose of minimizing total assets and thus improving performance ratios such as ROA.

Accepted Answer

A) True 
 B)False

Question 17

Although they are subject to reserve requirements, many DIs have begun to issue medium-term notes because they are a stable source of funds.

Accepted Answer

A) True 
 B)False

Question 18

The largest dollar volume of money market securities is

Accepted Answer

A) negotiable CDs. 
B) commercial paper. 
C) bankers acceptances. 
D) U.S.T-Bills. 
E) repurchase agreements. 
A) negotiable CDs. 
B) commercial paper. 
C) bankers acceptances. 
D) U.S.T-Bills. 
E) repurchase agreements.

Question 19

Federal Reserve primary credit loans available to DIs are generally at rates lower than the federal funds target rate.

Accepted Answer

A) True 
 B)False

Question 20

Under contemporaneous reserve accounting the

Accepted Answer

A) reserve maintenance period is two days longer than the reserve computation period. 
B) reserve maintenance period starts two days after the start of the reserve computation period. 
C) reserve computation period starts two days after the start of the reserve maintenance period. 
D) reserve computation period starts on the same date as the reserve maintenance period. 
E) reserve computation period is two days longer than the reserve maintenance period. 
A) reserve maintenance period is two days longer than the reserve computation period. 
B) reserve maintenance period starts two days after the start of the reserve computation period. 
C) reserve computation period starts two days after the start of the reserve maintenance period. 
D) reserve computation period starts on the same date as the reserve maintenance period. 
E) reserve computation period is two days longer than the reserve maintenance period.

Exam 18: Liability and Liquidity Management

Because the minimum amount of a negotiable wholesale CD is $100,000, holders of these CDs are fully covered by FDIC insurance.

Over the past 30 years in the DI industry

Because investment banks typically buy and sell securities on a regular basis; they have no need for a liability management plan.

The concept of constrained optimization facing an FI manager involving the minimum amount of liquid reserve assets required by regulators may

Which of the following liabilities have a high degree of withdrawal risk?

NOW accounts are potentially less prone to withdrawal risk than demand deposits.

Implicit interest involves the process of crediting the interest payment directly to a deposit account as opposed to sending an explicit interest check to the customer.

The minimum daily average reserve requirement is computed by

In October 2008, the opportunity cost of holding excess reserves for U.S. DIs

Which of the following liability products does NOT include transaction privileges?

Is the bank in compliance with the requirements?

Up to six percent of excess reserves may be carried forward to the next reserve maintenance period.

Under contemporaneous reserve accounting, there is a seven day reserve maintenance period.

Which of the following is a mechanism used by DI managers to impact withdrawal rates of NOW accounts.

Because retail CDs have fixed maturities, FI managers always should have perfect information regarding the scheduling of interest and principal payments.

Banks often convert on-balance-sheet bankers acceptances into off-balance-sheet letters of credit for the purpose of minimizing total assets and thus improving performance ratios such as ROA.

Although they are subject to reserve requirements, many DIs have begun to issue medium-term notes because they are a stable source of funds.

The largest dollar volume of money market securities is

Federal Reserve primary credit loans available to DIs are generally at rates lower than the federal funds target rate.

Under contemporaneous reserve accounting the

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