Exam 18: Liability and Liquidity Management

FIs participating in the fed funds market, either buying or selling, are usually able to do so without amount or maturity restrictions.

Holding small amounts of liquid assets could cause an FI to be unable to meet the claims of liability holders.

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

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. -Suppose the minimum balance to earn interest was lowered from $500 to $300 and she now pays a service charge of 5 cents per check. Note that it costs the bank 10 cents to process each check. What is her annual gross interest return?

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 reserve to be maintained with fed?

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

Which of the following rankings of liabilities is correct if they are ranked by withdrawal risk from riskiest to least risky?

Excessive illiquidity can result in an FI's inability to meet required payments on liability claims and, at the extreme, in insolvency.

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 (explicit and implicit) earned by her if the bank pays interest only on the amounts in excess of the required minimum of $500?

One cost of demand deposits to DIs is the reserve requirement placed on the bank by the Federal Reserve.

A strategy to lower deposits on Fridays can lower reserve requirements for a bank.

Why do FIs face a return or interest earnings penalty by holding large amounts of assets such as cash, T-bills, and T-bonds to reduce liquidity risk?

The Federal Reserve allows the DI to make up to a _____ daily average error without penalty.

Which of the following is the result of using "sweep accounts" in which high reserve ratio demand deposits are "swept" out of customers' accounts on Friday into higher interest-bearing savings accounts?

The DI can influence the withdrawal rates of NOW accounts through explicit interest payments, implicit interest payments, or minimum balance requirements.

Managing a bank's reserve position requires knowing only the target reserve ratio and the period over which reserves must be maintained.

The reserve computation period for determining required reserves covers the 14 days of a two-week period that runs from Monday to Monday.

For reserve computation purposes, Friday balances

Short-term CDs often are priced competitively with T-bills of similar maturity.

Medium term notes issued by a U.S. DI