Question 1

Abnormally large and unexpected deposit withdrawals can occur because of concerns by depositors about a bank's solvency relative to other banks.

Accepted Answer

A) True 
 B)False

Question 2

A disadvantage of using stored liquidity management to manage a FI's liquidity risk is

Accepted Answer

A) the resulting shrinkage of the FI's balance sheet. 
B) the high cost of purchased liabilities. 
C) the accessibility of international money markets. 
D) tax considerations. 
E) loss of flexibility as a result of dependence upon purchased liabilities. 
A) the resulting shrinkage of the FI's balance sheet. 
B) the high cost of purchased liabilities. 
C) the accessibility of international money markets. 
D) tax considerations. 
E) loss of flexibility as a result of dependence upon purchased liabilities.

Question 3

-If the bank decides to cut down on interest expenses by reducing its dependence upon borrowed funds, what policy must the bank follow?

Accepted Answer

A) Manage liquidity risk exclusively through reserve asset management. 
B) Manage liquidity risk exclusively through liability management. 
C) Reduce the bank's dependence upon demand deposits. 
D) Increase interest income by increasing lending. 
E) Increase interest income by increasing securities holdings. 
A) Manage liquidity risk exclusively through reserve asset management. 
B) Manage liquidity risk exclusively through liability management. 
C) Reduce the bank's dependence upon demand deposits. 
D) Increase interest income by increasing lending. 
E) Increase interest income by increasing securities holdings.

Question 4

The average interest earned on the loans is 6 percent and the average cost of deposits is 5 percent. Rising interest rates are expected to reduce the deposits by $3 million. Borrowing more debt will cost the bank 5.5 percent in the short term.
-What will be the cost of using a strategy of purchased liquidity management to meet the expected decline in deposits? Assume that the bank intends to keep $2 million in cash as liquidity precaution.

Accepted Answer

A) $10,000. 
B) $15,000. 
C) $30,000. 
D) $40,000. 
E) $50,000. 
A) $10,000. 
B) $15,000. 
C) $30,000. 
D) $40,000. 
E) $50,000.

Question 5

Government securities represent the reserve asset fund for life insurance companies.

Accepted Answer

A) True 
 B)False

Question 6

-What are the possible ways that the bank can meet an expected net deposit drain of +4 percent using purchased liquidity management techniques?

Accepted Answer

A) Utilize further the Fed funds market. 
B) Utilize repurchase agreements. 
C) Liquidate all cash holdings. 
D) All of the above. 
E) Answers A and B only. 
A) Utilize further the Fed funds market. 
B) Utilize repurchase agreements. 
C) Liquidate all cash holdings. 
D) All of the above. 
E) Answers A and B only.

Question 7

The average interest earned on the loans is 6 percent and the average cost of deposits is 5 percent. Rising interest rates are expected to reduce the deposits by $3 million. Borrowing more debt will cost the bank 5.5 percent in the short term.
-What will be the size of the bank if a stored liquidity management strategy is adopted?

Accepted Answer

A) $9 million. 
B) $11 million. 
C) $12 million. 
D) $14 million. 
E) $15 million. 
A) $9 million. 
B) $11 million. 
C) $12 million. 
D) $14 million. 
E) $15 million.

Question 8

A bank's net deposit drain

Accepted Answer

A) is negative if deposits exceed withdrawals. 
B) is positive if deposits exceed withdrawals. 
C) decreases during holiday and vacation periods. 
D) in unaffected by holiday and vacation periods. 
E) fluctuates unpredictably on any given day. 
A) is negative if deposits exceed withdrawals. 
B) is positive if deposits exceed withdrawals. 
C) decreases during holiday and vacation periods. 
D) in unaffected by holiday and vacation periods. 
E) fluctuates unpredictably on any given day.

Question 9

Hedge funds are not susceptible to liquidity risk or a liquidity crisis.

Accepted Answer

A) True 
 B)False

Question 10

The average interest earned on the loans is 6 percent and the average cost of deposits is 5 percent. Rising interest rates are expected to reduce the deposits by $3 million. Borrowing more debt will cost the bank 5.5 percent in the short term.
-What will be the cost of using a strategy of reducing its asset base to meet the expected decline in deposits? Assume that the bank intends to keep $2 million in cash as a liquidity precaution.

Accepted Answer

A) $10,000. 
B) $15,000. 
C) $30,000. 
D) $40,000. 
E) $50,000. 
A) $10,000. 
B) $15,000. 
C) $30,000. 
D) $40,000. 
E) $50,000.

Question 11

The price at which an open-end investment fund stands ready to redeem existing shares is the

Accepted Answer

A) strike price. 
B) face value. 
C) book value. 
D) net asset value. 
E) net worth. 
A) strike price. 
B) face value. 
C) book value. 
D) net asset value. 
E) net worth.

Question 12

Open-end mutual funds issue a fixed number of shares as liabilities.

Accepted Answer

A) True 
 B)False

Question 13

Which type of financial intermediary is more highly exposed to liquidity risk?

Accepted Answer

A) Property-casualty insurance companies. 
B) Life insurance companies. 
C) Mutual funds. 
D) Depository institutions. 
E) Pension funds. 
A) Property-casualty insurance companies. 
B) Life insurance companies. 
C) Mutual funds. 
D) Depository institutions. 
E) Pension funds.

Question 14

-What are the possible ways that the bank can meet an expected net deposit drain of +4 percent using stored liquidity management techniques?

Accepted Answer

A) Liquidate all cash holdings. 
B) Utilize further the Fed funds market. 
C) Liquidate some securities and/or loans. 
D) Liquidate all cash and use more Fed funds. 
E) All of the above are suitable techniques. 
A) Liquidate all cash holdings. 
B) Utilize further the Fed funds market. 
C) Liquidate some securities and/or loans. 
D) Liquidate all cash and use more Fed funds. 
E) All of the above are suitable techniques.

Question 15

Demand deposits pose a liquidity risk for FIs because funds may be withdrawn at any time.

Accepted Answer

A) True 
 B)False

Question 16

How does purchased liquidity management affect profitability?

Accepted Answer

A) By its impact on the interest rate sensitivity of assets. 
B) By its impact on the interest rate sensitivity of liabilities. 
C) By determining the default risk of investment securities. 
D) By its impact on the cost of purchased funds. 
E) By enhancing the liquidity of assets held. 
A) By its impact on the interest rate sensitivity of assets. 
B) By its impact on the interest rate sensitivity of liabilities. 
C) By determining the default risk of investment securities. 
D) By its impact on the cost of purchased funds. 
E) By enhancing the liquidity of assets held.

Question 17

Which of the following is a measure of the potential losses an FI could suffer as the result of fire-sale disposal of assets?

Accepted Answer

A) Quick ratio. 
B) Liquidity index. 
C) Financing gap and financing requirement. 
D) Peer group ratio. 
E) Current ratio. 
A) Quick ratio. 
B) Liquidity index. 
C) Financing gap and financing requirement. 
D) Peer group ratio. 
E) Current ratio.

Question 18

What is the impact of a 50 basis point increase in interest rates on the net asset value of an open-end bond mutual fund holding a seven year, $100 million face value 7 percent annual coupon bond selling at par? The fund has 10 million shares.

Accepted Answer

A) An increase of $0.24 per share. 
B) A decrease of $0.265 per share. 
C) An increase of $0.05 per share. 
D) A decrease of $0.05 per share. 
E) An increase of $0.265 per sharE. 
A) An increase of $0.24 per share. 
B) A decrease of $0.265 per share. 
C) An increase of $0.05 per share. 
D) A decrease of $0.05 per share. 
E) An increase of $0.265 per sharE.

Question 19

An FI has $5 million in cash reserves with the Fed in excess of its reserve requirements, $5 million in T-Bills, and a credit line of $10 million to borrow in the repo market. It currently has lent $2 million in the Fed Funds market and borrowed $1 million from the Federal discount window to meet its seasonal needs.
-What are the bank's total available sources of liquidity?

Accepted Answer

A) $17 million. 
B) $18 million. 
C) $20 million. 
D) $21 million. 
E) $22 million. 
A) $17 million. 
B) $18 million. 
C) $20 million. 
D) $21 million. 
E) $22 million.

Question 20

Which of the following is NOT a potential causes of liquidity risk for a DI?

Accepted Answer

A) A decrease in the DI's stock price caused by market factors. 
B) An increase in requests to fund large amounts of loan commitments. 
C) A decrease in the availability of short-term borrowed funds. 
D) An increase in requests by depositors to withdrawal large amounts of deposits. 
E) A decrease in asset prices of securities held in the investment portfolio. 
A) A decrease in the DI's stock price caused by market factors. 
B) An increase in requests to fund large amounts of loan commitments. 
C) A decrease in the availability of short-term borrowed funds. 
D) An increase in requests by depositors to withdrawal large amounts of deposits. 
E) A decrease in asset prices of securities held in the investment portfolio.

Exam 12: Liquidity Risk

Abnormally large and unexpected deposit withdrawals can occur because of concerns by depositors about a bank's solvency relative to other banks.

A disadvantage of using stored liquidity management to manage a FI's liquidity risk is

-If the bank decides to cut down on interest expenses by reducing its dependence upon borrowed funds, what policy must the bank follow?

Government securities represent the reserve asset fund for life insurance companies.

-What are the possible ways that the bank can meet an expected net deposit drain of +4 percent using purchased liquidity management techniques?

A bank's net deposit drain

Hedge funds are not susceptible to liquidity risk or a liquidity crisis.

The price at which an open-end investment fund stands ready to redeem existing shares is the

Open-end mutual funds issue a fixed number of shares as liabilities.

Which type of financial intermediary is more highly exposed to liquidity risk?

-What are the possible ways that the bank can meet an expected net deposit drain of +4 percent using stored liquidity management techniques?

Demand deposits pose a liquidity risk for FIs because funds may be withdrawn at any time.

How does purchased liquidity management affect profitability?

Which of the following is a measure of the potential losses an FI could suffer as the result of fire-sale disposal of assets?

What is the impact of a 50 basis point increase in interest rates on the net asset value of an open-end bond mutual fund holding a seven year, $100 million face value 7 percent annual coupon bond selling at par? The fund has 10 million shares.

Which of the following is NOT a potential causes of liquidity risk for a DI?

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

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

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