Question 1

During the financial crisis of 2008, there were large deposit inflows to the banking system.

Accepted Answer

A) True 
 B)False

Question 2

Even with liquidity planning, net deposit withdrawals and/or the exercise of loan commitments can pose significant liquidity problems for banks.

Accepted Answer

A) True 
 B)False

Question 3

Bank runs occur because customers know that banks will be forced to liquidate assets at fire-sale prices.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following is a condition for a DI to be growing?

Accepted Answer

A) Net positive drain on deposits. 
B) Peak of the net deposit drain probability distribution should lie at a point to the right of zero. 
C) Average deposit drain such that new deposit funds more than offset deposit withdrawals. 
D) The liability side of its balance sheet is decreasing. 
E) Unused loan commitments is increasing. 
A) Net positive drain on deposits. 
B) Peak of the net deposit drain probability distribution should lie at a point to the right of zero. 
C) Average deposit drain such that new deposit funds more than offset deposit withdrawals. 
D) The liability side of its balance sheet is decreasing. 
E) Unused loan commitments is increasing.

Question 5

Liquidity risk for a life insurance company only occurs when asset returns do not provide sufficient cash flows to meet policyholder liquidations.

Accepted Answer

A) True 
 B)False

Question 6

What information does the net liquidity statement provide?

Accepted Answer

A) A long-term focus on liquidity. 
B) Sources and uses of liquidity. 
C) Net asset value. 
D) Liquidity index information. 
E) Peer group ratio comparison. 
A) A long-term focus on liquidity. 
B) Sources and uses of liquidity. 
C) Net asset value. 
D) Liquidity index information. 
E) Peer group ratio comparison.

Question 7

Mutual funds tend to have less exposure to liquidity risk than banks and thrifts.

Accepted Answer

A) True 
 B)False

Question 8

In the event of financial distress, open-ended mutual fund investors

Accepted Answer

A) have an incentive to cash in their shares quickly since they are paid on a first come, first served basis. 
B) have an incentive to avoid a run since that will deplete the fund net asset value. 
C) have an incentive to cash in their shares quickly since that will increase the fund's net asset value. 
D) will switch into low risk bank deposits. 
E) have an incentive to avoid a run since the Federal Reserve guarantees mutual fund holdings. 
A) have an incentive to cash in their shares quickly since they are paid on a first come, first served basis. 
B) have an incentive to avoid a run since that will deplete the fund net asset value. 
C) have an incentive to cash in their shares quickly since that will increase the fund's net asset value. 
D) will switch into low risk bank deposits. 
E) have an incentive to avoid a run since the Federal Reserve guarantees mutual fund holdings.

Question 9

It is impossible for money market mutual fund share prices to fall below $1.00.

Accepted Answer

A) True 
 B)False

Question 10

Banks with relatively high loan commitments face less liquidity risk exposure than banks with a low level of loan commitments.

Accepted Answer

A) True 
 B)False

Question 11

Asset-side liquidity risk may be a result of OBS lending commitments.

Accepted Answer

A) True 
 B)False

Question 12

Depository institutions generally rely on each other for cash and to meet their daily liquidity needs.

Accepted Answer

A) True 
 B)False

Question 13

The assets of PC insurers are relatively short term and more liquid than those of life insurance companies.

Accepted Answer

A) True 
 B)False

Question 14

-If the bank's expected net deposit drain is +4 percent, what is the bank's expected liquidity requirement?

Accepted Answer

A) $7,560. 
B) $6,040. 
C) $16,000. 
D) $22,000. 
E) $14,760. 
A) $7,560. 
B) $6,040. 
C) $16,000. 
D) $22,000. 
E) $14,760.

Question 15

Liquidity planning primarily is designed to assist management in dealing with relatively predictable events.

Accepted Answer

A) True 
 B)False

Question 16

If stored liquidity is used by a DI to fund an exercised loan commitment

Accepted Answer

A) the balance sheet will decrease by the amount of the new loan. 
B) only the asset side of the balance sheet will increase. 
C) the balance sheet will increase by the amount of the new loan. 
D) only the liability side of the balance sheet will increase. 
E) there will be no effect on the balance sheet. 
A) the balance sheet will decrease by the amount of the new loan. 
B) only the asset side of the balance sheet will increase. 
C) the balance sheet will increase by the amount of the new loan. 
D) only the liability side of the balance sheet will increase. 
E) there will be no effect on the balance sheet.

Question 17

When liquidity risk problems occur at a DI, they often threaten the solvency of the institution.

Accepted Answer

A) True 
 B)False

Question 18

An open-end bond mutual fund is holding a three-year, $1 million face value 5 percent annual coupon bond selling at par. What is the impact on the total asset value of the fund of a 1 percent decrease in interest rates?

Accepted Answer

A) A decrease of $10,000. 
B) An increase of $10,000. 
C) A decrease of $26,730. 
D) An increase of $27,751. 
E) The answer depends upon the number of mutual funds shares outstanding. 
A) A decrease of $10,000. 
B) An increase of $10,000. 
C) A decrease of $26,730. 
D) An increase of $27,751. 
E) The answer depends upon the number of mutual funds shares outstanding.

Question 19

The net stable funds ratio (NSFR) is a longer-term measure than the liquidity coverage ratio (LCR).

Accepted Answer

A) True 
 B)False

Question 20

Consider a mutual fund with 100 shareholders who each invested $10 for a total of $1,000. If the assets of the mutual fund are worth $900, what is the net asset value for each one of the mutual fund shares?

Accepted Answer

A) $0.9. 
B) $9. 
C) $90. 
D) $10. 
E) $0.10. 
A) $0.9. 
B) $9. 
C) $90. 
D) $10. 
E) $0.10.

Exam 12: Liquidity Risk

During the financial crisis of 2008, there were large deposit inflows to the banking system.

Even with liquidity planning, net deposit withdrawals and/or the exercise of loan commitments can pose significant liquidity problems for banks.

Bank runs occur because customers know that banks will be forced to liquidate assets at fire-sale prices.

Which of the following is a condition for a DI to be growing?

Liquidity risk for a life insurance company only occurs when asset returns do not provide sufficient cash flows to meet policyholder liquidations.

What information does the net liquidity statement provide?

Mutual funds tend to have less exposure to liquidity risk than banks and thrifts.

In the event of financial distress, open-ended mutual fund investors

It is impossible for money market mutual fund share prices to fall below $1.00.

Banks with relatively high loan commitments face less liquidity risk exposure than banks with a low level of loan commitments.

Asset-side liquidity risk may be a result of OBS lending commitments.

Depository institutions generally rely on each other for cash and to meet their daily liquidity needs.

The assets of PC insurers are relatively short term and more liquid than those of life insurance companies.

-If the bank's expected net deposit drain is +4 percent, what is the bank's expected liquidity requirement?

Liquidity planning primarily is designed to assist management in dealing with relatively predictable events.

If stored liquidity is used by a DI to fund an exercised loan commitment

When liquidity risk problems occur at a DI, they often threaten the solvency of the institution.

An open-end bond mutual fund is holding a three-year, $1 million face value 5 percent annual coupon bond selling at par. What is the impact on the total asset value of the fund of a 1 percent decrease in interest rates?

The net stable funds ratio (NSFR) is a longer-term measure than the liquidity coverage ratio (LCR).

Consider a mutual fund with 100 shareholders who each invested $10 for a total of $1,000. If the assets of the mutual fund are worth $900, what is the net asset value for each one of the mutual fund shares?

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