Question 1

If a bank relies solely on purchased liquidity,the bank will likely

Accepted Answer

A) maintain large amounts of liquid assets. 
B) fund its loan commitments with asset sales. 
C) be required to borrow money at short notice. 
D) be required to raise equity capital quickly. 
E) be forced to liquidate liabilities at fire-sale prices. 
A) maintain large amounts of liquid assets. 
B) fund its loan commitments with asset sales. 
C) be required to borrow money at short notice. 
D) be required to raise equity capital quickly. 
E) be forced to liquidate liabilities at fire-sale prices.

Question 2

Repos and Fed funds borrowed are examples of stored liquidity.

Accepted Answer

A) True 
 B)False

Question 3

Closed-end mutual funds have less need to maintain liquid asset holdings than open-end mutual funds.

Accepted Answer

A) True 
 B)False

Question 4

What are the trade-offs involved between storing liquidity and purchasing liquidity as needed for a bank?

Accepted Answer

Storing liquidity is the conservative ap

Question 5

Stored liquidity management occurs when a DI uses its reserves held at the Federal Reserve to meet the net deposit drain.

Accepted Answer

A) True 
 B)False

Question 6

Bank A has a loan-to-deposit ratio of 110 percent,core deposits equal 55 percent of total assets,and borrowed funds are 25 percent of assets. Bank B has a loan-to-deposit ratio of 80 percent. Core deposits are 65 percent of assets and borrowed funds are 5 percent of assets. Which bank has more liquidity risk? Ceteris paribus,which bank will probably be more profitable when interest rates are low?

Accepted Answer

A) Bank A; Bank A 
B) Bank A; Bank B 
C) Bank B; Bank A 
D) Bank B; Bank B 
E) You can't tell. 
A) Bank A; Bank A 
B) Bank A; Bank B 
C) Bank B; Bank A 
D) Bank B; Bank B 
E) You can't tell.

Question 7

Which of the following statements,if any,is (are)true?
I. Mutual funds never have runs.
II. Funds invested with insurers are as safe as deposits at a bank.
III. Pension funds generally have less liquidity risk than banks.

Accepted Answer

A) All three are true. 
B) Only I is true. 
C) Only II and III are true. 
D) Only III is true. 
E) None of these choices are correct. 
A) All three are true. 
B) Only I is true. 
C) Only II and III are true. 
D) Only III is true. 
E) None of these choices are correct.

Question 8

What are Second National Bank's total uses of liquidity?

Accepted Answer

A) $6,520 
B) $13,500 
C) $14,200 
D) $12,280 
E) $5,760 
A) $6,520 
B) $13,500 
C) $14,200 
D) $12,280 
E) $5,760

Question 9

Which one of the following is a source of liquidity risk for a bank?

Accepted Answer

A) Predicted increase in net deposit drain before Christmas 
B) Maturation of notes payable 
C) Corporation calling in a bond the bank is holding 
D) A natural disaster in the bank's community 
E) None of these choices are correct. 
A) Predicted increase in net deposit drain before Christmas 
B) Maturation of notes payable 
C) Corporation calling in a bond the bank is holding 
D) A natural disaster in the bank's community 
E) None of these choices are correct.

Question 10

The Fed now operates the discount window differently than it used to. What are the major changes?

Accepted Answer

The Fed used to keep the discount rate b

Question 11

Liquidity planning is the only viable method that eliminates liquidity risk from DIs that currently exists.

Accepted Answer

A) True 
 B)False

Question 12

A bank's financing gap is calculated as average loans minus average deposits plus liquid assets.

Accepted Answer

A) True 
 B)False

Question 13

Runs on insurance firms are more likely to occur than runs on banks even in states with guaranty funds for insurers because these funds generally

Accepted Answer

A) lack a permanent reserve fund. 
B) do not repay insurance policyholders immediately. 
C) lack federal government backing. 
D) All of these choices are correct. 
E) None of these choices are correct. 
A) lack a permanent reserve fund. 
B) do not repay insurance policyholders immediately. 
C) lack federal government backing. 
D) All of these choices are correct. 
E) None of these choices are correct.

Question 14

An increasingly positive financing gap can indicate ________ liquidity risk because it may indicate ________ deposits and/or rising loan commitments.

Accepted Answer

A) increasing; increasing 
B) decreasing; decreasing 
C) increasing; decreasing 
D) decreasing; increasing 
A) increasing; increasing 
B) decreasing; decreasing 
C) increasing; decreasing 
D) decreasing; increasing

Question 15

A DI has highly liquid assets if there is a large price difference between immediate fire-sale asset prices and fair market prices of assets.

Accepted Answer

A) True 
 B)False

Question 16

The financing gap is defined as average core deposits minus average borrowed funds.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following can create liquidity risk for a life insurer?
I. Unexpectedly high number of policy surrenders
II. Unexpectedly low number of new policies sold
III. Unexpectedly high insurance claims filed by policyholders

Accepted Answer

A) I only 
B) II only 
C) I and II only 
D) II and III only 
E) I,II,and III 
A) I only 
B) II only 
C) I and II only 
D) II and III only 
E) I,II,and III

Question 18

Explain the relationship between each of the following ratios and liquidity risk.
(a)Loan-to-deposit ratio
(b)Borrowed funds to total assets
(c)Loan commitments to total assets

Accepted Answer

(a)Loan-to-deposit ratio: The higher the

Question 19

The two main reasons why runs on U.S. banks no longer occur are

Accepted Answer

A) reserve requirements and higher bank liquidity ratios. 
B) a required positive financing gap and bank use of purchased liquidity. 
C) the FDIC and the discount window. 
D) insurance funds operated by individual states and tighter bank regulations. 
E) None of these choices are correct. 
A) reserve requirements and higher bank liquidity ratios. 
B) a required positive financing gap and bank use of purchased liquidity. 
C) the FDIC and the discount window. 
D) insurance funds operated by individual states and tighter bank regulations. 
E) None of these choices are correct.

Question 20

The greater the ________ ratio,the more liquid is the institution,ceteris paribus.

Accepted Answer

A) borrowed funds to total assets 
B) core deposits to total assets 
C) loans to deposits 
D) unused commitments to lend to total assets 
E) unused commitments to lend to liquid assets 
A) borrowed funds to total assets 
B) core deposits to total assets 
C) loans to deposits 
D) unused commitments to lend to total assets 
E) unused commitments to lend to liquid assets

Exam 21: Managing Liquidity Risk on the Balance Sheet

If a bank relies solely on purchased liquidity,the bank will likely

Repos and Fed funds borrowed are examples of stored liquidity.

Closed-end mutual funds have less need to maintain liquid asset holdings than open-end mutual funds.

What are the trade-offs involved between storing liquidity and purchasing liquidity as needed for a bank?

Stored liquidity management occurs when a DI uses its reserves held at the Federal Reserve to meet the net deposit drain.

Which of the following statements,if any,is (are)true? I. Mutual funds never have runs. II. Funds invested with insurers are as safe as deposits at a bank. III. Pension funds generally have less liquidity risk than banks.

What are Second National Bank's total uses of liquidity?

Which one of the following is a source of liquidity risk for a bank?

The Fed now operates the discount window differently than it used to. What are the major changes?

Liquidity planning is the only viable method that eliminates liquidity risk from DIs that currently exists.

A bank's financing gap is calculated as average loans minus average deposits plus liquid assets.

Runs on insurance firms are more likely to occur than runs on banks even in states with guaranty funds for insurers because these funds generally

An increasingly positive financing gap can indicate ________ liquidity risk because it may indicate ________ deposits and/or rising loan commitments.

A DI has highly liquid assets if there is a large price difference between immediate fire-sale asset prices and fair market prices of assets.

The financing gap is defined as average core deposits minus average borrowed funds.

Which of the following can create liquidity risk for a life insurer? I. Unexpectedly high number of policy surrenders II. Unexpectedly low number of new policies sold III. Unexpectedly high insurance claims filed by policyholders

Explain the relationship between each of the following ratios and liquidity risk. (a)Loan-to-deposit ratio (b)Borrowed funds to total assets (c)Loan commitments to total assets

The two main reasons why runs on U.S. banks no longer occur are

The greater the ________ ratio,the more liquid is the institution,ceteris paribus.

Introduction

Determinants of Interest Rates

Interest Rates and Security Valuation

The Federal Reserve System, monetary Policy, and Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Stock Markets

Foreign Exchange Markets

Derivative Securities Markets

Commercial Banks: Industry Overview

Commercial Banks Financial Statements and Analysis

Regulation of Commercial Banks

Other Lending Institutions: Savings Institutions, credit Unions, and Finance Companies

Insurance Companies

Securities Firms and Investment Banks

Investment Companies

Pension Funds

Types of Risks Incurred by Financial Institutions

Managing Credit Risk on the Balance Sheet

Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

Managing Risk Off the Balance Sheet With Derivative Securities

Managing Risk Off the Balance Sheet With Loan Sales and Securitization

Filters

An increasingly positive financing gap can indicate liquidity risk because it may indicate deposits and/or rising loan commitments.