Question 1

If purchased 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.

Question 2

The liquidity index should be a number that is either greater than one or less than zero.

Accepted Answer

A) True 
 B)False

Question 3

A bank must be ready to pay out all demand deposit liabilities on any given day.

Accepted Answer

A) True 
 B)False

Question 4

The cost of stored liquidity management is the interest that must be paid on the stored funds.

Accepted Answer

A) True 
 B)False

Question 5

An FI's most liquid asset is cash.

Accepted Answer

A) True 
 B)False

Question 6

In a crisis, which of the following are relatively less likely to withdraw funds quickly from banks and thrifts?

Accepted Answer

A)  Correspondent banks.
B)  Small business corporations.
C)  Individual depositors.
D)  Mutual funds.
E)  Pension funds.

Question 7

Net asset value is the current value of a mutual fund's assets divided by the number of shares outstanding.

Accepted Answer

A) True 
 B)False

Question 8

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 purchased liquidity management strategy is adopted?

Accepted Answer

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

Question 9

For life insurance companies, the distribution of premium income minus policyholder liquidations is unpredictable.

Accepted Answer

A) True 
 B)False

Question 10

Insurance companies have had to deal with liability runs by policyholders.

Accepted Answer

A) True 
 B)False

Question 11

Purchased liquidity risk management usually involves purchased funds such as fed funds, repurchase agreements and CDs.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is NOT included as high-quality liquid assets when computing a liquidity coverage ratio?

Accepted Answer

A)  Sovereign debt.
B)  Bank capital.
C)  Government guaranteed mortgage-backed securities.
D)  Central bank reserves.
E)  Cash.

Question 13

Which intermediation function results in an FI's exposure to liquidity risk?

Accepted Answer

A)  Information production.
B)  Asset transformation.
C)  Conduit for monetary policy.
D)  Lender of last resort.
E)  Brokering between funds deficit units and funds surplus units.

Question 14

Liquidity risk for an FI includes the possibility of an unexpected inflow of funds.

Accepted Answer

A) True 
 B)False

Question 15

Deposit insurance is the only deterrent to bank runs, contagious runs, and bank panics.

Accepted Answer

A) True 
 B)False

Question 16

In general, money center banks are exposed to less liquidity risk than smaller, regional banks.

Accepted Answer

A) True 
 B)False

Question 17

Why have purchased liquidity management techniques become very popular in spite of its limitations?

Accepted Answer

A)  Because it insulates the assets of an FI from normal drains on liability liquidity.
B)  Because funds can be easily raised in the eventuality of a liquidity crunch.
C)  Because of decrease in the cost of funds during periods of high interest rate volatility.
D)  Because the funds are covered by deposit insurance.
E)  Because the adjustment to the deposit drain occurs on the liability side of the balance sheet.

Question 18

Which of the following is NOT a primary source of liquidity?

Accepted Answer

A)  Excess cash reserves over and above regulatory reserve requirements.
B)  Borrowings in the money market.
C)  Borrowings in the purchased funds market.
D)  Capital notes and other long-term financing alternatives.
E)  Cash-type assets that can be sold with little price risk and low transaction costs.

Question 19

What is the asset adjustment to a bank's balance sheet if the bank sold a five-year, 7 percent annual coupon $100,000 bond acquired at par, but now yielding 8 percent? The bond was not in the mark-to-market portfolio.

Accepted Answer

A)  A $96,007 reduction in assets.
B)  A $96,007 increase in assets.
C)  A $100,000 reduction in assets.
D)  A $100,000 increase in assets.
E)  A $100,000 increase in liabilities.

Question 20

-If the bank experiences a $50,000 sudden liquidity drain caused by a loan commitment draw down, what will be the impact on the balance sheet if stored liquidity management techniques are used?

Accepted Answer

A)  A reduction in cash of $21,000 and an increase in demand deposits of $29,000.
B)  A reduction in securities and/or current loans totaling $50,000.
C)  A reduction in cash of $21,000 and a decrease in securities holdings of $29,000.
D)  A decrease in equity of $50,000.
E)  A decrease in lending of $50,000.

Exam 12: Liquidity Risk

Correct Answer
verified

Which intermediation function results in an FI's exposure to liquidity risk?

Correct Answer
verified

The liquidity index should be a number that is either greater than one or less than zero.

Correct Answer
verified

Which of the following is NOT a primary source of liquidity?

Correct Answer
verified

Net asset value is the current value of a mutual fund's assets divided by the number of shares outstanding.

Correct Answer
verified

Liquidity risk for an FI includes the possibility of an unexpected inflow of funds.

Correct Answer
verified

Purchased liquidity risk management usually involves purchased funds such as fed funds, repurchase agreements and CDs.

Correct Answer
verified

A bank must be ready to pay out all demand deposit liabilities on any given day.

Correct Answer
verified

In a crisis, which of the following are relatively less likely to withdraw funds quickly from banks and thrifts?

Correct Answer
verified

-If the bank experiences a $50,000 sudden liquidity drain caused by a loan commitment draw down, what will be the impact on the balance sheet if stored liquidity management techniques are used?

Correct Answer
verified

Deposit insurance is the only deterrent to bank runs, contagious runs, and bank panics.

Correct Answer
verified

The cost of stored liquidity management is the interest that must be paid on the stored funds.

Correct Answer
verified

For life insurance companies, the distribution of premium income minus policyholder liquidations is unpredictable.

Correct Answer
verified

Insurance companies have had to deal with liability runs by policyholders.

Correct Answer
verified

In general, money center banks are exposed to less liquidity risk than smaller, regional banks.

Correct Answer
verified

Why have purchased liquidity management techniques become very popular in spite of its limitations?

Correct Answer
verified

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

Correct Answer
verified

Which of the following is NOT included as high-quality liquid assets when computing a liquidity coverage ratio?

Correct Answer
verified

What is the asset adjustment to a bank's balance sheet if the bank sold a five-year, 7 percent annual coupon $100,000 bond acquired at par, but now yielding 8 percent? The bond was not in the mark-to-market portfolio.

Correct Answer
verified

An FI's most liquid asset is cash.

Correct Answer
verified

Exam 12: Liquidity Risk

Correct AnswerverifiedShow Answer

Which intermediation function results in an FI's exposure to liquidity risk?

Correct AnswerverifiedShow Answer

The liquidity index should be a number that is either greater than one or less than zero.

Correct AnswerverifiedShow Answer

Which of the following is NOT a primary source of liquidity?

Correct AnswerverifiedShow Answer

Net asset value is the current value of a mutual fund's assets divided by the number of shares outstanding.

Correct AnswerverifiedShow Answer

Liquidity risk for an FI includes the possibility of an unexpected inflow of funds.

Correct AnswerverifiedShow Answer

Purchased liquidity risk management usually involves purchased funds such as fed funds, repurchase agreements and CDs.

Correct AnswerverifiedShow Answer

A bank must be ready to pay out all demand deposit liabilities on any given day.

Correct AnswerverifiedShow Answer

In a crisis, which of the following are relatively less likely to withdraw funds quickly from banks and thrifts?

Correct AnswerverifiedShow Answer

-If the bank experiences a $50,000 sudden liquidity drain caused by a loan commitment draw down, what will be the impact on the balance sheet if stored liquidity management techniques are used?

Correct AnswerverifiedShow Answer

Deposit insurance is the only deterrent to bank runs, contagious runs, and bank panics.

Correct AnswerverifiedShow Answer

The cost of stored liquidity management is the interest that must be paid on the stored funds.

Correct AnswerverifiedShow Answer

For life insurance companies, the distribution of premium income minus policyholder liquidations is unpredictable.

Correct AnswerverifiedShow Answer

Insurance companies have had to deal with liability runs by policyholders.

Correct AnswerverifiedShow Answer

In general, money center banks are exposed to less liquidity risk than smaller, regional banks.

Correct AnswerverifiedShow Answer

Why have purchased liquidity management techniques become very popular in spite of its limitations?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following is NOT included as high-quality liquid assets when computing a liquidity coverage ratio?

Correct AnswerverifiedShow Answer

What is the asset adjustment to a bank's balance sheet if the bank sold a five-year, 7 percent annual coupon $100,000 bond acquired at par, but now yielding 8 percent? The bond was not in the mark-to-market portfolio.

Correct AnswerverifiedShow Answer

An FI's most liquid asset is cash.

Correct AnswerverifiedShow Answer

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