Question 1

Federal funds are excess reserves held by the Federal Reserve Banks that are loaned to banks that have liquidity needs.

Accepted Answer

A) True 
 B)False

Question 2

For a DI in the U.S.with $200 in assets and $180 in deposits, a liquid assets ratio of 15 percent

Accepted Answer

A) would require $27.00 in cash and liquid government securities. 
B) would require $27.00 in liquid government securities. 
C) would require $30.00 in cash and liquid government securities. 
D) would require $30.00 in liquid government securities. 
E) None of the options. 
A) would require $27.00 in cash and liquid government securities. 
B) would require $27.00 in liquid government securities. 
C) would require $30.00 in cash and liquid government securities. 
D) would require $30.00 in liquid government securities. 
E) None of the options.

Question 3

In the U.S., a subsidiary bank can issue commercial paper to meet short-term liquidity needs, but the bank's parent holding company cannot.

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

To reduce liquidity risk an FI can efficiently manage the liability structure of its portfolio.

Accepted Answer

A) True 
 B)False

Question 6

What are the average daily demand deposit balances over the reserve computation period beginning the week of June 12?

Accepted Answer

A) $286 million. 
B) $296 million. 
C) $306 million. 
D) $326 million. 
E) $352 million. [Refer to: 18-120] 
A) $286 million. 
B) $296 million. 
C) $306 million. 
D) $326 million. 
E) $352 million. [Refer to: 18-120]

Question 7

If the fees charged on demand deposit accounts do not cover the cost of providing demand deposit services, the bank receives a subsidy or implicit interest payment.

Accepted Answer

A) True 
 B)False

Question 8

In most countries, assets used to satisfy the liquid assets ratio may include liquid government securities.

Accepted Answer

A) True 
 B)False

Question 9

A NOW account requires a minimum monthly balance of $500 if annual interest of 5 percent is to be earned monthly on its deposits.An account holder has maintained an average balance of $300 for the first nine months of the year and $800 for the last three months of the year.She has written an average of 20 checks a month and is not charged for these services.However, it costs the bank $0.02 to process each check. What is the average return earned (both explicit and implicit) by the account holder over the full year if the minimum balance is reduced to $200?

Accepted Answer

A) 2.01 percent. 
B) 2.65 percent. 
C) 3.78 percent. 
D) 5.35 percent. 
E) 6.13 percent. 
A) 2.01 percent. 
B) 2.65 percent. 
C) 3.78 percent. 
D) 5.35 percent. 
E) 6.13 percent.

Question 10

Which of the following is an outcome of an increase in the reserve requirement ratio?

Accepted Answer

A) DIs may hold fewer reserves against their transaction accounts. 
B) DIs are able to lend out a greater percentage of their deposits. 
C) Increased credit availability in the economy. 
D) DIs are only able to lend a smaller percentage of their deposits than before. 
E) A multiplier effect on the supply of DI deposits and thus the money supply. 
A) DIs may hold fewer reserves against their transaction accounts. 
B) DIs are able to lend out a greater percentage of their deposits. 
C) Increased credit availability in the economy. 
D) DIs are only able to lend a smaller percentage of their deposits than before. 
E) A multiplier effect on the supply of DI deposits and thus the money supply.

Question 11

In the U.S., cash reserves necessary to meet deposit reserve requirements typically include vault cash and cash deposits at the Federal Reserve Bank.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following liability products does NOT include transaction privileges?

Accepted Answer

A) Demand deposit accounts. 
B) NOW accounts. 
C) Passbook savings accounts. 
D) Money market deposit accounts. 
E) All of the options have transaction privileges. 
A) Demand deposit accounts. 
B) NOW accounts. 
C) Passbook savings accounts. 
D) Money market deposit accounts. 
E) All of the options have transaction privileges.

Question 13

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. If over the first 12 days of the current reserve maintenance period the average daily reserve held were $37 million, what does the bank need to hold as reserves over the last two days to meet the maximum reserve?

Accepted Answer

A) $125.552 million. 
B) $111.453 million. 
C) $135.690 million. 
D) $141.914 million. 
E) $129.110 million. 
A) $125.552 million. 
B) $111.453 million. 
C) $135.690 million. 
D) $141.914 million. 
E) $129.110 million.

Question 14

Demand deposits

Accepted Answer

A) have the same amount of withdrawal risk as interest-bearing transaction accounts. 
B) have less withdrawal risk than interest-bearing transaction accounts. 
C) have more withdrawal risk than money market demand accounts. 
D) have less withdrawal risk than money market demand accounts. 
E) have the same amount of withdrawal risk as money market demand accounts. 
A) have the same amount of withdrawal risk as interest-bearing transaction accounts. 
B) have less withdrawal risk than interest-bearing transaction accounts. 
C) have more withdrawal risk than money market demand accounts. 
D) have less withdrawal risk than money market demand accounts. 
E) have the same amount of withdrawal risk as money market demand accounts.

Question 15

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?

Accepted Answer

A) $53.75. 
B) $54.63. 
C) $52.06. 
D) $51.54. 
E) $55.37. 
A) $53.75. 
B) $54.63. 
C) $52.06. 
D) $51.54. 
E) $55.37.

Question 16

Regulators in the U.S.do not allow government securities to perform the role of a required reserve.

Accepted Answer

A) True 
 B)False

Question 17

A DI offers a $500 minimum balance NOW account paying 5.5 percent annual interest.The account has a service charge of $0.05 per check, and processing costs per check are $0.15.The customer maintains a balance of $1,000, and averages 150 checks per year.What is the annual gross interest return on this account to the customer?

Accepted Answer

A) $22.50. 
B) $70.00. 
C) $15.00. 
D) $55.00. 
E) $7.50. Gross interest return = [(avg.balance above minimum × explicit interest rate) + (implicit interest)]/avg.balance
GIR = (1,000 × 0.055) + (150 × (0.15 − 0.05)) = $55.00 + $15.00 = $70.00 
A) $22.50. 
B) $70.00. 
C) $15.00. 
D) $55.00. 
E) $7.50. Gross interest return = [(avg.balance above minimum × explicit interest rate) + (implicit interest)]/avg.balance
GIR = (1,000 × 0.055) + (150 × (0.15 − 0.05)) = $55.00 + $15.00 = $70.00

Question 18

The Fed discount window is an appropriate place to borrow reserve shortfalls because of its lower than market rates.

Accepted Answer

A) True 
 B)False

Question 19

The largest dollar volume of money market securities is

Accepted Answer

A) negotiable CDs. 
B) commercial paper. 
C) banker's acceptances. 
D) U.S.T-Bills. 
E) repurchase agreements. 
A) negotiable CDs. 
B) commercial paper. 
C) banker's acceptances. 
D) U.S.T-Bills. 
E) repurchase agreements.

Question 20

The negotiable instrument characteristic of large wholesale CDs effectively eliminates the adverse withdrawal risk for the bank.

Accepted Answer

A) True 
 B)False

Exam 19: Liability and Liquidity Management

Federal funds are excess reserves held by the Federal Reserve Banks that are loaned to banks that have liquidity needs.

For a DI in the U.S.with $200 in assets and $180 in deposits, a liquid assets ratio of 15 percent

In the U.S., a subsidiary bank can issue commercial paper to meet short-term liquidity needs, but the bank's parent holding company cannot.

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

To reduce liquidity risk an FI can efficiently manage the liability structure of its portfolio.

What are the average daily demand deposit balances over the reserve computation period beginning the week of June 12?

If the fees charged on demand deposit accounts do not cover the cost of providing demand deposit services, the bank receives a subsidy or implicit interest payment.

In most countries, assets used to satisfy the liquid assets ratio may include liquid government securities.

Which of the following is an outcome of an increase in the reserve requirement ratio?

In the U.S., cash reserves necessary to meet deposit reserve requirements typically include vault cash and cash deposits at the Federal Reserve Bank.

Which of the following liability products does NOT include transaction privileges?

Demand deposits

Regulators in the U.S.do not allow government securities to perform the role of a required reserve.

The Fed discount window is an appropriate place to borrow reserve shortfalls because of its lower than market rates.

The largest dollar volume of money market securities is

The negotiable instrument characteristic of large wholesale CDs effectively eliminates the adverse withdrawal risk for the bank.

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

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Fintech Risks

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