Question 1

Managing liabilities as a means of managing liquidity risk involves the tradeoff between lower funding cost and higher risk of withdrawals.

Accepted Answer

A) True 
 B)False

Question 2

In the U.S., MMDAs typically are transaction accounts without limitations on the size or number of checks or transfers that can occur each month.

Accepted Answer

A) True 
 B)False

Question 3

The concept of constrained optimization facing an FI manager involving the minimum amount of liquid reserve assets required by regulators may

Accepted Answer

A) penalize the FI if the minimum amount is less than the amount warranted by the actual withdrawal risk. 
B) benefit the FI if the minimum amount is more than is warranted by actual withdrawal risk. 
C) lead to increased withdrawals by depositors that do not meet the minimum requirement. 
D) assist the FI manager by providing an optimal target amount of reserves that will exactly match withdrawal expectations. 
E) None of the options. 
A) penalize the FI if the minimum amount is less than the amount warranted by the actual withdrawal risk. 
B) benefit the FI if the minimum amount is more than is warranted by actual withdrawal risk. 
C) lead to increased withdrawals by depositors that do not meet the minimum requirement. 
D) assist the FI manager by providing an optimal target amount of reserves that will exactly match withdrawal expectations. 
E) None of the options.

Question 4

The weekend game is

Accepted Answer

A) a strategy to reduce bank interest rate risk exposure. 
B) a strategy to reduce bank liquidity risk exposure. 
C) a strategy to reduce the cost of meeting reserve requirements. 
D) the buying and selling of Fed funds late Friday afternoon. 
E) the triple witching effect on the third Friday of the month. 
A) a strategy to reduce bank interest rate risk exposure. 
B) a strategy to reduce bank liquidity risk exposure. 
C) a strategy to reduce the cost of meeting reserve requirements. 
D) the buying and selling of Fed funds late Friday afternoon. 
E) the triple witching effect on the third Friday of the month.

Question 5

Wholesale certificates of deposit

Accepted Answer

A) are less than $100,000 in denomination. 
B) cannot be rolled over prior to maturity. 
C) can be resold on the secondary market. 
D) are sold only to other financial intermediaries. 
E) are covered by Federal deposit insurance. 
A) are less than $100,000 in denomination. 
B) cannot be rolled over prior to maturity. 
C) can be resold on the secondary market. 
D) are sold only to other financial intermediaries. 
E) are covered by Federal deposit insurance.

Question 6

Which of the following observations is true of the contemporaneous reserve accounting system?

Accepted Answer

A) The reserve computation and reserve maintenance periods do not overlap. 
B) The maintenance period does not begin until seventeen days after the end of the computation period. 
C) It results in a two-day window during which required reserves are known with certainty. 
D) It increases the accuracy of information on aggregate required reserve balances. 
E) It may be used instead of the lagged reserve accounting system. 
A) The reserve computation and reserve maintenance periods do not overlap. 
B) The maintenance period does not begin until seventeen days after the end of the computation period. 
C) It results in a two-day window during which required reserves are known with certainty. 
D) It increases the accuracy of information on aggregate required reserve balances. 
E) It may be used instead of the lagged reserve accounting system.

Question 7

Because investment banks typically buy and sell securities on a regular basis; they have no need for a liability management plan.

Accepted Answer

A) True 
 B)False

Question 8

In the U.S., excess reserves held at the central bank pay interest to the DI.

Accepted Answer

A) True 
 B)False

Question 9

For reserve calculation purposes, the period that begins on a Thursday and ends on a Wednesday 14 days later is known as

Accepted Answer

A) the reserve maintenance period. 
B) the reserve adjustment period. 
C) the reserve computation period. 
D) the contemporaneous accounting period. 
E) None of the options. 
A) the reserve maintenance period. 
B) the reserve adjustment period. 
C) the reserve computation period. 
D) the contemporaneous accounting period. 
E) None of the options.

Question 10

A liquid asset can be converted to cash quickly, but will require a discount from market value.

Accepted Answer

A) True 
 B)False

Question 11

Passbook savings accounts normally receive a lower interest rate than NOW accounts.

Accepted Answer

A) True 
 B)False

Question 12

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 exactly meet the reserve requirement?

Accepted Answer

A) $86.42 million. 
B) $91.46 million. 
C) $79.63 million. 
D) $99.14 million. 
E) $87.11 million. 
A) $86.42 million. 
B) $91.46 million. 
C) $79.63 million. 
D) $99.14 million. 
E) $87.11 million.

Question 13

Which of the following liability products does NOT have withdrawal risk?

Accepted Answer

A) Wholesale CDs. 
B) Money market deposit accounts. 
C) Retail CDs. 
D) NOW accounts. 
E) All of the options have withdrawal risk. 
A) Wholesale CDs. 
B) Money market deposit accounts. 
C) Retail CDs. 
D) NOW accounts. 
E) All of the options have withdrawal risk.

Question 14

By definition, all transaction accounts at U.S.FIs allow account holders to make unlimited withdrawals.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is a mechanism used by DI managers to impact withdrawal rates of NOW accounts.

Accepted Answer

A) Implicit interest payments. 
B) Minimum balance requirements. 
C) Explicit interest payments. 
D) All of the options. 
E) There is no way to impact withdrawal rates. 
A) Implicit interest payments. 
B) Minimum balance requirements. 
C) Explicit interest payments. 
D) All of the options. 
E) There is no way to impact withdrawal rates.

Question 16

An instrument whose ownership can be transferred in the secondary market is referred to as a negotiable instrument.

Accepted Answer

A) True 
 B)False

Question 17

The Federal Reserve allows the DI to make up to a _____ daily average error without penalty.

Accepted Answer

A) 1 percent 
B) 4 percent 
C) 3 percent 
D) 10 percent 
E) 5 percent 
A) 1 percent 
B) 4 percent 
C) 3 percent 
D) 10 percent 
E) 5 percent

Question 18

Over the past 30 years in the DI industry

Accepted Answer

A) the loan portfolio has become more liquid because of increased securitization. 
B) lower amounts of very liquid assets need to be held to manage withdrawal risk. 
C) more opportunities exist for raising funds that are not deposit related. 
D) DIs have intentionally managed liabilities to reduce withdrawal risk. 
E) All of the options. 
A) the loan portfolio has become more liquid because of increased securitization. 
B) lower amounts of very liquid assets need to be held to manage withdrawal risk. 
C) more opportunities exist for raising funds that are not deposit related. 
D) DIs have intentionally managed liabilities to reduce withdrawal risk. 
E) All of the options.

Question 19

Implicit interest involves the process of crediting the interest payment directly to a deposit account as opposed to sending an explicit interest check to the customer.

Accepted Answer

A) True 
 B)False

Question 20

Since 1998, interest rate variability in the fed funds market has decreased because

Accepted Answer

A) fewer institutions were allowed to participate in the fed funds market. 
B) of the introduction of lagged reserve accounting. 
C) new securities were approved that participants can use instead of fed funds to meet liquidity needs. 
D) of the introduction of contemporaneous reserve accounting. 
E) more participants were allowed to enter the fed funds market. 
A) fewer institutions were allowed to participate in the fed funds market. 
B) of the introduction of lagged reserve accounting. 
C) new securities were approved that participants can use instead of fed funds to meet liquidity needs. 
D) of the introduction of contemporaneous reserve accounting. 
E) more participants were allowed to enter the fed funds market.

Exam 19: Liability and Liquidity Management

Managing liabilities as a means of managing liquidity risk involves the tradeoff between lower funding cost and higher risk of withdrawals.

In the U.S., MMDAs typically are transaction accounts without limitations on the size or number of checks or transfers that can occur each month.

The concept of constrained optimization facing an FI manager involving the minimum amount of liquid reserve assets required by regulators may

The weekend game is

Wholesale certificates of deposit

Which of the following observations is true of the contemporaneous reserve accounting system?

Because investment banks typically buy and sell securities on a regular basis; they have no need for a liability management plan.

In the U.S., excess reserves held at the central bank pay interest to the DI.

For reserve calculation purposes, the period that begins on a Thursday and ends on a Wednesday 14 days later is known as

A liquid asset can be converted to cash quickly, but will require a discount from market value.

Passbook savings accounts normally receive a lower interest rate than NOW accounts.

Which of the following liability products does NOT have withdrawal risk?

By definition, all transaction accounts at U.S.FIs allow account holders to make unlimited withdrawals.

Which of the following is a mechanism used by DI managers to impact withdrawal rates of NOW accounts.

An instrument whose ownership can be transferred in the secondary market is referred to as a negotiable instrument.

The Federal Reserve allows the DI to make up to a _____ daily average error without penalty.

Over the past 30 years in the DI industry

Implicit interest involves the process of crediting the interest payment directly to a deposit account as opposed to sending an explicit interest check to the customer.

Since 1998, interest rate variability in the fed funds market has decreased because

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

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