Question 1

Under contemporaneous reserve accounting, there is a seven day reserve maintenance period.

Accepted Answer

A) True 
 B)False

Question 2

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?

Accepted Answer

A) 2.98 percent. 
B) 3.48 percent. 
C) 4.28 percent. 
D) 4.79 percent. 
E) 5.35 percent. 
A) 2.98 percent. 
B) 3.48 percent. 
C) 4.28 percent. 
D) 4.79 percent. 
E) 5.35 percent.

Question 3

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

Accepted Answer

A) DIs must hold more reserves against the transaction accounts on their balance sheets. 
B) DIs are able to lend a smaller percentage of their deposits. 
C) Decreased credit availability in the economy. 
D) A multiple contraction in deposits and a decrease in the money supply. 
E) A multiplier effect on the supply of DI deposits and thus, the money supply. 
A) DIs must hold more reserves against the transaction accounts on their balance sheets. 
B) DIs are able to lend a smaller percentage of their deposits. 
C) Decreased credit availability in the economy. 
D) A multiple contraction in deposits and a decrease in the money supply. 
E) A multiplier effect on the supply of DI deposits and thus, the money supply.

Question 4

Which of the following is a mechanism used by DI managers to reduce demand deposit withdrawal rates?

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

Question 5

Which of the following observations concerning repurchase agreements is NOT true?

Accepted Answer

A) They can be viewed as collateralized federal funds transactions. 
B) The RP market is a highly liquid and flexible source of funds for DIs needing to increase their liabilities and to offset deposit withdrawals. 
C) Unlike fed funds, these transactions cannot be rolled over each day. 
D) It is difficult to transact an RP borrowing late in the day. 
E) Negotiations over the collateral package can delay RP transactions. 
A) They can be viewed as collateralized federal funds transactions. 
B) The RP market is a highly liquid and flexible source of funds for DIs needing to increase their liabilities and to offset deposit withdrawals. 
C) Unlike fed funds, these transactions cannot be rolled over each day. 
D) It is difficult to transact an RP borrowing late in the day. 
E) Negotiations over the collateral package can delay RP transactions.

Question 6

Funding costs generally are positively related to the period of time the liability remains on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 7

In October 2008, the opportunity cost of holding excess reserves for U.S.DIs

Accepted Answer

A) increased because new reserve requirements imposed by the Federal Reserve as a result of the financial crisis. 
B) decreased because subsidiary DIs were first allowed to issue commercial paper directly, rather than through the parent holding company. 
C) decreased because the Federal Reserve began to pay interest to DIs on excess reserves held at the Fed. 
D) increased because the Federal Reserve no longer accepted government securities as meeting excess reserve requirements. 
E) None of the options. 
A) increased because new reserve requirements imposed by the Federal Reserve as a result of the financial crisis. 
B) decreased because subsidiary DIs were first allowed to issue commercial paper directly, rather than through the parent holding company. 
C) decreased because the Federal Reserve began to pay interest to DIs on excess reserves held at the Fed. 
D) increased because the Federal Reserve no longer accepted government securities as meeting excess reserve requirements. 
E) None of the options.

Question 8

The penalty for undershooting the minimum reserve requirements may include explicit interest rate charges as well as implicit costs in the form of more frequent monitoring and examinations.

Accepted Answer

A) True 
 B)False

Question 9

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. What is Michelle's annual gross interest return?

Accepted Answer

A) $35. 
B) $65. 
C) $70. 
D) $30. 
E) $55. 
A) $35. 
B) $65. 
C) $70. 
D) $30. 
E) $55.

Question 10

A strategy to increase reservable deposits on a Friday and decrease reservable deposits on the following Monday is called the weekend game.

Accepted Answer

A) True 
 B)False

Question 11

An FI offers a $2,500 minimum balance NOW account paying 4 percent annual interest, and there are no service charges as long as the customer maintains the minimum balance.The customer maintains a balance of $5,000, and averages 750 checks per year.Each check has a processing cost to the FI of $0.15.What is the annual gross interest return on this account to the customer?

Accepted Answer

A) $112.50. 
B) $100.00. 
C) $312.50. 
D) $137.50. 
E) $212.50. Gross return = (avg.balance above minimum × explicit interest rate) + (implicit interest)
Gross return = [(5,000 × 0.04) + (750 × 0.15)] = (200 + 112.5) = $312.50 
A) $112.50. 
B) $100.00. 
C) $312.50. 
D) $137.50. 
E) $212.50. Gross return = (avg.balance above minimum × explicit interest rate) + (implicit interest)
Gross return = [(5,000 × 0.04) + (750 × 0.15)] = (200 + 112.5) = $312.50

Question 12

The interbank funds market is a potential source for increasing reserves to meet required reserves.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following is the result of using "sweep accounts" in which high reserve ratio demand deposits are "swept" out of customers' accounts on Friday into higher interest-bearing savings accounts?

Accepted Answer

A) Increased reserve requirements for the bank. 
B) Higher average balances in a DI's demand deposit. 
C) Lower required reserve holdings at the Federal Reserve. 
D) Lower interest burden for the bank. 
E) None of the options. 
A) Increased reserve requirements for the bank. 
B) Higher average balances in a DI's demand deposit. 
C) Lower required reserve holdings at the Federal Reserve. 
D) Lower interest burden for the bank. 
E) None of the options.

Question 14

The establishment of minimum required reserves by regulators is a method of extracting taxes from FIs.

Accepted Answer

A) True 
 B)False

Question 15

Property-casualty insurance companies can reduce their exposure to liquidity risk by diversifying coverage across different types of disasters.

Accepted Answer

A) True 
 B)False

Question 16

Excessive amounts of liquid asset holdings can penalize the earnings of a DI.

Accepted Answer

A) True 
 B)False

Question 17

Most large banks in the U.S.directly issue commercial paper to meet their liquidity needs.

Accepted Answer

A) True 
 B)False

Question 18

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. What is the average return (explicit and implicit) earned by her if the bank pays interest only on the amounts in excess of the required minimum of $500?

Accepted Answer

A) 9.01%. 
B) 7.56%. 
C) 6.93%. 
D) 5.97%. 
E) 8.23%. 
A) 9.01%. 
B) 7.56%. 
C) 6.93%. 
D) 5.97%. 
E) 8.23%.

Question 19

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. What is the reserve to be maintained with fed?

Accepted Answer

A) $38.247 million. 
B) $34.419 million. 
C) $36.971 million. 
D) $35.087 million. 
E) $35.695 million. 
A) $38.247 million. 
B) $34.419 million. 
C) $36.971 million. 
D) $35.087 million. 
E) $35.695 million.

Question 20

What is the average implicit interest rate on a $100,000 account if the bank's average management costs are $2,500 and annual fees average $1,750?

Accepted Answer

A) 4.25 percent. 
B) 2.50 percent. 
C) 1.75 percent. 
D) 0.75 percent. 
E) -0.75 percent. (costs - fees)/avg.balance
(2,500 - 1,750)/100,000 = 0.0075 
A) 4.25 percent. 
B) 2.50 percent. 
C) 1.75 percent. 
D) 0.75 percent. 
E) -0.75 percent. (costs - fees)/avg.balance
(2,500 - 1,750)/100,000 = 0.0075

Exam 19: Liability and Liquidity Management

Under contemporaneous reserve accounting, there is a seven day reserve maintenance period.

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

Which of the following is a mechanism used by DI managers to reduce demand deposit withdrawal rates?

Which of the following observations concerning repurchase agreements is NOT true?

Funding costs generally are positively related to the period of time the liability remains on the balance sheet.

In October 2008, the opportunity cost of holding excess reserves for U.S.DIs

The penalty for undershooting the minimum reserve requirements may include explicit interest rate charges as well as implicit costs in the form of more frequent monitoring and examinations.

A strategy to increase reservable deposits on a Friday and decrease reservable deposits on the following Monday is called the weekend game.

The interbank funds market is a potential source for increasing reserves to meet required reserves.

Which of the following is the result of using "sweep accounts" in which high reserve ratio demand deposits are "swept" out of customers' accounts on Friday into higher interest-bearing savings accounts?

The establishment of minimum required reserves by regulators is a method of extracting taxes from FIs.

Property-casualty insurance companies can reduce their exposure to liquidity risk by diversifying coverage across different types of disasters.

Excessive amounts of liquid asset holdings can penalize the earnings of a DI.

Most large banks in the U.S.directly issue commercial paper to meet their liquidity needs.

What is the average implicit interest rate on a $100,000 account if the bank's average management costs are $2,500 and annual fees average $1,750?

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