Question 1

The future liquidity position of a DI cannot be forecasted.

Accepted Answer

A) True 
 B)False  False

Question 2

The liquidity coverage ratio for a DI incorporates an "acute liquidity stress scenario" specified by banking supervisors.

Accepted Answer

A) True 
 B)False  True

Question 3

In terms of liquidity risk measurement, the financing requirement is defined as

Accepted Answer

A) total deposits minus core deposits. 
B) financing gap plus liquid assets. 
C) rate sensitive assets minus rate sensitive liabilities. 
D) total assets minus total liabilities. 
E) average loans minus average deposits. 
A) total deposits minus core deposits. 
B) financing gap plus liquid assets. 
C) rate sensitive assets minus rate sensitive liabilities. 
D) total assets minus total liabilities. 
E) average loans minus average deposits. B

Question 4

An FI has $5 million in cash reserves with the Fed in excess of its reserve requirements, $5 million in T-Bills, and a credit line of $10 million to borrow in the repo market.It currently has lent $2 million in the Fed Funds market and borrowed $1 million from the Federal discount window to meet its seasonal needs. What are the bank's current total uses of liquidity?

Accepted Answer

A) $1 million. 
B) $3 million. 
C) $8 million. 
D) $10 million. 
E) $15 million. 
A) $1 million. 
B) $3 million. 
C) $8 million. 
D) $10 million. 
E) $15 million.

Question 5

An open-end bond mutual fund is holding a three-year, $1 million face value 5 percent annual coupon bond selling at par.What is the impact on the total asset value of the fund of a 1 percent decrease in interest rates?

Accepted Answer

A) A decrease of $10,000. 
B) An increase of $10,000. 
C) A decrease of $26,730. 
D) An increase of $27,751. 
E) The answer depends upon the number of mutual funds shares outstanding. 
A) A decrease of $10,000. 
B) An increase of $10,000. 
C) A decrease of $26,730. 
D) An increase of $27,751. 
E) The answer depends upon the number of mutual funds shares outstanding.

Question 6

Liquid funds can be obtained by a DI through unlimited borrowing in the money or purchased funds markets.

Accepted Answer

A) True 
 B)False

Question 7

In the event of financial distress, open-ended mutual fund investors

Accepted Answer

A) have an incentive to cash in their shares quickly since they are paid on a first come, first served basis. 
B) have an incentive to avoid a run since that will deplete the fund net asset value. 
C) have an incentive to cash in their shares quickly since that will increase the fund's net asset value. 
D) will switch into low risk bank deposits. 
E) have an incentive to avoid a run since the Federal Reserve guarantees mutual fund holdings. 
A) have an incentive to cash in their shares quickly since they are paid on a first come, first served basis. 
B) have an incentive to avoid a run since that will deplete the fund net asset value. 
C) have an incentive to cash in their shares quickly since that will increase the fund's net asset value. 
D) will switch into low risk bank deposits. 
E) have an incentive to avoid a run since the Federal Reserve guarantees mutual fund holdings.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Government securities represent the reserve asset fund for life insurance companies.

Accepted Answer

A) True 
 B)False

Question 10

If stored 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. 
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 11

Core deposits represent a relatively short-term source of funds.

Accepted Answer

A) True 
 B)False

Question 12

In terms of liquidity risk measurement, the financing gap is defined as rate sensitive assets minus rate sensitive liabilities.

Accepted Answer

A) True 
 B)False

Question 13

When comparing banks and mutual funds,

Accepted Answer

A) mutual funds have more liquidity risk than banks because all shareholders share the loss of value on a pro rata basis. 
B) mutual funds have less liquidity risk than banks because all shareholders share the loss of value on a pro rata basis. 
C) mutual funds have more liquidity risk than banks because all shareholders have the ability to withdraw their money on a first-come first basis. 
D) mutual funds have less liquidity risk than banks because all shareholders have the ability to withdraw their money on a first-come first basis. 
E) mutual funds have the same liquidity risk as banks because both shareholders and depositors share the fall in the loss of value on a pro rata basis. 
A) mutual funds have more liquidity risk than banks because all shareholders share the loss of value on a pro rata basis. 
B) mutual funds have less liquidity risk than banks because all shareholders share the loss of value on a pro rata basis. 
C) mutual funds have more liquidity risk than banks because all shareholders have the ability to withdraw their money on a first-come first basis. 
D) mutual funds have less liquidity risk than banks because all shareholders have the ability to withdraw their money on a first-come first basis. 
E) mutual funds have the same liquidity risk as banks because both shareholders and depositors share the fall in the loss of value on a pro rata basis.

Question 14

The net stable funds ratio (NSFR) is a longer-term measure than the liquidity coverage ratio (LCR).

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements regarding net stable funding (NSFR) ratio is true?

Accepted Answer

A) NSFR takes a longer-term look at liquidity on a DI's balance sheet. 
B) NSFR evaluates liquidity over the entire balance sheet and provides incentives for Dis to use stable sources of funding. 
C) NSFR is intended to ensure that long-term assets are funded with a minimum amount of stable liabilities. 
D) NSFR ratio is reported to DI supervisors quarterly as of 2018. 
E) All of the above are true. 
A) NSFR takes a longer-term look at liquidity on a DI's balance sheet. 
B) NSFR evaluates liquidity over the entire balance sheet and provides incentives for Dis to use stable sources of funding. 
C) NSFR is intended to ensure that long-term assets are funded with a minimum amount of stable liabilities. 
D) NSFR ratio is reported to DI supervisors quarterly as of 2018. 
E) All of the above are true.

Question 16

In the event of a bank run, depositor claims on the bank are satisfied on a pro rata basis.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

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

Question 19

Liquidity index is a measure of the potential losses an FI could suffer as the result of sudden disposal of assets.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 12: Liquidity Risk

The future liquidity position of a DI cannot be forecasted.

The liquidity coverage ratio for a DI incorporates an "acute liquidity stress scenario" specified by banking supervisors.

In terms of liquidity risk measurement, the financing requirement is defined as

An open-end bond mutual fund is holding a three-year, $1 million face value 5 percent annual coupon bond selling at par.What is the impact on the total asset value of the fund of a 1 percent decrease in interest rates?

Liquid funds can be obtained by a DI through unlimited borrowing in the money or purchased funds markets.

In the event of financial distress, open-ended mutual fund investors

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

Government securities represent the reserve asset fund for life insurance companies.

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

Core deposits represent a relatively short-term source of funds.

In terms of liquidity risk measurement, the financing gap is defined as rate sensitive assets minus rate sensitive liabilities.

When comparing banks and mutual funds,

The net stable funds ratio (NSFR) is a longer-term measure than the liquidity coverage ratio (LCR).

Which of the following statements regarding net stable funding (NSFR) ratio is true?

In the event of a bank run, depositor claims on the bank are satisfied on a pro rata basis.

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

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

Liquidity index is a measure of the potential losses an FI could suffer as the result of sudden disposal of assets.

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

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

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Fintech Risks

Liability and Liquidity Management

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