Question 1

Which of the following statements is true?

Accepted Answer

A) Closed-end funds issue an unlimited number of shares as liabilities. 
B) Open-end funds supply limited number of shares to investors. 
C) Open-end funds need not stand ready to buy back previously issued shares from investors at the current market price for the fund's shares. 
D) At a given market price, the supply of open-end fund shares is perfectly inelastic. 
E) The number of outstanding shares of a closed-ended fund may change when the issuing fund chooses to repurchase them. 
A) Closed-end funds issue an unlimited number of shares as liabilities. 
B) Open-end funds supply limited number of shares to investors. 
C) Open-end funds need not stand ready to buy back previously issued shares from investors at the current market price for the fund's shares. 
D) At a given market price, the supply of open-end fund shares is perfectly inelastic. 
E) The number of outstanding shares of a closed-ended fund may change when the issuing fund chooses to repurchase them.

Question 2

What is a fire-sale price?

Accepted Answer

A) Market value of an asset. 
B) Price received for an asset that has to be liquidated immediately. 
C) Maximum price that will be received on sale of an asset irrespective of the time of sale. 
D) Replacement value of an asset. 
E) Book value of an asset. 
A) Market value of an asset. 
B) Price received for an asset that has to be liquidated immediately. 
C) Maximum price that will be received on sale of an asset irrespective of the time of sale. 
D) Replacement value of an asset. 
E) Book value of an asset.

Question 3

During the financial crisis of 2008, liquidity problems were avoided as banks continued to provide lending to each other.

Accepted Answer

A) True 
 B)False

Question 4

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 5

A net deposit drain is the amount by which cash withdrawals exceed additions; a net cash outflow.

Accepted Answer

A) True 
 B)False

Question 6

Because cash reserves at the Federal Reserve do not earn interest, DIs do not hold any excess cash reserves beyond the minimum requirements.

Accepted Answer

A) True 
 B)False

Question 7

Liquidity planning primarily is designed to assist management in dealing with relatively predictable events.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

For a DI, what does a high ratio of loans to deposits indicate?

Accepted Answer

A) DI relies heavily on the short-term money market to fund loans. 
B) High degree of loan commitments. 
C) DI has large amounts of asset-side liquidity. 
D) Liquidity concerns are at a bare minimum for the FI. 
E) DI relies heavily on core deposits to fund loans. 
A) DI relies heavily on the short-term money market to fund loans. 
B) High degree of loan commitments. 
C) DI has large amounts of asset-side liquidity. 
D) Liquidity concerns are at a bare minimum for the FI. 
E) DI relies heavily on core deposits to fund loans.

Question 10

An FI's most liquid asset is cash.

Accepted Answer

A) True 
 B)False

Question 11

A disadvantage of using purchased liquidity management to manage a FI's liquidity risk is

Accepted Answer

A) the resulting shrinkage of the FI's balance sheet. 
B) the relatively high cost of purchased liabilities. 
C) the accessibility of international money markets. 
D) tax considerations. 
E) loss of flexibility as a result of dependence upon purchased liabilities. 
A) the resulting shrinkage of the FI's balance sheet. 
B) the relatively high cost of purchased liabilities. 
C) the accessibility of international money markets. 
D) tax considerations. 
E) loss of flexibility as a result of dependence upon purchased liabilities.

Question 12

The net stable funds ratio (NSFR) attempts to ensure illiquid assets and securities are funded with a minimum amount of stable liabilities for at least a one year time horizon.

Accepted Answer

A) True 
 B)False

Question 13

The liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) proposed by the Bank for International Settlements are scheduled to take effect in

Accepted Answer

A) 2011 for LCR and 2014 for NSFR. 
B) 2012 for both LCR and NSFR. 
C) 2015 for LCR and 2018 for NSFR. 
D) 2013 for LCR and 2016 for NSFR. 
E) 2014 for both LCR and NSFR. 
A) 2011 for LCR and 2014 for NSFR. 
B) 2012 for both LCR and NSFR. 
C) 2015 for LCR and 2018 for NSFR. 
D) 2013 for LCR and 2016 for NSFR. 
E) 2014 for both LCR and NSFR.

Question 14

The greater the difference between fair market prices and fire-sale prices for assets, the less liquid the DI's portfolio of assets.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

Financing requirement is the financing gap minus the liquid assets.

Accepted Answer

A) True 
 B)False

Question 17

Liquidity risk for a life insurance company only occurs when asset returns do not provide sufficient cash flows to meet policyholder liquidations.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

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

Question 19

Consider a mutual fund with 100 shareholders who each invested $10 for a total of $1,000.If the assets of the mutual fund are worth $900, what is the net asset value for each one of the mutual fund shares?

Accepted Answer

A) $0.9. 
B) $9. 
C) $90. 
D) $10. 
E) $0.10. 
A) $0.9. 
B) $9. 
C) $90. 
D) $10. 
E) $0.10.

Question 20

Banks with relatively high loan commitments face less liquidity risk exposure than banks with a low level of loan commitments.

Accepted Answer

A) True 
 B)False

Exam 12: Liquidity Risk

Which of the following statements is true?

What is a fire-sale price?

During the financial crisis of 2008, liquidity problems were avoided as banks continued to provide lending to each other.

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

A net deposit drain is the amount by which cash withdrawals exceed additions; a net cash outflow.

Because cash reserves at the Federal Reserve do not earn interest, DIs do not hold any excess cash reserves beyond the minimum requirements.

Liquidity planning primarily is designed to assist management in dealing with relatively predictable events.

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

For a DI, what does a high ratio of loans to deposits indicate?

An FI's most liquid asset is cash.

A disadvantage of using purchased liquidity management to manage a FI's liquidity risk is

The net stable funds ratio (NSFR) attempts to ensure illiquid assets and securities are funded with a minimum amount of stable liabilities for at least a one year time horizon.

The liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) proposed by the Bank for International Settlements are scheduled to take effect in

The greater the difference between fair market prices and fire-sale prices for assets, the less liquid the DI's portfolio of assets.

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

Financing requirement is the financing gap minus the liquid assets.

Liquidity risk for a life insurance company only occurs when asset returns do not provide sufficient cash flows to meet policyholder liquidations.

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

Consider a mutual fund with 100 shareholders who each invested $10 for a total of $1,000.If the assets of the mutual fund are worth $900, what is the net asset value for each one of the mutual fund shares?

Banks with relatively high loan commitments face less liquidity risk exposure than banks with a low level of loan commitments.

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