Question 1

Why do FIs face a return or interest earnings penalty by holding large amounts of assets such as cash, T-bills, and T-bonds to reduce liquidity risk?

Accepted Answer

A)  These assets carry a reserve requirement tax. 
B)  These assets offer low returns. 
C)  These assets offer higher returns that reflect their risk. 
D)  Inflation increases the purchasing power value of these assets. 
A)  These assets carry a reserve requirement tax. 
B)  These assets offer low returns. 
C)  These assets offer higher returns that reflect their risk. 
D)  Inflation increases the purchasing power value of these assets. B

Question 2

Although Australia has only had an explicit deposit insurance scheme since 2008, it has had depositor protection since 1959 and has always had depositor preference.

Accepted Answer

A) True 
 B)False  True

Question 3

Which of the following statements is true?

Accepted Answer

A)  An increase in the liquidation costs of non-liquid assets encourages an FI to shift more funds into more liquid, lower yielding assets. 
B)  A decrease in the yield of non-liquid assets will reduce holdings of liquid assets due to higher opportunity costs of holding liquid assets. 
C)  The greater the volatility of the level of deposits, the greater the optimal proportion of reserve assets held to deposits. 
D)  An increase in the liquidation costs of non-liquid assets encourages an FI to reduce their holdings of more liquid, lower yielding assets. 
A)  An increase in the liquidation costs of non-liquid assets encourages an FI to shift more funds into more liquid, lower yielding assets. 
B)  A decrease in the yield of non-liquid assets will reduce holdings of liquid assets due to higher opportunity costs of holding liquid assets. 
C)  The greater the volatility of the level of deposits, the greater the optimal proportion of reserve assets held to deposits. 
D)  An increase in the liquidation costs of non-liquid assets encourages an FI to reduce their holdings of more liquid, lower yielding assets. A

Question 4

A committed liquidity facility is a:

Accepted Answer

A)  facility that allows the FI to access funds from the RBA to obtain liquidity to meets its settlement needs. 
B)  liquidity facility that allows the FI to access funds from the RBA to obtain liquidity to meets its short-term needs. 
C)  liquidity facility that allows the FI to access funds from the RBA to obtain liquidity to meets its long-term needs. 
D)  facility providing a secured line of credit from the RBA to allow access to liquid assets to meet Basel III liquidity reforms. 
A)  facility that allows the FI to access funds from the RBA to obtain liquidity to meets its settlement needs. 
B)  liquidity facility that allows the FI to access funds from the RBA to obtain liquidity to meets its short-term needs. 
C)  liquidity facility that allows the FI to access funds from the RBA to obtain liquidity to meets its long-term needs. 
D)  facility providing a secured line of credit from the RBA to allow access to liquid assets to meet Basel III liquidity reforms.

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

A viable liability management strategy is the diversification of funding sources.

Accepted Answer

A) True 
 B)False

Question 7

The gross interest return is calculated as explicit interest less implicit interest.

Accepted Answer

A) True 
 B)False

Question 8

What are the withdrawal risks and costs associated with the following types of liabilities?
a) cheque account and other demand deposits.
b) fixed-term deposits
c) interbank funds

Accepted Answer

a) cheque account and other demand depos

Question 9

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

Accepted Answer

A)  implicit interest payments 
B)  minimum balance requirements 
C)  explicit interest payments 
D)  There is no way to mitigate withdrawal risk. 
A)  implicit interest payments 
B)  minimum balance requirements 
C)  explicit interest payments 
D)  There is no way to mitigate withdrawal risk.

Question 10

Which of the following statements is true?

Accepted Answer

A)  Liquid assets pay high interest rates. 
B)  Liquid assets bear low default risk. 
C)  Holding a high proportion of funds in liquid assets will result in increased profitability. 
D)  All of the listed options are correct. 
A)  Liquid assets pay high interest rates. 
B)  Liquid assets bear low default risk. 
C)  Holding a high proportion of funds in liquid assets will result in increased profitability. 
D)  All of the listed options are correct.

Question 11

Which of the following statements is true?

Accepted Answer

A)  Bank accepted bills classify as purchased liquidity. 
B)  Loans to short-term money market dealers classify as purchased liquidity. 
C)  Securities sold under agreements to repurchase classify as stored liquidity. 
D)  Certificates of deposits classify as stored liquidity. 
A)  Bank accepted bills classify as purchased liquidity. 
B)  Loans to short-term money market dealers classify as purchased liquidity. 
C)  Securities sold under agreements to repurchase classify as stored liquidity. 
D)  Certificates of deposits classify as stored liquidity.

Question 12

An FI offers a $2500 minimum balance investment savings account paying 4 per cent annual interest, and there are no service charges as long as the customer maintains the minimum balance. The customer maintains a balance of $5000, and averages 750 cheques per year. Each cheque 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)  $212.50 
A)  $112.50 
B)  $100.00 
C)  $312.50 
D)  $212.50

Question 13

A deep market is defined as a market in which:

Accepted Answer

A)  low volumes of a particular security are traded. 
B)  large volumes of a particular security are traded. 
C)  low-priced securities are traded. 
D)  high-priced securities are traded. 
A)  low volumes of a particular security are traded. 
B)  large volumes of a particular security are traded. 
C)  low-priced securities are traded. 
D)  high-priced securities are traded.

Question 14

Over the past 30 years in the DI industry:

Accepted Answer

A)  the loan portfolio has become more liquid because of increased securitisation. 
B)  lower amounts of very liquid assets need to be held to manage withdrawal risk. 
C)  DIs have intentionally managed liabilities to reduce withdrawal risk. 
D)  All of the listed options are correct. 
A)  the loan portfolio has become more liquid because of increased securitisation. 
B)  lower amounts of very liquid assets need to be held to manage withdrawal risk. 
C)  DIs have intentionally managed liabilities to reduce withdrawal risk. 
D)  All of the listed options are correct.

Question 15

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

Accepted Answer

A)  They can be viewed as collateralised short term loans where a financial security is swapped for cash. 
B)  The repurchase market is a highly liquid and flexible source of funds for DIs needing to access liquidity to offset deposit withdrawals. 
C)  Repos under the intra-day facility system are discouraged and attract an interest rate charge of 25 basis points above the target cash rate. 
D)  It is difficult to transact a repurchase agreement borrowing late in the day. 
A)  They can be viewed as collateralised short term loans where a financial security is swapped for cash. 
B)  The repurchase market is a highly liquid and flexible source of funds for DIs needing to access liquidity to offset deposit withdrawals. 
C)  Repos under the intra-day facility system are discouraged and attract an interest rate charge of 25 basis points above the target cash rate. 
D)  It is difficult to transact a repurchase agreement borrowing late in the day.

Question 16

What does 'constrained optimisation' in the context of liquidity management refer to?

Accepted Answer

A)  It refers to the case that any liquid asset holdings over and above the reserve requirements imposed by regulators need to be balanced by the same amount of short-term liabilities. 
B)  It refers to the case that any increases in an FI's current liability holdings incur a decrease in the profitability of the FI's liquidity holdings. 
C)  It refers to the case that any liquid asset reserve requirements imposed by regulators set a minimum bound on the level of liquid reserve assets in the balance sheet. 
D)  It refers to the case that any liquid asset reserve requirements imposed by regulators need to be balanced by the same amount of short-term liabilities. 
A)  It refers to the case that any liquid asset holdings over and above the reserve requirements imposed by regulators need to be balanced by the same amount of short-term liabilities. 
B)  It refers to the case that any increases in an FI's current liability holdings incur a decrease in the profitability of the FI's liquidity holdings. 
C)  It refers to the case that any liquid asset reserve requirements imposed by regulators set a minimum bound on the level of liquid reserve assets in the balance sheet. 
D)  It refers to the case that any liquid asset reserve requirements imposed by regulators need to be balanced by the same amount of short-term liabilities.

Question 17

Because retail CDs have fixed maturities, FI managers always should have perfect information regarding the scheduling of interest and principal payments.

Accepted Answer

A) True 
 B)False

Question 18

FIs are particularly vulnerable to sudden and unexpected demand for funds. Liquidity regulations are imposed for all of the following reasons, except to:

Accepted Answer

A)  ensure that authorised DIs have sufficient liquidity. 
B)  prevent liquidity problems and possible contagion effects that may spread to other FIs. 
C)  increase liquidity for prudential management. 
D)  ensure that authorised DIs have sufficient capital. 
A)  ensure that authorised DIs have sufficient liquidity. 
B)  prevent liquidity problems and possible contagion effects that may spread to other FIs. 
C)  increase liquidity for prudential management. 
D)  ensure that authorised DIs have sufficient capital.

Question 19

Basel III liquidity reforms costs are:

Accepted Answer

A)  reduced profitability due to more liquid balance sheets. 
B)  reduced impact of the liquidity coverage ratio and net stable funding ratio on credit unions and building societies. 
C)  competitiveness of Australian banks will be negatively impacted if other countries do not take up the reforms. 
D)  All of the listed options are correct. 
A)  reduced profitability due to more liquid balance sheets. 
B)  reduced impact of the liquidity coverage ratio and net stable funding ratio on credit unions and building societies. 
C)  competitiveness of Australian banks will be negatively impacted if other countries do not take up the reforms. 
D)  All of the listed options are correct.

Question 20

Assume the average management cost per account per year is $200 and the average fees earned per account per year is $170. The average annual size of account is $1800. What is the average implicit interest rate (round to two decimals)?

Accepted Answer

A)  -1.67 per cent 
B)  1.67 per cent 
C)  4.86 per cent 
D)  15 per cent 
A)  -1.67 per cent 
B)  1.67 per cent 
C)  4.86 per cent 
D)  15 per cent

Why do FIs face a return or interest earnings penalty by holding large amounts of assets such as cash, T-bills, and T-bonds to reduce liquidity risk?

Although Australia has only had an explicit deposit insurance scheme since 2008, it has had depositor protection since 1959 and has always had depositor preference.

Which of the following statements is true?

A committed liquidity facility is a:

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

A viable liability management strategy is the diversification of funding sources.

The gross interest return is calculated as explicit interest less implicit interest.

What are the withdrawal risks and costs associated with the following types of liabilities? a) cheque account and other demand deposits. b) fixed-term deposits c) interbank funds

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

Which of the following statements is true?

Which of the following statements is true?

A deep market is defined as a market in which:

Over the past 30 years in the DI industry:

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

What does 'constrained optimisation' in the context of liquidity management refer to?

Because retail CDs have fixed maturities, FI managers always should have perfect information regarding the scheduling of interest and principal payments.

FIs are particularly vulnerable to sudden and unexpected demand for funds. Liquidity regulations are imposed for all of the following reasons, except to:

Basel III liquidity reforms costs are:

Assume the average management cost per account per year is $200 and the average fees earned per account per year is $170. The average annual size of account is $1800. What is the average implicit interest rate (round to two decimals)?

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters

Exam 15: Liability and Liquidity Management

Why do FIs face a return or interest earnings penalty by holding large amounts of assets such as cash, T-bills, and T-bonds to reduce liquidity risk?

Although Australia has only had an explicit deposit insurance scheme since 2008, it has had depositor protection since 1959 and has always had depositor preference.

Which of the following statements is true?

A committed liquidity facility is a:

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

A viable liability management strategy is the diversification of funding sources.

The gross interest return is calculated as explicit interest less implicit interest.

What are the withdrawal risks and costs associated with the following types of liabilities? a) cheque account and other demand deposits. b) fixed-term deposits c) interbank funds

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

Which of the following statements is true?

Which of the following statements is true?

A deep market is defined as a market in which:

Over the past 30 years in the DI industry:

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

What does 'constrained optimisation' in the context of liquidity management refer to?

Because retail CDs have fixed maturities, FI managers always should have perfect information regarding the scheduling of interest and principal payments.

FIs are particularly vulnerable to sudden and unexpected demand for funds. Liquidity regulations are imposed for all of the following reasons, except to:

Basel III liquidity reforms costs are:

Assume the average management cost per account per year is $200 and the average fees earned per account per year is $170. The average annual size of account is $1800. What is the average implicit interest rate (round to two decimals)?

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters