Question 1

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. B

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

Which of the following observations is NOT true?

Accepted Answer

A)  Traditionally,DI managers have relied on purchased liquidity management as the primary mechanism of liquidity management.
B)  Today,many DIs rely on purchased liquidity management to deal with the risk of cash shortfalls.
C)  The largest banks with access to the money market and other nondeposit markets for funds rely on purchased liquidity management to deal with the risk of cash shortfalls.
D)  Purchased liquidity management and stored liquidity management are ways of managing a drain on deposits. A

Question 4

A bank's net deposit drain

Accepted Answer

A)  is negative if deposits exceed withdrawals.
B)  is positive if deposits exceed withdrawals.
C)  decreases during holiday and vacation periods.
D)  in unaffected by holiday and vacation periods.

Question 5

The assets of PC insurers are relatively short term and more liquid than those of life insurance companies.

Accepted Answer

A) True 
 B)False

Question 6

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.

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

Open-end mutual funds issue a fixed number of shares classified as liabilities.

Accepted Answer

A) True 
 B)False

Question 9

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.

Question 10

Depository institutions generally rely on each other for cash and to meet their daily liquidity needs.

Accepted Answer

A) True 
 B)False

Question 11

Most demand deposits stay at DIs for periods of two years or more.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is a condition for a DI to be growing?

Accepted Answer

A)  Net positive drain on deposits.
B)  Peak of the net deposit drain probability distribution should lie at a point to the right of zero.
C)  Average deposit drains such that new deposit funds more than offset deposit withdrawals.
D)  The liability side of its balance sheet is decreasing.

Question 13

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.

Question 14

Abnormally large and unexpected deposit withdrawals can occur because of concerns by depositors about a bank's solvency relative to other banks.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following balance sheet entries is not a tool used in purchased liquidity management?

Accepted Answer

A)  Bonds.
B)  Federal fund.
C)  Demand deposit.
D)  Repurchase agreement.

Question 16

What is the drawback of deposit insurance facility?

Accepted Answer

A)  Even when the DI is in trouble,the deposit holder has no incentive to run.
B)  DIs are more likely to increase the liquidity risk on their balance sheets.
C)  Deposit holder's place in line affects his or her ability to obtain their funds.
D)  Deposit insurance does not deter contagious runs and panics.

Question 17

Bank runs occur because customers know that banks will be forced to liquidate assets at fire-sale prices.

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.

Question 19

If the bank experiences a $50,000 sudden liquidity drain caused by a loan commitment draw down,what will be the impact on the balance sheet if stored liquidity management techniques are used?

Accepted Answer

A)  A reduction in cash of $21,000 and an increase in demand deposits of $29,000.
B)  A reduction in securities and/or current loans totaling $50,000.
C)  A reduction in cash of $21,000 and a decrease in securities holdings of $29,000.
D)  A decrease in equity of $50,000.

Question 20

Why have purchased liquidity management techniques become very popular in spite of its limitations?

Accepted Answer

A)  Because it insulates the assets of an FI from normal drains on liability liquidity.
B)  Because funds can be easily raised in the eventuality of a liquidity crunch.
C)  Because of decrease in the cost of funds during periods of high interest rate volatility.
D)  Because the funds are covered by deposit insurance.

Exam 12: Liquidity Risk

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?

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

Which of the following observations is NOT true?

A bank's net deposit drain

The assets of PC insurers are relatively short term and more liquid than those of life insurance companies.

Which of the following statements is true?

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

Open-end mutual funds issue a fixed number of shares classified as liabilities.

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

Depository institutions generally rely on each other for cash and to meet their daily liquidity needs.

Most demand deposits stay at DIs for periods of two years or more.

Which of the following is a condition for a DI to be growing?

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

Abnormally large and unexpected deposit withdrawals can occur because of concerns by depositors about a bank's solvency relative to other banks.

Which of the following balance sheet entries is not a tool used in purchased liquidity management?

What is the drawback of deposit insurance facility?

Bank runs occur because customers know that banks will be forced to liquidate assets at fire-sale prices.

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

If the bank experiences a $50,000 sudden liquidity drain caused by a loan commitment draw down,what will be the impact on the balance sheet if stored liquidity management techniques are used?

Why have purchased liquidity management techniques become very popular in spite of its limitations?