Question 1

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 2

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 3

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 4

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 5

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 6

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 7

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 8

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

Accepted Answer

A) True 
 B)False

Question 9

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 10

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 11

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 12

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 13

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

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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 16

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.

Question 17

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 18

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

Accepted Answer

A) True 
 B)False

Question 19

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 20

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.

Exam 12: Liquidity Risk

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?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following observations is NOT true?

Correct AnswerverifiedA

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is true?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedTrue

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?

Correct AnswerverifiedB

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

What is the drawback of deposit insurance facility?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A bank's net deposit drain

Correct AnswerverifiedShow Answer

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A

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