Q&A Hero

Q: Your U.S. bank issues a one-year U.S. CD at 5 percent annual interest to finance a C $1.274 million (Canadian dollar) investment in two-year, fixed rate Canadian bonds selling at par and paying 7 percent annually. You expect to liquidate your position in one year. Currently, spot exchange rates are US $0.78493 per Canadian dollar.If in one year there is no change to either interest rates or exchange rates, what is the end-of-year profit or loss for the bank? (Hint: Annual interest is paid on both the Canadian bonds and the CD on the date of liquidation in exactly one year.) A. Profit of US $20,000.B. Loss of C $224,000.C. Profit of US $50,000.D. Profit of C $63,700.E. Profit of US $313,000.

Q: Your U.S. bank issues a one-year U.S. CD at 5 percent annual interest to finance a C $1.274 million (Canadian dollar) investment in two-year, fixed rate Canadian bonds selling at par and paying 7 percent annually. You expect to liquidate your position in one year. Currently, spot exchange rates are US $0.78493 per Canadian dollar.If you wanted to hedge your bank's risk exposure, what hedge position would you take?A. A short interest rate hedge to protect against interest rate declines and a short currency hedge to protect against increases in the value of the Canadian dollar with respect to the U.S. dollar.B. A short interest rate hedge to protect against interest rate increases and a short currency hedge to protect against declines in the value of the Canadian dollar with respect to the U.S. dollar.C. A long interest rate hedge to protect against interest rate increases and a long currency hedge to protect against declines in the value of the Canadian dollar with respect to the U.S. dollar.D. A long interest rate hedge to protect against interest rate declines and a long currency hedge to protect against increases in the value of the Canadian dollar with respect to the U.S. dollar.E. A long interest rate hedge to protect against interest rate declines and a short currency hedge to protect against increases in the value of the Canadian dollar with respect to the U.S. dollar.

Q: Your U.S. bank issues a one-year U.S. CD at 5 percent annual interest to finance a C $1.274 million (Canadian dollar) investment in two-year, fixed rate Canadian bonds selling at par and paying 7 percent annually. You expect to liquidate your position in one year. Currently, spot exchange rates are US $0.78493 per Canadian dollar.Your position is exposed to A. interest rate risk only.B. credit risk only.C. exchange rate risk only.D. interest rate and exchange rate risk only.E. interest rate risk, exchange rate risk, and credit risk.

Q: A U.S. FI is raising all of its $20 million liabilities in dollars (one-year CDs) but investing 50 percent in U.S. dollar assets (one-year maturity loans) and 50 percent in U.K. pound sterling assets (one-year maturity loans). Suppose the promised one-year U.S. CD rate is 9 percent, to be paid in dollars at the end of the year, and that one-year, credit risk-free loans in the United States are yielding only 10 percent. Credit risk-free one-year loans are yielding 16 percent in the United Kingdom.If the exchange rate had fallen from $1.60/≤1 at the beginning of the year to $1.50/≤1 at the end of the year, the net interest margin for the FI on its balance sheet investments is A. 3.2875%.B. -3.2875%.C. 4%.D. 8.75%.E. 0.375%.

Q: A U.S. FI is raising all of its $20 million liabilities in dollars (one-year CDs) but investing 50 percent in U.S. dollar assets (one-year maturity loans) and 50 percent in U.K. pound sterling assets (one-year maturity loans). Suppose the promised one-year U.S. CD rate is 9 percent, to be paid in dollars at the end of the year, and that one-year, credit risk-free loans in the United States are yielding only 10 percent. Credit risk-free one-year loans are yielding 16 percent in the United Kingdom.If the exchange rate had fallen from $1.60/≤1 at the beginning of the year to $1.50/≤1 at the end of the year, the weighted return on the FI's asset portfolio would be A. 13.29%.B. 12.56%.C. 16%.D. 8.75%.E. 9.375%.

Q: A U.S. FI is raising all of its $20 million liabilities in dollars (one-year CDs) but investing 50 percent in U.S. dollar assets (one-year maturity loans) and 50 percent in U.K. pound sterling assets (one-year maturity loans). Suppose the promised one-year U.S. CD rate is 9 percent, to be paid in dollars at the end of the year, and that one-year, credit risk-free loans in the United States are yielding only 10 percent. Credit risk-free one-year loans are yielding 16 percent in the United Kingdom.If the exchange rate had fallen from $1.60/≤1 at the beginning of the year to $1.50/≤1 at the end of the year when the FI needed to repatriate the principal and interest on the loan. What would the dollar loan revenues at the end of the year be as a return on the original dollar investment? A. 13%.B. 12.55%.C. 16%.D. 8.75%.E. 7.25%.

Q: A U.S. FI is raising all of its $20 million liabilities in dollars (one-year CDs) but investing 50 percent in U.S. dollar assets (one-year maturity loans) and 50 percent in U.K. pound sterling assets (one-year maturity loans). Suppose the promised one-year U.S. CD rate is 9 percent, to be paid in dollars at the end of the year, and that one-year, credit risk-free loans in the United States are yielding only 10 percent. Credit risk-free one-year loans are yielding 16 percent in the United Kingdom.If the exchange rate had fallen from $1.60/≤1 at the beginning of the year to $1.50/≤1 at the end of the year when the FI needed to repatriate the principal and interest on the loan. What would be the dollar loan amount repatriated at the end of the year? A. $6.25 million.B. $11.6 million.C. $7.25 million.D. $6.625 million.E. $10.875 million.

Q: A U.S. FI is raising all of its $20 million liabilities in dollars (one-year CDs) but investing 50 percent in U.S. dollar assets (one-year maturity loans) and 50 percent in U.K. pound sterling assets (one-year maturity loans). Suppose the promised one-year U.S. CD rate is 9 percent, to be paid in dollars at the end of the year, and that one-year, credit risk-free loans in the United States are yielding only 10 percent. Credit risk-free one-year loans are yielding 16 percent in the United Kingdom.The weighted return on the bank's portfolio of investments would be A. 15%.B. 12%.C. 16%.D. 13%.E. 7%.

Q: A U.S. FI is raising all of its $20 million liabilities in dollars (one-year CDs) but investing 50 percent in U.S. dollar assets (one-year maturity loans) and 50 percent in U.K. pound sterling assets (one-year maturity loans). Suppose the promised one-year U.S. CD rate is 9 percent, to be paid in dollars at the end of the year, and that one-year, credit risk-free loans in the United States are yielding only 10 percent. Credit risk-free one-year loans are yielding 16 percent in the United Kingdom.If the spot foreign exchange rate remains constant at $1.60 to ≤1 throughout the year, the return from the U.K. investment will be A. 15%.B. 12%.C. 16%.D. 13%.E. 7%.

Q: A U.S. FI is raising all of its $20 million liabilities in dollars (one-year CDs) but investing 50 percent in U.S. dollar assets (one-year maturity loans) and 50 percent in U.K. pound sterling assets (one-year maturity loans). Suppose the promised one-year U.S. CD rate is 9 percent, to be paid in dollars at the end of the year, and that one-year, credit risk-free loans in the United States are yielding only 10 percent. Credit risk-free one-year loans are yielding 16 percent in the United Kingdom.What amount, in sterling, will the FI have to repatriate back to the U.S. after one year if the exchange rate remains constant at $1.60 to ≤1. A. ≤6.25 million.B. ≤7.875 million.C. ≤7.25 million.D. ≤6.625 million.E. ≤11.26 million.

Q: The following are the net currency positions of a U.S. FI (stated in U.S. dollars).Note: Net currency positions are foreign exchange bought minus foreign exchange sold restated in U.S. dollar terms.What is the portfolio weight of the Japanese yen in this FI's portfolio of foreign currency? A. +0.18 percent.B. -36.62 percent.C. +75.20 percent.D. -5.47 percent.E. +66.70 percent.

Q: The following are the net currency positions of a U.S. FI (stated in U.S. dollars).Note: Net currency positions are foreign exchange bought minus foreign exchange sold restated in U.S. dollar terms.How would you characterize the FI's risk exposure to fluctuations in the yen/dollar exchange rate? A. The FI is net short in the yen and therefore faces the risk that the yen will rise in value against the U.S. dollar.B. The FI is net short in the yen and therefore faces the risk that the yen will fall in value against the U.S. dollar.C. The FI is net long in the yen and therefore faces the risk that the yen will fall in value against the U.S. dollar.D. The FI is net long in the yen and therefore faces the risk that the yen will rise in value against the U.S. dollar.E. The FI has a balanced position in the Japanese yen.

Q: The following are the net currency positions of a U.S. FI (stated in U.S. dollars).Note: Net currency positions are foreign exchange bought minus foreign exchange sold restated in U.S. dollar terms.What is the portfolio weight of the Euro in this FI's portfolio of foreign currency? A. +0.18 percent.B. -36.62 percent.C. +75.20 percent.D. -5.47 percent.E. +66.70 percent.

Q: The following are the net currency positions of a U.S. FI (stated in U.S. dollars).Note: Net currency positions are foreign exchange bought minus foreign exchange sold restated in U.S. dollar terms.How would you characterize the FI's risk exposure to fluctuations in the Euro to dollar exchange rate? A. The FI is net short in the Euro and therefore faces the risk that the Euro will rise in value against the U.S. dollar.B. The FI is net short in the Euro and therefore faces the risk that the Euro will fall in value against the U.S. dollar.C. The FI is net long in the Euro and therefore faces the risk that the Euro will fall in value against the U.S. dollar.D. The FI is net long in the Euro and therefore faces the risk that the Euro will rise in value against the U.S. dollar.E. The FI has a balanced position in the Euro.

Q: The following are the net currency positions of a U.S. FI (stated in U.S. dollars).Note: Net currency positions are foreign exchange bought minus foreign exchange sold restated in U.S. dollar terms.What is the FI's total FX investment? A. US $671,500.B. US $1,236,700.C. -US $671,500.D. -US $1,236,700.E. 0

Q: The following are the net currency positions of a U.S. FI (stated in U.S. dollars).How would you characterize the FI's risk exposure to fluctuations in the Swiss franc/dollar exchange rate? A. The FI is net short in the franc and therefore faces the risk that the franc will rise in value against the U.S. dollar.B. The FI is net short in the franc and therefore faces the risk that the franc will fall in value against the U.S. dollar.C. The FI is net long in the franc and therefore faces the risk that the franc will fall in value against the U.S. dollar.D. The FI is net long in the franc and therefore faces the risk that the franc will rise in value against the U.S. dollar.E. The FI has a balanced position in the Swiss franc.

Q: The following are the net currency positions of a U.S. FI (stated in U.S. dollars).How would you characterize the FI's risk exposure to fluctuations in the yen/dollar exchange rate? A. The FI is net short in the yen and therefore faces the risk that the yen will rise in value against the U.S. dollar.B. The FI is net short in the yen and therefore faces the risk that the yen will fall in value against the U.S. dollar.C. The FI is net long in the yen and therefore faces the risk that the yen will fall in value against the U.S. dollar.D. The FI is net long in the yen and therefore faces the risk that the yen will rise in value against the U.S. dollar.E. The FI has a balanced position in the Japanese yen.

Q: The following are the net currency positions of a U.S. FI (stated in U.S. dollars).How would you characterize the FI's risk exposure to fluctuations in the British pound to dollar exchange rate? A. The FI is net short in the British pound and therefore faces the risk that the British pound will rise in value against the U.S. dollar.B. The FI is net short in the British pound and therefore faces the risk that the British pound will fall in value against the U.S. dollar.C. The FI is net long in the British pound and therefore faces the risk that the British pound will fall in value against the U.S. dollar.D. The FI is net long in the British pound and therefore faces the risk that the British pound will rise in value against the U.S. dollar.E. The FI has a balanced position in the British pound.

Q: The following are the net currency positions of a U.S. FI (stated in U.S. dollars).What is the FI's net exposure in the Swiss franc? A. +2,400.B. +400.C. -2,800.D. -2,400.E. +3,200.

Q: The following are the net currency positions of a U.S. FI (stated in U.S. dollars).What is the FI's net exposure in the Japanese yen? A. +30,000.B. +40,600.C. -19,400.D. -40,600.E. +20,600.

Q: The following are the net currency positions of a U.S. FI (stated in U.S. dollars).What is the FI's net exposure in British pounds? A. -45,400.B. -150,600.C. -196,000.D. +105,200.E. +196,000.

Q: According to purchasing power parity (PPP), foreign currency exchange rates between two countries adjust to reflect changes in each country's A. unemployment rates. B. export competitiveness. C. inflation rates. D. foreign exchange reserves. E. reserve requirements.

Q: Which of the following is an example of interest rate parity? A. The Japanese yen trades at the same exchange rate as the Swiss franc. B. U.S. dollar rates on one year U.S. Treasury securities equal 1 year Japanese government bond rates. C. U.S. dollar rates on one year U.S. Treasury securities equal 1 year Japanese government bond rates, restated in dollars. D. British pound 2 year forward rates equal 2 year Swiss franc forward rates. E. All currency exchange rates and interest rates move in unison.

Q: The nominal interest rate is equal to the A. real interest rate minus the inflation premium. B. real interest rate minus the trailing inflation rate. C. real interest rate plus the expected interest rate increase. D. real interest rate plus the expected inflation rate. E. real interest rate plus the interest rate volatility.

Q: Deviations from the international currency parity relationships may occur because of A. free capital movements across national boundaries. B. barriers to cross-border financial flows. C. perfect rationality of market participants. D. differences in each country's productive capacity. E. Basel capital regulations.

Q: Most profits or losses on foreign trading for FIs come from A. open positions or speculation. B. market making. C. acting as agents for retail customers. D. acting as agents for wholesale customers. E. hedging activities.

Q: As of 2012, which of the following FX "markets" is the largest? A. London. B. New York. C. Tokyo. D. Hong Kong. E. Zurich.

Q: In which of the following FX trading activities does the FI not assume FX risk? A. The purchase and sale of foreign currencies for the purpose of profiting from forecasting or anticipating future movements in FX rates. B. The purchase and sale of foreign currencies to allow customers to partake in and complete international commercial trade transactions. C. The purchase and sale of foreign currencies for the purpose of offsetting customer exposure in any given currency. D. The purchase and sale of foreign currencies to allow customers to take positions in foreign real and financial investments. E. Answers B and D only.

Q: Which of the following FX trading activities is used for purposes of speculation? A. The purchase and sale of foreign currencies for the purpose of profiting from forecasting or anticipating future movements in FX rates. B. The purchase and sale of foreign currencies to allow customers to partake in and complete international commercial trade transactions. C. The purchase and sale of foreign currencies for the purpose of offsetting customer exposure in any given currency. D. The purchase and sale of foreign currencies to allow customers to take positions in foreign real and financial investments. E. None of the above.

Q: Which of the following FX trading activities is used to hedge FX risk? A. The purchase and sale of foreign currencies for the purpose of profiting from forecasting or anticipating future movements in FX rates. B. The purchase and sale of foreign currencies to allow customers to partake in and complete international commercial trade transactions. C. The purchase and sale of foreign currencies for the purpose of offsetting customer exposure in any given currency. D. The purchase and sale of foreign currencies to allow customers to take positions in foreign real and financial investments. E. None of the above.

Q: If foreign currency exchange rates are highly positively correlated, how can a FI reduce its exchange rate risk exposure? A. By taking net long positions in all currencies. B. By taking net short positions in all currencies. C. By taking opposing net short and net long positions in different currencies. D. By maximizing net FX exposure in each currency, independently. E. By minimizing net FX exposure in each currency, independently.

Q: The decline in European FX volatility during the last decade has been offset in part by A. the greater volatilities of Asian currencies. B. a reduction in inflation rates in European countries. C. the fixing of exchange rates among European countries. D. the replacement of domestic currencies with the euro. E. None of the above.

Q: The decrease in European FX volatility during the last decade has occurred because of A. the stabilizing force of the euro. B. reduction in inflation rates in European countries. C. the reduced volatility in many emerging-market countries. D. the greater volatilities of Asian currencies. E. Answers A and B only.

Q: The FI is acting as a speculator when it A. buys or sells currency to balance the FI's net exposure. B. takes a nonzero net position in a particular currency. C. processes an exporter's transaction in a foreign currency. D. makes a market in a currency. E. advises customers on their international business.

Q: Which of the following factors help explain the decline in FX trading in the early years of this century? A. Introduction of the euro. B. Consolidation in the banking industry. C. Growth of electronic brokering. D. Mergers in the corporate sector. E. All of the above.

Q: When purchasing and selling foreign currencies to allow customers to take positions in foreign real and financial investments, the FI A. acts defensively as a hedger. B. acts aggressively as a speculator. C. assumes the FX risk itself. D. acts as an agent. E. acts as a market maker.

Q: FX risk exposure of an FI essentially relates to which of the following activities? A. Purchase and sale of foreign currencies to allow customers to participate in and complete international commercial trade transactions. B. Purchase and sale of foreign currencies to allow customers to take positions in foreign real and financial investments. C. Purchase and sale of foreign currencies for hedging purposes to offset customer exposure in any given currency. D. Purchase and sale of foreign currencies for speculative purposes through forecasting or anticipating future movements in FX rates. E. None of the above.

Q: The FI is acting as a hedger when it A. buys or sells currency to balance the FI's net exposure. B. takes a nonzero net position in a particular currency. C. processes an exporter's transaction in a foreign currency. D. makes a market in a currency. E. advises customers on their international business.

Q: U.S. pension funds hold approximately _______ of their assets in foreign securities, while British pension funds have traditionally invested approximately _______ of their funds in foreign assets. A. 20 percent; 5 percent B. 5 percent; 20 percent C. 0 percent; 30 percent D. 30 percent; 10 percent E. 20 percent; 20 percent

Q: The reasons nondepository FIs have less FX risk than major money center banks include A. Smaller asset sizes. B. Prudent person concerns. C. Regulations. D. All of the above. E. Answers A and C only.

Q: A negative net exposure position in FX implies that the FI is A. net long in a currency and exposed to depreciation of the foreign currency. B. net short in a currency and exposed to depreciation of the foreign currency. C. net long in a currency and exposed to appreciation of the foreign currency. D. net short in a currency and exposed to appreciation of the foreign currency. E. neither long nor short in a currency.

Q: A positive net exposure position in FX implies that the FI is A. net long in a currency and exposed to depreciation of the foreign currency. B. net short in a currency and exposed to depreciation of the foreign currency. C. net long in a currency and exposed to appreciation of the foreign currency. D. net short in a currency and exposed to appreciation of the foreign currency. E. neither long nor short in a currency.

Q: The FI is acting as a FX market agent for its customers when it A. buys or sells currency to balance the FI's net exposure. B. takes a nonzero net position in a particular currency. C. processes an exporter's transaction in a foreign currency. D. makes a market in its domestic currency. E. advises customers on their international business.

Q: 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.Assume that the T-Bills can only be sold at a 10 percent discount, what is the net liquidity of the bank given this information? A. $6.5 million.B. $11.5 million.C. $16.5 million.D. $20.5 million.E. $21.5 million.

Q: 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 is the net liquidity of the bank? A. $7 million.B. $12 million.C. $17 million.D. $21 million.E. $22 million.

Q: 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? A. $1 million.B. $3 million.C. $8 million.D. $10 million.E. $15 million.

Q: 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 total available sources of liquidity? A. $17 million.B. $18 million.C. $20 million.D. $21 million.E. $22 million.

Q: The average interest earned on the loans is 6 percent and the average cost of deposits is 5 percent. Rising interest rates are expected to reduce the deposits by $3 million. Borrowing more debt will cost the bank 5.5 percent in the short term.What will be the size of the bank if a purchased liquidity management strategy is adopted? A. $9 million.B. $11 million.C. $12 million.D. $14 million.E. $15 million.

Q: The average interest earned on the loans is 6 percent and the average cost of deposits is 5 percent. Rising interest rates are expected to reduce the deposits by $3 million. Borrowing more debt will cost the bank 5.5 percent in the short term.What will be the cost of using a strategy of purchased liquidity management to meet the expected decline in deposits? Assume that the bank intends to keep $2 million in cash as liquidity precaution. A. $10,000.B. $15,000.C. $30,000.D. $40,000.E. $50,000.

Q: The average interest earned on the loans is 6 percent and the average cost of deposits is 5 percent. Rising interest rates are expected to reduce the deposits by $3 million. Borrowing more debt will cost the bank 5.5 percent in the short term. What will be the cost of using a strategy of reducing its asset base to meet the expected decline in deposits? Assume that the bank intends to keep $2 million in cash as a liquidity precaution. A. $10,000.B. $15,000.C. $30,000.D. $40,000.E. $50,000.

Q: The average interest earned on the loans is 6 percent and the average cost of deposits is 5 percent. Rising interest rates are expected to reduce the deposits by $3 million. Borrowing more debt will cost the bank 5.5 percent in the short term.What will be the size of the bank if a stored liquidity management strategy is adopted? A. $9 million.B. $11 million.C. $12 million.D. $14 million.E. $15 million.

Q: 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? 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. E. A decrease in lending of $50,000.

Q: If the bank decides to cut down on interest expenses by reducing its dependence upon borrowed funds, what policy must the bank follow? A. Manage liquidity risk exclusively through reserve asset management. B. Manage liquidity risk exclusively through liability management. C. Reduce the bank's dependence upon demand deposits. D. Increase interest income by increasing lending. E. Increase interest income by increasing securities holdings.

Q: The price at which an open-end investment fund stands ready to redeem existing shares is the A. strike price.B. face value.C. book value.D. net asset value.E. net worth.

Q: 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? A. $0.9. B. $9. C. $90. D. $10. E. $0.10.

Q: Which of the following statements is true? 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.

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

Q: Which of the following is NOT included as high-quality liquid assets when computing a liquidity coverage ratio? A. Sovereign debt. B. Bank capital. C. Government guaranteed mortgage-backed securities. D. Central bank reserves. E. Cash.

Q: What is the drawback of deposit insurance facility? 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. E. Deposit holders are less likely to panic if there is a perceived bank solvency problem.

Q: What are the two major liquidity risk insulation devices available? A. Deposit insurance and discount window. B. Liquidity planning and maturity ladder. C. Scenario analysis and liquidity index. D. Financing gap and the financing requirement. E. Secondary credit and seasonal credit.

Q: Which of the following observations concerning the Fed's discount window is true? A. The facility is provided to meet DIs' permanent liquidity needs. B. Four lending programs are offered through the Fed's discount window. C. Primary credit is available to sound depository institutions on a very short-term basis. D. Secondary credit is available only to depository institutions that are eligible for primary credit. E. Eligible institutions for seasonal credit are big banks located in urban areas.

Q: In a crisis, which of the following are relatively less likely to withdraw funds quickly from banks and thrifts? A. Correspondent banks. B. Small business corporations. C. Individual depositors. D. Mutual funds. E. Pension funds.

Q: In a crisis, which of the following are more likely to withdraw funds quickly from banks and thrifts? A. Correspondent banks. B. Small business corporations. C. Individual depositors. D. Mutual funds. E. Foreign depositors.

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

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

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

Q: A DI has two assets: 50 percent in one-month Treasury bills and 50 percent in real estate loans. If the DI must liquidate its T-bills today, it receives $98 per $100 of face value; if it can wait to liquidate them on maturity (in one month's time), it will receive $100 per $100 of face value. If the DI has to liquidate its real estate loans today, it receives $90 per $100 of face value liquidation at the end of one month will produce $92 per $100 of face value. The one-month liquidity index value for this DI's asset portfolio is A. .973. B. .940. C. .979. D. 1.06. E. 1.10.

Q: Which of the following is a measure of the potential losses an FI could suffer as the result of fire-sale disposal of assets? A. Quick ratio. B. Liquidity index. C. Financing gap and financing requirement. D. Peer group ratio. E. Current ratio.

Q: What information does the net liquidity statement provide? A. A long-term focus on liquidity. B. Sources and uses of liquidity. C. Net asset value. D. Liquidity index information. E. Peer group ratio comparison.

Q: Which of the following is NOT used as a method of measuring liquidity risk? A. Liquidity coverage ratio. B. Liquidity index. C. Financing gap and financing requirement. D. Peer group ratio comparison. E. Current ratio.

Q: Which of the following is NOT a primary source of liquidity? A. Excess cash reserves over and above regulatory reserve requirements. B. Borrowings in the money market. C. Borrowings in the purchased funds market. D. Capital notes and other long-term financing alternatives. E. Cash-type assets that can be sold with little price risk and low transaction costs.

Q: When comparing banks and mutual funds, 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.

Q: How does purchased liquidity management affect profitability? A. By its impact on the interest rate sensitivity of assets. B. By its impact on the interest rate sensitivity of liabilities. C. By determining the default risk of investment securities. D. By its impact on the cost of purchased funds. E. By enhancing the liquidity of assets held.

Q: Which intermediation function results in an FI's exposure to liquidity risk? A. Information production. B. Asset transformation. C. Conduit for monetary policy. D. Lender of last resort. E. Brokering between funds deficit units and funds surplus units.

Q: The surrender value of an insurance policy is A. its promised payoff. B. normally a portion of the contract's face value. C. its value upon bankruptcy. D. the value of the junk bonds in the insurance company's portfolio. E. its holdup value.

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

Q: What is the impact of a 50 basis point increase in interest rates on the net asset value of an open-end bond mutual fund holding a seven year, $100 million face value 7 percent annual coupon bond selling at par? The fund has 10 million shares. A. An increase of $0.24 per share. B. A decrease of $0.265 per share. C. An increase of $0.05 per share. D. A decrease of $0.05 per share. E. An increase of $0.265 per share.

Q: 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? 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.

Q: What is the asset adjustment to a bank's balance sheet if the bank sold a five-year, 7 percent annual coupon $100,000 bond acquired at par, but now yielding 8 percent? The bond was not in the mark-to-market portfolio. A. A $96,007 reduction in assets. B. A $96,007 increase in assets. C. A $100,000 reduction in assets. D. A $100,000 increase in assets. E. A $100,000 increase in liabilities.

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