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Banking
Q:
If purchased 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.
Q:
When banks use stored liquidity management, they
A. must pay interest on the funds that are stored.
B. store the funds at the U.S. Treasury.
C. necessarily increase the asset side of the balance sheet.
D. may shrink the balance sheet if cash is used as the liquidity adjustment mechanism.
E. threaten the capital position of the institution.
Q:
Why have purchased liquidity management techniques become very popular in spite of its limitations?
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.
E. Because the adjustment to the deposit drain occurs on the liability side of the balance sheet.
Q:
Which of the following statements is NOT true?
A. Stored liquidity management involves liquidation of assets.
B. Traditionally DIs have stored cash reserves at the Federal Reserve and in their vaults to overcome liquidity risk.
C. When the DI uses its cash as the liquidity adjustment mechanism, both sides of its balance sheet contract.
D. DIs hold cash reserves in excess of the minimum required to meet liquidity drains.
E. A DI sustains no cost under stored liquidity risk management.
Q:
A disadvantage of using stored liquidity management to manage a FI's liquidity risk is
A. the resulting shrinkage of the FI's balance sheet.
B. the 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.
Q:
A disadvantage of using purchased liquidity management to manage a FI's liquidity risk is
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.
Q:
Which of the following observations is NOT true?
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.
E. None of the above.
Q:
Which of the following balance sheet entries is not a tool used in purchased liquidity management?
A. Bonds.
B. Federal fund.
C. Demand deposit.
D. Repurchase agreement.
E. Subordinated note.
Q:
Which of the following is a condition for a DI to be growing?
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 drain such that new deposit funds more than offset deposit withdrawals.
D. The liability side of its balance sheet is decreasing.
E. Unused loan commitments is increasing.
Q:
A bank's net deposit drain
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.
E. fluctuates unpredictably on any given day.
Q:
What is a fire-sale price?
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.
Q:
Which type of financial intermediary is more highly exposed to liquidity risk?
A. Property-casualty insurance companies.
B. Life insurance companies.
C. Mutual funds.
D. Depository institutions.
E. Pension funds.
Q:
Which of the following is NOT a potential causes of liquidity risk for a DI?
A. A decrease in the DI's stock price caused by market factors.
B. An increase in requests to fund large amounts of loan commitments.
C. A decrease in the availability of short-term borrowed funds.
D. An increase in requests by depositors to withdrawal large amounts of deposits.
E. A decrease in asset prices of securities held in the investment portfolio.
Q:
Hedge funds are not susceptible to liquidity risk or a liquidity crisis.
Q:
It is impossible for money market mutual fund share prices to fall below $1.00.
Q:
Liquidation of a mutual fund causes assets to be liquidated and funds received to the dispersed to shareholders on a first come, first served basis.
Q:
Net asset value is the current value of a mutual fund's assets divided by the number of shares outstanding.
Q:
Open-end mutual funds issue a fixed number of shares as liabilities.
Q:
Liquidity risk for a life insurance company only occurs when asset returns do not provide sufficient cash flows to meet policyholder liquidations.
Q:
Government securities represent the reserve asset fund for life insurance companies.
Q:
Insurance companies have had to deal with liability runs by policyholders.
Q:
The assets of PC insurers are relatively short term and more liquid than those of life insurance companies.
Q:
Surrender value is the amount of cash a life insurance policy holder can receive by turning in the policy before it expires or matures.
Q:
For life insurance companies, the distribution of premium income minus policyholder liquidations is unpredictable.
Q:
The Fed discount window maintains three lending programs to assist DIs in managing liquidity problems.
Q:
In general, money center banks are exposed to less liquidity risk than smaller, regional banks.
Q:
A contagious run, or bank panic, differs from a run on a bank in that a contagious run involves loss of faith in the entire banking system as opposed to just one bank.
Q:
In the event of a bank run, depositor claims on the bank are satisfied on a pro rata basis.
Q:
Even with liquidity planning, net deposit withdrawals and/or the exercise of loan commitments can pose significant liquidity problems for banks.
Q:
A problem exists with the net stable funds ratio (NSFR) in that it does not include off-balance-sheet activities.
Q:
The net stable funds ratio (NSFR) is a longer-term measure than the liquidity coverage ratio (LCR).
Q:
When computing the liquidity coverage ratio, high-quality liquid assets are divided into two levels.
Q:
As of 2012, banks must report their The Liquidity Coverage Ratio (LCR) to the FDIC rather than to the Federal Reserve.
Q:
Deposit insurance is the only deterrent to bank runs, contagious runs, and bank panics.
Q:
The future liquidity position of a DI cannot be forecasted.
Q:
The cost of stored liquidity management is the interest that must be paid on the stored funds.
Q:
Abnormally large and unexpected deposit withdrawals can occur because of concerns by depositors about a bank's solvency relative to other banks.
Q:
Liquidity planning primarily is designed to assist management in dealing with relatively predictable events.
Q:
In terms of liquidity risk measurement, the financing gap is defined as rate sensitive assets minus rate sensitive liabilities.
Q:
The greater the difference between fair market prices and fire-sale prices for assets, the less liquid the DI's portfolio of assets.
Q:
The liquidity index should be a number that is either greater than one or less than zero.
Q:
Banks with relatively high loan commitments face less liquidity risk exposure than banks with a low level of loan commitments.
Q:
Liquid funds can be obtained by a DI through unlimited borrowing in the money or purchased funds markets.
Q:
Managing asset-side liquidity risk can involve either purchased liquidity management or stored liquidity management.
Q:
Because cash reserves at the Federal Reserve do not earn interest, DIs do not hold any excess cash reserves beyond the minimum requirements.
Q:
Purchased liquidity management carries the potential risk of significant increases in the cost of funds during periods of high interest rate volatility.
Q:
Purchased liquidity risk management usually involves purchased funds such as fed funds, repurchase agreements and CDs.
Q:
An expected net deposit drain on any given day means that deposit withdrawals are less than deposit inflows.
Q:
Core deposits represent a relatively short-term source of funds.
Q:
Asset-side liquidity risk may be a result of OBS lending commitments.
Q:
Bank runs occur because customers know that banks will be forced to liquidate assets at fire-sale prices.
Q:
Liquidity risk for an FI includes the possibility of an unexpected inflow of funds.
Q:
A bank must be ready to pay out all demand deposit liabilities on any given day.
Q:
Demand deposits pose a liquidity risk for FIs because funds may be withdrawn at any time.
Q:
An FI's most liquid asset is cash.
Q:
Mutual funds tend to have less exposure to liquidity risk than banks and thrifts.
Q:
During the financial crisis of 2008, there were large deposit inflows to the banking system.
Q:
During the financial crisis of 2008, liquidity problems were avoided as banks continued to provide lending to each other.
Q:
Depository institutions generally rely on each other for cash and to meet their daily liquidity needs.
Q:
When liquidity risk problems occur at a DI, they often threaten the solvency of the institution.
Q:
f the bank's expected net deposit drain is +4 percent, what is the bank's expected liquidity requirement? A. $7,560.B. $6,040.C. $16,000.D. $22,000.E. $14,760.
Q:
What are the possible ways that the bank can meet an expected net deposit drain of +4 percent using stored liquidity management techniques? A. Liquidate all cash holdings.B. Utilize further the Fed funds market.C. Liquidate some securities and/or loans.D. Liquidate all cash and use more Fed funds.E. All of the above are suitable techniques.
Q:
What are the possible ways that the bank can meet an expected net deposit drain of +4 percent using purchased liquidity management techniques? A. Utilize further the Fed funds market.B. Utilize repurchase agreements.C. Liquidate all cash holdings.D. All of the above.E. Answers A and B only.
Q:
LNW Bank is charging a 12 percent interest rate on a $5,000,000 loan. The bank also charged $100,000 in fees to originate the loan. The bank has a cost of funds of 8 percent. The borrower has a five percent chance of default, and if default occurs, the bank expects to recover 90 percent of the principal and interest.What is the risk of the loan using the Moody's Analytics model? A. 4.75 percent.B. 0.48 percent.C. 6.89 percent.D. 2.18 percent.E. 1.50 percent.
Q:
LNW Bank is charging a 12 percent interest rate on a $5,000,000 loan. The bank also charged $100,000 in fees to originate the loan. The bank has a cost of funds of 8 percent. The borrower has a five percent chance of default, and if default occurs, the bank expects to recover 90 percent of the principal and interest.What is the expected return on the loan using the Moody's Analytics model? A. 6.50 percent.B. 5.50 percent.C. 6.00 percent.D. 14.0 percent.E. 13.5 percent.
Q:
Using standard deviations, which bank is in a better position if the average earnings on the assets of Bank A is 11 percent and Bank B is 12 percent (ignore all other factors)? A. Bank B, because its earnings of 12 percent is higher than Bank A's 11 percent while, its standard deviation is lower.B. Bank B, because its earnings of 12 percent is higher compared to Bank A's 11 percent, while its standard deviation is higher.C. Bank B, because its earnings of 12 percent is higher compared to Bank A's 11 percent, while its standard deviation is the same.D. Bank A, because although its earnings of 11 percent is lower compared to Bank B's 12 percent, its standard deviation is significantly lower.E. Bank A, because although its earnings of 11 percent is lower compared to Bank B's 12 percent, its standard deviation is the same.
Q:
Estimate the standard deviation of Bank B's asset allocation proportions relative to the national benchmark. A. 40.44 percent.B. 34.32 percent.C. 29.89 percent.D. 21.21 percent.E. 15.00 percent.
Q:
Estimate the standard deviation of Bank A's asset allocation proportions relative to the national benchmark. A. 15.00 percent.B. 21.21 percent.C. 29.89 percent.D. 34.32 percent.E. 40.44 percent.
Q:
Kansas Bank has a policy of limiting their loans to any single customer so that the maximum loss as a percent of capital will not exceed 20 percent for both secured and unsecured loans. The limit has been adopted under the assumption that if the unsecured loan is defaulted, there will be no recovery of interest or principal payments. For loans that are secured (collateralized), it is expected that 40 percent of interest and principal will be collected.Suppose Kansas Bank wants to ensure that its maximum loss on a secured (collateralized) loan is 10 percent (as a percent of capital). If it wishes to keep a concentration limit at 40 percent for secured loans, what is the estimated amount lost per dollar of defaulted secured loan? A. 40 cents.B. 35 cents.C. 30 cents.D. 25 cents.E. 20 cents.
Q:
Kansas Bank has a policy of limiting their loans to any single customer so that the maximum loss as a percent of capital will not exceed 20 percent for both secured and unsecured loans. The limit has been adopted under the assumption that if the unsecured loan is defaulted, there will be no recovery of interest or principal payments. For loans that are secured (collateralized), it is expected that 40 percent of interest and principal will be collected.What is the concentration limit (as a % of capital) for secured loans made by this bank? A. 10 percent.B. 20 percent.C. 33 percent.D. 40 percent.E. 50 percent.
Q:
Kansas Bank has a policy of limiting their loans to any single customer so that the maximum loss as a percent of capital will not exceed 20 percent for both secured and unsecured loans. The limit has been adopted under the assumption that if the unsecured loan is defaulted, there will be no recovery of interest or principal payments. For loans that are secured (collateralized), it is expected that 40 percent of interest and principal will be collected.What is the concentration limit (as a percent of capital) for unsecured loans made by Kansas Bank? A. 5 percent.B. 10 percent.C. 15 percent.D. 20 percent.E. 25 percent.
Q:
A regression of sectoral loan losses against total loans losses, both measured as a percentage of total loans, of a bank results in the following beta coefficients for the real estate (RE) and commercial (CL) loan variables: βRE = 1.2, βCL = 1.6. The intercept for both regressions is zero.The results can be interpreted as A. If the total loan losses of the bank measured as a percentage of total loans is 2 percent, the losses in the real estate sector, measured as a percentage of total loans, is 1.2 percent.B. If the total loan losses of the bank measured as a percentage of total loans is 2 percent, the losses in the commercial sector, measured as a percentage of total loans, is 3.2 percent.C. If the total loan losses of the bank measured as a percentage of total loans is 2 percent, the losses in the commercial sector, measured as a percentage of total loans, is 6.4 percent.D. If the total loan losses of the bank measured as a percentage of total loans is 3 percent, the losses in the commercial sector, measured as a percentage of total loans, is 5.2 percent.E. If the total loan losses of the bank measured as a percentage of total loans is 3 percent, the losses in the real estate sector, measured as a percentage of total loans, is 4 percent.
Q:
A regression of sectoral loan losses against total loans losses, both measured as a percentage of total loans, of a bank results in the following beta coefficients for the real estate (RE) and commercial (CL) loan variables: βRE = 1.2, βCL = 1.6. The intercept for both regressions is zero.The results indicate that for the bank A. the real estate loan losses were systematically lower than the total loan losses.B. the real estate loan losses were systematically higher than the total loan losses.C. the commercial loan losses are systematically higher than the total loan losses.D. Answers A and C.E. Answers B and C.
Q:
If Bank A's average return on its loan portfolio is lower than that of Bank B's, A. its risk-adjusted return is higher than Bank B's.B. its risk-adjusted return is lower than Bank B's.C. its standard deviation is lower than Bank B's.D. its standard deviation is higher than Bank B's.E. Answers b and d
Q:
What is Bank B's standard deviation of its asset allocation proportions relative to the national banks average? Use the formula in the textbook. A. 14.16 percent.B. 33.33 percent.C. 5.66 percent.D. 3.00 percent.E. 1.50 percent.
Q:
What is Bank A's standard deviation of its asset allocation proportions relative to the national banks average? Use the formula in the textbook. A. 7.23 percent.B. 10.89 percent.C. 18.71 percent.D. 19.15 percent.E. 27.36 percent.
Q:
What is the risk (standard deviation of returns) on the bank's loan portfolio if loan returns are uncorrelated (ρ = 0)? A. 1.41 percent.B. 1.63 percent.C. 0.93 percent.D. 3.57 percent.E. 1.18 percent.
Q:
What is the FI's expected return on its loan portfolio? A. 15.00 percent.B. 18.00 percent.C. 12.00 percent.D. 14.67 percent.E. 13.33 percent.
Q:
In models that are based on loan loss ratios, a β that is found to be less than one for a particular loan sector indicates that
A. the loans in that sector will soon be downgraded soon.
B. the FI should increase its concentration in that loan sector due to the high rates of return.
C. the loan losses in that sector are systematically lower relative to total loan losses.
D. the FI should decrease its exposure to that sector because losses are higher than the rest of the portfolio
E. the calculation is in error because β is restricted to be greater than one.
Q:
A Hypothetical Rating Migration, or Transition Matrix, reflects all of the following EXCEPT
A. rating at which the portfolio ended the year.
B. transition probabilities.
C. rating at which the portfolio of loans began the year.
D. future migration expected in the portfolio.
E. the average proportions of loans that began the year.