Question 1

Even with liquidity planning, net deposit withdrawals and/or the exercise of loan commitments can pose significant liquidity problems for banks.

Accepted Answer

A) True 
 B)False

Question 2

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.

Accepted Answer

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.F) B) and D)
G) B) and E)

Question 3

An expected net deposit drain on any given day means that deposit withdrawals are less than deposit inflows.

Accepted Answer

A) True 
 B)False

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

Asset-side liquidity risk may be a result of off-balance sheet (OBS) lending commitments.

Accepted Answer

A) True 
 B)False

Question 6

For life insurance companies, the distribution of premium income minus policyholder liquidations is unpredictable.

Accepted Answer

A) True 
 B)False

Question 7

When banks use stored liquidity management, they

Accepted Answer

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.F) A) and B)
G) A) and C)

Question 8

Which of the following is NOT used as a method of measuring liquidity risk?

Accepted Answer

A)  Liquidity coverage ratio.
B)  Liquidity index.
C)  Financing gap and financing requirement.
D)  Peer group ratio comparison.
E)  Current ratio.F) B) and D)
G) D) and E)

Question 9

In a crisis, which of the following are more likely to withdraw funds quickly from banks and thrifts?

Accepted Answer

A)  Correspondent banks.
B)  Small business corporations.
C)  Individual depositors.
D)  Mutual funds.
E)  Foreign depositors.F) A) and B)
G) A) and C)

Question 10

How does purchased liquidity management affect profitability?

Accepted Answer

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.F) B) and E)
G) All of the above

Question 11

Which of the following statements is NOT true?

Accepted Answer

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.F) A) and C)
G) A) and D)

Question 12

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.
E)  fluctuates unpredictably on any given day.F) B) and D)
G) A) and B)

Question 13

A DI's financing requirement is defined as its financing gap plus the DI's liquid asset holdings.

Accepted Answer

A) True 
 B)False

Question 14

Purchased liquidity management carries the potential risk of significant increases in the cost of funds during periods of high interest rate volatility.

Accepted Answer

A) True 
 B)False

Question 15

Liquidity risk for an FI includes the possibility of an unexpected inflow of funds.

Accepted Answer

A) True 
 B)False

Question 16

What information does the net liquidity statement provide?

Accepted Answer

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.F) None of the above
G) A) and B)

Question 17

Unlike DIs, there is never a need for a life insurance company to have a liquidity plan for a "run" resulting from concerns about its solvency.

Accepted Answer

A) True 
 B)False

Question 18

Hedge funds are not susceptible to liquidity risk or a liquidity crisis.

Accepted Answer

A) True 
 B)False

Question 19

The Fed discount window maintains three lending programs to assist DIs in managing liquidity problems.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 12: Liquidity Risk

An expected net deposit drain on any given day means that deposit withdrawals are less than deposit inflows.

Correct AnswerverifiedShow Answer

The Fed discount window maintains three lending programs to assist DIs in managing liquidity problems.

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Which of the following statements is NOT true?

Correct AnswerverifiedShow Answer

Unlike DIs, there is never a need for a life insurance company to have a liquidity plan for a "run" resulting from concerns about its solvency.

Correct AnswerverifiedShow Answer

A bank's net deposit drain

Correct AnswerverifiedShow Answer

Even with liquidity planning, net deposit withdrawals and/or the exercise of loan commitments can pose significant liquidity problems for banks.

Correct AnswerverifiedShow Answer

Which of the following is NOT used as a method of measuring liquidity risk?

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

How does purchased liquidity management affect profitability?

Correct AnswerverifiedShow Answer

For life insurance companies, the distribution of premium income minus policyholder liquidations is unpredictable.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A DI's financing requirement is defined as its financing gap plus the DI's liquid asset holdings.

Correct AnswerverifiedShow Answer

Asset-side liquidity risk may be a result of off-balance sheet (OBS) lending commitments.

Correct AnswerverifiedShow Answer

Liquidity risk for an FI includes the possibility of an unexpected inflow of funds.

Correct AnswerverifiedShow Answer

When banks use stored liquidity management, they

Correct AnswerverifiedShow Answer

What information does the net liquidity statement provide?

Correct AnswerverifiedShow Answer

In a crisis, which of the following are more likely to withdraw funds quickly from banks and thrifts?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Hedge funds are not susceptible to liquidity risk or a liquidity crisis.

Correct AnswerverifiedShow Answer

Purchased liquidity management carries the potential risk of significant increases in the cost of funds during periods of high interest rate volatility.

Correct AnswerverifiedShow Answer

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