Question 1

What are the two major liquidity risk insulation devices available?

Accepted Answer

A)  Deposit insurance borrowing from the Bank of Canada.
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.F) A) and D)
G) C) and E) A

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

Managing asset-side liquidity risk can involve either purchased liquidity management or stored liquidity management.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following is a condition for a DTI 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 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.F) A) and E)
G) C) and D)

Question 5

In the event of a bank run, depositor claims on the bank are satisfied on a pro rata basis.

Accepted Answer

A) True 
 B)False  False

Question 6

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.
E)  $0.10.F) C) and D)
G) B) and D)

Question 7

Surrender value is the amount of cash a life insurance policy holder can receive by turning in the policy before it expires or matures.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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.
E)  loss of flexibility as a result of dependence upon purchased liabilities.F) A) and B)
G) A) and C)

Question 10

During the financial crisis of 2008, liquidity problems were avoided as banks continued to provide lending to each other.

Accepted Answer

A) True 
 B)False

Question 11

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?

Accepted Answer

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

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

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.
E)  average loans minus average deposits.F) C) and E)
G) B) and D)

Question 14

Asset-side liquidity risk may be a result of OBS lending commitments.

Accepted Answer

A) True 
 B)False

Question 15

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.
E)  Because the adjustment to the deposit drain occurs on the liability side of the balance sheet.F) D) and E)
G) B) and E)

Question 16

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

Accepted Answer

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

Question 17

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

Accepted Answer

A) True 
 B)False  True

Question 18

An FI's most liquid asset is cash.

Accepted Answer

A) True 
 B)False

Question 19

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 20

If stored liquidity is used by a DTI to fund an exercised loan commitment

Accepted Answer

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.F) A) and E)
G) B) and E)

Exam 12: Liquidity Risk

What are the two major liquidity risk insulation devices available?

Correct AnswerverifiedA

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

Correct AnswerverifiedShow Answer

Managing asset-side liquidity risk can involve either purchased liquidity management or stored liquidity management.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

In the event of a bank run, depositor claims on the bank are satisfied on a pro rata basis.

Correct AnswerverifiedFalse

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 AnswerverifiedShow Answer

Surrender value is the amount of cash a life insurance policy holder can receive by turning in the policy before it expires or matures.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

During the financial crisis of 2008, liquidity problems were avoided as banks continued to provide lending to each other.

Correct AnswerverifiedShow Answer

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?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Asset-side liquidity risk may be a result of OBS lending commitments.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedTrue

An FI's most liquid asset is cash.

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

If stored liquidity is used by a DTI to fund an exercised loan commitment

Correct AnswerverifiedShow Answer

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