Q&A Hero

Q: The Taylor Treadwell Bank has just calculated the ratio of its demand deposits to total time deposits. Which liquidity indicator is this? A. Deposit composition ratio B. Liquid securities indicator C. Net federal funds and repurchase agreement position D. Capacity ratio E. None of the options is correct

Q: The Taylor Treadwell Bank has just calculated the ratio of its net loans and leases to total assets. Which liquidity indicator is this? A. Cash position indicator B. Liquid securities indicator C. Net federal funds and repurchase agreement position D. Capacity ratio E. None of the options is correct

Q: Which of the following is an option when a liquidity deficit arises and a bank wants to use stored liquidity in its assets to cover the deficit? A. Borrowing in the Federal Funds market B. Issuing a jumbo CD C. Selling Treasury Bills D. Increasing their correspondent deposits with another bank E. All the options are correct

Q: The HTR Bank of Summerville has just calculated the ratios of its money market (short term) assets to volatile liabilities. Which liquidity indicator is this? A. Cash position indicator B. Liquid securities indicator C. Net federal funds and repurchase agreement position D. Capacity ratio E. Hot money ratio

Q: The Burr Bank has just calculated the ratio of its U.S. Government Securities to Total Assets. Which liquidity indicator is this? A. Cash position indicator B. Liquid securities indicator C. Net federal funds and repurchase agreement position D. Capacity ratio E. Hot money ratio

Q: The Simpson State Bank of Stillwater has just sold Federal funds to another bank in its Federal Reserve district. Which type of factor affecting legal reserves is this for the bank? A. A controllable factor increasing legal reserves B. A noncontrollable factor increasing legal reserves C. A controllable factor decreasing legal reserves D. A noncontrollable factor decreasing legal reserves E. None of the options is correct

Q: The Hora National Bank has just received notice that a large depositor with the bank wants to close its account immediately. Which type of factor affecting legal reserves is this for the bank? A. A controllable factor increasing legal reserves B. A noncontrollable factor increasing legal reserves C. A controllable factor decreasing legal reserves D. A noncontrollable factor decreasing legal reserves E. None of the options is correct

Q: The Sasser State Bank has just sold $25 million in Treasury Bills. Which type of factor affecting legal reserves is this for the bank? A. A controllable factor increasing legal reserves B. A noncontrollable factor increasing legal reserves C. A controllable factor decreasing legal reserves D. A noncontrollable factor decreasing legal reserves E. None of the options is correct

Q: The Peace Bank of Ohio has just received a $50 million credit at the local clearing house. Which type of factor affecting legal reserves is this for the bank? A. A controllable factor increasing legal reserves B. A noncontrollable factor increasing legal reserves C. A controllable factor decreasing legal reserves D. A noncontrollable factor decreasing legal reserves E. None of the options is correct

Q: The Harmony Bank of the South has just increased its Federal Funds Purchases. What source of liquidity does this represent to the bank? A. Incoming customer deposit B. Revenues from the sale of nondeposit services C. Customer loan repayment D. Sale of an asset E. Borrowings from the money market

Q: David Ashby has just paid off the balance on his home mortgage with First American Bank. What source of liquidity does this represent to the bank? A. Incoming customer deposit B. Revenues from the sale of nondeposit services C. Customer loan repayment D. Sale of an asset E. Borrowings from the money market

Q: A bank is required to maintain an average daily balance at the Fed of $700 million. On the first day of the maintenance period it maintains a balance of $750 million, the next two days it maintains a balance of $725 million, the next three days it maintains a balance of $625 million, the next three days it maintains a balance of $775 million, the next two days it maintains a balance of $700 million, and the next two days it maintains a balance of $675 million. What does its balance at the Fed has to be on the last day of the maintenance period in order to have a zero cumulative reserve deficit? A. $700 million B. $650 million C. $750 million D. $325 million E. None of the options is correct

Q: The Hollingsworth National Bank maintains an average clearing balance of $7,000,000 with the Federal Reserve. The Federal Funds rate is currently 5.25 percent. What is the credit the bank will earn over the maintenance period that can be used to offset any fees charged by the Federal Reserve? A. $367,500 B. $1,021 C. $14,292 D. $30,625 E. None of the options is correct

Q: A bank currently has $50 million in stable deposits against which they want to keep 10% reserves, $100 in vulnerable deposits against which they want to keep 40% reserves, and they have $50 million in "hot money" deposits against which they want to keep 90% reserves. The legal reserves for this bank are 10% of all deposits. What is the bank's liability liquidity reserve? A. $90 million B. $81 million C. $70 million D. $20 million E. None of the options is correct

Q: John Camey, the money manager of the First State Bank, has estimated that the bank has a 20 percent chance of a liquidity deficit of $700 million, a 30 percent chance of a liquidity deficit of $200 million, a 30 percent chance of a liquidity surplus of $400 million and a 20 percent chance of a liquidity surplus of $900 million over the next week. What is the bank's expected liquidity deficit or surplus over the next week? A. $100 million liquidity surplus B. $100 million liquidity deficit C. $400 million liquidity surplus D. $500 million liquidity surplus E. $0 liquidity surplus

Q: The Shirley State Bank has $90 million in transaction deposits subject to legal reserves. The bank must hold 3 percent legal reserves up to $43.9 million of transaction deposits and 10 percent legal reserves on any amount above this. What is the bank's total legal reserve requirement? A. $2.700 million B. $1.449 million C. $5.927 million D. $4.170 million E. None of the options is correct

Q: A bank or financial service institution can generally meet reserve requirements using all of the following except: A. selling liquid investments. B. borrowing in the fed funds market. C. drawing on any excess correspondent balances. D. borrowing in the repo market. E. selling new shares.

Q: The Fed funds rate usually hovers around the Fed's: A. target rate. B. set rate. C. quoted rate. D. limit rate. E. average rate.

Q: The Fed funds market is most volatile on a bank: A. computation day. B. settlement day. C. reserve day. D. maintenance day. E. holiday.

Q: Which of the following statements is correct? A. Demand for liquidity and sources of liquidity for a bank are generally equal to each other. B. Most liquidity problems in the banking system arise from outside a bank. C. Liquidity problems for a bank are made easier because most of their liabilities are not subject to immediate repayment. D. Liquidity management is easy for a bank because a bank that is very liquid is also very profitable. E. All of the options are correct.

Q: A manager that looks at loans and deposits increases and decreases among other things to measure the bank's liquidity position is using: A. the sources and uses of funds approach B. the structured funds approach C. the liquidity indicator approach D. signals from the marketplace E. None of the options is correct.

Q: A manager that examines the bank's stock price behavior and risk premium on the CDs to measure liquidity position is using: A. the sources and uses of funds approach. B. the structured funds approach. C. the liquidity indicator approach. D. signals from the marketplace. E. None of the options is correct.

Q: A manager that uses ratios such as cash and deposits due from banks to total assets and U.S. government securities to total assets to measure a firm's liquidity position is using: A. the sources and uses of funds approach. B. the structured funds approach. C. the liquidity indicator approach. D. signals from the market place. E. None of the options is correct.

Q: Which of the following is a guideline for liquidity managers of banks? A. A liquidity manager must keep track of activities of all departments of the bank B. A liquidity manager must know in advance (if possible) the plans of major creditors and depositors C. A liquidity manager should make sure the bank has clear priorities and objectives for liquidity management D. A liquidity manager must analyze the liquidity needs of the bank on a continuous basis E. All the options are guidelines for liquidity managers

Q: A financial institution has estimated that over the last ten years the deposit withdrawals during Christmas time is about 25% higher than during any other time of the year. This is the _________________________ of estimating future deposits. A. trend component B. seasonal component C. cyclical component D. stationary component E. None of the options is correct

Q: A financial institution has estimated that its growth rate in deposits over the last ten years has averaged 6 percent per year. This is the _________________________ of estimating future deposits. A. trend component B. seasonal component C. cyclical component D. stationary component E. None of the options is correct

Q: In the week to come, a bank expects $55 million in incoming deposits, $75 million in acceptable loan requests, $35 million in money market borrowings, $10 million in deposit withdrawals, and $30 million in loan repayments. The bank is expecting a: A. liquidity deficit. B. liquidity surplus. C. balanced liquidity position. D. liquidity reversal. E. None of the options is correct.

Q: A bank money manager estimates that the bank will experience a liquidity deficit of $400 million with a probability of 10 percent, a liquidity deficit of $900 million with a probability of 20 percent, a liquidity surplus of $600 million with a probability of 30 percent, and a liquidity surplus of $1,200 with a probability of 40 percent over the next month. What is this bank's expected liquidity deficit or surplus next month? A. $880 million liquidity surplus B. $440 million liquidity deficit C. $440 million liquidity surplus D. $880 million liquidity deficit E. None of the options is correct

Q: A bank currently holds $105 million in transaction deposits subject to legal reserves but has managed to enter into sweep account arrangements affecting $55 million of these accounts. Given that the bank must hold 3 percent legal reserves up to $47.8 million of transaction deposits and 10 percent legal reserves on any amount above that, how much has this bank reduced its total legal reserves as a result of these sweep arrangements? A. $5.500 million B. $1.449 million C. $7.119 million D. $1.619 million E. None of the options is correct

Q: A bank maintains an average clearing balance of $1,000,000 with the Federal Reserve. The Federal funds rate is currently 4.5 percent. What amount of credit will the bank earn over the reserve maintenance period that can be used to offset any fees charged by the Federal Reserve? A. $17,500 B. $1,750 C. $45,000 D. $12,500 E. None of the options is correct

Q: A bank currently has $150 million in "hot money" deposits against which it wants to hold an 80 percent reserve and $90 million in vulnerable deposits against which it wants to hold a 30 percent reserve. It also has $45 million in stable deposits against which it wants to hold a 5 percent reserve. Legal reserves for the bank are 5 percent of all deposits. What is the bank's liability liquidity reserve? A. $149.25 million B. $285 million C. $141.7875 million D. $216.60 million E. None of the options is correct

Q: Which of the following is an example of a source of funds? A. A customer withdraws $1,000 from his account B. A borrower repays $1,500 of a loan he had taken C. A bank increases its Fed funds sold account by $1,000,000 D. A bank purchases $5,000,000 in T-Bills E. None of the options is a source of funds

Q: Which of the following is an example of a use of funds? A. A customer withdraws $1,000 from their account B. A borrower repays $1,500 of a loan they have received C. A bank issues a $1,000,000 CD D. A bank sells $5,000,000 of T-Bills E. None of the options is a use of funds

Q: If a bank's management uses "the discipline of the financial marketplace" to gauge its liquidity position, one of the indicators of this market test of adequacy of a bank's liquidity position is: A. the bank's return on equity capital. B. the volume of bank stock outstanding. C. the bank's return on assets. D. the size of risk premiums on CDs the bank issues. E. None of the options is correct.

Q: A person responsible for overseeing an institution's legal reserve account is called: A. reserve manager. B. money market manager. C. money position manager. D. legal counselor. E. None of the options is correct.

Q: When some of a bank's expected demand for liquidity are stored in its assets, while other unexpected cash needs are met from near-term borrowings, the approach to liquidity management is known as: A. liability management. B. asset conversion. C. borrowed liquidity management. D. balanced liquidity management. E. None of the options is correct

Q: A bank following a(n) _________________________ liquidity management strategy must take care that assets with the least profit potential are sold first. A. asset conversion B. liability management C. availability D. funds source E. None of the options is correct

Q: The risk that liquid funds will not be available in the volume needed by a bank is often called: A. market risk. B. price risk. C. availability risk. D. interest-rate risk. E. None of the options is correct.

Q: Factors that influence a bank's choice among the various sources of reserves include which of the following? A. Immediacy of the need B. Duration of the need C. Interest rate outlook D. Regulations E. All of the options are correct

Q: "Core deposits", "hot money", and "vulnerable money" are categories of funds under which of the following methods of estimating a bank's liquidity needs? A. Sources and uses of funds approach B. Structure of funds approach C. Liquidity indicator approach D. Sources and uses of funds approach and liquidity indicator approach E. None of the options is correct

Q: When a bank's sources of liquidity exceed it uses of liquidity, the bank will have a: A. positive liquidity gap. B. negative liquidity gap. C. cyclical liquidity gap. D. seasonal liquidity gap. E. None of the options is correct.

Q: Due to the inherent risks in relying on borrowed liquidity and costs of storing liquid assets, most financial firms compromise by using: A. asset management. B. liability management. C. balanced liquidity management. D. asset and liability management. E. All the options are correct.

Q: Which of the following is not a source of liquidity for financial institutions? A. Deposits B. Money market borrowings C. Sale of marketable securities D. Dividend payments to stockholders E. All the options are correct.

Q: Sources of liquidity for banks include: A. deposit inflows. B. money market borrowings. C. sale of marketable securities. D. repayments of loans disbursed. E. All of the options are correct.

Q: Financial institutions face significant liquidity problems because of: A. imbalances between the maturities of their assets and liabilities. B. their high proportion of liabilities subject to immediate withdrawal. C. the sensitivity of their business to changes in interest rates. D. imbalances between the maturities of their assets and liabilities and their high proportion of liabilities subject to immediate withdrawal. E. All of the answer options are correct.

Q: For a bank, there is always a trade-off problem between liquidity and: A. risk exposure. B. revenue generation. C. profitability. D. efficiency. E. None of the options is correct.

Q: In the week about to begin, a bank expects $30 million in incoming deposits, $20 million in deposit withdrawals, $15 million in revenues from the sale of nondeposit services, $25 million in customer loan repayments, $5 million in sale of bank assets, $45 million in money market borrowings, $60 million in acceptable loan requests, $10 million in repayments of bank borrowings, $5 million in cash outflows to cover other operating expenses, and $10 million in dividend payments to its stockholders. The bank's net liquidity position for the week is expected to be: A. $30 million surplus. B. $20 million deficit. C. $10 million deficit. D. $15 million surplus. E. None of the options is correct.

Q: The two most pressing demands for liquidity from a bank come from, first, customers withdrawing their deposits and, second, from: A. credit requests from customers the bank wishes to keep. B. checks being cashed at local stores and directly from the bank. C. demands for wired funds from correspondent banks. D. legal reserve requirements set by the Federal Reserve Board. E. None of the options is correct.

Q: Which of the following is not a reason for banks to hold liquid assets? A. To meet customers' needs for currency B. To meet capital requirements C. To meet required reserves D. To compensate for correspondent bank services E. To assist in the check clearing process

Q: A financial institution that has ready access to immediately spendable funds at reasonable cost and at precisely the time those funds are needed is considered: A. risk-free. B. liquid. C. efficient. D. profitable. E. None of the options is correct.

Q: Loan commitments ratio measures the volume of promises a lender has made to its customers to provide credit up to pre-specified amount over a given time period.

Q: Core deposit ratio is used as one of the liquidity indicators for depository institutions and is defined as ratio of the core deposits to total assets.

Q: All central banks around the world have some specified reserve requirement.

Q: A bank or financial service institution can meet reserve requirements by selling Treasury securities in its portfolio.

Q: Discount window loans jumped dramatically the day following 9/11.

Q: Robberies of cash from banks have declined in recent years.

Q: Interest in banks' and financial service institutions' liquidity management is a relatively new phenomenon which arose following the 9/11 crisis.

Q: Some central banks around the world impose reserve requirements on bank loans.

Q: The oldest approach to liquidity management is the asset liquidity management approach.

Q: The liquidity problem for banks is made easier because depositors and borrowers are not sensitive to changing interest rates.

Q: The liquidity problem for banks is made easier because most of their liabilities are not subject to immediate repayment.

Q: One of the problems with liquidity management for a bank is that there is a trade-off between liquidity and profitability.

Q: The sources and uses of funds method of estimating a bank's liquidity requirements divides the bank's liabilities into three categorieshot money, vulnerable funds, and stable fundsand estimates the probability of each being withdrawn from the bank.

Q: All central banks impose reserve requirements on the banks they regulate.

Q: According to the textbook, banks making heavy use of borrowed sources of liquidity must wrestle with the problem of interest cost uncertainty.

Q: According to the textbook, if a bank's liquidity deficit is expected to last for only a few hours, the Federal funds market or the central bank's discount window is normally the preferred source of funds.

Q: If a bank receives more checks deposited to the accounts it holds than checks drawn against its deposit accounts, the bank's legal reserves will tend to increase.

Q: If a bank in the United States runs a legal reserve deficit of more than 2 percent of its required daily average legal reserve position, it will be assessed an interest penalty equal to the Federal Reserve's discount rate plus 5 percent.

Q: A bank's money position manager is responsible for ensuring that the bank maintains an adequate level of legal reserves.

Q: The liquidity indicator, core deposits divided by total assets, is a measure of stored liquidity.

Q: The Federal Reserve has been lowering deposit reserve requirements in recent years.

Q: Volume of legal reserves held at the Federal Reserve by depository institutions has declined sharply in recent years.

Q: Most liquidity problems in banking arise from inside a bank, not from its customers.

Q: A U.S. bank can run up to a 5-percent deficit in its legal reserve requirement unconditionally without incurring an interest penalty from the Federal Reserve System.

Q: According to the textbook, the management of a bank expects to lose its "hot money" liabilities during a period.

Q: A financial institution's liquidity gap represents the difference between its sources and uses of liquid funds.

Q: Borrowed liquidity (liability) management is less risky for a financial institution than is asset conversion.

Q: One principle of sound bank liquidity management is to be sure to first sell those assets which have least profit potential.

Q: Asset conversion is considered to be a costless approach to liquidity management.

Q: Liquid assets generally have a stable price but are not necessarily reversible.