Q&A Hero

Q: Asset liquidity management (asset conversion) involves storing liquidity in assets, such as cash and marketable securities.

Q: Liquid assets must have a reasonably stable price so that the market is deep enough to absorb the sale without a significant loss of value.

Q: One of the ratios used in the liquidity indicator approach to managing a financial institution's liquidity needs is ___________. This ratio is cash and deposits due from depository institutions divided by total assets, where a greater ratio indicates a stronger liquidity position.

Q: The ____________ is where a money position manager can cover a large reserve deficit quickly. It is usually one of the cheapest places to borrow but is also frequently volatile.

Q: If total legal reserves held are less than required reserves, a bank has ___________.

Q: If total legal reserves held are greater than required reserves, a bank has ____________.

Q: The daily average amount of deposits and other reservable liabilities are computed using information gathered over a two-week period extending from a Tuesday to a Monday two weeks later. This interval is known as ___________.

Q: Many analysts believe there is only one ultimate sound method for assessing a financial institution's liquidity needs. This method centers on ___________.

Q: Many financial service institutions estimate their liquidity needs based upon experience and industry averages. This approach to managing liquidity is called the ____________ approach.

Q: In the _____________ approach to managing liquidity, deposits and other sources of funds are divided into categories and, then liquidity managers must set aside liquid funds according to some desired operating rule.

Q: The ________________ approach to managing liquidity starts with two simple facts, liquidity rises as deposits increase and loans decrease, and liquidity falls when deposits fall and loans increase.

Q: For several decades, the largest banks around the world have chosen _____________, which calls for borrowing immediately spendable funds to cover all anticipated demands for liquidity.

Q: Not all _____________ banks around the world have reserve requirements.

Q: Many depository institutions hold __________ balances (extra reserves) to help prevent overdraft penalties.

Q: The fed funds rate is generally most volatile on a bank's __________ day.

Q: The method used in the U.S. to determine a bank's legal reserve requirement, in which the period for holding legal reserves follows the period used to calculate the required amount of legal reserves, is called ________________________.

Q: A(n) _________________________ is the person in a bank, responsible for the bank's cash position and meeting legal reserve requirements.

Q: Under a _________________________ strategy, some of the expected demands for liquidity are stored in assets, while others are backstopped by arrangements for lines of credit from banks or other suppliers of funds.

Q: The oldest approach to meeting liquidity needs, which relies on the sale of liquid assets to meet liquidity demands is called ________________________.

Q: _________________________ is the availability of cash in the amount needed at a reasonable cost.

Q: _________________________ is a 14 day period stretching from a Thursday to a Wednesday. This is the period in which a bank has to keep its average daily level of required reserves for a particular computation period with the Federal Reserve bank in the region.

Q: A(n) _________________________ is a service developed by banks where a bank shifts money overnight out of accounts with reserve requirements into savings accounts and other similar accounts with no reserve requirements

Q: A(n) _________________________ is an account many banks hold at the Federal Reserve to cover any checks drawn against the bank.

Q: _________________________ are the assets a bank must, by law, hold behind its deposits. In the U.S., only vault cash and deposits held with the Federal Reserves can be used to meet these requirements.

Q: _________________________ are the deposits and other borrowings of a bank which are very interest sensitive or the ones bank is sure will be withdrawn during the current period.

Q: A _________________________ is the difference between an institution's sources and uses of funds.

Q: _________________________ is a strategy in which a financial institution borrows in the money market to meet its liquidity needs.

Q: When a financial institution sells assets to manage liquidity, it faces ________________________. It loses future earnings on those assets, incurs transaction costs on those sales, and the assets most easily sold often have the lowest return.

Q: A(n) __________________ is an asset which can be converted into cash easily, which has a relatively stable price, and is reversible so that the sellers can recover their original investment with little risk of loss.

Q: _____________ is a strategy of protecting securities purchased from loss of return, no matter which way interest rates go. A. Duration B. Immunization C. Front-end loading D. Back-end loading E. Factorization

Q: If the yield curve is upward sloping: A. investors expect the short-term interest rates to fall in the future. B. investors often shift their investment holdings away from long-term securities. C. investors often short sell short-term securities. D. no portfolio management is required. E. investors often shift their investment holdings away from short-term securities.

Q: Range notes are: A. securities that usually pay low interest rates. B. securities that pay interest only if the underlying index moves out of the predetermined range. C. securities that pay interest only if the underlying index stays in the predetermined range. D. usually issued as putable securities. E. securities with pay-off similar to a financial future.

Q: Capital gains on municipal bonds are: A. fully taxable without any exceptions. B. tax exempt. C. tax deductible. D. fully taxable except for appreciation to par for bonds originally issued at a discount. E. tax exempt for bonds issued at a premium.

Q: Bankers' acceptances: A. can be sold in the open market. B. are non-negotiable instruments. C. are always sold at a price above par value. D. if sold, erases the issuer's obligation to pay off at maturity. E. never qualify for discounting at the Federal Reserve Banks.

Q: The Treasury Direct system: A. provides the owners of treasury securities with statement of holdings. B. deposits any income earned directly into the owners' accounts. C. provides greater convenience to the investors. D. provides increased protection against theft. E. All the options are correct.

Q: An investor's return on a T-bill consists purely of: A. cash dividends. B. coupon payments. C. price appreciation. D. stock dividends E. special dividends.

Q: Which of the following is also referred to as a bank's crossroads account? A. Investments B. Capital C. Total assets D. Total liabilities E. Shareholders' equity

Q: Which of the following asset classes is considered as the riskiest for a bank? A. Corporate bonds B. Equities C. Real-estate D. Loans E. Municipal bonds

Q: The Dakota National Bank has purchased a security issued by the state of Tennessee that has 20 years to maturity. What type of security has it purchased? A. Commercial Paper B. Banker's Acceptance C. Corporate Bond D. Certificate of Deposit E. Municipal Bond

Q: The Goodknight Company has issued securities with 45 days to maturity. What type of security has it issued? A. Commercial Paper B. Banker's Acceptance C. Corporate Bond D. Treasury Bonds E. Municipal Bond

Q: The Wesson Wisconsin State Bank has purchased a bank-qualified municipal bond with a coupon rate of 7.5%. The bank had to borrow funds to make this purchase at a cost of 6%. The bank is in the 25% tax bracket. What is the net after-tax return on this bank-qualified municipal bond? A. 7.5% B. 2.7% C. 3.0% D. 1.5% E. None of the options is correct

Q: The Carey State Bank has purchased a bank-qualified municipal bond with a coupon rate of 6%. The bank has had to borrow funds to make this purchase at a cost of 5.25%. The bank is in the 40% tax bracket. What is the net after-tax return on this bank-qualified municipal bond? A. 6.00% B. 0.75% C. 2.85% D. 2.43% E. None of the options is correct

Q: The Roy State Bank has just purchased a portfolio of asset-backed securities. What type of risk do these securities have that other securities do not have? A. Credit risk B. Interest rate risk C. Business risk D. Call risk E. Prepayment risk

Q: Moody's Investor Service has added the numbers 1, 2, and 3 to some of their ratings. What type of risk are these ratings attempting to measure? A. Credit risk B. Interest rate risk C. Business risk D. Call risk E. Prepayment risk

Q: The Caldwell National Bank has purchased a bond that pays a coupon rate of 10.5%. It is a little concerned because it believes rates will decrease in the future and they will not be able to reinvest the coupon payments at the same rate. What type of risk are they concerned about? A. Credit risk B. Reinvestment risk C. Business risk D. Call risk E. Prepayment risk

Q: The Terrell State Bank is a small bank located in Guyman, Oklahoma. All of its loans are agriculture and small business loans in Guyman. It wants to buy a municipal bond from the state of South Carolina. What type of risk is it likely trying to reduce with this purchase? A. Credit risk B. Interest-rate risk C. Business risk D. Call risk E. Prepayment risk

Q: The Dillinger State Bank has purchased a bond issued by the Interstate Manufacturing Company that has 15 years to maturity and has a coupon rate of 12.5%. Market interest rates have recently declined to 8% and the Dillinger State Bank is worried that the Interstate Manufacturing Company will retire the bond and issue new ones with a lower coupon rate. What type of risk is the Dillinger State Bank worried about? A. Credit risk B. Interest-rate risk C. Business risk D. Call risk E. Inflation risk

Q: The Sheets Savings and Loan Association has purchased a bond that has a coupon rate of 7.5% and a face value of $1000. It has 5 years to maturity and is currently selling in the market for $1063. The bond makes annual coupon payments. What is the duration of this bond? A. 7.50 years B. 5.00 years C. 4.65 years D. 4.37 years E. None of the options is correct

Q: The Johnson National Bank has purchased a bond that has a coupon rate of 5.5% and a face value of $1000. It has 4 years to maturity and is currently selling in the market for $917. The bond makes annual coupon payments. What is the duration of this bond? A. 3.38 years B. 3.6 years C. 4.00 years D. 5.50 years E. None of the options is correct

Q: The Farmer National Bank has purchased a bond that has a coupon rate of 11.5% and a face value of $1000. It has 16 years to maturity and is currently selling in the market for $1309.80. The bond makes annual coupon payments. The Farmer National Bank plans on selling this bond at the end of 8 years for $1071 (ex-interest). What is the holding period return on this bond? A. 7% B. 8% C. 11.5% D. 16% E. None of the options is correct

Q: The Price Perpetual Bank has purchased a bond that has a coupon rate of 5.5% and a face value of $1,000. It has 11 years to maturity and is currently selling in the market for $887.52. The bond makes annual coupon payments. The Price Perpetual Bank is planning on selling this bond at the end of 5 years for $1,036.50 (ex-interest). What is the holding period return on this bond? A. 5.5% B. 7% C. 11% D. 9.82% E. None of the options is correct

Q: The Stumbaugh State Bank is thinking about purchasing a corporate bond that pays a coupon of 9%. The bank has a marginal tax rate of 40%. What is the after-tax yield on this bond? A. 15% B. 9% C. 5.4% D. 3.6% E. None of the options is correct

Q: The Ferson National Bank is thinking about purchasing a municipal bond that pays a coupon of 5.5%. This bank has a marginal tax rate of 30%. What is the after-tax yield on this bond? A. 7.86% B. 5.5% C. 3.85% D. 1.65% E. None of the options is correct

Q: The Lancaster State Bank is thinking about purchasing a corporate bond that pays a coupon of 8.5%. The bank has a marginal tax rate of 25%. What is the after-tax yield on this bond? A. 11.33% B. 8.5% C. 6.375% D. 2.125% E. None of the options is correct

Q: An investment maturity strategy which calls for a bank to put all of its investment assets into very long-term securities is called the: A. front-end loaded maturity policy. B. back-end loaded maturity policy. C. ladder or spaced maturity policy. D. barbell investment portfolio strategy. E. rate expectation approach.

Q: Which of the following is a characteristic of Treasury bills? A. They are coupon instruments B. They are short-term debt instruments issued by major corporations C. They are discount securities D. They have more risk than other money market securities E. All the options are characteristics of Treasury bills

Q: A bank that is concerned that the economic conditions of the market area they serve may take a downturn with falling demand for loans and higher bankruptcies in the areas, is concerned about which of the following? A. Business risk B. Liquidity risk C. Tax exposure D. Credit risk E. Inflation risk

Q: A financial institution that is concerned about the possibility that the purchasing power of both the interest income and repaid principal on a loan will decline is concerned about which of the following? A. Business risk B. Liquidity risk C. Tax exposure D. Credit risk E. Inflation risk

Q: A security which was created by the United States Treasury department to protect against inflation risk is called: A. CMO. B. FNMA. C. GNMA. D. TIPS. E. CD.

Q: A bond has eight years to maturity and a coupon rate of 6.5 percent. Coupon payments are made annually and the bond has a face value of $1,000. The bond is currently selling in the market for $862. If this bond is sold at the end of four years for $1046 (ex-interest), what is the holding period return on this bond? A. 6.5 percent B. 12 percent C. 9 percent D. 6 percent E. None of the options is correct

Q: A bond has six years to maturity and has a coupon rate of 7.5 percent. Coupon payments are made annually and the bond has a face value of $1,000. The bond is currently selling in the market for $1,127. What is the yield-to-maturity on this bond? A. 7.5 percent B. 5 percent C. 11.5 percent D. 2.5 percent E. None of the options is correct

Q: A $1,000 bond has three years to maturity and has a coupon rate of 15 percent. Coupon payments are made annually. The bond is currently selling in the market for $1,072 and has a yield-to-maturity of 12%. What is the duration of this bond? A. 3 years B. 1 year C. 1.92 years D. 2.45 years E. 2.64 years

Q: Which of the following would not be considered a bank-qualified municipal security? A. A Columbia County general obligation bond to modernize the county fire department B. A Bucks County general obligation bond to build a new sewer plant C. A City of San Marcos general obligation bond to pay for street repairs D. A City of Chicopee general obligation bond to pay for a new city jail E. A Treasury bond to finance government debt

Q: An investor can invest in either a tax-exempt security that pays 5%, or a taxable corporate security of comparable risk and maturity that pays 8%. At what marginal tax rate will the investor be indifferent between these two securities? A. 25.0% B. 32.5% C. 37.5% D. 57.5% E. 62.5%

Q: Suppose a bank has found bank-qualified municipal bonds which have a nominal gross rate of return of 8 percent and that it can borrow funds needed for this purchase at a rate of 6.25 percent. The bank is in the 35 percent tax bracket. What is the net after-tax return on this bond? A. 5.20 percent B. 3.5 percent C. 1.75 percent D. 0 percent E. None of the options is correct

Q: A bank replaces 5-year corporate bonds with a coupon rate of 9.75 percent with 5-year municipal bonds with a coupon rate of 7 percent. The bank is in the 35 percent tax bracket and these bonds have the same default risk. What is the most likely reason the bank changed from the corporate to the municipal bonds? A. Liquidity risk B. Business risk C. Credit risk D. Tax exposure E. Interest rate risk

Q: Mortgage prepayment risk: A. is higher on high interest rate mortgages. B. is felt most dramatically when interest rates rise. C. is eliminated by the use of mortgage backed securities. D. is eliminated by the purchase of a stripped mortgage obligation. E. All the options are true.

Q: A security where the interest payments and the principal payments are sold separately is called: A. a Treasury note. B. an accretion. C. a structured note. D. a stripped security. E. None of the options is correct.

Q: Banks are generally not allowed to invest in speculative grade bonds. What kind of risk is this designed to limit? A. Liquidity risk B. Business risk C. Credit risk D. Operational risk E. Interest rate risk

Q: In recent years security dealers have assembled pools of federal agency securities whose interest yield may be periodically reset based on what happens to a stated interest rate, or may carry multiple coupon rates that are periodically adjusted; the foregoing describes a: A. financial futures contract. B. revenue-anticipation note. C. zero coupon instrument. D. structured note. E. None of the options is correct.

Q: Which of the following is true of Treasury bills? A. Interest on Treasury bills is not exempt from state income taxes. B. Interest on Treasury bills is exempt from federal income taxes. C. Treasury bills pay a lower pre-tax yield than comparable corporate securities. D. All the options are true. E. None of the options is correct.

Q: Which of the following is not one of the capital market instruments? A. U.S. Treasury notes B. Corporate notes and bonds C. U.S. Treasury bonds D. Municipal bonds E. Commercial paper

Q: Which of the following statements is (are) correct regarding duration? A. In comparing two bonds with the same yield to maturity and the same maturity, a bond with a higher coupon rate will have a longer duration. B. In comparing two loans with the same maturity and the same interest rate, a fully amortized loan will have a shorter duration than a loan with a balloon payment. C. The duration will always be shorter than the maturity for all debt instruments. D. All of the options are correct. E. B and C

Q: The most aggressive investment maturity strategy that calls for the bank to continually shift the maturities of its securities in response to changes in forecasts of interest rates and other economic conditions is known as: A. barbell strategy. B. rate expectations approach. C. front-end loaded policy. D. ladder approach. E. None of the options is correct.

Q: _____________ is the method by which banks can provide a safeguard for the deposits of governmental units. A. Hedging B. Loan sale C. Pledging D. Securitization E. Window dressing

Q: Principal roles that a financial institution's investment portfolio plays include which of the following? A. Income stability B. Geographic diversification C. Hedging interest rate risk D. Backup liquidity E. All of the options are correct

Q: Fluctuations in the timing of cash-flows arising out of an underlying pool of securitized assets is referred to as: A. income risk. B. prepayment risk. C. liquidity risk. D. capital risk. E. None of the options is correct.

Q: Pools of mortgages put together, either by a government agency or by a private investment banking corporation, to raise more loanable funds for the issuer are known as a(n): A. accretion bond. B. participation certificate. C. CMO. D. stripped security. E. commercial paper.

Q: A bank's promise to pay the holder a designated amount of money, on a designated future date, and often used in international trade is known as a(n): A. promissory guarantee. B. discount security. C. bankers' acceptance. D. in-the-money option. E. accretion note.

Q: An important investment security popular with banks that must, by law, mature within one year from the date of issue and which has a high degree of safety and marketability is the: A. Treasury bill. B. Treasury note. C. FNMA note. D. bankers' acceptance. E. Eurodollar CD.