65.

A financial institution that has ready access to immediately spendable funds at

reasonable cost at precisely the time those funds are needed is:
Liquid
66. Which of the following is not a reason that banks to hold liquid assets?
B) To meet capital requirements.
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67. The two most pressing demands for liquidity from a bank come from, first,
customers withdrawing their deposits and, second, from:
A) Credit requests from those customers the bank wishes to keep
68. A bank expects in the week about to begin $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 sales 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.
This bank's net liquidity position for the week is:
D) $15 million
69. There is a trade-off problem between liquidity and:
Profitability
70. Financial institutions face significant liquidity problems because of:
A) Imbalances between the maturities of their assets and their principal liabilities.
B) Their high proportion of liabilities subject to immediate withdrawal.
C) Their sensitivity to changes in interest rates.
D) Both A and B
E) All of the above.
Answer: E
71. Sources of liquidity for banks include:
A) Deposit inflows
B) Money market borrowings
C) Sales of marketable securities
D) Loan repayments
E) All of the above
Answer: E
72. Which of the following is not a source of liquidity for financial institutions?
D) Dividend payments to stockholders
73. Which of the following liquidity strategies is the most effective for banks today?
C) Balanced Liquidity Management
74. When a bank's sources of liquidity exceed it uses of liquidity, the bank will have a
_______________ liquidity gap.
Positive
75. "Core deposits", "hot money", and "vulnerable money" are categories of funds
under which of the following methods of estimating a bank's liquidity needs?
B) Structure of Funds Approach
76. 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 above
Answer: E
77. The risk that liquid funds will not be available in the volume needed by a bank is
often called:
C) Availability risk
78. A bank following an _________________________ liquidity management
strategy must take care that those assets with the least profit potential are sold first.
The strategy that correctly fills in the blank in the foregoing sentence is:
A) Asset conversion
79. 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 this
approach to liquidity management is described by which of the terms listed below?
D) Balanced liquidity management
80. The notion that bank management should strive to meet all good loans that walk
in the door in order to build lasting customer relationships is referred to as the:
B) Customer relationship doctrine
81. A bank manager responsible for overseeing the institution's legal reserve
account is called:
C) Money position manager
82. If a bank's management uses "the discipline of the financial marketplace" to
gauge its liquidity position one indicator of this market test of the adequacy of a
bank's liquidity position is:
D) The size of risk premiums on CDs the bank issues
83. Which of the following is an example of a use of funds for the bank?
A) A customer withdraws $1000 from their account
84. Which of the following is an example of a source of funds?
B) A borrower repays $1500 of a loan they have received
85. A bank currently has $150 million in "hot money" deposits against which they
want to hold an 80 percent reserve. This bank has $90 million in vulnerable deposits
against which they want to hold a 30 percent reserve and this bank has $45 million in
stable deposits against which they want to hold a 5 percent reserve. The legal
reserves for this bank are 5 percent of all deposits. What is this bank's liability
liquidity reserve?
C) $141.7875 million
86. A bank maintains a clearing balance of $5,000,000 with the Federal Reserve.
The Federal funds rate is currently 6.5 percent. What credit will this bank earn over
the reserve maintenance period to offset any fees charged this bank by the Federal
Reserve?
D) $12,639
87. A bank maintains a clearing balance of $1,000,000 with the Federal Reserve.
The Federal funds rate is currently 4.5 percent. What credit will this bank earn over
the reserve maintenance period to offset any fees charged this bank by the Federal
Reserve?
B) $1,750
88. 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
89. 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 $1200 with a probability of 40 percent over the next
month. What is this bank's expected liquidity deficit or surplus over this next month?
C) $440 liquidity surplus
90. A bank expects in the week to come $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. This bank is expecting a:
B) Liquidity surplus
91. 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
92. 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.
B) Seasonal component
93. Which of the following is a guideline for liquidity managers of banks?
A) The liquidity manager must keep track of the activities of all departments of the
bank
B) The liquidity manager must know in advance (if possible) the plans of major
creditors and depositors
C) The liquidity manager should make sure the bank has clear priorities and
objectives for liquidity management
D) The liquidity manager must analyze the liquidity needs of the bank on a
continuous basis
E) All of the above are guidelines for liquidity managers
Answer: E
94. A manager that uses ratios such as cash and due from banks to total assets and
U.S. government securities to total assets to measure their liquidity position is using:
C) The liquidity indicator approach
95. A manager that examines the stock price behavior of the bank and the risk
premium on the bank CD's to measure their liquidity position is using:
D) Signals from the marketplace
96. A manager that looks at deposit increases and decreases and loan increases
and decreases among other things to measure their liquidity position is using:
A) The sources and uses of funds approach
97. Which of the following statements is correct?
B) Most liquidity problems in banking arise from outside the bank
98. The Fed funds market is most volatile on bank:
B) Settlement day
99. The Fed funds rate usually hovers around the Feds:
A) Target rate
100. A bank or financial service institution can generally meet reserve requirements
using all of the following except:
E) Selling new shares
101. The Shirley State Bank has $90 in transaction deposits subject to legal
reserves. This bank must hold 3 percent legal reserves up to $43.9 of transaction
deposits and 10 percent legal reserves on any amount above this. What is this
bank's total legal reserves?
C) $5.924 million
102. 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, a 30 percent chance
of a liquidity deficit of $200, a 30 percent chance of a liquidity surplus of $400 and a
20 percent chance of a liquidity surplus of $900 over the next week. What is this
bank's expected liquidity deficit or surplus over the next week?
A) $100 liquidity surplus
103. 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 this bank's liability liquidity reserve?
B) $81 million
104. The Hollingsworth National Bank maintains a clearing balance of $7,000,000
with the Federal Reserve. The Federal Funds rate is currently 5.25 percent. What is
the credit this bank will earn over the maintenance period to offset any fees charged
this bank by the Federal Reserve?
C) $14,292
105. A bank must maintain an average daily balance at the Fed of $600. In the first 2
days of the maintenance period, they maintain a balance of $450, the next three
days they maintain a balance of $700, the next two days they maintain a balance of
$650, the next three days they maintain a balance of $450 and the next three days
they maintain a balance of $650. What does their balance at the Fed have to be on
the last day of the maintenance period in order to have a zero cumulative reserve
deficit?
D) $800
106. A bank must maintain an average daily balance at the Fed of $700. On the first
day of the maintenance period they maintain a balance of $750, the next two days
they maintain a balance of $725, the next three days they maintain a balance of
$625, the next two days they maintain a balance of $775, the next two days they
maintain a balance of $700 and the next two days they maintain a balance of $675.
What does their balance have to be on the last day of the maintenance period in
order to have a cumulative reserve deficit?
B) $650
107. 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?
C) Customer loan repayment
108. The Harmony Bank of the South has just increased its Federal Funds
Purchased. What source of liquidity does this represent to the bank?
D) Sale of an asset
109. 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?
B) A noncontrollable factor increasing legal reserves
110. 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
111. The Hora National Bank has just received notice that a large depositor with the
bank wants to close their account immediately. Which type of factor affecting legal
reserves is this for the bank?
D) A noncontrollable factor decreasing legal reserves
112. The Simpson State Bank of Stillwater has just sold Federal Funds to another
bank in their Federal Reserve district. Which type of factor affecting legal reserves is
this for the bank?
C) A controllable factor decreasing legal reserves
113. The Burr Bank has just calculated the ratio of U.S. Government Securities to
Total Assets. Which liquidity indicator is this?
B) Liquid securities indicator
114. The HTR Bank of Summerville has just calculated the ratios of money market
(short term) assets to volatile liabilities. Which liquidity indicator is this?
E) Hot money ratio
115. Which of the following is an option when a liquidity deficit arises and the bank
wants to borrow liquidity to cover the deficit?
D) Issuing a jumbo CD
116. Which of the following is an option when a liquidity deficit arises and the bank
wants to use their stored liquidity in their assets to cover the deficit?
C) Selling Treasury Bills
117. The Taylor Treadwell Bank has just calculated the ratio of net loans and leases
to total assets. Which liquidity indicator is this?
D) Capacity ratio
118. The Taylor Treadwell Bank has just calculated the ratio of demand deposits to
total time deposits. Which liquidity indicator is this?
A) Deposit composition ratio