True/False (8 questions, 1 pt. each, 8 pts.)
Enter whether the sentence or statement is true (enter “A” on your clicker) or false ( “B”).
Suppose that Congress were to demand that defined-benefit pension funds use a lower interest rate to calculate the PV of their expected future liabilities. This lower discount factor would make pension funds look more insolvent. T
Life insurance companies typically have greater liquidity risk than property-casualty insurance companies.
Bank regulators can discourage moral hazard by requiring banks to maintain greater capital levels.
Securitization enables mortgages to be financed by outside investors--who now earn mortgage interest income--instead of traditional lenders. Lending institutions have therefore not welcomed the increased securitization of home mortgage loans.
Liability-side liquidity risk may be a result of OBS lending commitments.
In the U.S., cash reserves required to meet deposit reserve requirements typically include U.S. government bonds such as U.S. Treasury Bills, vault cash and cash deposits at the Federal Reserve Bank.
Demand deposits are a low-cost, but not costless, source of funds and have a high degree of withdrawal risk.
Share deposits at credit unions are insured by the FDIC.
Multiple Choice (9 questions, 2 pts. each, except where noted, 22 pts. total) Identify the letter of the choice that best completes the statement or answers the question. Or choose the response closest (i.e. has the minimum difference in absolute value) to your answer.
(3 pts.) Subordinated debt (SD) has been proposed as a means of increasing the degree of overall market discipline at a depository institution (DI). Which of the following objectives will SD help achieve? a.
The expected cost of issuing SD should decrease as the risk of the DI increased.
Secondary market yields on the SD would be inversely related to an increase in the risk of the DI. b.
Mandatory SD would reduce transparency at DIs.
Issuing SD might reduce the risk of DI insolvency. c.
SD would further emphasize the use of capital forbearance.
The contagion effect
occurs when liquidity risk problems at bad banks damages well-run banks.
results when interest rate risk exacerbates credit risk and liquidity risk exposures. b.
is eliminated by government insurance against bank runs.
stems from the positive correlation in FI returns.
(3 pts.) What is the average implicit interest rate (IIR) on a $15,000 account if the bank's average management costs are $200 and annual fees average $75? a.
3.0% < IIR < 4.0%
2.0% < IIR < 3.0%
0.0% < IIR < 1.0%
4.0% < IIR
1.0% < IIR < 2.0%
The process of encouraging owners to be more knowledgeable of the risk profile of the DI is to encourage more a.
Which of the following is not accomplished by asset securitization? a.
Increases the liquidity of assets
Decreases the duration of assets b.
Provides a new source of funds
Decreases the costs of regulation c.
Increases the costs of monitoring
Which of the following is not a primary source of liquidity? a.
Excess cash reserves over and above regulatory reserve requirements.
Capital notes and other long-term financing alternatives b.
Borrowings in the money/purchased funds market
Cash-type assets that can be sold with little price risk and low transaction costs. c.
Fed funds borrowed
(3 pts.) Requiring minimum reserves to be held at the central bank is the equivalent of a.
mandating buffer reserves.
promoting the contagious effects of liquidity risk. b.
a reserve requirement tax.
none of the above.
mandating target reserve ratio.
Servicing a pass-through security (e.g. a mortgage-backed security, MBS) refers to a.
an FI processing...
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