1. When liquidity risk problems occur at a DI, they often threaten the solvency of the institution.
2. Depository institutions generally rely on each other for cash and to meet their daily liquidity needs.
3. During the financial crisis of 2008, liquidity problems were avoided as banks continued to provide lending to
each other.
4. During the financial crisis of 2008, there were large deposit inflows to the banking system.
5. Mutual funds tend to have less exposure to liquidity risk than do banks and thrifts.
6. An FI’s most liquid asset is cash.
7. Demand deposits pose a liquidity risk for FIs because funds may be withdrawn at any time.
8. A bank must be ready to pay out all demand deposit liabilities on any given day.
9. Liquidity risk for an FI includes the possibility of an unexpected inflow of funds.
10. Bank runs occur because customers know that banks will be forced to liquidate assets at fire-sale prices.
11. Asset-side liquidity risk may be a result of OBS lending commitments.
12. Core deposits represent a relatively short-term source of funds.
13. An expected net deposit drain on any given day means that deposit withdrawals are less than deposit
inflows.
14. Purchased liquidity risk management usually involves purchased funds such as Fed funds, repurchase
agreements and CDs.
15. Purchased liquidity management carries the potential risk of significant increases in the cost of funds during
periods of high interest rate volatility.
16. Because cash reserves at the Federal Reserve do not earn interest, DIs do not hold any excess cash reserves
beyond the minimum requirements.
17. Managing asset-side liquidity risk can involve either purchased liquidity management or stored liquidity
management.
18. Liquid funds can be obtained by a DI through unlimited borrowing in the money or purchased funds
markets.
19. High loan commitment banks face less liquidity risk exposure than low commitment banks.
20. The liquidity index should be a number that is either greater than one or less than zero.
21. The greater the difference between fair market prices and fire-sale prices for assets, the less liquid the DI’s
portfolio of assets.
22. In terms of liquidity risk measurement, the financing gap is defined as rate sensitive assets minus rate
sensitive liabilities.
23. Maturity ladder/scenario analysis is a method of measuring liquidity risk and net funding requirements.
24. The relative time frame for active liquidity management is 2 to 4 months.
25. Liquidity planning primarily is designed to assist management in dealing with relatively predictable events.
26. Abnormally large and unexpected deposit withdrawals can occur because of concerns by depositors about a
bank’s solvency relative to other banks.
27. The cost of stored liquidity management is the interest that must be paid on the stored funds.
28. The future liquidity position of a DI cannot be forecasted.
29. Deposit insurance is the only deterrent to bank runs, contagious runs, and bank panics.
30. A liquidity plan for a DI should provide a detailed list of fund providers who are most likely to withdraw in
the case of a liquidity crisis.
31. Even with liquidity planning, net deposit withdrawals and/or the exercise of loan commitments can pose
significant liquidity problems for banks.
32. Liquidity planning should identify the size of potential deposit withdrawals over various time horizons in
the future, as well as alternative emergency private funding sources to meet those withdrawals.
33. In the event of a bank run, depositor claims on the bank are satisfied on a pro rata basis.
34. A contagious run, or bank panic, differs from a run on a bank in that a contagious run involves loss of faith
in the entire banking system as opposed to just one bank.
35. In general, money center banks are exposed to less liquidity risk than smaller, regional banks.
36. The Fed discount window maintains three lending programs to assist DIs in managing liquidity problems.
37. For life insurance companies, the distribution of premium income minus policyholder liquidations normally
is predictable.
38. Surrender value is the amount of cash a life insurance policy holder can receive by turning in the policy
before it expires or matures.
39. The assets of PC insurers are relatively short term and more liquid than those of life insurance companies.
40. Insurance companies have had to deal with liability runs by policyholders.
41. Government securities represent the reserve asset fund for life insurance companies.
42. Liquidity risk for a life insurance company only occurs when asset returns do not provide sufficient cash
flows to meet policyholder liquidations.
43. Open-end mutual funds issue a fixed number of shares as liabilities.
44. Net asset value is the current value of a mutual fund’s assets divided by the number of shares outstanding.
45. Liquidation of a mutual fund causes assets to be liquidated and funds received to the dispersed to
shareholders on a first come, first served basis.
46. It is impossible for money market mutual fund share prices to fall below $1.00.
47. Hedge funds are not susceptible to liquidity risk or a liquidity crisis.
48. Which of the following is NOT a potential causes of liquidity risk for a DI?
49. Which type of financial intermediary is more highly exposed to liquidity risk?
50. What is a fire-sale price?
51. A bank’s net deposit drain
52. Which of the following is a condition for a DI to be growing?
53. Which of the following balance sheet entries is not a part of liability management?
54. Which of the following observations is NOT true?
55. A disadvantage of using liability management to manage a FI’s liquidity risk is
56. A disadvantage of using asset management to manage a FI’s liquidity risk is
57. Which of the following statements is NOT true?
58. Why have purchased liquidity management techniques become very popular in spite of its limitations?
59. When banks use stored liquidity management, they
60. If purchased liquidity is used by a DI to fund an exercised loan commitment
61. If stored liquidity is used by a DI to fund an exercised loan commitment
62. What is the asset adjustment to a bank’s balance sheet if the bank sold a five-year, 7 percent annual coupon
$100,000 bond acquired at par, but now yielding 8 percent? The bond was not in the mark-to-market portfolio.
63. An open-end bond mutual fund is holding a three-year, $1 million par value 5 percent annual coupon bond.
What is the impact on the total asset value of the fund of a 1 percent decrease in interest rates?