Chapter11

LiquidityandReservesManagement:StrategiesandPolicies

FillintheBlankQuestions

1. A(n)__________________isanassetwhichcanbeconvertedintocasheasily,whichhasarelativelystablepriceandisreversiblesothatthesellercanrecovertheiroriginalinvestmentwithlittleriskofloss.

Answer:liquidasset

2. Whenafinancialinstitutionsellsassetstomanageliquidityitfaces_________________________.Theylosethefutureearningsonthoseassets,theyfacetransactioncostsonthosesalesandtheassetsmosteasilysoldoftenhavethelowestreturn.

Answer:opportunitycosts

3. _________________________iswhenthefinancialinstitutionborrowsmoneyinthemoneymarkettomeettheirliquidityneeds.

Answer:Purchased(borrowed)liquidity

4. The_________________________isthetotaldifferencebetweenitssourcesandusesoffunds.

Answer:liquiditygap

5. _________________________arethedepositsandotherborrowingsofthebankwhichareveryinterestsensitiveorwherethebankissuretheywillbewithdrawnduringthecurrentperiod.

Answer:"Hotmoney"liabilities

6. The_________________________istheideathatmanagementshouldmakeallgoodloansandcountonitsabilitytoborrowfundsifitdoesnothavetheliquiditytomeetitscashneeds.

Answer:customerrelationshipdoctrine

7. _________________________aretheassetsthebankmustbylawholdbehinditsdeposits.IntheU.S.onlyvaultcashanddepositsheldwiththeFederalReservescanbeusedtomeettheserequirements.

Answer:Legalreserves

8. A(n)_________________________istheaccountthebankmusthaveattheFederalReservetocoveranychecksdrawnagainstthebank.

Answer:clearingbalance

9. A(n)_________________________isaservicedevelopedbybankswherethebankshiftsmoneyoutofaccountswithreserverequirementsandintosavingsaccountsovernight.

Answer:sweepsaccount

10. The_________________________isa14dayperiodstretchingfromaThursdaytoaWednesday.Thisistheperiodinwhichthebankhastokeeptheiraveragedailylevelofrequiredreservesforaparticularcomputationperiod.

Answer:reservemaintenanceperiod

11. _________________________istheavailabilityofcashintheamountneededatareasonablecost.

Answer:Liquidity

12. Theoldestapproachtomeetingliquidityneedswhichreliesonthesaleofliquidassetstomeetliquiditydemandsiscalled_________________________.

Answer:assetliquiditymanagement

13. Undera_________________________strategysomeoftheexpecteddemandsforliquidityarestoredinassets,whileothersarebackstoppedbyarrangementsforlinesofcreditfrombanksorothersuppliersoffunds.

Answer:balancedliquiditymanagement

14. A(n)_________________________isthepersoninthebankresponsibleforthebank'scashpositionandmeetinglegalreserverequirements.

Answer:moneypositionmanager

15. ThemethodusedintheU.S.todetermineabank'slegalreserverequirementinwhichtheperiodforholdinglegalreservesfollowstheperiodusedtocalculatetherequiredamountoflegalreservesiscalled_________________________.

Answer:laggedreserveaccounting

16. Thefedfundsrateisgenerallymostvolatileonbank__________day.

Answer:settlement

17. Manydepositoryinstitutionshold__________balances(extrareserves)tohelppreventoverdraftpenalties.

Answer:precautionary

18. Notall_______banksaroundtheworldhavereserverequirements.

Answer:central

Forseveraldecades,thelargestbanksaroundtheworldhavechosenwhichcallsforborrowingimmediatelyspendablefundstocoverallanticipateddemandsforliquidity.

Answer:liabilitymanagement

Theapproachtomanagingliquiditystartswithtwosimplefacts,liquidityrisesasdepositsincreaseandloansdecreaseandliquidityfallswhendepositsfallandloansincrease.

Answer:sourcesandusesoffunds

Intheapproachtomanagingliquiditydepositsandothersourcesoffundsaredividedintocategoriesandthenliquiditymanagersmustsetasideliquidfundsaccordingtosomedesiredoperatingrule.

Answer:structureoffunds

Manyfinancialserviceinstitutionsestimatetheirliquidityneedsbaseduponexperienceandindustryaverages.Thisapproachtomanagingliquidityiscalledtheapproach.

Answer:liquidityindicator

Manyanalystsbelievethereisonlyonesoundmethodforassessingafinancialinstitution’sliquidityneeds.Thismethodcenterson.

Answer:disciplineofthefinancialmarketplace(signalsfromthemarketplace)

ThefordepositsandotherreservableliabilitiesandforvaultcashholdingsisatwoweekperiodextendingfromTuesdaytoaMondaytwoweekslater.

Answer:reservecomputationperiod

Iftotallegalreservesheldaregreaterthanrequiredreservesthebankhas.

Answer:excessreserves

Iftotallegalreservesheldarelessthanrequiredreservesthebankhas.

Answer:areservedeficit

Theiswhereamoneypositionmanagercancoveralargereservedeficitquickly.Itisusuallyoneofthecheapestplacestoborrowbutisalsofrequentlyvolatile.

Answer:federalfundsmarket

Oneoftheratiosusedintheliquidityindicatorapproachtomanagingafinancialinstitution’sliquidityneedsis.Thisratioiscashandduefromdepositoryinstitutionsdividedbytotalassetswhereagreaterratioindicatesastrongerliquidityposition.

Answer:cashpositionindicator

True/FalseQuestions

T F 29. Liquidassetsmusthaveareasonablystablepricesothatthemarketisdeepenoughtoabsorbthesalewithoutasignificantlossofvalue.

Answer:True

T F 30. Assetliquiditymanagement(orassetconversion)involvesstoringliquidityinassets,suchasdepositsandjumboCDs.

Answer:False

TF31. Assetliquiditymanagement(orassetconversion)involvesstoringliquidityinassets,suchascashandmarketablesecurities.

Answer:True

T F 32. Liquidassetsgenerallyhaveastablepricebutarenotnecessarilyreversible.

Answer:False

T F 33. Assetconversionisconsideredtobeacostlessapproachtoliquiditymanagement.

Answer:False

T F 34. Oneprincipleofsoundbankliquiditymanagementistobesuretosellfirstthoseassetswiththeleastprofitpotential.

Answer:True

T F 35. Borrowedliquidity(liability)managementislessriskyforafinancialinstitutionthanisassetconversion.

Answer:False

T F 36. Afinancialinstitution'sliquiditygaprepresentsthedifferencebetweenitssourcesandusesofliquidfunds.

Answer:True

T F 37. Abankexpectstoloseits"hotmoney"liabilities,accordingtothetextbook.

Answer:True

T F 38. Accordingtothecustomerrelationshipdoctrineabankshouldturndownanyloanrequestsforwhichitdoesnothaveenoughdepositsonhandbutshouldhelpitsborrowingcustomerobtainfundsfromsomeothersource(suchasbyissuingaletterofcredittobackstopthecustomer'sloanfromanotherlender).

Answer:False

T F 39. AU.S.bankcanrunuptoa5-percentdeficitinitslegalreserverequirementwithoutincurringaninterestpenaltyfromtheFederalReserveSystem.

Answer:False

T F 40. Mostliquidityproblemsinbankingarisefrominsideabank,notfromitscustomers.

Answer:False

T F 41. HoldingsofliquidassetsatU.S.bankshaveexperiencedagradualdeclineinrecentyears.

Answer:True

T F 42. TheFederalReservehasbeenloweringdepositreserverequirementsinrecentyears.

Answer:True

T F 43. Theliquidityindicator,coredepositsdividedbytotalassets,isameasureofstoredliquidity.

Answer:False

T F 44. Abank'smoneypositionmanagerisresponsibleforinsuringthatthebankmaintainsanadequateleveloflegalreserves.

Answer:True

T F 45. IfabankintheUnitedStatesrunsalegalreservedeficitofmorethan2percentofitsrequireddailyaveragelegalreservepositionitwillbeassessedaninterestpenaltyequaltotheFederalReserve'sdiscountrateplus5percent.

Answer:False

T F 46. Ifabankreceivesmorechecksdepositedtotheaccountsitholdsthanchecksdrawnagainstitsdepositaccounts,thebank'slegalreserveswilltendtoincrease.

Answer:True

T F 47. Accordingtothetextbookifabank'sliquiditydeficitisexpectedtolastforonlyafewhours,thefederalfundsmarketorthecentralbank'sdiscountwindowisnormallythepreferredsourceoffunds.

Answer:True

T F 48. Banksmakingheavyuseofborrowedsourcesofliquiditymustwrestlewiththeproblemofinterestcostuncertainty,accordingtothetextbook.

Answer:True

T F 49. Allcentralbanksimposereserverequirementsonthebankstheyregulate.

Answer:False

T F 50. Thesourcesandusesoffundsmethodofestimatingabank'sliquidityrequirementsdividesthebank'sliabilitiesintothreetypes(hotmoney,vulnerablefundsandstablefunds)andestimatestheprobabilityofeachbeingwithdrawnfromthebank.

Answer:False

T F 51. Oneoftheproblemswithliquiditymanagementforabankisthatrarelydoesthedemandforfundsequalthesupplyoffundsatagiventime.

Answer:True

T F 52. Oneoftheproblemswithliquiditymanagementforabankisthatthereisatrade-offbetweenbankliquidityandprofitability.

Answer:True

T F 53. Theliquidityproblemforbanksismadeeasierbecausemostoftheirliabilitiesarenotsubjecttoimmediaterepayment.

Answer:False

T F 54. Theliquidityproblemforbanksismadeeasierbecausedepositorsandborrowersarenotsensitivetochanginginterestrates.

Answer:False

T F 55. Theoldestapproachtoliquiditymanagementistheassetliquiditymanagementapproach.

Answer:True

T F 56. Somecentralbanksaroundtheworldimposereserverequirementsonbankloans.

Answer:True

T F 57. Somecentralbanksaroundtheworldimposereserverequirementsonnondepositliabilities.

Answer:True

T F 58. Interestinbankandfinancialserviceliquiditymanagementisarelativelynewphenomenonwhicharosefollowingthe9/11crisis.

Answer:False

T F 59. Bankrobberieshavedeclinedinrecentyears.

Answer:False

T F 60. Discountwindowloansjumpeddramaticallythedayfollowing9/11.

Answer:True

T F 61. AbankorfinancialserviceinstitutioncanmeetreserverequirementsbysellingTreasurysecuritiesinitsportfolio.

Answer:True

T F 62. Allcentralbanksaroundtheworldhavesomespecifiedreserverequirement.

Answer:False

T F 63. Coredepositratioisusedasoneoftheliquidityindicatorsfordepositoryinstitutionsandisdefinedastheratioofcoredepositstototalassets.

Answer:True

T F 64. Loancommitmentsratiomeasuresthevolumeofpromisesalenderhasmadetoitscustomerstoprovidecredituptopre-specifiedamountoveragiventimeperiod.

Answer:True

MultipleChoiceQuestions

Afinancialinstitutionthathasreadyaccesstoimmediatelyspendablefundsatreasonablecostatpreciselythetimethosefundsareneededis:

A) Riskfree

B) Liquid

C) Efficient

D) Profitable

E) Noneoftheabove

Answer:B

Whichofthefollowingisnotareasonthatbankstoholdliquidassets?

Tomeetcustomer'sneedsforcurrency.

Tomeetcapitalrequirements.

Tomeetrequiredreserves.

Tocompensateforcorrespondentbankservices.

Toassistinthecheckclearingprocess.

Answer:B

Thetwomostpressingdemandsforliquidityfromabankcomefrom,first,customerswithdrawingtheirdepositsand,second,from:

A) Creditrequestsfromthosecustomersthebankwishestokeep

B) Checksbeingcashedatlocalstoresanddirectlyfromthebank

C) Demandsforwiredfundsfromcorrespondentbanks.

D) LegalreserverequirementssetbytheFederalReserveBoard.

E) Noneoftheabove.

Answer:A

Abankexpectsintheweekabouttobegin$30millioninincomingdeposits,$20millionindepositwithdrawals,$15millioninrevenuesfromthesaleofnondepositservices,$25millionincustomerloanrepayments,$5millioninsalesofbankassets,$45millioninmoneymarketborrowings,$60millioninacceptableloanrequests,$10millioninrepaymentsofbankborrowings,$5millionincashoutflowstocoverotheroperatingexpenses,and$10millionindividendpaymentstoitsstockholders.Thisbank'snetliquiditypositionfortheweekis:

A) $30million

B) $20million

C) $10million

D) $15million

E) Noneoftheabove

Answer:D

Thereisatrade-offproblembetweenliquidityand:

A) Riskexposure

B) Safety.

C) Profitability

D) Efficiency

E) Noneoftheabove

Answer:C

Financialinstitutionsfacesignificantliquidityproblemsbecauseof:

A) Imbalancesbetweenthematuritiesoftheirassetsandtheirprincipalliabilities.

B) Theirhighproportionofliabilitiessubjecttoimmediatewithdrawal.

C) Theirsensitivitytochangesininterestrates.

D) BothAandB

E) Alloftheabove.

Answer:E

Sourcesofliquidityforbanksinclude:

A) Depositinflows

B) Moneymarketborrowings

C) Salesofmarketablesecurities

D) Loanrepayments

E) Alloftheabove

Answer:E

Whichofthefollowingisnotasourceofliquidityforfinancialinstitutions?

A) Deposits

B) Moneymarketborrowings

C) Salesofmarketablesecurities

D) Dividendpaymentstostockholders

E) Alloftheabove

Answer:D

Whichofthefollowingliquiditystrategiesisthemosteffectiveforbankstoday?

A) AssetManagement

B) LiabilityManagement

C) BalancedLiquidityManagement

D) Alloftheabove

E) AandBabove

Answer:C

Whenabank'ssourcesofliquidityexceeditusesofliquidity,thebankwillhavea_______________liquiditygap.

A) Positive

B) Negative

C) Cyclical

D) Seasonal

E) Noneoftheabove

Answer:A

"Coredeposits","hotmoney",and"vulnerablemoney"arecategoriesoffundsunderwhichofthefollowingmethodsofestimatingabank'sliquidityneeds?

A) SourcesandUsesofFundsApproach

B) StructureofFundsApproach

C) LiquidityIndicatorApproach

D) Noneoftheabove

E) AandC

Answer:B

Factorsthatinfluenceabank'schoiceamongthevarioussourcesofreservesincludewhichofthefollowing?

A) Immediacyoftheneed

B) Durationoftheneed

C) Interestrateoutlook

D) Regulations

E) Alloftheabove

Answer:E

Theriskthatliquidfundswillnotbeavailableinthevolumeneededbyabankisoftencalled:

A) Marketrisk

B) Pricerisk

C) Availabilityrisk

D) Interest-raterisk

E) Noneoftheabove

Answer:C

Abankfollowingan_________________________liquiditymanagementstrategymusttakecarethatthoseassetswiththeleastprofitpotentialaresoldfirst.Thestrategythatcorrectlyfillsintheblankintheforegoingsentenceis:

A) Assetconversion

B) Liabilitymanagement

C) Availability

D) Fundssource

E) Noneoftheabove

Answer:A

Whensomeofabank'sexpecteddemandforliquidityarestoredinitsassets,whileotherunexpectedcashneedsaremetfromnear-termborrowingsthisapproachtoliquiditymanagementisdescribedbywhichofthetermslistedbelow?

A) Liabilitymanagement

B) Assetconversion

C) Borrowedliquiditymanagement

D) Balancedliquiditymanagement

E) Noneoftheabove

Answer:D

Thenotionthatbankmanagementshouldstrivetomeetallgoodloansthatwalkinthedoorinordertobuildlastingcustomerrelationshipsisreferredtoasthe:

A) Assetconversionliquiditystrategy

B) Customerrelationshipdoctrine

C) Loanaccommodationdoctrine

D) Balancedfundsmanagementdoctrine

E) Noneoftheabove

Answer:B

Abankmanagerresponsibleforoverseeingtheinstitution’slegalreserveaccountiscalled:

A) Reservemanager

B) Moneymarketmanager

C) Moneypositionmanager

D) Legalcounselor

E) Noneoftheabove

Answer:C

Ifabank'smanagementuses"thedisciplineofthefinancialmarketplace"togaugeitsliquiditypositiononeindicatorofthismarkettestoftheadequacyofabank'sliquiditypositionis:

A) Thebank'sreturnonequitycapital

B) Thevolumeofbankstockoutstanding

C) Thebank'sreturnonassets

D) ThesizeofriskpremiumsonCDsthebankissues

E) Noneoftheabove

Answer:D

Whichofthefollowingisanexampleofauseoffundsforthebank?

A) Acustomerwithdraws$1000fromtheiraccount

B) Aborrowerrepays$1500ofaloantheyhavereceived

C) Thebankissuesa$1,000,000CD

D) Thebanksells$5,000,000ofT-Bills

E) Noneoftheaboveareusesoffunds

Answer:A

Whichofthefollowingisanexampleofasourceoffunds?

A) Acustomerwithdraws$1000fromtheiraccount

B) Aborrowerrepays$1500ofaloantheyhavereceived

C) AbankincreasesitsFedfundssoldby$1,000,000

D) Thebankpurchases$5,000,000inT-Bills

E) Noneoftheaboveareusesoffunds

Answer:B

Abankcurrentlyhas$150millionin"hotmoney"depositsagainstwhichtheywanttoholdan80percentreserve.Thisbankhas$90millioninvulnerabledepositsagainstwhichtheywanttoholda30percentreserveandthisbankhas$45millioninstabledepositsagainstwhichtheywanttoholda5percentreserve.Thelegalreservesforthisbankare5percentofalldeposits.Whatisthisbank'sliabilityliquidityreserve?

A) $149.25million

B) $285million

C) $141.7875million

D) $216.60million

E) Noneoftheabove

Answer:C

Abankmaintainsaclearingbalanceof$5,000,000withtheFederalReserve.TheFederalfundsrateiscurrently6.5percent.WhatcreditwillthisbankearnoverthereservemaintenanceperiodtooffsetanyfeeschargedthisbankbytheFederalReserve?

A) $325,000

B) $8,357,143

C) $194,444

D) $12,639

E) Noneoftheabove

Answer:D

Abankmaintainsaclearingbalanceof$1,000,000withtheFederalReserve.TheFederalfundsrateiscurrently4.5percent.WhatcreditwillthisbankearnoverthereservemaintenanceperiodtooffsetanyfeeschargedthisbankbytheFederalReserve?

A) $17,500

B) $1,750

C) $45,000

D) $12,500

E) Noneoftheabove

Answer:B

Abankcurrentlyholds$105millionintransactiondepositssubjecttolegalreservesbuthasmanagedtoenterintosweepaccountarrangementsaffecting$55millionoftheseaccounts.Giventhatthebankmusthold3percentlegalreservesupto$47.8millionoftransactiondepositsand10percentlegalreservesonanyamountabovethat,howmuchhasthisbankreduceditstotallegalreservesasaresultofthesesweeparrangements?

A) $5.500million

B) $1.449million

C) $7.119million

D) $1.619million

E) Noneoftheabove

Answer:A

Abankmoneymanagerestimatesthatthebankwillexperiencealiquiditydeficitof$400millionwithaprobabilityof10percent,aliquiditydeficitof$900millionwithaprobabilityof20percent,aliquiditysurplusof$600millionwithaprobabilityof30percentandaliquiditysurplusof$1200withaprobabilityof40percentoverthenextmonth.Whatisthisbank'sexpectedliquiditydeficitorsurplusoverthisnextmonth?

A) $880liquiditysurplus

B) $440liquiditydeficit

C) $440liquiditysurplus

D) $880liquiditydeficit

E) Noneoftheabove

Answer:C

Abankexpectsintheweektocome$55millioninincomingdeposits,$75millioninacceptableloanrequests,$35millioninmoneymarketborrowings,$10millionindepositwithdrawalsand$30millioninloanrepayments.Thisbankisexpectinga:

A) Liquiditydeficit

B) Liquiditysurplus

C) Balancedliquidityposition

D) Noneoftheabove

Answer:B

Afinancialinstitutionhasestimatedthatitsgrowthrateindepositsoverthelasttenyearshasaveraged6percentperyear.Thisisthe_________________________ofestimatingfuturedeposits.

A) Trendcomponent

B) Seasonalcomponent

C) Cyclicalcomponent

D) Stationarycomponent

E) Noneoftheabove

Answer:A

AfinancialinstitutionhasestimatedthatoverthelasttenyearsthedepositwithdrawalsduringChristmastimeisabout25%higherthanduringanyothertimeoftheyear.Thisisthe_________________________ofestimatingfuturedeposits.

A) Trendcomponent

B) Seasonalcomponent

C) Cyclicalcomponent

D) Stationarycomponent

E) Noneoftheabove

Answer:B

Whichofthefollowingisaguidelineforliquiditymanagersofbanks?

A) Theliquiditymanagermustkeeptrackoftheactivitiesofalldepartmentsofthebank

B) Theliquiditymanagermustknowinadvance(ifpossible)theplansofmajorcreditorsanddepositors

C) Theliquiditymanagershouldmakesurethebankhasclearprioritiesandobjectivesforliquiditymanagement

D) Theliquiditymanagermustanalyzetheliquidityneedsofthebankonacontinuousbasis

E) Alloftheaboveareguidelinesforliquiditymanagers

Answer:E

AmanagerthatusesratiossuchascashandduefrombankstototalassetsandU.S.governmentsecuritiestototalassetstomeasuretheirliquiditypositionisusing:

A) Thesourcesandusesoffundsapproach

B) Thestructuredfundsapproach

C) Theliquidityindicatorapproach

D) Signalsfromthemarketplace

E) Noneoftheabove

Answer:C

AmanagerthatexaminesthestockpricebehaviorofthebankandtheriskpremiumonthebankCD'stomeasuretheirliquiditypositionisusing:

A) Thesourcesandusesoffundsapproach

B) Thestructuredfundsapproach

C) Theliquidityindicatorapproach

D) Signalsfromthemarketplace

E) Noneoftheabove

Answer:D

Amanagerthatlooksatdepositincreasesanddecreasesandloanincreasesanddecreasesamongotherthingstomeasuretheirliquiditypositionisusing:

A) Thesourcesandusesoffundsapproach

B) Thestructuredfundsapproach

C) Theliquidityindicatorapproach

D) Signalsfromthemarketplace

E) Noneoftheabove

Answer:A

Whichofthefollowingstatementsiscorrect?

A) Thedemandsforliquidityandsourcesofliquidityforabankaregenerallyequaltoeachother

B) Mostliquidityproblemsinbankingarisefromoutsidethebank

C) Theliquidityproblemsforabankaremadeeasierbecausemostoftheirliabilitiesarenotsubjecttoimmediaterepayment

D) Liquiditymanagementiseasyforabankbecauseabankthatisveryliquidisalsoveryprofitable.

E) Alloftheabovestatementsarecorrect

Answer:B

TheFedfundsmarketismostvolatileonbank:

A) Computationday

B) Settlementday

C) Reserveday

D) Maintenanceday

E) Holiday

Answer:B

TheFedfundsrateusuallyhoversaroundtheFeds:

A) Targetrate

B) Setrate

C) Quotedrate

D) Limitrate

E) Averagerate

Answer:A

Abankorfinancialserviceinstitutioncangenerallymeetreserverequirementsusingallofthefollowingexcept:

A) Sellingliquidinvestments

B) Borrowinginthefedfundsmarket

C) Drawingonanyexcesscorrespondentbalances

D) Borrowingintherepomarket

E) Sellingnewshares

Answer:E

TheShirleyStateBankhas$90intransactiondepositssubjecttolegalreserves.Thisbankmusthold3percentlegalreservesupto$43.9oftransactiondepositsand10percentlegalreservesonanyamountabovethis.Whatisthisbank’stotallegalreserves?

A)$2.700million

B)$1.449million

C)$5.924million

D)$4.170million

E)Noneoftheabove

Answer:C

JohnCamey,themoneymanageroftheFirstStateBank,hasestimatedthatthebankhasa20percentchanceofaliquiditydeficitof$700,a30percentchanceofaliquiditydeficitof$200,a30percentchanceofaliquiditysurplusof$400anda20percentchanceofaliquiditysurplusof$900overthenextweek.Whatisthisbank’sexpectedliquiditydeficitorsurplusoverthenextweek?

A)$100liquiditysurplus

B)$100liquiditydeficit

C)$400liquiditysurplus

D)$500liquiditysurplus

E)$0liquiditysurplus

Answer:A

Abankcurrentlyhas$50millioninstabledepositsagainstwhichtheywanttokeep10%reserves,$100invulnerabledepositsagainstwhichtheywanttokeep40%reservesandtheyhave$50millionin“hotmoney’depositsagainstwhichtheywanttokeep90%reserves.Thelegalreservesforthisbankare10%ofalldeposits.Whatisthisbank’sliabilityliquidityreserve?

A)$90million

B)$81million

C)$70million

D)$20million

E)Noneoftheabove

Answer:B

TheHollingsworthNationalBankmaintainsaclearingbalanceof$7,000,000withtheFederalReserve.TheFederalFundsrateiscurrently5.25percent.WhatisthecreditthisbankwillearnoverthemaintenanceperiodtooffsetanyfeeschargedthisbankbytheFederalReserve?

A)$367,500

B)$1021

C)$14,292

D)$30,625

E)Noneoftheabove

Answer:C

AbankmustmaintainanaveragedailybalanceattheFedof$600.Inthefirst2daysofthemaintenanceperiod,theymaintainabalanceof$450,thenextthreedaystheymaintainabalanceof$700,thenexttwodaystheymaintainabalanceof$650,thenextthreedaystheymaintainabalanceof$450andthenextthreedaystheymaintainabalanceof$650.WhatdoestheirbalanceattheFedhavetobeonthelastdayofthemaintenanceperiodinordertohaveazerocumulativereservedeficit?

A)$600

B)$400

C)$500

D)$800

E)Noneoftheabove

Answer:D

AbankmustmaintainanaveragedailybalanceattheFedof$700.Onthefirstdayofthemaintenanceperiodtheymaintainabalanceof$750,thenexttwodaystheymaintainabalanceof$725,thenextthreedaystheymaintainabalanceof$625,thenexttwodaystheymaintainabalanceof$775,thenexttwodaystheymaintainabalanceof$700andthenexttwodaystheymaintainabalanceof$675.Whatdoestheirbalancehavetobeonthelastdayofthemaintenanceperiodinordertohaveacumulativereservedeficit?

A)$700

B)$650

C)$750

D)$325

E)Noneoftheabove

Answer:B

DavidAshbyhasjustpaidoffthebalanceonhishomemortgagewithFirstAmericanBank.Whatsourceofliquiditydoesthisrepresenttothebank?

A)Incomingcustomerdeposit

B)Revenuesfromthesameofnondepositservices

C)Customerloanrepayment

D)Saleofanasset

E)Borrowingsfromthemoneymarket

Answer:C

TheHarmonyBankoftheSouthhasjustincreaseditsFederalFundsPurchased.Whatsourceofliquiditydoesthisrepresenttothebank?

A)Incomingcustomerdeposit

B)Revenuesfromthesameofnondepositservices

C)Customerloanrepayment

D)Saleofanasset

E)Borrowingsfromthemoneymarket

Answer:D

ThePeaceBankofOhiohasjustreceiveda$50millioncreditatthelocalclearinghouse.Whichtypeoffactoraffectinglegalreservesisthisforthebank?

A)Acontrol