Deck 13: Managing Nondeposit Liabilities

Question 1

A repurchase agreement (RP)whereby the collateral is specifically identified is known as a conventional or ____________ RP.

Answer 1

fixed-collateral

Question 2

Repurchase Agreements (RPs)are very similar to Federal funds and are often viewed as ____________ Federal funds transactions.

Answer 2

collateralized

Question 3

Federal Reserve balances of banks can be transferred from one institution to another in seconds through the Fed's wire transfer network called the ______________________.

Answer 3

Fedwire

Question 4

A ______________ repurchase agreement (RP)is one in which the underlying collateral is not identified precisely and thus allows some substitution at the time of delivery.

Question 5

_________________________ are short-term notes,with maturities ranging from 3 days to 9 months,issued by well-known companies.

Question 6

When the first priority of a bank is to make loans to all good quality loan customers it is following the _________________________ doctrine.

Question 7

Dollar-denominated CDs issued outside the U.S.are called ______________________.

Question 8

For a bank with immediate reserve requirements,a viable alternative to Fed funds market and RPs is to use the _______________ window operated by the Federal Reserve to provide loans.

Question 9

The type of discount window loan available at higher interest rates to depository institutions not qualifying for primary credit is known as ___________ credit.

Question 10

Volatility in funding and credit costs to banks due to fluctuating supply and demand conditions in the market is known as __________________ risk.

Question 11

A _________________________ is a temporary sale of high-quality,easily-liquidated assets accompanied by an agreement to buy back those assets on a future specific date at a predetermined price.

Question 12

The securities most often used in a repurchase agreement are ____________________.

Question 13

When a bank buys funds from other financial institutions in order to cover good quality loan demand and to satisfy deposit reserve requirements,it is practicing _________________________ management.

Question 14

Originally,__________________ funds consisted exclusively of deposits held by U.S.banks at the Federal Reserve banks which were loaned from one bank to another.

Question 15

The danger that a bank in need of funds will not be able to find someone willing to grant a loan at a reasonable rate,is known as _________________________ risk.

Question 16

Common nondeposit borrowings of a bank are _____-term rather than ______-term debt.

Question 17

The type of discount window loan with generally the lowest rate of interest is known as __________ credit.

Question 18

The CDs that large foreign banks sell through their U.S.branches are called ________________________.

Question 19

The spread between current and expected loans and investments and the current and expected inflows from deposits and other sources of funds is known as the __________.

Question 20

A(n)_________________________ is an interest bearing receipt for funds issued by a bank with a minimum denomination of $100,000.

Question 21

The loan from a Federal Reserve bank which normally lasts only a few days and is designed to provide immediate aid in meeting a bank's legal reserve requirement is known as extended credit.

Question 22

Federal funds today consist exclusively of deposits held at the Federal Reserve banks.

Question 23

Asset management is regarded as an interest-sensitive approach to raising funds.

Question 24

One of the three types of loans in the Fed Funds market,__________________ loans are longer-term Fed funds contracts lasting several days,weeks or months,often accompanied by a written contract.

Question 25

The volume of variable-rate CDs exceeds the volume of fixed-rate CDs among U.S.banks.

Question 26

Accommodating banks buy and sell Federal funds simultaneously to make a market for the reserves of its customer institutions.

Question 27

One of the three types of loans in the Fed Funds market,__________________ loans are unwritten agreements,negotiated via wire or telephone,with the borrowed funds returned the next day.

Question 28

Loans of Federal funds under a continuing contract are automatically renewed each day unless either the borrower or the lender decides to end the agreement.

Question 29

Yankee CDs are issued by savings and loan associations and other nonbank savings institutions.

Question 30

Longer-term federal funds contracts lasting several days,weeks,or months,often accompanied by a written contract,are called continuing contracts.

Question 31

In recent years,deposits have been growing faster than nondeposit sources of funds among U.S.banks.

Question 32

The most common type of Federal funds loans are term loans.

Question 33

The traditional and principal source of bank funds is deposits.

Question 34

One of the three types of loans in the Fed Funds market,__________________ contracts are automatically renewed each day unless either the borrower or lender decides to end this agreement.

Question 35

When financial institution borrows in the RP market,this loan is listed as _________________________ under agreements to repurchase.

Question 36

Liability management is considered to be an interest-sensitive approach to raising bank funds.

Question 37

Liability management banking calls for using price (the interest rate offered)as the control lever to regulate incoming funds.

Question 38

There are no reserve requirements on Federal funds borrowings in the U.S.

Question 39

Funds raised by the use of liability management techniques are considered to be flexible.

Question 40

The ___________________________ System provides access to nondeposit borrowings to depository institutions.These borrowings are fully collateralized by home mortgages and have maturities ranging from overnight to 20 years.

Question 41

Primary credit is defined as loans available for short terms and normally considered beneficial for the borrower because it carries an interest rate slightly below the target Fed funds rate.

Question 42

CDs sold by some of the largest foreign banks active in the United States through their branches are called Yankee CDs.

Question 43

In recent years,financial institutions have gotten better at managing interest rate risk.

Question 44

Nondeposit funds do have the advantage of quick availability compared to most types of deposits,but are not as stable a funding source for banks as are time and savings deposits.

Question 45

There are no restrictions on getting a Federal Reserve loan and because it is the cheapest source of short-term funds,most banks use this source of funds exclusively.

Question 46

Longer-term federal funds contracts which are automatically renewed each day unless either the borrower or the lender decides to end the agreement are called term loans.

Question 47

Interest rates in the Repurchase Agreement (RP)market are quoted on a 360-day basis.

Question 48

Large banks depend more on nondeposit borrowings than small banks.

Question 49

Although there is an active federal funds spot market,there is currently no associated futures market for federal funds.

Question 50

The size of a financial institution has an effect on the type of nondeposit funding source it considers.For example,larger depository institutions have the credit standing to sell the largest negotiable CDs,while the Fed funds market is suitable for smaller institutions.

Question 51

According to the FDIC Improvement Act,undercapitalized U.S.banks cannot be granted discount window loans for more than 60 days in each 120-day period.

Question 52

When the general credit conditions are tight,there is a possibility that not every borrower will be accommodated by lenders.This chance of credit rationing is referred to as credit availability risk.

Question 53

Repurchase Agreement (RPs)transactions are perceived to be less risky than equivalent Federal funds transactions.

Question 54

Only federal regulators can limit the terms (amount,frequency,and use)of borrower funds by the U.S.depository institutions.

Question 55

The main use of federal funds today is still the traditional one.Federal funds provide a mechanism that allows banks short of legal reserves to satisfy the reserve requirements or to satisfy a loan demand by tapping into immediately available funds from other institutions possessing temporarily idle funds.

Question 56

Negotiable CDs are restricted to short maturities-from seven days to one or two years.

Question 57

Under current federal law,commercial banks in the United States can issue commercial paper as direct obligations of the banks.

Question 58

Loans from the Fed funds market must be backed by collateral.

Question 59

One of the factors to consider when a bank chooses among the nondeposit funding sources is the relative cost.In general,managers prefer to borrow from the cheapest source of funds,although other factors do play a role.

Question 60

Seasonal credit discount window loans generally have the highest interest rates.

Question 61

Suppose a bank promises an annual return of 6.5 percent on a three month (90-day $150,000 CD),what will be the total amount due to the customer at the end of the three month period?

A)$152,437.50
B)$2,437.50
C)$150,000
D)$152,404.11
E)None of the options is correct

Question 62

Longer-term federal funds contracts lasting several days,weeks,or months,often accompanied by a written contract,are known as:

A)term loans.
B)continuing contracts.
C)rollover loans.
D)federal funds mutuality agreements.
E)None of the options is correct.

Question 63

The most popular domestic source of borrowed reserves for U.S.banks is:

A)Federal funds market.
B)money market negotiable CDs.
C)Eurodollar market.
D)borrowings from the Federal Reserve Banks.
E)commercial paper market.

Question 64

A federal funds loan that is automatically renewed each day unless either the borrower or the lender decides to end the loan agreement is known as a(n):

A)overnight loan.
B)continuing contract.
C)term loan.
D)rollover loan agreement.
E)None of the options is correct.

Question 65

Depository institutions hold deposits with the Federal reserve:

A)to satisfy legal reserve requirements.
B)to clear checks.
C)to pay for purchases of government securities.
D)for inter-bank lending through Fed's wire system.
E)All of the options are correct.

Question 66

First National Bank has new loan requests of $225 million,needs to purchase $100 million in U.S.Treasury securities to meet pledging requirements,and anticipates draws against credit lines of $135 million.Deposits received today total $215 million and the bank expects to bring in an additional $100 million next week.What is First National's estimated funds gap for the coming week?

A)-$225 million
B)$145 million
C)$135 million
D)-$100 million
E)None of the options is correct.

Question 67

Which of the following is a factor that affects a bank's decision as to which nondeposit sources of funds to use to cover its projected funds gap?

A)The relative cost of raising the funds.
B)The length of time the funds will be required.
C)The risk associated with each source of funds.
D)The size of the bank.
E)All of the options are correct.

Question 68

A bank plans on borrowing $150 million through an RP transaction collateralized by T-bills.It plans on borrowing the money for 5 days and the current RP rate is 5.25 percent.What is the bank's total interest cost in dollars?

A)$7,875,000
B)$107,877
C)$21,875
D)$109,375
E)None of the options is correct

Question 69

Which of the following is the role performed by accommodating banks?

A)They act as intermediaries in the Eurodollar market.
B)They issue negotiable CDs for themselves and for other banks.
C)They sell commercial paper to raise funds for themselves and other firms belonging to their bank holding company.
D)They buy and sell federal funds simultaneously in order to make a market for reserves of customer banks.
E)None of the options is correct.

Question 70

The strategy that banks should buy the reserves they need to cover good-quality loan requests is known as:

A)funds management.
B)asset management.
C)liability management.
D)asset-liability coordinated management.
E)None of the options is correct.

Question 71

Short-term notes,with maturities ranging from 3 days to 9 months,issued by well-known companies are known as:

A)negotiable CDs.
B)commercial paper.
C)federal funds.
D)repurchase agreements.
E)None of the options is correct.

Question 72

As per liability management banking,the control lever to regulate the liabilities and assets on the balance sheet is

A)management discretion.
B)the volume of loan demand the bank faces.
C)deposit growth.
D)market interest rates.
E)None of the options is correct.

Question 73

Which of the following source of bank funding is considered a hybrid account because though legally a deposit,it is considered as just another form of IOU?

A)Federal funds loan
B)Repurchase agreement
C)Negotiable CD
D)Eurodollar deposit
E)None of the options is correct

Question 74

Time deposits with minimum denominations of $100,000 are generally referred to as:

A)mini CDs.
B)jumbo CDs.
C)large CDs.
D)giant CDs.
E)super CDs.

Question 75

CDs that are sold by some of the largest foreign banks through their U.S.branches are called:

A)thrift CDs.
B)domestic CDs.
C)EuroCDs.
D)Yankee CDs.
E)None of the options is correct.

Question 76

First National Bank is planning to raise $30 million through an offering of negotiable CDs.The current rate for similar CDs is 5.5 percent.Noninterest cost rate for CDs is 0.25 percent.First National pays a deposit insurance premium of 0.0023 per dollar of insured deposits.Due to other immediate cash needs,only $25 million will be fully invested.What is the effective cost rate of borrowing in the CD market for the bank?

A)6.9 percent
B)7.2 percent
C)6.0 percent
D)5.5 percent
E)None of the options is correct.

Question 77

First National Bank has new loan requests of $175 million,needs to purchase $50 million in U.S.Treasury securities to meet pledging requirements,and anticipates draws against credit lines of $45 million.Deposits received today total $140 million and the bank expects to bring in an additional $230 million next week.What is First National's estimated funds gap for the coming week?

A)$225 million.
B)-$145 million.
C)$135 million.
D)-$100 million.
E)None of the options is correct.

Question 78

The doctrine that the first priority of a bank is to make loans to all those customers from whom the bank expects to receive positive net earnings is called the:

A)funds management doctrine.
B)customer relationship doctrine.
C)loan priority doctrine.
D)revenue flows doctrine.
E)None of the options is correct.

Question 79

The source of short-term funds for commercial banks that was developed to tap temporary surplus funds held by large corporate and wealthy individual customers is:

A)Federal funds.
B)commercial paper.
C)Eurodollar deposits.
D)negotiable CDs.
E)None of the options is correct.

Question 80

Which of the following laws restricts Federal Reserve lending to undercapitalized banks and allows for long-term Fed support only to borrowing institutions that are considered "viable entities"?

A)Riegle Community Development and Regulatory Improvement Act
B)FDIC Improvement Act
C)Financial Institutions Reform,Recovery,and Enforcement Act
D)Depository Institutions Deregulation and Monetary Control Act
E)None of the options is correct