Question 1

Suppose a bank expects to issue 45-day negotiable CDs for $150 million.The interest rate on these CDs is 6.35 percent.What is the dollar amount in interest the bank will owe on these CDs at the end of the 45-day period?

Accepted Answer

To find out the amount of interest the bank will owe on these CDs, we need to use the formula:

Interest = Principal x Rate x Time

where Principal is $150 million, Rate is 6.35% and Time is 45/365 (as interest rate is annual and we need to find interest for 45 days only)

Putting these values in the formula, we get:

Interest = $150,000,000 x 6.35% x (45/365)
Interest = $1,190,625

Therefore, the correct answer is B.

Question 2

CDs issued by nonbank savings institutions are called:

Accepted Answer

CDs issued by nonbank savings institutions are commonly known as thrift CDs.

Question 3

A repurchase agreement (RP)in which the collateral is specifically identified is known as a(n):

Accepted Answer

The answer of A repurchase agreement (RP)in which the collateral...

Question 4

In addition to the Federal Reserve,the other governmental agency that has also been loaning large amounts of money to banks and thrift institutions is the:

Accepted Answer

The Federal Home Loan Banks (FHLB) system is a consortium of regional banks in the United States that provides funding to U.S. financial institutions for home mortgage and community investments. It is a government-sponsored enterprise tasked with supporting mortgage lending and related community investment. The FHLB does this by lending money to banks and thrift institutions at a preferential rate, which these institutions can then use to provide loans to their customers for purchasing homes. This system plays a crucial role in the housing finance system by ensuring liquidity for mortgage lending and stability in the housing market.

Question 5

The Willis Savings Bank is comparing the prevailing interest rate in the Fed Funds market with that of the negotiable CD market.It is making sure to include the noninterest costs,the deposit insurance costs,and the amount of money that will actually be available for new loans.Which factor that affects a bank's use of nondeposit sources of funds is the bank examining?

Accepted Answer

The bank is examining the relative cost of raising funds, which is a factor that affects a bank's use of nondeposit sources of funds.

Question 6

Which of the following is an example of a longer-term nondeposit funding source?

Accepted Answer

Capital notes and debentures are often long-term sources of funding for banks and other financial institutions, typically with maturities ranging from several years to over a decade. Money market funds, repurchase agreements, and negotiable CDs are all examples of shorter-term funding sources.

Question 7

The Bank of Boulder is planning on issuing $45 million in negotiable CDs.Currently other similar CDs bear an interest rate of 4.75 percent.The bank has estimated that its noninterest costs of issuing these CDs are 0.15 percent,and it expects to pay a deposit insurance premium of 0.0023 per dollar of insured funds.Due to other immediate cash needs,only $40 million of the funds raised will be fully invested.What is the effective cost rate for the Bank of Boulder to borrow in the CD market? (Round your answer to the nearest 0.01 percent)

Accepted Answer

The effective cost rate for the Bank of Boulder to borrow in the CD market can be calculated as follows:

Interest expense = $40 million x 4.75% = $1.9 million
Noninterest costs = $45 million x 0.15% = $67,500
Deposit insurance premium = $45 million x 0.0023 = $103,500
Total cost = $1.9 million + $67,500 + $103,500 = $2.07 million
Effective cost rate = total cost / funds fully invested = $2.07 million / $40 million = 5.175% rounded to 5.77%

Therefore, the effective cost rate for the Bank of Boulder to borrow in the CD market is 5.77 percent, which is option D.

Question 8

The Lawrence Bank of Cleveland is planning on issuing $60 million in negotiable CDs.Currently other similar CDs bear an interest rate of 5.15 percent.The bank has estimated that its noninterest costs of issuing these CDs will be 0.2 percent,and expects to pay a deposit insurance premium of 0.0023 per dollar of insured funds.Due to other immediate cash needs,only $50 million of the funds raised will be fully invested.What is the effective cost rate for the Lawrence Bank of Cleveland to borrow in the CD market? (Round your answer to the nearest .01 percent)

Accepted Answer

The effective cost rate is 6.70 percent. The noninterest costs of issuing the CDs are 0.2 percent, and the deposit insurance premium is 0.0023 per dollar of insured funds. So, the total cost of issuing the CDs is 5.15 percent + 0.2 percent + 0.0023 percent = 5.3523 percent. Since only $50 million of the funds raised will be fully invested, the effective cost rate is 5.3523 percent / 0.8333 = 6.42 percent.

Question 9

The TRC Bank is planning on raising $500 million in a new offering of commercial paper through its holding company.It plans on using $475 million of it to fund new loans.The current interest rate for similar commercial paper is 6.45 percent and it expects 0.25 percent in issuing costs.What is the effective rate of interest on this issue of commercial paper?

Accepted Answer

The effective rate of interest on this issue of commercial paper can be calculated using the following formula:

Effective Rate = (Interest + Issuing Costs) / Proceeds

Interest = $475,000,000 * 6.45% = $30,537,500
Issuing Costs = $500,000,000 * 0.25% = $1,250,000
Proceeds = $500,000,000 - $1,250,000 = $498,750,000

Effective Rate = ($30,537,500 + $1,250,000) / $498,750,000 = 0.0649435 or 6.49435%

Rounding to two decimal places, the effective rate of interest is 7.05 percent. Therefore, the best choice is C.

Question 10

The First State Bank of Summerville knows that,if it issues commercial paper through a subsidiary,tight money supply conditions in the market may result in the interest rate on the commercial paper to be very high.What factor that affects a bank's use of nondeposit sources of funds is the bank concerned about?

Accepted Answer

The answer of The First State Bank of Summerville knows...

Question 11

The Bridges State Bank has new loan requests of $315,needs to purchase $125 million in U.S.Treasury securities for reserve requirements,and anticipates draws on lines of credit in the amount of $65 million.If total deposits received today are $205 million and the bank expects to bring in an additional $185 million in deposits next week,what is the estimated funds gap for the Bridges State Bank?

Accepted Answer

The estimated funds gap is calculated as total outflows minus total inflows. Outflows: $315 million (loans) + $125 million (securities) + $65 million (credit draws) = $505 million. Inflows: $205 million (deposits today) + $185 million (deposits next week) = $390 million. Funds gap = $505 million - $390 million = $115 million.

Question 12

Bank of America is concerned that the Federal Reserve Board may impose legal reserve requirements on money borrowed in the Fed funds market.Which factor that affects a bank's use of nondeposit sources of funds is this bank concerned about?

Accepted Answer

The bank is concerned about the potential for regulations from the Federal Reserve Board regarding legal reserve requirements for money borrowed in the Fed funds market. This falls under the factor of regulations, which can affect a bank's use of nondeposit sources of funds.

Question 13

A conventional Repurchase Agreement (RP)is ________ for the borrower than (as)a General Collateral Finance RP.

Accepted Answer

A conventional Repurchase Agreement (RP) requires the borrower to deliver a specific security as collateral, while a General Collateral Finance RP allows the borrower to choose from a pool of securities that can be used as collateral. This flexibility makes the General Collateral Finance RP more advantageous for the borrower, as they can choose securities that are more valuable or easier to obtain. Therefore, the conventional RP is less flexible compared to the General Collateral Finance RP, making option B the correct answer.

Question 14

An agreement where one party agrees to sell T-bills to another party and at the same time agrees to buy them back at a future date for set price is known as a:

Accepted Answer

A repurchase agreement, or repo, is a short-term borrowing arrangement where one party (usually a financial institution) sells securities (in this case T-bills) to another party (usually a counterparty) and simultaneously agrees to buy them back at a future date at a set price, effectively allowing the lender to earn interest on the loan.

Question 15

The Williams National Bank has new loan requests of $585 million,needs to purchase $160 in U.S.Treasury securities for reserve requirements,and anticipates draws on lines of credit in the amount of $120 million.If deposits received today total $300 million and it expects to bring in an additional $340 million in deposits next week,what is the estimated funds gap of the Williams National Bank?

Accepted Answer

The total funds needed are $585 million (loans) + $160 million (securities) + $120 million (lines of credit) = $865 million. The total deposits expected are $300 million (today) + $340 million (next week) = $640 million. The funds gap is $865 million - $640 million = $225 million.

Question 16

The First State Bank of Summerville needs to raise $500,000 in nondeposit sources of funds.It knows that the Eurodollar market requires a minimum denomination of $1 million.What factor that affects a bank's use of nondeposit sources of funds is this bank concerned about?

Accepted Answer

The size of the bank is a concern here because the Eurodollar market's minimum denomination of $1 million exceeds the bank's requirement of $500,000, indicating that the bank's size and its funding needs are not aligned with the available nondeposit funding options.

Question 17

Which of the following is not an advantage of using a repurchase agreement?

Accepted Answer

The answer of Which of the following is not an...

Question 18

The First State Bank of Summerville knows that,if it issues a large amount of the negotiable CD,the interest cost on the CD may be very high due to tight money supply conditions.As a result,it chooses to ration the credit and lend only to its most loyal clients.What risk factor that affects a bank's use of nondeposit sources of funds is the concern here?

Accepted Answer

The concern of the First State Bank of Summerville about rationing credit and lending only to its most loyal clients indicates that the risk factor here is credit availability. This means that the bank is concerned about the availability of nondeposit sources of funds since it knows that issuing a large amount of negotiable CDs may result in high interest costs due to tight money supply conditions. Therefore, to minimize the risk of not being able to access nondeposit sources of funds when needed, the bank decides to lend only to its most loyal clients.

Question 19

All of the following types of loans are available through the discount window except:

Accepted Answer

Adjustment credit is an outdated term and is no longer available through the discount window. The current types of credit available are primary, secondary, and seasonal credit.

Question 20

Dollar denominated CDs issued by banks outside the United States are known as:

Accepted Answer

Euro CDs are dollar-denominated certificates of deposit issued by banks outside the United States, offering a way to invest in dollars without being subject to U.S. banking regulations.

Quiz 13: Managing Nondeposit Liabilities