Question 1

The Sasser State Bank has just sold $25 million in Treasury Bills.Which type of factor affecting legal reserves is this for the bank?

Accepted Answer

The sale of Treasury Bills is a controllable factor that increases legal reserves because the bank can choose to sell or hold the bills.

Question 2

A bank is required to maintain an average daily balance at the Fed of $600 million.In the first 2 days of the maintenance period,it maintains a balance of $450 million,the next three days it maintains a balance of $700 million,the next two days it maintains a balance of $650 million,the next three days it maintains a balance of $450 million,and the next three days it maintains a balance of $650 million.What does its balance at the Fed has to be on the last day of the maintenance period in order to have a zero cumulative reserve deficit?

Accepted Answer

To calculate the cumulative reserve deficit, we need to calculate the difference between the actual balance maintained at the Fed and the required average daily balance of $600 million.

The bank maintained a balance of $450 million for the first 2 days, which is $150 million below the requirement. For the next three days, it maintained a balance of $700 million, which is $100 million above the requirement. For the next two days, it maintained a balance of $650 million, which is $50 million above the requirement. For the next three days, it maintained a balance of $450 million, which is $150 million below the requirement. And for the next three days, it maintained a balance of $650 million, which is $50 million above the requirement.

The cumulative reserve deficit is therefore $(150) + 100 + 50 + (150) + 50 = $200 million.

To have a zero cumulative reserve deficit, the bank needs to maintain a balance of $600 million on the last day.

Therefore, the answer is D) $800 million, because the bank needs to maintain a balance of $800 million on the last day to bring the average balance to $600 million.

Question 3

The Taylor Treadwell Bank has just calculated the ratio of its demand deposits to total time deposits.Which liquidity indicator is this?

Accepted Answer

The ratio of demand deposits to total time deposits is known as deposit composition ratio, which is a liquidity indicator. It measures the percentage of a bank's deposits that are available on demand.

Question 4

The Peace Bank of Ohio has just received a $50 million credit at the local clearing house.Which type of factor affecting legal reserves is this for the bank?

Accepted Answer

The $50 million credit received by the Peace Bank of Ohio is a noncontrollable factor that increases legal reserves. Legal reserves refer to the amount of funds that a bank is required by law to hold either as cash in its vaults or as a deposit with the central bank. Legal reserve requirements are set by regulatory authorities, and banks have little control over them. Therefore, the $50 million credit received by the Peace Bank of Ohio is a noncontrollable factor that increases its legal reserves.

Question 5

The Harmony Bank of the South has just increased its Federal Funds Purchases.What source of liquidity does this represent to the bank?

Accepted Answer

The answer of The Harmony Bank of the South has...

Question 6

The most important source of liquidity for a depository institution is:

Accepted Answer

The most important source of liquidity for a depository institution is new customer deposits because they represent the primary source of funding for a bank's operations. When banks receive deposits, they can either use them to make loans or invest in liquid securities to generate income. Therefore, new customer deposits are the lifeblood of a bank and the key driver of its ability to lend and generate profits.

Question 7

David Ashby has just paid off the balance on his home mortgage with First American Bank.What source of liquidity does this represent to the bank?

Accepted Answer

David Ashby's payment represents a customer loan repayment, which is a source of liquidity for the bank. The bank can use these funds to make new loans or investments, or to meet short-term funding needs. Option A (incoming customer deposit) is not applicable as Ashby is paying off his mortgage rather than making a deposit. Option B (revenues from the sale of nondeposit services) is also not applicable as it is not related to this specific transaction. Option D (sale of an asset) and option E (borrowings from the money market) are not relevant to this scenario.

Question 8

A bank is required to maintain an average daily balance at the Fed of $700 million.On the first day of the maintenance period it maintains a balance of $750 million,the next two days it maintains a balance of $725 million,the next three days it maintains a balance of $625 million,the next three days it maintains a balance of $775 million,the next two days it maintains a balance of $700 million,and the next two days it maintains a balance of $675 million.What does its balance at the Fed has to be on the last day of the maintenance period in order to have a zero cumulative reserve deficit?

Accepted Answer

The answer of A bank is required to maintain an...

Question 9

The Burr Bank has just calculated the ratio of its U.S.Government Securities to Total Assets.Which liquidity indicator is this?

Accepted Answer

The ratio of U.S. Government Securities to Total Assets is a liquidity indicator known as the Liquid Securities Indicator. This ratio measures the ability of the bank to raise cash quickly by selling highly liquid securities like U.S. Treasury securities.

Question 10

The Taylor Treadwell Bank has just calculated the ratio of its net loans and leases to total assets.Which liquidity indicator is this?

Accepted Answer

The ratio of net loans and leases to total assets is a capacity ratio, which measures the ability of the bank to generate income from its assets. It is a liquidity indicator in the sense that it shows the ability of the bank to meet its obligations as they fall due, but it is not classified specifically as a cash position or liquid securities indicator. Option C is incorrect as it refers to a different liquidity measure that focuses on the availability of funds in the interbank market. Option E is also incorrect as the question explicitly mentions a liquidity measure, so it cannot be that none of the options is correct.

Question 11

The Simpson State Bank of Stillwater has just sold Federal funds to another bank in its Federal Reserve district.Which type of factor affecting legal reserves is this for the bank?

Accepted Answer

Selling Federal funds to another bank is a controllable action by the Simpson State Bank of Stillwater, and it decreases its legal reserves because the bank is transferring reserve balances to another bank.

Question 12

Which of the following is an option when a liquidity deficit arises and a bank wants to use stored liquidity in its assets to cover the deficit?

Accepted Answer

Selling Treasury Bills is a way for a bank to convert its stored liquidity (in the form of assets) into cash to cover a liquidity deficit.

Question 13

_____________ indicators tend to be highly sensitive to the season of the year and stage of the business cycle.

Accepted Answer

The answer of _____________ indicators tend to be highly sensitive...

Question 14

The base amount of transaction deposits for a depository institution above which the legal reserve requirement changes to ten percent is known as:

Accepted Answer

The reserve tranche refers to the portion of a depository institution's deposits that is subject to a different (usually higher) reserve requirement. This term is specifically used in the context of the Federal Reserve's requirements in the United States, where different tiers of deposits have different reserve requirements.

Question 15

The Hora National Bank has just received notice that a large depositor with the bank wants to close its account immediately.Which type of factor affecting legal reserves is this for the bank?

Accepted Answer

The large depositor's decision to close its account is a noncontrollable factor that decreases legal reserves for the bank. The bank cannot control the actions of its depositors, and losing a large account can significantly impact the bank's legal reserves.

Question 16

The HTR Bank of Summerville has just calculated the ratios of its money market (short term)assets to volatile liabilities.Which liquidity indicator is this?

Accepted Answer

The ratio of money market assets to volatile liabilities is known as the Hot Money Ratio. This liquidity indicator measures a bank's ability to cover withdrawals of short-term or "hot" money, which can leave the bank quickly if depositors seek higher returns elsewhere or if they lose confidence in the bank's stability.

Question 17

Which of the following is an option when a liquidity deficit arises and a bank wants to borrow liquidity to cover the deficit?

Accepted Answer

The answer of Which of the following is an option...

Question 18

While the largest U.S.depositories are required to settle their legal reserve requirements with the Federal Reserve over successive bi-weekly periods,the more numerous but smaller banks are required to do so:

Accepted Answer

The answer of While the largest U.S.depositories are required to...

Question 19

Recent research on money position management suggests that the reserve deficits of smaller depository institutions normally occur:

Accepted Answer

According to the research on money position management, reserve deficits of smaller depository institutions usually occur late in the reserve maintenance period. This is because smaller institutions often have fewer resources to manage their cash flows efficiently and may wait until the end of the maintenance period to adjust their reserves.

Quiz 11: Liquidity and Reserves Management: Strategies and Policies