Managing Nondeposit Liabilities for Commercial Banking | FRL 460, Exams of Banking and Finance

Download Managing Nondeposit Liabilities for Commercial Banking | FRL 460 and more Exams Banking and Finance in PDF only on Docsity! Chapter 13 Managing Nondeposit Liabilities Fill in the Blank Questions 1. Dollar denominated CDs issued outside the U.S. are called _________________________. Answer: Eurodollar CDs 2. The CDs large foreign banks sell through their U.S. branches are called _________________________. Answer: Yankee CDs 3. When a bank buys funds from other financial institutions in order to cover good quality loan demand and to satisfy deposit reserve requirements they are practicing _________________________. Answer: liability management 4. When the first priority of a bank is to make loans to all good quality loan customers they are following the _________________________. Answer: customer relationship doctrine 5. Originally __________________ consisted exclusively of deposits held by U.S. banks at the Federal Reserve banks which were loaned from one bank to another. Answer: federal funds 6. _________________________ is the short-term notes, with maturities ranging from 3 to 4 days to 9 months, issued by well known companies. Answer: Commercial paper 7. A _________________________ is the temporary sale of high-quality, easily-liquidated assets accompanied by the agreement to buy back those assets on a future specific date at a predetermined price. Answer: repurchase agreement 8. Because the interest rate on CDs, commercial paper and other nondeposit borrowings (except borrowings from the Federal Reserve discount window) are determined by supply and demand conditions in the market they all face __________________ risk. Answer: interest rate Rose/Hudgins, Bank Management and Financial Services, 8/e1 Test Bank, Chapter 132 Answer: False 30. There are no reserve requirements on Federal funds borrowings in the U.S. Answer: True 31. Accommodating banks buy and sell Federal funds simultaneously. Answer: True 32. 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. Answer: True 33. 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. Answer: False 34. Yankee CDs are issued by large savings and loan associations and other nonbank savings institutions. Answer: False 35. The volume of variable-rate CDs exceeds the volume of fixed-rate CDs among U.S. banks. Answer: False 36. Liability management is considered to be an interest-sensitive approach to raising bank funds. Answer: True 37. Funds raised by the use of liability management techniques are considered to be flexible. Answer: True 38. Liability management banking calls for using price (the interest rate offered) as the control lever to regulate incoming funds. Answer: True 39. The most common type of federal funds loans are term loans. Answer: False 40. Longer-term federal funds contracts lasting several days, weeks, or months, often accompanied by a written contract, are called continuing contracts. Answer: False Rose/Hudgins, Bank Management and Financial Services, 8/e5 41. 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. Answer: True 42. The largest foreign banks active in the United States sell CDs through their U.S. branches called Yankee CDs. Answer: True 43. Under current federal law commercial banks in the United States can issue commercial paper as direct obligations of the banks. Answer: False 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. Answer: True 45. 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, Answer: False 46. 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 tap into immediately available funds from other institutions possessing temporarily idle funds. Answer: True 47. One of the factors to consider when a bank chooses among nondeposit funding sources is the relative cost. In general, the cheapest source of short-term funds is the Fed Funds market. Answer: True 48. There are no restrictions on getting a Federal Reserve loan and because it is the cheapest source of short-term funds most banks will use this source of funds exclusively. Answer: False 49. CDs must be issued with maturities of at least 7 days. Answer: True 50. Loans from the Fed Funds market must be backed by collateral. Answer: False Test Bank, Chapter 136 51. In recent years financial institutions have gotten better at managing interest rate risk. Answer: True 52. Large banks depend more on nondeposit borrowings than small banks. Answer: True 53. Although there is an active federal funds spot market, there is currently no associated futures market for federal funds. Answer: False 54. Repurchase Agreement (RPs) transactions are perceived to be less risky than equivalent federal funds transactions. Answer: True 55. Interest rates in the Repurchase Agreement (RP) market are quoted on a 360-day basis. Answer: True 56. Seasonal credit discount window loans generally have the highest interest rates. Answer: False 57. 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. Answer: False 58. When the general credit conditions are tight, there is a possibility that not every borrower will be accommodated by a lender. This chance of credit rationing is referred to as credit availability risk. Answer: True 59. The size of a financial institution has an effect on the type of nondeposit funding source that it will consider. 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. Answer: True 60. Only federal regulators can limit the terms (amount, frequency, and use) of borrower funds by the U.S. depository institutions. Answer: False Rose/Hudgins, Bank Management and Financial Services, 8/e7 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 above. Answer: E 71. First National Bank is planning to raise $30 million through an offering of negotiable CDs. The current rate for similar CDs is 5.5%. 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? A) 6.9% B) 7.2% C) 6.0% D) 5.5% E) None of the above. Answer: B 72. CDs that are sold by 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 above. Answer: D 73. Accommodating banks perform what role? 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 above. Answer: D 74. 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: A) Overnight loan. B) Continuing contract. C) Term loan. D) Rollover loan agreement E) None of the above Answer: B Test Bank, Chapter 1310 75. 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 above Answer: A 76. The federal law that restricts Federal Reserve lending to undercapitalized banks and to banks that are "viable entities" is the: 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 above. Answer: B 77. The bank funding source that is really a "hybrid" account is the: A) Federal funds loan. B) Repurchase agreement. C) Negotiable CD. D) Eurodollar deposit. E) None of the above. Answer: C 78. A bank plans on borrowing $150 million through an RP transaction collateralized by T-bills. The bank plans on borrowing the money for 5 days and the current RP rate is 5.25 percent. What is this bank's total interest cost in dollars? A) $7,875,000 B) $107,877 C) $21,875 D) $109,375 E) None of the above Answer: D 79. 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 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 above Answer: A Rose/Hudgins, Bank Management and Financial Services, 8/e11 80. The short-term notes, with maturities ranging from 3 or 4 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 above Answer: B 81. The TRC Bank is planning on raising $500 million in a new offering of commercial paper through its holding company. The plan on using $475 million of it to fund new loans. The current interest rate for similar commercial paper is 6.45 percent and they expect .25 percent in issuing costs. What is the effective rate of interest on this issue of commercial paper? A) 6.65% B) 6.45% C) 7.05% D) 6.79% E) None of the above Answer: C 82. 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 set price is known as: A) A repurchase agreement B) Commercial paper C) Federal Funds D) Negotiable CDs E) None of the above Answer: A 83. Which of the following is not an advantage of using a repurchase agreement? A) The bank gains excess reserves which can used to make new deposits B) The bank makes use of high-quality but low yielding assets without losing them permanently C) If the agreement is made with a bank who keeps a checkable deposit with the bank it can reduce both the bank's deposits and reserve requirements D) The interest rate the bank has to pay is usually low E) All of the above are advantages of using a repurchase agreement Answer: A 84. Which of the following is an example of a longer term nondeposit funding source? A) Federal funds B) Repurchase agreements C) Capital notes and debentures D) Negotiable CDs E) None of the above Test Bank, Chapter 1312 Answer: A 94. The First State Bank of Summerville knows that, if they issue commercial paper through a subsidiary, money is very tight and the interest rate on the commercial paper may very high. What factor that affects a bank’s use of nondeposit sources of funds is the bank concerned about? 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) Regulations Answer: C 95. The First State Bank of Summerville knows that, if they issue a large amount of the negotiable CD, money is tight. As a result, they choose to ration the credit and lend only to their most loyal clients. What risk factor that affects a bank’s use of nondeposit sources of funds is the concern here? A) Interest rate changes B) The length of time the funds will be required C) The relative cost of raising the funds D) Credit availability E) Regulations Answer: D 96. The manager of the First National Bank of Edmond needs $100 million this afternoon to satisfy an unexpected loan demand from an excellent customer of the bank. What factor that affects a bank’s use of nondeposit sources of funds is the manager concerned about? 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) Regulations Answer: B 97. The First State Bank of Summerville needs to raise $500,000 in nondeposit sources of funds. They know 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? 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) Regulations Rose/Hudgins, Bank Management and Financial Services, 8/e15 Answer: D 98. Bank of America is concerned because they have heard 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? 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) Regulations Answer: E 99. The Bank of Boulder is planning on issuing $45 million in negotiable CDs. Currently other similar CDs have an interest rate of 4.75%. The Bank of Boulder has estimated that its noninterest costs of issuing these CDs are .15%. The Bank of Boulder must pay a deposit insurance premium of .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 .01%) A) 4.75% B) 4.90% C) 5.10% D) 5.79% E) None of the above Answer: D 100. The Lawrence Bank of Cleveland is planning on issuing $60 million in negotiable CDs. Currently other similar CDs have an interest rate of 5.15%. The Lawrence Bank of Cleveland has estimated that is noninterest costs of issuing these CDs will be .2%. The Lawrence Bank of Cleveland must pay a deposit insurance premium of .0023 per dollar of insured funds. Due to other immediate cash needs, only $50 of the funds raised will be full 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%) A) 6.71% B) 6.42% C) 5.58% D) 5.15% E) None of the above Answer: A 101. CDs issued by savings institutions are called: A) Thrift CDs B) Domestic CDs Test Bank, Chapter 1316 C) Euro CDs D) Yankee CDs E) Variable rate CDs Answer: A 102. When a foreign branch lends a Eurodeposit to its home office in the U.S., how is this listed on the balance sheet of the home office? A) Loan from Subsidiary B) Liabilities to Foreign Branches C) Securities Sold under Agreement to Repurchase D) Bankers Acceptance E) None of the above Answer: B 103. A Fed Funds loan that is an unwritten agreement negotiated via wire or telephone with the borrowed funds returned the next day is known as: A) An overnight loan B) A continuing contract C) A term loan D) A daytime loan E) None of the above Answer: A 104. A bank plans on borrowing $225 million for 10 days through a RP transaction collateralized by T-Bills. The current RP rate is 4.5%. What is this bank’s total interest cost in dollars? A) $10,125,000 B) $1,125,000 C) $281,250 D) $28,125 E) None of the above Answer: C 105. A bank plans on borrowing $450 million for 20 days through a RP transaction collateralized by T-Bills. The current RP rate is 6.25%. What is this bank’s total interest cost in dollars? A) $28,125,000 B) $78,125 C) $1,406,250 D) $1,562,500 E) None of the above Answer: D 106. A bank promises an annual return of 7.75 percent on a 180 day, $250,000 Rose/Hudgins, Bank Management and Financial Services, 8/e17