Chapter 13: Managing Nondeposit Liabilities

Fill in the Blank Questions

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

EuroCDs

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

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, it is practicing
_________________________ management.

liability

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

customer relationship

5 Originally, __________________ funds consisted exclusively of deposits held by U.S.

. banks at the Federal Reserve banks which were loaned from one bank to another.

federal

6 _________________________ are short-term notes, with maturities ranging from 3

. days to 9 months, issued by well-known companies.

Commercial papers

7 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.
 repurchase agreement

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

interest rate

9 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
__________.

available funds gap

10 A(n) _________________________ is an interest bearing receipt for funds issued by

. a bank with a minimum denomination of $100,000.

negotiable jumbo CD

11. 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.

credit availability

12 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.

discount

13 The securities most often used in a repurchase agreement are

. ____________________.

T-Bills

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

. debt.
 short, long

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

collateralized

16 A repurchase agreement (RP) whereby the collateral is specifically identified is

. known as a conventional or ____________ RP.

fixed-collateral

17 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.

General Collateral Finance

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

secondary

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

seasonal

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

Fedwire

21 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.
 overnight

22 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.

term

23 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.

continuing

24 When financial institution borrows in the RP market, this loan is listed as

. _________________________ under agreements to repurchase.

securities sold

25 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.

Federal Home Loan Bank

True / False Questions

26 The traditional and principal source of bank funds is deposits. TRUE

.

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

. funds. FALSE

28 In recent years, deposits have been growing faster than nondeposit sources of funds
. among U.S. banks. FALSE
29 Federal funds today consist exclusively of deposits held at the Federal Reserve
. banks. FALSE

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

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

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

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

36 Liability management is considered to be an interest-sensitive approach to raising

. bank funds. TRUE

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

. flexible. TRUE

38 Liability management banking calls for using price (the interest rate offered) as the
. control lever to regulate incoming funds. TRUE
39 The most common type of Federal funds loans are term loans. FALSE
.
40 Longer-term federal funds contracts lasting several days, weeks, or months, often
. accompanied by a written contract, are called continuing contracts. FALSE

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. TRUE

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

43 Under current federal law, commercial banks in the United States can issue
. commercial paper as direct obligations of the banks. 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. 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. 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 satisfy the reserve
requirements or to satisfy a loan demand by tapping into immediately available funds
from other institutions possessing temporarily idle funds. TRUE
47 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. 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 use this source of funds
exclusively. FALSE

49 Negotiable CDs are restricted to short maturities—from seven days to one or two
. years. TRUE

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

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

52. Large banks depend more on nondeposit borrowings than small banks. TRUE

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

54 Repurchase Agreement (RPs) transactions are perceived to be less risky than

. equivalent Federal funds transactions. TRUE
55 Interest rates in the Repurchase Agreement (RP) market are quoted on a 360-day
. basis. TRUE

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

58 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. TRUE

59 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. TRUE

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

Multiple Choice Questions

61 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.

62 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.

63 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.

64 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.

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.

66. 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.

67 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.

68 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.

69 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.

70 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.

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 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.

72 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.

73 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.

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(n):

A. overnight loan.

B. continuing contract.

C. term loan.

D. rollover loan agreement.

E. None of the options is correct.

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 options is correct.

76 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

77 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

78 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

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 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

80 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.

81 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?

A. 6.65 percent

B. 6.45 percent

C. 7.05 percent
 D. 6.79 percent

E. None of the options is correct

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 future date for set price is known as a:

A. repurchase agreement.

B. commercial paper.

C. term loan.

D. negotiable CD.

E. None of the options is correct

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

.
A. The bank gains excess reserves which can be 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 which keeps a checkable deposit with
another 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 options are advantages of using a repurchase agreement.

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

A. Money market funds

B. Repurchase agreements

C. Capital notes and debentures

D. Negotiable CDs

E. None of the options is correct

85 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?
 A. $9,525,000

B. $1,190,625

C. $76,200,000

D. $6,750,000

E. None of the options is correct

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

A. Domestic CDs.

B. Euro CDs.

C. Yankee CDs.

D. Commercial paper.

E. None of the options is correct.

87 A repurchase agreement (RP) in which the collateral is specifically identified is

. known as a(n):

A. conventional RP.

B. General Collateral Finance RP.

C. specific RP.

D. general RP.

E. individual RP.

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

A. more flexible

B. less flexible

C. as flexible

D. less rigid

E. None of the options is correct

89 All of the following types of loans are available through the discount window except:
.
A. adjustment credit.

B. primary credit.

C. secondary credit.

D. seasonal credit.

E. None of the options is correct.

90 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:

A. FDIC.

B. OCC.

C. OTS.

D. FHLB.

E. RTC.

91 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?

A. $505 million

B. -$390 million

C. $115 million

D. -$315 million

E. None of the options is correct

92 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?
 A. $225 million

B. $585 million

C. $640 million

D. $865 million

E. None of the options is correct

93 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?

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

94 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?

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

95 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?
 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

96 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?

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

97 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?

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

98 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)
 A. 4.75 percent

B. 4.90 percent

C. 5.10 percent

D. 5.77 percent

E. None of the options is correct

99 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)

A. 6.70 percent

B. 6.42 percent

C. 5.58 percent

D. 5.15 percent

E. None of the options is correct

100 CDs issued by nonbank savings institutions are called:

.
A. thrift CDs.

B. domestic CDs.

C. EURO CDs.

D. Yankee CDs.

E. variable rate CDs.

101 When a foreign branch lends a Euro deposit 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 options is correct

102 A Fed Funds loan that is an unwritten agreement, negotiated via wire or telephone,
. and with the borrowed funds returned the next day is known as a(n):

A. overnight loan.

B. continuing contract.

C. term loan.

D. daytime loan.

E. None of the options is correct.

103 A bank plans on borrowing $225 million for 10 days through an RP transaction
. collateralized by T-Bills. The current RP rate is 4.5 percent. What is the 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 options is correct

104 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 percent. What is the 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 options is correct

105 A bank promises an annual return of 7.75 percent on a 180 day, $250,000 CD. What
. will be the total amount due the customer at the end of the six-month period?

A. $269,375.00

B. $259,687.50

C. $9,687.50

D. $250,000.00

E. None of the options is correct

106 A bank promises an annual return of 4.85 percent on a 60 day, $300,000 CD. What
. will be the total amount due to the customer at the end of the two-month period?

A. $302,425

B. $314,550

C. $14,550

D. $2,425

E. None of the options is correct

107 The HTR Bank is planning on raising $750 million in a new offering of commercial
. paper through its holding company. It plans on using $725 million of it to fund new
loans. The current interest rate for similar commercial paper is 7.15 percent and it
expects 0.15 percent in issuing costs. What is the effective rate of interest on this
issue of commercial paper?

A. 7.30 percent

B. 7.15 percent

C. 7.40 percent

D. 7.55 percent

E. None of the options is correct

108 The Carter State Bank is planning on raising $600 million in a new offering of
. commercial paper through its holding company. It plans on using $500 million of it
to fund new loans. The current interest rate for similar commercial paper is 4.85
percent and it expects 0.3 percent in issuing costs. What is the effective rate of
interest on this issue of commercial paper?
 A. 5.15 percent

B. 6.18 percent

C. 5.82 percent

D. 4.85 percent

E. None of the options is correct

109 Setting the Federal Reserve primary-credit discount rate above the Fed Funds rate
. mirrors what credit facilities used by several European central banks?

A. The Vince credit facilities

B. The Adam Smith credit facilities

C. The Lombard credit facilities

D. The Lower Back credit facilities

E. None of the options is correct

110. Which of the following is one of the disadvantages of following the customer
relationship doctrine?

A. High interest costs on loans

B. Negative returns on loans

C. Poor credit scores of customers

D. Fewer loyal customers

E. Low service fees

111. Money market suppliers of funds typically have a(n) ______________ response to
changes in the market interest rates.

A. elastic

B. inelastic

C. slow

D. marginal
 E. opposite

112. With liability management, institutions in need of more funds to cover expanding
loan commitments or deficiencies in the cash reserves can
______________________ to reduce their volume of money market borrowings.

A. lower their offer rate

B. lower their bid rate

C. raise their bid rate

D. raise their offer rate

E. reduce cutoff for minimum credit score required to grant loans

113. The interest rate on a Fed funds loan is:

A. decided by the Federal Reserve Board.

B. based on LIBOR.

C. decided by the U.S. Treasury Department.

D. subject to negotiation between the borrower and the

lender.

E. based on Euribor.

114. Which of the following is an advantage of a General Collateral Finance RP?

A. The securities pledged in the first leg need not necessarily be the same to be
returned.

B. It can be settled on the books of the FICC which allows for netting of
transactions.

C. It entails lower transaction costs.

D. It helps make RP market more liquid.

E. All of the options are correct.

115. In the United States, legal reserve requirements on certificates of deposits is

currently:
 A. zero.

B. 5 percent.

C. 10 percent.

D. 15 percent.

E. 10 percent of the instruments maturing in the next three months.

116 The largest unregulated financial market place in the world is the:
.
A. U.S. treasuries.

B. Eurocurrency market.

C. agro-commodities market.

D. inter-bank loan market.

E. Fed funds market.