Chap011 - Chapter 11 Liquidity and Reserves Management...

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Chapter 11 Liquidity and Reserves Management: Strategies and Policies 1. A(n) __________________ is an asset which can be converted into cash easily, which has a relatively stable price and is reversible so that the seller can recover their original investment with little risk of loss. Answer: liquid asset 2. When a financial institution sells assets to manage liquidity it faces _________________________. They lose the future earnings on those assets, they face transaction costs on those sales and the assets most easily sold often have the lowest return. Answer: opportunity costs 3. _________________________ is when the financial institution borrows money in the money market to meet their liquidity needs. Answer: Purchased (borrowed) liquidity 4. The _________________________ is the total difference between its sources and uses of funds. Answer: liquidity gap 5. _________________________ are the deposits and other borrowings of the bank which are very interest sensitive or where the bank is sure they will be withdrawn during the current period. Answer: "Hot money" liabilities 6. The _________________________ is the idea that management should make all good loans and count on its ability to borrow funds if it does not have the liquidity to meet its cash needs. Answer: customer relationship doctrine 7. _________________________ are the assets the bank must by law hold behind its deposits. In the U.S. only vault cash and deposits held with the Federal Reserves can be used to meet these requirements. Answer: Legal reserves 8. A(n) _________________________ is the account the bank must have at the Federal Reserve to cover any checks drawn against the bank. Answer: clearing balance 9. A(n) _________________________ is a service developed by banks where the bank shifts money out of accounts with reserve requirements and into savings accounts overnight. Answer: sweeps account 10. The _________________________ is a 14 day period stretching from a Thursday to a Wednesday. This is the period in which the bank has to keep their average daily level of required Test Bank, Chapter 11 178
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reserves for a particular computation period. Answer: reserve maintenance period 11. _________________________ is the availability of cash in the amount needed at a reasonable cost. Answer: Liquidity 12. The oldest approach to meeting liquidity needs which relies on the sale of liquid assets to meet liquidity demands is called _________________________. Answer: asset liquidity management 13. Under a _________________________ strategy some of the expected demands for liquidity are stored in assets, while others are backstopped by arrangements for lines of credit from banks or other suppliers of funds. Answer: balanced liquidity management
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Chap011 - Chapter 11 Liquidity and Reserves Management...

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