Slides 1-4

Question 1

Money is a medium of exchange, store of value, unit of account and ___.

Answer 1

Standard of deferred payment

Question 2

The four main characteristics of money are that it should be ___, ___, ___ and ___.

Answer 2

Portable, Durable, Scarce, Not Easily Counterfeited

Question 3

Other than M1 or M2, another measure of money supply is MZM which is ___.

Answer 3

M2 minus small time deposits plus institutional MMMFs

Question 4

Banks make loans in ___, but favor risk free Treasury securities in ___.

Answer 4

Good times, Bad times

Question 5

The first 10.3 have a ___ rr, next up to $44.4 million have a ___ rr, and amounts over $44.4 million have a ___ rr.

Answer 5

0, 3%, 10%

Question 6

The four ways excess reserves are used include ___, ___, ___ and ___.

Answer 6

Held by bank earning interest from the Fed, lent in the federal funds market, Used to buy securities, Used to make new loans

Question 7

Total Reserves = ___+___ or alternatively = ___+___

Answer 7

Vault Cash + Reserve Balances with Fed; or Excess + Required

Question 8

Banks lend excess reserves to each other in the ___, and are charged interest rate called the ___.

Answer 8

Federal funds market, Federal Funds Rate

Question 9

When banks cannot make their reserve requirement, they are faced with five options being: ___, ___, ___, ___ or ___.

Answer 9

Borrowing in the fed funds market, Borrowing from the fed at the discount rate, Selling securities owned by bank, Reducing outstanding loans, Issuing CDs

Question 10

The supervisory rating system CAMELS stands for ___.

Answer 10

Capital adequacy, Asset quality, Management and admin, Earnings, Liquidity, Sensitivity to market risk

Question 11

Core deposits represent an increasingly (smaller/larger) portion of bank funding.

Answer 11

Smaller

Question 12

Liquidity or Reserve management is ensuring that the bank maintains an appropriate level of reserves, ensure sufficient excess reserves but also the ___.

Answer 12

Buying and selling of reserve balances to minimize cost of holding near zero-interest earning assets.

Question 13

When banks borrow in the fed funds market overall reserves (do/don’t) change but when banks borrow from the fed the volume of bank reserves ___.

Answer 13

Don’t change, but borrowing from Fed direct the volume of bank reserve increases.

Question 14

Three Asset management strategies include: ___, ___ and ___.

Answer 14

Balancing returns against risk, Diversification and Managing Liquidity

Question 15

Other than managing cost of funds via mix of liabilities, core deposits, and managed liabilities (e.g. Eurodollars), a liability management strategy also includes ___.

Answer 15

Managing the maturity structure of liabilities (i.e. don’t let all liabilities mature on the same day)

Question 16

Because banks’ liabilities typically tend to roll over or reprice faster than assets, when interest rates rise the value of both assets and liabilities ___ but the effect is likely to be larger for ___ than for ___.

Answer 16

Fall, Larger for Assets than for Liabilities

Question 17

Basis risk means the risk that ___.

Answer 17

Not all interest rates will move together

Question 18

If a bank has more rate-sensitive ___ than ___, a rise in interest rates will ___ bank profits and a decline in interest rates will ___ bank profits.

Answer 18

Liabilities than Assets, A rise will reduce profits, A decline will raise profits

Question 19

The Dollar Interest-Sensitive Gap = ___

Answer 19

Int-Sens Assets - Int-Sens Liabilities

Question 20

The Relative Int-Sensetive Gap = ___

Answer 20

Dollar IS Gap/Bank Size

Question 21

The Interest Sensitivity Raio = ___

Answer 21

Interest Sensitive Assets/Interest Sensitive Liabilities

Question 22

A liability sensitive has: +/- Dollar Int Sensetive Gap, +/- Relative IS Gap, Int Sensitivity Ratio ( than 1)

Answer 22

Negative, Negative Less than 1

Question 23

For an Asset-Sensitive Bank, as interest rates rise, NIM (rises/falls)

Answer 23

Rises

Question 24

For a Liability-Sensitive Bank, as interest rates rise, NIM (rises/falls)

Answer 24

Falls

Question 25

When interest rate sensetive assets = interest rate sensetive liabilities, the interest sensitivity ration is For an Asset-Sensitive Bank, as interest rates rise, NIM is ___.

Answer 25

One

Question 26

The Fed Funds rate is a measure of the ___ of funds to banks.

Answer 26

Marginal cost

Question 27

The Fed determines the supply of ___, by buying or selling ___.

Answer 27

Bank reserves, By buying or selling securities

Question 28

The Fed buying securities shifts the supply curve to the (right/left), selling securities shifts the curve to the (right/left).

Answer 28

Buying=Right Shift, Selling=Left Shift

Question 29

Buying securities increases ___ and drived the Fed funds rate ___.

Answer 29

Increases reserves, Lower

Question 30

Required Reserves = ___

Answer 30

Mandated Required Reserves Ration x Reservable Deposit Liabilities (Transactions Deposits)

Question 31

The demand for excess reserves is determined by the ___, for which a rise in will shift the demand curve ___, unless the increase will cause the Fed funds rate to rise.

Answer 31

Degree of uncertainty, Outward shift

Question 32

Money market instruments include Fed funds, CDs, Eurodollars, commercial paper, ___ and ___.

Answer 32

T-Bills and Repurchase Agreements (and Reverse RPs)

Question 33

Recently, the growth in the Eurodollar market is related to the sizable ___.

Answer 33

US Current Account deficit and increased holdings of dollars by foreigners

Question 34

LIBOR is nothing more than a ___, which also represents the ___ of term funds to banks.

Answer 34

Survey of Eurodollar rates, represents the marginal cost of term funds (much like Fed Funds)

Question 35

The most prominent purchases of Money Market Instruments are ___.

Answer 35

Money market funds