Exam (elaborations)
ECN-460 Midterm Questions And Answers Latest Update
- Course
- ECN 460
- Institution
- Arizona State University
ECN-460 Midterm Questions And Answers Latest Update
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Solution 2024/2025Pepper
ECN-460 Midterm Questions And Answers
Latest Update
What is asset transformation? ANS✔✔ selling liabilities with one set of
characteristics and using the proceeds to buy assets with a different set of
characteristics; borrowing short, lending long
List the six primary concerns of a bank manager. ANS✔✔ 1. Liquidity risk
management
2. Capital adequacy risk management
3. Asset management risk
4. Interest rate risk management
5. Liability management "Managed liability"
6. Credit risk management
Differentiate between required reserves and excess reserves. ANS✔✔
Required reserves - reserve ratio (RR) of deposits required by Federal
Reserve
Excess reserves - insurance against the costs associated with deposit
outflows
What are non-transaction deposits and why is it so important to banks?
ANS✔✔ depositors accounts (savings, money market, CDs) that have
restrictions on how and when funds can be withdrawn.
These provide a source of funding that can be used for long-term
investments. Less liquid
, Solution 2024/2025
Pepper
Differentiate between discount loans and fed funds loans ANS✔✔ Discount
loans - loan from Fed Reserve to bank
Fed funds loans - overnight loan from one bank to another
What are the primary products considered under the umbrella of asset-
managed liabilities (ALM)? ANS✔✔ Negotiable CDs, Increase in Fed Funds
borrowed, & Eurodollar borrowings
List the primary assets and liabilities on a bank's balance sheet ANS✔✔
Primary assets - cash, securities, loans, and property
Liabilities - deposits, borrowings, financial obligations
Assess balance sheet impacts of deposit outflows ANS✔✔ Balance the need
for liquidity against increased returns from less liquid assets without
incurring huge costs
What are the three major costs associated with deposit outflows when
excess reserves are insufficient? ANS✔✔ Foregone interest, opportunity
cost, increased marginal return of holding reserves
Calculate reserve balances given deposit required reserve ratios ANS✔✔
Reserve Requirement = Deposits * Reserve Ratio
How do capital levels prevent bank failures? ANS✔✔ Bank failure
prevention, Return on Equity (ROE), Regulatory Requirement
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