Enter whether the sentence or statement is true (enter “A” on your clicker) or false ( “B”).
1. Suppose that Congress were to demand that defined-benefit pension funds use a lower interest rate to calculate the PV of their expected future liabilities. This lower discount factor would make pension funds look more insolvent. T
2. Life insurance companies typically have greater liquidity risk than property-casualty insurance companies.
3. Bank regulators can discourage moral hazard by requiring banks to maintain greater capital levels.
4. Securitization enables mortgages to be financed by outside investors--who now earn mortgage interest income--instead of traditional lenders. Lending institutions have therefore not welcomed the increased securitization of home mortgage loans.
5. Liability-side liquidity risk may be a result of OBS lending commitments.
6. In the U.S., cash reserves required to meet deposit reserve requirements typically include U.S. government bonds such as U.S. Treasury Bills, vault cash and cash deposits at the Federal Reserve Bank.
7. Demand deposits are a low-cost, but not costless, source of funds and have a high degree of withdrawal risk.
8. Share deposits at credit unions are insured by the FDIC.
Multiple Choice (9 questions, 2 pts. each, except where noted, 22 pts. total)
Identify the letter of the choice that best completes the statement or answers the question. Or choose the response closest (i.e. has the minimum difference in absolute value) to your answer. 9. (3 pts.) Subordinated debt (SD) has been proposed as a means of increasing the degree of overall market discipline at a depository institution (DI). Which of the following objectives will SD help achieve?
a. The expected cost of issuing SD should decrease as the risk of the DI increased. d. Secondary market yields on the SD would be inversely related to an increase in the risk of the