UCE Practice Questions 3

Questions and Answers

In order to provide funds to satisfy liquidity needs, a bank may:

Increase liabilities of a term nature.

Purchase treasury stock.

A & B above. (correct)

Increase holdings of non-liquid assets.

Liquidate investment securities.

The major objective of a sound funds management program is:

Optimize dividend payout and stock value increases.

Optimize earnings, flexibility, and manage interest rate risk. (correct)

Optimize control of funds costs.

Optimize flexibility only.

None of the above.

Which of the following is a legitimate reason for a national bank to borrow?

A, B, and C only. (correct)

To meet temporary or seasonal loan demands.

A desire for increased earnings.

As an effective liability management tool.

To meet unexpected deposit withdrawals.

Which ratio on the UBPR reflects a more favorable condition the more negative the indicator is?

Net non-core funding dependence. Signup and view all the answers

A national bank has municipal general obligation bonds in its investment portfolio that are in default. Which of the following classifications is appropriate?

Book value of the securities classified as doubtful. Signup and view all the answers

Securities issued by which of the following issuers would be subject to limitations for dealing in, underwriting, or purchase for the portfolio?

Agricultural Credit Corporation (bank owns less than 80% of the corporation). Signup and view all the answers

If a bank purchases an investment security at a premium, the bank:

Must either charge-off the entire premium at the time of purchase or amortize the premium over the life of the security. Signup and view all the answers

Study Notes

Liquidity Needs and Bank Operations

Banks can satisfy liquidity needs by liquidating investment securities or increasing term liabilities.
Purchasing treasury stock and increasing non-liquid assets are not effective solutions for liquidity.
Combining liquidations of assets and increasing liabilities (options A & B) is a valid approach.

Objectives of Funds Management

A sound funds management program maximizes earnings, flexibility, and manages interest rate risk.
Effective funds management involves balancing interest costs while supporting asset growth.

Valid Reasons for National Bank Borrowing

National banks may borrow to address temporary or seasonal loan demands.
Unexpected deposit withdrawals and effective liability management are also legitimate borrowing reasons.

UBPR Ratio Analysis

The net non-core funding dependence ratio favors a more negative indicator, reflecting better financial health.
A negative ratio indicates that temporary investments exceed volatile liabilities, reducing reliance on borrowed funds.

Classification of Defaulted Municipal Bonds

Municipal general obligation bonds in default are classified as doubtful when the market remains unstable.
Doubtful assets have characteristics making full recovery highly questionable, differing from substandard assets.

Limitations on Security Transactions

Securities from an Agricultural Credit Corporation are subject to limitations unless the bank owns over 80% of the corporation.
Other issues like those from student loan and mortgage associations do not have these limitations.

Premiums on Investment Securities

When a bank purchases an investment security at a premium, it must amortize the premium over the security's life.
Alternatively, the entire premium can be charged off at the time of purchase.

Description

This quiz focuses on liquidity management strategies for banks. It tests understanding of how banks can provide funds to satisfy liquidity needs by evaluating different options. Explore important concepts in banking and finance fundamentals.