2016-FRR Exam Dumps | Bank Milo has $4 million in cash and $5 million in loans coming due tomorrow with an expected default

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Financial Risk and Regulation (FRR) Series
GARP.2016-FRR.v2024-09-09.q145
Question 114

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Question 114/145

Bank Milo has $4 million in cash and $5 million in loans coming due tomorrow with an expected default rate of 1%. The proceeds will be deposited overnight. The bank owes $ 9 million on a securities purchase that settles in two days and pays off $8 million in commercial paper in three days that is not expected to renew. On what days does the bank face negative cumulative liquidity?

A. Day 3 only.

B. Days 2 and 3.

C. Day 2 only.

D. Days 1, 2 and 3.

Correct Answer: B

* Day 1:
* Bank Milo has $4 million in cash.
* $5 million in loans coming due with an expected default rate of 1%.
* The proceeds from the loans will be $5 million * (1 - 0.01) = $4.95 million.
* Total cash available at the end of Day 1 = $4 million + $4.95 million = $8.95 million.
* No outflows on Day 1.
* Cumulative liquidity = $8.95 million (positive).
* Day 2:
* No cash inflow.
* $9 million is due for a securities purchase.
* Cumulative liquidity = $8.95 million - $9 million = -$0.05 million (negative).
* Day 3:
* No cash inflow.
* $8 million due for commercial paper pay off.
* Cumulative liquidity = -$0.05 million - $8 million = -$8.05 million (negative).
Therefore, Bank Milo faces negative cumulative liquidity on Days 2 and 3.
References:Based on the financial risk and regulation analysis, these calculations align with standard liquidity management practices detailed in the provided materials.

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