2016-FRR Exam Dumps | Bank Zilo has $2 million in cash and $10 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 57

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Question 57/145

Bank Zilo has $2 million in cash and $10 million in loans coming due tomorrow with an expected default rate of 1%. The proceeds will be deposited overnight. The bank owes $ 10 million on a securities purchase that settles in two days and pays off $9 million in commercial paper in three days that is not expected to renew.
How much money should the bank plan to raise so as to avoid a liquidity problem?

A. $710 million

B. $712 million

C. $700 million

D. $650 million

Correct Answer: C

Bank Zilo needs to carefully manage its liquidity to avoid potential problems. Here's the detailed analysis:
* Current Cash: $2 million
* Loans Due Tomorrow: $10 million (with an expected 1% default rate, meaning 99% will be repaid)
* Expected Loan Repayment: $10 million * 99% = $9.9 million
* Total Cash Available Tomorrow: $2 million + $9.9 million = $11.9 million However, the bank has significant obligations coming up:
* Securities Purchase (in 2 days): $10 million
* Commercial Paper Maturing (in 3 days): $9 million
Given these commitments, the bank needs to ensure it has enough liquidity:
* Total Obligations in 3 Days: $10 million (securities) + $9 million (commercial paper) = $19 million
* Shortfall: $19 million - $11.9 million = $7.1 million
Therefore, to avoid a liquidity problem, the bank should plan to raise at least $7.1 million.
References: The calculation aligns with the principles outlined in "How Finance Works" on managing liquidity needs and planning for upcoming financial obligations.

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