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2 Feb 2019

The spread, which is the difference between the asked price and the bid prices is a very important factor in the determination of liquidity of the asset or assets being traded. In the capital market a smaller spread between the the asked and bid prices is considered a much better liquidity of the assets under consideration. Please expantiate.

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Casey Durgan
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3 Feb 2019

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Which of the following are true about a bid and asked price to exchange currency at a bank? a. The difference between a banks bid and asked prices is their fee for exchanging currency b. A bank will purchase currency at the “Bid Price” and sell at the “Asked Price” c. A currency which is not traded very much will likely have a large bid/ask spread

i. A,B,C are true

ii. A and C only

iii. B and C only

iv. A and B only

Please select the best answer and explain why it is the best answer.

1. During a “flight to quality”

a. The spread between Treasury bonds and Baa bonds increases.

b. The change in the spread between Treasury bonds and Baa bonds cannot to be predicted

c. The spread between Treasury bonds and Baa bonds decreases

d. The spread between Treasury bonds and Baa bonds is not affected

2. The collapse of the subprime mortgage market increased the spread between Baa and default-free U.S. Treasury bonds. This is due to

a. A reduction in risk

b. A reduction in maturity

c. A flight to quality

d. A flight to liquidity

3. Banks earn profits by selling _____ with attractive combinations of liquidity, risk, and return, and using the proceeds to buy _______ with a different set of characteristics.

a. Securities; deposits

b. Loans; deposits

c. Assets; liabilities

d. Liabilities; assets

4. Which of the following bank assets is the most liquid?

a. Reserves

b. Consumer loans

c. Cash items in process of collection

d. U.S. government securities

Please answer true or false and give a valid explanation.

1. Dividends paid reduce bank capital. The ability of the subsidiary banks of Wells Fargo Bank Holding Company to pay dividends in the future depends to a certain extent on regulatory capital rules.

a. True/False

2. If the yield curve flattens out then the spread between the yields a bank earns on its assets and the cost of funding these assets will decline.

a. True/False

3. Bank Holding Companies typically pay dividends to their bank subsidiaries. This is an important source of liquidity for banks.

a. True/False

4. The discount window at the Federal Reserve helps to relieve liquidity strains for individual depository institutions and for the banking system as a whole by providing a source of funding in time of need.

a. True/False

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