QUESTION 2B. LIQUIDITY AND LIABILITY MANAGEMENT

Infinity Bank has the following assets in its portfolio: $40 million in cash reserves with the Reserve Bank, $40 million in Treasury notes, and $60 million in mortgage loans. If the assets need to be liquidated at short notice, Infinity will receive only 99 per cent of the fair market value of the Treasury notes and 90 per cent of the fair market value of the mortgage loans.

(i) Calculate the liquidity index for Infinity Bank.

(ii) Based on this index, is Infinity Bank highly liquid?

(iii) Is the liquidity index a comprehensive measure of a bank's overall access to liquidity? Why or why not?