Archives
Management Chapter 1 1 If not done by FIs, the process of monitoring the actions of borrowers would reduce the attractiveness and increase the risk of investing in corporate debt and equity by individuals
1. Prior to the financial crisis of 2007-2008, J.P. Morgan Chase was the largest bank holding company in the world and operations in 60 countries. 2. As of 2009, U.S. FIs held assets totaling over $35 trillion. TRUE Saunders – […]
Management Chapter 10 1 Considering the market risk of traders’ portfolios for the purpose of establishing logical position limits per trader in each area of trading is a resource allocation benefit of market risk measurement
1. Market risk is the uncertainty of an FI’s earnings resulting from changes in market conditions such as interest rates and asset prices. 2. As securitization of assets continues to expand, the management of market risk will become more important […]
Management Chapter 10 2 Which of the following items is not considered to be an advantage of using back simulation over the Risk Metrics approach in developing market risk models
57. Which of the following items is not considered to be an advantage of using back simulation over the RiskMetrics approach in developing market risk models? 58. An advantage of the historic or back simulation model for quantifying market risk […]
Management Chapter 11 1 The primary difficulty in arranging a syndicated loan is having all of the various lending and borrowing parties reach agreement on terms, rates, and collateral
1. Default by a large corporation is seldom a problem for FIs since these corporations have many different sources of borrowed funds. 2. Junk bonds are bonds that are rated less than investment grade by bond-rating agencies. TRUE Saunders – […]
Management Chapter 11 2 If the fee income on this loan is 0.4 percent and the spread over the cost of funds to the bank is 1 percent, what is the expected income on this loan for the current year
72. Which of the following is true of the prime lending rate? 73. Suppose that debt-equity ratio (D/E) and the sales-asset ratio (S/A) were two factors influencing the past default behavior of borrowers. Based on past default (repayment) experience, the […]
Management Chapter 12 1 The concentration limit method of managing credit risk concentration involves estimating the minimum loan amount to a single customer as a percent of capital
1. The concentration limit method of managing credit risk concentration involves estimating the minimum loan amount to a single customer as a percent of capital. 2. Concentration limits are used to either reduce or increase exposure to specific industries. TRUE […]
Management Chapter 13 1 The Federal Reserve requires banks to complete schedule L with their quarterly call reports to list the notional size and variety of off-balance-sheet activities
1. Off-balance-sheet items can generate cash flows that immediately impact the bank’s financial performance. 2. Off-balance-sheet activities are an important source of fee income for many FIs. TRUE Saunders – Chapter 13 #2 3. Off-balance sheet activities can have both […]
Management Chapter 13 2 Assume 50 percent of the loan is drawn and that there are reserve requirements of 10 percent on demand deposits. What should the bank charge as back-end fees
68. If a future credit crunch is possible, a loan commitment may expose the FI to 69. What is seen as a possible reason behind restricted supply of spot loans to borrowers during a credit crunch? A. Expansionary monetary policy […]
Management Chapter 14 1 The greater the volatility of foreign exchange rates given any net exposure position, the greater the fluctuations in value of the foreign exchange portfolio
1. An FI can eliminate its currency risk exposure by matching its foreign currency assets to its foreign currency liabilities. 2. To a U.S. trader of foreign currencies, a direct quote indicates U.S. dollars received for each one unit of […]
Management Chapter 14 2 If in one year there is no change to either interest rates or exchange rates, what is the end-of-year profit or loss for the bank
60. What is the FI’s net exposure in the Japanese yen? 61. What is the FI’s net exposure in the Swiss franc? A. +2,400. B. +400. C. -2,800. D. -2,400. E. +3,200. Saunders – Chapter 14 #61 62. How would […]
Management Chapter 15 1 All of the following are relevant determinants of sovereign risk exposure: the rate of domestic money supply growth; the variance of export revenue, and the size of the population
1. If the credit risk of a foreign borrower is good, then the sovereign country risk is irrelevant. 2. FIs that lend to foreign entities often need to make provisions to their loan loss reserves. TRUE Saunders – Chapter 15 […]
Management Chapter 15 2 The allocation of country resources between present and future consumption is measured by which of the following variables of the credit scoring model of sovereign country risk exposure
65. High rates of domestic inflation impact the credit scoring model of sovereign country risk exposure through which of the following variables? 66. The allocation of country resources between present and future consumption is measured by which of the following […]
Management Chapter 16 1 Wholesale cash management services allow corporate customers to minimize cash balances and to monitor quickly cash transactions and balances
1. Two important input factors in financial intermediation are capital and labor. 2. Technological efficiency focuses exclusively on the cost side of financial intermediation. FALSE Saunders – Chapter 16 #2 3. According to Hitachi Data Systems, recovery time from system […]
Management Chapter 16 2 New retail products and services based heavily on technology often are risky because of the high usage rate necessary to make them positive net present value projects
94. Should the bank invest in this project if the discount rate is 12 percent? 95. Should the bank invest in this project if the discount rate is 18 percent? A. Yes, because the net present value of the project […]
Management Chapter 16 3 Which of the following partially explains why cash management services have not attracted customers in Europe to the degree that they have in the US
162. Which of the following wholesale services offered by FIs to businesses allows the FI to combine the e-mail capabilities of the Internet with the FIs ability to process payments electronically through the interbank payment networks? 163. Which of the […]
Management Chapter 17 1 Because cash reserves at the Federal Reserve do not earn interest, DIs do not hold any excess cash reserves beyond the minimum requirements
1. When liquidity risk problems occur at a DI, they often threaten the solvency of the institution. 2. Depository institutions generally rely on each other for cash and to meet their daily liquidity needs. TRUE Saunders – Chapter 17 #2 […]
Management Chapter 17 2 What are the possible ways that the bank can meet an expected net deposit drain of +4 percent using purchased liquidity management techniques
64. What is the impact of a 50 basis point increase in interest rates on the net asset value of an open-end bond mutual fund holding a seven year, $100 million par value 7 percent annual coupon bond? The fund […]
Management Chapter 18 1 One reason FIs such as depository institutions and life insurance companies are exposed to liquidity risk is the relatively illiquid nature of their liabilities
1. To reduce liquidity risk an FI can efficiently manage the liability structure of its portfolio. 2. One method of reducing the risk of a liquidity crisis for an FI to efficiently manage liquid asset positions. TRUE Saunders – Chapter […]
Management Chapter 18 2 If over the first 12 days of the current reserve maintenance period the average daily reserve held were $37 million, what does the bank need to hold as reserves over the last two days to meet the minimum reserve
81. For reserve calculation purposes, the period that begins on a Thursday and ends on a Wednesday 14 days later is known as 82. Under the lagged reserve accounting system, the A. reserve maintenance period is two days longer than […]
Management Chapter 19 1 The adverse effects of a contagious run include the restrictions on the ability of individuals to transfer wealth through time and a negative impact on the level or rate of savings
1. Contagious runs on bank deposits are directed at FIs, whether they are failing or healthy. 2. A run on a bank is not necessarily a bad occurrence. True False 3. The adverse effects of a contagious run include the […]
Management Chapter 19 2 Pricing deposit insurance premiums to reflect increases in risk-taking by financial institutions is one method to reduce incentives to take risks
19. Moral hazard provides an incentive for bank owners to accept greater asset risks because they have less to lose, and potentially more to gain. 20. Pricing insurance premiums in an actuarially fair manner involves assessing the risk-taking profile of […]
Management Chapter 2 1 Large banks tend to make business decisions based on personal knowledge of customers creditworthiness and business conditions in the local communities
1. In recent years, the number of commercial banks in the U.S. has been increasing. 2. Most of the change in the number of commercial banks since 1990 has been due to bank failures. FALSE Saunders – Chapter 02 #2 […]
Management Chapter 2 2 The credit union industry avoided much of the financial distress of the 1980s because of the short maturity and relatively lower credit risk of their assets.
110. Which of the following currently manages the insurance funds for both commercial banks and savings institutions? 111. The common bond principle of credit unions emphasizes the depository and lending needs of credit union members. TRUE Saunders – Chapter 02 […]
Management Chapter 2 3 The Federal Reserve System has regulatory supervision over all holding company banks whether they include national- or state-chartered banks.
201. The largest liability on credit unions’ balance sheet as of year-end 2009 was 202. All commercial banks must be members of the Federal Reserve System. FALSE Saunders – Chapter 02 #31 203. Credit Unions were generally less affected than […]
Management Chapter 2 4 One of the primary reasons that investment banks were allowed to convert to bank holding companies during the recent financial crisis was recognition that
269. The largest asset class on credit unions’ balance sheet as of year-end 2009 was 270. By late 2009, the number of commercial banks in the U.S. was approximately A. 2,200. B. 4,680. C. 6,900. D. 8,100. E. 12,700. Saunders […]
Management Chapter 20 1 One function of capital is to provide funding for real assets, such as branches and technology, that are necessary to provide financial services
1. Capital is the primary protection for an FI against the risk of insolvency and failure. 2. The primary role of capital for an FI is to assure the highest possible return on equity for its shareholders. FALSE Saunders – […]
Management Chapter 20 2 Which ratio shows degree of discrepancy between the market value of an FI’s equity capital as perceived by investors in the stock market and the book value of capital on its balance sheet
90. Which ratio shows degree of discrepancy between the market value of an FI’s equity capital as perceived by investors in the stock market and the book value of capital on its balance sheet? 91. Error! Hyperlink reference not valid. […]
Management Chapter 21 1 The commercial paper market is an example of nonbank competition on the asset side of the balance sheet that has become increasingly intense for banks
1. A universal FI is an FI that has expanded its operations across country lines. 2. Banks increasingly have been susceptible to nonbank competition on both sides of the balance sheet. TRUE Saunders – Chapter 21 #2 3. The commercial […]
Management Chapter 21 2 Concern about the financial impact of an extension of the federal safety net has been used to justify product segmentation on the grounds of
90. Concern about the financial impact of an extension of the federal safety net has been used to justify product segmentation on the grounds of 91. Concern about the ability to analyze a more complex corporate structure has been used […]
Management Chapter 22 1 The Financial Accounting Standards Board requires that all derivatives be marked-to-market with any losses and gains transparent on FI’s financial statements
1. Federal regulations in the U.S. allow derivatives to be used only by the 25 largest banks. 2. Derivative contracts allow an FI to manage interest rate and foreign exchange risk. TRUE Saunders – Chapter 22 #2 3. The replacement […]
Management Chapter 22 2 Based on the estimate of gain or loss in question 108, what is the number of T-bond futures contracts necessary to hedge the balance sheet if the duration of the deliverable
77. In a credit forward contract transaction 78. What is the purpose of a credit forward agreement? A. To allow property-casualty insurers to hedge the extreme losses that occur after major catastrophes. B. To adjust prices on outstanding futures each […]
Management Chapter 23 1 The buyer of a bond call option stands to make a positive payoff if changes in market interest rates cause the bond price to rise above the exercise price
1. The payoff values on bond options are positively linked to the changes in interest rates. 2. A bond call option gives the holder the right to sell the underlying bond at a prespecified exercise price. True False 3. FIs […]
Management Chapter 23 2 Buying a call option on a bond ensures a bank that it will be able to sell the bond at a given point in time for a price at least equal to the exercise price of the option
h23 Key 1. The payoff values on bond options are positively linked to the changes in interest rates. 2. A bond call option gives the holder the right to sell the underlying bond at a prespecified exercise price. FALSE Saunders […]
Management Chapter 23 3 If the manager buys a one-year option with an exercise price equal to the expected price of the bond in one year, what will be the exercise price of the option
71. Which of the following is a good strategy to adopt when interest rates are expected to rise? 72. What is the advantage of an options hedge over a futures hedge? A. The options hedge has lower credit risk exposure. […]
Management Chapter 24 1 In a conventional interest rate swap agreement, the fixed-rate payer is attempting to transform the variable-rate nature of its liabilities into fixed-rate liabilities
1. The extreme growth of the swap market has raised concern about the credit risk exposures of banks engaging in this market. 2. The largest segment of the global swap market is the currency swap market. FALSE Saunders – Chapter […]
Management Chapter 24 2 Consider a situation where the duration of the fixed portion of a swap is greater than the floating portion of a swap. Which of the following statements is most correct
57. An FI has purchased an agency security that is an inverse floater at 9 percent minus LIBOR. Which of the following characteristics reflect this type of asset? 58. An FI has entered a $100 million swap agreement with a […]
Management Chapter 25 1 The growth of the commercial paper market as well as the increased ability of banks to underwrite commercial paper has reduced the importance of short-term segment of the loan sales market
1. The growth of the commercial paper market as well as the increased ability of banks to underwrite commercial paper has reduced the importance of short-term segment of the loan sales market. 2. Banks began selling short-term loans only since […]
Management Chapter 26 1 The availability of a liquid secondary market for asset-backed securities provided an incentive for FIs to follow an originate-to-lend strategy of loan origination
1. Depository institutions have followed and originate-to-lend model of loan origination only since the Financial Services Modernization Act of 1999. 2. The availability of a liquid secondary market for asset-backed securities provided an incentive for FIs to follow an originate-to-lend […]
Management Chapter 26 2 Which of the following good news and bad news effect is NOT true when mortgage interest rates decline, resulting in faster repayments
73. Which of the following good news and bad news effect is NOT true when mortgage interest rates decline, resulting in faster repayments? 74. Which of the following is NOT a factor that may cause the prepayment risk on a […]
Management Chapter 3 1 The process of life insurance uses risk pooling to transfer income-related uncertainties from a group of individuals to an insured individual
1. In recent years, the total assets of insurance companies in the U.S. have been decreasing. 2. Due to a recent increase in demand for new insurance products, the number of life insurance companies as been increasing in the United […]
Management Chapter 3 2 If the loss ratio on a line of insurance is 70 percent and loss adjustment expenses are 33 percent, then the line is profitable before dividends if the ratio of
61. The largest asset category on the balance sheet of U.S. life insurance companies as of year-end 2009 was 62. The largest liability category on the balance sheet of U.S. life insurance companies as of year-end 2009 was A. net […]
Management Chapter 4 1 Securities underwriting and trading is an activity that requires a considerable investment in long-term assets and relatively small investments in short-term assets
1. Investment banks specialize in the origination, underwriting, and distribution of securities issues. 2. Investment banks engage in activities such as advising on mergers, acquisitions, and corporate restructuring. TRUE Saunders – Chapter 04 #2 3. Securities trading and underwriting is […]
Management Chapter 4 2 An attempt by a market maker to earn a profit on the price movements of securities by taking inventory positions for its own account is called
61. An attempt by a market maker to earn a profit on the price movements of securities by taking inventory positions for its own account is called 62. Soft dollars is a term often used in reference to the portion […]
Management Chapter 5 1 Mutual funds achieve economies of scale for individual investors by realizing the benefits of lower transaction costs and commissions as compared to those incurred by individual investors
1. Mutual funds are financial intermediaries that invest in diversified portfolios of assets. 2. Open-end mutual funds are the major type of mutual funds. TRUE Saunders – Chapter 05 #2 3. Mutual funds achieve economies of scale for individual investors […]
Management Chapter 5 2 The type of abusive activity that involves cases where investors were able to buy or sell mutual fund shares long after the price had been set each day is
65. The largest asset category of mutual funds as of 2009 was 66. The type of abusive activity that involves cases where investors were able to buy or sell mutual fund shares long after the price had been set each […]
Management Chapter 6 1 Factoring is the process where accounts are purchased by a nonfinancial company at a discount from their face value in exchange for the responsibility of collection
1. Finance companies differ from banks in that they do not accept deposits. 2. Finance companies have been among the slowest growing FI groups in recent years. FALSE Saunders – Chapter 06 #2 3. Sales finance institutions provide financing to […]
Management Chapter 7 1 Because the economies of the U.S. and other overseas countries have become more integrated, the risks of financial intermediation have decreased
1. Because the economies of the U.S. and other overseas countries have become more integrated, the risks of financial intermediation have decreased. 2. Interest rate risk stems from the impact of both anticipated and unanticipated changes in interest rates on […]
Management Chapter 7 2 An advantage FIs have over individual household investors is that they are able to diversify away credit risk by holding a large portfolio of loans to different entities
68. Matching the book is intended to protect the FI from 69. When the assets and liabilities of an FI are not equal in size, efficient hedging of interest rate risk can be achieved by A. increasing the duration of […]
Management Chapter 8 1 In the repricing gap model, assets or liabilities are rate sensitive within a given time period if the dollar values of each are subject to receiving a different interest rate should market rates change
1. The economic insolvency of many thrift institutions during the 1980s was due, at least in part, to unexpected increases in interest rates. 2. Because the increased level of financial market integration has increased the speed with which interest rate […]
Management Chapter 8 2 Which theory of term structure states that long-term rates are equal to the geometric average of current and expected short-term rates plus a risk premium that increases with the maturity of the security
65. The cumulative one-year repricing gap (CGAP) for the bank is 66. The gap ratio is A. .015. B. -.015. C. .025. D. -.144. E. .154. Saunders – Chapter 08 #66 67. Suppose that interest rates rise by 2 percent […]
Management Chapter 9 1 The difference between the changes in the market value of the assets and market value of liabilities for a given change in interest rates is, by definition, the change in the FI’s net worth
1. In most countries FIs report their balance sheet using market value accounting. 2. Marking –to-market accounting is a market value accounting method that reflects the purchase prices of assets and liabilities. FALSE Saunders – Chapter 09 #2 3. The […]
Management Chapter 9 2 Calculate the percentage change in this bond’s price if interest rates on comparable risk securities decline to 7 percent. Use the duration valuation equation
Saunders – Chapter 09 92. What is the duration of the assets? A. 0.708 years. B. 0.354 years. C. 0.350 years. D. 0.955 years. E. 0.519 years. Saunders – Chapter 09 #92 93. What is the duration of the liabilities? […]