54) In reference to capital requirements,
A) bank capital adequacy refers to the amount of equity capital a bank holds as reserves against
impaired loans.
B) bank capital adequacy refers to the amount of debt capital a bank holds as reserves against risky
assets to reduce the probability of bank failure.
C) most bank regulators agree with the doctrine of “less is more.”
D) none of the options
55) In reference to capital requirements, value-at-risk analysis
A) refers to traditional bank loans and deposits.
B) refers to a “risk-focused” approach to determining adequate bank capital.
C) provides a level of confidence measure of the probability of the maximum loss that can occur
during a period of time.
D) refers to a “risk-focused” approach to determining adequate bank capital and provides a level of
confidence measure of the probability of the maximum loss that can occur during a period of time.
56) The core of the international money market is
A) the Eurocurrency market.
B) the market for foreign exchange.
C) the futures forwards and options markets on foreign exchange.
D) none of the options
57) Eurocurrency
A) is the euro, the common currency of Europe.
B) is a time deposit of money in an international bank located in a county different from the
country that issued the currency.
C) is a demand deposit of money in an international bank located in a county different from the
country that issued the currency.
D) is either a time deposit of money in an international bank located in a county different from the
country that issued the currency or a demand deposit of money in an international bank located in
a county different from the country that issued the currency.
58) The Eurocurrency market
A) is only in Europe.
B) is an external banking system that runs parallel to the domestic banking system of the country
that issued the currency.
C) has languished following monetary union in Europe.
D) none of the options
59) LIBOR
A) is a market rate, analogous to the U.S. Federal Funds rate.
B) is a government set rate, like the discount rate.
C) is the rate at which banks in London will accept interbank deposits.
D) none of the options
60) LIBOR
A) is the London Interbank Offered Rate.
B) is the reference rate in London for Eurodollar deposits.
C) one of several reference rates in London: there is a LIBOR for Eurodollars, Euro yen,
Euro—Canadian dollars, and even euro.
D) all of the options
61) The rate charged by banks with excess funds is referred to as the interbank offered rate; they
will accept interbank deposits at the interbank bid rate.
A) The spread is generally 1/8 of 1 percent for most major Euro currencies.
B) The spread is generally referred to as “the TED spread.”
C) The spread is generally referred to as the bid-ask commission.
D) none of the options
62) The LIBOR rate for euro
A) is EURIBOR.
B) is a government set rate.
C) is the rate at which Interbank deposits of euro are offered by one prime bank to another in the
euro zone.
D) is EURIBOR, and is the rate at which Interbank deposits of euro are offered by one prime bank
to another in the euro zone.
63) In the wholesale money market, denominations
A) are at least $10,000, but sizes of $100,000 or larger are more typical.
B) are at least $100,000, but sizes of $500,000 or larger are more typical.
C) are at least $500,000, but sizes of $1,000,000 or larger are more typical.
D) none of the options
64) Approximately ________ of wholesale Euro bank external liabilities come from fixed time
deposits, the remainder from Negotiable Certificates of Deposit.
A) 50 percent
B) 75 percent
C) 90 percent
D) none of the options
65) Eurodollars refers to dollar deposits when the depository bank is located
A) in Europe.
B) in Europe, and the Caribbean.
C) outside the United States.
D) in the United States.
66) Euro credits
A) are credit cards that work in the euro zone.
B) are denominated in currencies that are the same as the home currency of the Euro bank.
C) short- to medium-term loans of Euro currency extended by Euro banks to corporations,
sovereign governments, non prime banks, or international organizations.
D) none of the options
67) Euro credits
A) are often so large that individual banks cannot handle them.
B) short- to medium-term loans of Euro currency extended by Euro banks to corporations,
sovereign governments, non prime banks, or international organizations.
C) frequently require the use of a banking syndicate.
D) all of the options
68) Euro credits feature rollover pricing.
A) Rollover pricing was created on Euro credits so that Euro banks do not end up paying more on
Euro currency time deposits than they earn from the loans.
B) Because of the rollover pricing feature, a Euro credit may be viewed as a series of shorter-term
loans, where at the end of each time period (generally three or six months), the loan is rolled over
and the base lending rate is repriced to current LIBOR over the next time interval of the loan.
C) The lending rate on these Euro credits is stated as LIBOR + X percent, where X is the lending
margin charged depending upon the credit worthiness of the borrower. LIBOR is reset according
to a set schedule.
D) all of the options
69) Teltrex International can borrow $3,000,000 at LIBOR plus a lending margin of 0.75 percent
per annum on a three-month rollover basis from Barclays in London. Suppose that three-month
LIBOR is currently 5 17⁄32 percent. Further suppose that over the second three-month interval
LIBOR falls to 5 1⁄8 percent. How much will Teltrex pay in interest to Barclays over the six-month
period for the Eurodollar loan?
A) $79,921.875
B) $91,171.88
C) $96,174.39
D) $364,687.52
70) A bank agrees to buy from a customer a “three against six” FRA at the market rate for such
instruments. How can the bank hedge this obligation?
A) Go long a 6-month Eurodollar deposit in the amount of the FRA at the current 6-month rate
financed by going short a 3-month Eurodollar deposit in the amount of the FRA at the current
3-month rate.
B) Go short a 6-month Eurodollar deposit in the amount of the FRA at the current 6-month rate; go
long a 3-month Eurodollar deposit in the amount of the FRA at the current 3-month rate.
C) Borrow a 3-month Eurodollar deposit in the amount of the FRA at the current 3-month rate.
D) none of the options
71) A forward rate agreement (FRA) is a contract between two banks
A) that allows the Euro bank to hedge the interest rate risk in mismatched deposits and credits.
B) in which the buyer agrees to pay the seller the increased interest cost on a notional amount if
interest rates fall below an agreed rate, and the seller agrees to pay the buyer the increased interest
cost if interest rates increase above the agreed rate.
C) that is structured to capture the maturity mismatch in standard-length Euro deposits and credits.
D) all of the options
72) A bank bought a “three against six” FRA. Payment is made when?
A) At the end of 3 months
B) At the end of 6 months
C) At the end of 9 months
D) none of the options
73) In an FRA, the buyer agrees to pay the seller
A) the increased interest cost on a notional amount if interest rates fall below an agreement rate.
B) the increased interest cost if interest rates increase above the agreement rate.
C) the increased interest cost on a notional amount if interest rates rise above an agreement rate.
D) none of the options
74) In an FRA, the seller agrees to pay the buyer
A) the increased interest cost if interest rates fall below the agreement rate.
B) the increased interest cost if interest rates increase above the agreement rate.
C) the increased interest cost on a notional amount if interest rates fall below an agreement rate.
D) none of the options
75) ABC International has borrowed $4,000,000 at LIBOR plus a lending margin of .65 percent
per annum on a three-month rollover basis from Barclays in London. Three month LIBOR is
currently 5.5 percent, but ABC is worried about an increase in three-month LIBOR 3 months from
now. What could they do to hedge?
A) Buy a 3 × 6 FRA in the amount of $4 million.
B) Sell a 3 × 6 FRA in the amount of $4 million.
C) Buy a 3 × 3 FRA in the amount of $4 million.
D) Buy a 3 × 9 FRA in the amount of $4 million.
76) ABC International can borrow $4,000,000 at LIBOR plus a lending margin of 0.65 percent per
annum on a three-month rollover basis from Barclays in London. Three month LIBOR is currently
5.5 percent. Suppose that over the second three-month interval LIBOR falls to 5.0 percent. How
much will ABC pay in interest to Barclays over the six-month period for the Eurodollar loan?
A) $50,000
B) $100,000
C) $118,000
D) $120,000
77) You entered in to a 3 × 6 forward rate agreement that obliged you to borrow $10,000,000 at 3
percent. Suppose at the maturity of the FRA, the correct interest rate is 3.5 percent. Clearly you are
better off since you have the ability to borrow $10,000,000 for 3 months at 3 percent instead of 3.5
percent. What is the payoff at the maturity of the FRA?
A) Net payment of $12,391.57 to you
B) Net payment of $12,500 to you
C) Net payment of $50,000 to you
D) Net payment of $48,309.18 to you
78) A bank bought a “three against six” $5,000,000 FRA for a three-month period beginning three
months from today and ending six months from today. The reason that the bank bought the FRA
was to hedge: the bank accepted a 3-month deposit and made a six-month loan. The agreement rate
with the seller is 5 percent. Assume that three months from today the settlement rate is 5.25
percent. Who pays whom? How much? When? The actual number of days in the FRA is 90.
A) The bank pays $3,084.52 at the end of 3 months
B) The bank pays $3,084.52 at the end of 6 months
C) The counter party pays $3,084.52 at the end of 3 months
D) The counter party pays $3,084.52 at the end of 6 months
79) A bank sold a 3 × 9 FRA. Payment is made when?
A) At the end of 3 months
B) At the end of 6 months
C) At the end of 9 months
D) none of the options
80) Since SR < AR, then
A) ABC Bank will pay XYZ Bank a cash settlement at the beginning of the 91-day FRA period.
B) XYZ Bank will pay ABC Bank a cash settlement at the beginning of the 91-day FRA period.
C) ABC Bank will pay XYZ Bank a cash settlement at the end of the 91-day FRA period.
D) XYZ Bank will pay ABC Bank a cash settlement at the end of the 91-day FRA period.
81) The payment amount under this FRA is
A) $9,985.
B) $10,111.
C) $60,667.
D) $120,000.
82) A “three against nine” forward rate agreement
A) could call for a buyer to sell a six-month Eurobond in three months at prices agreed upon today.
B) could call for a buyer to pay the seller the increased interest cost on a notational amount if
six-month interest rates fall below an agreed rate beginning three months from now and ending
nine months from now.
C) is a forward contract on a three-month Eurobond with a nine-month maturity.
D) is a forward contract on a nine-month Eurobond with a three-month maturity.
83) Forward rate agreements can be used for speculative purposes. If one believes rates will be less
than the agreement rate,
A) take a short position in a forward rate agreement.
B) the purchase of a FRA is the suitable position.
C) the sale of a FRA is the suitable position.
D) take a long position in the spot market.
84) The most widely used futures contract for hedging short-term U.S. dollar interest rate risk is
A) the Eurodollar contract.
B) the Euroyen contract.
C) the EURIBOR contract.
D) none of the options
85) Consider the position of a treasurer of a MNC, who has $20,000,000 that his firm will not need
for the next 90 days.
A) He could borrow the $20,000,000 in the money market.
B) He could take a long position in the Eurodollar futures contract.
C) He could take a short position in the Eurodollar futures contract.
D) none of the options
86) A decrease in the implied three-month LIBOR yield causes Eurodollar futures price
A) to increase.
B) to decrease.
C) there is no direct or indirect relationship.
D) none of the options
87) Which of the following are principles of sound banking behavior?
A) Avoid an undue concentration of loans to single activities.
B) Control mismatches between assets and liabilities.
C) Expand cautiously into unfamiliar activities.
D) all of the options
88) Who benefits from debt-for-equity swaps?
A) The creditor bank
B) The LDC
C) The market maker
D) all of the options
89) The Brady Bond is named after
A) U.S. Treasury Secretary, Nicholas F. Brady.
B) U.S. Treasury Secretary, Brady F. Nichols.
C) U.S. bank robber, Nicholas F. Brady.
D) none of the options
90) The Asian crisis
A) followed a period of economic recession in the region coupled with record private capital
outflows.
B) followed a period of economic expansion in the region financed by record private capital
inflows.
C) began in the fall of 2001 when Japan devalued the yen.
D) none of the options
91) Proceeding the Asian crisis,
A) bankers from industrialized countries actively sought to finance the growth opportunities in the
region.
B) the risk exposure of the lending banks in East Asia was primarily to local banks and commercial
firms, and not to sovereignties, as in the LDC debt crisis.
C) bankers failed to correctly assess the political and economic risks.
D) bankers were willing to lend huge amounts to borrowers with a limited potential to repay.
E) all of the options
92) Proceeding the Asian crisis,
A) domestic price bubbles in East Asia, particularly in real estate, were fostered by capital inflows
from bankers from the G-10 countries.
B) the liberalization of financial markets coupled with capital inflows from bankers from the G-10
countries contributed to bubbles in financial asset prices.
C) the close interrelationships common among commercial firms and financial institutions in Asia
resulted in poor investment decision making.
D) all of the options
93) Proceeding the Asian crisis,
A) it may have been implicitly assumed that the governments would come to the rescue of their
private banks should financial problems develop.
B) the history of managed growth in the East Asian region at least suggested that the economic and
financial system, as an integral unit, could be managed in an economic downturn.
C) it may have been implicitly assumed that the governments would come to the rescue of their
private banks should financial problems develop, and the history of managed growth in the East
Asian region at least suggested that the economic and financial system, as an integral unit, could be
managed in an economic downturn.
D) none of the options
94) So-called subprime mortgages were typically
A) mortgages granted to borrowers with less-than-perfect credit.
B) backed by the full faith and credit of the U.S. government.
C) held to maturity by the originating lender, thereby assuring that default risk was priced into the
rate of return.
D) none of the options
95) One lesson from the credit crunch is that
A) in the aggregate, credit scores tend to understate the probability of default—thereby a pool of
subprime mortgages is actually quite a safe investment since not every borrower defaults.
B) moral hazard, while an issue in the market for used cars, does not seem to affect the U.S.
financial system due to the effective regulatory environment.
C) bankers seem not to scrutinize credit risk as closely when they serve only as mortgage
originators and then pass it on to MBS investors rather than hold the paper themselves.
D) none of the options
96) The models that the credit rating firms (e.g., Moody’s, S&P, and Fitch) used to evaluate the risk
of the various tranches of MBS debt and thereby assign a credit rating (e.g. AAA, AA-BB, or
unrated) were
A) right on target, but only in the aggregate.
B) poorly specified.
C) superfluous, since the CDOs turned out to be backed by the full faith and credit of the U.S.
Treasury.
D) super models, and while as a group they were not so good at evaluating credit risk, they made
up for it with their good looks and impeccable fashion sense.
97) Many lessons should be learned from the credit crunch.
A) One lesson is that credit rating agencies need to refine their models for evaluating esoteric
credit risk created in MBS and CDOs.
B) One lesson is that borrowers must be more wary of putting complete faith in credit ratings.
C) One lesson is that bankers seem not to scrutinize credit risk as closely when they serve only as
mortgage originators and then pass it on to MBS investors rather than hold the paper themselves.
D) all of the options
98) So-called subprime mortgages were typically
A) not held by the originating bank, but instead were resold for packaging into mortgage-backed
securities.
B) aggregated and then sliced into tranches each representing a different risk class: AAA, AA-BB,
or unrated.
C) not held by the originating bank, but instead were resold for packaging into mortgage-backed
securities. Additionally, they were aggregated and then sliced into tranches each representing a
different risk class: AAA, AA-BB, or unrated.
D) all of the options
99) One enduring truth of banking is that
A) for some reason, bankers always seem willing to lend huge amounts to borrowers with a limited
potential to repay.
B) credit ratings work, but only in the aggregate.
C) when liquidity dries up, bankers are typically able to ride out the storm by buying up other
investors debt at pennies on the dollar, holding it until the crisis is over, and then selling at a huge
profit.
D) none of the options
100) With regard to creating money,
A) only central banks such as the Federal Reserve can create money.
B) money is created when a bank customer invests in a time deposit.
C) commercial banks can create money when a bank lends out funds borrowed from another
customer who invested in a time deposit.
D) none of the options