Contagious runs on bank deposits are directed at FIs, whether they are failing or
healthy.
Answer:
Worldwide investments in mutual funds have grown at a rate faster than in the United
States over the last decade.
Answer:
Migration analysis is not appropriate for an FI to use in the analysis of credit risk of
consumer loans and credit card portfolios.
Answer:
FIs that lend to foreign entities often need to make provisions to their loan loss
reserves.
Answer:
One result of the FBSEA was the increase in the regulatory burden of foreign banks in
the U.S.
Answer:
Savings associations and savings banks are chartered and regulated by the Federal
Reserve Bank.
Answer:
The SEC requires that prospectuses or advertisements regarding a mutual fund contain
information that returns of the mutual fund carry some risk.
Answer:
The maturity gap for a bank is the weighted average maturity of the assets minus the
weighted average maturity of the liabilities.
Answer:
The Standardized Approach in calculating capital to cover operational risk requires DIs
to separate activities into business units from which a capital charge is determined
based on the amount of operational risk in each unit.
Answer:
Liquidity risk for a life insurance company only occurs when asset returns do not
provide sufficient cash flows to meet policyholder liquidations.
Answer:
Annuities are the reverse of life insurance in that they are different means of liquidating
a fund.
Answer:
Moral hazard encourages the FI to take on more, rather than less, risk.
Answer:
The ability of the FDIC to place a bank into receivership even though the book value of
capital remains positive is an attempt to institute increased stockholder discipline.
Answer:
Concentration limits are used to either reduce or increase exposure to specific
industries.
Answer:
Basel III guidelines for determining credit risk-adjusted on-balance-sheet assets relies
more heavily on credit agency ratings than did Basel I.
Answer:
Both the debt service ratio and the import ratio typically have low systematic risk
elements in a CRA analysis.
Answer:
Life insurance companies also manage private pension plans that may include
guaranteed investment contracts (GICs).
Answer:
For a given change in interest rates, the change in price for each additional year of
maturity of a fixed-rate asset is smaller as the maturity increases.
Answer:
The buyer of a bond put option stands to make a profit if changes in market interest
rates cause the bond price to fall below the exercise price.
Answer:
FX trading risk exposure continues into the night until all FI operations are closed.
Answer:
Which of the following is NOT TRUE regarding hedge ratio?A. When there is no basis
risk hedge ratio is equal to one.
B. When h = 1, both spot and futures are expected to change together by the same
absolute amount.
C. When h = 1, FX risk of the cash position should be hedged dollar for dollar by
buying FX futures.
D. When basis risk is present, the spot and future exchange rates are expected to move
imperfectly together.
E. The FI must sell a greater number of futures when there is basis risk than it has to
when basis risk is absent.
Answer:
Holding small amounts of liquid assets could cause an FI to be unable to meet the
claims of liability holders.
Answer:
The RiskMetrics model generally prefers using the present value of cash flow changes
as the price-sensitivity weights.
Answer:
Off-balance-sheet hedging involves taking a position in FX forward or other derivative
securities even though no FX assets or liabilities are on the balance sheet.
Answer:
The DIDMCA of 1980 and the DIA of 1982 were the initial acts to begin the
deregulation of the commercial banking industry.
Answer:
Technological efficiency focuses exclusively on the cost side of financial
intermediation.
Answer:
Automobile liability insurance provides protection against theft or damage to the
vehicle.
Answer:
Historical evidence indicates that the benefits of greater management attention in load
funds do not outweigh the disadvantages of the load fee.
Answer:
A hedge of interest rate risk with a put option completely offsets gains but only partly
offsets losses.
Answer:
Economies of scope involve the ability to lower the average cost of operations by
expanding the output of financial services.
Answer:
Because the business of funds management generates fees based on the size of the pool
of assets managed, the flow of income is more volatile than either investment banking
function or the trading function.
Answer:
Credit unions operate on a common bond principle which emphasizes the depository
and lending needs of credit union members.
Answer:
Statistical credit scoring models have been suggested for use in measuring the risk of
DIs for the purpose of assigning deposit insurance premiums.
Answer:
Except in cases of extreme credit risk shocks or interest rate risk shocks, the book value
of equity is equal to the economic or market value of equity.
Answer:
The FBSEA of 1991 required a foreign bank to have Fed approval to establish a branch
as a new entry, but does not require such approval if the entry is by acquisition.
Answer:
Most securities firms are subject to large amounts of interest rate and market risk
because of the large amount financial assets on the balance sheet.
Answer:
Commercial letters of credit are used only in international trade.
Answer:
Securities underwriting and trading is an activity that requires a considerable
investment in long-term assets and relatively small investments in short-term assets.
Answer:
Assume a binomial pricing model where there is an equal probability of interest rates
increasing or decreasing 1 percent per year.
What should be the price of a three-year 6 percent cap if the current (spot) rates are also
6 percent? The face value is $5,000,000, and time periods are zero, one, and two. A.
$25,000.
B. $20,409.
C. $22,041.
D. $42,450.
E. $66,030.
Answer:
Bank regulators set minimum capital standards to A. inhibit rapid growth rate of bank
assets.
B. protect shareholders from managerial fraud or incompetence.
C. protect creditors from decreases in asset values.
D. force banks to follow socially desirable policies.
E. make work for regulators.
Answer:
The following information is for a collateralized mortgage obligation (CMO). Tranche
A has a face value of $50 million and pays 6 percent annually. Tranche B has a face
value of $50 million and pays 8 percent annually. All mortgages have maturities of 30
years.
What are the principals outstanding on Tranches A and B, respectively, after the CMO
distributes the $10 million of cash flows? A. $50 million; $47 million.
B. $47 million; $50 million.
C. $48 million; $48 million.
D. $50 million; $48 million.
E. $50 million; $50 million.
Answer:
Is the firm adequately capitalized if it has total capital and surplus of $10 million?A.
No, its total risk-based capital charge is higher than $10 million.
B. No, its total risk-based capital charge is lower than $10 million.
C. Yes, its total risk-based capital charge is higher than $10 million.
D. Yes, its total risk-based capital charge is lower than $10 million.
E. No, its total risk-based capital charge is greater than 0.
Answer:
Securities firms have equity ratios that are lower than those for commercial banks
because their balance sheets contain a larger portion of A. illiquid assets.
B. current liabilities.
C. long term liabilities.
D. fixed assets.
E. liquid assets.
Answer:
What should be the price of a three-year 5 percent floor if the current (spot) rates are
also 6 percent? The face value is $5,000,000, and time periods are zero, one, and two.
A. $8,250.
B. $10,799.
C. $12,550.
D. $15,875.
E. $17,455.
Answer:
When repricing all interest sensitive assets and all interest sensitive liabilities in a
balance sheet, the cumulative gap will beA. zero.
B. one.
C. greater than one.
D. a negative value.
E. infinity.
Answer:
Which of the following is an advantage of having swap dealers? A. They serve the
function of taking the opposite side of each transaction in order to keep the swap market
liquid.
B. They reduce the search costs of finding counterparties having mirror image
financing requirement.
C. They generally guarantee swap payments over the life of the contract.
D. They incur any costs associated with the default by replacing the defaulting party on
the same terms as the original swap.
E. All of the above.
Answer:
Which of the following two investment banks were granted approval to be chartered as
commercial banks during the most recent financial crisis? A. Merrill Lynch and Bear
Stearns.
B. Goldman Sachs and Morgan Stanley.
C. Bear Stearns and Lehman Brothers.
D. Merrill Lynch and Morgan Stanley.
E. Lehman Brothers and Goldman Sachs.
Answer:
Which of the following implies reduced unit costs as size or volume of assets increases?
A. Diseconomies of scale.
B. Economies of scale.
C. Economies of scope.
D. Diseconomies of scope.
E. Constant returns to scale
Answer:
Which of the following hedge fund objectives would be classified under the “more
risky” category? A. Distressed securities funds.
B. Fund of funds.
C. Opportunistic funds.
D. Emerging markets funds.
E. Special situations funds.
Answer:
The outstanding number of put or call contracts is called A. open interest.
B. pull-to-par.
C. cap.
D. floor.
E. collar.
Answer:
What explains the recent increase in many large insurance companies conversion to
stockholder controlled companies? A. Pressure from policyholders.
B. Additional premiums.
C. Access to equity markets.
D. Tax concerns.
E. Regulatory requirement.
Answer:
The largest dollar volume of money market securities is A. negotiable CDs.
B. commercial paper.
C. bankers acceptances.
D. U.S. T-Bills.
E. repurchase agreements.
Answer:
A primary advantage for a depository institution of belonging to the Federal Reserve
System is A. direct access to correspondent banking services.
B. the lower deposit reserves required under the Federal Reserve System.
C. direct access to the discount window of the Fed.
D. commission less trading of U.S. government securities.
E. decreased costs of regulatory compliance.
Answer:
Which of the following occurs if the costs of joint production of FI services are higher
than they would be if they were produced independently?A. Economies of scale.
B. Diseconomies of scale.
C. Economies of scope.
D. Diseconomies of scope.
E. Constant returns to scale.
Answer:
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 A. market timing.
B. late trading.
C. directed brokerage.
D. improper fee assessment.
E. None of the above.
Answer:
Bank B plans to acquire Bank A and in the process cut costs by $100,000. What is the
combined bank’s average costs? A. 12.00 percent.
B. 12.67 percent.
C. 13.00 percent.
D. 13.33 percent.
E. 15.00 percent.
Answer:
During the period from 1977 to 2012, A. total assets in finance companies grew over
1,000%.
B. commercial paper became a less important source of funds for finance companies.
C. assets in finance companies became less diversified.
D. mortgage lending declined in importance to finance companies.
E. in finance companies, consumer lending increased as a percent of total assets.
Answer:
Sumitomo Bank’s risk manager has estimated that the DEARs of two of its major assets
in its trading portfolio, foreign exchange and bonds, are -$150,000 and -$250,000,
respectively.
What is the total DEAR of Sumitomo’s trading portfolio if the correlations among assets
are ignored? A. -$100,000.
B. -$291,548.
C. -$350,000.
D. -$380,789.
E. -$400,000.
Answer:
What agency acts as the distributor or “clearinghouse” for mutual fund transactions?A.
SEC.
B. NASD.
C. FedWire.
D. NYSE.
E. U.S. Treasury.
Answer:
The origination of a home mortgage loan is considered to be aA. primary security,
because this is the FI’s primary source of business.
B. secondary security, because mortgages are typically resold in the secondary market.
C. primary security, because the mortgage note is a newly created security.
D. secondary security if the sale is for an existing home and a primary security if it is
for a new home.
E. derivative security because the value of the mortgage note depends on the
underlying value of the home.
Answer:
Which of the following groups of FIs have experienced the highest percentage growth
in assets in the U.S. financial services industry during the past sixty years? A.
Commercial banks.
B. Thrifts.
C. Life insurance companies.
D. Investment companies.
E. Finance companies.
Answer:
The following market value balance sheet of a failed bank ($ millions)
If the insured depositor transfer resolution method is utilized, what is the cost to insured
depositors of bank failure resolution?A. $0.
B. -$200 million.
C. $67 million.
D. $133 million.
E. $200 million.
Answer:
An FI funds a $5 million residential mortgage in 2012 by allocating capital and by
issuing demand deposits. The mortgage represents a loan-to-value of 70 percent. The
demand deposits have a reserve requirement of 10 percent and a deposit insurance
premium of 23 basis points.
What is the deposit insurance premium on the demand deposits issued to fund the
mortgage? A. $11,756.
B. $12,778.
C. $11,500.
D. $1,150.
E. $9,200.
Answer:
What is seen as a reason for the increased expansion of foreign bank activities in the
United States following the passage of the International Banking Act? A. Access to the
Federal Reserve’s discount window, Fedwire, and FDIC insurance.
B. Absence of the Federal Reserve’s reserve requirements, audits, and exams.
C. No interstate branching restrictions.
D. No restrictions on corporate securities underwriting activities.
E. Answers C and D only.
Answer:
What type of risk focuses upon mismatched currency positions? A. Liquidity risk.
B. Interest rate risk.
C. Credit risk.
D. Foreign exchange rate risk.
E. Off-balance sheet risk.
Answer:
If you wanted to hedge your bank’s risk exposure, what hedge position would you take?
A. A short interest rate hedge to protect against interest rate declines and a short
currency hedge to protect against increases in the value of the Canadian dollar with
respect to the U.S. dollar.
B. A short interest rate hedge to protect against interest rate increases and a short
currency hedge to protect against declines in the value of the Canadian dollar with
respect to the U.S. dollar.
C. A long interest rate hedge to protect against interest rate increases and a long
currency hedge to protect against declines in the value of the Canadian dollar with
respect to the U.S. dollar.
D. A long interest rate hedge to protect against interest rate declines and a long
currency hedge to protect against increases in the value of the Canadian dollar with
respect to the U.S. dollar.
E. A long interest rate hedge to protect against interest rate declines and a short
currency hedge to protect against increases in the value of the Canadian dollar with
respect to the U.S. dollar.
Answer:
As of January 2012, which of the following accounts for the highest volume of noncash
transactions worldwide? A. Checks.
B. Card payments.
C. Debit transfers.
D. E-money payments.
E. Credit transfers.
Answer:
The use of the Herfindahl-Hirschman Index (HHI) to measure bank concentration has
been criticized becauseA. ascertaining whether the relevant geographic scope of the
market should be regional, national, or city is becoming increasingly difficult to
determine.
B. the index was originally designed for nonfinancial competition.
C. separating financial markets into banks, thrifts, and insurance companies is
becoming increasingly difficult to justify.
D. All of the above.
E. Answers A and C only.
Answer:
The short-term mutual fund sector includes A. money market mutual funds.
B. hybrid funds.
C. equity funds.
D. bond funds.
E. tax-exempt municipal bond funds.
Answer:
The characteristics of a Collateralized Mortgage Obligation (CMO) securities issue
include all of the following EXCEPT A. the tranches will have different coupon rates.
B. the CMO securities are insured separately from the GNMA pass-through securities.
C. the principal payments are made totally to the earliest remaining tranche.
D. GNMA pass-through securities are used as collateral in a trust to support the CMOs.
E. the CMO securities are split into different tranches or groupings.
Answer:
Which of the following is not a feature of the Foreign Bank Supervision Enhancement
Act? A. The Federal Reserve has the power to close a foreign bank if it is engaged in
unsafe and unsound banking practice.
B. The Federal Reserve has the responsibility to examine each subsidiary, branch,
agency, or representative office at least once each year.
C. The Fed’s approval is necessary to establish a subsidiary, branch, agency or
representative office in the U.S.
D. Only foreign subsidiaries with access to FDIC insurance can take retail deposits
under $100,000.
E. After December 19, 1992, state-licensed agencies and branches could not engage in
any activity no permitted to a federal branch.
Answer:
The following is the balance sheet of Boston Bank. The average maturity of demand
deposits is estimated at 2 years.
What is
the repricing gap if a 1-year maturity gap is used if runoffs are also considered? A. -22
million.
B. +$22 million.
C. +$53 million.
D. -$40 million.
E. -$70 million.
Answer:
What does a low value of R2 indicate?A. It means the degree of confidence increases in
the use of futures contracts, with a given hedge ratio estimate, to hedge cash asset-risk
position.
B. It means that we have little confidence that the slope coefficient from the regression
is actually the TRUE hedge ratio.
C. It indicates that there is no statistical association at all between spot rates and future
prices.
D. It indicates that the regression line does not fit the scatter of observations.
E. It indicates a low value of hedging ineffectiveness.
Answer: