The use of the option pricing model to determine the actuarially fair premium for
deposit insurance indicates that the cost of the insurance should rely on both the asset
quality and level of leverage of the DI.
Answer:
An angel venture capitalist is likely to be a wealthy individual that makes equity
investments in unsuccessful, bankrupt firms.
Answer:
A permanent guarantee fund for the insurance industry does not exist.
Answer:
Basel II attempts to encourage market discipline by having banks disclose capital
structure, risk exposures, and capital adequacy in a systematic manner.
Answer:
The definition of a highly leveraged transaction is any transaction that involves a
buyout, acquisition or recapitalization.
Answer:
In the sale of a loan to an investor/buyer, there are fewer agency costs associated with
loan participation contracts than with loan assignment contracts.
Answer:
A strategy to lower deposits on Fridays can lower reserve requirements for a bank.
Answer:
Attempts to satisfy the objectives of shareholders and regulators requires the bank to
use the same duration match in the protection of net worth from interest rate risk.
Answer:
Depository institutions have followed and originate-to-distribute model of loan
origination only since the Financial Services Modernization Act of 1999.
Answer:
As of June 2012, U.S. commercial banks held over $42 trillion of forward contracts that
were listed for trading on the Chicago Mercantile exchange.
Answer:
When a substandard loan is identified by a regulator, it is required that the loan
immediately be charged off by the bank.
Answer:
The risk of moral hazard increases when capital levels are low.
Answer:
The largest segment of the global swap market is the currency swap market.
Answer:
In order to realize a return on their investment, venture capital firms sell their equity
interest in the company.
Answer:
Fed funds are subject to settlement risk, but have little or no early withdrawal risk.
Answer:
Over the last 30 years finance companies have replaced real estate loans and other
assets with increasing amounts of consumer and business loans.
Answer:
When the Fed finds it necessary to slow economic activity, it allows interest rates to
fall.
Answer:
A futures contract has only one payment cash flow that occurs at the time of delivery.
Answer:
If the value of equity is less than zero on a mark-to-market accounting basis, liquidation
of the FI may result in losses to the depositors or creditors.
Answer:
The increased use of technology may have positive and negative effects on the
perceived service quality provided to retail customers.
Answer:
Which of the following observations concerning e-money is NOT TRUE?A. Check
writing lays the foundation of e-money.
B. E-money removes the middleman from a transaction.
C. The e-money user transfers the money from his or her bank account to the account
of the funds’ receiver.
D. The primary function of e-money is to facilitate transactions on the Internet.
E. E-money is not a cost efficient way of managing transactions that are small in value.
Answer:
The greater the volatility of foreign exchange rates given any net exposure position, the
greater the fluctuations in value of the foreign exchange portfolio.
Answer:
Adjusting interest rates, fees, and other terms upward for increasing amounts of default
risk is a way to attempt to realize the expected return on the loan.
Answer:
The operational risk faced by an FI includes sources other than technology.
Answer:
The use of an exchange rate forward contract assures the FI of the opportunity to buy
(or sell) the foreign currency at a future time at a known price.
Answer:
Large banks tend to make business decisions based on personal knowledge of
customers creditworthiness and business conditions in the local communities.
Answer:
As currently structured, state guarantee funds will continue to collect premium
payments and honor life policies and annuity obligations of a failed insurance
company.
Answer:
As the investment horizon approaches, the duration of an unrebalanced portfolio that
originally was immunized will be less than the time remaining to the investment
horizon.
Answer:
Loss exposures faced by insurers in accident and health lines are more similar to those
faced by traditional life insurance than by property-casualty insurance.
Answer:
Under Basel III a depository institution’s capital is divided into five categories.
Answer:
Duration of a fixed-rate coupon bond will always be greater than one-half of the
maturity.
Answer:
A key assumption of Macaulay duration is that the yield curve is flat so that all cash
flows are discounted at the same discount rate.
Answer:
Increased competition for securities underwritings should reduce the spreads and thus
lower the price paid for the securities by the investing public.
Answer:
The process of life insurance uses risk pooling to transfer income-related uncertainties
from a group of individuals to an insured individual.
Answer:
To address the decreasing balance of the FDIC deposit insurance fund during the
financial crisis of 2007-2008 A. deposit insurance programs were suspended for a
period of three months.
B. the FDIC increased individual depositor insurance coverage from $100,000 to
$250,000.
C. the FDIC announced that it would no longer honor deposit insurance coverage of
some failing DIs.
D. two special assessments were levied on institutions participating in the FDIC
insurance programs.
E. the U.S. Treasury had to take over management of the FDIC.
Answer:
What is the price volatility if the maximum potential adverse move in yields is
estimated at 20 basis points? A. -1.32 percent.
B. -2.00 percent.
C. -2.18 percent.
D. -1.09 percent.
E. -1.20 percent.
Answer:
Compared to banks and savings institutions, credit unions are able to pay a higher rate
on the deposits of members because A. they intend to attract new members.
B. they do not issue common stock.
C. of their tax-exempt status.
D. Regulation Q still applies to the industry.
E. they are subject to the provisions of the Community Reinvestment Act.
Answer:
Under which model does an FI compare its own allocation of loans in any specific area
with the national allocations across borrowers to measure the extent to which its loan
portfolio deviates from the market portfolio benchmark? A. CreditMetrics.
B. Credit Risk +.
C. Loan loss ratio-based model.
D. Moody’s Analytics portfolio manager model.
E. Loan volume-based model.
Answer:
Hadbucks National Bank current balance sheet appears below. All assets and liabilities
are currently priced at par and pay interest annually.
What is the
impact on the FI’s equity of a 2 percent overall increase in market interest rates on all
fixed-rate instruments? A. Equity rises by $4.318 million.
B. Equity declines by $2.912 million.
C. Equity rises by $2.060 million.
D. Equity declines by $1.880 million.
E. Equity does not change.
Answer:
The balance sheet of XYZ Bank appears below. All figures in millions of US Dollars.
Total one-year
rate-sensitive assets is A. $540 million.
B. $580 million.
C. $555 million.
D. $415 million.
E. $720 million.
Answer:
Finance companies have enjoyed very high rates of growth because they A. are willing
to lend to riskier customers than commercial banks.
B. charge higher rates on lower risk loans.
C. do not have ties or affiliations with manufacturing firms.
D. face very high levels of regulation, which assures their success.
E. do not sell the loans that they originate.
Answer:
Access to the discount window of the Federal Reserve is unlikely to deter bank runs
becauseA. discount loans are meant to provide temporary liquidity for inherently
solvent banks.
B. borrowing is not automatic, that is, banks gain access only on a “need to borrow”
basis.
C. a bank needs high-quality liquid assets to pledge as collateral.
D. discount window advances to undercapitalized banks that eventually fail requires
the Federal Reserve to compensate the FDIC for incremental losses caused by keeping
the bank open for an additional period of time.
E. All of the above.
Answer:
Medium term notes issued by a U.S. DIA. generally have a maturity of five to seven
years.
B. are a stable source of funds with low withdrawal risk.
C. are not subject to reserve requirements.
D. are not subject to deposit insurance.
E. All of the above.
Answer:
Which of the following is considered to be the most liquid asset? A. T-notes.
B. T-bills.
C. Cash.
D. T-bonds.
E. Wholesale CDs.
Answer:
The major source of risk exposure resulting from issuance of standby letters of credit is
A. technology risk.
B. interest rate risk.
C. credit risk.
D. foreign exchange risk.
E. off-balance-sheet risk.
Answer:
Which of the following are functions of GNMA?A. Engaging in swap transactions
where it swaps mortgage-backed securities with an FI for original mortgages.
B. Sponsors mortgage-backed securities programs by FIs such as banks, thrifts, and
mortgage bankers.
C. Acts as a guarantor to investors in mortgage-backed securities regarding the timely
pass-through of principal and interest payments on their sponsored bonds.
D. All of the above.
E. Answers B and C only.
Answer:
If the firm commitment price is $15 and one million shares are sold in the primary
market for $13 and then resold in the secondary market for $13.25, what is the
underwriter’s profit/loss? A. -$2,000,000.
B. $2,000,000.
C. -$1,750,000.
D. $1,750,000.
E. 0
Answer:
The FDICIA of 1991 strengthened the role of regulators to monitor bank asset quality
by the following measures EXCEPT A. requiring improved accounting standards for
banks.
B. giving private accountants an increased role in monitoring bank performances.
C. requiring an annual on-site examination by regulators.
D. requiring banks to work on achieving market value accounting.
E. disallowing independent audits.
Answer:
The minimum daily average reserve requirement is computed byA. multiplying the
reserve ratio by the daily closing deposit balance.
B. multiplying the reserve ratio by the daily average closing deposit balance.
C. dividing the reserve ratio by the daily average closing deposit balance.
D. dividing the reserve ratio by the daily closing deposit balance.
E. adding up daily closing deposit balances and dividing by 14.
Answer:
The insolvency of the FSLIC occurred because of A. declining real estate values.
B. risky lending.
C. asset liability mismatch.
D. insider lending.
E. All of the above.
Answer:
On September 7, 2008, both FHMA and FHLMC were placed under conservatorship by
the A. Federal Reserve.
B. Federal Housing Finance Agency.
C. Federal Deposit Insurance Corporation.
D. Federal Home Loan Bank.
E. Comptroller of the Currency.
Answer:
Choose among the following major banking laws.
A. The McFadden Act of 1927
B. The Glass-Steagall Act of 1933
C. The Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of
1980
D. The Garn-St Germain Depository Institutions Act of 1982
E. The Competitive Equality in Banking Act of 1987
F. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
G. The Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991
H. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
I. Financial Services Modernization Act of 1999
This legislation introduced money market deposit accounts.
Answer:
What is an important determinant of rescheduling probability if the country is providing
several incentives to increase domestic savings?A. The debt service ratio.
B. The import ratio.
C. The investment ratio.
D. The variance of export revenue.
E. The rate of growth of the domestic money supply.
Answer:
A contract that results in the delivery of a futures contract when exercised is a A. put
option.
B. call option.
C. naked option.
D. futures option.
E. credit spread call option.
Answer:
The Riegle-Neal Act of 1994A. specifically allows banks to establish de novo branches
in new states.
B. effectively allows full interstate branching within the U.S.
C. is given credit for initiating a wave of bank mergers across the U.S.
D. All of the above.
E. Answers B and C only.
Answer:
What is the credit equivalent amount of the off-balance-sheet foreign exchange
contracts if it is out-of-the-money by $4 million? A. $1.0 million.
B. $2.0 million.
C. $5.0 million.
D. $6.0 million.
E. $9.0 million.
Answer:
The following information on the mortality rate of loans as estimated by an FI:
What is the cumulative
mortality rate of the A-rated and B-rated loans for year 2? A. 1.0 percent and 2.24
percent.
B. 0.5 percent and 1.24 percent.
C. 1.0 percent and 1.74 percent.
D. 0.5 percent and 0.5 percent.
E. 1.0 percent and 1.0 percent.
Answer:
Choose among the following major banking laws.
A. The McFadden Act of 1927
B. The Glass-Steagall Act of 1933
C. The Depository Institutions Deregulation and Monetary Control Act (DIDMCA) of
1980
D. The Garn-St Germain Depository Institutions Act of 1982
E. The Competitive Equality in Banking Act of 1987
F. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989
G. The Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991
H. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
I. Financial Services Modernization Act of 1999
This legislation phased out Regulation Q ceilings on deposit interest rates.
Answer:
A disadvantage of the historic or back simulation model for quantifying market risk
includes A. calculation of a standard deviation of returns is not required.
B. calculation of the correlation between asset returns is not required.
C. estimates of past returns used in the model may not be relevant to the current market
returns.
D. it accounts for non-standard return distributions.
E. None of the above.
Answer:
An investment banker agrees to underwrite an issue of 10 million shares of stock for
Rochester Industries on a best-efforts basis. The investment banker is able to sell 8
million shares for $10.50 per share, and it charges Rochester Industries $0.225 per share
sold.
If the investment bank were able to sell all 10 million shares for $12.75 per share, how
much money does Rochester Industries receive? A. $127,500,000.
B. $125,250,000.
C. $105,675,000.
D. $102,000,000.
E. $99,000,000.
Answer:
The following question are based on material in Appendix 8B
The liquidity premium theory of the term structure of interest rates A. assumes that
investors will hold long-term maturity assets if there is a sufficient premium to
compensate for the uncertainty of the long-term.
B. assumes that long-term interest rates are an arithmetic average of short-term rates
plus a liquidity premium.
C. recognizes that forward rates are perfect predictors of future interest rates.
D. assumes that risk premiums increase uniformly with maturity.
E. None of the above.
Answer:
The use of expected shortfall (ES) is most appropriate when A. there is a small sample
size used to estimate probability distributions.
B. the VAR indicates there is no possibility of losses so another method must be used
to determine market risk.
C. the probability distribution is skewed to the right.
D. a continuous probability distribution cannot be constructed.
E. The probability distribution indicates there is a possibility of a “fat tail” loss.
Answer:
A bond is scheduled to mature in five years. Its coupon rate is 9 percent with interest
paid annually. This $1,000 par value bond carries a yield to maturity of 10 percent.
Calculate the duration of the liabilities to four decimal places.A. 2.05 years.
B. 1.75 years.
C. 2.22 years.
D. 2.125 years.
E. 2.50 years.
Answer:
The principal objective in the creation of _____ is to maximize asset values by
separating good loans from bad loans. A. hedge funds
B. bad banks
C. vulture funds
D. structured banks
E. correspondent banks
Answer:
Ally Financial [formerly General Motors Acceptance Corporation (GMAC)] A. is a
wholly owned subsidiary of General Motors.
B. only provides financing to purchasers of automobiles built by General Motors.
C. was classified as a commercial bank holding company in 2008.
D. did not participate in federal bailout funds during the financial crisis because of
their financial strength.
E. is the largest finance company in the U.S.
Answer:
The following information is about current spot rates for Second Duration Savings’
assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually.
What is the
duration of the two-year loan (per $100 face value) if it is selling at par? A. 2.00 years
B. 1.92 years
C. 1.96 years
D. 1.00 year
E. 0.91 years
Answer: