The loss to a buyer of bond put options is limited to the premium paid.
Answer:
Reciprocal banking pacts allowed the non-state companies to purchase banks as long as
the purchase permission went in both directions.
Answer:
The Securities Act of 1933 requires that a mutual fund furnish full and accurate
information on all financial and corporate matters to prospective fund purchasers.
Answer:
Which of the following observations is NOT TRUE?A. Variance of bond prices is
nonconstant over time.
B. Variance of bond prices rises at first and then falls as the bond approaches maturity.
C. As the bond approaches maturity, all price paths must lead to 100 percent of the face
value of the bond.
D. As the bond approaches maturity, all price paths must lead to the principal paid by
the issuer on maturity.
E. Variance of a bond’s price or return increases as maturity approaches.
Answer:
The extreme growth of the swap market has raised concern about the credit risk
exposures of banks engaging in this market.
Answer:
The growth in home equity lines of credit over the last two decades has occurred in part
because of the tax deductibility of the interest payments.
Answer:
A major cause of the FSLIC insolvency in the 1980s was the dramatic rise in interest
rates in 1979-82 that created extensive duration mismatches of assets and liabilities in
the savings and loan industry.
Answer:
Duration is related to maturity in a linear manner through the interest rate of the asset.
Answer:
Investors in GNMA pass-through securities are exposed to the risk that the originating
bank may fail, and the risk that the trustee may mismanage monthly interest and
principal payments collected.
Answer:
State regulation of the U.S. insurance industry has an effect on the ability of insurance
companies to invest in foreign securities.
Answer:
Credit rationing is a form of managing credit risk.
Answer:
The simple model of migration analysis tracks the credit ratings of companies that have
borrowed from the FI.
Answer:
The repricing model is a simplistic approach to focusing on the exposure of net interest
income to changes in market levels of interest rates for given maturity periods.
Answer:
Prepayment models are attempts by professional mortgage portfolio managers to
estimate the rate of prepayment on given mortgage pools.
Answer:
Services provided by depository institutions have become relatively less significant as a
portion of all services provided by FIs.
Answer:
Which of the following statements is NOT TRUE?A. Stored liquidity management
involves liquidation of assets.
B. Traditionally DIs have stored cash reserves at the Federal Reserve and in their vaults
to overcome liquidity risk.
C. When the DI uses its cash as the liquidity adjustment mechanism, both sides of its
balance sheet contract.
D. DIs hold cash reserves in excess of the minimum required to meet liquidity drains.
E. A DI sustains no cost under stored liquidity risk management.
Answer:
GNMA helps create pass-through asset-backed securities by providing timing
insurance.
Answer:
Funds transferred on the Fedwire are settled immediately.
Answer:
A principal-only (PO) mortgage pass-through strip security is attractive to investors that
wish to increase the interest rate sensitivity of their portfolio.
Answer:
Because the repricing model ignores the market value effect of changing interest rates,
the repricing gap is an incomplete measure of the TRUE interest rate risk exposure of
an FI.
Answer:
Which of the following observations is TRUE of a spot loan?A. It involves a maximum
size and a maximum period of time over which the borrower can withdraw funds.
B. It involves immediate withdrawal of the entire loan amount by the borrower.
C. It is an unsecured short-term debt instrument issued by corporations.
D. It is a nonbank loan substitute.
E. It is a line of credit.
Answer:
Foreign exchange risk is that the value of assets and liabilities may change because of
changes in the level of interest rates.
Answer:
The “flash crash” on the NYSE in May 2010 was directly attributable to the
manipulation of LIBOR by Barclays PLC.
Answer:
Covenants are restrictions in loan and bond agreements that encourage or forbid certain
actions by the borrower.
Answer:
FIs are independent market entities that create financial assets whose value is the
transformation of financial risk.
Answer:
For a given change in required yields, short-duration securities suffer a smaller capital
loss or receive a smaller capital gain than do long-duration securities.
Answer:
The risk that a computer system may malfunction during the processing of data is an
example of operational risk.
Answer:
Exercise of a put option on futures by the buyer of the option will occur if interest rates
have increased.
Answer:
The Value at Risk (VAR) provides information about the potential size of the expected
loss given a level of probability.
Answer:
The Fed discount window maintains three lending programs to assist DIs in managing
liquidity problems.
Answer:
Immunizing the net worth ratio requires that the duration of the assets be set equal to
the duration of the liabilities.
Answer:
State-sponsored insurance guarantee funds are run and administered by private
insurance companies operating in the state.
Answer:
Closed-end bank loan mutual funds are restricted to investing in loans only through the
loan resale or secondary market.
Answer:
A possible reason for the high systematic risk of VAREX in LCDs and EMs is A. the
tendency of world commodity prices to reflect non-similar economic conditions.
B. the sensitivity of this ratio to rising nominal and real interest rates in the developed,
or lending, countries.
C. the tendency of prices and world demands for commodities to reflect simultaneously
economic conditions.
D. the discretionary nature of money supply growth for LDC governments.
E. different demands for imports, and wide differences in the scale of vital imports
across LDCs.
Answer:
A futures contract A. is tailor-made to fit the needs of the buyer and the seller.
B. has more credit risk than a forward contract.
C. is marked to market more frequently than a forward contract.
D. has a shorter time to delivery than a forward contract.
E. has more price risk than a forward contract.
Answer:
Which of the following is a weakness of the repricing model to measure interest rate
risk?A. Potential for overaggregation of assets and liabilities within each maturity
bucket.
B. It ignores how changes in interest rates affect the market value of assets and
liabilities.
C. It ignores the reinvestment of loan interest and principal payments that are
reinvested at current market rates.
D. It fails to recognize off-balance-sheet activities that may be rate sensitive.
E. All of the above.
Answer:
Which of the following has proven to be strong competition for bank deposit and
transaction account products? A. Commercial paper market.
B. Money market mutual funds.
C. Finance company business credit.
D. Hedge funds.
E. None of the above.
Answer:
Under contemporaneous reserve accounting the A. reserve maintenance period is two
days longer than the reserve computation period.
B. reserve maintenance period starts two days after the start of the reserve computation
period.
C. reserve computation period starts two days after the start of the reserve maintenance
period.
D. reserve computation period starts on the same date as the reserve maintenance
period.
E. reserve computation period is two days longer than the reserve maintenance period.
Answer:
Two countries are identical in all respects except that country A’s rate of growth of the
domestic money supply (MG) is 33 percent, while country B’s MG is 25 percent, and
country A’s variance of export revenue (VAREX) is 3.75 percent, while country B’s
VAREX is 10 percent. Based only on these two variables, which country possesses the
most sovereign country risk?A. Country A because the higher rate of money supply
growth is insufficient to overcome the impact of a lower export revenue variance on
country risk exposure.
B. Country B because the higher rate of money supply growth has less impact on
country risk exposure than the impact of a lower export revenue variance.
C. Country A because the higher rate of money supply growth is sufficient to overcome
the impact of a higher export revenue variance on country risk exposure.
D. Country B because the higher rate of money supply growth has a positive impact on
country risk that outweighs the impact of a lower export revenue variance.
E. They both have the same sovereign country risk exposure.
Answer:
The risk that interest income will increase at a slower rate than interest expense is A.
credit risk.
B. political risk.
C. currency risk.
D. interest rate risk.
E. liquidity risk.
Answer:
Cumulative default probability refers toA. probability that a borrower will default over
a specified multiyear period.
B. expected maximum change in the loan rate due to a change in the risk factor on the
loan.
C. historic default rate experience of a bond or loan.
D. expected maximum change in the loan rate due to a change in the credit premium.
E. probability that a borrower will default in any given year.
Answer:
Which of the following is the type of loan that Ford Motor Credit Corporation provides
to Ford dealers to finance the cars that the dealer has for sale? A. Inventory loan.
B. Wholesale loan.
C. Automobile lease.
D. Factoring.
E. Equipment loan.
Answer:
Overseas bank is pooling 50 similar and fully amortized mortgages into a pass-through
security. The face value of each mortgage is $100,000 paying 180 monthly interest and
principal payments at a fixed rate of 9 percent per annum.
If the entire mortgage pool is repaid at the end of the second month, what is the
weighted average life of the mortgage pool? A. 2.10 months.
B. 2 months.
C. 1.997 months.
D. 1.95 months.
E. 1.90 months.
Answer:
Two countries are identical in all respects except that country A’s debt service ratio is
1.5, while country B’s debt service ratio is 1.25, and country A’s import ratio is 0.75,
while country B’s import ratio is 0.90. Based only on the effect of these two variables,
compare the likely price of debt issued by country A to the likely price of debt issued by
country B if both debt issues have the same maturity and coupon payments. Both debt
issues are trading in the secondary market. A. Country B’s debt is priced higher because
the probability of rescheduling is lower for country B than for country A.
B. Country A’s debt is priced higher because the probability of rescheduling is lower
for country A than for country B.
C. Country B’s debt is priced lower because country B has a lower probability of
rescheduling than does country A.
D. Country A’s debt is priced lower because country A has a lower probability of
rescheduling than does country B.
E. Both debt issues have the same price.
Answer:
Using the term structure of default probabilities, the implied default probability for
BBB corporate debt during the current year is A. 98.0 percent.
B. 2.35 percent.
C. 4.19 percent.
D. 3.90 percent.
E. 2.71 percent.
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
interest rate risk exposure of the optimal transaction in the previous question over the
next 2 years? A. The risk that interest rates will rise since the FI must purchase a 2-year
CD in one year.
B. The risk that interest rates will rise since the FI must sell a 1-year CD in one year.
C. The risk that interest rates will fall since the FI must sell a 2-year loan in one year.
D. The risk that interest rates will fall since the FI must buy a 1-year loan in one year.
E. There is no interest rate risk exposure.
Answer:
In addition to purchasing the cap, if the bank also purchases a 3-year 6 percent floor and
interest rates are 5 percent and 7 percent in years 2 and 3, respectively, what are the
payoffs to the bank? Specifically, the bank will A. receive $50,000 at the end of year 2
and receive $50,000 at the end of year 3.
B. receive $50,000 at the end of year 2 and pay $50,000 at the end of year 3.
C. receive $0 at the end of year 2 and pay $50,000 at the end of year 3.
D. receive $0 at the end of year 2 and receive $50,000 at the end of year 3.
E. receive $50,000 at the end of year 2 and pay $0 at the end of year 3.
Answer:
What is the asset adjustment to a bank’s balance sheet if the bank sold a five-year, 7
percent annual coupon $100,000 bond acquired at par, but now yielding 8 percent? The
bond was not in the mark-to-market portfolio.A. A $96,007 reduction in assets.
B. A $96,007 increase in assets.
C. A $100,000 reduction in assets.
D. A $100,000 increase in assets.
E. A $100,000 increase in liabilities.
Answer:
The purpose of the countercyclical buffer proposed by Basel III is to A. expose those
banks with inadequate capital to survive economic downturns.
B. assist insolvent banks build capital during economic expansions.
C. protect the banking system and reduce systematic exposures to economic
downturns.
D. enhance global movement of funds to those countries experiencing excess aggregate
credit growth.
E. force DIs to immediately adjust capital to meet the 2.5 percent level of buffer capital
required.
Answer:
The net asset value of a mutual fund is found by A. subtracting the daily market value
of the fund’s asset portfolio from the previous days’ value.
B. dividing the cumulative value of all asset positions held by the fund by the total
number of asset shares held by the fund.
C. computing the daily market value of the fund’s total asset portfolio and then dividing
this amount by the number of mutual fund shares outstanding.
D. comparing the daily market value of the fund’s total asset portfolio with that of its
peers.
E. subtracting expenses, commissions, and dividends from the fund’s total asset
portfolio.
Answer:
In the Moody’s Analytics model, which of the following is a function of the historical
returns of the individual assets. A. The risk of a loan.
B. The expected default frequency.
C. The loss given default.
D. The correlation of default risk.
E. The volatility of the loan’s default rate.
Answer:
Simulations by Moody’s Analytics have shown which of the following models to be
relatively better predictors of corporate failure and distress?A. Z score-type models.
B. S&P rating changes.
C. Expected Default Frequency (EDF) models.
D. Linear probability models.
E. Logit models.
Answer:
What is defined as the sum of the products of the time when principal payments are
received and the amount of principal received all divided by total principal outstanding?
A. Weighted-average life.
B. Burn-out factor.
C. Degree of collateralization.
D. Option-adjusted spread.
E. Time to maturity.
Answer:
The largest liability on U.S. commercial banks’ balance sheet as of September 30. 2012
was A. investment securities.
B. non-transaction accounts.
C. transaction accounts.
D. borrowings.
E. cash.
Answer:
Conceptually, an FI’s trading portfolio can be differentiated from its investment
portfolio by A. liquidity.
B. time horizon.
C. size of assets.
D. effects of interest rate changes.
E. Answers A and B only.
Answer:
Verifying the minimum level of capital or equity that must be held to fund the
operations of an FI is part of the goal of A. investor protection regulation.
B. safety and soundness regulation.
C. entry regulation.
D. credit allocation regulation.
E. consumer protection regulation.
Answer:
A possible reason for the high systematic risk of the debt service ratio (DSR) in LDCs
and EMs is A. the tendency of world commodity prices to reflect non-similar economic
conditions.
B. the sensitivity of this ratio to rising nominal and real interest rates in the developed,
or lending, countries.
C. the tendency of prices and world demands for commodities to reflect simultaneously
economic conditions.
D. the discretionary nature of money supply growth for LDC governments.
E. different demands for imports, and wide differences in the scale of vital imports
across LDCs.
Answer:
The Federal Reserve allows the DI to make up to a _____ daily average error without
penalty. A. 1 percent
B. 4 percent
C. 3 percent
D. 10 percent
E. 5 percent
Answer:
Interest rate risk management for financial intermediaries deals primarily with A.
controlling the overall size of the institution.
B. controlling the scope of the institution’s activities.
C. limiting the geographic spread of the institution’s offices.
D. limiting the mismatches on the institution’s balance sheet.
E. continuously and carefully complying with all government regulations.
Answer:
What is the expected return on the loan to the bank if 50 percent of the loan is drawn
using discounted cash flows? That is, the return has to be estimated at the beginning of
the loan period using present values. Assume there are reserve requirements of 10
percent on demand deposits. A. 12.00 percent.
B. 12.26 percent.
C. 12.59 percent.
D. 13.01 percent.
E. 13.26 percent.
Answer:
How would you characterize the FI’s risk exposure to fluctuations in the British pound
to dollar exchange rate? A. The FI is net short in the British pound and therefore faces
the risk that the British pound will rise in value against the U.S. dollar.
B. The FI is net short in the British pound and therefore faces the risk that the British
pound will fall in value against the U.S. dollar.
C. The FI is net long in the British pound and therefore faces the risk that the British
pound will fall in value against the U.S. dollar.
D. The FI is net long in the British pound and therefore faces the risk that the British
pound will rise in value against the U.S. dollar.
E. The FI has a balanced position in the British pound.
Answer:
A disadvantage of using purchased liquidity management to manage a FI’s liquidity risk
is A. the resulting shrinkage of the FI’s balance sheet.
B. the relatively high cost of purchased liabilities.
C. the accessibility of international money markets.
D. tax considerations.
E. loss of flexibility as a result of dependence upon purchased liabilities.
Answer:
According to purchasing power parity (PPP), foreign currency exchange rates between
two countries adjust to reflect changes in each country’sA. unemployment rates.
B. export competitiveness.
C. inflation rates.
D. foreign exchange reserves.
E. reserve requirements.
Answer:
If the loans in the bank’s portfolio are all negatively correlated, what will be the impact
on the bank’s credit risk exposure? A. The loans’ negative correlations will decrease the
bank’s credit risk exposure because lower than expected returns on some loans will be
offset by higher than expected returns on other loans.
B. The loans’ negative correlations will increase the bank’s credit risk exposure because
lower than expected returns on some loans will be offset by higher than expected
returns on other loans.
C. The loans’ negative correlations will increase the bank’s credit risk exposure because
higher returns on less risky loans will be offset by lower returns on riskier loans.
D. The loans’ negative correlations will decrease the bank’s credit risk exposure
because higher returns on less risky loans will be offset by lower returns on riskier
loans.
E. There is no impact on the bank’s credit risk exposure.
Answer: