A digital default option expires unexercised in situations where the loan is paid in
accordance with the loan agreement.
Answer:
Time intermediation involves the investment of small amounts by investors into mutual
funds that invest in long-term securities such as stocks and bonds.
Answer:
Many of the various risks faced by an FI often are interrelated with each other.
Answer:
Which of the following is TRUE about reverse repurchase agreements?A. They are
securities purchased under agreements to resell.
B. They account for less than 5 percent of assets of broker-dealers.
C. They amount to 40.8 percent of total liabilities and equity of broker-dealers.
D. They are treated as liabilities.
E. They are securities temporarily lent in exchange for cash received.
Answer:
Finance companies have been among the slowest growing FI groups in recent years.
Answer:
Which of the following is TRUE of private placement of securities?A. Securities are
placed with few large institutional investors.
B. Securities of private firms are sold to the investing public at lower prices.
C. They must be registered with the SEC.
D. Public trading in these securities is not allowed.
E. Subject to more stringent disclosure and informational requirements than those
imposed by the SEC on publicly registered issues.
Answer:
The creation and sale of CMOs is based, at least in part, on the ability to segment the
market for pass-through security products.
Answer:
In late 2012, shadow banking activities came under federal government regulation.
Answer:
A bank with a negative repricing (or funding) gap faces refinancing risk.
Answer:
Investment banks engage in activities such as advising on mergers, acquisitions, and
corporate restructuring.
Answer:
The expected return of a portfolio of loans is equal to the weighted average of the
expected returns of the individual loans.
Answer:
Contingent claims are assets and liabilities that will come into existence at a future time
often at the insistence of a customer or second party.
Answer:
Equity holders absorb credit losses on the asset portfolio because liability holders are
junior claimants.
Answer:
The increased use of wire transfers as a replacement for check and cash payments has
decreased the risk of fraud.
Answer:
Research on bank mergers for the decade of the 1990s found that improved
performance of the merged bank occurred because of both revenue enhancements and
cost reduction.
Answer:
Pension and mutual funds have a lower correlation between the maturities of their
assets and liabilities than do commercial banks and thrifts.
Answer:
Investment banks specialize in the origination, underwriting, and distribution of new
securities issued by corporations or governments.
Answer:
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.
Answer:
One method of increasing reserves to meet a reserve target is to sell liquid assets.
Answer:
Since their introduction, the proportion of ARMs to fixed-rate residential mortgages has
remained very stable over interest rate cycles.
Answer:
The Riegle-Neal Act of 1994 removed many of the restriction on interstate banking that
were originally imposed by the 1933 Glass Steagall Act.
Answer:
Recently banks have changed the liability structure towards instruments that have less
withdrawal risk and higher explicit interest costs.
Answer:
A pure credit swap is similar to buying credit insurance.
Answer:
Property-casualty insurance companies can reduce their exposure to liquidity risk by
diversifying coverage across different types of disasters.
Answer:
To be more precise in measuring interest rate risk, the runoff component of long-term
mortgages should be considered in the time buckets in which the maturities actually
occur.
Answer:
Investing in a zero-coupon asset with a maturity equal to the desired investment horizon
removes interest rate risk from the investment management process.
Answer:
The present value of an off-balance-sheet item is its notional value.
Answer:
Event risks often cause sudden and unanticipated changes in financial market
conditions.
Answer:
A significant advantage for credit unions in competing with commercial banks is the
tax-exempt status that has been granted to credit unions.
Answer:
The top ten underwriters of global debt and equity issues represent over 80 percent of
the industry total.
Answer:
A large number of the savings institution failures during the in the 1980s was a result
ofA. interest rate risk exposure.
B. excessively risky investments.
C. fraudulent behavior on the part of managers.
D. All of the above.
E. answers B and C only.
Answer:
Which of the following factors occurred in the early 2000s and created concerns about
the ability of Fannie Mae and Freddie Mac to manage their portfolios of assets?A.
Fannie Mae miscalculated the value of its mortgages that created a restatement of its
stockholder equity.
B. Both agencies overcharged lenders for services they provided.
C. Fannie Mae operated for some time with a sharp increase in interest rate risk on its
balance sheet.
D. All of the above.
E. Answers B and C only.
Answer:
In the NAIC model for life insurance companies, which risk captures the risk of adverse
changes in mortality risk and morbidity risk? A. Interest rate risk.
B. Business risk.
C. Asset risk.
D. Foreign exchange risk.
E. Insurance risk.
Answer:
One hundred identical mortgages are pooled together into a pass-through security. Each
mortgage has a $150,000 principal, a fixed annual interest rate of 8 percent (paid
monthly), and is fully amortized over a term of 30 years.
What is the weighted average life of the above mortgage pool? A. 30 years.
B. 2 months.
C. 1.998 months.
D. 1 month.
E. 1.5 months.
Answer:
Is Fifth Bank currently over or under capitalized for on-balance-sheet assets in order to
be considered well capitalized according to Basel III? A. Overcapitalized for both Tier
I and Total capital standards.
B. Overcapitalized for Tier I standard; Undercapitalized for Total standard.
C. Undercapitalized for Tier I standard; Overcapitalized for Total standard.
D. Undercapitalized for both Tier I and Total capital standards.
E. Unable to determine.
Answer:
Which of the following describes debt repudiation? A. Changing the contractual terms
of a loan, such as its maturity and interest payments.
B. Direct nationalization of private sector assets.
C. Outright cancellation of all current and future debt obligations.
D. Automatic default of all international loans upon default of any one loan.
E. Debt conversion schemes of debtor countries that signal creditworthiness.
Answer:
Money center banks are considered to be any bank which A. has corporate
headquarters in either New York City, Chicago, San Francisco, Atlanta, Dallas, or
Charlotte.
B. is a net supplier of funds on the interbank market.
C. relies almost entirely on nondeposit and borrowed funds as sources of liabilities.
D. does not participate in foreign currency markets.
E. is not characterized by any of the above.
Answer:
A disadvantage of using stored liquidity management to manage a FI’s liquidity risk is
A. the resulting shrinkage of the FI’s balance sheet.
B. the 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:
The minimum reserves that may be maintained toward the next reserve maintenance
period, September 23 to October 6, is A. $33.3170 million.
B. $38.2470 million.
C. $39.0073 million.
D. $35.0876 million.
E. $41.4064 million.
Answer:
Which of the following relationships does NOT hold in the pricing of fixed-rate assets
given changes in market rate? A. A decrease in interest rates generally leads to an
increase in the value of assets.
B. Longer maturity assets have greater changes in price than shorter maturity assets for
given changes in interest rates.
C. The absolute change in price per unit of maturity time for given changes in interest
rates decreases over time, although the relative changes actually increase.
D. For a given percentage decrease in interest rates, assets will increase in price more
than they will decrease in price for the same, but opposite increase in rates.
E. None of the above.
Answer:
The Basel capital requirements differ from previous capital standards in all except one
of the following ways?A. More stringent capital standards for large banks than for
small banks.
B. Inclusion of off balance sheet assets in the asset base.
C. Restrictions on the amount of goodwill that can be counted towards primary or Tier
I capital.
D. Risk weighting of assets on the basis of credit risk exposure.
E. Risk weighting of off balance sheet contingencies.
Answer:
What is the daily earnings at risk (DEAR) of this bond portfolio? A. -$246,111.
B. -$218,180.
C. -$135,474.
D. -$149,021.
E. -$225,789.
Answer:
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 A. commissions and
other expenses are 15 percent and investment yields are 10 percent.
B. commissions and other expenses are 5 percent and investment yields are 6 percent.
C. commissions and other expenses are 16 percent and investment yields are 20 percent
D. commissions and other expenses are 15 percent and investment yields are 12
percent.
E. commissions and other expenses are 6 percent and investment yields are 4 percent.
Answer:
Deviations from the international currency parity relationships may occur because of
A. free capital movements across national boundaries.
B. barriers to cross-border financial flows.
C. perfect rationality of market participants.
D. differences in each country’s productive capacity.
E. Basel capital regulations.
Answer:
The following are the assets and liabilities of a government security dealer.
Use the repricing model to
determine the funding gap for a maturity bucket of 91 days. A. -$60 million.
B. -$150 million.
C. $0.
D. -$250 million.
E. -$300 million.
Answer:
An option that does NOT identifiably hedge an underlying asset is a A. put option.
B. call option.
C. naked option.
D. futures option.
E. credit spread call option.
Answer:
The largest line of life insurance in terms of total contract value in the U.S. isA.
ordinary life.
B. group life.
C. industrial life.
D. credit life.
E. noncontributory life.
Answer:
A bank holding company must obtain the approval of the Fed before acquiring more
than _____ of the shares of an additional bank, bank holding company, or financial
services firm. A. 5 percent
B. 10 percent
C. 15 percent
D. 25 percent
E. 50 percent
Answer:
The reason FIs can offer highly liquid, low price-risk contracts to savers while investing
in relatively illiquid and higher risk assets is A. because diversification allows an FI to
predict more accurately the expected returns on its asset portfolio.
B. significant amounts of portfolio risk are diversified away by investing in assets that
have correlations between returns that are less than perfectly positive.
C. because individual savers cannot benefit from risk diversification.
D. because FIs have a cost advantage in monitoring their portfolios.
E. All of the above.
Answer:
Marginal default probability refers to the A. probability that a borrower will default
over a specified multiyear period.
B. marginal increase in the default probability due to a change in credit premium.
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:
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.
Answer:
Eveningstar open-end fund has 1,000 shares outstanding and has the following assets in
its portfolio: 100 shares of Procter & Gamble (P&G) priced at $30.00, 300 shares of
Intel priced at $50.00 and 200 shares of Microsoft priced at $60.00. The Morningstar
closed-end fund has the following stocks in its portfolio: 300 shares of P&G and 300
shares of Microsoft. It has a total of 500 shares outstanding.
What is the NAV of both funds? A. $30.33 and $13.50.
B. $60.00 and $27.00.
C. $30.00 and $54.00.
D. $60.00 and $27.00.
E. $15.00 and $54.00.
Answer:
Which of the following observations is NOT correct? A. Most loans are sold with
recourse.
B. Loan sales are a primitive substitute for securitization.
C. Selling of a loan creates a secondary market for loans.
D. Ownership of the loan is always transferred to the loan purchaser.
E. Loan sales do not involve the creation of new types of securities.
Answer:
At the time of placement, the premium on the options are quoted at 1¾. What is the cost
to Allright in placing the hedge?A. $1,093,750.
B. $782,250.
C. $360,500.
D. $1,342,500.
E. $1,094.
Answer:
In addition to purchasing the cap, if the bank also sells 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 bankA. receive $50,000 at the end of year 2 and
receive $50,000 at the end of year 3.
B. pay $50,000 at the end of year 2 and receive $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 $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:
As of 2012, which of the following FX “markets” is the largest? A. London.
B. New York.
C. Tokyo.
D. Hong Kong.
E. Zurich.
Answer:
Why are the regular GNMA pass-throughs not very attractive to insurance companies
and pension funds seeking long-term duration assets to match their long-term duration
liabilities? A. Because of their short expected duration.
B. Because these bonds have the shortest average life with a maximum of prepayment
protection.
C. Because they are zero coupon bonds and hence carry maximum amount of risk.
D. Because of their failures to offer prepayment protection.
E. Bondholders receive the promised coupon and principal payments but are not
entitled to accrued interest payments.
Answer:
According to Moody’s Analytics, default correlations tend to be _____ and lie between
_______. A. Low; 0.002 and 0.15
B. High; 1.86 and 2.99
C. Low; 0.001 and 0.002
D. High; 2.99 and 3.50
E. Low; 0 and 0.001
Answer:
What is the major distinction between NOW accounts and traditional demand deposits?
A. Minimum account balance requirement to earn interest for NOW accounts.
B. Zero explicit interest on NOW accounts.
C. Noncheckable nature of NOW accounts.
D. NOW accounts usually involve physical presence at the institution for withdrawal.
E. Legal power to delay payment on NOW accounts.
Answer:
Why do FIs face a return or interest earnings penalty by holding large amounts of assets
such as cash, T-bills, and T-bonds to reduce liquidity risk? A. These assets carry a
reserve requirement tax.
B. These assets offer low returns.
C. These assets offer higher returns that reflect their risk.
D. Inflation increases the purchasing power value of these assets.
E. All of the above.
Answer:
What is the minimum required Tier I and Total risk-based capital for the
on-balance-sheet assets in order for the DI to be adequately capitalized? A. $8 million;
$8 million.
B. $16.87 million; $16.87 million.
C. $17.22 million; $22.96 million.
D. $22.96 million; $28.70 million.
E. $10.8 million; $8 million.
Answer:
Michelle has maintained an average balance of $300 per month for the first three
months of the year, $800 per month for the next three months, and $1,000 per month for
the final six months of the year in a NOW account. It requires a minimum balance of
$500 to be maintained if annual interest of 5 percent is to be earned. She writes an
average of 25 checks per month but the account does not have a service charge for
checks although it costs the bank 10 cents to process each check.
What is Michelle’s annual gross interest return? A. $35.
B. $65.
C. $70.
D. $30.
E. $55.
Answer:
The largest liability on property-casualty insurers’ balance sheet as of 2012 was A. loss
reserve and loss adjustment expenses.
B. unearned premiums.
C. cash.
D. policyholder surplus.
E. conditional reserve funds.
Answer: