Finance companies operate more like nonfinancial, nonregulated companies than any
other type of financial institution.
Answer:
Swaps generally have a shorter maturity than other derivative instruments.
Answer:
The emergence of the Euro as a uniform medium of exchange is expected to cause the
importance of the dollar to increase among major European countries.
Answer:
One cost of demand deposits to DIs is the reserve requirement placed on the bank by
the Federal Reserve.
Answer:
The risk premium, or spread, between corporate bonds and Treasury securities tends to
increase as the time to maturity increases.
Answer:
International bond finance is more likely to be rescheduled than international loan
finance because of the relatively fewer lenders involved with a loan finance issue.
Answer:
The primary reason for the decline of the S&L industry was the passage of legislation
that gave commercial lending powers to the S&L industry.
Answer:
In the LCD and EM debt markets, sovereign bonds have historically been issued in
foreign currencies.
Answer:
The cumulative default probability of a borrower in a given time period is one minus
the product of the marginal default probabilities for all time periods up to that time
period.
Answer:
Duration normally is less than the maturity for a fixed income asset.
Answer:
In terms of total assets, commercial banks with under $1 billion in assets have become a
larger segment of the industry in recent years.
Answer:
An option’s delta has a value between 0 and 100.
Answer:
Convexity is a desirable effect to a portfolio manager because it is easy to measure and
price.
Answer:
Unsecured debt is considered to be senior to secured debt.
Answer:
The Federal Reserve mandates reserve requirements for depository institutions so that
the DIs may provide payment services for the U.S. economy.
Answer:
The loan sales market in which an FI originates and sells a short-term loan of a
corporation can be considered a close substitute to the issuance of commercial paper.
Answer:
Which of the following is TRUE of Brady bonds?A. They are uncollateralized.
B. They have a shorter maturity and a higher than promised coupon (yield) than the
original sovereign loans.
C. The benefit from Brady bond is the ‘saving” from lower interest spreads required on
such bonds.
D. Their value partly reflects the value of collateral underlying the principal and/or
interest on the issue.
E. Their value fully reflects the credit risk rating of the country issuing the bonds.
Answer:
Cash management accounts did not exist before 1999.
Answer:
Defining buckets of time over a range of maturities assures the capture of all relevant
information necessary to accurately assess the interest rate risk exposure of an FI.
Answer:
As of October 1987, there were over 9,500 securities firms and investment banks.
Answer:
An FI with a negative duration gap is exposed to interest rate declines and could hedge
its interest rate risk by buying forward contracts.
Answer:
The Fed discount window is an appropriate place to borrow reserve shortfalls because
of its lower than market rates.
Answer:
At the end of 2012, the world-wide notational value of swap agreements was less than
$400 trillion.
Answer:
Fees from derivative products are an increasing component of noninterest income for
many FIs.
Answer:
An FI would normally purchase a cap if it was funding fixed-rate assets with
variable-rate liabilities.
Answer:
The U.S. tax burden faced by domestic FIs has been minimized, in part, by the ability to
use international wire networks for the transfer of funds.
Answer:
Fedwire is a wire transfer network of over 9,300 international FIs with the Federal
Reserve System.
Answer:
After nearly failing, the FDIC’s Bank Insurance Fund (BIF) achieved record levels of
reserves during the 1990s.
Answer:
Section 20 affiliates allow banks to transact previously ineligible securities activities.
Answer:
The relationship of a limited or fixed upside return with a high probability and the
potential large downside loss with a small probability is an example of an asset’s credit
risk to an FI.
Answer:
In general, the banking industry performed at higher levels of profitability in the decade
of the 1990s than the decade of the 1980s.
Answer:
The rate of investing in mutual funds tends to be positively correlated with economic
activity in the U.S., but is negatively correlated with economic activity in other
countries.
Answer:
Long-term loans are more likely to be made under a loan commitment agreement than
short-term loans.
Answer:
Sovereign risk involves the inability of a foreign corporation to repay the principal or
interest on a loan because of stipulations by the foreign government that are out of the
control of the foreign corporation.
Answer:
The return from investing in mutual funds can include dividends, gains from the sale of
the mutual fund assets, and gains from the sale of the mutual fund shares.
Answer:
For reserve calculation purposes, the period that begins on a Tuesday and ends on a
Monday 14 days later is known as A. the reserve maintenance period.
B. the reserve allocation period.
C. the reserve computation period.
D. the contemporaneous accounting period.
E. None of the above.
Answer:
Buying a cap option agreementA. means buying a (or several) call option on interest
rates.
B. means buying insurance against excessive decreases in interest rates.
C. allows more than one exercise date.
D. All of the above are correct.
E. Answers A and C only.
Answer:
What is the average implicit interest rate on a $100,000 account if the bank’s average
management costs are $2,500 and annual fees average $1,750? A. 4.25 percent.
B. 2.50 percent.
C. 1.75 percent.
D. 0.75 percent.
E. -0.75 percent.
Answer:
A bank that finances long-term fixed-rate mortgages with short-term deposits is
exposed toA. increases in net interest income and decreases in the market value of
equity when interest rates fall.
B. decreases in net interest income and decreases in the market value of equity when
interest rates fall.
C. decreases in net interest income and increases in the market value of equity when
interest rates increase.
D. increases in net interest income and increases in the market value of equity when
interest rates increase.
E. decreases in net interest income and decreases in the market value of equity when
interest rates increase.
Answer:
What interest rate is expected on a one-year B-rated corporate bond in one year? (Hint:
Use the implied forward rate.) A. 10.0 percent.
B. 9.09 percent.
C. 14.15 percent.
D. 12.0 percent.
E. 17.0 percent.
Answer:
If foreign currency exchange rates are highly positively correlated, how can a FI reduce
its exchange rate risk exposure? A. By taking net long positions in all currencies.
B. By taking net short positions in all currencies.
C. By taking opposing net short and net long positions in different currencies.
D. By maximizing net FX exposure in each currency, independently.
E. By minimizing net FX exposure in each currency, independently.
Answer:
The front-end load on these type of shares is charged on new sales and is not generally
incurred when these shares are exchanged for another mutual fund within the same fund
family. A. Class A shares.
B. Class B shares.
C. Class C shares.
D. Class D shares.
E. Either Class A or Class C shares.
Answer:
Which of the following implies that small FIs are more cost efficient than large FIs, and
that in a freely competitive environment for financial services, small FIs may
outperform their larger counterparts?A. Economies of scale.
B. Diseconomies of scale.
C. Economies of scope.
D. Diseconomies of scope.
E. Constant returns to scale.
Answer:
Immunizing the balance sheet to protect equity holders from the effects of interest rate
risk occurs when A. the maturity gap is zero.
B. the repricing gap is zero.
C. the duration gap is zero.
D. the effect of a change in the level of interest rates on the value of the assets of the FI
is exactly offset by the effect of the same change in interest rates on the liabilities of the
FI.
E. after-the-fact analysis demonstrates that immunization coincidentally occurred.
Answer:
The writer of a bond call optionA. receives a premium and must stand ready to sell the
bond at the exercise price.
B. receives a premium and must stand ready to buy bonds at the exercise price.
C. pays a premium and has the right to sell the underlying bond at the agreed exercise
price.
D. pays a premium and has the right to buy the underlying bond at the agreed exercise
price.
E. pays a premium and has the obligation to buy the underlying bond at the agreed
exercise price.
Answer:
The move toward market value accounting A. increases banks’ incentives to sell loans
to avoid reporting capital losses.
B. decreases banks’ incentives to sell loans to avoid reporting capital losses.
C. increases banks’ incentives to sell loans since all assets will automatically be marked
to market.
D. decreases banks’ incentives to sell loans since all assets will automatically be
marked to market.
E. has no impact on the banks’ incentives to sell loans.
Answer:
Loan assignments A. are common in loan syndications.
B. do not have buyer restrictions.
C. comprise less than 30 percent of the U.S. loan sales market.
D. involve extremely high monitoring costs.
E. expose the buyer to a double risk and involve double monitoring costs.
Answer:
The costs to the bank of borrowing at the discount window do NOT include A. an
explicit rate of interest on the borrowings.
B. the market value of collateral to be pledged against the loans.
C. the negative signal the use of such borrowings sends to regulators about the insurer’s
financial condition.
D. the negative signal the use of such borrowings sends to the market about the bank’s
financial condition.
E. the possibility of greater regulatory scrutiny and examination.
Answer:
Which of the following contributed the least to the collapse of the FSLIC/FDIC deposit
insurance funds? A. An increase in interest rate volatility.
B. Enhanced investment powers granted to thrifts.
C. Fraudulent behavior induced by the greed of the decade of the 80s.
D. Fraudulent behavior induced by ineffective regulatory incentives.
E. The extension of deposit insurance to uninsured depositors.
Answer:
As of January 2012, which of the following represented the highest percent of the dollar
value of noncash transactions in the United States? A. Checks.
B. Card payments.
C. Debit transfers.
D. E-money payments.
E. Credit transfers.
Answer:
If the exchange rate in one month is $1.55/£1, what action should the FI take in regards
to the hedge?A. Call the £100 million proceeds of the T-bill from the option writer for
$160 million
B. Put the £100 million proceeds from the T-bill to the option writer for $160 million.
C. Put the £100 million proceeds from the T-bill to the option writer for $155 million.
D. Call the £100 million proceeds of the T-bill from the option writer for $155 million
E. Allow the option contracts to expire since they are out of the money.
Answer:
In international finance, the import ratio is determined by dividing the value of imports
by the A. total foreign exchange reserves.
B. real investment.
C. gross national product.
D. value of exports.
E. money supply.
Answer:
In 1994, The Federal Reserve Board ruled against a proposal to use quantitative models
to assess credit concentration risk because A. current methods to identify concentration
risk were not sufficiently advanced.
B. there was no public data on default rates on publicly traded bonds.
C. there was sufficient information on commercial loan defaults for banks to perform
in-house analysis.
D. problems related to credit concentration risk have been minimal for U.S. banks.
E. there was already a law that requires banks to set aside capital to compensate for
credit concentration risk.
Answer:
An FI has reduced its interest rate risk exposure to the lowest possible level by selling
sufficient futures to offset the risk exposure of its whole balance sheet or cash positions
in each asset and liability. The FI is involved in A. microhedging.
B. selective hedging.
C. routine hedging.
D. overhedging.
E. speculation.
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:
Which of the following is NOT a valid conceptual or application problem of the
mortality rate approach to estimate default risk? A. Implied future probabilities are
sensitive to the period over which MMRs are calculated.
B. The estimates are sensitive to the number of issues in each investment grade.
C. Syndicated loans seem to have higher mortality rates than corporate bonds.
D. The estimated probability values are historic or backward-looking measures.
E. The estimates are sensitive to the relative size of issues in each investment grade.
Answer:
What is the expected payoff, the 99% value at risk (VAR) and the expected shortfall
(ES) of security Gamma (in millions)? A. +$248; -$2,000; -$2000
B. -$248; -$20; -$2,000
C. -$2.150; -$2,150; -$2,150
D. +$248; -$21.50; -$20.00
E. ±$0.00; -248; -$2,150
Answer:
What is the percentage price change for the bond if interest rates decline 50 basis points
from the original 5 percent? A. -2.106 percent.
B. +2.579 percent.
C. +0.000 percent.
D. +3.739 percent.
E. +2.444 percent.
Answer:
What are the two basic types of loan sale contracts or mechanisms by which loans can
be transferred between seller and buyer? A. Participations and assignments.
B. Participations and originations.
C. Syndications and originations.
D. Transfers and assignments.
E. Exercise and transfers.
Answer:
Which of the following differentiates securities firms from investment banks? A.
Securities firms are concerned with the commercial side of the business while
investment banks are concerned with the retail side of the business.
B. Securities firms assist in trading of existing securities while investment banks
specialize in underwriting new securities.
C. Securities firms underwrite new issues of securities while investment banks provide
brokerage services.
D. Securities firms originate new issues of securities and investment banks underwrite
the securities.
E. Securities firms are concerned with private placements of securities whereas
investment banks are concerned with publicly traded securities.
Answer:
How is a hedge ratio commonly determined? A. By discounting the optimal number of
futures to sell per $1 of cash position using the yield involved.
B. By using the ratio of the most recent spot and futures price changes.
C. By running an ordinary least squares regression of changes in spot prices on
changes in futures prices.
D. By using the conversion factor.
E. By squaring the correlation between past changes in spot asset prices and futures
prices.
Answer:
Which of the following government agencies or government-sponsored enterprises are
NOT directly involved in the creation of mortgage-backed pass-through securities? A.
Government National Mortgage Association.
B. Farmers Home Administration.
C. Federal National Mortgage Association.
D. Federal Home Loan Mortgage Corporation.
E. All of the above are directly involved.
Answer:
Which of the following liability products does NOT include transaction privileges? A.
Demand deposit accounts.
B. NOW accounts.
C. Passbook savings accounts.
D. Money market deposit accounts.
E. All of the above have transaction privileges.
Answer:
The FI is acting as a speculator when it A. buys or sells currency to balance the FI’s net
exposure.
B. takes a nonzero net position in a particular currency.
C. processes an exporter’s transaction in a foreign currency.
D. makes a market in a currency.
E. advises customers on their international business.
Answer:
Loan sales do not completely protect the lending FI from credit risk exposure because
A. defaults may reduce the ability of the lending bank to sell loans in the future.
B. a loan sale contains an implicit quality guarantee by the lending FI.
C. loans are always sold with recourse.
D. regulators require the lending FI to make restitution for defaulted loans.
E. loan sales force the FI to mark its remaining loans to market prices.
Answer:
Calculation of the “add-on” to the risk-based capital ratio to measure operational riskA.
may be done using the Basic Indicator Approach.
B. may be done using the Standardized Approach.
C. may be done using the Advanced Measurement Approach.
D. All of the above.
E. Answers A and B only.
Answer:
According to this model, An FI would be most likely to lend to a country withA. a low
debt service ratio.
B. a high import ratio.
C. a high investment ratio.
D. a low variance of export revenue.
E. a small rate of growth of the domestic money supply.
Answer:
Traditional country risk analysis (CRA) that is based on discriminant statistical models
often suffers from problems of using data that is not current.
Answer:
These “more risky” hedge funds aim to profit from changes in global economies,
typically brought about by shifts in government policy that impact interest rates. A.
Distressed securities funds.
B. Macro funds.
C. Value funds.
D. Opportunistic funds.
E. Market timing funds.
Answer:
The repricing model measures the impact of unanticipated changes in interest rates on
A. the market value of equity.
B. net interest income.
C. both market value of equity and net interest income.
D. the FI’s capital position.
E. the prices of assets and liabilities.
Answer: