When liquidity risk problems occur at a DI, they often threaten the solvency of the
institution.
Answer:
As a result of trading and fee assignment abuses by the mutual fund industry, the SEC
established new rules regarding fund governance and conflicts of interest in 2004 and
2005.
Answer:
The contemporaneous reserve accounting system requires the maintenance period to
occur simultaneously with the computation period.
Answer:
Forward contracts are marked-to-market on a daily basis.
Answer:
A bond call option gives the holder the right to sell the underlying bond at a
pre-specified exercise price.
Answer:
In addition to establishing minimum capital requirements, Basel II proposed procedures
to ensure that sound internal process are used to assess capital adequacy and to set
targets that are commensurate with the risk profile and environment.
Answer:
The average cost to the FDIC of each bank failure during the decade of the 1980s was
larger than the total cost of all bank failures during the period 1933-79.
Answer:
In the BIS framework, vertical offsets are charges that reflect the modified duration and
interest rate shocks for each maturity.
Answer:
During a liquidity crisis assets normally must be sold at a loss because of the rising
interest rates caused by financial institutions attempting to raise funds.
Answer:
Mutual funds that are load funds use sales agents, and thus always have an up-front
commission charge.
Answer:
The primary objective of the 1933 Glass-Steagall Act was to prevent commercial banks
from competing directly with commercial insurance companies.
Answer:
Adverse selection is a situation where customers who most need insurance are more
likely to apply for insurance.
Answer:
Core deposits represent a relatively short-term source of funds.
Answer:
The total FX risk for a domestic bank that is making a one-year loan in a foreign
currency is that the interest income expected on the loan is exposed to a depreciation of
the foreign currency.
Answer:
Basel I (1993) requires banks in the member countries of the Bank for International
Settlements to utilize risk-based capital ratios.
Answer:
U.S. mutual fund companies have made significant progress in entering Japan and
Europe.
Answer:
Off-balance-sheet items often are called contingent assets and liabilities because they
may, or may not, affect the balance sheet in the future.
Answer:
A default option is exercised when the holder requests a draw on the loan commitment.
Answer:
Which of the following is TRUE of the market price of a futures contract over time?A.
It is set at time 0.
B. It is fixed over the life of the contract.
C. It changes based on the market value of the underlying asset.
D. It decreases with time to expiration.
E. It is based on supply and demand.
Answer:
In the BIS standardized framework model, the specific risk charge attempts to measure
the decline in the liquidity or credit risk quality of the trading portfolio over the holding
period.
Answer:
The prompt corrective action program of the FDIC Improvement Act allows a bank or
thrift to be placed into receivership when the book value of capital to assets falls below
2 percent.
Answer:
Insurance companies have had to deal with liability runs by policyholders.
Answer:
For life insurance companies, the distribution of premium income minus policyholder
liquidations is unpredictable.
Answer:
Initial public offerings (IPOs) are first-time issues of firms whose equity has not
previously traded in an organized market.
Answer:
Buying a floor means buying a put option on interest rates.
Answer:
An FI is exposed to liquidity risk because the average maturity of assets and the average
maturity of liabilities are often different on the FIs balance sheet.
Answer:
In the case of an insurance company failure, policyholders immediately receive a
payout of the cash surrender value of their policies.
Answer:
Wholesale cash management services allow corporate customers to minimize cash
balances and to monitor quickly cash transactions and balances.
Answer:
The SEC requires securities firms to follow capital rules that utilize market value
accounting.
Answer:
By rescheduling its debt, a borrower raises the present value of its future payments in
hard currencies.
Answer:
Commercial banks have had limited power to underwrite corporate securities since
Answer:
Selective hedging occurs by reducing the interest rate risk by selling sufficient futures
contracts to offset the interest rate risk exposure of a portion of the cash positions on the
balance sheet.
Answer:
According to Altman’s credit scoring model, which of the following Z scores would
indicate a low default risk firm? A. Less than 1.
B. 1.
C. Between 1 and 1.81.
D. Between 1.81 and 2.99.
E. Greater than 2.99.
Answer:
An investment banker agrees to underwrite an issue of 10 million shares of stock for
TWResearch, Inc. on a firm commitment basis. The investment banker pays $10.50 per
share to TWResearch, Inc. for the 10 million shares of stock. It then sells those shares
to the public for $11.20 per share.
If the investment bank can sell the shares for $9.75 per share, what is the profit (loss) to
the investment banker?A. Profit of $1,000,000.
B. Loss of $7,500,000.
C. Profit of $7,000,000.
D. Loss of $7,000,000.
E. Loss of $1,000,000.
Answer:
Which of the following best describes economies of scale? A. The average cost of
production decreases as the level of output increases.
B. The effects on costs related to managerial ability and other hard-to-quantify factors.
C. Cost savings are realized from using many of the same inputs to produce multiple
products.
D. The average cost of production increases as the level of output increases.
E. Cost increases are realized from using many of the same inputs to produce multiple
products.
Answer:
The risk that a foreign government may devalue the currency relates to A. credit risk.
B. sovereign risk.
C. foreign exchange risk.
D. liquidity risk.
E. interest rate risk.
Answer:
Which of the following is a benefit to the lender in a loan rescheduling? A. The FI may
become locked into a particular loan portfolio structure.
B. Rescheduling may close the market for future loans.
C. Rescheduling may create interruptions in the flow of international trade since letters
of credit may be more difficult to acquire.
D. Rescheduling may lower the present value of future payments in hard currencies.
E. The FI may receive additional fees, collateral, and option features on the loan.
Answer:
Given the exercise price of the option, what premium should be paid for this option?A.
$2.2339 per $1,000 of bond option purchased.
B. $4.0275 per $1,000 of bond option purchased.
C. $2.2752 per $1,000 of bond option purchased.
D. $2.2156 per $1,000 of bond option purchased.
E. $3.8211 per $1,000 of bond option purchased.
Answer:
Which of the following is a problem encountered while using more observations in the
back simulation approach? A. Past observations become decreasingly relevant in
predicting VAR in the future.
B. Calculations become highly complex.
C. Need to assume a symmetric (normal) distribution for all asset returns.
D. Requirement for calculating the correlations of asset returns.
E. Answers B and C only.
Answer:
Identify the primary regulator (s) of mutual funds. A. Fed.
B. SEC.
C. NASD.
D. State regulators.
E. Stock exchanges.
Answer:
If the bank decides to cut down on interest expenses by reducing its dependence upon
borrowed funds, what policy must the bank follow? A. Manage liquidity risk
exclusively through reserve asset management.
B. Manage liquidity risk exclusively through liability management.
C. Reduce the bank’s dependence upon demand deposits.
D. Increase interest income by increasing lending.
E. Increase interest income by increasing securities holdings.
Answer:
Daily earnings at risk (DEAR) is calculated as A. the price sensitivity times an adverse
daily yield move.
B. the dollar value of a position times the price volatility.
C. the dollar value of a position times the potential adverse yield move.
D. the price volatility times the √N.
E. More than one of the above is correct.
Answer:
Kansas Bank has a policy of limiting their loans to any single customer so that the
maximum loss as a percent of capital will not exceed 20 percent for both secured and
unsecured loans. The limit has been adopted under the assumption that if the unsecured
loan is defaulted, there will be no recovery of interest or principal payments. For loans
that are secured (collateralized), it is expected that 40 percent of interest and principal
will be collected.
What is the concentration limit (as a percent of capital) for unsecured loans made by
Kansas Bank? A. 5 percent.
B. 10 percent.
C. 15 percent.
D. 20 percent.
E. 25 percent.
Answer:
First Duration, a securities dealer, has a leverage-adjusted duration gap of 1.21 years,
$60 million in assets, 7 percent equity to assets ratio, and market rates are 8 percent.
What is the impact on the dealer’s market value of equity per $100 of assets if the
change in all interest rates is an increase of 0.5 percent [i.e., ΔR = 0.5 percent] A. +
$336,111.
B. -$0.605.
C. -$336,111.
D. +$0.605.
E. -$363,000.
Answer:
A bank holding company has a banking affiliate and a securities affiliate. If the
securities affiliate fails, it could cause the bank to also fail because A. the bank holding
company could use funds from the banking affiliate to provide funds to the securities
affiliate by downstreaming.
B. the bank holding company could use funds from the banking affiliate to provide
funds to the securities affiliate by upstreaming.
C. the bank holding company could induce the banking affiliate to make loans to the
securities affiliate.
D. Answers A and C only.
E. Answers B and C only.
Answer:
Counter party credit risk in OBS contractsA. is the risk that the counterparty will likely
default when he is in the money on a contract position.
B. refers to the risk that a counterparty will default when suffering large actual or
potential losses on its position.
C. requires the counterparty to return to the market and replace contracts at less
favorable terms.
D. All of the above.
E. None of the above.
Answer:
Confidence Bank has made a loan to Risky Corporation. The loan terms include a
default risk-free borrowing rate of 8 percent, a risk premium of 3 percent, an origination
fee of 0.1875 percent, and a 9 percent compensating balance requirement. Required
reserves at the Fed are 6 percent. What is the expected or promised gross return on the
loan? A. 11.19 percent.
B. 11.90 percent.
C. 12.29 percent.
D. 12.02 percent.
E. 12.22 percent.
Answer:
Historical analysis of recent changes in exchange rates in both the spot and futures
markets for a given currency reveals that spot rates are thirty percent more sensitive
than futures prices. Given this information, the hedge ratio for this currency is A. 0.70.
B. 0.77.
C. 1.30.
D. 1.43.
E. 1.86.
Answer:
The major buyers of U.S. domestic loans of non-distressed companies include all of the
following EXCEPT A. domestic banks.
B. foreign banks.
C. the Resolution Trust Corporation.
D. non-financial companies.
E. closed-end bank loan mutual funds.
Answer:
How can discriminant analysis be used to make credit decisions? A. By discriminating
between good and bad borrowers.
B. By using statistical analysis to predict the default probabilities.
C. By using statistical analysis to isolate and weight factors to arrive at default risk
classification of a commercial borrower.
D. By using statistical analysis to bypass qualitative credit decision making.
E. By updating FI bankruptcy experiences.
Answer:
Finance companies often prefer to lease equipment to customers becauseA.
repossession in the event of default is easier.
B. a lease with little or no down payment is more attractive to business customers.
C. the finance company receives the benefit of depreciation expense.
D. All of the above.
E. Answers A and C only.
Answer:
The nominal interest rate is equal to theA. real interest rate minus the inflation
premium.
B. real interest rate minus the trailing inflation rate.
C. real interest rate plus the expected interest rate increase.
D. real interest rate plus the expected inflation rate.
E. real interest rate plus the interest rate volatility.
Answer:
Which of the following considerations was not imposed by FDICIA in an attempt to
increase regulatory discipline?A. The act required improved accounting standards for
banks.
B. The act forbids the use of brokered deposits.
C. The act required an annual on-site examination of every bank.
D. The act gave private accountants a greater role in monitoring a bank’s performance.
E. The act produced prompt corrective action capital zones based on observable rules
rather than discretion of examiners.
Answer:
This legislation explicitly stated that banking and insurance were not closely related
activities. A. The McCarran-Ferguson Act of 1945.
B. Savings and Loan Holding Company Act of 1968.
C. The Garn-St.Germain Depository Institutions Act of 1982.
D. The Competitive Equality Banking Act of 1987.
E. The International Banking Act of 1978.
Answer:
In making credit decisions, which of the following items is considered a market-specific
factor? A. Whether the borrower’s capital structure is beyond the point where
additional debt increases the probability of loss of principal or interest.
B. Whether the relative level of interest rates will encourage the borrower to take
excessive risks.
C. Whether property can be pledged as collateral.
D. Whether the volatility of earnings could present a period where the periodic
payment of interest and principal would be at risk.
E. Whether the record of the borrower is sufficient to create an implicit contract.
Answer:
Which of the following factors may affect the promised return an FI receives on a loan?
A. The collateral backing of the loan.
B. Fees relating to the loan.
C. The interest rate on the loan.
D. The credit risk premium on the loan.
E. All of the above.
Answer:
If the exchange rate had fallen from $1.60/≤1 at the beginning of the year to $1.50/≤1 at
the end of the year, the net interest margin for the FI on its balance sheet investments
isA. 3.2875%.
B. -3.2875%.
C. 4%.
D. 8.75%.
E. 0.375%.
Answer:
From a regulatory perspective, what is the impact on book value capital of a 25 basis
point decrease in interest rates if the FI is holding a 20-year, fixed-rate, 11 percent
annual coupon $100,000 par value bond? A. A decrease of $250.
B. An increase of $250.
C. An increase of $2,023.
D. A decrease of $1,959.
E. No impact on capital since the book value is unchanged.
Answer:
The vast majority of credit derivative contracts held by commercial banks consist of
credit A. forward contracts.
B. futures contracts.
C. options.
D. swaps.
E. currency contracts.
Answer:
The net worth of a bank is the difference between the A. value of retained earnings and
the provision for loan losses.
B. market value of assets and the market value of liabilities.
C. book value of assets and book value of liabilities.
D. rate-sensitive assets and rate-sensitive liabilities.
E. None of the above.
Answer:
Which of the following is NOT a reason for FIs to sell loans? A. Loan diversification.
B. To reduce required reserves.
C. To reduce required capital.
D. To reduce costs of credit risk assessment.
E. To provide liquidity.
Answer:
In models that are based on loan loss ratios, a β that is found to be less than one for a
particular loan sector indicates thatA. the loans in that sector will soon be downgraded
soon.
B. the FI should increase its concentration in that loan sector due to the high rates of
return.
C. the loan losses in that sector are systematically lower relative to total loan losses.
D. the FI should decrease its exposure to that sector because losses are higher than the
rest of the portfolio
E. the calculation is in error because β is restricted to be greater than one.
Answer: