The export revenue variance (VAREX) should be negatively related to the probability
of debt rescheduling.
Answer:
Returns from domestic and foreign investments may not be perfectly correlated because
of different economic infrastructures and growth rates.
Answer:
Most portfolio managers will accept some level of risk above the minimum risk
portfolio if they expect to receive higher returns.
Answer:
The SEC requires mutual funds to disclose the risk to investors of frequent trading in
fund shares.
Answer:
The concentration of business among the largest firms in the securities firm/investment
banking business has increased significantly since the stock market crash of 1987.
Answer:
The required monitoring and surveillance efforts of several regulatory bodies in the case
of large holding companies with multi-subsidiaries may actually decrease the efficiency
of regulatory oversight.
Answer:
GNMA pass-through bondholders can be protected against default risk by FHA/VA
housing insurance.
Answer:
Open interest refers to the dollar amount of outstanding option contracts.
Answer:
As the U.S. dollar appreciates against the Japanese yen, U.S. goods become less
expensive to Japanese consumers.
Answer:
The Garn-St Germain Act is an interstate banking law that allows banks to branch on an
interstate basis rather than building more expensive holding company structures.
Answer:
Which of the following statements about leverage adjusted duration gap is TRUE?A. It
is equal to the duration of the assets minus the duration of the liabilities.
B. Larger the gap in absolute terms, the more exposed the FI is to interest rate shocks.
C. It reflects the degree of maturity mismatch in an FI’s balance sheet.
D. It indicates the dollar size of the potential net worth.
E. Its value is equal to duration divided by (1 + R).
Answer:
Runoff in demand deposits in a repricing model is typically lower during periods of
falling interest rates.
Answer:
Demand deposits pose a liquidity risk for FIs because funds may be withdrawn at any
time.
Answer:
In the U.S., a subsidiary bank can issue commercial paper to meet short-term liquidity
needs, but the bank’s parent holding company cannot.
Answer:
Controlled disbursement accounts are designed to reduce the delay in check clearing.
Answer:
Under Basel II (2006), regulatory minimum capital requirements for credit, market, and
operational risks are covered in the first pillar of the regulation.
Answer:
One method of guarding against credit risk is to assess a risk premium based on the
estimate of default risk exposure that a borrower carries.
Answer:
Bad debt expense and administrative costs are lower on home equity loans than other
typical loans of finance companies.
Answer:
The required contribution from surviving insurers to protect policyholders of failed
insurance companies usually is on a pro rata amount based on the relative asset size of
the surviving company.
Answer:
A plain vanilla fixed-floating interest rate swap may involve a third party that acts as a
broker, but is not likely to have any sophisticated special features.
Answer:
A loan credit rating is the same as bond credit rating in that it is based solely on the
financial soundness of the underlying corporation.
Answer:
The maturity gap model estimates the difference between interest earned and interest
paid during a given period of time.
Answer:
A forward contract has only one payment cash flow that occurs at the time of delivery.
Answer:
As a delegated monitor, an FI’s actions reduce agency costs.
Answer:
International expansion often produces revenue-risk diversification benefits for U.S.
banks.
Answer:
Insurance guaranty funds involve a permanent fund similar to the FDIC for the purpose
of compensating the policyholders of failed insurers.
Answer:
Buyers of LDC debt in secondary markets typically are large FIs who are willing to
accept write-downs of loans on their balance sheets.
Answer:
The greater the difference between fair market prices and fire-sale prices for assets, the
less liquid the DI’s portfolio of assets.
Answer:
The maturity of a portfolio of assets or liabilities is a weighted average of the maturities
of the assets or liabilities that comprise that portfolio.
Answer:
Which of the following is TRUE of X efficiencies?A. They result from diseconomies
of scope.
B. They are difficult to pin down in a quantitative fashion.
C. They result from diseconomies of scale.
D. They are a direct result of significant economies of scope.
E. They are a direct result of significant economies of scale.
Answer:
The value of an interest-only (IO) mortgage-backed strip is not sensitive to changes in
current market interest rates.
Answer:
Annuities are popular retirement savings products because investment returns on
contributions are tax-deferred.
Answer:
Which of the following observations is TRUE?A. Central bank directly controls both
inside and outside money.
B. Outside money is that part of the money supply produced by the private banking
system.
C. Inside money refers to the quantity of notes and coin in the economy.
D. Bulk of the money supply consists of inside money.
E. Central banks cannot vary the quantity of outside money.
Answer:
One advantage of asset securitization to a bank is the ability to originate new assets
before the original assets have matured.
Answer:
The Federal Reserve requires banks to complete schedule L with their quarterly call
reports to list the notional size and variety of off-balance-sheet activities.
Answer:
Which of the following observations is TRUE of open-end mutual funds?A. They have
a fixed number of shares outstanding.
B. The value of shares changes with the demand for the fund by investors.
C. Investors buy and sell shares on a stock exchange.
D. The demand for shares determines the number outstanding.
E. Shares may trade at a premium or discount.
Answer:
As compared to LCs, SLCs typically are used to cover contingencies that potentially are
more severe and which may not be trade related.
Answer:
The estoppel argument used in bank failures is based on the concept of financial
unsophistication.
Answer:
Firms in industries that have low costs of entry tend to enjoy larger profits than firms in
industries with high costs of entry.
Answer:
Which of the following is TRUE of the “netting” process in the swap market?A. It
decreases or mitigates the credit risk on swaps.
B. Both parties make payments to each other as a consequence.
C. It implies that the default exposure of the in-the-money party is the total fixed or
floating payment.
D. It does not happen across contracts.
E. Netting by novation increases the potential risk of loss.
Answer:
When using the RiskMetrics model, price volatility 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. None of the above.
Answer:
Which of the following statements does NOT reflect credit decisions at the retail level?
A. Loans to retail customers are more likely to be rationed through interest rates than
loan quantity restrictions.
B. Most loan decisions at the retail level tend to be accept or reject decisions.
C. Mortgage loans often are discriminated based on loan to price ratios rather than
interest rates.
D. Household borrowers require higher costs of information collection for lenders.
E. Retail loans tend to be smaller than wholesale loans.
Answer:
What is the impact of a 50 basis point increase in interest rates on the net asset value of
an open-end bond mutual fund holding a seven year, $100 million face value 7 percent
annual coupon bond selling at par? The fund has 10 million shares.A. An increase of
$0.24 per share.
B. A decrease of $0.265 per share.
C. An increase of $0.05 per share.
D. A decrease of $0.05 per share.
E. An increase of $0.265 per share.
Answer:
An FI finances a $250,000 2-year fixed-rate loan with a $200,000 1-year fixed-rate CD.
Use the repricing model to determine (a) the FI’s repricing (or funding) gap using a
1-year maturity bucket, and (b) the impact of a 100 basis point (0.01) decrease in
interest rates on the FI’s annual net interest income? A. $0; $0.
B. -$200,000; +$2,000.
C. -$200,000; -$2,000.
D. +$50,000; -$500.
E. -$200,000; -$1,000.
Answer:
What are, respectively, the credit equivalent value of the letters of credit, interest rate
swaps, and FX contracts? A. $10.0 million; $3.5 million; $5.0 million.
B. $50.0 million; $300 million; $50.0 million.
C. $5.0 million; $1.5 million; $5.0 million.
D. $10.0 million; $1.5 million; $5.0 million.
E. $5.0 million; $3.5 million; $5.0 million.
Answer:
Which of the following is not a characteristic of a loan commitment? A. The maximum
amount of the loan is negotiated at the time of the loan agreement.
B. The interest rate on fixed-rate loans is determined at the time of the loan is actually
taken down.
C. Floating-rate loans transfer the interest rate risk to the borrower.
D. The time period for which the loan is available is negotiated at the time of the loan
agreement.
E. In a floating-rate loan the borrower pays interest rate in force when the loan is
actually taken down.
Answer:
Millon National Bank has 10 million British pounds (£) in one-year assets and £8
million in one-year liabilities. In addition, it has one-year liabilities of 4 million euros
(€). Assets are earning 8 percent and both liabilities are being paid at a rate of 8 percent.
All interest and principal will be paid at the end of the year.
If the year-end spot exchange rate for the British pound is $1.50/£ and the liabilities pay
8 percent, what is the maximum that the € can appreciate and the bank still maintain a
zero profit? A. €1.30/$.
B. €1.33/$.
C. €1.35/$.
D. €1.50/$.
E. €1.60/$.
Answer:
Concern about the financial impact of an extension of the federal safety net has been
used to justify product segmentation on the grounds of A. safety and soundness issues.
B. economy of scale and scope issues.
C. conflict of interest issues.
D. deposit insurance issues.
E. regulatory oversight issues.
Answer:
What is the advantage of an options hedge over a futures hedge? A. The options hedge
has lower credit risk exposure.
B. The options hedge has lower transaction costs.
C. The options hedge is marked to market less frequently.
D. The options hedge offers the most downside risk protection.
E. The options hedge offers the most upside gain potential.
Answer:
An investment banker agrees to underwrite an issue of 5 million shares of stock for
NetChoice, Inc. on a best-efforts basis. The investment banker is able to sell 4.5 million
shares for $31.00 per share and it charges NetChoice, Inc. $0.375 per share sold.
What is the profit to the investment banker if all 5 million shares were sold for $35 per
share? A. Profit of $1,275,000.
B. Loss of $1,875,000.
C. Profit of $1,875,000.
D. Loss of $3,125,000.
E. Profit of $3,125,500.
Answer:
The largest asset class on U.S. commercial banks’ balance sheet as of September 30,
2012 was A. investment securities.
B. commercial and industrial loans.
C. real estate loans.
D. cash.
E. deposits.
Answer:
If at the end of the year, the exchange rate is $1.65/≤, what is the spread earned on the
loan by the FI in dollars after adjusting fully for exchange rates? A. -$3,750,000.
B. -$1,250,000.
C. +$1,250,000.
D. +$3,750,000.
E. +$5,000,000.
Answer:
Each of the following is a special function performed by FIs at a macro level EXCEPT
A. transmission of monetary policy.
B. credit allocation.
C. intergenerational wealth transfers or time intermediation.
D. denomination intermediation.
E. interbank lending and investing.
Answer:
During the most recent financial crisis, the FI segment that was most negatively
affected by credit default swaps was A. commercial banks.
B. insurance companies.
C. pension funds.
D. finance companies.
E. mutual funds.
Answer:
The Douglas amendment to the Bank Holding Company was passed to address a
potential loophole to interstate banking posed by A. unit banks.
B. multibank holding companies.
C. one-bank holding companies.
D. foreign banks.
E. reciprocal agreements.
Answer:
If the chosen maturity buckets have a time period that is too long, the repricing model
may produce inaccurate results because A. as the time to maturity increases, the price
volatility increases.
B. price changes will be overestimated.
C. there may be large differentials in the time to repricing for different securities within
each maturity bucket.
D. the FI will be unable to accurately measure the quantity of rate sensitive assets.
E. the FI will be unable to accurately measure the quantity of rate sensitive liabilities.
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 prompt corrective action requiring mandatory intervention
by regulators when a bank’s capital falls below certain levels.
Answer:
In market-making A. principal transactions are two-way transactions on behalf of
customers, such as a dealer working for a fee or commission.
B. principal transactions are when market makers take long or short positions and seek
profits on price movements.
C. market makers take inventory positions to stabilize the market in the securities.
D. Answers A and C only.
E. Answers B and C only.
Answer:
What is the cost to the uninsured depositors if the insured depositor transfer resolution
method is used by the regulators to resolve the bank failure? A. $0.
B. $20 million.
C. $30 million.
D. $40 million.
E. $60 million.
Answer:
What is the FI’s interest rate risk exposure?A. Exposed to increasing rates.
B. Exposed to decreasing rates.
C. Perfectly balanced.
D. Exposed to long-term rate changes.
E. Insufficient information.
Answer:
By late 2012, the number of branches of existing commercial banks in the U.S.
approximated ________, which was a(an) _________ from 1985. A. 83,000; increase
B. 43,000; increase
C. 68,000; decrease
D. 103,000; decrease
E. 72,000; increase
Answer:
Lenders may find it costly to reschedule non-accruing sovereign country debt because
A. it is politically embarrassing.
B. of tax reasons.
C. they might be subject to greater regulatory attention.
D. it is detrimental to maintaining good customer relations.
E. bankruptcy costs are high.
Answer:
Which of the following is an attempt to measure the absence of governmental constraint
on the production, consumption, and distribution of goods? A. Euromoney Index.
B. Index of Economic Freedom.
C. Corruption Perceptions Index.
D. Economist Intelligence Unit.
E. Institutional Investor Index.
Answer:
The provision of deposit insurance by the FDIC is similar to having the FDIC
________ on the assets of the bank that buys the deposit insurance. A. write a call
option
B. buy a call option
C. write a put option
D. having a secondary lien
E. enter into a swap agreement
Answer:
The recent financial crisis highlighted, in retrospect, how heavily households and
businesses had come to rely on FIs to act as specialists in A. generating profits and
lowering costs.
B. risk measurement and management.
C. investment advice and brokerage services.
D. time intermediation and denomination mediation.
E. derivative securities and interbank borrowing.
Answer:
An investor buys a $100,000 Treasury bond futures contract at 99-13/32nds. The
following day the Treasury bond futures settlement price is 99-26/32nds. What is the
one-day profit or loss on the Treasury bond futures position? A. A profit of $406.25.
B. A loss of $406.25.
C. A profit of $130.
D. A loss of $329.
E. A profit of $329.
Answer:
Borrower reputation is important in assessing credit quality because A. good past
payment performance perfectly predicts future behavior.
B. preservation of a good customer/FI relationship acts as an additional incentive to
encourage loan repayment.
C. FIs only lend to customers they know.
D. customers with poor credit histories always default on their loans.
E. a reputation for honesty is important in credit appraisal.
Answer:
Which of the following is a measure of the potential losses an FI could suffer as the
result of fire-sale disposal of assets? A. Quick ratio.
B. Liquidity index.
C. Financing gap and financing requirement.
D. Peer group ratio.
E. Current ratio.
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.
What is the duration of the above Treasury note? Use the asked price to calculate the
duration. Recall that Treasuries pay interest semiannually.A. 3.86 years.
B. 1.70 years.
C. 2.10 years.
D. 1.90 years.
E. 3.40 years.
Answer:
Managers can achieve the results of duration matching by using these to hedge interest
rate risk. A. Rate sensitive assets.
B. Rate sensitive liabilities.
C. Coupon bonds.
D. Consol bonds.
E. Derivatives.
Answer:
The uniform guidelines issued by bank regulators for trading in futures and forwardsA.
require a bank to establish trading limits.
B. require a bank to disclose large contract positions.
C. require a bank to establish internal guidelines regarding hedging activities.
D. All of the above are correct.
E. Answers A and C only.
Answer:
For an FI investing in risky loans or bonds, the probability is relatively the lowest for
which of the following occurrences? A. Repayment of principal and promised interest
in full.
B. Partial default on interest payments.
C. Complete default on interest payments.
D. Partial default of the principal remaining on a loan.
E. Complete default on principal and interest.
Answer:
The numbers provided are in millions of dollars and reflect market values:
What is
the duration of the municipal notes (the value of x)?A. 1.94 years.
B. 2.00 years.
C. 1.00 years.
D. 1.81 years.
E. 0.97 years.
Answer:
What is the required yield on this risky loan? A. 6.165 percent.
B. 6.00 percent.
C. 0.165 percent.
D. 5.835 percent.
E. None of the above.
Answer:
A level _____ of the Herfindahl-Hirschman Index (HHI) is considered to reflect a
highly concentrated market. A. above 1,000
B. above 10,000
C. between 1,000 and 1,500
D. above 1,800
E. below 1,000
Answer: