By regulation, the payments on an annuity contract must stop when the annuity holder
dies.
Answer:
The Clearing House Interbank Payments System (CHIPS) is an international wire
transfer system owned by the participating banks in the countries in which it is used.
Answer:
The primary difficulty in arranging a syndicated loan is having all of the various
lending and borrowing parties reach agreement on terms, rates, and collateral.
Answer:
One cause of residential mortgage prepayment risk is the sale of the mortgaged
property.
Answer:
Mutual funds tend to have less exposure to liquidity risk than banks and thrifts.
Answer:
Long-term violations of the interest rate parity relationship may occur if imperfections
in the international financial markets are allowed to exist.
Answer:
Securities firms and investment banks are more involved internationally than other
member of the financial services industry.
Answer:
Buying a call option on a bond ensures a bank that it will be able to sell the bond at a
given point in time for a price at least equal to the exercise price of the option.
Answer:
Demand deposits are a costless source of funds and have a high degree of withdrawal
risk.
Answer:
Highly leveraged transaction (HLT) loans typically are used to finance new fixed assets
of an ongoing firm.
Answer:
Net asset value is the current value of a mutual fund’s assets divided by the number of
shares outstanding.
Answer:
Because a bad-bank bank has a difficult time gaining deposits for funding, it also has a
difficult time devising an optimal strategy to manage and dispose of bad assets.
Answer:
An FI is short-funded when the maturity of its liabilities is less than the maturity of its
assets.
Answer:
One advantage of caps, collars, and floors is that because they are exchange-traded
options there is no counterparty risk present in the transactions.
Answer:
Most large banks in the U.S. directly issue commercial paper to meet their liquidity
needs.
Answer:
Which of the following observations is NOT TRUE?A. Traditionally, DI managers
have relied on purchased liquidity management as the primary mechanism of liquidity
management.
B. Today, many DIs rely on purchased liquidity management to deal with the risk of
cash shortfalls.
C. The largest banks with access to the money market and other nondeposit markets for
funds rely on purchased liquidity management to deal with the risk of cash shortfalls.
D. Purchased liquidity management and stored liquidity management are ways of
managing a drain on deposits.
E. None of the above.
Answer:
A total return credit swap is eliminates interest rate risk as well as credit risk.
Answer:
Mortgage-backed bonds are a form of on-balance-sheet securitization.
Answer:
Which of the following is NOT TRUE of a loan that is sold without recourse?A. The
loan is removed from the FI’s balance sheet.
B. The FI has no explicit liability if the loan eventually goes bad.
C. The FI that originated the loan bears all the credit risk.
D. The buyer can put the loan back to the selling FI.
E. None of the above.
Answer:
Seeking international partners is a recent trend among securities firms and investment
banks.
Answer:
Liquid funds can be obtained by a DI through unlimited borrowing in the money or
purchased funds markets.
Answer:
The Bank for International Settlements (BIS) requires depository institutions to have
interest rate risk management systems.
Answer:
Rescheduling loans is easier than renegotiating payments on bonds because the same
FIs typically form loan syndicates that create cohesiveness in negotiations.
Answer:
Property-casualty insurers tend to have a higher level of liquidity risk than life insurers.
Answer:
The amount of leverage of a borrower and the probability of default are positively
related, but only after some minimum level of debt.
Answer:
In a conventional interest rate swap agreement, the swap buyer agrees to make a
number of fixed interest rate payments to the swap seller.
Answer:
The initial steps of cross selling financial products can easily occur with computer
technology.
Answer:
FNMA does not hold the mortgages it purchases on its balance sheet, thereby
transferring credit and default risk to investors purchasing its securities.
Answer:
Employee fraud is a type of operational risk to a financial institution.
Answer:
The traditional duration equation can be used to measure the capital at risk on the loan.
Answer:
When conducting a firm commitment offering, the investment bank is acting as an
agent on behalf of the issuing company or government.
Answer:
The risk-based capital model in the life insurance industry includes asset risk, business
risk, insurance risk, and interest rate risk.
Answer:
The Resolution Trust Corporation (RTC), a government agency formed to manage
failed S&Ls in the early 1990s, followed a Good Bank/Bad Bank concept in the sale of
loans.
Answer:
An interest-only (IO) mortgage pass-through strip has a claim on the present value of
interest payments on the mortgages in a GNMA pool.
Answer:
A forward contract specifies immediate delivery for immediate payment.
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 conclusions can you draw from the duration gap in your answer to the previous
question?A. The market value of the dealer’s equity decreases slightly if interest rates
fall.
B. The market value of the dealer’s equity becomes negative if interest rates rise.
C. The market value of the dealer’s equity decreases slightly if interest rates rise.
D. The market value of the dealer’s equity becomes negative if interest rates fall.
E. The dealer has no interest rate risk exposure.
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 when the FI needed to repatriate the principal and interest on the
loan. What would the dollar loan revenues at the end of the year be as a return on the
original dollar investment? A. 13%.
B. 12.55%.
C. 16%.
D. 8.75%.
E. 7.25%.
Answer:
For property-casualty insurers, loss rates are more predictable for A. low-severity
high-frequency events.
B. low-severity low-frequency events.
C. high-severity high-frequency events.
D. high severity low-frequency events.
E. low severity medium-frequency events.
Answer:
Which of the following rankings of liabilities is correct if they are ranked by
withdrawal risk from riskiest to least risky? A. Federal funds; demand deposits;
certificates of deposit.
B. Demand deposits; money market demand accounts; certificates of deposit.
C. Repurchase agreements; money market demand accounts; certificates of deposit.
D. Certificates of deposit; federal funds; demand deposits.
E. Passbook savings accounts; money market demand accounts; certificates of deposit.
Answer:
What is the 10-day VAR assuming the daily returns are independently distributed?A.
-$714,009.31
B. -$778,270.16
C. -$389,135.09
D. -$428,405.58
E. -$471,246.16
Answer:
An “adverse material changes in conditions” clause is included in loan commitments to
protect the FI against A. credit risk.
B. interest rate risk.
C. takedown risk.
D. funding risk.
E. exchange rate risk.
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 law allows bank holding companies to convert out-of-state subsidiary banks into
branches of a single interstate bank.
Answer:
In firm commitment underwriting, the underwriter’s spread is A. the bid ask spread in
the secondary market.
B. the interest spread earned by the FI.
C. the difference between the underwriter’s buy and sell price.
D. the difference between the offer price under a firm commitments as opposed to a
best efforts underwriting contract.
E. the commission per share.
Answer:
If rates increase 1 percent, what will be the change in value of the option position? A.
-$1,660,525.
B. +$1,660,525.
C. -$2,430,511.
D. -$765,253.
E. +$2,430,511.
Answer:
Advantages of depositing funds into a typical bank account instead of directly buying
corporate securities include all of the following EXCEPT A. monitoring done by the
bank on your behalf.
B. increased liquidity if funds are needed quickly.
C. increased transactions costs.
D. less price risk when funds are needed.
E. better diversification of deposited funds.
Answer:
An investment banker agrees to underwrite an issue of 10 million shares of stock for
Rochester Industries on a best-efforts basis. The investment banker is able to sell 8
million shares for $10.50 per share, and it charges Rochester Industries $0.225 per share
sold.
What is the profit to the investment banker if it is able to sell 8 million shares for
$10.50 per share? 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. Profit of $1,800,000.
Answer:
The most numerous of the institutions that define the depository institutions segment of
the FI industry in the US is (are) A. savings associations.
B. small commercial banks.
C. large commercial banks.
D. savings banks.
E. credit unions.
Answer:
Using market risk management (MRM) to identify the potential return per unit of risk
in different areas by comparing returns to market risk so that more capital and resources
can be directed to preferred trading areas is considered to be which of the following?
A. Regulation.
B. Resource allocation.
C. Management information.
D. Setting limits.
E. Performance evaluation.
Answer:
What does the Moody’s Analytics model use as equivalent to holding a call option on
the assets of the firm? A. The value of equity in a firm.
B. Total liabilities of a firm.
C. Net income of a firm.
D. Dividend yield of investments.
E. Short-term debt liabilities of a firm.
Answer:
According to Altman’s credit scoring model, this firm should be considered A. a high
default risk firm.
B. an indeterminant default risk firm.
C. a low default risk firm.
D. a lowest risk customer.
E. Either C or D.
Answer:
An investment banker agrees to underwrite an issue of 5 million shares of stock for
NetChoice, Inc. on a firm commitment basis. The investment banker pays $31.50 per
share to NetChoice, Inc. for the 5 million shares of stock. It then sells those shares to
the public for $30.00 per share.
How much money does NetChoice, Inc. receive? A. $150,000,000.
B. $157,500,000.
C. $112,000,000.
D. $125,000,000.
E. $105,000,000.
Answer:
In a crisis, which of the following are more likely to withdraw funds quickly from
banks and thrifts? A. Correspondent banks.
B. Small business corporations.
C. Individual depositors.
D. Mutual funds.
E. Foreign depositors.
Answer:
The primary advantage to the investor of a brokerage firm cash management account
(CMA) over commercial bank deposit accounts is that A. no FDIC insurance is
required on CMAs.
B. no regulatory oversight of CMAs.
C. they make it easier to buy and sell securities using funds from the CMA.
D. CMAs guarantee higher rates of return than money market deposit accounts.
E. Regulation Q interest rate ceilings do not apply to CMAs.
Answer:
In which of the following FX trading activities does the FI not assume FX risk? A. The
purchase and sale of foreign currencies for the purpose of profiting from forecasting or
anticipating future movements in FX rates.
B. The purchase and sale of foreign currencies to allow customers to partake in and
complete international commercial trade transactions.
C. The purchase and sale of foreign currencies for the purpose of offsetting customer
exposure in any given currency.
D. The purchase and sale of foreign currencies to allow customers to take positions in
foreign real and financial investments.
E. Answers B and D only.
Answer:
What is globalization? A. The process that causes an FI to focus more intensely on
their own domestic market.
B. Acceptance of the Federal Reserve as the regulator of the world financial system.
C. Usually refers to the initiation of GLOBEX, a new international financial
communications and trading system.
D. The evolution of markets and institutions so that geographic boundaries do not
restrict financial transactions.
E. Joint ownership of international electronic payments systems.
Answer:
The results can be interpreted asA. If the total loan losses of the bank measured as a
percentage of total loans is 2 percent, the losses in the real estate sector, measured as a
percentage of total loans, is 1.2 percent.
B. If the total loan losses of the bank measured as a percentage of total loans is 2
percent, the losses in the commercial sector, measured as a percentage of total loans, is
3.2 percent.
C. If the total loan losses of the bank measured as a percentage of total loans is 2
percent, the losses in the commercial sector, measured as a percentage of total loans, is
6.4 percent.
D. If the total loan losses of the bank measured as a percentage of total loans is 3
percent, the losses in the commercial sector, measured as a percentage of total loans, is
5.2 percent.
E. If the total loan losses of the bank measured as a percentage of total loans is 3
percent, the losses in the real estate sector, measured as a percentage of total loans, is 4
percent.
Answer:
The first mutual fund was founded in this city in 1924. A. New York, New York
B. San Francisco, California
C. Boston, Massachusetts
D. London, England
E. Paris, France
Answer:
What is the minimum Tier 1 and Total risk-based capital Fifth Bank needs in order to be
considered adequately capitalized under Basel III capital requirements for both
on-balance sheet and off-balance sheet items?A. $40.71 million; $63.0 million.
B. $38.91 million; $51.88 million.
C. $51.88 million; $64.85 million.
D. $50.40 million; $67.5 million.
E. $38.91 million; $50.40 million.
Answer:
The following information is available on the average costs of the three major banks in
a given local market. Bank A has assets of $10 million and average costs are 15 percent,
Bank B has assets of $20 million and average costs of 13 percent while Bank C has
assets of $30 million with average costs of 12 percent. Average costs are measured as a
proportion of total assets.
The above figures indicate that A. there are significant economies of scale still present
in the local markets.
B. there are significant diseconomies of scale still present in the local markets.
C. there are significant economies of scope still present in the local markets.
D. there are significant diseconomies of scope still present in the local markets.
E. there is not enough information to determine economies of scale or scope.
Answer:
Which of the following is the is a source of prepayment risk on a typical FNMA
mortgage-backed pass-through security? A. Refinancing.
B. Default risk.
C. Housing turnover.
D. Non-assumable mortgages.
E. All of the above.
Answer:
If over the first 12 days of the current reserve maintenance period the average daily
reserve held were $37 million, what does the bank need to hold as reserves over the last
two days to exactly meet the reserve requirement? A. $86.42 million.
B. $91.46 million.
C. $79.63 million.
D. $99.14 million.
E. $87.11 million.
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.
If the investment bank sells 4.5 million shares for $29 per share, how much money does
NetChoice, Inc. receive? A. $145,000,000.
B. $130,500,000.
C. $143,125,000.
D. $128,812,500.
E. $115,762,500.
Answer:
Under the option pricing model of deposit insurance, the cost of the insurance A.
decreases as the insured deposit base increases.
B. decreases as the period over which the insurance coverage extends is increased.
C. increases with the level of risk of the assets held by the DI increase.
D. decreases with market interest rates.
E. increase as the level of leverage used by the DI decreases.
Answer:
An attempt by a market maker to earn a profit on the price movements of securities by
taking inventory positions for its own account is calledA. risk arbitrage.
B. an agency transaction.
C. best efforts underwriting.
D. pure arbitrage.
E. a principal transaction.
Answer:
The insured depositor transfer method of failure resolution A. results in the closure of
the failed bank.
B. results in the merger of the failed bank into a stronger entity.
C. keeps the failed bank operating for a short period of time.
D. minimizes the FDIC’s out of pocket costs of resolving a failed DI.
E. forces insured depositors to bear some losses.
Answer:
Which of the following is NOT a type of consumer loan? A. Personal cash loan.
B. Mobile home loan.
C. Private-label credit card loan.
D. Equipment loan.
E. Motor vehicle loan.
Answer:
Which of the following is NOT a major function of financial intermediaries? A.
Brokerage services.
B. Asset transformation services.
C. Information production.
D. Management of the nation’s money supply.
E. Administration of the payments mechanism.
Answer: