The cost of stored liquidity management is the interest that must be paid on the stored
funds.
Answer:
An FI may be insolvent in market value terms even if the book value of equity is
positive.
Answer:
On-balance-sheet hedging involves making changes in the on-balance-sheet assets and
liabilities to protect FI profits from FX risk without the use of derivative securities.
Answer:
Exactly matching the maturities of assets and liabilities will provide a perfect hedge
against interest rate risk for an FI.
Answer:
In terms of rating agencies such as S&P, investment grade companies are those whose
bond ratings are grade B or above.
Answer:
The ability to refinance a mortgage with no prepayment penalty gives the borrower a
long-term put option on interest rates.
Answer:
Credit risk stems from non-repayment or delays in repayment of either principal or
interest on FI assets.
Answer:
The use of off-balance-sheet activities and instruments will always reduce the risk to a
bank.
Answer:
As compared to the BIS standardized framework model for measuring market risk, the
internal models allowed by the large banks are subject to audit by the regulators.
Answer:
Commercial loans have been decreasing in importance in bank loan portfolios.
Answer:
Duration increases with the maturity of a fixed-income asset at a decreasing rate.
Answer:
Which of the following good news and bad news effect is NOT TRUE when mortgage
interest rates decline, resulting in faster repayments?A. Lower market yields reduce the
discount rates on any mortgage cash flows and increase the present value of any given
stream of cash flows (good news effect).
B. Low yields lead to faster prepayment of the mortgage pool’s principal (good news
effect).
C. With early prepayments comes fewer interest payments in absolute terms (bad news
effect).
D. Faster cash flows due to prepayments can only be reinvested at lower interest rates
(bad news effect).
E. Faster cash flows due to prepayments can be reinvested at higher interest rates (good
news effect).
Answer:
The FDIC deposit insurance program is also available to credit unions.
Answer:
A spot contract specifies deferred delivery and payment.
Answer:
Small investors in mutual funds are often able to realize larger returns than they would
receive from bank deposits.
Answer:
For a given change in interest rates, fixed-rate assets with long-term maturities will
have smaller changes in price than assets with shorter maturities.
Answer:
The Volker Rule reduces the specialness of banks in maturity intermediation by
effectively forcing Dis to hold a matched maturity book.
Answer:
As of the first quarter 2012, non-interest expense was approximately 640 percent larger
than interest expense for all FDIC insured banks.
Answer:
GNMA is more active in the market for mortgage pass-through securities than either
FNMA or FHLMC.
Answer:
As of March 2012, the payday loan industry was regulated at the federal level.
Answer:
Contingent credit risk occurs with the use of derivative products and involves the
potential default by a counterparty.
Answer:
Loans originated by domestic U.S. banks cannot be sold to foreign banks.
Answer:
Pension fund management is a relatively small portion of the life insurance industry.
Answer:
Research suggests that the total risk exposure of a financial services organization could
actually increase if there is excessive product expansion in some nonbank lines.
Answer:
Property-casualty insurance companies typically have greater liquidity risk than life
insurance companies.
Answer:
The party in a swap that receives fixed-rate payments will always have zero basis risk
since the fixed-rate swap payments can be structured to cover the fixed-rate liability
payments.
Answer:
In terms of liquidity risk measurement, the financing gap is defined as rate sensitive
assets minus rate sensitive liabilities.
Answer:
Activity and performance trends in the investment banking industry are highly
correlated with general economic expansions and recessions.
Answer:
An up-front fee on a loan commitment rewards the FI for its willingness to stand ready
to lend the commitment amount during some agreed upon time period.
Answer:
One advantage of portfolio diversification methods is that they are applicable to all FIs,
regardless of their size.
Answer:
It is not possible to separate credit risk exposure from the lending process itself.
Answer:
A major weakness of the RiskMetrics Model is the need to assume a symmetric or
normal distribution of asset returns.
Answer:
Most loans originated and sold in the short-term market are secured loans to below
investment grade entities.
Answer:
Duration considers the timing of all the cash flows of an asset by summing the product
of the cash flows and the time of occurrence.
Answer:
In group life insurance, lower rates on policies can be offered because of cost
economies as a result of mass administration of plans and reduced selling and
commission costs.
Answer:
One cost of rescheduling for a lender is the potential placement of the lender on a
regulatory watch or problem list.
Answer:
The variance of returns of a portfolio of loans normally is equal to the arithmetic
average of the variance of returns of the individual loans.
Answer:
Willingness to post collateral may be a signal of more rather than less credit risk on the
part of the borrower.
Answer:
Credit risk exposes the lender to the uncertainty that only interest payments may not be
received.
Answer:
What is the reason for decrease in the number of futures contract needed to hedge a
cash position in case of tailing the hedge? A. Lower average transaction costs resulting
from higher number of transactions.
B. Interest income generated from reinvesting the cash flows generated by the futures
contracts.
C. Lack of perfect correlation between spot and futures prices.
D. The effect of conversion factor.
E. Hedging only a proportion of balance sheet position.
Answer:
Which of the following is a self-regulatory organization involved in the day-to-day
regulation of trading practices?A. Securities and Exchange Commission.
B. New York Stock Exchange.
C. Securities Investor Protection Corporation.
D. Chicago Board of Trade.
E. All of the above.
Answer:
The surrender value of an insurance policy is A. its promised payoff.
B. normally a portion of the contract’s face value.
C. its value upon bankruptcy.
D. the value of the junk bonds in the insurance company’s portfolio.
E. its holdup value.
Answer:
On Fedwire, daylight overdraft A. is a bank’s positive intraday balance in its reserve
account at the Fed.
B. does not occur under the current payments system.
C. invites a fee is 50 basis points, quoted as an annual rate on the basis of a 24-hour
day.
D. has a seasonal component.
E. is not a potential source of instability in the financial markets.
Answer:
How can market risk be defined in absolute terms? A. A dollar exposure amount or as a
relative amount against some benchmark.
B. The gap between promised cash flows from loans and securities and realized cash
flows.
C. The change in value of an FI’s assets and liabilities denominated in nondomestic
currencies.
D. The cost incurred by an FI when its technological investments do not produce
anticipated cost savings.
E. The capital required to offset a sudden decline in the value of its assets.
Answer:
A Hypothetical Rating Migration, or Transition Matrix, reflects all of the following
EXCEPT A. rating at which the portfolio ended the year.
B. transition probabilities.
C. rating at which the portfolio of loans began the year.
D. future migration expected in the portfolio.
E. the average proportions of loans that began the year.
Answer:
If Treasury bond futures prices are currently 89-00/32nds, what is the value of the
Treasury bond futures hedge position? A. $30,000,000.
B. $28,387,500.
C. $26,700,000.
D. $89,000,000.
E. $890,000.
Answer:
What is the total DEAR of Sumitomo’s trading portfolio if the correlation among assets
is assumed to be 0.0? A. -$100,000.
B. -$291,548.
C. -$350,000.
D. -$380,789.
E. -$400,000.
Answer:
Swapping an obligation to pay interest at a specified fixed or floating rate for payments
representing the total return on a loan or a bond of a specified amount is an example of
A. a commodity swap.
B. a credit swap.
C. a currency swap.
D. an equity swap.
E. an interest rate swap.
Answer:
Which of the following describes debt moratoria? A. Delay in repaying interest and/or
principal on debt because of government prohibition of such action.
B. Special reserves created on the balance sheet against which to write off bad loans.
C. The official terminology for a sovereign loan rescheduling.
D. Debt issued by a country that is swapped for an outstanding loan to that same
country.
E. Changing the contractual terms of a loan, such as its maturity and interest payments.
Answer:
Match the following pieces of legislation with the function achieved by each regulation
as stated in question
A. Securities Act of 1933
B. Securities Exchange Act of 1934
C. Investment Advisers Act
D. Investment Company Act
E. Insider Trading and Securities Fraud Enforcement Act of 1988
F. Market Reform Act of 1990
G. National Securities Markets Improvement Act of 1996
Sets rules to prevent conflicts of interest, fraud, and excessive fees or charges for fund
shares.
Answer:
Lenders may find it beneficial to reschedule sovereign country debt A. to avoid
political embarrassment.
B. for tax reasons.
C. to avoid marking the balance sheet to market.
D. to maintain good customer relations.
E. to keep from going bankrupt.
Answer:
Instead of a cap, if the bank had purchased a 3-year 6 percent floor and interest rates are
5 percent and 6 percent in years 2 and 3, respectively, what are the payoffs to the bank?
A. The bank will receive $50,000 at the end of year 2 and receive $50,000 at the end of
year 3.
B. The bank will receive $50,000 at the end of year 2 and pay $50,000 at the end of
year 3.
C. The bank will receive $0 at the end of year 2 and pay $50,000 at the end of year 3.
D. The bank will receive $0 at the end of year 2 and receive $50,000 at the end of year
3.
E. The bank will receive $50,000 at the end of year 2 and pay $0 at the end of year 3.
Answer:
What distinguishes financial intermediaries from industrial firms? A. FI balance sheets
are almost totally comprised of financial assets while commercial firms hold substantial
amounts of real assets.
B. Industrial firms are the customers of FIs, but FIs cannot be customers of industrial
firms.
C. FIs deal exclusively in primary securities, but industrial firms specialize in
secondary securities.
D. Industrial firms produce real goods or services while FIs only produce money.
E. Industrial firms are unregulated while FIs are heavily regulated.
Answer:
It is estimated that 75 percent of all hedge funds are located in A. Bermuda.
B. Hong Kong.
C. Cayman Islands.
D. Luxembourg.
E. San Marino.
Answer:
Which of the following refers to the fee charged on the unused balance of a loan
commitment.A. Up-front fee.
B. Facility fee.
C. Compensating balance.
D. Commitment fee.
E. Closing costs.
Answer:
The market in which foreign currency is traded for immediate delivery is the A. spot
market.
B. forward market.
C. futures market.
D. currency swap market.
E. London capital market.
Answer:
The following question are based on material in Appendix 8B
The market segmentation theory of the term structure of interest rates A. assumes that
investors will hold long-term maturity assets if there is a sufficient premium to
compensate for the uncertainty of the long-term.
B. assumes that the yield curve reflects the market’s current expectations of future
short-term interest rates.
C. assumes that market rates are determined by supply and demand conditions within
fairly distinct time or maturity buckets.
D. fails to recognize that forward rates are not perfect predictors of future interest rates.
E. assumes that both investors and borrowers are willing to shift from one maturity
sector to another to take advantage of opportunities arising from changing yields.
Answer:
A method of measuring the interest rate or gap exposure of an FI is A. the duration
model.
B. the maturity model.
C. the repricing model.
D. the funding gap model.
E. All of the above.
Answer:
In terms of liquidity risk measurement, the financing requirement is defined as A. total
deposits minus core deposits.
B. financing gap plus liquid assets.
C. rate sensitive assets minus rate sensitive liabilities.
D. total assets minus total liabilities.
E. average loans minus average deposits.
Answer:
Depository financial institutions include all of the following EXCEPT A. commercial
banks.
B. savings banks.
C. investment banks.
D. credit unions.
E. all of the above are depository institutions.
Answer:
The purchaser of an option must pay the writer a A. strike price.
B. market price.
C. margin.
D. premium.
E. basis.
Answer:
Which of the following is NOT an advantage of a finance company over a commercial
bank in providing services to small business customers? A. Finance companies are less
willing to accept risky customers than are banks.
B. Finance companies are not subject to regulations that restrict the type of products
and services they can offer.
C. Finance companies often have substantial industry and product expertise.
D. Finance companies generally have lower overhead than banks.
E. Finance companies do not accept deposits and therefore are not subject to bank-type
regulatory restrictions.
Answer:
Closed-end investment companies A. have a fixed number of shares.
B. can trade at a price that is greater than, equal to, or less than the NAV.
C. will trade at a different price as the number of shares of the fund changes.
D. A and C only.
E. A and B only.
Answer:
Consider a six-year maturity, $100,000 face value bond that pays a 5 percent fixed
coupon annually.
What is the price of the bond if market interest rates are 4 percent?A. $105,816.44.
B. $105,287.67.
C. $105,242.14.
D. $100,000.00.
E. $106,290.56.
Answer:
A weakness of migration analysis to evaluate credit concentration risk is that the A.
information obtained for this analysis is usually ex-post (i.e. after the fact).
B. information obtained for this analysis is ex-ante (i.e. before the fact).
C. analysis makes use of historical data classified only by industries.
D. analysis makes use of historical data classified by individual firms.
E. migration of firms may only be temporary.
Answer:
Which of the following is not a reasonable argument for the increase in the number of
banks that can compete in security underwriting activities? A. Small firms gain
increased access to the capital markets.
B. Lower commission and fee expense for firms issuing securities.
C. Issuing firms realize an increase in the degree of underpricing of new issues.
D. The market for securities underwriting will see a decline in market concentration.
E. More competition will increase the new issue proceeds to the issuing firm.
Answer:
What is the spread earned if the bank can sell one-year forward Euros at €1.755/$? A.
-0.70 percent.
B. -0.25 percent.
C. 0.00 percent.
D. 0.20 percent.
E. 0.50 percent.
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 meet the minimum reserve? A. $33.92 million.
B. $41.23 million.
C. $51.19 million.
D. $47.23 million.
E. $46.05 million.
Answer:
Which of the following is a problem in using discriminant analysis to evaluate credit
risk?A. It does not consider gradations of default.
B. The weights in the discriminant function are assumed to be dynamic.
C. It can include hard-to-quantify factors.
D. Data on loan specific information of banks are readily available.
E. It does not assume that variables are independent of one another.
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 bond?A. 4.677 years.
B. 5.000 years.
C. 4.674 years.
D. 4.328 years.
E. 4.223 years
Answer: