Recent evidence strongly suggests that economies of scope exist for both asset and
liability products, but not for off-balance-sheet products.
Answer:
Calculating the risk of a multi-asset trading portfolio requires the consideration of the
correlations of returns between the different assets.
Answer:
As compared to venture capital firms, private equity firms specialize in assisting
existing companies that have proven themselves in their industry.
Answer:
The total premium cost to an FI of hedging by buying put options is the price of each
put option times the number of put options purchased.
Answer:
Under FDICIA, the ability for regulators to show forbearance is limited by a set of
mandatory actions for each level of capital that an FI achieved.
Answer:
Although cloud computing is a technology that FIs can provide to business clients, the
FI itself seldom uses cloud computing in their own operations.
Answer:
Adjustable rate mortgages have interest rates that adjust periodically according to the
movement in some index.
Answer:
The securitization of mortgages involves the pooling of mortgage loans for sale in the
financial markets.
Answer:
In order to achieve a more stable revenue stream in a merger, the asset and liability
portfolios of the two institutions should have similar credit, interest rate, and liquidity
characteristics.
Answer:
CBOT catastrophe call spread options have variable payoffs that are capped at a level of
less than 100 percent of extreme losses.
Answer:
All tranches in a collateralized mortgage obligation (CMO) have the same prepayment
risk exposure.
Answer:
GNMA pass-throughs can assist an FI in resolving duration mismatch and illiquidity
risk problems.
Answer:
The current market value of an off-balance-sheet item is determined by finding the
current market value of the underlying item.
Answer:
Broker-dealers make very few adjustments to the book value net worth to reach an
approximate market value net worth.
Answer:
The notational value of swaps that are held by commercial banks as of 2012 was over
$130 trillion.
Answer:
FIs typically are concerned about the value at risk of their trading portfolios.
Answer:
As of 2012, Commercial banks are not allowed to own or invest in mutual funds.
Answer:
When a Special Purpose Vehicle (SPV) creates asset-backed securities, the SPV retains
ownership of the original assets.
Answer:
Fedwire is a wire transfer network operated through the Federal Reserve System to
assist banks in making financial transactions among themselves, on behalf of
themselves and customers.
Answer:
The DI manager can change the pricing on NOW accounts by changing both implicit
and explicit interest payments.
Answer:
A problem exists with the net stable funds ratio (NSFR) in that it does not include
off-balance-sheet activities.
Answer:
The Black-Scholes model does not work well to value bond options because of
violations of the underlying assumption of a constant variance of returns on the
underlying asset.
Answer:
Managing asset-side liquidity risk can involve either purchased liquidity management
or stored liquidity management.
Answer:
In a conventional interest rate swap agreement, the fixed-rate payer is attempting to
transform the variable-rate nature of its liabilities into fixed-rate liabilities.
Answer:
A lending decision to a firm in a foreign country should involve both a credit risk
analysis and a sovereign risk analysis.
Answer:
The risk-adjusted asset values of OBS market contracts or derivative instruments are
determined in a manner similar to the risk-adjusted asset values of contingent guarantee
claims.
Answer:
The front-end or back-end loads charged by some mutual funds often are combined
with 12b-1 fees.
Answer:
Swap transactions are homogeneous in nature so that the contracts can be easily traded
in the secondary market for swaps.
Answer:
The chief compliance officer of a mutual fund reports directly to the senior executives
of the fund management company.
Answer:
In the early 2000s the market risk capital requirement uniformly was a large proportion
of the total risk capital requirements for the largest US banks.
Answer:
The numbers provided are in millions of dollars and reflect market values:
What is
the weighted average duration of the liabilities of the FI?A. 5.00 years.
B. 5.35 years.
C. 5.70 years.
D. 6.05 years.
E. 6.40 years.
Answer:
Open-end mutual funds guarantee A. investors a minimum rate of return.
B. investors a minimum Net Asset Value (NAV).
C. to redeem investors’ shares upon demand at the daily Net Asset Value (NAV).
D. to earn the rate of return promised in the prospectus.
E. that there will be no load charges.
Answer:
What is the 10-day VAR of Sumitomo’s trading portfolio if the correlation among assets
is assumed to be -1.0?A. -$100,000.
B. -$316,228.
C. -$1,106,797.
D. -$1,204,161.
E. -$1,264,911.
Answer:
The following information details the current rate sensitivity report for Gotbucks Bank,
Inc. ($million).
How
will a decrease of 25 basis points in all interest rates affect Gotbuck’s net interest
income over a planning period of 91 days? A. +$0.1875 million.
B. +$0.1250 million.
C. -$0.1375 million.
D. +$0.0625 million.
E. 0
Answer:
Suppose that the doubling of a bank’s deposit funding allows the bank to triple its loan
output. What can you conclude about the bank’s production technology? A. It exhibits
economies of scale using the production approach.
B. It exhibits diseconomies of scale using the production approach.
C. It exhibits diseconomies of scale using the intermediation approach.
D. It exhibits economies of scale using the intermediation approach.
E. It exhibits neither economies nor diseconomies of scale.
Answer:
Credit Unions were generally less affected than other depository institutions by the
recent financial crisis becauseA. they had relatively more assets in consumer loans than
other DIs.
B. they had relatively more residential mortgages.
C. they hold more government and agency securities, on average.
D. they hold less government and agency securities, on average.
E. Answers A and C only.
Answer:
The process of providing custody and escrow services, clearance and settlement
services, and research and other advisory services by a securities firm involves the
function of A. mergers and acquisitions.
B. market making.
C. investment banking.
D. back-office functions.
E. cash management services.
Answer:
The DEAR of a bank’s trading portfolio has been estimated at $5,000. It is assumed that
the daily earnings are independently and normally distributed.
What is the 10-day VAR? A. $5,000.
B. $10,000.
C. $15,811.
D. $22,361.
E. $50,000.
Answer:
Market risk measurement considers the return-risk ratio of traders, which may allow a
more rational compensation system to be put in place. Thus market risk measurement
(MRM) aids in A. regulation.
B. resource allocation.
C. management information.
D. setting limits.
E. performance evaluation.
Answer:
What is the approximate yield on a 20-year 10 percent annual coupon LDC bond selling
at 75 cents on the dollar? (choose the closest answer) A. 10 percent.
B. 40 percent.
C. 14 percent.
D. 25 percent.
E. Cannot be determined.
Answer:
What is float? A. Overnight payments via CHIPS or Fedwire.
B. Encoding, endorsing, microfilming, and handling customers’ checks.
C. Time it takes a check to clear at a bank.
D. Management of multiple currency and security portfolios for trading and investment
purposes.
E. Interval between the dispatch of a bill and actual payment by the consumer.
Answer:
The following are protective mechanisms that have been developed by regulators to
promote the safety and soundness of the banking system EXCEPT A. encouraging
banks to rely more on deposits rather than debt or capital as a cushion against failure.
B. encouraging banks to limit lending to a single customer to no more than 10% of
capital.
C. the provision of deposit insurance.
D. the periodic monitoring of banks.
E. encouraging banks to produce timely accounting statements and reports.
Answer:
The following are the assets and liabilities of a government security dealer.
Use the repricing model to
determine the funding gap for a maturity bucket of 30 days. A. -$425 million.
B. -$95 million.
C. -$10 million.
D. -$475 million.
E. +$150 million.
Answer:
What will be the cost of using a strategy of purchased liquidity management to meet the
expected decline in deposits? Assume that the bank intends to keep $2 million in cash
as liquidity precaution. A. $10,000.
B. $15,000.
C. $30,000.
D. $40,000.
E. $50,000.
Answer:
The Securities Investor Protection Corporation (SIPC) protects investors against losses
of up to ____ on securities firm failures. A. $100,000
B. $200,000
C. $500,000
D. $1,000,000
E. $25,000,000
Answer:
In calculating the net capital for a securities firms, which of the following is NOT an
adjustment to the book value of net worth? A. The market value of net worth is
calculated on a day-to-day basis.
B. A series of adjustments are made to reflect unrealized profits and losses,
subordinated liabilities, deferred taxes, options, and futures.
C. The amount of securities that cannot be publicly sold are subtracted.
D. All assets not readily converted into cash are subtracted.
E. Haircuts to reflect potential market value fluctuations in asset values are deducted.
Answer:
The
average interest earned on the loans is 6 percent and the average cost of deposits is 5
percent. Rising interest rates are expected to reduce the deposits by $3 million.
Borrowing more debt will cost the bank 5.5 percent in the short term.
What will be the size of the bank if a stored liquidity management strategy is adopted?
A. $9 million.
B. $11 million.
C. $12 million.
D. $14 million.
E. $15 million.
Answer:
The credit risk on swaps is considered to be A. more than the credit risk on loans.
B. less than the credit risk on loans.
C. same as the credit risk on loans.
D. is negligible compared to the credit risk on loans.
E. less likely to cause an FI to fail than is interest rate risk.
Answer:
If the bank receives a quote of $0.1975/€ for one-year forward rates for the Euro (to buy
and to sell), what is the arbitrage profit for the bank if it uses $1,000,000 as the notional
amount? A. $5,000.
B. $16,500.
C. $19,350.
D. $22,000.
E. $25,675.
Answer:
What should be the trading price of the BP futures contract at the end of the year in
order for the FI to be perfectly hedged? That is, the FI earns its original anticipated
spread without any effects of exchange rate changes? A. $1.60/≤.
B. $1.61/≤.
C. $1.62/≤.
D. $1.63/≤.
E. $1.64/≤.
Answer:
The following question are based on material in Appendix 8B
Which theory of term structure argues that individual investors have specific maturity
preferences? A. The unbiased expectations theory.
B. The liquidity premium theory.
C. The loanable funds theory.
D. The market segmentation theory.
E. None of the above.
Answer:
Allright Insurance has total assets of $140 million consisting of $50 million in 2-year, 6
percent Treasury notes and $90 million in 10-year, 7.2 percent fixed-rate Baa bonds.
These assets are funded by $100 million 5-year, 5 percent fixed rate GICs and equity.
The duration of the T-notes, Baa bonds, and GICs is 1.93 years, 6.9 years, and 4.5 years
respectively. What is the leverage-adjusted duration gap for Allright? A. 1.99 years.
B. 5.13 years.
C. 0.63 years.
D. 1.91 years.
E. 1.0 year.
Answer:
The largest liability on FDIC-insured savings institutions’ balance sheet as of year-end
2012 was A. commercial paper.
B. small time and savings deposits.
C. repurchase agreements.
D. FHLBB advances.
E. cash.
Answer:
Customer loans are classified on a DI’s balance sheet as A. assets, because the DI’s
major asset is its client base.
B. liabilities, because the customer may default on the loan.
C. assets, because the DI earns servicing fees on the loan.
D. liabilities, because the DI must transfer funds to the borrower at the initiation of the
loan.
E. assets, because DIs originate and monitor loan portfolios.
Answer:
What is the most important factor determining bankruptcy, according to the Altman
Z-score model? A. Working capital to assets ratio.
B. Retained earnings to assets ratio.
C. Earnings before interest and taxes to assets ratio.
D. Market value of equity to book value of long-term debt ratio.
E. Sales to assets ratio.
Answer:
Which of the following partially explains why cash management services have not
attracted customers in Europe to the degree that they have in the US?A. Prevalence of
nationwide branching and banking in Europe.
B. Prevalence of interregional banking restrictions in Europe.
C. Prohibitive charges imposed for the use of domestic telephone lines in Europe.
D. Prohibitive charges imposed on such services in Europe.
E. None of the above.
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.
Calculate the percentage change in this bond’s price if interest rates on comparable risk
securities increase to 11 percent. Use the duration valuation equation.A. +4.25 percent
B. -4.25 percent
C. +8.58 percent
D. -3.93 percent
E. -3.84 percent
Answer:
The merger bid premium usually is defined asA. the difference between the price paid
for the company and the market value immediately prior to the merger announcement.
B. the ratio of the purchase price of a target bank’s equity to its book value.
C. the difference between the market value immediately prior to the merger
announcement and the book value of the company.
D. All of the above.
E. Answers A and B only.
Answer:
Which of the following is NOT considered a trading activity of securities firms? A.
Position trading.
B. Pure arbitrage.
C. Liquidity trading.
D. Risk arbitrage trading.
E. Program trading.
Answer:
Which of the following observations concerning mortgages is NOT valid? A. They
may refer to loans secured by lien on residential houses.
B. They are a minor component in finance company portfolios.
C. Mortgage-backed securities are created by securitization.
D. Home equity loans are examples of second mortgages.
E. The interest on a mortgage loan secured by a primary residence is not tax deductible
to the homeowner.
Answer:
In a loan participation A. the holder (buyer) is not a party to the underlying credit
agreement, so the initial contract between the loan seller and the borrower remains in
place after the sale.
B. the holder (buyer) is a party to the underlying credit agreement, so the initial
contract between the loan seller and the borrower remains in place after the sale.
C. the holder (buyer) can vote only on material changes to the loan contract such as
changes in interest rate or collateral backing the loan.
D. Answers A and C only.
E. Answers B and C only.
Answer:
Separate accounts business of a life insurance company represents A. policies written
that cover individuals as a group.
B. liabilities owed to other life insurance companies as a result of reinsurance.
C. the cumulative cash value paid to policyholders if the policies are terminated before
maturity.
D. a fund established separately from the other funds of the insurance company and
invested without regard to the usual diversification restrictions.
E. the cumulative price that the company may repurchase policies from existing
customers.
Answer:
The Euromoney Index for a given country currently is based on the A. spread of the
required interest rate on that country’s debt over LIBOR.
B. a number of economic and political factors specifically weighted according to their
relative importance in determining country risk problems.
C. a combined economic and political risk survey of economists and political analysts
presented on a 100-point scale.
D. surveys of the loan officers of major multinational banks.
E. historical default rates of that country’s loans.
Answer:
What is the concentration limit (as a % of capital) for secured loans made by this bank?
A. 10 percent.
B. 20 percent.
C. 33 percent.
D. 40 percent.
E. 50 percent.
Answer: