Historically credit card loans have had very low rates of default or credit risk when
compared to other assets that an FI may hold.
Answer:
Sellers of LDC debt in secondary markets include small FIs wishing to disengage
themselves from the LDC market.
Answer:
The Glass-Steagall Act allowed commercial banks to underwrite new issues of Treasury
securities.
Answer:
Banks with relatively high loan commitments face less liquidity risk exposure than
banks with a low level of loan commitments.
Answer:
The use of duration to predict changes in bond prices for given changes in interest rate
changes will always underestimate the amount of the TRUE price change.
Answer:
If the average maturity of assets is 5 years and the average maturity of liabilities is 7
years, then the FI has no interest rate risk exposure.
Answer:
Most nonbank FIs have foreign exchange risk exposure that is smaller than the
exposure of the large U.S. money-center banks.
Answer:
In the property-casualty insurance model, risk-based capital is a function of six different
risk categories.
Answer:
The payments from an annuity offered by a life insurance company can either begin
immediately or may be deferred to start at some future date.
Answer:
Because of its complexity, small depository institutions rarely use the repricing, or
funding gap, model.
Answer:
Individual mortgage loans in a pool sponsored by FNMA or FHLMC must be
non-assumable if the property is sold.
Answer:
The largest source of funding for securities service firms and investment banks as an
industry is repurchase agreements.
Answer:
Effective use of diversification principles allows an FI to reduce the total default risk in
a portfolio.
Answer:
Investment in technology has allowed FIs to lower the amount of non-interest income
as a percent of total operating income.
Answer:
The weighted-average life of a loan is always greater than the duration of the loan.
Answer:
Funds transferred on CHIPS are settled immediately.
Answer:
The major traders of mortgage-backed securities prior to the recent financial crisis were
investment banks and securities firms.
Answer:
The JPM RiskMetrics model is based on the assumption of a binomial distribution of
asset returns.
Answer:
Monte-Carlo simulation is a tool for considering portfolio valuation under all possible
combinations of factors that determine a security’s value.
Answer:
An FI is exposed to reinvestment risk by holding longer-term assets relative to
liabilities.
Answer:
All else equal, the value of an option increases with an increase in the variance of
returns in the underlying asset.
Answer:
The liabilities of depository institutions are significant components of the money
supply.
Answer:
The fact that the capital gain effect for rate decreases is greater than the capital loss
effect for rate increases is caused by convexity in the yield-price relationship.
Answer:
The largest property-casualty (PC) insurance companies have become less influential
over the past decade.
Answer:
Which of the following holds TRUE for the writer of a bond call option if interest rates
decrease?A. Makes profits limited to call premium
B. Makes losses limited to call premium
C. Potential to make large losses
D. Potential to make unlimited profits
E. Answers B and D only.
Answer:
Bernie Madoff and his infamous Ponzi scheme is an example of external operational
risk to the hedge funds he managed.
Answer:
To be an affiliate of a holding company, the parent must own at least 50 percent of the
shares of the affiliate company.
Answer:
One reason to exclude demand deposits when estimating a bank’s repricing gap is
because, by regulation, explicit interest cannot be paid on these deposits.
Answer:
A universal FI is an FI that has expanded its operations across country lines.
Answer:
The conflict of interest that occurs when a bank suggests the issuance of capital market
debt for the purpose of reducing bank loans under conditions of deteriorating or
questionable firm financial health is commonly referred to as bankruptcy risk
transference.
Answer:
Demand deposits A. have the same amount of withdrawal risk as interest-bearing
transaction accounts.
B. have less withdrawal risk than interest-bearing transaction accounts.
C. have more withdrawal risk than money market demand accounts.
D. have less withdrawal risk than money market demand accounts.
E. have the same amount of withdrawal risk as money market demand accounts.
Answer:
The price at which an open-end investment fund stands ready to redeem existing shares
is theA. strike price.
B. face value.
C. book value.
D. net asset value.
E. net worth.
Answer:
How can the portfolio manager use futures markets to protect against the risk exposure
of rising interest rates? A. Buy interest rate futures.
B. Sell currency futures.
C. Buy currency futures.
D. Sell interest rate futures.
E. Sell stock market index futures.
Answer:
What are the total risk-adjusted off-balance-sheet assets of the bank as defined under
the Basel II standards? A. $400 million.
B. $16.5 million.
C. $11.5 million.
D. $13.5 million.
E. $18.5 million.
Answer:
Which account refers to the reserve set-aside that contains the portion of a premium that
has been paid before insurance coverage has been provided. A. Unearned premiums.
B. Prepaid premiums.
C. Premium reserves.
D. Policy reserves.
E. Outstanding premiums.
Answer:
In a credit forward contract transaction A. the credit forward buyer is the lender who is
trying to hedge the loan.
B. the credit forward seller is the lender who is trying to hedge the loan.
C. the credit forward buyer will pay the credit forward seller if the credit spread at the
maturity of the forward contract is less than at the initiation of the contract.
D. the credit forward seller will pay the credit forward buyer if the credit spread at the
maturity of the forward contract is greater than at the initiation of the contract.
E. the characteristics of the benchmark bond must be the same as those of the bank’s
loan to the borrower.
Answer:
Which of the following situations pose a refinancing risk for an FI? A. An FI issues
$10 million of liabilities of one-year maturity to finance the purchase of $10 million of
assets with a two-year maturity.
B. An FI issues $10 million of liabilities of two-year maturity to finance the purchase
of $10 million of assets with a two-year maturity.
C. An FI issues $10 million of liabilities of three-year maturity to finance the purchase
of $10 million of assets with a two-year maturity.
D. An FI matches the maturity of its assets and liabilities.
E. All of the above.
Answer:
When an FI pre-commits to lending at a fixed rate, it is exposed to A. credit risk.
B. interest rate risk.
C. takedown risk.
D. funding risk.
E. exchange rate risk.
Answer:
A NOW account requires a minimum monthly balance of $500 if annual interest of 5
percent is to be earned monthly on its deposits. An account holder has maintained an
average balance of $300 for the first nine months of the year and $800 for the last three
months of the year. She has written an average of 20 checks a month and is not charged
for these services. However, it costs the bank $0.02 to process each check.
What is the average return earned (both explicit and implicit) by the account holder
over the full year? A. 2.98 percent.
B. 3.48 percent.
C. 4.28 percent.
D. 4.79 percent.
E. 5.35 percent.
Answer:
What is the net liquidity of the bank? A. $7 million.
B. $12 million.
C. $17 million.
D. $21 million.
E. $22 million.
Answer:
Which of the following measures the difference between the private costs of regulations
and the private benefits of those regulations for the producers of financial services?A.
Capital adequacy.
B. Agency costs.
C. Net regulatory burden.
D. Charter value.
E. Liquidity risk.
Answer:
Traditionally, regulation of FIs in the U.S. has been A. minimal, as evidenced by the
recent financial crisis.
B. extensive, as a result of the importance of FI to the economy.
C. minimal, because the free market is allowed to allocate financial resources.
D. extensive, because banks have monopoly power.
E. no different from regulation of nonfinancial firms.
Answer:
An FI has a 1-year 8-percent US $160 million loan financed with a 1-year 7-percent UK
≤100 million CD. The current exchange rate is $1.60/≤.
If the exchange rate remains the same, what is the dollar spread earned by the bank at
the end of the year? A. $750,000.
B. $1,000,000.
C. $1,250,000.
D. $1,600,000.
E. $1,750,000.
Answer:
This legislation restricts insurance companies from owning or being affiliated with full
service banks. A. The McCarran-Ferguson Act of 1945.
B. The Bank Holding Company Act of 1956.
C. The Garn-St. Germain Depository Institutions Act of 1982.
D. Savings and Loan Holding Company Act of 1968.
E. The International Banking Act of 1978.
Answer:
An organization form that limits business transactions to a single location is A. an unit
bank.
B. a multibank holding company.
C. a one-bank holding company.
D. an interstate bank.
E. a fully integrated universal bank.
Answer:
Which of the following observations concerning reinsurance is FALSE? A. It is an
alternative to managing risk on a PC insurer’s balance sheet.
B. Non-U.S. reinsurers are majority players in U.S. reinsurance business.
C. It does not enable the insurer to improve its capital position.
D. It can be used to limit losses and stabilize cash flows.
E. It represented 2.6 percent of total PC industry assets in 2012.
Answer:
The duration of all floating rate debt instruments is A. equal to the time to maturity.
B. less than the time to repricing of the instrument.
C. time interval between the purchase of the security and its sale.
D. equal to time to repricing of the instrument.
E. infinity.
Answer:
What are commercial letters of credit?A. They are contractual commitments to make a
loan up to a stated amount at a given interest rate in the future.
B. They are contracts that give the holder the right, but not the obligation, to buy or sell
an underlying asset at a pre-specified price for a specified time period.
C. They are nonstandard contracts between two parties to deliver and pay for an asset
in the future.
D. They are standardized contract guaranteed by organized exchanges to deliver and
pay for an asset in the future.
E. They are contingent guarantees sold by an FI to underwrite the trade or commercial
performance of the buyer of the guaranty.
Answer:
Which of the following is NOT a reason why international loans are more likely to be
rescheduled than international bonds? A. Governments appear to view the social costs
of default on bonds as less critical than on loans.
B. Many international loan contracts contain cross-default provisions that
automatically put into default all loans by that country in the case of one default.
C. Banks receive no subsidization from major governments to make international
loans.
D. Many international loan syndicates contain the same group of banks which
increases the cohesiveness of loan renegotiations.
E. Renegotiation of loans is easier because there are fewer banks in loan syndication
than there are bondholders in a debt offering.
Answer:
What is a fire-sale price? A. Market value of an asset.
B. Price received for an asset that has to be liquidated immediately.
C. Maximum price that will be received on sale of an asset irrespective of the time of
sale.
D. Replacement value of an asset.
E. Book value of an asset.
Answer:
Currently, this basic type of loan sale contracts comprises the bulk of loan sales trading.
A. Participations.
B. Originations.
C. Syndications.
D. Assignments.
E. Transfers.
Answer:
Which of the following is NOT a typical argument against market value accounting? A.
Market value accounting introduces an unnecessary degree of variability into an FI’s
earnings.
B. The use of market value accounting may reduce the willingness of FI’s to invest in
longer-term assets.
C. FI’s are increasingly trading, selling, and securitizing assets.
D. Market value accounting is difficult to implement.
E. Market value accounting may interfere with an FI’s special functions as lenders and
monitors of credit.
Answer:
If the loan portfolio consists of a five-year, 10 percent annual coupon loan selling at par,
what is the market, or economic, value of capital if interest rates increase 1 percent? A.
$35 million.
B. -$155 million.
C. $7 million.
D. -$7 million.
E. $0.
Answer:
Which of the following are used to link the hedge fund manager’s incentives more
closely to those of the fund investors and to reduce the manager’s incentive to increase
the risk of trades?A. High-water marks.
B. Discount rates.
C. Trade limits.
D. Management fees.
E. Low hurdle rates.
Answer:
If a 12-year, 6.5 percent semi-annual $100,000 T-bond, currently yielding 4.10 percent,
is used to deliver against a 6-year, 5 percent T-bond at 110-17/32, what is the
conversion factor? What would the buyer have to pay the seller? A. 1.1027; $110,531.
B. 1.2257; $135,478.
C. 1.8370; $253,830.
D. 1.3622; $163,339.
E. 1.7263; $141,788.
Answer:
The following are the net currency positions of a U.S. FI (stated in U.S. dollars).
Note: Net currency positions are foreign exchange bought minus foreign exchange sold
restated in U.S. dollar terms.
What is the FI’s total FX investment? A. US $671,500.
B. US $1,236,700.
C. -US $671,500.
D. -US $1,236,700.
E. 0
Answer:
The Basel capital requirements are based upon the premise that A. banks with riskier
assets should have higher capital ratios.
B. banks with riskier assets should have lower capital ratios.
C. banks with riskier assets should have lower absolute amounts of capital.
D. banks with riskier assets should have higher absolute amounts of capital.
E. there is no relationship between asset risk and capital.
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 limited interstate branching.
Answer:
What does R2 = 0 indicate? A. Changes in the spot rate and changes in the futures price
are perfectly correlated.
B. All observations between changes in spot rate and changes in futures price lie on a
straight line.
C. The spot and future exchange rates are expected to move imperfectly together.
D. The FI must sell a greater number of futures to hedge the cash position.
E. There is no statistical association between changes in spot rates and changes in
futures price.
Answer:
Assume a third FI (company C) operates in the same market with two FIs, and it has
$800 million in assets and total costs of $420 million. What can you conclude about the
cost structure of the FIs in this market?A. There are significant economies of scale
because companies A, B, and C coexist in the industry.
B. There are no significant economies of scale because both companies A and C are
much larger than company B.
C. There are no significant economies of scale because the unit costs are constant.
D. There are significant economies of scale beyond the $500 million asset size.
E. There are no significant economies of scale because the unit costs increase as size
increases.
Answer:
