1. Because the economies of the U.S. and other overseas countries have become more integrated, the risks of
financial intermediation have decreased.
2. Interest rate risk stems from the impact of both anticipated and unanticipated changes in interest rates on FI
profitability.
3. An FI is short-funded when the maturity of its liabilities is less than the maturity of its assets.
4. An FI is exposed to reinvestment risk by holding longer-term assets relative to liabilities.
5. An FI that is short-funded faces the risk that the return of reinvesting assets could exceed the cost of funding
those assets.
6. Exactly matching the maturities of assets and liabilities will provide a perfect hedge against interest rate risk
for an FI.
7. Matching the maturities of assets and liabilities supports the asset transformation function of FIs.
8. Funding a portion of assets with equity capital means that hedging risk does not require perfect matching of
the assets and liabilities.
9. Active trading of assets and liabilities creates market risk.
10. FIs typically are concerned about the value at risk of their trading portfolios.
11. Market risk is present whenever an FI takes an open position and prices change in a direction opposite to
that expected.
12. FIs that make loans or buy bonds with long maturity liabilities are more exposed to interest rate risk than FIs
that make loans or buy bonds with short maturity liabilities.
13. The relationship of a limited or fixed upside return with a high probability and the potential large downside
loss with a small probability is an example of an asset’s credit risk to an FI.
14. Credit risk stems from non-repayment or delays in repayment of either principal or interest on FI assets.
15. Credit risk exposes the lender to the uncertainty that only interest payments may not be received.
16. In the case where a borrower defaults on a loan, the FI may lose only a portion of the interest payments and
a portion of the principal that was loaned.
17. Historically credit card loans have had very low rates of default or credit risk when compared to other assets
that an FI may hold.
18. 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.
19. Managerial monitoring efficiency and credit risk management strategies affect the shape of the risk of the
loan return distribution.
20. Individuals have an advantage over FIs in that individuals more easily can diversify away some of the credit
risk of their asset portfolios.
21. Similar to loans, non-government bonds expose a lender to principal payment default risk.
22. Effective use of diversification principles allows an FI to reduce the total default risk in a portfolio.
23. Firm-specific credit risk can be eliminated by diversification.
24. Systematic credit risk can be reduced significantly by diversification.
25. An off-balance-sheet activity does not appear on the current balance sheet because it does not involve
holding a current primary claim or the issuance of a current secondary claim.
26. Off-balance-sheet risk occurs because of activities that do not appear on the balance sheet.
27. Off-balance-sheet activities often affect the shape of an FI’s current balance sheet through the creation of
contingent claims.
28. Contingent claims are assets and liabilities that will come into existence at a future time often at the
insistence of a customer or second party.
29. Off-balance-sheet activities have become an important source of fee income, even though losses on these
activities can cause a financial institution to fail.
30. The objective of technological expansion is to achieve economies of scale at the expense of diseconomies of
scope.
31. Technology risk is the uncertainty that economies of scale or scope will be realized from the investment in
new technologies.
32. The mergers of Citicorp with Travelers Insurance is an example of an attempt to exploit economies of
scope.
33. Economies of scope involve the ability to lower the average cost of operations by expanding the output of
financial services.
34. Employee fraud is a type of operational risk to a financial institution.
35. The risk that a computer system may malfunction during the processing of data is an example of operational
risk.
36. Direct foreign investment and foreign portfolio investment both can be beneficial to an FI because of
imperfectly correlated returns with domestic investments.
37. Returns from domestic and foreign investments may not be perfectly correlated because of different
economic infrastructures and growth rates.
38. Foreign exchange risk is that the value of assets and liabilities may change because of changes in the foreign
exchange rate between two countries.
39. Foreign exchange risk is that the value of assets and liabilities may change because of changes in the level
of interest rates.
40. Foreign exchange risk includes interest rate risk and credit risk as well as changes in the foreign exchange
rate between two countries.
41. An FI can hold assets denominated in a foreign country, but it cannot issue foreign liabilities.
42. An FI is net long in foreign assets if it holds more foreign liabilities than foreign assets.
43. For an FI to exactly hedge the foreign investment risk, the foreign currency assets must equal the foreign
currency liabilities.
44. To be immunized against foreign currency and foreign interest rate risk, an FI should match both the size
and maturities of its foreign assets and foreign liabilities.
45. Sovereign risk involves the inability of a foreign corporation to repay the principal or interest on a loan
because of stipulations by the foreign government that are out of the control of the foreign corporation.
46. Control of the future supply of funds available to a foreign country is one method to ensure the repayment
of an existing debt.
47. Unanticipated withdrawals by liability holders are a major part of liquidity risk.
48. A natural consequence of the effects of realized liquidity risk across several institutions is the ability to
recognize capital gains on the sale of assets in the attempt to generate cash.
49. During a liquidity crisis assets normally must be sold at a loss because of the rising interest rates caused by
financial institutions attempting to raise funds.
50. A lower level of equity capital increases the risk of insolvency to a financial institution.
51. Many of the various risks faced by an FI often are interrelated with each other.
52. Event risks often cause sudden and unanticipated changes in financial market conditions.
53. General macroeconomic risks may affect all risks of a financial institution.
54. Foreign exchange rate risk occurs because foreign exchange rates are volatile and can impact banks with
exposed foreign assets and/or liabilities.
55. Holding corporate bonds with fixed interest rates involves
56. Regulation limits FI investment in non-investment grade bonds (rated below Baa or non-rated).What kind of
risk is this designed to limit?
57. What type of risk focuses upon mismatched asset and liability maturities and durations?
58. The asset transformation function potentially exposes the FI to
59. Which function of an FI involves buying primary securities and issuing secondary securities?
60. What type of risk focuses upon mismatched currency positions?
61. What type of risk focuses upon future contingencies?
62. If the loans in the bank’s portfolio are all negatively correlated, what will be the impact on the bank’s credit
risk exposure?
63. A mortgage loan officer is found to have provided false documentation that resulted in a lower interest rate
on a loan approved for one of her friends. The loan was subsequently added to a loan pool, securitized and sold.
Which of the following risks applies to the false documentation by the employee?
64. A small local bank failed because a housing market collapse following the departure of the areas largest
employer. What type of risk applies to the failure of the institution?
65. The risk that a German investor who purchases British bonds will lose money when trying to convert bond
interest payments made in pounds sterling into euros is called
66. An FI that finances long-term fixed rate mortgages with short-term deposits is exposed to
67. The risk that an investor will be forced to place earnings from a loan or security into a lower yielding
investment is known as