Archives: Quiz

The Federal Reserve System (a) is in charge of managing the New York Stock Exchange. (b) is headed by the Secretary of the Treasury. (c) is the central bank of the United States. (d) was dissolved in the late 1980s. […]

The Competitive Equality Banking Act of 1987 (a) made branching across state lines legal. (b) forbade the opening of additional nonbank banks. (c) mandated that banks charge the same interest rate to all customers receiving a particular type of loan. […]

In 1998, in order to avoid contagion, the Fed (a) expanded the deposit insurance system. (b) made substantial loans to three of the top 10 U.S. banks. (c) brought together the creditors of Long-Term Capital Management. (d) raised interest rates. […]

In early 2003, President Bush was considering whether to nominate Alan Greenspan for (a) a fourth term as Chairman of the Board of Governors of the Federal Reserve System. (b) a fifth term as Chairman of the Board of Governors […]

The “Member Bank Reserve Changes” data published weekly in The Wall Street Journal is most useful for (a) information on sources of change in the monetary base. (b) gauging whether a particular bank is likely to fail. (c) gauging the […]

If the Fed sterilizes the purchase of foreign assets, (a) its assets and liabilities rise by the same amount. (b) its assets and liabilities fall by the same amount. (c) the composition of its assets changes, but its liabilities are […]

The most important economic benefit from specialization is that it (a) makes it possible for an economy to begin using money. (b) leads to an increase in the standard of living in an economy. (c) makes barter possible. (d) eliminates […]

Which of the following is a contractual saving institution? (a) The New York Stock Exchange (b) Greater Illinois Savings and Loan (c) Prudential Insurance Company (d) Fidelity Magellan Mutual Fund Answer: The effects of interest rates on the transactions demand […]

Under narrow banking (a) banks would make loans only from bank equity. (b) banks would not be allowed more than one branch. (c) federal deposit insurance would be eliminated. (d) banks would not be allowed to make any risky loans. […]

Acme Widget has been sued. It had been expected to lose suit and to be liable for massive payments that would have imperiled the future of the company. If Acme unexpectedly wins the suit, (a) the price of its bonds […]

Interest rate fluctuations (a) are usually not considered to be of much importance and are largely ignored by the Fed. (b) have the paradoxical effect of increasing the rate of economic growth. (c) make it difficult for households and firms […]

An FI manager purchases a zero-coupon bond that has two years to maturity. The manager paid $76.95 per $100 for the bond. The current yield on a one-year bond of equal risk is 12 percent, and the one-year rate in […]

The numbers provided are in millions of dollars and reflect market values: What is the weighted average duration of the assets of the FI?A. 7.25 years. B. 7.75 years. C. 8.25 years. D. 8.75 years. E. 9.25 years. Answer: C. […]

Which of the following describes the process of “netting” in the swap market?A. Stripping out the “interest rate” sensitive element of total return swaps to reduce the net portfolio risk. B. Acting as an intermediary by bringing together two FIs […]

What is the gain or loss on the futures position using T-Bonds (Duration = 9 years, $96 per $100 face value) if the shock to interest rates is 1 percent [i.e. ΔR/(1 + R) = 0.01 and ΔRf/(1 + Rf) […]

Which of the following situations is similar to the externality effect? A. Exercising an adverse material change in conditions clause as a last resort, thereby canceling or repricing a loan commitment. B. Increase in the cost of funds above normal […]

Identify the residual class of a CMO that gives the owner the right to any remaining collateral in the trust after all other bond classes have been retired plus any reinvestment income earned by the trust. A. Class A bonds. […]

Which of the following observations about the repricing model is correct? A. Its information value is limited. B. It accounts for the problem of rate-insensitive asset and liability runoffs and prepayments. C. It accommodates cash flows from off-balance-sheet activities. D. […]

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually. What is market value of the ten-year loan if all market interest rates increase by 2 percent? A. $40.000 […]

Finance companies have had no significant downturns in economic performance over the last two decades. Answer: Insurance guarantee funds are administered by federal insurance regulators. Answer: FALSE The cost of insolvency of an FI to the FDIC is offset in […]

A digital default option expires unexercised in situations where the loan is paid in accordance with the loan agreement. Answer: Time intermediation involves the investment of small amounts by investors into mutual funds that invest in long-term securities such as […]

Liquidity risk for an FI includes the possibility of an unexpected inflow of funds. Answer: During the financial crisis of 2008, there were large deposit inflows to the banking system. Answer: TRUE The buyer of a loan participation benefits because […]

Average daily turnover in the FX market has recently been over $4 trillion. Answer: The extremely high growth of OBS activities since the early 1990s has caused regulators to recognize the potential risk exposure to FIs from their use. Answer: […]

A mutual fund objective statement provides general information about the types of securities a mutual fund will hold as assets. Answer: The safety and soundness of a holding company that has both a bank subsidiary and a securities affiliate can […]

Basel III capital ratios will become fully effective in 2016. Answer: Market value at risk (VAR) is defined as the daily earnings at risk (DEAR) times the number of days (N). Answer: FALSE Equipment leasing to customers is a function […]

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 […]

All off-balance-sheet items will eventually move on to the balance sheet at some point in time. Answer: Under Basel III, banks are allowed to use their internal estimates of borrower creditworthiness to assess credit risk subject to strict disclosure standards. […]

The loss to a buyer of bond put options is limited to the premium paid. Answer: Reciprocal banking pacts allowed the non-state companies to purchase banks as long as the purchase permission went in both directions. Answer: TRUE The Securities […]

Contagious runs on bank deposits are directed at FIs, whether they are failing or healthy. Answer: Worldwide investments in mutual funds have grown at a rate faster than in the United States over the last decade. Answer: TRUE Migration analysis […]

Both parties in an interest rate swap normally are fully hedged against interest rate risk on the notional amount of the swap. Answer: One way to minimize contingent credit risk is to use derivative products sold on organized exchanges. Answer: […]

When liquidity risk problems occur at a DI, they often threaten the solvency of the institution. Answer: As a result of trading and fee assignment abuses by the mutual fund industry, the SEC established new rules regarding fund governance and […]

The advantage to the lender (purchaser) of a Brady bond versus a loan to a foreign country is that U.S. Treasury bonds serve as collateral for Brady bonds. Answer: An FI that sells a loan with recourse retains ownership of […]

In general, maximum levels of losses in the property-casualty industry are more predictable for liability lines than for property lines. Answer: An FI that is short-funded faces the risk that the return of reinvesting assets could exceed the cost of […]

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 […]

Violation of the interest rate parity theorem would allow arbitrage profits. Answer: As a percent of assets, finance companies currently rely more heavily on commercial paper as a source of financing than in 1977. Answer: FALSE A naked option is […]

An FI can hold assets denominated in a foreign country, but it cannot issue foreign liabilities. Answer: Unexpected increases in inflation cause loss rates to increase more for long-tail risk than for short-tail risks. Answer: TRUE The hedge ratio measures […]

Basis risk occurs on a loan commitment because the spread of a pricing index over the cost of funds may vary. Answer: A run on a bank is not necessarily a bad occurrence. Answer: TRUE Retail banking services and products […]

The savings association industry continues to be the primary lender of residential mortgages. Answer: As the economic expansion continued through the 1990s, the demand for finance company loans increased. Answer: TRUE Determining risk-adjusted asset values for OBS market contracts requires […]

Finance companies operate more like nonfinancial, nonregulated companies than any other type of financial institution. Answer: Swaps generally have a shorter maturity than other derivative instruments. Answer: FALSE The emergence of the Euro as a uniform medium of exchange is […]

Chinese walls are barriers within organizations that limit the flow of confidential information between departments of business areas. Answer: Catastrophe futures are designed to hedge extreme losses of natural disasters for property-casualty insurance companies. Answer: TRUE Operational risk has increased […]

As an industry, finance companies have escaped the merger and consolidation activity that has affected nearly every other sector of the financial services industry. Answer: Historically, correspondent banking relationships have been important in the sale of bank loans. Answer: TRUE […]

As of December 2012, the number of nationally chartered banks was greater than the number of state chartered banks. Answer: Although life insurance companies also provide health and accident insurance, they underwrite less than 35% of all health insurance policies. […]

The use of the option pricing model to determine the actuarially fair premium for deposit insurance indicates that the cost of the insurance should rely on both the asset quality and level of leverage of the DI. Answer: An angel […]

An FI can eliminate its currency risk exposure by matching its foreign currency assets to its foreign currency liabilities. Answer: Futures contracts are the primary security that insurance companies and banks use to hedge interest rate risk prior to originating […]

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: TRUE On-balance-sheet hedging […]

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 […]

Prior to the financial crisis of 2008, the return on equity for small community banks had been larger than for large money center banks. Answer: GNMA will sponsor any pool of loans regardless of the size of each individual loan […]

Financial institutions are subject to economies of scale in the collection of information. Answer: International expansion by a commercial bank should provide increased access to funding sources. Answer: TRUE Merger premiums tend to be higher for target banks in competitive […]

Prepayment risk means that realized cash flows on pass-through securities may be more than expected cash flows. Answer: The passage of legislation to prevent discrimination in lending is an example of regulation to protect investors. Answer: FALSE The net stable […]

An off-balance-sheet forward position is used to hedge the FI’s on-balance-sheet risk exposure. Answer: In the U.S., cash reserves necessary to meet deposit reserve requirements typically include vault cash and cash deposits at the Federal Reserve Bank. Answer: TRUE Because […]