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  My courses  U…  C…  B…  FINS5512-5187_00254  Quiz #1 Access (Sunday, August 12th)  Quiz 1 Access Link

Started on Sunday, 12 August 2018, 7:00 PM

State Finished
Completed on Sunday, 12 August 2018, 7:55 PM
Time taken 55 mins
Grade 25.00 out of 27.00 (93%)

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Question 1 FanBank has estimated that it has risk-weighted assets of $14.53 billion out of a total asset figure of $18.62
Correct billion.
Mark 1.00 out of What is the total capital (T1 + T2) requirement for FanBank ($million) if you assume Basel III requirements?
1.00
Express your answer in millions of dollars to two decimal places. Do not write "$" and do not write "millions".

Answer: 1162.40

The total capital (Tier 1 + Tier 2) ratio under Basel III is 8.0% of risk-weighted assets (not total assets). So the
required amount of total capital is $14.53 billion x 8.0% = $1162.40 million.
The total capital (Tier 1 + Tier 2) ratio under Basel III is 8.0% of risk-weighted assets (not total assets). So the
required amount of total capital is $14.53 billion x 8.0% = $1162.4 million.
Question 2 All of the following items/transactions are off-balance sheet items for a bank, except:
Correct
I A standby letter of credit provided by the bank
Mark 1.00 out of
II A fully drawn credit card limit provided by the bank
1.00
III A performance bond provided by the bank
IV A documentary letter of credit provided by the bank

Select one:
I and IV

III
II Correct answer
All of the options listed are off balance sheet items.

IV

Your answer is correct.

Question 3 Financial markets:

Correct
I Facilitate the exchange of financial assets
Mark 1.00 out of
II Reveal information about the prices of financial assets
1.00
III Allow for the flow of funds between surplus entities and deficit entities

Select one:
II and III are correct
Only I is correct

I, II, III are correct Correct answer.

I and II are correct

Only II is correct

Your answer is correct.

Question 4 Which of the following best describes the liquidity transformation function of a bank?
Correct

Mark 1.00 out of Select one:

1.00 A saver can withdraw their funds immediately without borrowers having to repay their loans early
Correct answer.

The shares of a commercial bank are normally able to be sold quickly and close to the published market
price

The creation of a secondary market offers liquidity that encourages market participants to purchase
securities in the primary market

A saver can invest for a two-year horizon while a borrower can borrow for 30 years

The collection of many small deposits from many savers together into a liquid pool that can be loaned
out in large amounts to a firm

Your answer is correct.

Question 5 An investment bank is acting in its role as an underwriter when it:
Correct

Mark 1.00 out of Select one:

1.00 Guarantees the issue price of a company's new equity securities and/or debt securities Correct
answer.

Gives strategic or financial advice to a firm engaged in a merger or takeover

Evaluates whether the employees of a company should be provided with health and/or life insurance,
how much coverage they should receive (if any), and how much the firm should pay for their cover

Places new share issues with selected financial institutions

Guarantees the issue price of a company's new equity securities (but not the price of its new debt
securities)

Your answer is correct.

Question 6 Which of the following are NOT classified as financial assets?

Correct
I. Patents
Mark 1.00 out of
II. Term deposits
1.00
III. Treasury Notes
IV. Inventory and spare parts
V. Negotiable certificates of deposits
VI. Preference shares

Select one:
II and IV.

I and VI.

I, II, and III.

I and IV. Correct answer.

I, II, and VI.

Your answer is correct.

Question 7 Which of the following statements about bank capital under Basel III is false?
Correct
I Common Equity Tier 1 (CET1) capital includes retained earnings, but not contingent convertible bonds
Mark 1.00 out of
II Tier 1 capital includes retained earnings, but not contingent convertible bonds
1.00
III Common Equity Tier 1 (CET1) capital includes retained earnings, but not mandatory convertible bonds
IV Tier 1 capital includes retained earnings, but not mandatory convertible bonds

Select one:
IV

II Correct answer.

III and IV

III

Your answer is correct.

Question 8 Which of the following statements are true?
Incorrect
I Money allows economic and financial transactions to be carried out more efficiently than bartering
Mark 0.00 out of
II Money does not solve the problem of the “double-coincidence of wants”
1.00
III Money increases economic growth by assisting transfers from investors to borrowers

Select one:
I and III are correct.

Only II is correct.

II and III are correct.

I, II, and III are correct.

Only I is correct. Incorrect answer.

Statement II is incorrect as money DOES solve the problem of the double-coincidence of wants. Barter, on
the other hand, suffers from this problem as the goods/services that you have to offer in a barter exchange
may not be desired by the person from whom you wish to acquire particular goods/services.
Statement III is correct and should be included as economic growth is increased through money assisting
the flow of funds from the surplus investor entities to the deficit borrowing entities.

Your answer is incorrect.

Question 9 The Reserve Bank of Australia (RBA) sells $500 million worth of its holdings of Australian Commonwealth
Correct Government Securities (AGS) to a foreign central bank. The AGS being sold are short-term, discount Treasury
Mark 1.00 out of Notes that mature 2 months from now. This sale is BOTH a _______________ transaction AND a
1.00 __________________ transaction.

Select one:
“capital market”;“wholesale market”

“money market”;“primary market”

“secondary market”;“money market” Correct answer.

“retail market”;“money market”

“primary market”;“wholesale market”

Your answer is correct.

Question 10 OhBank has estimated that it has risk-weighted assets of $12.40 billion out of a total asset figure of $27.93
Correct billion.
Mark 1.00 out of What is the minimum Tier 1 capital (in $million) required out of OhBank's total capital requirement if you
1.00 assume Basel III requirements?
Express your answer in millions of dollars to two decimal places. Do not write "$" and do not write "millions".

Answer: 744.00

The total Tier 1 ratio under Basel III is 6.0% of risk-weighted assets (not total assets). So the required amount
of Tier 1 capital is $12.40 billion x 6.0% = $744.00 million.
The total Tier 1 ratio under Basel III is 6.0% of risk-weighted assets (not total assets). So the required amount
of Tier 1 capital is $12.40 billion x 6.0% = $744 million.
Question 11 Which of the following best describes a cash management trust?
Correct

Mark 1.00 out of Select one:

1.00 A financial institution that pools funds for individuals and then invests them in both the money and
capital markets

A financial institution whose function is to provide cash income for employees of corporations or
governments after they retire
A financial institution that aims to achieve high investment returns on its invested funds by using exotic
financial products

A financial institution that sells unsecured notes and uses the funds to make loans to household
borrowers and companies

A mutual fund managed by a financial intermediary that specialises in investing in short-term debt
instruments Correct answer.

Your answer is correct.

Question 12 Which of the following is the most likely example of a retail market transaction?
Correct
I A bank issues new ordinary shares in order to improve its capital base
Mark 1.00 out of
II A firm sells long-term bonds in order to acquire another firm
1.00
III A central bank buys its domestic currency to try to improve its value
IV A restaurant borrows from a bank in order to buy new kitchen equipment

Select one:
II and IV are correct.

Only IV is correct. Correct answer. The amount of funds a restaurant would need to borrow in order
to purchase new kitchen equipment would most likely be small enough that the restaurant would be forced
to borrow at retail market interest rates.

I and IV are correct.

I, II, and II are correct.

Only II is correct.

Your answer is correct.

Question 13 Which of the following statements about project-finance on a non-recourse basis is true?
Correct
I. Project financing is typically syndicated to a consortium of lenders due to the vast scale of many projects.
Mark 1.00 out of
II. Project finance loans are provided to a separate legal entity that is established for the purpose of the
1.00
project.
III. Project finance loans are secured by the assets and operations of the project’s sponsors.

Select one:
III

I and II Correct answer.

II and III

None of the listed statements are true.

Your answer is correct.

Question 14 Last year a firm's founder arranged for an investor buy some existing shares in the firm from one of the
Correct founder's family members. This year the firm listed new shares on the stock exchange through an initial public
Mark 1.00 out of
offering (IPO). The purchase of shares by the investor last year was a __________________ transaction
1.00 because ______________________.

Select one:
“primary market”; “the transaction involved the flow of funds to the firm”

“primary market”; “the transaction occurred prior to the firm's IPO”

“secondary market”; “the transaction was private and did not occur through a public stock exchange”

“secondary market”; “the transaction did not involve the original issue of securities” Correct answer.

“secondary market”; “the transaction occurred prior to the firm's IPO, which is the only time that a firm
ever undergoes a primary market transaction involving equity”

Your answer is correct.

Question 15 Bathurst Bank is a small Australian bank. Which of Bathurst Bank’s following assets would have a non-zero
Correct risk-weighting when calculating its risk-weighted assets?
Mark 1.00 out of
1.00 Select one:
a. Gold bullion held in Bathurst Bank’s own vaults

b. Gold bullion held in the vaults of the Central Bank of Venezuela on an unallocated basis Correct
answer
c. Treasury Bond issued by the Commonwealth Government of Australia (denominated in Australian
dollars)

d. Australian dollar notes and coins held by Bathurst Bank

e. Australian dollar deposits with the Reserve Bank of Australia

Your answer is correct.

Question 16 A contractual savings institution is a type of financial institution that:
Correct
I obtains most of its funds from the savings of individuals and small businesses
Mark 1.00 out of
II mostly assists with off-balance sheet advisory services
1.00
III obtains most of its funds by selling money market securities
IV receives periodic payments and then makes payments in return when a specified event occurs
V has mostly ceased to exist due to financial deregulation

Select one:
V is correct.

I is correct.

III is correct.
IV is correct. Correct answer.

II is correct.

Your answer is correct.

Question 17 Which of the following balance sheet portfolio items is NOT a source of funds for a bank?
Correct
I Overdrafts
Mark 1.00 out of
II Lease finance
1.00
III Call deposits
IV Share capital
V Consumer loans
VI Certificates of deposits
VII Term deposits

Select one:
I, V and VII

I, II, IV and V
Only I

I, II, and V Correct answer.

I, II and VII

Your answer is correct.

Question 18 Which of the following is NOT one of the principal aims of Basel III?
Correct
I Bring the exposures from all off-sheet balance sheet transactions to accounts
Mark 1.00 out of
II Improve the risk management and governance of banks
1.00
III Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory
arbitrage.
IV Ensuring that credit risk, operational risk and market risk are quantified based on data and formal
techniques
V Strengthen the level of transparency and disclosure by banks
VI To boost the banking sector’s ability to absorb shocks arising from both financial and economic stress

Select one:
II, III, V, and VI.

II, V, VI
I, III, and IV. Correct answer.

Only I.

III, IV, and VI.

Your answer is correct.

Question 19 Which of the following is/are not typically associated with hedge funds?
Correct
I Use of derivative instruments
Mark 1.00 out of
II Use of short-selling
1.00
III Use of minimal financial leverage
IV Use of a limited partnership ownership structure
V Charging high management fees
VI Investment in highly illiquid assets
VII Use of open-ended fund structure

Select one:
I, II, IV and V

IV, V, and VI

I, II, III, VI and VI

III and VI Correct answer.

I, II, IV, V and VI

Your answer is correct.

Question 20 Which of the following statements regarding life insurance companies is true?
Correct

Mark 1.00 out of Select one:

1.00 Life insurance companies sell contracts that offer financial protection against premature death are more
likely to acquire shorter-term securities than longer-term assets.

Life insurance companies invest primarily in government bonds and tend to avoid equity-related
investments.
As inflows of funds for life insurance offices are relatively easy to predict, they have very little need for
longer-term assets in their portfolios.
As outflows of funds for life insurance offices are relatively difficult to predict, they overweight the level
of short-maturity securities in their portfolios due to the matching principle.

None of the other statements about life insurance companies is true. Correct answer.

Your answer is correct.

Question 21 Which of the following statements about superannuation funds is false?

Incorrect

Mark 0.00 out of Select one:

1.00 A defined benefit superannuation fund involves the calculation of its payout amount through a formula
based at the time that the payee leaves the fund.

An accumulation superannuation fund varies its superannuation income depending on the strength of
the performance of the plan’s investments.

A defined benefit fund obliges the employer to make good on any shortfall in the fund when the benefit
is to be paid out.

Rather than having their superannuation entitlements taxed as ordinary income, an early retiree has the
ability to hold their eligible superannuation funds in a rollover scheme that keeps their funds in a taxation
environment that is more favourable.
None of the other four statements regarding superannuation is false. Incorrect answer.
A defined benefit superannuation fund involves the calculation of its payout amount through a formula
based at the time that the payee entered the fund.

Your answer is incorrect.

A defined benefit superannuation fund involves the calculation of its payout amount through a formula based at
the time that the payee entered the fund.
Question 22 Which of the following is NOT usually an example of a short-term discount security?
Correct
I Unsecured notes
Mark 1.00 out of
II Negotiable certificates of deposit
1.00
III Term loans
IV Commercial paper
V Bank bills
VI Term deposits

Select one:
I and III.

I, III, and VI. Correct answer.

I, II, and III.
I, II and IV.

I, III, and IV.

Your answer is correct.

Question 23 Under which of the following situations would Company X be unlikely to employ the services of an investment
Correct bank?
Mark 1.00 out of I Another company has expressed interest in acquiring Company X, and Company X wants to receive
1.00 the highest price possible
II Company X wants to raise funds through the sale of new shares at a guaranteed price per share
III Company X wants to execute a hostile takeover of another company
IV Company X wants a new fund manager for its employees’ superannuation investments
V Company X wants to divest some of its assets into a separate listed entity

Select one:
I and IV

II and IV
Only I

I, III, and V
Only IV Correct answer.
I and II

Your answer is correct.

Question 24 This question is worth positive 2 marks for a correct answer.
Correct
This question is worth negative 2 marks for an incorrect answer.
Mark 2.00 out of
2.00 Please select the neutral response for no penalty if you believe you are unable to answer
this question.

OhBank is a small Australian bank. The government regulator has provided OhBank with the following table of
risk weights of different residential mortgage types:

STANDARD ELIGIBLE MORTGAGES NON-STANDARD ELIGIBLE MORTGAGES

At least 40% insured At least 40% insured
LVR (%) No LMI No LMI
with LMI with LMI
0-60 35% 35% 50% 35%
60.01-80 35% 35% 75% 50%
80.01-90 50% 35% 100% 75%
90.01-100 75% 50% 100% 75%
>100.01 100% 75% 100% 100%
"LMI" = Lenders Mortgage Insurance
You have the following formation about some home loans that OhBank Bank issued recently:
A loan of $570,000 to Mr Singh who purchased an apartment for $600,000. Mr Singh took out lenders
mortgage insurance ("LMI") on the full value of the property.
A loan to Mr & Mrs Huang for a house at a purchase price of $3.1 million. They chose not to take out
LMI. They put down a deposit of $0.775 million toward the purchase price.
A loan to Bad Luck Brian, who borrowed 85% of his house's $800,000 purchase price and obtained full
LMI. Since taking possession of the house, Brian's house has been exposed to a toxic chemical leak.
OhBank's independent valuer estimates this will cause Brian's house to fall in value by 95%. In addition,
they estimate the property will not be able to be sold for 10 years.

Assuming Basel III requirements, what is the minimum amount of total capital (T1 + T2) required to support
these 3 mortgages?

Select one:
a. $0.2632 million

b. $0.1215 million
c. $0.2860 million
d. $0.1634 million

e. I am unable to answer this question and accept 0 marks.

f. $0.0989 million
g. $0.1423 million Correct answer.

h. $0.1963 million

Your answer is correct.

Under Basel III, the minimum amount of total capital (T1 + T2) is 8% of the risk-weighted assets.
Mr Singh's apartment:
A loan of $570,000 for property bought for $600,000 implies a LVR of 95%
This is a standard loan with full LMI
This corresponds to a risk weighting of 50%
The Huang house:
A deposit of $0.775 million is 25% of the $3.1 million purchase price.
The LVR of the loan is the remaining 75%, which corresponds to a dollar amount for the loan
of $2.325 million
This is a standard loan with no LMI
This corresponds to a risk weighting of 35%
Brian's house:
The original LVR of the loan was 85%, which corresponds to a dollar amount of the loan
of $680,000
 As the property will fall in value from $800,000 by 95%, it will now be worth $40,000. So its
current LVR is much greater than 100%.
Although he has full LMI, this loan is non-standard as the property is no longer easily marketable
This corresponds to a risk weighting of 100%

Given the above risk weightings and loan values, the risk-weighted assets (RWA) can be found as:
RWA = (0.50 x $570,000) + (0.35 x $2.325 million) + (1.00 x $680,000)
RWA = $1.77875 million

OhBank requires a minimum of 8% of RWA for its total capital (T1 + T2) requirement:
Minimum capital = 8% x $1.77875 million
Minimum capital = $0.1423 million
Question 25 This question is worth positive 2 marks for a correct answer.
Correct
This question is worth negative 2 marks for an incorrect answer.
Mark 2.00 out of
2.00 Please select the neutral response for no penalty if you believe you are unable to answer
this question.

You have the following table for matching published credit ratings to the equivalent credit rating grades under
the Standardised Approach.

CREDIT RATING P&S Corp

GRADE RATING
1 AAA to AA-
2 A+ to A-
3 BBB+ to BBB-
4 BB+ to BB-
5 B+ to B-
6 CCC+ to D

The regulator has published the following mapping of risk weightings vs credit rating grades for different
counterparties:

CREDIT RATING GRADE

COUNTERPARTY
1 2 3 4 5 6
Reserve Bank of Australia 0% 0% 0% 0% 0% 0%
Commonwealth government of Australia 0% 0% 0% 0% 0% 0%
State governments & Territories 0% 20% 50% 100% 100% 150%
Commercial banks (<3mth maturity) 20% 20% 20% 50% 50% 150%
Commercial banks (>3mth maturity) 20% 50% 50% 100% 100% 150%
Corporations 20% 50% 100% 100% 150% 150%

FongBank is an Australian bank that has the following assets. All claims are denominated in Australian dollars.

ASSET VALUE ADDITIONAL NOTES

Notes & Coins $93m All Australian dollars
Gold bullion $335m Held in FongBank's vaults
Commonwealth Government of Australia Treasury Bonds $395m Rated AAA
Loan to State Government of New South Wales $75m Rated BBB+
5-year term loan to Safe Bank of NSW $245m Rated BBB-
Loan to Dodgy Aeronautical Fusion Corportation $7m Rated BB-

FongBank has also provided Dodgy A.F. Corp with a performance-related guarantee of $242 million. You know
that performance-related guarantees have a credit conversion factor (CCF) of 50%.
Assuming Basel III requirements, calculate the minimum amount of CET1 capital (in $millions) that
FongBank would need to have out of their total capital requirement.

Select one:
a. $9.65 million

b. $18.40 million
c. $12.96 million Correct answer
d. $9.69 million

e. $11.95 million
f. $17.28 million

g. I am unable to answer this question and accept zero marks.

Your answer is correct.

The $93m of notes/coins and $335m in gold held by FongBank carry no counterparty risk. That is, they have a
risk weighting of zero.
Similarly, all Australian dollar claims against the Commonwealth Govt of Australia carry a 0% risk weighting (so
we can ignore the $395m of Treasury bonds).
Therefore, the only relevant items for determining the bank's required capital are:
1. $75m worth of loans to the State Government of NSW
The credit rating of BBB+ corresponds to a credit rating grade of 3
A loan to a state government with a credit rating grade of 3 carries a risk weighting of 50%
2. $245m worth of long-term loans to Safe Bank of NSW
The credit rating of BBB- corresponds to a credit rating grade of 3
A long-term loan to a commercial bank with a credit rating grade of 3 carries a risk weighting of
50%
3. $7m worth of loans to Dodgy A.F. Corp
The credit rating of BB- corresponds to a credit rating grade of 4
A loan to a corporation with a credit rating grade of 4 carries a risk weighting of 100%
4. $242m in a performance-related guarantee to Dodgy A.F. Corp
We know from above the risk weighting for this corporation is 100%
And the question states the credit-conversion factor (CCF) for a performance-related guarantee is
50%, which we use to convert the off-balance sheet item to a balance-sheet equivalent

We therefore can calculate risk-weighted assets as:

RWA = (0.5 x $75m) + (0.50 x $245m) + (1.00 x $7m) + (1.00 x (0.50 x $242m))
RWA = $288 million

The bank is required to hold a minimum of 4.5% of this value as CET1 capital. Therefore:
Minimum Tier 1 Capital = 4.5% x $288 million
Minimum Tier 1 Capital = $12.96 million