Interest rate risk stems from the impact of both anticipated and unanticipated changes in interest rates

on FI profitability => F

An FI is exposed to reinvestment/ refinancial risk by holding longer-tẻm assets relative to liabilities

=> F

Active trading of assets and liabilities creates market risk => T

FIs typically are concerned about the value at risk of their trading portfolios. => T

Credit risk stems from non-repayment or delays in repayment of either principal or interest on FI
assets. => T

Credit risk exposes the lender to the uncertainty that only interest payments may not be received. => F

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. => T

Foreign exchange risk is that the value of assets and liabilities may change because of changes in the
foreign exchange rate between two countries. => T

The risk that a debt security’s price will fall, subjecting the investor to a potential capital loss is =>
market risk

The risk that interest income will increase at a slower rate than interest expense is => interest rate risk

The risk that borrowers are unable to repay their loans on time is => credit risk

The risk that many borrowers in a particular country fail to repay their loans is => sovereign risk (RR
chủ quyền)

The risk that many depositors withdraw their funds at once is => liquidity risk

The risk that foreign governments may devalue their exchange rates is => currency risk

Which term refers to the risk that the cost of rolling over or re-borrowing funds will rise above the
returns being earned on asset investment? => Refinancing risk

Which term refers to the risk that interest income will decrease as maturing assets are replaced with
new, more current assets? => Reinvestment risk

The increased opportunity for a bank to securitize loans into liquid and tradable assets is likely to
affect which type of risk? => Market risk

The risk of default is associated with general economy-wide or macro conditions affecting all
borrowers. => Systematic credit risk

Which of the following refers to an FI’s ability to generate cost synergies by producing more than one
output with the same inputs? => Economies of scope
The risk that an FI may not have enough capital to offset a sudden decline in the value of its assets
relative to its liabilities is referred to as => insolvency risk

Which of the following may occur when a sufficient number of borrowed are unable to repay interest
and principal on loans, thus causing an FI’s equity to approach zero? => lower its average costs of
operations by expanding its output of financial services

If not done by FIs, the process of monitoring the actions of borrowers would reduce the attractiveness
and increase the risk of investing in corporate debt and equity by individuals => T

Failure to monitor the actions of firms in a timely and complete fashion after purchasing securities in
that firm exposes the investor to agency costs. => T

The risk that the sale price of an asset will be less than the purchase price of an asset is called liquidity
risk => F

Because bank loans have a shorter maturity than most debt contracts, FIs typically exercise less
monitoring power and control over the borrower. => F

Because the average maturity of assets and the average maturity of liabilities are often different on an
FIs balance sheet, the FI is exposed to liquidity risk => F

When an FI functions as a broker, they are selling a financial asset that they have created and will
continue to hold on their balance sheet. => F

Secondary securities are securities that serve as collateral for primary securities. => F

Depository financial institutions include all of the following EXCEPT => investment banks

Nondepository financial institutions are represented by all of the following EXCEPT => credit unions

Which of the following statements is FALSE? => A financial intermediary acts as a lender of last
resort

Which function of an FI reduces transaction and information cost between a corporation and
individual which may encourage a higher rate of savings? => Brokerage services

Which of the following is NOT a major function of financial intermediaries? => Management of the
nations’s money supply

Many households place funds with financial institutions because many FI accounts provide => ALL
OF THE ABOVE (flexible maturities verses other interest-earning securities; better liquidity than
directly negotiated debt contracts; less price risk if interest rates change.)

The reason FIs can offer highly liquid, low price-risk contracts to savers while investing in relatively
illiquid and higher risk assets is => ALL OF THE ABOVE (because diversification allows an FI to
predict more accurately the expected returns on its asset portfolio; significant amounts of portfolio
risk are diversified away by investing in assets that have correlations between returns that are less
than perfectly positive; because individual savers cannot benefit from risk diversification; because FIs
have a cost advantage in monitoring their portfolios)
The federal government has traditionally extended safety nets to DIs consisting of => deposit
insurance, discount window borrowing and reserve requirements.

The asset transformation function of FIs typically involves => altering the liquidity and maturity
features of funds sources used to finance the FI’s asset portfolio.

Which of the following refers to the possibility that a firm’s owners or managers will take actions
contrary to the promises contained in the covenants of the securities the firm issues to raise funds? =>
Agency costs

Traditionally, regulation of FIs in the U.S has been => extensive, as a result of the importance of FI to
the economy.

Financial intermediaries are => neither funds surplus nor deficit units,

Cash market are knows as => c) spot market

Investor who do not considerisks in their decision making is => b) risk neutral

When the law of one prices is oulated, what transaction happened => c) arbitrage

A short hedge is one in which => c) hedger is short in the futures

Supposed the asset buy $50 sell at future contracts $53. What is your profits if at three maturity the
prices is $49 => b) $3

front office => trading

Rủi ro khi người đi vay không có khả năng trả nợ => rủi ro thanh khoản (credit risk)

Which of the following major is use => A duration

RSA > RSL => reinvestment risk

RSA < RSL => refinancing risk

Interest rate swaps payment are made => at whatever dates an agreed upon by the counter paties ??

Which of following is NOT type of swaps? => settlement swaps

The different between swap rate and the rate on treasury security on the same maturity is called =>
swap spread

The most basic and common types of swap is called => plain vanilla swaps

An interest rate swaps with both sides paying a floating rate is called => basis swaps

Enterprise risk management includes all but except? => seeks to manage risk of products

Hedge accounting is a method of accounting for which the => gain or losses from hedge until the
hedge completed
A positive correlation between the inflation rate and the RBA's target cash rate decision suggests that
when inflation is on the increase, the RBA generally increases its targeted cash rate. => T

Direct quote shows the amount of home currency received for one unit of the foreign currency
exchanged. => T

Indirect quote shows the amount of home currency received for one unit of the foreign currency
exchanged. => F

Indirect quote shows the amount of foreign currency received for each unit of home currency
exchanged. => T

Direct quote shows the amount of foreign currency received for each unit of home currency
exchanged. => F

A net exposure is the degree to which a bank is net long (positive) or net short (negative) in a given
currency. => T

On-balance-sheet hedging involves taking positions in forward or other derivative securities to hedge
FX risk. => F

Off-balance-sheet hedging involves making changes in the on-balance-sheet assets and liabilities to
protect the FI’s profits from FX risk and taking positions in forward or other derivative securities to
hedge FX risk. => F

A Financial Institution acts defensively as a hedger to reduce FX exposure if it engages in the

purchase and sale of foreign currencies for hedging purposes to offset customer or FI exposure in any
given currency. => T

A Financial Institution that holds more foreign currency liabilities than assets has a net long position.
=> F

A net short position exposes a Financial Institution to the risk that the foreign currency could rise in
value against its domestic currency. => T

A Financial Institution (FI) usually creates an open position by taking an unhedged position in a
foreign currency in its FX trading with other FIs. => T

Most profits or losses on FX trading for Financial Institutions come from taking an open position or
speculating in currencies. Revenues from market making—the bid–ask spread—or from acting as
agents for retail or wholesale customers generally provide only a secondary or supplementary revenue
source. => T

Most profits or losses on FX trading for Financial Institutions come from market making-the bid-ask
spread-or from acting as agents for retail or wholesale customers. Revenues from taking an open
position or speculating in currencies generally provide only a secondary or supplementary revenue
source. => F

Good managers can know in advance what exchange rates will be at the end of a particular time
horizon. => F
The interest rate parity theorem implies that while interest rates are hedged, the dollar return on
foreign investments can be above or below the return on domestic investments. => F

The interest rate parity theorem implies that by hedging in the forward exchange rate market, an
investor realizes the same returns whether investing domestically or in a foreign country. => T

The role of the forward FX contract is to offset the uncertainty regarding the future spot rate on a
particular currency at the end of the investment horizon. => T

Forward exchange rate is the exchange rate agreed to today for future (forward) delivery of a currency
=> T

Currency swaps are used to hedge against exchange rate risk from mismatched currencies on assets
and liabilities. => T

In a currency swap it is usual to include both principal and interest payments as part of the swap
agreement. => T

Agency costs are costs relating to the risk that the owners and managers of firms that receive savers'
funds will take action with those funds contrary to the best interests of the saver. => T

Due to the costs of monitoring, liquidity and price risk savers often prefer to hold the financial claims
issued by Fls rather than those issued by corporations => F

In the principal-agent relationship between savers and a borrowing firm the savers are the agents and
the borrowing firm is the principal. => F

By acting as a delegated monitor, financial intermediaries reduce the degree of information

imperfection and asymmetry between the ultimate suppliers and users of funds. => T

Financial Institutions are better able to manage the risk of mismatching maturities of assets and
liabilities than household savers. => T

Financial Instituions play a significant role in the transmission of monetary policy. => T

The risk that the sale price of an asset will be less than the purchase price of an asset is called liquidity
risk => F

Because the average maturity of assets and the average maturity of liabilities are often different on a
Financial Institute's balance sheet, the Fl is exposed to liquidity risk => F

None of the commercial banks in Vietnam defaulted during the global financial crisis. => T

Lehman Brothers defaulted during the global financial crisis. => T

Interest rate risk is part of the loan commitment contingent risk because of the uncertainty of changes
in interest rates before the borrower exercises his or her option to borrow. => T
Standby letters of credit are guarantees issued to cover contingencies that are potentially more severe
and less predictable than contingencies covered under trade-related or documentary letters of credit
=> T

Conceptually, a swap contract can be viewed as a succession of forward contracts. => T

Financial Institutions may issue standby letters of credit to cover contingencies that are potentially
more severe, less predictable and not necessarily trade related. => T

Standby letters of credit can be seen as direct competitors to loan commitments.=> T

The default risk of a futures contract is less than that of a forward contract. => T

A loan commitment agreement is a contractual commitment to lend to a firm a certain maximum

mount at given interest rate terms => T

The delta of an option is the change in the value of an option for a small unit change in the price of the
underlying security. => T

Basis risk refers to the variable spread between a lending rate and a borrowing rate, or between any
two interest rates or prices. => T

The delta of an option is always greater than one. => F

Documentary letters of credit are contingent guarantees sold by a Financial Institution to underwrite a
trade or commercial performance of the buyer of the guarantee => T

The repricing gap considers the timing and size of cash flows => F

The repricing gap focuses on the interest income effect. => T

An FI with a positive repricing gap expects interest rates to decrease. => F

An FI with a neutral repricing gap in its three to six month bucket is hedged against any interest rate
changes at all points in time. => F

The repricing gap is a book-value based approach. => T

Over-aggregation and runoffs are the major problems associated with the repricing gap. => T

Convexity is the major problem associated with the repricing gap. => F

The cumulative repricing gap position of an FI for a given extended time period is the sum of the
repricing gap values for the individual time periods that make up the extended time period. => T

An FI with a negative gap of $20 million suffers a $0.2 million decrease in its net interest income if
interest rates decrease by 1 per cent. => F

An FI with a positive gap of $30 million suffers a $0.15 million decrease in its net interest income if
interest rates increase by 0.5 per cent. => F
Because the repricing model ignores the market value effect of changing interest rates, the repricing
gap is an incomplete measure of the true interest rate risk exposure of an FI. => T

If the spread between rate-sensitive assets and rate-sensitive liabilities increases for a bank, future
changes in interest rates will lead to an increase in net interest income. => T

Spread effect is periodic cash flow of interest and principal amortisation payments on long-term assets
that can be reinvested at market rates. => F

The term 'rate-sensitive assets' refers to assets whose interest rate will be repriced over some future
period. => T

The term 'rate-sensitive assets' refers to assets with a particularly high interest rate. => F

Interest rate spread is the difference between the earning assets interest rate and the interest rate paid
on interest-bearing liability. => T

Interest rate spread is the difference between the earning assets interest rate and cash rate set by RBA.
=> F

In simple words, duration measures the average life of an asset or liability. => T

The duration of a zero-coupon bond is always smaller than its maturity. => F

The maturity of a fixed-income security is always smaller than its duration. => F

It is not possible to measure the duration of a perpetuity as a perpetuity has no maturity. => F

Using the leverage adjusted duration gap, it is possible to measure the effect of changing interest rates
on an FI's net worth. => T

The leverage adjusted duration gap reflects the degree of duration mismatch in an FI's balance sheet.
=> T

Duration measures changes in an FI's net worth inaccurately if inerest rate changes are large.=> T

Immunisation requires constant portfolio rebalancing when interest rates move. => T

Immunisation does not require constant portfolio rebalancing when interest rates move.=> F

Duration matching is a desirable interest rate risk management tool as it captures changes in interest
rates over long periods of time. => F

The FI's portfolio is immunised when the weighted-average duration of the bond portfolio exactly
equals the FI's desired investment horizon. => T

The FI's portfolio is immunised when the weighted-average duration of the bond portfolio exactly
equals the weighted-average maturity of the bond portfolio.=> F

The larger the numerical value of the duration of an asset or liability, the less sensitive the price of
that asset or liability is to changes in the interest rate.=> F
As interest rates increase (decrease) the value of an asset or a liability decreases (increases).=> T

The greater is convexity, the more insurance a portfolio manager has against interest rate increases
and the greater potential gain from rate decreases.=> T

One method of changing the positive leverage adjusted duration gap for the purpose of immunising
the net worth of a typical depository institution is to increase the duration of the assets and to decrease
the duration of the liabilities.=> F

A call option is an agreement between a buyer and seller at time 0, when there is a contractual
agreement that an asset will be exchanged for cash at some later date.=> F

A forward contract is an agreement between a buyer and seller at time 0, when there is a contractual
agreement that an asset will be exchanged for cash at some later date.=> T

A futures contract is a standardised contract guaranteed by organised exchanges to deliver and pay for
an asset in the future.=> T

A forward contract is a standardised contract guaranteed by organised exchanges to deliver and pay
for an asset in the future.=> F

Forwards are on-balance-sheet transactions. => F

Some futures exchanges have deliverable bond futures, meaning that at the contract's expiry holders
of bought futures positions must take physical delivery and sellers must make delivery. => T

For a currency that has a futures contract, basis risk is not typically a problem as $1 is the same as any
other $1. => T

Basis risk occurs on a loan commitment because the spread of a pricing index over the cost of funds
may vary.=> T

Basis risk is a residual risk that arises because the movement in a spot (cash) asset's price is not
perfectly correlated with the movement in the price of the asset delivered under a futures or forward
contract.=> T

Firm-specific risk is a residual risk that arises because the movement in a spot (cash) asset's price is
not perfectly correlated with the movement in the price of the asset delivered under a futures or
forward contract.=> F

All call options are eventually exercised and the underlying asset must be delivered.=> F

In a put option, the purchaser of the bond option is committed to handing over the specified bond at a
specified time.=> F

An interest rate swap is a succession of forward contracts on interest rates arranged by two parties that
allows for the exchange of fixed-interest payments for floating payments; as such, it allows an FI to
place a long-term hedge.=> T

It is possible to create a synthetic fixed-rate position from floating-rate instruments using futures
contracts. Forward contracts cannot be used.=> F
When calculating the number of hedges required for a position, the number should always be rounded
up to cover the full position.=> T

Off-market swaps are swaps that are have non-standard terms that require one party to compensate
another so the swap can be tailored to the needs of the transacting parties; compensation is usually in
the form of an upfront fee or payment.=> T

Buying a call option (standing ready to buy bonds at the exercise price) is a strategy that an FI may
take when bond prices rise and interest rates are expected to fall. => T

Duration is seen as a more complete measure of an asset or liability interest rate sensitivity than
maturity because it takes into account => size of cash flow and asset

Duration of zero coupon bond => = its maturity

The lower th coupon or interest payment on security => the higher duration

The duration of an asset or liability for which their are interfering cash flow between issue and
maturity => > assets & liabity

The term core deposits refer to the deposits that => act as long-terms sources of funds for the FI

The cumulative gap over the whole balance sheet is defined as => =0

Duration is defined as => weight average time to maturity of series of cash flow, using present value
of cash flow as weight

Fire-sale price refers to the price received for an asset that has to be sold immediately. => T

Fire-sale price refers to the price received for an asset that has to be sold at half price. => F

Core deposits are those deposits that provide a DI with a long-term funding source => T

In 2010, the Bank for International Settlements (BIS) developed two new liquidity ratios to be
maintained by DIs, namely, the liquidity coverage ratio (LCR) and a net stable funds ratio (NSFR) =>
T

Available unencumbered assets are important as they have the potential to be used as collateral to
raise additional secured funding in secondary markets and also possible at the RBA, and as such, may
potentially be additional sources of liquidity for the DI => T

The aim of open market transactions is to influence the level of liquidity in the market. => T

Liquidity risk can only arise on the asset side of an FI’s balance sheet as this means that the FI does
not hold enough liquid assets such as cash or liquid securities. => F

An FI can manage a drain on deposits or an exercise of a loan commitment in two major ways, these
being purchased liquidity management and stored liquidity management. => T

Purchased liquidity management is a liability-side adjustment to the balance sheet to cover a deposit
drain => T
Stored liquidity management is an asset-side adjustment to the balance sheet to cover a deposit drain
=> T

Stored liquidity management is a liability-side adjustment to the balance sheet to cover a deposit drain
=> F

Purchased liquidity management is an asset-side adjustment to the balance sheet to cover a deposit
drain => F

The liquidity index will always lie between -1 and +1. => F

The maturity ladder model allows a comparison of cash inflows and cash outflows over a series of
specified time periods. => T

The Bank for International Settlements requires FIs to measure their liquidity positions under normal
market conditions only. => F

Trend liquidity planning calculates an FI’s liquidity need as the simple difference between the FI’s
liquid assets and its volatile sources of funds. => F

Liquidation of a mutual fund causes assets to be liquidated and funds received to the dispersed to
shareholders on a first come, first served basis. => F

A contagious run, or bank panic, differs from a run on a bank in that a contagious run involves loss of
faith in the entire banking system as opposed to just one bank. => T

A deep marke is defined as => high volume of particular security are traded

Which of following are characteristic of liquid asset => turn asset to cash -> low transaction cost, turn
asset to cash -> little or no lost in value, asset -> cash quickly

Which statement is true? => liquid asset been low defaut risk

Potential sources of liquid includes: => short term securities: repos, notes

Bill of exchanges issued by non banks drawer to raise funds for business purposes which accepted by
non bank are: => commercial bills

Which of following liability products does not have withdraw risks => CD

Fire sale price refers to => asset sold immediately

Bank panic refers to => whole bank industry

An investment fund that sell a fixed number of shares in the fund to outside investor is called => close
end fund

Shorel liquid management is => asset side to balance sheet to cover deposit draw

Which of statement is true => financing requirement is financing gap + financing institution
A bank run refers to a sudden => and unexpected |^ (dấu mũi tên lên) in deposit withdraw

An open-end funds is defined as investment that sells => elastic number of shares to outside investor

Banks have been partially responsible for big corporate collapses such as Enron. => F
Non-performing loans are loans characterised by some type of default—from non-payment to delays
in payment of interest and/or principal. => T
Non-performing loans are loans with yield less than 5%.=> F
Unsecured loans are riskier than secured loans from the investor perspective. => T
Credit card facilities are a revolving loan product. => F
Default risk is the risk that the borrower is unable or unwilling to fulfil the terms promised under the
loan contract. => F
Operational risk is the risk that the borrower is unable or unwilling to fulfil the terms promised under
the loan contract. => F
In its simplest form the rate on a loan is set as the base lending rate plus a credit risk premium. => F
Covenants are restrictions written into bond and loan contracts either limiting or encouraging the
borrower's actions that affect the probability of repayment. => T
A borrower's leverage refers to the payment capacity, that is, the 'leverage' the borrower has to service
its loans. => F
The position of the business cycle in the economy is not important in assessing the default probability
of a borrower. => F
By selecting and combining different economic and financial borrower characteristics, an FI manager
may be able to improve the pricing of default risk. => F
Linear discriminant models rely on a company's forecasted financial data so that the FI manager is
able to assess the borrower's future payment ability. => F
A company with an Altman Z-score of 3.15 should not be granted a loan due to a high default
probability. => F
The zone of ignorance in the Altman Z-score model indicates that it is difficult to predict whether or
not the prospective borrower will default in the future. => F
Using term structure derivation of credit risk on a one-year loan, it is possible to simply calculate the
risk premium on the loan by deducting the market rate for a one-year zero-coupon government bond
from the market rate for a one-year zero-coupon corporate bond of a credit rating equivalent to that of
the prospective borrower. => F
Mortality rates analyse historic default risk experience of bonds and loans of similar quality. => T
The estimate of loan (or capital) risk (∆L) can be calculated as follows:
DL ´ L ´ [∆R / (1+R)]. => F
Moody's KMV Credit Monitor model compares loans with option payoffs. => F
A loan provided by a group of financial institution instead of a single bank is called => a syndicated
loan
… is a debt security issued by corporation and sold to investor => company bond
A corporate bond is => a debt security issued by corporation and sold to investor
The term “asset backed loan” refers to loan that backed by: => 2nd claim on certain assets of the
borrower at maturity
An unsecured loan is also referred to as => Junior debt
Credit scoring models include => All of above (Logit model, linear dicriminant analys, linear prob
model)
In which of the following activities is hedge accounting prohibited? => using long puts to protect an
asset
Which of the following activities does senior management NOT DO? => define roles and
responsibilities
The major difference between firm-specific credit risk and systematic credit risk is that: => Financial
institutions can diversify firm-specific risk, while systematic credit risk cannot be diversified
… can be reduced by diversification => firm-specific credit risk
The market value of the derivatives contracts worldwide totals => over a trillion dollars but less than a
hundred trillion
Cash markets are also known as => spot markets
A call option gives the holder => the right to buy something
Which of the following instruments are contracts but are not securities => option and swaps
A transaction in which an investor holds a position in the spot market and sells a futures contract or
writes a call is => a hedge
Which of the following statements is not true about fair value hedges? => only dealer firms are
eligible to use it
Enterprise risk management includes all of the following except => seeks to manage risk of product
obsolescence risk
Hedge accounting is a method of accounting for which the => gains and losses from a hedge are
deferred until the hedge is completed
A direct quote => shows the amount of home currency received for one unit of the foreign currency
exchanged
An indirect quote => shows the amount of foreign currency received for each unit of home currency
exchanged
The proposition stating that the discounted spread between domestic and foreign interest rate equals
the percentage spread between forward and spot exchange rates is called => interest rate parity
theorem
Which of the following statement is true => The reason why in a currency swap it is usual to include
both principal and interest payments as part of the swap agreement is that both principal and interest
are exposed to foreign exchange risk.
Which of the following is an appropriate definition of a currency swap? => A swap used to hedge
against exchange rate risk from mismatched currencies on assets and liabilities
A United States Financial Institution wishes to hedge a $10,000,000 loan using euro currency futures.
Each euro futures contract is for $125,000, and the hedge ratio is 1.40. The loan is payable in one year
in euros. What type of currency hedge is necessary to protect the financial institution from exchange
rate risk? => Sell euro currency futures
Which of the following statements best describes the interest rate parity theorem (IRPT) => The IRPT
is a proposition stating that the discount spread between domestic and foreign currency rates equals
the percentage spread between forward and spot exchange rates
Which of the following statements is true? => The real interest rate is the difference between a
nominal interest rate and the expected rate of inflation.
Which of the following statements is true? => The difference between a nominal interest rate and the
rate of inflation is called the real interest rate.
Which of the following statements is true? (note: FX - Foreign exchange) => All of the listed options
are correct (Conceptually, an FX rate will appreciate in value relative to other currencies when supply
is low; Conceptually, an FX rate will depreciate in value relative to other currencies when demand is
low; Conceptually, an FX rate will appreciate in value relative to other currencies when demand is
high)
Which of the following statements is true? (note: FX - Foreign exchange) => Conceptually, an FX
rate will depreciate in value relative to other currencies when demand is low
The bank has a positive repricing gap. Is it exposed to interest rate increases or decreases and why?
=> Interest rate decreases because the interest income on its assets will fall more than the interest
expenses on its liabilities and net interest income will fall
The bank has a negative repricing gap. Is it exposed to interest rate increase or decreases and why? =>
Interest rate increases because the interest income on its assets will rise by less than the interest
expenses on its liabilities and net interest income will
fall
An investment fund that sell a fixed number of shares in the fund to outside investor is called: =>
closed - end funds
Fire - sale price refers to the price received for: => An asset that has to be sold immediately
Traditionally, risk has been defined as: => uncertainty concerning the occurrence of loss.
Objective risk is defined as => the relative variation of actual loss from expected loss.
An insurance company estimates its objective risk for 10,000 exposures to be 10 percent. Assuming
the probability of loss remains the same, what would happen to the objective risk if the number of
exposures were to increase to 1 million? => It would decrease to 1 percent.
Uncertainty based on a person's mental condition or state of mind is known as => subjective risk.
The long-run relative frequency of an event based on the assumption of an infinite number of
observations with no change in the underlying conditions is called: => objective probability.
Which of the following statements about a priori probabilities is correct? => They are objective
probabilities that can be determined by deductive reasoning.
An individual's personal estimate of the chance of loss is a(n) => subjective probability.
A peril is => the cause of a loss.
An earthquake is an example of a(n) => peril.
Dense fog that increases the chance of an automobile accident is an example of a => physical hazard.
Which of the following statements about speculative risks is true? => They may benefit society even
though a loss occurs.
All of the following are programs to insure fundamental risks EXCEPT: => auto physical damage
insurance.
All of the following are examples of personal risks EXCEPT: => loss of business income.
Which of the following statements about liability risks is (are) true? => Future income and assets can
be attached to pay judgments if inadequate insurance is carried.
ABC Insurance Company plans to sell homeowners insurance in five Western states. ABC expects
that 8 homeowners out of every 100, on average, will report claims each year. The variation between
the rate of loss that ABC expects to occur and the rate of loss that actually occurs is called: =>
objective risk.
Williams Company installed smoke detectors, a sprinkler system, and fire extinguishers in its new
manufacturing facility. These devices are all examples of: => risk control
Which of the following statements about hedging is (are) true? => Hedging is a form of risk transfer
AND Hedging is used to address the risk of unfavorable price fluctuations.
Which of the following statements about chance of loss and risk is (are) true? => Two individuals
may perceive differently the risk inherent in a given activity.
A risk that affects only individuals or small groups and not the entire economy is called a: =>
diversifiable risk.
Which of the following is an example of a commercial risk? => the loss of business income
A special form of planned retention by which part or all of a give loss exposure is retained by the firm
is called: => self-insurance.
A student who has skipped many classes and not studied the course material was surprised to learn
there was a test when he showed-up for class. The student's mental uncertainty about whether or not
he will pass the test is called:=> subjective risk.
Economic collapse during the 1930s, the banking system in the U.S > performed directly or indirectly
all financial services. Those functions included all of the following EXCEPT => money market funds
Depository financial institutions include all of the following EXCEPT => credit unions
Many households place funds with financial institutions because many FI accounts provide => all of
the above (lower denominations than other securities, flexible maturities verses other interest-earning
securities, better liquidity than directly negotiated debt contracts, less price risk if interest rates
change.)
The federal government has traditionally extended safety nets to DIs consisting of => deposit
insurance and discount window borrowing
The assets transformation function of FIs typically involves => altering the liquidity and maturity
features of funds sources used to finances the FI’s assets portfolio.
Which of the following refers to the possibility that a firm’s owners or managers will take actions
contrary to the promises contained in the covenants of the securities the firm issues to raise funds? =>
Agency costs
Which of the following refers to the term “maturity intermediation”? => Mismatching the maturities
of assets and liabilities
Traditionally, regulation of FIs in the U.S has been => extensive, as a result of the importance of FI to
the economy.
Depository institution (DIs) play an important role in the transmission of monetary policy from the
Federal Reserve to the rest of the economy primarily because => DI deposits are a major portion of
the money supply
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? => Net regulatory burden
What is globalization? => The evolution of markets and institutions so that geographic boundaries do
not restrict financial transactions
Which of the following observations is true? => Bulk of the money supply consists of inside money
Net regulatory burden for FIs is higher because regulators may require the FI to: => to hold more
capital what would be held without regulation
What distinguishes financial intermediaries from industrial firms? => FI balance sheets are almost
totally comprised of financial assets while commercial firms hold substantial amounts of real assets
The origination of a home mortgage loan is considered to be a => primary security, because the
mortgage note is a newly created security
How have the innovations of global financial networks and computerized money and information
transfer systems changed financial intermediation? => Financial intermediation has become more
costly because it is necessary to invest in high cost technology
The charter values of FIs will be higher if regulators => increase the cost of entry by requiring more
capital and restrict the number of FIs that can operate in a given market.
In a world without FIs, household will be less willing to invest in corporate securities because they =>
all of the above (aren’t able to monitor the activities of the corporation more closely than FIs; tend to
prefer shorter, more liquid securities; are subject to price risk when corporate securities are sold; may
not have enough funds to purchase corporate securities.)
FIs perform their intermediary function in two ways => they specialize as brokers between savers and
users and they serve as assets transformers by purchasing primary securities and issuing secondary
securities.
Which of the following is true of secondary securities? => they are securities that back primary
securities.
Which of the following statements is FALSE? => A financial intermediary acts as a lender of last
resort
Which function of an FI reduces transaction and information costs between a corporation and
individual which may encourage a higher rate of savings? => Brokerage services
Which of the following is NOT a major function of financial intermediaries? => Management of the
nation’s money supply
Advantages of depositing funds into a typical bank account instead of directly buying corporate
securities include all of the following EXCEPT: => increase transaction costs
Negative externalities exist in the depository sector when =? All of the above (the fear of DI
insolvency leads to bank deposit runs; lending activity is impaired or constrained; there are delays in
disbursement from insolvent DIs; bank that are healthy suffer when another bank nears insolvency)
Which of the following is the term used when a banker refuses to make loans to residents living with
certain geographic boundaries? => Redlining
Why is the failure of a large bank more detrimental to the economy than the failure of a large steel
manufacturer ? => The large bank failure reduces credit availability throughout the economy.
Financial intermediaries are => neither funds surplus nor deficit units
Which of the following is true of secondary securities? => They are securities that back primary
securities.
Each of the following is a special function performed by FIs at a macro level EXCEPT => interbank
lending and investing.
Which of the following is closely associated with credit allocation regulation? => Support the FI’s
lending to socially important sectors.
Verifying the minimum level of capital or equity that must be held to fund the operations of an FI is
part of the goal of => safety and soundness regulation.
The Community Reinvestment Act and the Home Mortgage Disclosure Act were both passed to
provide incentives to comply with => consumer protection regulation.
Price and quantity restrictions in regulation are usually aimed at determining whether an FI is meeting
certain => credit allocation guidelines.
The following are protective mechanisms that have been developed by regulators to promote the
safety and soundness of the banking system EXCEPT => encouraging banks to rely more on deposits
rather than debt or capital as a cushion against failure.
Safety and soundness regulations include all of the following layers of protection EXCEPT => the
creation of money for those FIs in financial trouble.
Which of the following groups of FIs have experienced the highest percentage growth in assets in the
U.S. financial services industry during the past sixty years? => Investment companies.
Which of the following repealed the 1933 Glass-Steagall barriers between commercial banking,
insurance, and investment banking? => Financial Services Modernization Act (1999).
A significant recent trend in the provision of financial services is that households increasingly prefer
denomination intermediation and information services provided by => mutual funds
When a DI makes a shift from an “originate-to-hold” banking model to an “originate-tosell” model,
the change is likely to result in => decreased monitoring costs.
As DIs made a shift from an “originate-to-hold” banking model to an “originate-to-sell” model over
the last decade => the Federal Reserve decreased the number of services that banks could provide.
The recent financial crisis highlighted, in retrospect, how heavily households and businesses had
come to rely on FIs to act as specialists in => risk measurement and management.
Of the ten largest banks in the world at the beginning of 2009, how many were U.S. banks? => 2

Of the ten largest banks in the world at the beginning of 2015, how many were U.S. banks? => 1

Adopting an enterprise risk management approach by an FI is likely to result in all of the following
EXCEPT => larger investments in risk management processes and systems

Prior to the most recent financial crisis, the risks faced by FIs have traditionally been measured and
managed by => unctional risk area such as liquidity risks, price risk, or credit risk.

In what year did housing prices begin to deteriorate leading to a jump in defaults in the subprime
mortgage markets and the onset of the recent financial crisis? => 2006

As DIs made a shift from an "originate-to-hold" banking model to an "originate-to-distribute" model

over the last decade, => there was a dramatic increase in systematic risk of the financial system.

When a DI makes a shift from an "originate-to-hold" banking model to an "originate-to-distribute"

model, the change is likely to result in => decreased monitoring costs.

Investment companies are successful in attracting business away from banks and insurance companies
primarily because they => give savers cheaper access to the direct securities markets.

A significant recent trend in the provision of financial services is that households increasingly prefer
denomination intermediation and information services provided by => mutual funds and money
market mutual funds.
Price and quantity restrictions in regulation are usually aimed at determining whether an FI is meeting
certain => credit allocation guidelines.

Which of the following FIs does not currently provide a payment functions for their customers? =>
Pension funds

A consumer lending function is performed by each of the following FIs EXCEPT => mutual funds

As of 2015, commercial banks with over $10 billion in assets constituted approximately ____ percent
of the industry assets and numbered approximately______. => 83; 95

The largest assets class on U.S. commercial banks’ combined balance sheet as of June 30, 2015
was…. => real estate loans

The largest liability on U.S commercial banks’ combined balance sheets as of June 30.2015 was =>
non-transaction accounts

By late 2015, the number of commercial banks in the US was approximately => 5,470

By late 2015, the number of branches of existing commercial banks in the US approximated ______,
which was a(an) _________ from 1985. => 82,500; increase

The largest asset class on FDIC-insured savings institutions’ balance sheet as of mid-2015 was =>
mortgage loans

The largest liability on FDIC-insured savings institutions’ balance sheet as of mid -2015 was => small
time and savings deposits

The future viability of the savings association industry in traditional mortgage lending has been
questioned because of => all of the above

National-chartered commercial banks are most likely to be regulated by => the FIDC, the Federal
Reserve System, and the Comptroller of the Currency

State-chartered commercial banks may be regulated by => the FDIC, the Federal Reserve System. the
Comptroller of the Currency, and state banking commissions

The strong performance of commercial banks during the decade before 2007 was due to => the ability
of banks to shift credit risk from their balance sheets to financial markets

Money center banks are considered to be any bank which => relies almost entirely on nondeposit and
borrowed funds as sources of liabilities

A large number of the savings institutions failures during the in the 1980s was a result of => All of the
above (interest rate risk exposure; excessively risky investments;fraudulent behavior on the part of
managers; excessively risky investment and fraudulent behavior on the part of managers.)

One of the primary reasons that investment banks were allowed to convert to bank holding companies
during the recent financial crisis was recognition that => their operating activities were too risky and
they needed the cushion of bank deposit to alleviate funding risks.
Regulatory forbearance refers to a policy of => allowing insolvent banks to continute to operate The
Financial Institutions Reform Recovery and Enforcement Act (FIRREA) of 1989 introduced the
qualified thrift lender test (QTL), which set the percentage of assets required for qualification to be no
less than => 65 percent

A primary advantage for a depository institution of belonging to the Federal Reserve System is
=>direct access to the discount window of the Fed

Customer deposits are classified on a DI’s balance sheet as => liabilities, because the DI uses deposits
as a source of funds

Holdings of U.S Treasury securities are classified on a DI’s balance sheet as => assets, because
securities holdings represent a use of funds for investment

Customer loans are classified on a DI’s balance sheet as => assets, because DI’s originate and monitor
loan portfolios

This broad class of loans constitutes the highest percentage of total assets for all US => Commercial
and residential real estate.

Which of the following dominates the loan portfolio of commercial banks with assets less than one
billion dollars? => Real estate loans

Real estate loans comprise approximately_______ percent of large commercial banks’ (assets greater
than $1 billion) loan portfolio. => 46

Which of the following is true of off-balance sheet activities? => They have both risk-reducing as
well as risk-increasing attributes

Which of the following observations concerning trust department is true? => Only the largest banks
have sufficient staff to offer trust services

Which of the following identifies the primary function of the Office of the Comptroller of the
Currency => Charter national banks and approve their merger activity

Which of the following currently manages the insurance funds for both commercial banks and savings
institutions? => FDIC

What was the primary objective of the Bank Holding Company Act of 1956? => Restricted the
banking and nonbanking acquisition activities of multibank holding companies

These organizations were originated to avoid the legal definition of a bank => Nonbank banks

The qualified thrift lender test is designed to ensure that => a floor is set for the mortgage related
assets held by savings institutions

Which of the following is the most important source of funds for savings institutions => Small time
and savings deposits

The primary regulators of saving institutions are => the office of thrift supervision and the FDIC
The two largest asset classes on credit unions’ combined balance sheet ass of June 30, 2015 were =>
home mortgages and consumer loans

The largest liability on credit unions’ combined balance sheet as of June 30, 2015 was => small time
deposits and savings deposits

Credit Unions were generally less affected than order depository institutions by the recent financial
crisis because => they had relatively more assets in consumer loans than other DIs and they hold more
government and agency securities, on average

The most numerous of the institutions that define the depository institution segment of the FI industry
in the US is (are) => credit unions

Which of the following observations concerning credit unions is not true? => They invest heavily in
corporate securities

Compared to banks and savings institutions, credit unions are able to pay a higher rate on the deposits
of member because => of their tax-exempt status

Credit unions may be federally or state chartered. If a credit union is chartered at the federal level, it is
subject to the regulations imposed by the => National Credit Union Administration

According to the text, how many of the largest corporate credit unions were ultimately declared
insolvent during the recent financial crisis? => 5

Which of the following is NOT an off balance sheet activity for US banks? => Trust services

Correspondent banking may involve => acting as transfer and disbursement agents for pension funds

What is the defining characteristic of the dual banking system? => Coexistence of both nationally
chartered and state chartered banks.

The "repricing gap" model focuses on changes in the ____________ of a bank. => market value of
assets

In the "repricing gap" model, consider a loan that will mature in the next 3 months. Then we can say
this loan is ____________ within the coming 3-month period => underfunded

The "repricing gap" for a bank refers to: => ROA minus ROE

A bank with a negative 1-year repricing gap would expect ___________ if interest rates fall over the
coming year. => an increase in interest income

Consider the "repricing gap" model. If we sum up the various "gaps" for all the maturity buckets out
to one year, the result is called the: => duration gap

Which of the following would not be classified in the "one-year, rate sensitive asset" category? =>
Treasury bills with six-month maturity

In the basic "repricing gap" model, an increase in market interest rates would: => lower the book
value of stockholders' equity of a bank with a negative 1-year gap
"Duration" has economic meaning as the ___________ of an asset or liability. => interest rate
sensitivity

The "leverage adjusted duration gap": => measures the sensitivity of net interest income to interest
rate changes.

Imaginary State Bank holds just two assets: (1) a loan with market value of $500,000, having duration
of 2 years, and (2) a loan with market value of $250,000, having duration of 4 years. Find the duration
of this bank's asset portfolio. => 2.67

A "rate sensitive liability" in a one-year maturity bucket represents the amount of liabilities that
________________ within one year. => may mature

Which of the following bank balance sheet items would be categorized within the "one-year, rate
sensitive liabilities"? => 18-month certificates of deposit

When the "spread" between interest rates on RSA and RSL ____________, the bank's net interest
income would be expected to ____________. => increases; increase
Economic collapse during the 1930s, the banking system in the U.S. performed directly or
indirectly all financial services. Those functions included all of the following EXCEPT => B. money
market funds.
Depository financial institutions include all of the following EXCEPT =>investment banks.
Nondepository financial institutions are represented by all of the following EXCEPT => credit unions
Which of the following statements is FALSE? => A financial intermediary acts as a lender of last
resort
Which function of an FI reduces transaction and information costs between a corporation and
individual which may encourage a higher rate of savings? => A. Brokerage services.
In its role as a delegated monitor, an FI => E. All of the options; keeps track of required interest and
principal payments on loans it originates.; works with financially distressed borrowers in danger of
defaulting on their loans.;holds portfolios of loans that they continue to service.; maintains contact
with borrowers to ensure that loan proceeds are utilized for intended purposes.
Which of the following is NOT a major function of financial intermediaries? => Management of the
nation's money supply
Advantages of depositing funds into a typical bank account instead of directly buying
corporate securities include all of the following EXCEPT => increased transactions costs.
Many households place funds with financial institutions because many FI accounts provide =>E. All
of the options.; lower denominations than other securities.; flexible maturities verses other interest-
earning securities.;better liquidity than directly negotiated debt contracts.;less price risk if interest
rates change.
The reason FIs can offer highly liquid, low price-risk contracts to savers while investing in
relatively illiquid and higher risk assets is =>E. All of the options.;because diversification allows an
FI to predict more accurately the expected returns on its asset portfolio.;significant amounts of
portfolio risk are diversified away by investing in assets that have correlations between returns that
are less than perfectly positive.;because individual savers cannot benefit from risk
diversification.;because FIs have a cost advantage in monitoring their portfolios.
The federal government has traditionally extended safety nets to DIs consisting of => deposit
insurance and discount window borrowing.
The asset transformation function of FIs typically involves => B. altering the liquidity and maturity
features of funds sources used to finance the FI's asset portfolio.
Which of the following refers to the possibility that a firm's owners or managers will take
actions contrary to the promises contained in the covenants of the securities the firm issues to
raise funds? => Agency costs
Which of the following refers to the term "maturity intermediation"? =>Mismatching the maturities of
assets and liabilities.
Traditionally, regulation of FIs in the U.S. has been =>extensive, as a result of the importance of FI to
the economy
Depository institutions (DIs) play an important role in the transmission of monetary policy
from the Federal Reserve to the rest of the economy primarily because => DI deposits are a major
portion of the money supply.
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? => Net regulatory
burden
What is globalization? => The evolution of markets and institutions so that geographic boundaries do
not restrict financial transactions.
Negative externalities exist in the depository sector when => E. All of the options; the fear of DI
insolvency leads to bank deposit runs.; lending activity is impaired or constrained.; there are delays in
disbursements from insolvent DIs.; banks that are healthy suffer when another bank nears insolvency.
Why is the failure of a large bank more detrimental to the economy than the failure of a large
steel manufacturer? => The large bank failure reduces credit availability throughout the economy
Why do households prefer to use FIs as intermediaries to invest their surplus funds? => E. All of the
options. Transaction costs are low to the household since FIs are more efficient in monitoring and
gathering investment information.; To receive the benefits of diversification that households may not
be able to achieve on their own.; The FI has can benefit from combining funds and negotiating lower
asset prices and transactions costs.; The FI can provide insurance at relatively low cost that will
protect funds under management.
Financial intermediaries are =>neither funds surplus nor deficit units
Which of the following observations is true?=> Bulk of the money supply consists of inside money
Net regulatory burden for FIs is higher because regulators may require the FI to => A. hold more
capital than what would be held without regulation.
What distinguishes financial intermediaries from industrial firms? => A. FI balance sheets are almost
totally comprised of financial assets while commercial firms hold substantial amounts of real assets
The origination of a home mortgage loan is considered to be a => C. primary transaction, because the
mortgage note is a newly created financial asset.
How have the innovations of global financial networks and computerized money and
information transfer systems changed financial intermediation? => B. Financial intermediation has
become more costly because it is necessary to invest in high cost
technology
The charter values of FIs will be higher if regulators => E. increase the cost of entry by requiring
more capital and restrict the number of FIs that can operate in a given market
In a world without FIs, households will be less willing to invest in corporate securities
because they => E. All of the options; are not able to monitor the activities of the corporation more
closely than FIs.; tend to prefer shorter, more liquid securities.;are subject to price risk when corporate
securities are sold.;may not have enough funds to purchase corporate securities.
FIs perform their intermediary function in two ways => D. they specialize as brokers between savers
and users and they serve as asset transformers by purchasing primary securities and issuing secondary
securities.
Which of the following is true of secondary securities? => C. They are securities that back primary
securities
Each of the following is a special function performed by FIs at a macro level EXCEPT => E.
interbank lending and investing.
Which of the following is closely associated with credit allocation regulation? => A. Support the FI's
lending to socially important sectors.
Verifying the minimum level of capital or equity that must be held to fund the operations of
an FI is part of the goal of => B. safety and soundness regulation.
The Community Reinvestment Act and the Home Mortgage Disclosure Act were both passed
to provide incentives to comply with => C. consumer protection regulation
Price and quantity restrictions in regulation are usually aimed at determining whether an FI is
meeting certain => B. credit allocation guidelines
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.
Safety and soundness regulations include all of the following layers of protection EXCEPT => C. the
creation of money for those FIs in financial trouble.
Which of the following groups of FIs have experienced the highest percentage growth in
assets in the U.S. financial services industry during the past sixty years? => D. Investment companies.
Which of the following repealed the 1933 Glass-Steagall barriers between commercial
banking, insurance, and investment banking? => B. Financial Services Modernization Act (1999).
A significant recent trend in the provision of financial services is that households
increasingly prefer denomination intermediation and information services provided by => A. mutual
funds and money market mutual funds
Investment companies are successful in attracting business away from banks and insurance
companies primarily because they => D. give savers cheaper access to the direct securities markets.
When a DI makes a shift from an "originate-to-hold" banking model to an "originate-to
distribute" model, the change is likely to result in => D. decreased monitoring costs
As DIs made a shift from an "originate-to-hold" banking model to an "originate-to
distribute" model over the last decade, => C. there was a dramatic increase in systematic risk of the
financial system
All of the following are examples of participants in the shadow banking system EXCEPT => E. credit
unions
The housing bubble that began building in 2001 was primarily the result of => B. low interest rates
and increased liquidity provided by the Federal Reserve
In what year did housing prices begin to deteriorate leading to a jump in defaults in the
subprime mortgage markets and the onset of the recent financial crisis? => C. 2006
The recent financial crisis highlighted, in retrospect, how heavily households and businesses
had come to rely on FIs to act as specialists in => B. risk measurement and management
Prior to the most recent financial crisis, the risks faced by FIs have traditionally been
measured and managed by => B.functional risk area such as liquidity risks, price risk, or credit risk.
Adopting an enterprise risk management approach by an FI is likely to result in all of the
following EXCEPT => C.larger investments in risk management processes and systems
Of the ten largest banks in the world at the beginning of 2015, how many were U.S. banks? => B. 1.
Benefits of cryptocurrencies and blockchain include all of the following EXCEPT =>C.Transactions
among businesses or individuals will have to know each other to make financial agreements
Which of the following statements about financial technology (FinTech) are true: => E.A, B, and C
are true.; refers to the delivery of financial solutions in a manner that competes with traditional
financial methods.; is defined as technology-enabled innovation in financial services that could result
in new business models, applications, processes or products.;involves the risk that FinTech firms
could disrupt business of financial services in the form of lost customers and lost revenue.

Regulation limits FI investment in non-investment grade bonds (rated below Baa or non-rated). What
kind of risk is this designed to limit? => Credit risk
A U.S. bank has €40 million in assets and €50 million in CDs. All other assets and liabilities are in
U.S. dollars. This bank is [Net position = Asset value - Liability value] => Net short $10 million
Deposit taking Financial Institutions make money PRIMARILY via? => Both B and C (The spread
between borrowing rates and lending rates)
What will be the change in Net Interest Income for buckets of 12 months or less if interest rates
increase by 1%? Recall, Delta NII = (CGAP) Delta R => -150,000
If interest rates decrease 50 basis points for an FI that has a gap of +$5 million, the expected change
in net interest income is => -$25,000
An FI finances a $250,000 2-year fixed-rate loan with a $200,000 1-year
fixed-rate CD. Use the repricing model to determine (a) the FI's
repricing (or funding) gap using a 1-year maturity bucket, and (b) the
impact of a 100 basis point (0.01) decrease in interest rates on the FI's
annual net interest income? 1-year CGAP = RSA - RSL ∆NII = (CGAP) × ∆R
=> (-$200,000); +$2,000
The current 1-year and 2-year spot rates are 5.0% and 7.5% respectively. What is the 1-year forward
rate? => 10.03%
Enterprise risk management includes all of the following except: => Enterprise risk management
includes items such as business risk, operations risk, supply-chain risk, product liability risk, and
political and economic risk. Diversification risk is not a component of enterprise risk management.
A U.S firm sold $3 million in finished goods to a firm in Thailand for delivery in six months with the
contract to be invoiced in dollars. In the ensuing period, the value of the bhat declined by 80%, which
meant that Thai firm could not afford to purchase the dollars necessary to fulfill the contract. This is
an example of: => - economic exposure
The risk management process involves which of the following steps related to both internal and
external controls? => The risk management process includes both internal and external controls and
involves the following:1.Identifying and prioritizing risks and understanding their relevance. 2.
Understanding the stakeholder's objectives and their tolerance for risk. 3. Developing and
implementing appropriate strategies in the context of a risk management policy
Key elements of financial risk management include all of the following except: => Political and
economic risk is a component of enterprise risk management.
If an institution is developing a capital position that is designed to cover risk beyond what is
considered necessary for its best estimate reserves, the institution would be creating what would be
called: => risk margin
Commercial banks and other financial intermediaries provide a variety of services to their retail
customers in a very competitive market. Most institutions provide mortgage loans that allow the
customer to refinance the loan at any time without a prepayment penalty. The type of interest-rate risk
these institutions would be incurring is: => option risk
A company obtained a short-term bank loan of $250,000 at an annual interest rate of 6%. As a
condition of the loan, the company is required to maintain a compensating balance of $50,000 in its
checking account. The company's checking account earns interest at an annual rate of 2%. Ordinarily,
the company maintains a balance of $25,000 in its checking account for transaction purposes. What is
the effective interest rate of the loan? => $14,500 ÷ $225,000 = .0644, or 6.44% effective interest rate
The difference between the swap rate and the rate on a Treasury security of the same maturity is
called the => swap spread
Interest rate swap payments are made => at whatever dates are agreed upon by the counterparties
To determine the fixed rate on a swap, you would => price it as the issuance of a fixed rate bond and
purchase of a floating rate bond or vice versa
Which of the following is not a type of swap? => settlement swaps
The underlying amount of money on which the swap payments are made is called => notional amount
The most basic and common type of swap is called => plain vanilla swap
An interest rate swap with both sides paying a floating rate is called a => basis swap
Consider a swap to pay currency A floating and receive currency B floating. What type of swap
would be combined with this swap to produce a swap to produce a plain vanilla swap in currency B.
=> pay currency B fixed, receive currency A floating
How does the degree of liquidity risk differ for different types of financial institutions? => Due to the
nature of their asset and liability contracts, depository institutions are the FIs most exposed to
liquidity risk. Mutual funds, hedge funds, pension funds, and PC insurance companies are the least
exposed. In the middle are life insurance companies.
Which of the following statements is FALSE? => A financial intermediary acts as a lender of last
resort.
Holding corporate bonds with fixed interest rates involves => default risk and interest rate risk.
Regulation limits FI investment in non-investment grade bonds (rated below Baa or
non-rated). What kind of risk is this designed to limit? => Credit risk
What type of risk focuses upon mismatched asset and liability maturities and durations? => Interest
rate risk.
The asset transformation function potentially exposes the FI to => Interest rate risk.
Which function of an FI involves buying primary securities and issuing secondary securities? =>
Asset transformation.
What type of risk focuses upon mismatched currency positions? => Foreign exchange rate risk.
What type of risk focuses upon future contingencies? => Off-balance sheet risk.
If the loans in the bank's portfolio are all negatively correlated, what will be the impact on the bank's
credit risk exposure? => The loans’ negative correlations will decrease the bank’s credit risk exposure
because lower than expected returns on some loans will be offset by higher than expected returns on
other loans.
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
s≤kjold. Which of the following risks applies to the false
documentation by the employee? => Operational risk.
A small local bank failed because a housing market collapse following the departure of the area’s
largest employer. What type of risk applies to the failure of the institution? => Insolvency risk.
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 => foreign exchange rate risk
An FI that finances long-term fixed rate mortgages with short-term deposits is exposed to =>
decreases in net interest income and decreases in the market value of equity when interest rates rise.
The risk that an investor will be forced to place earnings from a loan or security into a lower yielding
investment is known as => reinvestment risk.
"Matching the book" or trying to match the maturities of assets and liabilities is intended to protect the
FI from => interest rate risk.
When the assets and liabilities of an FI are not equal in size, efficient hedging of interest rate risk can
be achieved by => not exactly matching the maturities of assets and liabilities
Unanticipated diseconomies of scale or scope are a result of => technology risk.
An FI that finances a euro (€) loan with U.S. dollar ($) deposits is exposed to => foreign exchange
risk
Matching the foreign currency book of assets and liability maturity does not protect the FI from =>
sovereign country risk
The potential exercise of unanticipated contingencies can result in => off-balance-sheet risk.
The asymmetric return distribution (relatively high probability of anticipated return; lower probability
of default) on risky debt exposes the FI to => credit risk
The major source of risk exposure resulting from issuance of standby letters of credit is => off-
balance-sheet risk.
Politically motivated limitations on payments of foreign currency may expose an FI to => sovereign
country risk.
The risk that a debt security's price will fall, subjecting the investor to a potential capital loss is =>
market risk
The risk that interest income will increase at a slower rate than interest expense is => interest rate risk.
The risk that borrowers are unable to repay their loans on time is => credit risk
The risk that many borrowers in a particular country fail to repay their loans as a result of a recession
in that country relates to sovereign risk => sovereign risk.
The risk that many depositors withdraw their funds from an FI at once is liquidity risk => liquidity
risk.
The risk that a foreign government may devalue the currency relates to => foreign exchange risk.
As commercial banks move from their traditional banking activities of deposit taking and lending and
shift more of their activities to trading, they are more subject to => market risk.
An advantage FIs have over individual household investors is that they are able to diversify away
credit risk by holding a large portfolio of loans to different entities. This reduces => firm-specific
credit risk.
A U.S. bank has €40 million in assets and €50 million in CDs. All other assets and liabilities are in
U.S. dollars. This bank is => net short €10 million
Interest rate risk management for financial intermediaries deals primarily with => limiting the
mismatches on the institution's balance sheet.
When the U.S. dollar declines against European currencies, it is => potentially harmful for those
banks that have financed U.S. dollar assets with liabilities denominated in European currencies
In which of the following situations would an FI be considered net long in foreign assets if it has ¥100
million in loans? => ¥80 million in liabilities.
With regard to market value risk, rising interest rates decrease fixed => decrease the value of fixed
rate liabilities
Which of the following situations pose a refinancing risk for an FI? one year two year => 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
Which term refers to the risk that the cost of rolling over or re-borrowing funds will
rise above the returns being earned on asset investments? => Refinancing risk
Which term refers to the risk that interest income will decrease as maturing assets are replaced with
new, more current assets? => Reinvestment risk
Which of the following would one typically find in the trading portfolio of an FI? => Bonds, equities,
and derivatives
The increased opportunity for a bank to securitize loans into liquid and tradable assets is likely to
affect which type of risk? => market risk
This risk of default is associated with general economy-wide or macro conditions affecting all
borrowers. => Systematic credit risk
Which of the following observations is NOT true of a letter of credit? => It appears on the FI's current
balance sheet.
Economically speaking, OBS activities are contractual claims that => all of the above (A.may or may
not occur. B. if the contingency does occur, the asset or liability is transferred onto the FI's balance
sheet. C. impact the economic value of the equity. D. if the contingency never occurs, there is
virtually no economic meaning to the OBS activity.)
The BIS definition: "the risk of loss resulting from inadequate or failed internal processes, people, and
systems or from external events," encompasses which of the following risks? => Operational risk and
technology risk
Which of the following refers to an FI's ability to generate cost synergies by producing more than one
output with the same inputs? => Economies of scope.
The risk that an FI may not have enough capital to offset a sudden decline in the value of its assets
relative to its liabilities is referred to as => insolvency risk.
Which of the following may occur when a sufficient number of borrowers are unable to repay interest
and principal on loans, thus causing an FI's equity to approach zero? => Insolvency risk
For an FI investing in risky loans or bonds, the probability is relatively the lowest for which of the
following occurrences? => Complete default on principal and interest
Economies of scale refer to an FI's ability to => lower its average costs of operations by expanding its
output of financial services
To what risk is the bank exposed? => Answer B and C only (B. Refinancing risk. C. Interest rate risk)
What is the bank's net interest income for the current year? => $140,000.
What is the bank's net interest income in dollars in year 3, after it refinances all of its liabilities at a
rate of 6.0 percent? => +$60,000. (calculate: If liabilities are refinanced at 6.0 percent, NII =
($300,000 - (4,000,000 × 0.06) = $300,000 - $240,000 = $60,000)
What is the bank's net interest income in dollars in year 3, if it refinances all of its liabilities at a rate
of 8.0 percent? => -$20,000 (calculate: If liabilities are refinanced at 8.0 percent, NII = ($300,000 -
(4,000,000 × 0.08) = $300,000 - $320,000 = ($20,000))
What is the maximum interest rate that it can refinance its $4 million liability and still break even on
its net interest income in dollars? => 7.5 percent
What is the net interest income in dollars if the spot prices at the end of the year are $1.50/£ and
€1.65/$? => $46,060.61.
What is the net interest income in dollars if the spot prices at the end of the year are $1.35/£ and
€1.35/$ and the liabilities instead cost 7 percent instead of 8 percent? => $116,592.59.
If the year-end spot exchange rate for the British pound is $1.50/£ and the liabilities pay 8 percent,
what is the maximum that the € can appreciate and the bank still maintain a zero profit? => €1.33/$.
When liquidity risk problems occur at a DI, they often threaten the solvency of the institution. =>
FALSE
Depository institutions generally rely on each other for cash and to meet their daily liquidity needs.
=> TRUE
During the financial crisis of 2008, liquidity problems were avoided as banks continued to provide
lending to each other. => FALSE
During the financial crisis of 2008, there were large deposit inflows to the banking system. => TRUE
Mutual funds tend to have less exposure to liquidity risk than banks and thrifts. => TRUE
An FI's most liquid asset is cash. => TRUE
Demand deposits pose a liquidity risk for FIs because funds may be withdrawn at any time. => TRUE
A bank must be ready to pay out all demand deposit liabilities on any given day. => TRUE
Which of the following is NOT a potential causes of liquidity risk for a DI? => A. A decrease in the
DI's stock price caused by market factors.
Which type of financial intermediary is more highly exposed to liquidity risk? => Depository
institutions.
What is a fire-sale price? => Price received for an asset that has to be liquidated immediately.
A bank's net deposit drain => is negative if deposits exceed withdrawals.
Which of the following is a condition for a DI to be growing? => Average deposit drain such that
new deposit funds more than offset deposit withdrawals.
Which of the following balance sheet entries is not a tool used in purchased liquidity management?
=> Demand deposit.
Which of the following observations is NOT true? => Traditionally, DI managers have relied on
purchased liquidity management as the primary mechanism of liquidity management.
A disadvantage of using purchased liquidity management to manage a FI's liquidity risk is => the
relatively high cost of purchased liabilities.
A disadvantage of using stored liquidity management to manage a FI's liquidity risk is => the
resulting shrinkage of the FI's balance sheet
Which of the following statements is NOT true? => . A DI sustains no cost under stored liquidity risk
management.
Why have purchased liquidity management techniques become very popular in spite of its limitations?
=> . Because it insulates the assets of an FI from normal drains on liability liquidity
When banks use stored liquidity management, they => may shrink the balance sheet if cash is used as
the liquidity adjustment mechanism.
If purchased liquidity is used by a DI to fund an exercised loan commitment => the balance sheet will
increase by the amount of the new loan.
If stored liquidity is used by a DI to fund an exercised loan commitment => there will be no effect on
the balance sheet.
What is the asset adjustment to a bank's balance sheet if the bank sold a fiveyear, 7 percent annual
coupon $100,000 bond acquired at par, but now yielding 8 percent? The bond was not in the mark-to-
market portfolio. => A $100,000 reduction in assets.
An open-end bond mutual fund is holding a three-year, $1 million face value 5 percent annual coupon
bond selling at par. What is the impact on the total asset value of the fund of a 1 percent decrease in
interest rates? => An increase of $27,751.
What is the impact of a 50 basis point increase in interest rates on the net asset value of an open-end
bond mutual fund holding a seven year, $100 million face value 7 percent annual coupon bond selling
at par? The fund has 10 million shares. => A decrease of $0.265 per share
In the event of financial distress, open-ended mutual fund investors => have an incentive to avoid a
run since that will deplete the fund net asset value.
The surrender value of an insurance policy is => normally a portion of the contract's face value.
Which intermediation function results in an FI's exposure to liquidity risk? => Asset transformation.
How does purchased liquidity management affect profitability? => By its impact on the cost of
purchased funds.
 When comparing banks and mutual funds, less loss => mutual funds have less liquidity risk than
banks because all shareholders share the loss of value on a pro rata basis
Which of the following is NOT a primary source of liquidity? => Capital notes and other long-term
financing alternatives.
Which of the following is NOT used as a method of measuring liquidity risk? => Current ratio.
What information does the net liquidity statement provide? => Sources and uses of liquidity.
Which of the following is a measure of the potential losses an FI could suffer as the result of fire-sale
disposal of assets? => Liquidity index
A DI has two assets: 50 percent in one-month Treasury bills and 50 percent in real estate loans. If the
DI must liquidate its T-bills today, it receives $98 per $100 of face value; if it can wait to liquidate
them on maturity (in one month's time), it will receive $100 per $100 of face value. If the DI has to
liquidate its real estate loans today, it receives $90 per $100 of face value liquidation at the end of one
month will produce $92 per $100 of face value. The one-month liquidity index value for this DI's
asset portfolio is => 0.979
For a DI, what does a high ratio of loans to deposits indicate? => DI relies heavily on the short-term
money market to fund loans.
In terms of liquidity risk measurement, the financing gap is defined as => average loans minus
average deposits.
In terms of liquidity risk measurement, the financing requirement is defined as => . financing gap plus
liquid assets
In a crisis, which of the following are more likely to withdraw funds quickly from banks and thrifts?
=> Mutual funds
In a crisis, which of the following are relatively less likely to withdraw funds quickly from banks and
thrifts? => Individual depositors
Which of the following observations concerning the Fed's discount window is true? => Primary credit
is available to sound depository institutions on a very shortterm basis
What are the two major liquidity risk insulation devices available? => Deposit insurance and
discount window.
What is the drawback of deposit insurance facility? => DIs are more likely to increase the liquidity
risk on their balance sheets
Which of the following is NOT included as high-quality liquid assets when computing a liquidity
coverage ratio? => Bank capital.
The liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) proposed by the Bank for
International Settlements are scheduled to take effect in => . 2015 for LCR and 2018 for NSFR
Which of the following statements is true? => The number of outstanding shares of a closed-ended
fund may change when the issuing fund chooses to repurchase them
Consider a mutual fund with 100 shareholders who each invested $10 for a total of $1,000. If the
assets of the mutual fund are worth $900, what is the net asset value for each one of the mutual fund
shares? => $9 (calculate: Mutual fund share price = Net Asset Value/Number of mutual fund shares
NAV per share = $900/100 = $9.00)
The price at which an open-end investment fund stands ready to redeem existing shares is the => net
asset value.
If the bank's expected net deposit drain is +4 percent, what is the bank's expected liquidity
requirement? => $22,000 (calculate: Net Deposit Drain = (withdrawals - additions) NPD = 0.04 ×
550,000 = $22,000)
What are the possible ways that the bank can meet an expected net deposit drain of +4 percent using
purchased liquidity management techniques? => Answers A and B only. (A. Utilize further the Fed
funds market. B. Utilize repurchase agreements.)
What are the possible ways that the bank can meet an expected net deposit drain of +4 percent using
stored liquidity management techniques? => Liquidate some securities and/or loans.
If the bank decides to cut down on interest expenses by reducing its dependence upon borrowed
funds, what policy must the bank follow? => Manage liquidity risk exclusively through reserve asset
management
If the bank experiences a $50,000 sudden liquidity drain caused by a loan commitment draw down,
what will be the impact on the balance sheet if stored liquidity management techniques are used? =>
A reduction in securities and/or current loans totaling $50,000.
What will be the size of the bank if a stored liquidity management strategy is adopted? => $9 million.
(calculate: After asset sales the size of the bank will be ($12 million - $3 million) = $9 million.)
What will be the cost of using a strategy of reducing its asset base to meet the expected decline in
deposits? Assume that the bank intends to keep $2 million in cash as a liquidity precaution. =>
$30,000 (Calculate: Cost = Loan interest rate - Cost of deposits) × 3,000,000 = $30,000)
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.
=> $15,000. (calculate: Cost = = (interest rate on new funds - interest rate on withdrawn funds) ×
amount of funds = (0.055 - 0.05) × 3,000,000 = $15,000)
What will be the size of the bank if a purchased liquidity management strategy is adopted? => $12
million
What are the bank's total available sources of liquidity? => $22 million. (Available sources = (excess
reserves + T-bills + credit line + fed funds) Sources = (5 + 5 + 10 + 2) = $22 million)
What are the bank's current total uses of liquidity? => $1 million.
What is the net liquidity of the bank? => $21 million.
Which of the following is NOT a source of foreign exchange risk? => B. Making domestic-currency
loans to foreign corporations.
The market in which foreign currency is traded for immediate delivery is the => A. spot market.
The FI is acting as a FX market agent for its customers when it => C. processes an exporter's
transaction in a foreign currency.
A positive net exposure position in FX implies that the FI is => A. net long in a currency and exposed
to depreciation of the foreign currency.
A negative net exposure position in FX implies that the FI is => net short in a currency and exposed
to appreciation of the foreign currency.
The reasons nondepository FIs have less FX risk than major money center banks include => All of
the above. (A. Smaller asset sizes. B. Prudent person concerns. C. Regulations.)
U.S. pension funds hold approximately _______ of their assets in foreign securities, while British
pension funds have traditionally invested approximately _______ of their funds in foreign assets. =>
B. 5 percent; 20 percent
The FI is acting as a hedger when it => A. buys or sells currency to balance the FI's net exposure.
FX risk exposure of an FI essentially relates to which of the following activities? => Purchase and
sale of foreign currencies for speculative purposes through forecasting or anticipating future
movements in FX rates.
When purchasing and selling foreign currencies to allow customers to take positions in foreign real
and financial investments, the FI => acts as an agent.
Which of the following factors help explain the decline in FX trading in the early years of this
century? => All of the above. (A. Introduction of the euro. B. Consolidation in the banking industry.
C. Growth of electronic brokering. D. Mergers in the corporate sector)
The FI is acting as a speculator when it => takes a nonzero net position in a particular currency
The decrease in European FX volatility during the last decade has occurred because of => . Answers
A and B only. (A. the stabilizing force of the euro. B. reduction in inflation rates in European
countries.)
The decline in European FX volatility during the last decade has been offset in part by => . the greater
volatilities of Asian currencies.
If foreign currency exchange rates are highly positively correlated, how can a FI reduce its exchange
rate risk exposure? => By taking opposing net short and net long positions in different currencies.
Which of the following FX trading activities is used to hedge FX risk? => The purchase and sale of
foreign currencies for the purpose of offsetting customer exposure in any given currency.
Which of the following FX trading activities is used for purposes of speculation? => The purchase
and sale of foreign currencies for the purpose of profiting from forecasting or anticipating future
movements in FX rates.
In which of the following FX trading activities does the FI not assume FX risk? => Answers B and D
only (B. The purchase and sale of foreign currencies to allow customers to partake in and complete
international commercial trade transactions.; D. The purchase and sale of foreign currencies to allow
customers to take positions in foreign real and financial investments.)
As of 2012, which of the following FX "markets" is the largest? => London
Most profits or losses on foreign trading for FIs come from => open positions or speculation.
Deviations from the international currency parity relationships may occur because of => barriers to
cross-border financial flows.
The nominal interest rate is equal to the => . real interest rate plus the expected inflation rate.
Which of the following is an example of interest rate parity? => . U.S. dollar rates on one year U.S.
Treasury securities equal 1 year Japanese government bond rates, restated in dollars.
According to purchasing power parity (PPP), foreign currency exchange rates between two countries
adjust to reflect changes in each country's => inflation rates.
How would you characterize the FI's risk exposure to fluctuations in the British pound to dollar
exchange rate? => . The FI is net short in the British pound and therefore faces the risk that the British
pound will rise in value against the U.S. dollar.
How would you characterize the FI's risk exposure to fluctuations in the yen/dollar exchange rate? =>
The FI is net long in the yen and therefore faces the risk that the yen will fall in value against the U.S.
dollar.
How would you characterize the FI's risk exposure to fluctuations in the Swiss franc/dollar exchange
rate? => The FI is net short in the franc and therefore faces the risk that the franc will rise in value
against the U.S. dollar
How would you characterize the FI's risk exposure to fluctuations in the Euro to dollar exchange rate?
=> The FI is net short in the Euro and therefore faces the risk that the Euro will rise in value against
the U.S. dollar
What is the portfolio weight of the Euro in this FI's portfolio of foreign currency? => -36.62 percent.
How would you characterize the FI's risk exposure to fluctuations in the yen/dollar exchange rate? =>
The FI is net long in the yen and therefore faces the risk that the yen will fall in value against the U.S.
dollar.
Your position is exposed to => interest rate risk, exchange rate risk, and credit risk
If you wanted to hedge your bank's risk exposure, what hedge position would you take? => A short
interest rate hedge to protect against interest rate increases and a short currency hedge to protect
against declines in the value of the Canadian dollar with respect to the U.S. dollar
If in one year there is no change to either interest rates or exchange rates, what is the end-of-year
profit or loss for the bank? (Hint: Annual interest is paid on both the Canadian bonds and the CD on
the date of liquidation in exactly one year.) => Profit of US $20,000.
Assume that instead of investing in Euro bonds at a fixed rate of 6.5 percent, it invests them in
variable rates of LIBOR + 1.5 percent, reset every six months. The current LIBOR rate is 5 percent.
What is the annual spread earned by the bank if LIBOR at the end of six months is 5.5 percent?
Assume both interest and principal will be reinvested in six months. Assume the exchange rate
remains at €1.75/$ at the end of the year. => 0.86 percent
Assume that instead of investing in Euro bonds at a fixed rate of 6.5 percent, the FI invests them in
variable rates of LIBOR + 1.5 percent, reset every six months. The current LIBOR rate is 5 percent.
Assume both interest and principal will be reinvested in six months. Assume the exchange rate
remains at €1.75/$ at the end of the year. What should be the LIBOR rates in six months in order for
the bank to earn a 1 percent spread? => 5.76 percent
Assume that instead of investing in Euro bonds at a fixed rate of 6.5 percent, the FI invests them in
variable rates of LIBOR + 1.5 percent, reset every six months. The current LIBOR rate is 5 percent.
LIBOR at the end of six months is 5.5 percent. Assume both interest and principal will be reinvested
in six months. Assume the spot exchange rate is €1.75/$. What should be the one-year forward rate in
order for the bank to earn a spread of 1 percent? => €1.7478/ $.
The root cause of much of the losses of FIs during the 昀椀 nancial crisis
of 2008-2009 was => market risk.
Conceptually, an FI's trading portfolio can be differentiated from its investment portfolio by =>
Answers A and B only. (A. liquidity. B. time horizon)
Regulators usually view tradable assets as those held for horizons of => . less than one year
Which term defines the risk related to the uncertainty of an FI's earnings on its trading portfolio
caused by changes, and particularly extreme changes in market conditions? => Market risk.
The portfolio of a bank that contains assets and liabilities that are relatively illiquid and held for
longer holding periods => is the investment portfolio.
How can market risk be defined in absolute terms? => . A dollar exposure amount or as a relative
amount against some benchmark.
Which benefits of market risk measurement (MRM) provides senior management with information on
the risk exposure taken by FI traders? => Management information.
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 =>
performance evaluation.
Using market risk management (MRM) to identify the potential return per unit of risk in different
areas by comparing returns to market risk so that more capital and resources can be directed to
preferred trading areas is considered to be which of the following? => Resource allocation.
A reason for the use of market risk management (MRM) for the purpose of identifying potential
misallocations of resources caused by prudential regulation is which of the following? => Regulation
The earnings at risk for an FI is a function of => all of the above (A. the time necessary to liquidate
assets. B. the potential adverse move in yield. C. the dollar market value of the position. D. the price
sensitivity of the position.)
In calculating the value at risk (VAR) of fixed-income securities in the RiskMetrics model => .
Answers B and C only. (B. the price volatility is the product of the modified duration and the adverse
yield change. C. the yield changes are assumed to be normally distributed.)
Daily earnings at risk (DEAR) is calculated as => the dollar value of a position times the price
volatility.
When using the RiskMetrics model, price volatility is calculated as => the price sensitivity times an
adverse daily yield move.
In the RiskMetrics model, value at risk (VAR) is calculated as => DEAR
times the √N
Which of the following securities is most unlikely to have a symmetrical return distribution, making
the use of RiskMetrics model inappropriate? => Option contracts
Which of the following is a problem encountered while using more observations in the back
simulation approach? => Past observations become decreasingly relevant in predicting VAR in the
future
Considering the Capital Asset Pricing Model, which of the following observations is incorrect? =>
Systematic risk is considered to be a diversifiable risk.
If a stock portfolio replicates the returns on a stock market index, the beta of the portfolio will be =>
equal to 1.
If an FIs trading portfolio of stock is not well-diversi 昀 椀 ed, the
additional risk that must be taken into account is => unsystematic risk
The capital requirements of internally generated market risk exposure estimates can be met => with
retained earnings and common stock only
Which of the following items is not considered to be an advantage of using back simulation over the
RiskMetrics approach in developing market risk models? => Back simulation creates a higher degree
of confidence in the estimates.
An advantage of the historic or back simulation model for quantifying market risk includes =>
calculation of a standard deviation of returns is not required.
A disadvantage of the historic or back simulation model for quantifying market risk includes =>
estimates of past returns used in the model may not be relevant to the current market returns.
Which of the following is a method that may overcome weaknesses in the historic or back simulation
model? => Weight sample size observations so that the more recent observations contribute a larger
amount to the model.
Which approach to measuring market risk, in effect, amounts to simulating or creating artificial
trading days and FX rate changes? => Monte Carlo simulation approach.
The use of expected shortfall (ES) is most appropriate when => The probability distribution indicates
there is a possibility of a "fat tail" loss.
The use of expected shortfall (ES) to measure market risk of a portfolio assumes which of the
following? => That changes in asset prices are normally distributed but with fat tails
To measure market risk at the 1 percent level of risk, what is the the scaling factor for the value at risk
(VAR) and the expected shortfall (ES) respectively? => 2.33 and 2.665
What is the 10-day VAR? $15,811
What is the 20-day VAR? => $22,361 (calculate: DEAR x √N= $5,000x √20 =
$22,361)
Where are the contingent items disclosed in the financial statements? => As footnotes to financial
statements.
Loan commitments are classified as => off-balance-sheet assets.
Standby letters of credit are classified as => off-balance-sheet liabilities.
Rediscounted bankers' acceptances are classified as => on-balance-sheet liabilities.
Loan loss reserves are classified as => equity capital.
When an FI pre-commits to lending at a fixed rate, it is exposed to => interest rate risk.
Up-front fees on loan commitments are charged as a certain percentage of => commitment size
Back-end fees on loan commitments are charged as a certain percentage of => unused portion of
commitment size.
Which of the following refers to the fee charged on the unused balance of a loan commitment. =>
Commitment fee.
The quantity risk exposure of a loan commitment is => takedown risk
Takedown risk in a loan commitment exposes the FI to => future liquidity risk.
Which of the following is true of an ‘adverse material change in conditions clause' used in a loan
commitment? => . It allows the FI to cancel or reprice a loan commitment.
An "adverse material changes in conditions" clause is included in loan commitments to protect the FI
against => credit risk
If a future credit crunch is possible, a loan commitment may expose the FI to => funding risk
What is a possible reason behind restricted supply of spot loans to borrowers during a credit crunch?
=> FI's increased aversion toward lending.
Which of the following situations is similar to the externality effect? => . Increase in the cost of funds
above normal levels while many FIs scramble for funds to meet their commitments to customers
during a credit crunch
An exporter demands a letter of credit in order to => guarantee receipt of payment from the importer
upon receipt of the goods
FIs are competing directly with loan commitments, one of their own OBS products, when they also
offer: => Standby letters of credit.
Off-balance-sheet items are => contingent assets and liabilities.
As of June 2012, the vast majority of OBS activities of commercial banks was => swap
Which of the following statements best describe a derivative contract? => Agreement between two
parties to exchange a standard quantity of an asset at a predetermined price at a specified date in the
future.
As of 2012, the top 25 U.S. commercial banks accounted for ________ percent of OBS derivative
contracts among FDIC-insured institutions. => 99.8
The effect to an FI of default by the counterparty to a derivative contract is LEAST serious with =>
futures contracts.
Which of the following is the newest addition to the derivative securities markets? => Credit
derivatives.
Which of the following is true of the market price of a futures contract over time? => It changes
based on the market value of the underlying asset.
Which of the following is true of the market price of an options contract over time? => It changes
based on the market value of the underlying asset.
What is a swap? => An agreement between two parties to exchange assets or a series of cash flows for
a specific period of time at a specified interval.
Which of the following ratios do FIs and regulators often use as a simple measure of solvency? =>
Capital to assets.
What are commercial letters of credit? => They are contingent guarantees sold by an FI to underwrite
the trade or commercial performance of the buyer of the guaranty
In economic terms, the letters of credit (LCs) and stand-by letters of credit SLCs sold by an FI => are
insurance against the frequency or severity of some particular future occurrence.
Which of the following 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? => Options.
Which of the following is true of the delta of an option? => It lies between 0 and 1.
If an option's price increases 1.4 percent for every 2 percent change in the price of the underlying
security, what is the value of the option's delta? => 0.70
The delta of an option is => a measure of the option's price volatility.
Which of the following is an out-of-the-money counterparty? => Counterparty that is currently at a
disadvantage in terms of cash flows.
In the early 1980s => banks increased their off-balance-sheet activities to avoid regulatory costs.
Why is the default risk much more serious for forward contracts than for futures contracts? => All of
the above. (A. Because forward contracts are nonstandard contracts. B. Forward contracts are entered
into bilaterally by the negotiating parties. C. For forwards, all cash flows are required to be paid at one
time on contract maturity. D. Forwards are essentially OTC arrangements with no external guarantees
in case of default.)
Which of the following is a non-schedule L off-balance-sheet risk? => Settlement risk.
Which of the following observations is NOT true? => The settlement risk that an FI is exposed to
within-day appears on its balance sheet
A $200 million loan commitment has an up-front fee of 20 basis points and a backend fee of 25 basis
points on the unused portion. The up-front fee is: $400,000. If 50 percent of the commitment is taken
down, the back-end fee is: $250,000. If 25 percent of the commitment is taken down, the total fees are
$775,000. What is the balance sheet capital? $60 million. If the FI bought call options on bonds with
a face value of $50 million, what is the minimum amount of the stockholder's potential true net
worth? $110 million. If the FI had contingent assets of $40 million and contingent liabilities of $160
million, calculate the stockholder's true net worth (ignore the option mentioned in previous question).
-$60 million.
Sun Bank has issued a one-year $5 million loan commitment to a customer for an up-front fee of 15
basis points and at a fixed rate of 12 percent. The back-end fee for the unused portion of the
commitment is 5 basis points. The bank requires a 10 percent compensating balance in demand
deposits. Reserve requirements on demand deposits are 10 percent. What is expected return on the
loan to the bank if 50 percent of the loan is drawn? Do not take future values of fee or interest income
received: 13.57 percent. What is the expected return on the loan at the end of the year if 50 percent of
the loan is drawn? Estimate using future values of fee and interest income received, that is, return is
defined as all fee and interest income earned at year-end as a percentage of funds used. Assume the
cost of funds to the bank is 8 percent: 13.60 percent. What is the expected return on the loan to the
bank if 50 percent of the loan is drawn immediately and there are no reserve requirements on demand
deposits? Do not take future values of fees or interest income received: 13.72 percent: 13.72 percent.
What is the expected return on the loan to the bank if 50 percent of the loan is drawn using discounted
cash flows? That is, the return has to be estimated at the beginning of the loan period using present
values. Assume there are reserve requirements of 10 percent on demand deposits: 12.59 percent.
How can noninterest operating income of an FI be increased by improved technological efficiency?
=> By linking services to the quality of the FI's technology
How can noninterest operating expenses of an FI be reduced by improved technological efficiency?
=> By improving the efficiency of management of information flows.
How can interest expense of an FI be reduced by improved technological efficiency? => By obtaining
access to low cost sources of funds.
How can interest income of an FI be increased by improved technological efficiency? => By
innovating new interest earning products.
Which of the following is NOT a source of operational risk for an FI? => Positive duration gap.
Which of the following are potential benefits of technology for an FI? => All of the above. (A.
Improved service quality, especially for customers of large banks. B. The rate of innovation of new
products can be increased. C. FIs can more easily cross-market new and existing products to
customers. D. Improved flexibility in financial transactions for retail customers.)
Which of the following occur when managers undertake growth-oriented investments to increase an
FI's size that may be inconsistent with stockholders' value-maximizing objectives? => Agency
conflicts.
The expenses relating to increased technological improvements made by FIs during the last several
years has the most impact on which of the following? => Noninterest expense.
As banks have increased the use of technology over the past 20 years => noninterest income as a
percent of total operating income has approximately doubled
What is float? => Time it takes a check to clear at a bank
Which of the following is a centralized collection service for corporate payments that helps reduce the
float? => Wholesale lockbox.
 Which of the following wholesale services offered by FIs allows businesses to transfer and transact
invoices, purchase orders, and shipping notices automatically? => . Electronic data exchange.
Which of the following wholesale services offered by FIs to businesses allows the FI to combine the
e-mail capabilities of the internet with the FIs ability to process payments electronically through the
interbank payment networks? => Electronic billing.
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? => Prevalence of nationwide branching and banking
in Europe.
As banks and other FIs increase the use of technology, an unintended consequence may be that =>
customers are driven away because they still want to interact with a person for certain transactions.
Which of the following implies reduced unit costs as size or volume of assets increases? =>
Economies of scale.
Which of the following implies reduced unit costs as the range of products offered increases inputs in
producing multiple products? => Economies of scope.
Large-scale investment projects that lead to excess capacity and integration problems that create cost
overruns and control problems are examples of => diseconomies of scale.
Which of the following implies that small FIs are more cost efficient than large FIs, and that in a
freely competitive environment for financial services, small FIs may outperform their larger
counterparts? => Diseconomies of scale.
Which of the following occurs if the costs of joint production of FI services are higher than they
would be if they were produced independently? => Diseconomies of scope.
According to studies, which of the following may better explain cost differences and operating cost
efficiencies among FIs? => X-inefficiencies.
Which of the following best describes economies of scope? => They occur when cost savings are
realized from using many of the same inputs to produce multiple products.
Which of the following best describes/defines X-inefficiencies? => The effects on costs related to
managerial ability and other hard-toquantify factors.
Which of the following best describes economies of scale? => The average cost of production
decreases as the level of output increases.
Which of the following are the two basic approaches to analyzing the cost functions of FIs? =>
Production approach and intermediation approach
Which of the following observations concerning the production approach to measure the cost function
of FIs is true? => Labor and capital are the only inputs.
Which of the following observations concerning the intermediation approach to measure the cost
function of FIs is true? => It views the output as being produced by labor, capital and the funds used
to produce intermediated services.
Which of the following statements is NOT true? => Fedwire is used to transfer funds from the Fed to
the banking system while CHIPS is used to make interbank funds transfers
As of January 2012, which of the following represented the highest percent of the dollar value of
noncash transactions in the United States? => Checks
As of January 2012, which of the following accounts for the highest volume of noncash transactions
in the United States? => Card payments.
As of January 2012, which of the following represented the highest percent of the dollar value of
noncash transactions worldwide? => Credit transfers.
As of January 2012, which of the following accounts for the highest volume of noncash transactions
worldwide? => Card payments.
Which of the following observations concerning e-money is NOT true? => E-money is not a cost
efficient way of managing transactions that are small in value
Which of the following observations is NOT true? => Money stored in e-money accounts and cards is
covered by deposit insurance.
Settlement risk is important because => of the interdependent nature of many international
transactions.
Daylight overdrafts occur when => FI debits exceed credits during the day.
On Fedwire, daylight overdraft => is a bank's positive intraday balance in its reserve account at the
Fed.
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? => It exhibits economies of scale using the
intermediation approach.
Why has empirical evidence on economies of scale and scope been so contradictory? => Efficiency
may be related to non-quantifiable variables such as managerial ability.
Which of the following is consistent with economies of scope? The subscript "b" refers to a banking
firm, "s" for a securities firm, "AC" is average costs and "TC" is total costs. => ACb + s < ACb +
ACs.
Which is the most important banking area in which technology has had an impact? => Cash-
management services.
Which of the following is NOT a wholesale banking service? => Automated teller machines.
Which of the following is NOT a retail banking service? => Check deposit services
Which of the following observations is NOT true of a liquid asset? => Large transactions may move
its market price substantially.
Why do FIs face a return or interest earnings penalty by holding large amounts of assets such as cash,
T-bills, and T-bonds to reduce liquidity risk? => These assets offer low returns.
Which of the following is considered to be the most liquid asset? => Cash
The concept of constrained optimization facing an FI manager involving the minimum amount of
liquid reserve assets required by regulators may => penalize the FI if the minimum amount is less
than the amount warranted by the actual withdrawal risk.
Which of the following is an outcome of an increase in the reserve requirement ratio? => DIs are only
able to lend a smaller percentage of their deposits than before
Which of the following is an outcome of a decrease in the reserve requirement ratio? => A multiplier
effect on the supply of DI deposits and thus, the money supply.
Requiring minimum reserves to be held at the central bank is the equivalent of => a reserve
requirement tax
Required reserve ratios in the U.S. for demand deposits are => 0 percent, 3 percent, and 10 percent
For a DI in the U.S. with $200 in assets and $180 in deposits, a liquid assets ratio of 15 percent =>
None of the above. (A. would require $27.00 in cash and liquid government securities. B. would
require $27.00 in liquid government securities. C. would require $30.00 in cash and liquid
government securities. D. would require $30.00 in liquid government securities.)
Many states in the U.S. impose liquid asset ratios on insurance companies which may be met by =>
cash and government securities.
Buffer reserves at DIs are => government securities that do not qualify as required reserves, but that
can be converted to cash quickly.
Managing the reserve position of a U.S. bank requires knowing => All of the above. (A. the target
reserve ratio. B. the time period over which average deposits are calculated. C. the time period over
which average reserves must be maintained. D. the asset and liability methods that may be used to
meet required reserves.)
For reserve calculation purposes, the period that begins on a Tuesday and ends on a Monday 14 days
later is known as => the reserve computation period.
For reserve calculation purposes, the period that begins on a Thursday and ends on a Wednesday 14
days later is known as => the reserve maintenance period.
Under the lagged reserve accounting system, the => reserve maintenance period does not begin until
seventeen days after the end of the computation period.
Under contemporaneous reserve accounting the => reserve maintenance period starts two days after
the start of the reserve computation period.
Which of the following observations is true of the contemporaneous reserve accounting system? => It
results in a two-day window during which required reserves are known with certainty
The weekend game is => a strategy to reduce the cost of meeting reserve requirements.
One method that may be employed by banks to lower required reserves is to => transfer deposits
offshore on Friday and to transfer them back on Monday
Another method that may be employed by banks to lower required reserves is to => sweep demand
deposits into higher interest-bearing accounts on Friday with a return sweep the following Monday
Which of the following is the result of using "sweep accounts" in which high reserve ratio demand
deposits are "swept" out of customers' accounts on Friday into higher interest-bearing savings
accounts? => Lower required reserve holdings at the Federal Reserve.
The minimum daily average reserve requirement is computed by => multiplying the reserve ratio by
the daily average closing deposit balance.
For reserve computation purposes, Friday balances => receive triple weights in the calculations
The Federal Reserve allows the DI to make up to a _____ daily average error without penalty. => 4
percent
In October 2008, the opportunity cost of holding excess reserves for U.S. DIs => decreased because
the Federal Reserve began to pay interest to DIs on excess reserves held at the Fed.
Demand deposits => have more withdrawal risk than money market demand accounts.
Which of the following liabilities have a high degree of withdrawal risk? => Demand deposits.
What is the average implicit interest rate on a $100,000 account if the bank's average management
costs are $2,500 and annual fees average $1,750? => 0.75 percent
An FI offers a $2,500 minimum balance NOW account paying 4 percent annual interest, and there are
no service charges as long as the customer maintains the minimum balance. The customer maintains a
balance of $5,000, and averages 750 checks per year. Each check has a processing cost to the FI of
$0.15. What is the annual gross interest return on this account to the customer? => $312.50
A DI offers a $500 minimum balance NOW account paying 5.5 percent annual interest. The account
has a service charge of $0.05 per check, and processing costs per check are $0.15. The customer
maintains a balance of $1,000, and averages 150 checks per year. What is the annual gross interest
return on this account to the customer? => $70.00.
What is the major distinction between NOW accounts and traditional demand deposits? => Minimum
account balance requirement to earn interest for NOW accounts.
Which of the following rankings of liabilities is correct if they are ranked by withdrawal risk from
riskiest to least risky? => Demand deposits; money market demand accounts; certificates of deposit.
Which of the following is a mechanism used by DI managers to reduce demand deposit withdrawal
rates? => Implicit interest payments.
Which of the following is a mechanism used by DI managers to impact withdrawal rates of NOW
accounts. => All of the above. (A. Implicit interest payments. B. Minimum balance requirements. C.
Explicit interest payments. E. There is no way to impact withdrawal rates.)
Why are passbook savings generally less liquid than demand deposits and NOW accounts? => All of
the above. (A. They are non checkable. B. They usually involve physical presence at the institution
for withdrawal. C. The DI has the legal power to delay payment for as long as one month. D. They
tend to pay higher interest rates than demand deposits and NOW accounts. )
Wholesale certificates of deposit => can be resold on the secondary market
Since 1998, interest rate variability in the fed funds market has decreased because => of the
introduction of lagged reserve accounting.
Which of the following observations concerning the federal funds rate is NOT true? => Rate
variability has increased since the introduction of lagged reserve accounting.
Which of the following observations concerning repurchase agreements is NOT true? => Unlike fed
funds, these transactions cannot be rolled over each day
Which of the following rankings of liabilities is correct if they are ranked by funding costs from
lowest cost to highest cost? => Retail certificates of deposit; repurchase agreements; federal funds.
In situations where the required reserve shortfall exceeds 4 percent, the bank may be => Answers A,
B, and C only. (A. assessed explicit monetary penalties by the Federal Reserve Bank. B. assessed
implicit penalties in the form of more frequent monitoring and examinations. C. allowed to carry 4
percent of the required reserves to the next maintenance period.)
Which of the following liability products does NOT include transaction privileges? => Passbook
savings accounts
Which of the following liability products does NOT have withdrawal risk? => Wholesale CDs
The largest dollar volume of money market securities is => commercial paper.
Over the past 30 years in the DI industry => All of the above. (A. the loan portfolio has become more
liquid because of increased securitization. B. lower amounts of very liquid assets need to be held to
manage withdrawal risk. C. more opportunities exist for raising funds that are not deposit related. D.
DIs have intentionally managed liabilities to reduce withdrawal risk.)
Medium term notes issued by a U.S. DI => All of the above. (A. generally have a maturity of five to
seven years. B. are a stable source of funds with low withdrawal risk. C. are not subject to reserve
requirements. D. are not subject to deposit insurance.)
Economic collapse during the 1930s, the banking system in the U.S. performed directly or indirectly
all financial services. Those functions included all of the following EXCEPT => B. money market
funds.
Depository financial institutions include all of the following EXCEPT => C. investment banks.
Nondepository financial institutions are represented by all of the following EXCEPT => D. credit
unions.
Which of the following statements is FALSE? => E. A financial intermediary acts as a lender of last
resort.
Which function of an FI reduces transaction and information costs between a corporation and
individual which may encourage a higher rate of savings? => A. Brokerage services.
In its role as a delegated monitor, an FI => E. All of the above.; keeps track of required interest and
principal payments on loans it originates.; works with financially distressed borrowers in danger of
defaulting on their loans.; holds portfolios of loans that they continue to service.; maintains contact
with borrowers to ensure that loan proceeds are utilized for intended purposes.
Which of the following is NOT a major function of financial intermediaries? => D. Management of
the nation's money supply.
Advantages of depositing funds into a typical bank account instead of directly buying corporate
securities include all of the following EXCEPT => C. increased transactions costs.
Many households place funds with financial institutions because many FI accounts provide => E. All
of the above.; lower denominations than other securities.; flexible maturities verses other interest-
earning securities.; better liquidity than directly negotiated debt contracts.;less price risk if interest
rates change.
The reason FIs can offer highly liquid, low price-risk contracts to savers while investing in relatively
illiquid and higher risk assets is => E. All of the above.; because diversification allows an FI to
predict more accurately the expected returns on its asset portfolio.; significant amounts of portfolio
risk are diversified away by investing in assets that have correlations between returns that are less
than perfectly positive.; because individual savers cannot benefit from risk diversification.; because
FIs have a cost advantage in monitoring their portfolios.