Question 1

The risk that an investor will be forced to place earnings from a loan or security into a lower yielding investment is known as:

Accepted Answer

A)  liquidity risk. 
B)  reinvestment risk. 
C)  credit risk. 
D)  foreign exchange risk. 
A)  liquidity risk. 
B)  reinvestment risk. 
C)  credit risk. 
D)  foreign exchange risk.

Question 2

A high-quality loan book for Australian banks during the global financial crisis (GFC) meant that:

Accepted Answer

A)  their non-performing loans as a percentage of their total domestic loan portfolio fell during the GFC. 
B)  their non-performing loans as a percentage of their total domestic loan portfolio increased above 2 per cent during the GFC. 
C)  Australian banks' profitability fell and Australian FIs were severely impacted by the GFC. 
D)  Australian banks' profitability was maintained and Australian FIs were not severely impacted by the GFC. 
A)  their non-performing loans as a percentage of their total domestic loan portfolio fell during the GFC. 
B)  their non-performing loans as a percentage of their total domestic loan portfolio increased above 2 per cent during the GFC. 
C)  Australian banks' profitability fell and Australian FIs were severely impacted by the GFC. 
D)  Australian banks' profitability was maintained and Australian FIs were not severely impacted by the GFC.

Question 3

A small local bank failed because of a housing market collapse following the departure of the area's largest employer. What type of risk applies to the failure of the institution?

Accepted Answer

A)  firm-specific risk 
B)  technological risk 
C)  operational risk 
D)  insolvency risk 
A)  firm-specific risk 
B)  technological risk 
C)  operational risk 
D)  insolvency risk

Question 4

Which of the following are effective measures for claimholders if a foreign government prohibits repayment of debt obligations to an international lender?

Accepted Answer

A)  The claimholder can recover its outstanding debt through local courts. 
B)  The claimholder can recover its outstanding debt through international courts 
C)  The claimholder cannot do anything. 
D)  The claimholder has limited recourse through normal legal channels but may exert leverage if it has control over future loans or supply of funds. 
A)  The claimholder can recover its outstanding debt through local courts. 
B)  The claimholder can recover its outstanding debt through international courts 
C)  The claimholder cannot do anything. 
D)  The claimholder has limited recourse through normal legal channels but may exert leverage if it has control over future loans or supply of funds.

Question 5

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?

Accepted Answer

A)  insolvency risk 
B)  sovereign risk 
C)  currency risk 
D)  liquidity risk 
A)  insolvency risk 
B)  sovereign risk 
C)  currency risk 
D)  liquidity risk

Question 6

Matching the foreign currency book protects the FI from:

Accepted Answer

A)  sovereign country risk. 
B)  interest rate risk. 
C)  liquidity risk. 
D)  foreign exchange risk. 
A)  sovereign country risk. 
B)  interest rate risk. 
C)  liquidity risk. 
D)  foreign exchange risk.

Question 7

An example of refinancing risk is a case in which an FI:

Accepted Answer

A)  funds 2-year maturity assets with 1-year maturity liabilities. 
B)  funds 1-year maturity assets with 2-year maturity liabilities. 
C)  funds 2-year maturity assets with 2-year maturity liabilities 
D)  None of the listed options are correct. 
A)  funds 2-year maturity assets with 1-year maturity liabilities. 
B)  funds 1-year maturity assets with 2-year maturity liabilities. 
C)  funds 2-year maturity assets with 2-year maturity liabilities 
D)  None of the listed options are correct.

Question 8

An Australian FI that invests €50 million in 3-year maturity loans and partially funds these loans with €30 million 1-year deposits is exposed to the following risks.

Accepted Answer

A)  A depreciation of the euro against the Australian dollar plus credit risk plus refinancing risk, such as increasing interest rates in the Eurozone. 
B)  An appreciation of the euro against the Australian dollar plus credit risk plus refinancing risk, such as increasing interest rates in the Eurozone. 
C)  A depreciation of the euro against the Australian dollar plus credit risk plus reinvestment risk, such as decreasing interest rates in the Eurozone. 
D)  A depreciation of the euro against the Australian dollar reinvestment risk, such as increasing interest rates in the Eurozone. 
A)  A depreciation of the euro against the Australian dollar plus credit risk plus refinancing risk, such as increasing interest rates in the Eurozone. 
B)  An appreciation of the euro against the Australian dollar plus credit risk plus refinancing risk, such as increasing interest rates in the Eurozone. 
C)  A depreciation of the euro against the Australian dollar plus credit risk plus reinvestment risk, such as decreasing interest rates in the Eurozone. 
D)  A depreciation of the euro against the Australian dollar reinvestment risk, such as increasing interest rates in the Eurozone.

Question 9

Which of the following is a suitable description of the term 'economies of scope'?

Accepted Answer

A)  The use of several inputs to produce one common output. 
B)  The ability to generate cost savings by producing more than one output with the same inputs. 
C)  The ability to lower average operating costs by expanding the number of outputs. 
D)  The ability to lower average operating costs by lowering the number of outputs. 
A)  The use of several inputs to produce one common output. 
B)  The ability to generate cost savings by producing more than one output with the same inputs. 
C)  The ability to lower average operating costs by expanding the number of outputs. 
D)  The ability to lower average operating costs by lowering the number of outputs.

Question 10

What are the major objectives of technological expansion?

Accepted Answer

A)  To lower operating costs, increase profits and capture new markets. 
B)  To stabilise operating costs, increase profits and capture new markets. 
C)  To lower operating costs, stabilise profits and capture new markets. 
D)  To lower operating costs, increase profits and stabilise the existing market share. 
A)  To lower operating costs, increase profits and capture new markets. 
B)  To stabilise operating costs, increase profits and capture new markets. 
C)  To lower operating costs, stabilise profits and capture new markets. 
D)  To lower operating costs, increase profits and stabilise the existing market share.

Question 11

When analysing an FI's performance, it is not important to consider its off-balance-sheet activities as they have no current or future impact on the FI's financial standing.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following are typical off-balance-sheet activities?

Accepted Answer

A)  letters of credit 
B)  loan commitments 
C)  forward contracts, swaps and other derivative securities 
D)  All of the listed options are correct. 
A)  letters of credit 
B)  loan commitments 
C)  forward contracts, swaps and other derivative securities 
D)  All of the listed options are correct.

Question 13

The Reserve Bank of Australia believes that operational risk could lead to severe financial distress for FIs. Outline what is meant by operational risk and how it can impact on a financial institution. In particular, illustrate your answer with recent cases of bank operational risk, for example: retail bank system failures, trading loss fraud and Ponzi scheme fraud.

Accepted Answer

Operational risk is partly related to te

Question 14

Matching the foreign currency book does not protect the FI from:

Accepted Answer

A)  sovereign country risk. 
B)  interest rate risk. 
C)  liquidity risk. 
D)  foreign exchange risk. 
A)  sovereign country risk. 
B)  interest rate risk. 
C)  liquidity risk. 
D)  foreign exchange risk.

Question 15

Credit risk refers to the possibility that promised cash flows on financial claims such as loans and securities are not paid in full.

Accepted Answer

A) True 
 B)False

Question 16

The collapse of the US bank, IndyMac Bank was an example of:

Accepted Answer

A)  market risk. 
B)  operational risk. 
C)  insolvency risk. 
D)  insolvency and liquidity risk. 
A)  market risk. 
B)  operational risk. 
C)  insolvency risk. 
D)  insolvency and liquidity risk.

Question 17

A letter of credit is:

Accepted Answer

A)  a credit guarantee issued by an FI's customer to pay a pre-determined amount of money to the FI at a future point in time. 
B)  an on-balance-sheet transaction for the issuing FI. 
C)  a credit guarantee issued by an FI on which payment is contingent on some future event occurring. 
D)  None of the listed options are correct. 
A)  a credit guarantee issued by an FI's customer to pay a pre-determined amount of money to the FI at a future point in time. 
B)  an on-balance-sheet transaction for the issuing FI. 
C)  a credit guarantee issued by an FI on which payment is contingent on some future event occurring. 
D)  None of the listed options are correct.

Question 18

A short-funded FI is exposed to increasing interest rates.

Accepted Answer

A) True 
 B)False

Question 19

Sovereign risk involves the inability of a foreign corporation to repay the principal or interest on a loan because of stipulations by the foreign government that are out of the control of the foreign corporation.

Accepted Answer

A) True 
 B)False

Question 20

Assume that you are a financial advisor to ABC Bank. The bank wishes to invest $50 million in loans with an average maturity of 3 years. The average interest rate on these loans is 12 per cent p.a. The bank can either grant the loans at a variable rate or at a fixed rate for the time of the investment. ABC Bank has the choice of funding these loans through either at-call deposits or through 5-year maturity term deposits. Explain the different types of risks that ABC Bank faces when funding its loans.

Accepted Answer

In mismatching the maturities of assets

The risk that an investor will be forced to place earnings from a loan or security into a lower yielding investment is known as:

A high-quality loan book for Australian banks during the global financial crisis (GFC) meant that:

A small local bank failed because of a housing market collapse following the departure of the area's largest employer. What type of risk applies to the failure of the institution?

Which of the following are effective measures for claimholders if a foreign government prohibits repayment of debt obligations to an international lender?

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?

Matching the foreign currency book protects the FI from:

An example of refinancing risk is a case in which an FI:

An Australian FI that invests €50 million in 3-year maturity loans and partially funds these loans with €30 million 1-year deposits is exposed to the following risks.

Which of the following is a suitable description of the term 'economies of scope'?

What are the major objectives of technological expansion?

When analysing an FI's performance, it is not important to consider its off-balance-sheet activities as they have no current or future impact on the FI's financial standing.

Which of the following are typical off-balance-sheet activities?

Matching the foreign currency book does not protect the FI from:

Credit risk refers to the possibility that promised cash flows on financial claims such as loans and securities are not paid in full.

The collapse of the US bank, IndyMac Bank was an example of:

A letter of credit is:

A short-funded FI is exposed to increasing interest rates.

Sovereign risk involves the inability of a foreign corporation to repay the principal or interest on a loan because of stipulations by the foreign government that are out of the control of the foreign corporation.

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters

Exam 4: Risk of Financial Institutions

The risk that an investor will be forced to place earnings from a loan or security into a lower yielding investment is known as:

A high-quality loan book for Australian banks during the global financial crisis (GFC) meant that:

A small local bank failed because of a housing market collapse following the departure of the area's largest employer. What type of risk applies to the failure of the institution?

Which of the following are effective measures for claimholders if a foreign government prohibits repayment of debt obligations to an international lender?

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?

Matching the foreign currency book protects the FI from:

An example of refinancing risk is a case in which an FI:

An Australian FI that invests €50 million in 3-year maturity loans and partially funds these loans with €30 million 1-year deposits is exposed to the following risks.

Which of the following is a suitable description of the term 'economies of scope'?

What are the major objectives of technological expansion?

When analysing an FI's performance, it is not important to consider its off-balance-sheet activities as they have no current or future impact on the FI's financial standing.

Which of the following are typical off-balance-sheet activities?

Matching the foreign currency book does not protect the FI from:

Credit risk refers to the possibility that promised cash flows on financial claims such as loans and securities are not paid in full.

The collapse of the US bank, IndyMac Bank was an example of:

A letter of credit is:

A short-funded FI is exposed to increasing interest rates.

Sovereign risk involves the inability of a foreign corporation to repay the principal or interest on a loan because of stipulations by the foreign government that are out of the control of the foreign corporation.

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters