Question 1

Funds transferred on Fedwire are settled at the end of the day.

Accepted Answer

A) True 
 B)False

Question 2

When an FI pre-commits to lending at a fixed rate,it is exposed to

Accepted Answer

A) credit risk. 
B) interest rate risk. 
C) takedown risk. 
D) funding risk. 
A) credit risk. 
B) interest rate risk. 
C) takedown risk. 
D) funding risk.

Question 3

In many ways,standby letters of credit (SLCs)perform similar functions for a borrower as do loan commitments.

Accepted Answer

A) True 
 B)False

Question 4

Off-balance-sheet items often are called contingent assets and liabilities because they may,or may not,affect the balance sheet in the future.

Accepted Answer

A) True 
 B)False

Question 5

In the U.S. ,commercial banks are the only issuers of standby letters of credit.

Accepted Answer

A) True 
 B)False

Question 6

The quantity risk exposure of a loan commitment is

Accepted Answer

A) credit risk. 
B) interest rate risk. 
C) takedown risk. 
D) funding risk. 
A) credit risk. 
B) interest rate risk. 
C) takedown risk. 
D) funding risk.

Question 7

An FI has assets of $800 million and liabilities of $740 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?

Accepted Answer

A) $10 million. 
B) $70 million. 
C) $110 million. 
D) $790 million. 
A) $10 million. 
B) $70 million. 
C) $110 million. 
D) $790 million.

Question 8

A corporation is planning to issue $10 million worth of 180-day commercial paper.In order to reduce the interest rates by 25 basis points (per year),it plans to back this issue with a standby letter of credit or a loan commitment.The standby letter of credit is available for 20 basis points (per year)to be paid up-front.The loan commitment for $10 million is available for an up-front fee of 15 basis points (per year)and a 5 basis points back-end fee.

Which method is preferable,between the loan commitment and the standby letter of credit?

Accepted Answer

A) The loan commitment is preferable because the savings are greater. 
B) The standby letter of credit is preferable because the savings are greater. 
C) The loan commitment is preferable it has a lower risk of default. 
D) The standby letter of credit is preferable because it has a lower risk of default. 
E) The loan commitment is preferable because the back-end fee is payable at the end of the year. 
A) The loan commitment is preferable because the savings are greater. 
B) The standby letter of credit is preferable because the savings are greater. 
C) The loan commitment is preferable it has a lower risk of default. 
D) The standby letter of credit is preferable because it has a lower risk of default. 
E) The loan commitment is preferable because the back-end fee is payable at the end of the year.

Question 9

Standby letters of credit perform an insurance function similar to that of commercial and trade letters of credit.

Accepted Answer

A) True 
 B)False

Question 10

Loan commitments are classified as

Accepted Answer

A) on-balance-sheet assets. 
B) off-balance-sheet assets. 
C) off-balance-sheet liabilities. 
D) on-balance-sheet liabilities. 
A) on-balance-sheet assets. 
B) off-balance-sheet assets. 
C) off-balance-sheet liabilities. 
D) on-balance-sheet liabilities.

Question 11

Rediscounted bankers' acceptances are classified as

Accepted Answer

A) on-balance-sheet assets. 
B) off-balance-sheet assets. 
C) off-balance-sheet liabilities. 
D) on-balance-sheet liabilities. 
A) on-balance-sheet assets. 
B) off-balance-sheet assets. 
C) off-balance-sheet liabilities. 
D) on-balance-sheet liabilities.

Question 12

Funds transferred on the Clearing House Interbank Payments System (CHIPS)are settled immediately.

Accepted Answer

A) True 
 B)False

Question 13

Standby letters of credit are classified as

Accepted Answer

A) on-balance-sheet assets. 
B) off-balance-sheet assets. 
C) off-balance-sheet liabilities. 
D) on-balance-sheet liabilities. 
A) on-balance-sheet assets. 
B) off-balance-sheet assets. 
C) off-balance-sheet liabilities. 
D) on-balance-sheet liabilities.

Question 14

The current market value or contingent claim value of OBS items overestimates their notional value.

Accepted Answer

A) True 
 B)False

Question 15

The use of letters of credit (LCs)and standby letters of credit (SLCs)may result in an FI having a higher concentration ratio than desired for a particular industry.

Accepted Answer

A) True 
 B)False

Question 16

Credit derivatives allow FIs to hedge credit risk on individual assets,but not on portfolios of assets.

Accepted Answer

A) True 
 B)False

Question 17

A corporation is planning to issue $10 million worth of 180-day commercial paper.In order to reduce the interest rates by 25 basis points (per year),it plans to back this issue with a standby letter of credit or a loan commitment.The standby letter of credit is available for 20 basis points (per year)to be paid up-front.The loan commitment for $10 million is available for an up-front fee of 15 basis points (per year)and a 5 basis points back-end fee.

What are the savings to the corporation if it obtains a loan commitment to back its $10 million issue of commercial paper?

Accepted Answer

A) $1,250. 
B) $2,500. 
C) $3,750. 
D) $5,000. 
A) $1,250. 
B) $2,500. 
C) $3,750. 
D) $5,000.

Question 18

Which of the following is an out-of-the-money counterparty in the derivative securities market?

Accepted Answer

A) Counterparty in a loan commitment contract. 
B) FI that trades in securities prior to their actual issue. 
C) Counterparty that is currently at an advantage in terms of cash flows. 
D) FI that guarantees to underwrite the performance of the buyer of the guaranty. 
E) Counterparty that is currently at a disadvantage in terms of cash flows. 
A) Counterparty in a loan commitment contract. 
B) FI that trades in securities prior to their actual issue. 
C) Counterparty that is currently at an advantage in terms of cash flows. 
D) FI that guarantees to underwrite the performance of the buyer of the guaranty. 
E) Counterparty that is currently at a disadvantage in terms of cash flows.

Question 19

All off-balance-sheet items will eventually move on to the balance sheet at some point in time.

Accepted Answer

A) True 
 B)False

Question 20

Contingent credit risk on derivative contracts is more serious for futures contracts than for forward contracts.

Accepted Answer

A) True 
 B)False

Exam 16: Off-Balance-Sheet Risk

Funds transferred on Fedwire are settled at the end of the day.

When an FI pre-commits to lending at a fixed rate,it is exposed to

In many ways,standby letters of credit (SLCs)perform similar functions for a borrower as do loan commitments.

Off-balance-sheet items often are called contingent assets and liabilities because they may,or may not,affect the balance sheet in the future.

In the U.S. ,commercial banks are the only issuers of standby letters of credit.

The quantity risk exposure of a loan commitment is

An FI has assets of $800 million and liabilities of $740 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?

Standby letters of credit perform an insurance function similar to that of commercial and trade letters of credit.

Loan commitments are classified as

Rediscounted bankers' acceptances are classified as

Funds transferred on the Clearing House Interbank Payments System (CHIPS)are settled immediately.

Standby letters of credit are classified as

The current market value or contingent claim value of OBS items overestimates their notional value.

The use of letters of credit (LCs)and standby letters of credit (SLCs)may result in an FI having a higher concentration ratio than desired for a particular industry.

Credit derivatives allow FIs to hedge credit risk on individual assets,but not on portfolios of assets.

Which of the following is an out-of-the-money counterparty in the derivative securities market?

All off-balance-sheet items will eventually move on to the balance sheet at some point in time.

Contingent credit risk on derivative contracts is more serious for futures contracts than for forward contracts.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Firms and Investment Banks

Financial Services: Mutual Fund and Hedge Fund Companies

Financial Services: Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters