Question 1

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

What is the balance sheet capital?

Accepted Answer

A) -$60 million. 
B) $60 million. 
C) $740 million. 
D) $800 million. 
A) -$60 million. 
B) $60 million. 
C) $740 million. 
D) $800 million.

Question 2

Off-balance-sheet activities generally have risk-reducing attributes,but seldom have risk-increasing attributes.

Accepted Answer

A) True 
 B)False

Question 3

Why is the default risk much more serious for forward contracts than for futures contracts?

Accepted Answer

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. 
E) All of the options. 
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. 
E) All of the options.

Question 4

Off-balance sheet activities can have both positive and negative effects on the risk of the FI.

Accepted Answer

A) True 
 B)False

Question 5

What is a possible reason behind restricted supply of spot loans to borrowers during a credit crunch?

Accepted Answer

A) Expansionary monetary policy actions of the Federal Reserve. 
B) FI's increased aversion toward lending. 
C) Shift to the right in the loan supply function at all interest rates. 
D) Low aggregate demand from borrowers to take down loan commitments. 
A) Expansionary monetary policy actions of the Federal Reserve. 
B) FI's increased aversion toward lending. 
C) Shift to the right in the loan supply function at all interest rates. 
D) Low aggregate demand from borrowers to take down loan commitments.

Question 6

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 option to borrow.

Accepted Answer

A) True 
 B)False

Question 7

Off-balance-sheet items are

Accepted Answer

A) items omitted from the short form balance sheet. 
B) contingent assets and liabilities. 
C) risk-free assets and liabilities. 
D) exceptionally risky assets and liabilities. 
A) items omitted from the short form balance sheet. 
B) contingent assets and liabilities. 
C) risk-free assets and liabilities. 
D) exceptionally risky assets and liabilities.

Question 8

A $200 million loan commitment has an up-front fee of 20 basis points and a back-end fee of 25 basis points on the unused portion.

If 25 percent of the commitment is taken down,the total fees are

Accepted Answer

A) $250,000. 
B) $4,000,000. 
C) $400,000. 
D) $775,000. 
A) $250,000. 
B) $4,000,000. 
C) $400,000. 
D) $775,000.

Question 9

The Clearing House Interbank Payments System (CHIPS)is an international wire transfer system owned by the participating banks in the countries in which it is used.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Settlement risk on wire transfers involves intraday credit risk.

Accepted Answer

A) True 
 B)False

Question 12

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.

Accepted Answer

A) 13.45 percent. 
B) 13.57 percent. 
C) 13.60 percent. 
D) 13.72 percent. 
A) 13.45 percent. 
B) 13.57 percent. 
C) 13.60 percent. 
D) 13.72 percent.

Question 13

The source of strength doctrine involving failed FIs in multibank holding company corporate structures has been widely accepted by the courts.

Accepted Answer

A) True 
 B)False

Question 14

Commercial letters of credit are used only in international trade.

Accepted Answer

A) True 
 B)False

Question 15

What are commercial letters of credit?

Accepted Answer

A) They are contractual commitments to make a loan up to a stated amount at a given interest rate in the future. 
B) They 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. 
C) They are nonstandard contracts between two parties to deliver and pay for an asset in the future. 
D) They are standardized contract guaranteed by organized exchanges to deliver and pay for an asset in the future. 
E) They are contingent guarantees sold by an FI to underwrite the trade or commercial performance of the buyer of the guaranty. 
A) They are contractual commitments to make a loan up to a stated amount at a given interest rate in the future. 
B) They 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. 
C) They are nonstandard contracts between two parties to deliver and pay for an asset in the future. 
D) They are standardized contract guaranteed by organized exchanges to deliver and pay for an asset in the future. 
E) They are contingent guarantees sold by an FI to underwrite the trade or commercial performance of the buyer of the guaranty.

Question 16

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 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.

Accepted Answer

A) 13.45 percent. 
B) 13.57 percent. 
C) 13.60 percent. 
D) 13.72 percent. 
A) 13.45 percent. 
B) 13.57 percent. 
C) 13.60 percent. 
D) 13.72 percent.

Question 17

Loan loss reserves 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. 
E) equity capital. 
A) on-balance-sheet assets. 
B) off-balance-sheet assets. 
C) off-balance-sheet liabilities. 
D) on-balance-sheet liabilities. 
E) equity capital.

Question 18

As of the first quarter of 2015,the vast majority of OBS activities of commercial banks was

Accepted Answer

A) future and forward contracts. 
B) credit derivatives. 
C) commitments to buy foreign exchange (FX). 
D) swap contracts. 
A) future and forward contracts. 
B) credit derivatives. 
C) commitments to buy foreign exchange (FX). 
D) swap contracts.

Question 19

Which of the following is true about the value of the delta of an option?

Accepted Answer

A) It lies between 0 and 0.5. 
B) It is always negative. 
C) It lies between 0 and 1. 
D) It is greater than 1. 
A) It lies between 0 and 0.5. 
B) It is always negative. 
C) It lies between 0 and 1. 
D) It is greater than 1.

Question 20

Fees from derivative products are an increasing component of noninterest income for many FIs.

Accepted Answer

A) True 
 B)False

Exam 16: Off-Balance-Sheet Risk

An FI has assets of $800 million and liabilities of $740 million. What is the balance sheet capital?

Off-balance-sheet activities generally have risk-reducing attributes,but seldom have risk-increasing attributes.

Why is the default risk much more serious for forward contracts than for futures contracts?

Off-balance sheet activities can have both positive and negative effects on the risk of the FI.

What is a possible reason behind restricted supply of spot loans to borrowers during a credit crunch?

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 option to borrow.

Off-balance-sheet items are

A $200 million loan commitment has an up-front fee of 20 basis points and a back-end fee of 25 basis points on the unused portion. If 25 percent of the commitment is taken down,the total fees are

The Clearing House Interbank Payments System (CHIPS)is an international wire transfer system owned by the participating banks in the countries in which it is used.

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

Settlement risk on wire transfers involves intraday credit risk.

The source of strength doctrine involving failed FIs in multibank holding company corporate structures has been widely accepted by the courts.

Commercial letters of credit are used only in international trade.

What are commercial letters of credit?

Loan loss reserves are classified as

As of the first quarter of 2015,the vast majority of OBS activities of commercial banks was

Which of the following is true about the value of the delta of an option?

Fees from derivative products are an increasing component of noninterest income for many FIs.

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