Exam 7: Risks of Financial Institutions

The asymmetric return distribution (relatively high probability of anticipated return;lower probability of default)on risky debt exposes the FI to

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?

One method of guarding against credit risk is to assess a risk premium based on the estimate of default risk exposure that a borrower carries.

Holding corporate bonds with fixed interest rates involves

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

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 sold.Which of the following risks applies to the false documentation by the employee?

Bank of the Atlantic has liabilities of $4 million with an average maturity of two years paying interest rates of 4.0 percent annually.It has assets of $5 million with an average maturity of 5 years earning interest rates of 6.0 percent annually.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?

An FI that finances a euro (€)loan with U.S.dollar ($)deposits is exposed to

Which of the following would one typically find in the trading portfolio of an FI?

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

Which of the following observations is NOT true of a letter of credit?

Off-balance-sheet risk occurs because of activities that do not appear on the balance sheet.

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?

To ease the demand for immediate cash by customers,and FI can either borrow additional funds or sell assets.

Foreign exchange risk includes interest rate risk and credit risk as well as changes in the foreign exchange rate between two countries.

Financial claims issued by corporations and held by FIs promise a limited or fixed upside return.

Effective use of diversification principles allows an FI to reduce the total default risk in a portfolio.

The more volatile asset prices,the more market risks an FI has when they have an open,or unhedged,position.

Millon National Bank has 10 million British pounds (£)in one-year assets and £8 million in one-year liabilities.In addition,it has one-year liabilities of 4 million euros (€).Assets are earning 8 percent and both liabilities are being paid at a rate of 8 percent.All interest and principal will be paid at the end of the year.What is the net interest income in dollars if the spot prices at the end of the year are $1.50/£ and €1.65/$?

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 is out of the control of the foreign corporation.