Question 1

Returns from domestic and foreign investments may not be perfectly correlated because of different economic infrastructures and growth rates.

Accepted Answer

A) True 
 B)False

Question 2

The relationship of a limited or fixed upside return with a high probability and the potential large downside loss with a small probability is an example of an asset's credit risk to an FI.

Accepted Answer

A) True 
 B)False

Question 3

The asset transformation function potentially exposes the FI to

Accepted Answer

A) foreign exchange risk. 
B) technology risk. 
C) operational risk. 
D) trading risk. 
E) interest rate risk. 
A) foreign exchange risk. 
B) technology risk. 
C) operational risk. 
D) trading risk. 
E) interest rate risk.

Question 4

One objective of technological expansion is to achieve economies of scale at the expense of diseconomies of scope.

Accepted Answer

A) True 
 B)False

Question 5

When the U.S.dollar declines against European currencies,it is

Accepted Answer

A) potentially harmful for European banks only. 
B) potentially harmful for U.S.banks only. 
C) potentially harmful for those banks that have financed U.S.dollar assets with liabilities denominated in European currencies. 
D) potentially harmful for those banks that have financed European currency assets with U.S.dollar liabilities. 
A) potentially harmful for European banks only. 
B) potentially harmful for U.S.banks only. 
C) potentially harmful for those banks that have financed U.S.dollar assets with liabilities denominated in European currencies. 
D) potentially harmful for those banks that have financed European currency assets with U.S.dollar liabilities.

Question 6

Economies of scope involve the ability to lower the average cost of operations by expanding the output of financial services.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) credit risk. 
B) sovereign risk. 
C) currency risk. 
D) liquidity risk. 
A) credit risk. 
B) sovereign risk. 
C) currency risk. 
D) liquidity risk.

Question 8

Unanticipated withdrawals by liability holders are a major part of liquidity risk.

Accepted Answer

A) True 
 B)False

Question 9

Insolvency risk is a consequence of the other risks to which FI is exposed.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A) Credit risk. 
B) Refinancing risk. 
C) Reinvestment risk. 
D) Liquidity risk. 
A) Credit risk. 
B) Refinancing risk. 
C) Reinvestment risk. 
D) Liquidity risk.

Question 11

The risk that a foreign government may devalue the currency relates to

Accepted Answer

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

Question 12

When the assets and liabilities of an FI are not equal in size,efficient hedging of interest rate risk can be achieved by

Accepted Answer

A) increasing the duration of assets and increasing the duration of equity. 
B) issuing more equity and reducing the amount of borrowed funds. 
C) not exactly matching the maturities of assets and liabilities. 
D) issuing more equity and investing the funds in higher-yielding assets. 
A) increasing the duration of assets and increasing the duration of equity. 
B) issuing more equity and reducing the amount of borrowed funds. 
C) not exactly matching the maturities of assets and liabilities. 
D) issuing more equity and investing the funds in higher-yielding assets.

Question 13

For an FI investing in risky loans or bonds,the probability is relatively the lowest for which of the following occurrences?

Accepted Answer

A) Repayment of principal and promised interest in full. 
B) Partial default on interest payments. 
C) Complete default on interest payments. 
D) Partial default of the principal remaining on a loan. 
E) Complete default on principal and interest. 
A) Repayment of principal and promised interest in full. 
B) Partial default on interest payments. 
C) Complete default on interest payments. 
D) Partial default of the principal remaining on a loan. 
E) Complete default on principal and interest.

Question 14

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 bank's net interest income for the current year?

Accepted Answer

A) $300,000. 
B) $140,000. 
C) $160,000. 
D) $280,000. 
A) $300,000. 
B) $140,000. 
C) $160,000. 
D) $280,000.

Question 15

The potential exercise of unanticipated contingencies can result in

Accepted Answer

A) technology risk. 
B) interest rate risk. 
C) credit risk. 
D) foreign exchange risk. 
E) off-balance-sheet risk. 
A) technology risk. 
B) interest rate risk. 
C) credit risk. 
D) foreign exchange risk. 
E) off-balance-sheet risk.

Question 16

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

Accepted Answer

A) credit risk. 
B) market risk. 
C) political risk. 
D) sovereign risk. 
A) credit risk. 
B) market risk. 
C) political risk. 
D) sovereign risk.

Question 17

The major source of risk exposure resulting from issuance of standby letters of credit is

Accepted Answer

A) technology risk. 
B) interest rate risk. 
C) credit risk. 
D) foreign exchange risk. 
E) off-balance-sheet risk. 
A) technology risk. 
B) interest rate risk. 
C) credit risk. 
D) foreign exchange risk. 
E) off-balance-sheet risk.

Question 18

An FI is net long in foreign assets if it holds more foreign liabilities than foreign assets.

Accepted Answer

A) True 
 B)False

Question 19

Foreign exchange risk is that the value of assets and liabilities may change because of changes in the level of interest rates.

Accepted Answer

A) True 
 B)False

Question 20

Off-balance sheet activities never have an effect on the value of equity the FI holds.

Accepted Answer

A) True 
 B)False

Exam 7: Risks of Financial Institutions

Returns from domestic and foreign investments may not be perfectly correlated because of different economic infrastructures and growth rates.

The relationship of a limited or fixed upside return with a high probability and the potential large downside loss with a small probability is an example of an asset's credit risk to an FI.

The asset transformation function potentially exposes the FI to

One objective of technological expansion is to achieve economies of scale at the expense of diseconomies of scope.

When the U.S.dollar declines against European currencies,it is

Economies of scope involve the ability to lower the average cost of operations by expanding the output of financial services.

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

Unanticipated withdrawals by liability holders are a major part of liquidity risk.

Insolvency risk is a consequence of the other risks to which FI is exposed.

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

The risk that a foreign government may devalue the currency relates to

When the assets and liabilities of an FI are not equal in size,efficient hedging of interest rate risk can be achieved by

For an FI investing in risky loans or bonds,the probability is relatively the lowest for which of the following occurrences?

The potential exercise of unanticipated contingencies can result in

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

The major source of risk exposure resulting from issuance of standby letters of credit is

An FI is net long in foreign assets if it holds more foreign liabilities than foreign assets.

Foreign exchange risk is that the value of assets and liabilities may change because of changes in the level of interest rates.

Off-balance sheet activities never have an effect on the value of equity the FI holds.

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

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

Off-Balance-Sheet 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