Question 1

An up-front fee on a loan commitment rewards the FI for its willingness to stand ready to lend the commitment amount during some agreed upon time period.

Accepted Answer

A) True 
 B)False  True

Question 2

The delta of an option is the sensitivity of an option's value to a unit change in the value of the underlying asset.

Accepted Answer

A) True 
 B)False  True

Question 3

Which of the following is a non-schedule L off-balance-sheet risk?

Accepted Answer

A) Takedown risk. 
B) Settlement risk. 
C) Aggregate funding risk. 
D) When-issued trading. 
E) Credit risk with derivative securities. 
A) Takedown risk. 
B) Settlement risk. 
C) Aggregate funding risk. 
D) When-issued trading. 
E) Credit risk with derivative securities. B

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

The estoppel argument used in bank failures is based on the concept of financial unsophistication.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

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 8

Commercial letters of credit are guarantees that are issued to cover contingencies that are potentially more severe and less predictable than those covered by standby letters of credit.

Accepted Answer

A) True 
 B)False

Question 9

Contingent credit risk occurs with the use of derivative products and involves the potential default by a counterparty.

Accepted Answer

A) True 
 B)False

Question 10

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. 
E) $375,000. 
A) $250,000. 
B) $4,000,000. 
C) $400,000. 
D) $775,000. 
E) $375,000.

Question 11

Up-front fees on loan commitments are charged as a certain percentage of

Accepted Answer

A) commitment size. 
B) loan taken down. 
C) utilized portion of commitment size. 
D) unused portion of commitment size. 
E) interest payable on the loan commitment. 
A) commitment size. 
B) loan taken down. 
C) utilized portion of commitment size. 
D) unused portion of commitment size. 
E) interest payable on the loan commitment.

Question 12

Contingent credit risk is more serious for futures contracts than forward contracts because the over-the-counter arrangements necessary to replicate the guarantees at a later date.

Accepted Answer

A) True 
 B)False

Question 13

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. 
E) foreign (off shore) 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. 
E) foreign (off shore) assets and liabilities.

Question 14

Even though an FI has off-balance-sheet activities, the true net worth is equal to on-balance sheet assets minus on-balance sheet liabilities.

Accepted Answer

A) True 
 B)False

Question 15

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 16

If a commercial bank engages in OBS activities, there are no additional capital requirements imposed by regulators.

Accepted Answer

A) True 
 B)False

Question 17

Off-balance sheet positions are risky because they may yield negative future cash flows.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is true 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. 
E) It is always equal to 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. 
E) It is always equal to 1.

Question 19

Which of the following is true of the market price of an options contract over time?

Accepted Answer

A) It is set at time 0. 
B) It is fixed over the life of the contract. 
C) It changes based on the market value of the underlying asset. 
D) It increases with time to expiration. 
E) It is based on supply and demand. 
A) It is set at time 0. 
B) It is fixed over the life of the contract. 
C) It changes based on the market value of the underlying asset. 
D) It increases with time to expiration. 
E) It is based on supply and demand.

Question 20

Takedown risk in a loan commitment exposes the FI to

Accepted Answer

A) immediate liquidity risk. 
B) basis risk. 
C) spread risk. 
D) externality effects. 
E) future liquidity risk. 
A) immediate liquidity risk. 
B) basis risk. 
C) spread risk. 
D) externality effects. 
E) future liquidity risk.

Exam 16: Off-Balance-Sheet Risk

An up-front fee on a loan commitment rewards the FI for its willingness to stand ready to lend the commitment amount during some agreed upon time period.

The delta of an option is the sensitivity of an option's value to a unit change in the value of the underlying asset.

Which of the following is a non-schedule L off-balance-sheet risk?

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

The estoppel argument used in bank failures is based on the concept of financial unsophistication.

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

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.

Commercial letters of credit are guarantees that are issued to cover contingencies that are potentially more severe and less predictable than those covered by standby letters of credit.

Contingent credit risk occurs with the use of derivative products and involves the potential default by a counterparty.

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

Up-front fees on loan commitments are charged as a certain percentage of

Contingent credit risk is more serious for futures contracts than forward contracts because the over-the-counter arrangements necessary to replicate the guarantees at a later date.

Off-balance-sheet items are

Even though an FI has off-balance-sheet activities, the true net worth is equal to on-balance sheet assets minus on-balance sheet liabilities.

If a commercial bank engages in OBS activities, there are no additional capital requirements imposed by regulators.

Off-balance sheet positions are risky because they may yield negative future cash flows.

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

Which of the following is true of the market price of an options contract over time?

Takedown risk in a loan commitment exposes the FI to

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