Question 1

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. 
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 2

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 3

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 4

In the early 1980s

Accepted Answer

A) banks increased their off-balance-sheet activities to avoid competition from nonbank banks. 
B) banks decreased their off-balance-sheet activities to avoid regulatory taxes. 
C) banks decreased their off-balance-sheet activities to avoid competition from nonbank banks. 
D) banks increased their off-balance-sheet activities to avoid regulatory costs. 
E) banks increased their off-balance-sheet activities to avoid interest rate risk exposure. 
A) banks increased their off-balance-sheet activities to avoid competition from nonbank banks. 
B) banks decreased their off-balance-sheet activities to avoid regulatory taxes. 
C) banks decreased their off-balance-sheet activities to avoid competition from nonbank banks. 
D) banks increased their off-balance-sheet activities to avoid regulatory costs. 
E) banks increased their off-balance-sheet activities to avoid interest rate risk exposure.

Question 5

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.
-Assume 50 percent of the loan is drawn and that there are reserve requirements of 10 percent on demand deposits. What should the bank charge as back-end fees if they require an expected return of 13.63 percent? Do not take future values of fees or interest income received.

Accepted Answer

A) 5 basis points. 
B) 10 basis points. 
C) 15 basis points. 
D) 20 basis points. 
E) 25 basis points. 
A) 5 basis points. 
B) 10 basis points. 
C) 15 basis points. 
D) 20 basis points. 
E) 25 basis points.

Question 6

The extremely high growth of OBS activities since the early 1990s has caused regulators to recognize the potential risk exposure to FIs from their use.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

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 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. 
E) $850 million. 
A) $10 million. 
B) $70 million. 
C) $110 million. 
D) $790 million. 
E) $850 million.

Question 9

If an FI is a counterparty to a swap arrangement, it must record the notational value of the swap as the market value.

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is true of an 'adverse material change in conditions clause' used in a loan commitment?

Accepted Answer

A) It allows the FI to cancel or reprice a loan commitment. 
B) It protects the lender against takedown risk. 
C) It protects the lender against basis risk. 
D) Exercise of the clause helps defaulted borrowers. 
E) It is exercised frequently by most FIs. 
A) It allows the FI to cancel or reprice a loan commitment. 
B) It protects the lender against takedown risk. 
C) It protects the lender against basis risk. 
D) Exercise of the clause helps defaulted borrowers. 
E) It is exercised frequently by most FIs.

Question 12

Loans sold without recourse have contingent liability off-balance-sheet implications for the FI that sells the loan.

Accepted Answer

A) True 
 B)False

Question 13

If a future credit crunch is possible, a loan commitment may expose the FI to

Accepted Answer

A) credit risk. 
B) interest rate risk. 
C) sovereign country risk. 
D) funding risk. 
E) exchange rate risk. 
A) credit risk. 
B) interest rate risk. 
C) sovereign country risk. 
D) funding risk. 
E) exchange rate risk.

Question 14

As of June 2012, the vast majority of OBS activities of commercial banks was

Accepted Answer

A) future and forward contracts. 
B) credit derivatives. 
C) commitments to buy FX. 
D) swap contracts. 
E) loans sold with recourse. 
A) future and forward contracts. 
B) credit derivatives. 
C) commitments to buy FX. 
D) swap contracts. 
E) loans sold with recourse.

Question 15

If an FI enters into a loan commitment, it is essentially entering into a forward contract.

Accepted Answer

A) True 
 B)False

Question 16

As of 2012, the top 25 U.S. commercial banks accounted for ________ percent of OBS derivative contracts among FDIC-insured institutions.

Accepted Answer

A) 100 
B) 99.8 
C) 92.6 
D) 81.9 
E) 60.7 
A) 100 
B) 99.8 
C) 92.6 
D) 81.9 
E) 60.7

Question 17

The ability to provide loan commitments is a signal to borrowers that the FI has a lower risk portfolio.

Accepted Answer

A) True 
 B)False

Question 18

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. 
E) 13.90 percent. 
A) 13.45 percent. 
B) 13.57 percent. 
C) 13.60 percent. 
D) 13.72 percent. 
E) 13.90 percent.

Question 19

Which of the following statements best describe a derivative contract?

Accepted Answer

A) Contractual commitments to make a loan up to a stated amount at a given interest rate in the future. 
B) Contingent guarantees sold by an FI to underwrite the performance of the buyer of the guaranty. 
C) Agreement between two parties to exchange a standard quantity of an asset at a predetermined price at a specified date in the future. 
D) Trading in securities prior to their actual issue. 
E) Loans originated by an FI and then sold to other investors with recourse. 
A) Contractual commitments to make a loan up to a stated amount at a given interest rate in the future. 
B) Contingent guarantees sold by an FI to underwrite the performance of the buyer of the guaranty. 
C) Agreement between two parties to exchange a standard quantity of an asset at a predetermined price at a specified date in the future. 
D) Trading in securities prior to their actual issue. 
E) Loans originated by an FI and then sold to other investors with recourse.

Question 20

In many ways, SLCs perform similar functions for a borrower as do loan commitments.

Accepted Answer

A) True 
 B)False

Exam 16: Off-Balance-Sheet Risk

Rediscounted bankers' acceptances are classified as

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

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

In the early 1980s

The extremely high growth of OBS activities since the early 1990s has caused regulators to recognize the potential risk exposure to FIs from their use.

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

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 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?

If an FI is a counterparty to a swap arrangement, it must record the notational value of the swap as the market value.

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

Which of the following is true of an 'adverse material change in conditions clause' used in a loan commitment?

Loans sold without recourse have contingent liability off-balance-sheet implications for the FI that sells the loan.

If a future credit crunch is possible, a loan commitment may expose the FI to

As of June 2012, the vast majority of OBS activities of commercial banks was

If an FI enters into a loan commitment, it is essentially entering into a forward contract.

As of 2012, the top 25 U.S. commercial banks accounted for ________ percent of OBS derivative contracts among FDIC-insured institutions.

The ability to provide loan commitments is a signal to borrowers that the FI has a lower risk portfolio.

Which of the following statements best describe a derivative contract?

In many ways, SLCs perform similar functions for a borrower as do loan commitments.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

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