Question 1

Which of the following is an out-of-the-money counterparty?

Accepted Answer

A) Counterparty in a loan commitment contract. 
B) FI that trades in securities prior to their actual issue. 
C) Counterparty that is currently at an advantage in terms of cash flows. 
D) FI that guarantees to underwrite the performance of the buyer of the guaranty. 
E) Counterparty that is currently at a disadvantage in terms of cash flows. 
A) Counterparty in a loan commitment contract. 
B) FI that trades in securities prior to their actual issue. 
C) Counterparty that is currently at an advantage in terms of cash flows. 
D) FI that guarantees to underwrite the performance of the buyer of the guaranty. 
E) Counterparty that is currently at a disadvantage in terms of cash flows.

Question 2

Standby letters of credit perform an insurance function similar to that of commercial and trade letters of credit.

Accepted Answer

A) True 
 B)False

Question 3

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.
-What are the savings to the corporation if it obtains a loan commitment to back its $10 million issue of commercial paper?

Accepted Answer

A) $1,250. 
B) $2,500. 
C) $3,750. 
D) $5,000. 
E) $6,250 
A) $1,250. 
B) $2,500. 
C) $3,750. 
D) $5,000. 
E) $6,250

Question 4

The ability to form financial holding companies for the purpose of creating full-service financial institutions has caused an increase in affiliate risk.

Accepted Answer

A) True 
 B)False

Question 5

In the U.S., commercial banks are the only issuers of standby letters of credit.

Accepted Answer

A) True 
 B)False

Question 6

The quantity risk exposure of a loan commitment is

Accepted Answer

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

Question 7

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.

Which of the following is an out-of-the-money counterparty?

Standby letters of credit perform an insurance function similar to that of commercial and trade letters of credit.

The ability to form financial holding companies for the purpose of creating full-service financial institutions has caused an increase in affiliate risk.

In the U.S., commercial banks are the only issuers of standby letters of credit.

The quantity risk exposure of a loan commitment is

What are commercial letters of credit?

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

Exam 16: Off-Balance-Sheet Risk

Which of the following is an out-of-the-money counterparty?

Standby letters of credit perform an insurance function similar to that of commercial and trade letters of credit.

The ability to form financial holding companies for the purpose of creating full-service financial institutions has caused an increase in affiliate risk.

In the U.S., commercial banks are the only issuers of standby letters of credit.

The quantity risk exposure of a loan commitment is

What are commercial letters of credit?

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