Question 1

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. 
E) $80,000. 
A) $300,000. 
B) $140,000. 
C) $160,000. 
D) $280,000. 
E) $80,000.

Question 2

Matching the maturities of assets and liabilities supports the asset transformation function of FIs.

Accepted Answer

A) True 
 B)False

Question 3

For an FI to exactly hedge the foreign investment risk, the foreign currency assets must equal the foreign currency liabilities.

Accepted Answer

A) True 
 B)False

Question 4

In the case where a borrower defaults on a loan, the FI may lose only a portion of the principal that was loaned.

Accepted Answer

A) True 
 B)False

Question 5

If the loans in the bank's portfolio are all negatively correlated, what will be the impact on the bank's credit risk exposure?

Accepted Answer

A) The loans' negative correlations will decrease the bank's credit risk exposure because lower than expected returns on some loans will be offset by higher than expected returns on other loans. 
B) The loans' negative correlations will increase the bank's credit risk exposure because lower than expected returns on some loans will be offset by higher than expected returns on other loans. 
C) The loans' negative correlations will increase the bank's credit risk exposure because higher returns on less risky loans will be offset by lower returns on riskier loans. 
D) The loans' negative correlations will decrease the bank's credit risk exposure because higher returns on less risky loans will be offset by lower returns on riskier loans. 
E) There is no impact on the bank's credit risk exposure. 
A) The loans' negative correlations will decrease the bank's credit risk exposure because lower than expected returns on some loans will be offset by higher than expected returns on other loans. 
B) The loans' negative correlations will increase the bank's credit risk exposure because lower than expected returns on some loans will be offset by higher than expected returns on other loans. 
C) The loans' negative correlations will increase the bank's credit risk exposure because higher returns on less risky loans will be offset by lower returns on riskier loans. 
D) The loans' negative correlations will decrease the bank's credit risk exposure because higher returns on less risky loans will be offset by lower returns on riskier loans. 
E) There is no impact on the bank's credit risk exposure.

Question 6

Which function of an FI involves buying primary securities and issuing secondary securities?

Accepted Answer

A) Brokerage. 
B) Asset transformation. 
C) Investment research. 
D) Self-regulator. 
E) Trading. 
A) Brokerage. 
B) Asset transformation. 
C) Investment research. 
D) Self-regulator. 
E) Trading.

Question 7

In which of the following situations would an FI be considered net long in foreign assets if it has ¥100 million in loans?

Accepted Answer

A) ¥120 million in liabilities. 
B) ¥80 million in liabilities. 
C) ¥100 million in liabilities. 
D) ¥110 million in liabilities. 
E) Answers A and D only. 
A) ¥120 million in liabilities. 
B) ¥80 million in liabilities. 
C) ¥100 million in liabilities. 
D) ¥110 million in liabilities. 
E) Answers A and D only.

Question 8

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?

Accepted Answer

A) 6.5 percent. 
B) 7.0 percent. 
C) 7.5 percent. 
D) 8.0 percent. 
E) 8.5 percent. 
A) 6.5 percent. 
B) 7.0 percent. 
C) 7.5 percent. 
D) 8.0 percent. 
E) 8.5 percent.

Question 9

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.

Accepted Answer

A) True 
 B)False

Question 10

"Matching the book" or trying to match the maturities of assets and liabilities is intended to protect the FI from

Accepted Answer

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

Question 11

Foreign exchange risk is that the value of assets and liabilities may change because of changes in the foreign exchange rate between two countries.

Accepted Answer

A) True 
 B)False

Question 12

An advantage FIs have over individual household investors is that they are able to diversify away credit risk by holding a large portfolio of loans to different entities. This reduces

Accepted Answer

A) firm-specific credit risk. 
B) systematic credit risk. 
C) interest rate risk. 
D) market risk. 
E) political risk. 
A) firm-specific credit risk. 
B) systematic credit risk. 
C) interest rate risk. 
D) market risk. 
E) political risk.

Question 13

Event risks often cause sudden and unanticipated changes in financial market conditions.

Accepted Answer

A) True 
 B)False

Question 14

What type of risk focuses upon future contingencies?

Accepted Answer

A) Liquidity risk. 
B) Interest rate risk. 
C) Credit risk. 
D) Foreign exchange rate risk. 
E) Off-balance sheet risk. 
A) Liquidity risk. 
B) Interest rate risk. 
C) Credit risk. 
D) Foreign exchange rate risk. 
E) Off-balance sheet risk.

Question 15

The risk that many depositors withdraw their funds from an FI at once is

Accepted Answer

A) credit risk. 
B) sovereign risk. 
C) currency risk. 
D) liquidity risk. 
E) interest rate risk. 
A) credit risk. 
B) sovereign risk. 
C) currency risk. 
D) liquidity risk. 
E) interest rate risk.

Question 16

A U.S. bank has €40 million in assets and €50 million in CDs. All other assets and liabilities are in U.S. dollars. This bank is

Accepted Answer

A) net long €10 million. 
B) net short €10 million. 
C) neither short nor long in €. 
D) net long -€10 million. 
E) net short -€10 million. 
A) net long €10 million. 
B) net short €10 million. 
C) neither short nor long in €. 
D) net long -€10 million. 
E) net short -€10 million.

Question 17

An FI that is short-funded faces the risk that the return of reinvesting assets could exceed the cost of funding those assets.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

To be immunized against foreign currency and foreign interest rate risk, an FI should match both the size and maturities of its foreign assets and foreign liabilities.

Accepted Answer

A) True 
 B)False

Question 20

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

Exam 7: Risks of Financial Institutions

What is the bank's net interest income for the current year?

Matching the maturities of assets and liabilities supports the asset transformation function of FIs.

For an FI to exactly hedge the foreign investment risk, the foreign currency assets must equal the foreign currency liabilities.

In the case where a borrower defaults on a loan, the FI may lose only a portion of the principal that was loaned.

If the loans in the bank's portfolio are all negatively correlated, what will be the impact on the bank's credit risk exposure?

Which function of an FI involves buying primary securities and issuing secondary securities?

In which of the following situations would an FI be considered net long in foreign assets if it has ¥100 million in loans?

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?

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.

"Matching the book" or trying to match the maturities of assets and liabilities is intended to protect the FI from

Foreign exchange risk is that the value of assets and liabilities may change because of changes in the foreign exchange rate between two countries.

An advantage FIs have over individual household investors is that they are able to diversify away credit risk by holding a large portfolio of loans to different entities. This reduces

Event risks often cause sudden and unanticipated changes in financial market conditions.

What type of risk focuses upon future contingencies?

The risk that many depositors withdraw their funds from an FI at once is

A U.S. bank has €40 million in assets and €50 million in CDs. All other assets and liabilities are in U.S. dollars. This bank is

An FI that is short-funded faces the risk that the return of reinvesting assets could exceed the cost of funding those assets.

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

To be immunized against foreign currency and foreign interest rate risk, an FI should match both the size and maturities of its foreign assets and foreign liabilities.

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

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

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