Question 1

Individuals have an advantage over FIs in that individuals more easily can diversify away some of the credit risk of their asset portfolios.

Accepted Answer

A) True 
 B)False

Question 2

Active trading of assets and liabilities creates market risk.

Accepted Answer

A) True 
 B)False

Question 3

What type of risk focuses upon mismatched currency positions?

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 4

Off-balance-sheet activities often affect the shape of an FIs current balance sheet through the creation of contingent claims.

Accepted Answer

A) True 
 B)False

Question 5

What is the bank's net interest income in dollars in year 3, after it refinances all of its liabilities at a rate of 6.0 percent?

Accepted Answer

A) -$60,000. 
B) -$140,000. 
C) +$140,000. 
D) +$60,000. 
E) +$800,000. 
A) -$60,000. 
B) -$140,000. 
C) +$140,000. 
D) +$60,000. 
E) +$800,000.

Question 6

An off-balance-sheet activity does not appear on the current balance sheet because it does not involve holding a current primary claim or the issuance of a current secondary claim.

Accepted Answer

A) True 
 B)False

Question 7

The risk that a German investor who purchases British bonds will lose money when trying to convert bond interest payments made in pounds sterling into euros is called

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 8

The mergers of Citicorp with Travelers Insurance is an example of an attempt to exploit economies of scope.

Accepted Answer

A) True 
 B)False

Question 9

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 10

The increased opportunity for a bank to securitize loans into liquid and tradable assets is likely to affect which type of risk?

Accepted Answer

A) Sovereign risk. 
B) Market risk. 
C) Insolvency risk. 
D) Technological risk. 
E) Interest rate risk. 
A) Sovereign risk. 
B) Market risk. 
C) Insolvency risk. 
D) Technological risk. 
E) Interest rate risk.

Question 11

Which of the following situations pose a refinancing risk for an FI?

Accepted Answer

A) An FI issues $10 million of liabilities of one-year maturity to finance the purchase of $10 million of assets with a two-year maturity. 
B) An FI issues $10 million of liabilities of two-year maturity to finance the purchase of $10 million of assets with a two-year maturity. 
C) An FI issues $10 million of liabilities of three-year maturity to finance the purchase of $10 million of assets with a two-year maturity. 
D) An FI matches the maturity of its assets and liabilities. 
E) All of the above. 
A) An FI issues $10 million of liabilities of one-year maturity to finance the purchase of $10 million of assets with a two-year maturity. 
B) An FI issues $10 million of liabilities of two-year maturity to finance the purchase of $10 million of assets with a two-year maturity. 
C) An FI issues $10 million of liabilities of three-year maturity to finance the purchase of $10 million of assets with a two-year maturity. 
D) An FI matches the maturity of its assets and liabilities. 
E) All of the above.

Question 12

Employee fraud is a type of operational risk to a financial institution.

Accepted Answer

A) True 
 B)False

Question 13

During a liquidity crisis assets normally must be sold at a loss because of the rising interest rates caused by financial institutions attempting to raise funds.

Accepted Answer

A) True 
 B)False

Question 14

A mortgage loan officer is found to have provided false documentation that resulted in a lower interest rate on a loan approved for one of her friends. The loan was subsequently added to a loan pool, securitized and sold. Which of the following risks applies to the false documentation by the employee?

Accepted Answer

A) Market risk. 
B) Credit risk. 
C) Operational risk. 
D) Technological risk. 
E) Sovereign risk. 
A) Market risk. 
B) Credit risk. 
C) Operational risk. 
D) Technological risk. 
E) Sovereign risk.

Question 15

Effective use of diversification principles allows an FI to reduce the total default risk in a portfolio.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following may occur when a sufficient number of borrowers are unable to repay interest and principal on loans, thus causing an FI's equity to approach zero?

Accepted Answer

A) Insolvency risk. 
B) Sovereign risk. 
C) Foreign exchange risk. 
D) Liquidity risk. 
E) Interest rate risk. 
A) Insolvency risk. 
B) Sovereign risk. 
C) Foreign exchange risk. 
D) Liquidity risk. 
E) Interest rate risk.

Question 17

An FI can hold assets denominated in a foreign country, but it cannot issue foreign liabilities.

Accepted Answer

A) True 
 B)False

Question 18

Technology risk is the uncertainty that economies of scale or scope will be realized from the investment in new technologies.

Accepted Answer

A) True 
 B)False

Question 19

Regulation limits FI investment in non-investment grade bonds (rated below Baa or non-rated). What kind of risk is this designed to limit?

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 20

The risk that a debt security's price will fall, subjecting the investor to a potential capital loss is

Accepted Answer

A) credit risk. 
B) market risk. 
C) currency risk. 
D) liquidity risk. 
E) political risk. 
A) credit risk. 
B) market risk. 
C) currency risk. 
D) liquidity risk. 
E) political risk.

Exam 7: Risks of Financial Institutions

Individuals have an advantage over FIs in that individuals more easily can diversify away some of the credit risk of their asset portfolios.

Active trading of assets and liabilities creates market risk.

What type of risk focuses upon mismatched currency positions?

Off-balance-sheet activities often affect the shape of an FIs current balance sheet through the creation of contingent claims.

What is the bank's net interest income in dollars in year 3, after it refinances all of its liabilities at a rate of 6.0 percent?

An off-balance-sheet activity does not appear on the current balance sheet because it does not involve holding a current primary claim or the issuance of a current secondary claim.

The risk that a German investor who purchases British bonds will lose money when trying to convert bond interest payments made in pounds sterling into euros is called

The mergers of Citicorp with Travelers Insurance is an example of an attempt to exploit economies of scope.

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

The increased opportunity for a bank to securitize loans into liquid and tradable assets is likely to affect which type of risk?

Which of the following situations pose a refinancing risk for an FI?

Employee fraud is a type of operational risk to a financial institution.

During a liquidity crisis assets normally must be sold at a loss because of the rising interest rates caused by financial institutions attempting to raise funds.

Effective use of diversification principles allows an FI to reduce the total default risk in a portfolio.

Which of the following may occur when a sufficient number of borrowers are unable to repay interest and principal on loans, thus causing an FI's equity to approach zero?

An FI can hold assets denominated in a foreign country, but it cannot issue foreign liabilities.

Technology risk is the uncertainty that economies of scale or scope will be realized from the investment in new technologies.

Regulation limits FI investment in non-investment grade bonds (rated below Baa or non-rated). What kind of risk is this designed to limit?

The risk that a debt security's price will fall, subjecting the investor to a potential capital loss is

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