Question 1

Which of the following are typical off-balance-sheet activities?

Accepted Answer

A) letters of credit 
B) loan commitments 
C) forward contracts, swaps and other derivative securities 
D) All of the listed options are correct. 
A) letters of credit 
B) loan commitments 
C) forward contracts, swaps and other derivative securities 
D) All of the listed options are correct. D

Question 2

The risk that an investor will be forced to place earnings from a loan or security into a lower yielding investment is known as:

Accepted Answer

A) liquidity risk 
B) reinvestment risk 
C) credit risk 
D) foreign exchange risk 
A) liquidity risk 
B) reinvestment risk 
C) credit risk 
D) foreign exchange risk B

Question 3

Market risk is defined as the risk:

Accepted Answer

A) incurred by granting loans to companies that do not hold a large market share 
B) incurred in the trading of assets and liabilities due to changes in interest rates, exchange rates and other asset prices 
C) that a sudden surge in liability withdrawals may require FIs to liquidate assets at less than fair market prices 
D) that an FI loses market share 
A) incurred by granting loans to companies that do not hold a large market share 
B) incurred in the trading of assets and liabilities due to changes in interest rates, exchange rates and other asset prices 
C) that a sudden surge in liability withdrawals may require FIs to liquidate assets at less than fair market prices 
D) that an FI loses market share B

Question 4

A bank has liabilities of $4 million with an average maturity of two years paying interest rates of 4 per cent annually.It has assets of $5 million with an average maturity of five years earning interest rates of 6 per cent annually.To what risk is the bank exposed?

Accepted Answer

A) reinvestment risk 
B) refinancing risk 
C) interest rate risk 
D) refinancing risk and interest rate risk 
A) reinvestment risk 
B) refinancing risk 
C) interest rate risk 
D) refinancing risk and interest rate risk

Question 5

Which of the following are typical operational risk sources?

Accepted Answer

A) employee fraud 
B) back-office failures 
C) general technological glitches 
D) All of the listed options are correct. 
A) employee fraud 
B) back-office failures 
C) general technological glitches 
D) All of the listed options are correct.

Question 6

Sovereign risk refers to the risk that repayments from:

Accepted Answer

A) local borrowers are interrupted because of interference from foreign governments 
B) foreign borrowers are interrupted because of interference from local governments 
C) foreign borrowers are interrupted because of interference from foreign governments 
D) None of the listed options are correct. 
A) local borrowers are interrupted because of interference from foreign governments 
B) foreign borrowers are interrupted because of interference from local governments 
C) foreign borrowers are interrupted because of interference from foreign governments 
D) None of the listed options are correct.

Question 7

The major source of risk exposure resulting from issuance of standby letters of credit is:

Accepted Answer

A) technology risk 
B) interest rate risk 
C) credit risk 
D) off-balance-sheet risk 
A) technology risk 
B) interest rate risk 
C) credit risk 
D) off-balance-sheet risk

Question 8

Matching the foreign currency book protects the FI from:

Accepted Answer

A) sovereign country risk 
B) interest rate risk 
C) liquidity risk 
D) foreign exchange risk 
A) sovereign country risk 
B) interest rate risk 
C) liquidity risk 
D) foreign exchange risk

Question 9

.... can be reduced by diversification.

Accepted Answer

A) Firm-specific credit risk 
B) Systematic credit risk 
C) Firm-specific and systematic credit risks 
D) None of the listed options are correct. 
A) Firm-specific credit risk 
B) Systematic credit risk 
C) Firm-specific and systematic credit risks 
D) None of the listed options are correct.

Question 10

The market risk of an FI increases with:

Accepted Answer

A) increasing volatility of asset prices 
B) increasingly large unhedged short positions in bonds, equities and other commodities 
C) increasingly large unhedged long positions in bonds, equities and other commodities 
D) All of the listed options are correct. 
A) increasing volatility of asset prices 
B) increasingly large unhedged short positions in bonds, equities and other commodities 
C) increasingly large unhedged long positions in bonds, equities and other commodities 
D) All of the listed options are correct.

Question 11

Sovereign risk involves the inability of a foreign corporation to repay the principal or interest on a loan because of stipulations by the foreign government that are out of the control of the foreign corporation.

Accepted Answer

A) True 
 B)False

Question 12

A 'fire-sale' means that an FI increases its liquidity position by selling part of its assets at the assets' fair market values.

Accepted Answer

A) True 
 B)False

Question 13

An FI that only operates domestically is never exposed to foreign exchange rate risk.

Accepted Answer

A) True 
 B)False

Question 14

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) currency risk 
D) liquidity risk 
A) insolvency risk 
B) sovereign risk 
C) currency risk 
D) liquidity risk

Question 15

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, securitised 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 
A) market risk 
B) credit risk 
C) operational risk 
D) technological risk

Question 16

The positive difference between an FI's contingent liabilities and contingent assets represents:

Accepted Answer

A) an additional obligation, or claim, on the FI's net worth 
B) an additional profit for the FI 
C) an increase in assets 
D) None of the listed options are correct. 
A) an additional obligation, or claim, on the FI's net worth 
B) an additional profit for the FI 
C) an increase in assets 
D) None of the listed options are correct.

Question 17

A letter of credit is:

Accepted Answer

A) a credit guarantee issued by an FI's customer to pay a predetermined amount of money to the FI at a future point in time 
B) an on-balance-sheet transaction for the issuing FI 
C) a credit guarantee issued by an FI on which payment is contingent on some future event occurring 
D) None of the listed options are correct. 
A) a credit guarantee issued by an FI's customer to pay a predetermined amount of money to the FI at a future point in time 
B) an on-balance-sheet transaction for the issuing FI 
C) a credit guarantee issued by an FI on which payment is contingent on some future event occurring 
D) None of the listed options are correct.

Question 18

The major source of risk exposure resulting from issuance of standby letters of credit is:

Accepted Answer

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

Question 19

Technological failure, employee fraud and employee errors are all sources of operational risk.

Accepted Answer

A) True 
 B)False

Question 20

An FI with a low level of leverage, such as a high level of capitalisation:

Accepted Answer

A) is generally less profitable 
B) is better able to withstand losses 
C) has improved ability to remain solvent 
D) All of the listed options are correct. 
A) is generally less profitable 
B) is better able to withstand losses 
C) has improved ability to remain solvent 
D) All of the listed options are correct.

Which of the following are typical off-balance-sheet activities?

The risk that an investor will be forced to place earnings from a loan or security into a lower yielding investment is known as:

Market risk is defined as the risk:

A bank has liabilities of $4 million with an average maturity of two years paying interest rates of 4 per cent annually.It has assets of $5 million with an average maturity of five years earning interest rates of 6 per cent annually.To what risk is the bank exposed?

Which of the following are typical operational risk sources?

Sovereign risk refers to the risk that repayments from:

The major source of risk exposure resulting from issuance of standby letters of credit is:

Matching the foreign currency book protects the FI from:

.... can be reduced by diversification.

The market risk of an FI increases with:

Sovereign risk involves the inability of a foreign corporation to repay the principal or interest on a loan because of stipulations by the foreign government that are out of the control of the foreign corporation.

A 'fire-sale' means that an FI increases its liquidity position by selling part of its assets at the assets' fair market values.

An FI that only operates domestically is never exposed to foreign exchange rate risk.

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?

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, securitised and sold.Which of the following risks applies to the false documentation by the employee?

The positive difference between an FI's contingent liabilities and contingent assets represents:

A letter of credit is:

The major source of risk exposure resulting from issuance of standby letters of credit is:

Technological failure, employee fraud and employee errors are all sources of operational risk.

An FI with a low level of leverage, such as a high level of capitalisation:

Why Are Financial Institutions Special

The Financial Service Industry: Depository Institutions

The Financial Service Industry: Other Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off-Balance-Sheet Instruments

Managing Interest Rate Risk Using Securitisation

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risks

Capital Management and Adequacy

Filters

Exam 4: Risks of Financial Institutions

Which of the following are typical off-balance-sheet activities?

The risk that an investor will be forced to place earnings from a loan or security into a lower yielding investment is known as:

Market risk is defined as the risk:

A bank has liabilities of $4 million with an average maturity of two years paying interest rates of 4 per cent annually.It has assets of $5 million with an average maturity of five years earning interest rates of 6 per cent annually.To what risk is the bank exposed?

Which of the following are typical operational risk sources?

Sovereign risk refers to the risk that repayments from:

The major source of risk exposure resulting from issuance of standby letters of credit is:

Matching the foreign currency book protects the FI from:

.... can be reduced by diversification.

The market risk of an FI increases with:

Sovereign risk involves the inability of a foreign corporation to repay the principal or interest on a loan because of stipulations by the foreign government that are out of the control of the foreign corporation.

A 'fire-sale' means that an FI increases its liquidity position by selling part of its assets at the assets' fair market values.

An FI that only operates domestically is never exposed to foreign exchange rate risk.

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?

The positive difference between an FI's contingent liabilities and contingent assets represents:

A letter of credit is:

The major source of risk exposure resulting from issuance of standby letters of credit is:

Technological failure, employee fraud and employee errors are all sources of operational risk.

An FI with a low level of leverage, such as a high level of capitalisation:

Why Are Financial Institutions Special

The Financial Service Industry: Depository Institutions

The Financial Service Industry: Other Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off-Balance-Sheet Instruments

Managing Interest Rate Risk Using Securitisation

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risks

Capital Management and Adequacy

Filters