Question 1

For most financial institutions,present value uncertainty is the risk that

Accepted Answer

A) the market value of an asset (liability)will decline if interest rates increase. 
B) interest income will rise by more than interest expense when rates increase. 
C) assets will be insufficient to cover loan losses. 
D) bank capital will be insufficient to cover loan losses. 
E) real interest rates will exceed nominal rates. 
A) the market value of an asset (liability)will decline if interest rates increase. 
B) interest income will rise by more than interest expense when rates increase. 
C) assets will be insufficient to cover loan losses. 
D) bank capital will be insufficient to cover loan losses. 
E) real interest rates will exceed nominal rates. A

Question 2

A corporate borrower failing to repay a loan on time due to equipment breakdowns is an example of firm specific credit risk.

Accepted Answer

A) True 
 B)False  True

Question 3

The terrorist attacks on the World Trade Center in 2001 are an example of ________.

Accepted Answer

A) regulatory risk 
B) liquidity risk 
C) credit risk 
D) insolvency risk 
E) event risk 
A) regulatory risk 
B) liquidity risk 
C) credit risk 
D) insolvency risk 
E) event risk E

Question 4

What is insolvency risk? How can liquidity risk and credit risk cause insolvency? What are the two best protections against insolvency at an FI?

Accepted Answer

Insolvency occurs when equity becomes ze

Question 5

A U.S. bank has £700 million in loans it has made to corporate customers and it has £850 million in deposits. The net foreign exchange exposure from these accounts may be hedged by selling 150 million pounds forward.

Accepted Answer

A) True 
 B)False

Question 6

In October 2005,the Bankruptcy Reform Act was signed into law. This law primarily

Accepted Answer

A) made it easier for many debtors to receive bankruptcy protection. 
B) made it more difficult for many debtors to receive bankruptcy protection. 
C) applied only to corporations. 
D) applied only to corporations and financial institutions. 
E) made it easier for foreign debtors to seek debt relief under U.S. law. 
A) made it easier for many debtors to receive bankruptcy protection. 
B) made it more difficult for many debtors to receive bankruptcy protection. 
C) applied only to corporations. 
D) applied only to corporations and financial institutions. 
E) made it easier for foreign debtors to seek debt relief under U.S. law.

Question 7

Nationalization of private financial institutions is an example of sovereign risk.

Accepted Answer

A) True 
 B)False

Question 8

Many intermediaries,such as banks,cannot be asset transformers and match maturities of their assets and liabilities at the same time.

Accepted Answer

A) True 
 B)False

Question 9

Characterize each of the following according to the type of risk it primarily represents:
I. Loan default
II. Unexpected deposit withdrawals
III. Losses on foreign currency holdings
IV. Losses on standby letters of credit
V. Reduction in earnings after an interest rate increase
Indicate which of the risks could cause insolvency of the FI.

Accepted Answer

I. Credit risk II. Liquidity r

Question 10

A bank has invested in U.S. Treasury investments that mature in two years. They will be held until maturity. The investments are funded with three-year maturity time deposits. The primary risk this bank faces is

Accepted Answer

A) refinancing risk. 
B) reinvestment risk. 
C) liquidity risk. 
D) credit risk. 
E) off-balance-sheet risk. 
A) refinancing risk. 
B) reinvestment risk. 
C) liquidity risk. 
D) credit risk. 
E) off-balance-sheet risk.

Question 11

A bank has total assets of $620 million and $68.2 million in equity. The managers of the bank realize that $18.6 million of its $372 million loan portfolio will not be repaid. After the bank charges off these unexpected bad loans the bank's equity to asset ratio will be ________.

Accepted Answer

A) 11.00 percent 
B) 10.64 percent 
C) 9.77 percent 
D) 8.25 percent 
E) 8.00 percent 
A) 11.00 percent 
B) 10.64 percent 
C) 9.77 percent 
D) 8.25 percent 
E) 8.00 percent

Question 12

The risk that an unanticipated increase in liability withdrawals may cause an FI to have to sell assets at fire sale prices is an example of

Accepted Answer

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

Question 13

Assets in a bank's trading book tend to be held for a longer time than assets held in the banking book.

Accepted Answer

A) True 
 B)False

Question 14

What is sovereign risk? How is this different from credit risk on a domestic loan? How can sovereign risk be limited?

Accepted Answer

Sovereign risk is the risk that loan rep

Question 15

Having longer maturity assets than liabilities causes banks to bear which of the following risks?
I. Interest rate risk
II. Liquidity risk
III. Credit risk

Accepted Answer

A) I only 
B) I and II only 
C) I and III only 
D) II and III only 
E) I,II,and III 
A) I only 
B) I and II only 
C) I and III only 
D) II and III only 
E) I,II,and III

Question 16

Risk arising from unhedged positions in securities,currencies,and derivatives is called market risk.

Accepted Answer

A) True 
 B)False

Question 17

In general terms explain why certain types of derivatives such as options,futures,swaps,and other exotic contracts can generate such catastrophically large losses and even insolvency for users at times. Does this mean that corporate or institutional use of derivatives should be limited or otherwise regulated? Explain.

Accepted Answer

Derivatives are complex instruments that

Question 18

A bank invests $250 million to add the ability to provide online bill paying for its customers. Usage of the new service is at about 50 percent of expected usage. This is an example of

Accepted Answer

A) technological risk. 
B) operational risk. 
C) market risk. 
D) credit risk. 
E) derivative risk. 
A) technological risk. 
B) operational risk. 
C) market risk. 
D) credit risk. 
E) derivative risk.

Question 19

A bank that has made floating rate loans funded by longer maturity deposits is at risk from falling interest rates.

Accepted Answer

A) True 
 B)False

Question 20

Second Bank now offers web banking services. Last week a computer glitch posted all web deposit transfers to the wrong accounts. This is an example of

Accepted Answer

A) credit risk. 
B) liquidity risk. 
C) stupidity risk. 
D) technological risk. 
E) operational risk. 
A) credit risk. 
B) liquidity risk. 
C) stupidity risk. 
D) technological risk. 
E) operational risk.

Exam 19: Types of Risks Incurred by Financial Institutions

For most financial institutions,present value uncertainty is the risk that

A corporate borrower failing to repay a loan on time due to equipment breakdowns is an example of firm specific credit risk.

The terrorist attacks on the World Trade Center in 2001 are an example of ________.

What is insolvency risk? How can liquidity risk and credit risk cause insolvency? What are the two best protections against insolvency at an FI?

A U.S. bank has £700 million in loans it has made to corporate customers and it has £850 million in deposits. The net foreign exchange exposure from these accounts may be hedged by selling 150 million pounds forward.

In October 2005,the Bankruptcy Reform Act was signed into law. This law primarily

Nationalization of private financial institutions is an example of sovereign risk.

Many intermediaries,such as banks,cannot be asset transformers and match maturities of their assets and liabilities at the same time.

A bank has invested in U.S. Treasury investments that mature in two years. They will be held until maturity. The investments are funded with three-year maturity time deposits. The primary risk this bank faces is

A bank has total assets of $620 million and $68.2 million in equity. The managers of the bank realize that $18.6 million of its $372 million loan portfolio will not be repaid. After the bank charges off these unexpected bad loans the bank's equity to asset ratio will be ________.

The risk that an unanticipated increase in liability withdrawals may cause an FI to have to sell assets at fire sale prices is an example of

Assets in a bank's trading book tend to be held for a longer time than assets held in the banking book.

What is sovereign risk? How is this different from credit risk on a domestic loan? How can sovereign risk be limited?

Having longer maturity assets than liabilities causes banks to bear which of the following risks? I. Interest rate risk II. Liquidity risk III. Credit risk

Risk arising from unhedged positions in securities,currencies,and derivatives is called market risk.

A bank invests $250 million to add the ability to provide online bill paying for its customers. Usage of the new service is at about 50 percent of expected usage. This is an example of

A bank that has made floating rate loans funded by longer maturity deposits is at risk from falling interest rates.

Second Bank now offers web banking services. Last week a computer glitch posted all web deposit transfers to the wrong accounts. This is an example of

Introduction

Determinants of Interest Rates

Interest Rates and Security Valuation

The Federal Reserve System, monetary Policy, and Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Stock Markets

Foreign Exchange Markets

Derivative Securities Markets

Commercial Banks: Industry Overview

Commercial Banks Financial Statements and Analysis

Regulation of Commercial Banks

Other Lending Institutions: Savings Institutions, credit Unions, and Finance Companies

Insurance Companies

Securities Firms and Investment Banks

Investment Companies

Pension Funds

Managing Credit Risk on the Balance Sheet

Managing Liquidity Risk on the Balance Sheet

Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

Managing Risk Off the Balance Sheet With Derivative Securities

Managing Risk Off the Balance Sheet With Loan Sales and Securitization

Filters