Question 1

Loan charge-offs do not lead to insolvency risk because when loans are written off both loans and liabilities are reduced.

Accepted Answer

A) True 
 B)False

Question 2

Which one of the following intermediaries is likely to engage in more asset liability maturity matching?

Accepted Answer

A) Banks 
B) Savings associations 
C) Savings banks 
D) Life insurers 
A) Banks 
B) Savings associations 
C) Savings banks 
D) Life insurers

Question 3

The risk that an FI may not have enough capital to offset a sudden decline in the value of its assets is called operational risk.

Accepted Answer

A) True 
 B)False

Question 4

CHIPS and ACH are

Accepted Answer

A) potato products of Frito Lay. 
B) check clearing systems run by the Federal Reserve. 
C) retail payment systems used in Europe. 
D) international bank regulators. 
E) wholesale electronic payment systems. 
A) potato products of Frito Lay. 
B) check clearing systems run by the Federal Reserve. 
C) retail payment systems used in Europe. 
D) international bank regulators. 
E) wholesale electronic payment systems.

Question 5

Reinvestment risk occurs when a financial institution holds longer-term assets relative to liabilities and faces uncertainty about the interest rate at which it can reinvest funds borrowed over a longer period.

Accepted Answer

A) True 
 B)False

Question 6

A U.S. bank has £900 million in loans it has made to corporate customers and it has £750 million in deposits when the exchange rate is £1 = $1.98. The bank will have a net foreign exchange loss on these accounts if the exchange rate moves to £1 = $1.95.

Accepted Answer

A) True 
 B)False

Question 7

A bank has $150 million in one-year loans earning a fixed rate equal to 4.75 percent. The assets are funded by $150 million in liabilities that have a cost of 4.25 percent and a maturity of three years. If all interest rates are projected to fall 100 basis points by next year,by how much will the bank's profits and loan NIM change in year 2? Does this bank face refinancing risk or reinvestment risk? Explain.

Accepted Answer

Year 1 profits = (4.75% − 4.25%)× $150 m

Question 8

A bank has book value of $5 million in liquid assets and $95 million in nonliquid assets. Large depositors unexpectedly withdraw $9.5 million in deposits. To cover the withdrawals the bank sells all of its liquid assets at book value. To raise the additional funds needed the bank sells the necessary amount of nonliquid assets at 80 cents per dollar of book value. As a result,the bank's equity will ________.

Accepted Answer

A) remain unchanged 
B) fall $4.5 million 
C) fall $3.6 million 
D) fall $1.4 million 
E) fall $5.0 million 
A) remain unchanged 
B) fall $4.5 million 
C) fall $3.6 million 
D) fall $1.4 million 
E) fall $5.0 million

Question 9

Should regulators of FIs be concerned about the increased trading activity of FIs?

Accepted Answer

Yes. Trading is generally a riskier acti

Question 10

If a bank invested $75 million in a two-year asset paying 12 percent interest per year and simultaneously issued a $75 million one-year liability paying 10 percent interest per year,what would be the net interest income in two years if,at the end of the first year,all interest rates increased by 1.5 percentage point?

Accepted Answer

A) Decrease by $0.725 million 
B) Decrease by $1.875 million 
C) Increase by $1.875 million 
D) Increase by $0.725 million 
E) Decrease by $0.385 million 
A) Decrease by $0.725 million 
B) Decrease by $1.875 million 
C) Increase by $1.875 million 
D) Increase by $0.725 million 
E) Decrease by $0.385 million

Question 11

Why do banks continue to make credit card loans even though credit card default rates are often at least twice as high as other loan types?

Accepted Answer

Credit card loss rates are higher than m

Question 12

Suppose you purchase a 10-year AAA-rated British bond for par that is paying an annual coupon of 9 percent and has a face value of 1,000 British Pounds (£). The spot rate is US$1.105 for £. At the end of the year,the bond is downgraded to AA and the yield increases to 11 percent. In addition,the new spot rate becomes US$0.985 for £.
What is the loss or gain to a U.S. investor who holds this bond for a year?

Accepted Answer

A) −11.28% loss 
B) −10.14% loss 
C) −15.32% loss 
D) −8.71% loss 
E) −12.71% loss 
A) −11.28% loss 
B) −10.14% loss 
C) −15.32% loss 
D) −8.71% loss 
E) −12.71% loss

Question 13

MONDEX spent $50 million to develop the Smart Card,but tests of prototypes in New York and Canadian cities revealed very little consumer interest. 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.

Question 14

If a bank is exposed to refinancing risk,its profitability is reduced if interest rates ________ and if it is exposed to reinvestment risk,its profitability is reduced if interest rates ________.

Accepted Answer

A) rise; fall 
B) rise; rise 
C) fall; rise 
D) fall; fall 
E) rise; stay the same 
A) rise; fall 
B) rise; rise 
C) fall; rise 
D) fall; fall 
E) rise; stay the same

Question 15

The £ is worth 1.2569 euros and the euro is worth $1.5568. Statistical analysis indicates that when the euro rises 1 percent against the dollar,the pound rises 0.5 percent against the euro and vice versa. A U.S. bank has assets of £40 million that mature in one year funded with liabilities of €55 million due in six months. The bank would be hurt by
I. an increase in the value of the euro against the dollar.
II. a decrease in the value of the euro against the dollar.
III. an increase in euro interest rates relative to pound interest rates.
IV. an increase in pound interest rates relative to euro interest rates.

Accepted Answer

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

Question 16

A thrift makes long-term fixed-rate mortgages funded with short-term deposits and then interest rates rise. Which of the following is true?

Accepted Answer

A) Profitability would decline. 
B) Profitability would increase. 
C) The market value of equity increases. 
D) Interest income would fall. 
E) Profitability and market value of equity increase. 
A) Profitability would decline. 
B) Profitability would increase. 
C) The market value of equity increases. 
D) Interest income would fall. 
E) Profitability and market value of equity increase.

Question 17

Suppose you purchase a 10-year AAA-rated British bond for par that is paying an annual coupon of 9 percent and has a face value of 1,000 British Pounds (£). The spot rate is US$1.105 for £. At the end of the year,the bond is downgraded to AA and the yield increases to 11 percent. In addition,the new spot rate becomes US$0.985 for £.
What is the loss or gain to a British investor who holds this bond for a year?

Accepted Answer

A) −11.07% loss 
B) −7.14% loss 
C) −5.32% loss 
D) −2.07% loss 
E) −1.08% loss 
A) −11.07% loss 
B) −7.14% loss 
C) −5.32% loss 
D) −2.07% loss 
E) −1.08% loss

Question 18

Argentina has refused to pay loans made to it by foreign institutions three times. This is an example of

Accepted Answer

A) operational risk. 
B) liquidity risk. 
C) foreign exchange risk. 
D) sovereign risk. 
E) insolvency risk. 
A) operational risk. 
B) liquidity risk. 
C) foreign exchange risk. 
D) sovereign risk. 
E) insolvency risk.

Question 19

Repurchase agreements (repos)are used extensively to finance security holdings. In 2007,many investment banks and other financial institutions were unable to roll over their maturing repurchase agreements during the subprime mortgage crisis. This inability to get new repo financing is an example of

Accepted Answer

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

Question 20

What are the three major objectives of technological investments at FIs? What are the major risks involved with these investments?

Accepted Answer

1. Lower operating costs via exploiting

Loan charge-offs do not lead to insolvency risk because when loans are written off both loans and liabilities are reduced.

Which one of the following intermediaries is likely to engage in more asset liability maturity matching?

The risk that an FI may not have enough capital to offset a sudden decline in the value of its assets is called operational risk.

CHIPS and ACH are

Reinvestment risk occurs when a financial institution holds longer-term assets relative to liabilities and faces uncertainty about the interest rate at which it can reinvest funds borrowed over a longer period.

A U.S. bank has £900 million in loans it has made to corporate customers and it has £750 million in deposits when the exchange rate is £1 = $1.98. The bank will have a net foreign exchange loss on these accounts if the exchange rate moves to £1 = $1.95.

Should regulators of FIs be concerned about the increased trading activity of FIs?

Why do banks continue to make credit card loans even though credit card default rates are often at least twice as high as other loan types?

MONDEX spent $50 million to develop the Smart Card,but tests of prototypes in New York and Canadian cities revealed very little consumer interest. This is an example of

If a bank is exposed to refinancing risk,its profitability is reduced if interest rates and if it is exposed to reinvestment risk,its profitability is reduced if interest rates .

A thrift makes long-term fixed-rate mortgages funded with short-term deposits and then interest rates rise. Which of the following is true?

Argentina has refused to pay loans made to it by foreign institutions three times. This is an example of

Repurchase agreements (repos)are used extensively to finance security holdings. In 2007,many investment banks and other financial institutions were unable to roll over their maturing repurchase agreements during the subprime mortgage crisis. This inability to get new repo financing is an example of

What are the three major objectives of technological investments at FIs? What are the major risks involved with these investments?

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

Exam 19: Types of Risks Incurred by Financial Institutions

Loan charge-offs do not lead to insolvency risk because when loans are written off both loans and liabilities are reduced.

Which one of the following intermediaries is likely to engage in more asset liability maturity matching?

The risk that an FI may not have enough capital to offset a sudden decline in the value of its assets is called operational risk.

CHIPS and ACH are

Reinvestment risk occurs when a financial institution holds longer-term assets relative to liabilities and faces uncertainty about the interest rate at which it can reinvest funds borrowed over a longer period.

A U.S. bank has £900 million in loans it has made to corporate customers and it has £750 million in deposits when the exchange rate is £1 = $1.98. The bank will have a net foreign exchange loss on these accounts if the exchange rate moves to £1 = $1.95.

Should regulators of FIs be concerned about the increased trading activity of FIs?

Why do banks continue to make credit card loans even though credit card default rates are often at least twice as high as other loan types?

MONDEX spent $50 million to develop the Smart Card,but tests of prototypes in New York and Canadian cities revealed very little consumer interest. This is an example of

If a bank is exposed to refinancing risk,its profitability is reduced if interest rates ________ and if it is exposed to reinvestment risk,its profitability is reduced if interest rates ________.

A thrift makes long-term fixed-rate mortgages funded with short-term deposits and then interest rates rise. Which of the following is true?

Argentina has refused to pay loans made to it by foreign institutions three times. This is an example of

Repurchase agreements (repos)are used extensively to finance security holdings. In 2007,many investment banks and other financial institutions were unable to roll over their maturing repurchase agreements during the subprime mortgage crisis. This inability to get new repo financing is an example of

What are the three major objectives of technological investments at FIs? What are the major risks involved with these investments?

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

If a bank is exposed to refinancing risk,its profitability is reduced if interest rates and if it is exposed to reinvestment risk,its profitability is reduced if interest rates .