Question 1

Banks can control their risk associated with standby letters of credit by:

Accepted Answer

A)  limiting their amount outstanding 
B)  diversifying their portfolio of such letters 
C)  increasing capital 
D)  all of the above

Question 2

A bank that organizes a note issuance facility is called a(n):

Accepted Answer

A)  originator 
B)  facilitator 
C)  opener 
D)  arranger

Question 3

SLCs are often used in connection with the issuance of debt obligations as backup lines of credit.

Accepted Answer

A) True 
 B)False

Question 4

Loan sales enable banks to:

Accepted Answer

A)  increase diversification 
B)  lower capital requirements 
C)  eliminate low-earning assets from their portfolio 
D)  all of the above

Question 5

Institutions that have the right to bid for the short-term notes issued under the note issuance facility are called:

Accepted Answer

A)  tender panels 
B)  prospectors 
C)  bid parties 
D)  none of the above

Question 6

The Chicago Board of Trade is an over-the-counter for derivative securities.

Accepted Answer

A) True 
 B)False

Question 7

Basis swaps are interest rate swaps in which the interest payments are based on fixed rates and floating rates of interest.

Accepted Answer

A) True 
 B)False

Question 8

A revolving loan commitment differs from a line of credit in that:

Accepted Answer

A)  the bank is obligated to make the loan 
B)  the bank charges a fee 
C)  a and b 
D)  none of the above

Question 9

Aggregation risk comes about in derivatives deals due to the complex legal uncertainties that can exist.

Accepted Answer

A) True 
 B)False

Question 10

A swap where the two interest payments are based on two different floating rates of interest is called a(n):

Accepted Answer

A)  cross-currency interest rate swap 
B)  currency swap 
C)  basis swap 
D)  maturity swap

Question 11

The major risk facing banks with loan commitments is that a large number of borrowers will take down their loans simultaneously and the bank may not have sufficient funds to make the loans. This is known as availability risk.

Accepted Answer

A) True 
 B)False

Question 12

A credit option seeks to:

Accepted Answer

A)  allow two banks to exchange interest and principal payments on portions of their loans. 
B)  allow a bank to protect itself from a decline in a borrower's credit quality 
C)  allow a bank the option to make a loan or not 
D)  all of the above are types of credit options

Question 13

Which of the following is NOT a regulator of the derivative markets?

Accepted Answer

A)  Commodity Futures Trading Commission (CFT
C)  
B)  Securities Exchange Commission (SE
C)  
C)  Federal Reserve System (FRS) 
D)  none of the above; they are ALL regulators in derivatives markets

Question 14

Buying a forward rate agreement is analogous to buying a put and selling a call, where the forward price is equal to the exercise price of the options.

Accepted Answer

A) True 
 B)False

Question 15

The motivation for the growth of loan commitments is:

Accepted Answer

A)  stock market crash 
B)  interest rate volatility 
C)  S&L bailout 
D)  all of the above

Question 16

Banks can earn income on standby letters of credit from:

Accepted Answer

A)  fee income 
B)  interest income 
C)  a and b 
D)  none of the above

Question 17

A coupon swap is a type of:

Accepted Answer

A)  interest rate swap 
B)  currency swap 
C)  basis swap 
D)  denomination swap

Question 18

SLCs are NOT considered loans for the purpose of calculating legal lending limits for commercial banks.

Accepted Answer

A) True 
 B)False

Question 19

Settlement risk occurs when one party in a financial transaction pays out funds to the other party before it receives its own cash or assets.

Accepted Answer

A) True 
 B)False

Question 20

An example of off-balance sheet trade finance is:

Accepted Answer

A)  commercial letter of credit 
B)  acceptance participation 
C)  a and b 
D)  none of the above

Exam 14: Off-Balance Sheet Activities

Banks can control their risk associated with standby letters of credit by:

A bank that organizes a note issuance facility is called a(n) :

SLCs are often used in connection with the issuance of debt obligations as backup lines of credit.

Loan sales enable banks to:

Institutions that have the right to bid for the short-term notes issued under the note issuance facility are called:

The Chicago Board of Trade is an over-the-counter for derivative securities.

Basis swaps are interest rate swaps in which the interest payments are based on fixed rates and floating rates of interest.

A revolving loan commitment differs from a line of credit in that:

Aggregation risk comes about in derivatives deals due to the complex legal uncertainties that can exist.

A swap where the two interest payments are based on two different floating rates of interest is called a(n) :

The major risk facing banks with loan commitments is that a large number of borrowers will take down their loans simultaneously and the bank may not have sufficient funds to make the loans. This is known as availability risk.

A credit option seeks to:

Which of the following is NOT a regulator of the derivative markets?

Buying a forward rate agreement is analogous to buying a put and selling a call, where the forward price is equal to the exercise price of the options.

The motivation for the growth of loan commitments is:

Banks can earn income on standby letters of credit from:

A coupon swap is a type of:

SLCs are NOT considered loans for the purpose of calculating legal lending limits for commercial banks.

Settlement risk occurs when one party in a financial transaction pays out funds to the other party before it receives its own cash or assets.

An example of off-balance sheet trade finance is: