Question 1

The delta of an option is the sensitivity of an option's value to a unit change in the value of the underlying asset.

Accepted Answer

A) True 
 B)False

Question 2

When-issued trading involves the commitment to buy and sell securities before they are issued.

Accepted Answer

A) True 
 B)False

Question 3

A corporation is planning to issue $10 million worth of 180-day commercial paper.In order to reduce the interest rates by 25 basis points (per year), it plans to back this issue with a standby letter of credit or a loan commitment.The standby letter of credit is available for 20 basis points (per year) to be paid up-front.The loan commitment for $10 million is available for an up-front fee of 15 basis points (per year) and a 5 basis points back-end fee. Which method is preferable, between the loan commitment and the standby letter of credit?

Accepted Answer

A) The loan commitment is preferable because the savings are greater. 
B) The standby letter of credit is preferable because the savings are greater. 
C) The loan commitment is preferable it has a lower risk of default. 
D) The standby letter of credit is preferable because it has a lower risk of default. 
E) The loan commitment is preferable because the back-end fee is payable at the end of the year. 
A) The loan commitment is preferable because the savings are greater. 
B) The standby letter of credit is preferable because the savings are greater. 
C) The loan commitment is preferable it has a lower risk of default. 
D) The standby letter of credit is preferable because it has a lower risk of default. 
E) The loan commitment is preferable because the back-end fee is payable at the end of the year.

Question 4

Sun Bank has issued a one-year $5 million loan commitment to a customer for an up-front fee of 15 basis points and at a fixed rate of 12 percent.The back-end fee for the unused portion of the commitment is 5 basis points.The bank requires a 10 percent compensating balance in demand deposits.Reserve requirements on demand deposits are 10 percent. What is the expected return on the loan to the bank if 50 percent of the loan is drawn using discounted cash flows? That is, the return has to be estimated at the beginning of the loan period using present values.Assume there are reserve requirements of 10 percent on demand deposits.

Accepted Answer

A) 12.00 percent. 
B) 12.26 percent. 
C) 12.59 percent. 
D) 13.01 percent. 
E) 13.26 percent. 
A) 12.00 percent. 
B) 12.26 percent. 
C) 12.59 percent. 
D) 13.01 percent. 
E) 13.26 percent.

Question 5

Which of the following is true about the value of the delta of an option?

Accepted Answer

A) It lies between 0 and 0.5. 
B) It is always negative. 
C) It lies between 0 and 1. 
D) It is greater than 1. 
E) It is always equal to 1. 
A) It lies between 0 and 0.5. 
B) It is always negative. 
C) It lies between 0 and 1. 
D) It is greater than 1. 
E) It is always equal to 1.

Question 6

Off-balance-sheet items often are called contingent assets and liabilities because they may, or may not, affect the balance sheet in the future.

Accepted Answer

A) True 
 B)False

Question 7

A contractual commitment to make a loan up to a stated amount at a given interest rate in the future is a loan commitment agreement.

Accepted Answer

A) True 
 B)False

Question 8

A $200 million loan commitment has an up-front fee of 20 basis points and a back-end fee of 25 basis points on the unused portion. If 25 percent of the commitment is taken down, the total fees are

Accepted Answer

A) $250,000. 
B) $4,000,000. 
C) $400,000. 
D) $775,000. 
E) $375,000. 
A) $250,000. 
B) $4,000,000. 
C) $400,000. 
D) $775,000. 
E) $375,000.

Question 9

Loans sold without recourse have contingent liability off-balance-sheet implications for the FI that sells the loan.

Accepted Answer

A) True 
 B)False

Question 10

Contingent credit risk is more serious for futures contracts than forward contracts because the over-the-counter arrangements necessary to replicate the guarantees at a later date.

Accepted Answer

A) True 
 B)False

Question 11

Loan commitment activities increase the insolvency exposure of FIs that engage in such activities.

Accepted Answer

A) True 
 B)False

Question 12

Why is the default risk much more serious for forward contracts than for futures contracts?

Accepted Answer

A) Because forward contracts are nonstandard contracts. 
B) Forward contracts are entered into bilaterally by the negotiating parties. 
C) For forwards, all cash flows are required to be paid at one time on contract maturity. 
D) Forwards are essentially OTC arrangements with no external guarantees in case of default. 
E) All of the options. 
A) Because forward contracts are nonstandard contracts. 
B) Forward contracts are entered into bilaterally by the negotiating parties. 
C) For forwards, all cash flows are required to be paid at one time on contract maturity. 
D) Forwards are essentially OTC arrangements with no external guarantees in case of default. 
E) All of the options.

Question 13

Which of the following ratios do FIs and regulators often use as a simple measure of solvency?

Accepted Answer

A) Current ratio. 
B) Capital to assets. 
C) Earnings before interest and taxes to total assets. 
D) Quick ratio. 
E) Asset turnover ratio. 
A) Current ratio. 
B) Capital to assets. 
C) Earnings before interest and taxes to total assets. 
D) Quick ratio. 
E) Asset turnover ratio.

Question 14

Up-front fees on loan commitments are charged as a certain percentage of

Accepted Answer

A) commitment size. 
B) loan taken down. 
C) utilized portion of commitment size. 
D) unused portion of commitment size. 
E) interest payable on the loan commitment. 
A) commitment size. 
B) loan taken down. 
C) utilized portion of commitment size. 
D) unused portion of commitment size. 
E) interest payable on the loan commitment.

Question 15

Loans sold with recourse by an FI may have future contingent liability off-balance-sheet implications for the FI.

Accepted Answer

A) True 
 B)False

Question 16

A corporation is planning to issue $10 million worth of 180-day commercial paper.In order to reduce the interest rates by 25 basis points (per year), it plans to back this issue with a standby letter of credit or a loan commitment.The standby letter of credit is available for 20 basis points (per year) to be paid up-front.The loan commitment for $10 million is available for an up-front fee of 15 basis points (per year) and a 5 basis points back-end fee. What are the savings to the corporation if it obtains a loan commitment to back its $10 million issue of commercial paper?

Accepted Answer

A) $1,250. 
B) $2,500. 
C) $3,750. 
D) $5,000. 
E) $6,250 
A) $1,250. 
B) $2,500. 
C) $3,750. 
D) $5,000. 
E) $6,250

Question 17

An upfront fee is the fee imposed on the unused balance of a loan commitment.

Accepted Answer

A) True 
 B)False

Question 18

The effect to an FI of default by the counterparty to a derivative contract is LEAST serious with

Accepted Answer

A) options contracts. 
B) futures contracts. 
C) swap agreements. 
D) forward contracts. 
E) loan commitments. 
A) options contracts. 
B) futures contracts. 
C) swap agreements. 
D) forward contracts. 
E) loan commitments.

Question 19

Which of the following is true of the market price of an options contract over time?

Accepted Answer

A) It is set at time 0. 
B) It is fixed over the life of the contract. 
C) It changes based on the market value of the underlying asset. 
D) It increases with time to expiration. 
E) It is based on supply and demand. 
A) It is set at time 0. 
B) It is fixed over the life of the contract. 
C) It changes based on the market value of the underlying asset. 
D) It increases with time to expiration. 
E) It is based on supply and demand.

Question 20

Off-balance-sheet items can generate cash flows that immediately impact the bank's financial performance.

Accepted Answer

A) True 
 B)False

Exam 16: Off-Balance-Sheet Risk

The delta of an option is the sensitivity of an option's value to a unit change in the value of the underlying asset.

When-issued trading involves the commitment to buy and sell securities before they are issued.

Which of the following is true about the value of the delta of an option?

Off-balance-sheet items often are called contingent assets and liabilities because they may, or may not, affect the balance sheet in the future.

A contractual commitment to make a loan up to a stated amount at a given interest rate in the future is a loan commitment agreement.

A $200 million loan commitment has an up-front fee of 20 basis points and a back-end fee of 25 basis points on the unused portion. If 25 percent of the commitment is taken down, the total fees are

Loans sold without recourse have contingent liability off-balance-sheet implications for the FI that sells the loan.

Contingent credit risk is more serious for futures contracts than forward contracts because the over-the-counter arrangements necessary to replicate the guarantees at a later date.

Loan commitment activities increase the insolvency exposure of FIs that engage in such activities.

Why is the default risk much more serious for forward contracts than for futures contracts?

Which of the following ratios do FIs and regulators often use as a simple measure of solvency?

Up-front fees on loan commitments are charged as a certain percentage of

Loans sold with recourse by an FI may have future contingent liability off-balance-sheet implications for the FI.

An upfront fee is the fee imposed on the unused balance of a loan commitment.

The effect to an FI of default by the counterparty to a derivative contract is LEAST serious with

Which of the following is true of the market price of an options contract over time?

Off-balance-sheet items can generate cash flows that immediately impact the bank's financial performance.

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

Risks of Financial Institutions

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

Technology and Other Operational Risks

Fintech 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

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