Question 1

In the early 1980s

Accepted Answer

A) banks increased their off-balance-sheet activities to avoid competition from nonbank banks. 
B) banks decreased their off-balance-sheet activities to avoid regulatory taxes. 
C) banks decreased their off-balance-sheet activities to avoid competition from nonbank banks. 
D) banks increased their off-balance-sheet activities to avoid regulatory costs. 
E) banks increased their off-balance-sheet activities to avoid interest rate risk exposure. 
A) banks increased their off-balance-sheet activities to avoid competition from nonbank banks. 
B) banks decreased their off-balance-sheet activities to avoid regulatory taxes. 
C) banks decreased their off-balance-sheet activities to avoid competition from nonbank banks. 
D) banks increased their off-balance-sheet activities to avoid regulatory costs. 
E) banks increased their off-balance-sheet activities to avoid interest rate risk exposure.

Question 2

Back-end 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 3

Rediscounted bankers' acceptances are classified as

Accepted Answer

A) on-balance-sheet assets. 
B) off-balance-sheet assets. 
C) off-balance-sheet liabilities. 
D) on-balance-sheet liabilities. 
E) equity capital. 
A) on-balance-sheet assets. 
B) off-balance-sheet assets. 
C) off-balance-sheet liabilities. 
D) on-balance-sheet liabilities. 
E) equity capital.

Question 4

Off-balance-sheet items are

Accepted Answer

A) items omitted from the short form balance sheet. 
B) contingent assets and liabilities. 
C) risk-free assets and liabilities. 
D) exceptionally risky assets and liabilities. 
E) foreign (off shore) assets and liabilities. 
A) items omitted from the short form balance sheet. 
B) contingent assets and liabilities. 
C) risk-free assets and liabilities. 
D) exceptionally risky assets and liabilities. 
E) foreign (off shore) assets and liabilities.

Question 5

The Federal Reserve requires banks to complete schedule L with their quarterly call reports to list the notional size and variety of off-balance-sheet activities.

Accepted Answer

A) True 
 B)False

Question 6

Contingent credit risk on derivative contracts is more serious for futures contracts than for forward contracts.

Accepted Answer

A) True 
 B)False

Question 7

The aggregate commitment funding risk can increase the cost of funds above normal levels.

Accepted Answer

A) True 
 B)False

Question 8

Basis risk occurs on a loan commitment because the spread of a pricing index over the cost of funds may vary.

Accepted Answer

A) True 
 B)False

Question 9

The ability to provide loan commitments is a signal to borrowers that the FI has a lower risk portfolio.

Accepted Answer

A) True 
 B)False

Question 10

The back-end fee is the fee charged for making funds available through a loan commitment.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following are contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a pre-specified price for a specified time period?

Accepted Answer

A) Options. 
B) Futures. 
C) Forwards. 
D) Swaps. 
E) All of the options. 
A) Options. 
B) Futures. 
C) Forwards. 
D) Swaps. 
E) All of the options.

Question 12

In many ways, standby letters of credit (SLCs) perform similar functions for a borrower as do loan commitments.

Accepted Answer

A) True 
 B)False

Question 13

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 50 percent of the commitment is taken down, the back-end fee is

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 14

Standby letters of credit are classified as

Accepted Answer

A) on-balance-sheet assets. 
B) off-balance-sheet assets. 
C) off-balance-sheet liabilities. 
D) on-balance-sheet liabilities. 
E) equity capital. 
A) on-balance-sheet assets. 
B) off-balance-sheet assets. 
C) off-balance-sheet liabilities. 
D) on-balance-sheet liabilities. 
E) equity capital.

Question 15

The delta of an option is

Accepted Answer

A) a measure of the option's price volatility. 
B) calculated by dividing the price of the underlying security by the change in the option's price. 
C) equal to the option premium. 
D) calculated by multiplying the change in the price of the underlying security by the change in the option's price. 
E) usually negative. 
A) a measure of the option's price volatility. 
B) calculated by dividing the price of the underlying security by the change in the option's price. 
C) equal to the option premium. 
D) calculated by multiplying the change in the price of the underlying security by the change in the option's price. 
E) usually negative.

Question 16

If a commercial bank engages in OBS activities, there are no additional capital requirements imposed by regulators.
6 Credit derivatives allow FIs to hedge credit risk on individual assets, but not on portfolios of assets.

Accepted Answer

A) True 
 B)False

Question 17

Loan loss reserves are classified as

Accepted Answer

A) on-balance-sheet assets. 
B) off-balance-sheet assets. 
C) off-balance-sheet liabilities. 
D) on-balance-sheet liabilities. 
E) equity capital. 
A) on-balance-sheet assets. 
B) off-balance-sheet assets. 
C) off-balance-sheet liabilities. 
D) on-balance-sheet liabilities. 
E) equity capital.

Question 18

As compared to letters of credit (LCs), standby letters of credit (SLCs) typically are used to cover contingencies that potentially are more severe and which may not be trade related.

Accepted Answer

A) True 
 B)False

Question 19

In economic terms, the letters of credit (LCs) and stand-by letters of credit (SLCs) sold by an FI

Accepted Answer

A) are contractual commitments to make a loan up to a stated amount at a given interest rate in the future. 
B) are insurance against the frequency or severity of some particular future occurrence. 
C) are nonstandard contracts between two parties to deliver and pay for an asset in the future. 
D) are standardized contract guaranteed by organized exchanges to deliver and pay for an asset in the future. 
E) None of the options. 
A) are contractual commitments to make a loan up to a stated amount at a given interest rate in the future. 
B) are insurance against the frequency or severity of some particular future occurrence. 
C) are nonstandard contracts between two parties to deliver and pay for an asset in the future. 
D) are standardized contract guaranteed by organized exchanges to deliver and pay for an asset in the future. 
E) None of the options.

Question 20

Takedown risk is the uncertainty involved with the parties involved in the takedown of a loan commitment.

Accepted Answer

A) True 
 B)False

Exam 16: Off-Balance-Sheet Risk

In the early 1980s

Back-end fees on loan commitments are charged as a certain percentage of

Rediscounted bankers' acceptances are classified as

Off-balance-sheet items are

The Federal Reserve requires banks to complete schedule L with their quarterly call reports to list the notional size and variety of off-balance-sheet activities.

Contingent credit risk on derivative contracts is more serious for futures contracts than for forward contracts.

The aggregate commitment funding risk can increase the cost of funds above normal levels.

Basis risk occurs on a loan commitment because the spread of a pricing index over the cost of funds may vary.

The ability to provide loan commitments is a signal to borrowers that the FI has a lower risk portfolio.

The back-end fee is the fee charged for making funds available through a loan commitment.

Which of the following are contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a pre-specified price for a specified time period?

In many ways, standby letters of credit (SLCs) perform similar functions for a borrower as do loan commitments.

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 50 percent of the commitment is taken down, the back-end fee is

Standby letters of credit are classified as

The delta of an option is

If a commercial bank engages in OBS activities, there are no additional capital requirements imposed by regulators. 6 Credit derivatives allow FIs to hedge credit risk on individual assets, but not on portfolios of assets.

Loan loss reserves are classified as

As compared to letters of credit (LCs), standby letters of credit (SLCs) typically are used to cover contingencies that potentially are more severe and which may not be trade related.

In economic terms, the letters of credit (LCs) and stand-by letters of credit (SLCs) sold by an FI

Takedown risk is the uncertainty involved with the parties involved in the takedown of a loan commitment.

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

Filters