Question 1

The current market value of an off-balance-sheet item is determined by finding the current market value of the underlying item.

Accepted Answer

A) True 
 B)False

Question 2

Commercial letters of credit are guarantees that are issued to cover contingencies that are potentially more severe and less predictable than those covered by standby letters of credit.

Accepted Answer

A) True 
 B)False

Question 3

The contingent risk effects include:

Accepted Answer

A) identified-interest rate risk and takedown risk 
B) credit risk and aggregate funding risk 
C) Both A and B 
D) Neither A or B 
E) Contingent risk does not have effects 
A) identified-interest rate risk and takedown risk 
B) credit risk and aggregate funding risk 
C) Both A and B 
D) Neither A or B 
E) Contingent risk does not have effects

Question 4

If a future credit crunch is possible, a loan commitment may expose the FI to

Accepted Answer

A) credit risk. 
B) interest rate risk. 
C) sovereign country risk. 
D) funding risk. 
E) exchange rate risk. 
A) credit risk. 
B) interest rate risk. 
C) sovereign country risk. 
D) funding risk. 
E) exchange rate risk.

Question 5

Which of the following situations is similar to the externality effect?

Accepted Answer

A) Exercising an adverse material change in conditions clause as a last resort, thereby canceling or repricing a loan commitment. 
B) Increase in the cost of funds above normal levels while many FIs scramble for funds to meet their commitments to customers during a credit crunch. 
C) In a loan commitment, the borrower takes down only part of the funds over the specified time-period. 
D) The buyer of a commercial letter of credit fails to perform as promised under a contractual obligation. 
E) All of the options. 
A) Exercising an adverse material change in conditions clause as a last resort, thereby canceling or repricing a loan commitment. 
B) Increase in the cost of funds above normal levels while many FIs scramble for funds to meet their commitments to customers during a credit crunch. 
C) In a loan commitment, the borrower takes down only part of the funds over the specified time-period. 
D) The buyer of a commercial letter of credit fails to perform as promised under a contractual obligation. 
E) All of the options.

Question 6

Loan commitments 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 7

Funds transferred on the Clearing House Interbank Payments System (CHIPS) are settled immediately.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following refers to the fee charged on the unused balance of a loan commitment.

Accepted Answer

A) Up-front fee. 
B) Facility fee. 
C) Compensating balance. 
D) Commitment fee. 
E) Closing costs. 
A) Up-front fee. 
B) Facility fee. 
C) Compensating balance. 
D) Commitment fee. 
E) Closing costs.

Question 9

As of 2015, the top 25 U.S.commercial banks accounted for ________ percent of OBS derivative contracts among FDIC-insured institutions.

Accepted Answer

A) 100 
B) 99.8 
C) 92.6 
D) 81.9 
E) 60.7 
A) 100 
B) 99.8 
C) 92.6 
D) 81.9 
E) 60.7

Question 10

The Clearing House Interbank Payments System (CHIPS) is an international wire transfer system owned by the participating banks in the countries in which it is used.

Accepted Answer

A) True 
 B)False

Question 11

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 at the end of the year if 50 percent of the loan is drawn? Estimate using future values of fee and interest income received, that is, return is defined as all fee and interest income earned at year-end as a percentage of funds used.Assume the cost of funds to the bank is 8 percent.

Accepted Answer

A) 13.45 percent. 
B) 13.57 percent. 
C) 13.60 percent. 
D) 13.72 percent. 
E) 13.90 percent. 
A) 13.45 percent. 
B) 13.57 percent. 
C) 13.60 percent. 
D) 13.72 percent. 
E) 13.90 percent.

Question 12

Even though an FI may have off-balance-sheet activities, the true net worth is equal to on-balance sheet assets minus on-balance sheet liabilities.

Accepted Answer

A) True 
 B)False

Question 13

FIs are competing directly with loan commitments, one of their own OBS products, when they also offer:

Accepted Answer

A) Futures contracts. 
B) Swaps. 
C) Standby letters of credit. 
D) Forward contracts. 
E) When-issued trading. 
A) Futures contracts. 
B) Swaps. 
C) Standby letters of credit. 
D) Forward contracts. 
E) When-issued trading.

Question 14

Which of the following statements best describe a derivative contract?

Accepted Answer

A) Contractual commitments to make a loan up to a stated amount at a given interest rate in the future. 
B) Contingent guarantees sold by an FI to underwrite the performance of the buyer of the guaranty. 
C) Agreement between two parties to exchange a standard quantity of an asset at a predetermined price at a specified date in the future. 
D) Trading in securities prior to their actual issue. 
E) Loans originated by an FI and then sold to other investors with recourse. 
A) Contractual commitments to make a loan up to a stated amount at a given interest rate in the future. 
B) Contingent guarantees sold by an FI to underwrite the performance of the buyer of the guaranty. 
C) Agreement between two parties to exchange a standard quantity of an asset at a predetermined price at a specified date in the future. 
D) Trading in securities prior to their actual issue. 
E) Loans originated by an FI and then sold to other investors with recourse.

Question 15

What are commercial letters of credit?

Accepted Answer

A) They are contractual commitments to make a loan up to a stated amount at a given interest rate in the future. 
B) They 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. 
C) They are nonstandard contracts between two parties to deliver and pay for an asset in the future. 
D) They are standardized contract guaranteed by organized exchanges to deliver and pay for an asset in the future. 
E) They are contingent guarantees sold by an FI to underwrite the trade or commercial performance of the buyer of the guaranty. 
A) They are contractual commitments to make a loan up to a stated amount at a given interest rate in the future. 
B) They 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. 
C) They are nonstandard contracts between two parties to deliver and pay for an asset in the future. 
D) They are standardized contract guaranteed by organized exchanges to deliver and pay for an asset in the future. 
E) They are contingent guarantees sold by an FI to underwrite the trade or commercial performance of the buyer of the guaranty.

Question 16

A default option is exercised when the holder requests a draw on the loan commitment.

Accepted Answer

A) True 
 B)False

Question 17

Contingent credit risk occurs with the use of derivative products and involves the potential default by a counterparty.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is true of the market price of a futures 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 decreases 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 decreases with time to expiration. 
E) It is based on supply and demand.

Question 19

If an FI enters into a loan commitment, it is essentially entering into a forward contract.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following is a non-schedule L off-balance-sheet risk?

Accepted Answer

A) Takedown risk. 
B) Settlement risk. 
C) Aggregate funding risk. 
D) When-issued trading. 
E) Credit risk with derivative securities. 
A) Takedown risk. 
B) Settlement risk. 
C) Aggregate funding risk. 
D) When-issued trading. 
E) Credit risk with derivative securities.

Exam 16: Off-Balance-Sheet Risk

The current market value of an off-balance-sheet item is determined by finding the current market value of the underlying item.

Commercial letters of credit are guarantees that are issued to cover contingencies that are potentially more severe and less predictable than those covered by standby letters of credit.

The contingent risk effects include:

If a future credit crunch is possible, a loan commitment may expose the FI to

Which of the following situations is similar to the externality effect?

Loan commitments are classified as

Funds transferred on the Clearing House Interbank Payments System (CHIPS) are settled immediately.

Which of the following refers to the fee charged on the unused balance of a loan commitment.

As of 2015, the top 25 U.S.commercial banks accounted for ________ percent of OBS derivative contracts among FDIC-insured institutions.

The Clearing House Interbank Payments System (CHIPS) is an international wire transfer system owned by the participating banks in the countries in which it is used.

Even though an FI may have off-balance-sheet activities, the true net worth is equal to on-balance sheet assets minus on-balance sheet liabilities.

FIs are competing directly with loan commitments, one of their own OBS products, when they also offer:

Which of the following statements best describe a derivative contract?

What are commercial letters of credit?

A default option is exercised when the holder requests a draw on the loan commitment.

Contingent credit risk occurs with the use of derivative products and involves the potential default by a counterparty.

Which of the following is true of the market price of a futures contract over time?

If an FI enters into a loan commitment, it is essentially entering into a forward contract.

Which of the following is a non-schedule L off-balance-sheet risk?

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