Question 1

An FI can protect itself against insolvency resulting from off-balance sheet activities by purchasing insurance.

Accepted Answer

A) True 
 B)False

Question 2

The amount of regulations that have been proposed because of the increased use of risk-reducing OBS derivatives is increasing.

Accepted Answer

A) True 
 B)False

Question 3

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. The up-front 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 4

Which of the following is an out-of-the-money counterparty in the derivative securities market?

Accepted Answer

A) Counterparty in a loan commitment contract. 
B) FI that trades in securities prior to their actual issue. 
C) Counterparty that is currently at an advantage in terms of cash flows. 
D) FI that guarantees to underwrite the performance of the buyer of the guaranty. 
E) Counterparty that is currently at a disadvantage in terms of cash flows. 
A) Counterparty in a loan commitment contract. 
B) FI that trades in securities prior to their actual issue. 
C) Counterparty that is currently at an advantage in terms of cash flows. 
D) FI that guarantees to underwrite the performance of the buyer of the guaranty. 
E) Counterparty that is currently at a disadvantage in terms of cash flows.

Question 5

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 expected return on the loan to the bank if 50 percent of the loan is drawn? Do not take future values of fee or interest income received.

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 6

Derivative products used in managing contingent credit risk can only be acquired as over-the-counter arrangements.

Accepted Answer

A) True 
 B)False

Question 7

As of the first quarter of 2015, the vast majority of OBS activities of commercial banks was

Accepted Answer

A) future and forward contracts. 
B) credit derivatives. 
C) commitments to buy foreign exchange (FX). 
D) swap contracts. 
E) loans sold with recourse. 
A) future and forward contracts. 
B) credit derivatives. 
C) commitments to buy foreign exchange (FX). 
D) swap contracts. 
E) loans sold with recourse.

Question 8

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 immediately and there are no reserve requirements on demand deposits? Do not take future values of fees or interest income received.

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 9

Commercial letters of credit are used only in international trade.

Accepted Answer

A) True 
 B)False

Question 10

An up-front fee on a loan commitment rewards the FI for its willingness to stand ready to lend the commitment amount during some agreed upon time period.

Accepted Answer

A) True 
 B)False

Question 11

Settlement risk on wire transfers involves intraday credit risk.

Accepted Answer

A) True 
 B)False

Question 12

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 standby letter of credit 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 13

The ability to form financial holding companies for the purpose of creating full-service financial institutions has caused an increase in affiliate risk.

Accepted Answer

A) True 
 B)False

Question 14

An exporter demands a letter of credit in order to

Accepted Answer

A) guarantee safe delivery of goods to the importer. 
B) guarantee receipt of payment from the importer upon receipt of the goods. 
C) protect against adverse changes in foreign exchange rates. 
D) protect against adverse changes in international interest rates. 
E) ascertain the creditworthiness of the importer. 
A) guarantee safe delivery of goods to the importer. 
B) guarantee receipt of payment from the importer upon receipt of the goods. 
C) protect against adverse changes in foreign exchange rates. 
D) protect against adverse changes in international interest rates. 
E) ascertain the creditworthiness of the importer.

Question 15

An FI has assets of $800 million and liabilities of $740 million. What is the balance sheet capital?

Accepted Answer

A) -$60 million. 
B) $60 million. 
C) $740 million. 
D) $800 million. 
E) This question cannot be answered without information about off-balance sheet assets and liabilities. 
A) -$60 million. 
B) $60 million. 
C) $740 million. 
D) $800 million. 
E) This question cannot be answered without information about off-balance sheet assets and liabilities.

Question 16

Off-balance-sheet activities generally have risk-reducing attributes, but seldom have risk-increasing attributes.

Accepted Answer

A) True 
 B)False

Question 17

Off-balance sheet activities can have both positive and negative effects on the risk of the FI.

Accepted Answer

A) True 
 B)False

Question 18

What is a swap?

Accepted Answer

A) An agreement between two parties to exchange assets or a series of cash flows for a specific period of time at a specified interval. 
B) An agreement between a buyer and a seller at time 0 to exchange a nonstandardized asset for cash at some future date. 
C) A contract that gives the holder the right, but not the obligation to buy or sell the underlying asset at a specified price within a specified period of time. 
D) Trading in securities prior to their actual issue. 
E) Contractual commitment to make a loan up to a stated amount at a given interest rate in the future. 
A) An agreement between two parties to exchange assets or a series of cash flows for a specific period of time at a specified interval. 
B) An agreement between a buyer and a seller at time 0 to exchange a nonstandardized asset for cash at some future date. 
C) A contract that gives the holder the right, but not the obligation to buy or sell the underlying asset at a specified price within a specified period of time. 
D) Trading in securities prior to their actual issue. 
E) Contractual commitment to make a loan up to a stated amount at a given interest rate in the future.

Question 19

The use of letters of credit (LCs) and standby letters of credit (SLCs) may result in an FI having a higher concentration ratio than desired for a particular industry.

Accepted Answer

A) True 
 B)False

Question 20

The current market value or contingent claim value of OBS items overestimates their notional value.

Accepted Answer

A) True 
 B)False

Exam 16: Off-Balance-Sheet Risk

An FI can protect itself against insolvency resulting from off-balance sheet activities by purchasing insurance.

The amount of regulations that have been proposed because of the increased use of risk-reducing OBS derivatives is increasing.

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. The up-front fee is

Which of the following is an out-of-the-money counterparty in the derivative securities market?

Derivative products used in managing contingent credit risk can only be acquired as over-the-counter arrangements.

As of the first quarter of 2015, the vast majority of OBS activities of commercial banks was

Commercial letters of credit are used only in international trade.

An up-front fee on a loan commitment rewards the FI for its willingness to stand ready to lend the commitment amount during some agreed upon time period.

Settlement risk on wire transfers involves intraday credit risk.

The ability to form financial holding companies for the purpose of creating full-service financial institutions has caused an increase in affiliate risk.

An exporter demands a letter of credit in order to

An FI has assets of $800 million and liabilities of $740 million. What is the balance sheet capital?

Off-balance-sheet activities generally have risk-reducing attributes, but seldom have risk-increasing attributes.

Off-balance sheet activities can have both positive and negative effects on the risk of the FI.

What is a swap?

The use of letters of credit (LCs) and standby letters of credit (SLCs) may result in an FI having a higher concentration ratio than desired for a particular industry.

The current market value or contingent claim value of OBS items overestimates their notional value.

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