Question 1

Credit risk and interest rate risk cannot affect insolvency risk.

Accepted Answer

A) True 
 B)False

Question 2

Employee fraud is a type of operational risk to a financial institution.

Accepted Answer

A) True 
 B)False

Question 3

The risk that many depositors withdraw their funds from an FI at once is

Accepted Answer

A) credit risk. 
B) sovereign risk. 
C) currency risk. 
D) liquidity risk. 
E) interest rate risk. 
A) credit risk. 
B) sovereign risk. 
C) currency risk. 
D) liquidity risk. 
E) interest rate risk.

Question 4

General macroeconomic risks may affect all risks of a financial institution.

Accepted Answer

A) True 
 B)False

Question 5

Politically motivated limitations on payments of foreign currency may expose an FI to

Accepted Answer

A) sovereign country risk. 
B) interest rate risk. 
C) credit risk. 
D) foreign exchange risk. 
E) off-balance-sheet risk. 
A) sovereign country risk. 
B) interest rate risk. 
C) credit risk. 
D) foreign exchange risk. 
E) off-balance-sheet risk.

Question 6

Which of the following would one typically find in the trading portfolio of an FI?

Accepted Answer

A) Cash, loans, and deposits. 
B) Premises and equipment. 
C) Relatively illiquid assets. 
D) Assets held for long holding periods. 
E) Bonds, equities, and derivatives. 
A) Cash, loans, and deposits. 
B) Premises and equipment. 
C) Relatively illiquid assets. 
D) Assets held for long holding periods. 
E) Bonds, equities, and derivatives.

Question 7

Event risks often cause sudden and unanticipated changes in financial market conditions.

Accepted Answer

A) True 
 B)False

Question 8

Unanticipated diseconomies of scale or scope are a result of

Accepted Answer

A) interest rate risk. 
B) technology risk. 
C) credit risk. 
D) foreign exchange risk. 
E) off-balance-sheet risk. 
A) interest rate risk. 
B) technology risk. 
C) credit risk. 
D) foreign exchange risk. 
E) off-balance-sheet risk.

Question 9

An FI is only exposed to market risk in its trading portfolio if interest rates change over time.

Accepted Answer

A) True 
 B)False

Question 10

Technology risk is the uncertainty that economies of scale or scope will be realized from the investment in new technologies.

Accepted Answer

A) True 
 B)False

Question 11

Individuals have an advantage over FIs in that individuals more easily can diversify away some of the credit risk of their asset portfolios.

Accepted Answer

A) True 
 B)False

Question 12

A lower level of equity capital increases the risk of insolvency to a financial institution.

Accepted Answer

A) True 
 B)False

Question 13

Which function of an FI involves buying primary securities and issuing secondary securities?

Accepted Answer

A) Brokerage. 
B) Asset transformation. 
C) Investment research. 
D) Self-regulator. 
E) Trading. 
A) Brokerage. 
B) Asset transformation. 
C) Investment research. 
D) Self-regulator. 
E) Trading.

Question 14

Which of the following situations pose a refinancing risk for an FI?

Accepted Answer

A) An FI issues $10 million of liabilities of one-year maturity to finance the purchase of $10 million of assets with a two-year maturity. 
B) An FI issues $10 million of liabilities of two-year maturity to finance the purchase of $10 million of assets with a two-year maturity. 
C) An FI issues $10 million of liabilities of three-year maturity to finance the purchase of $10 million of assets with a two-year maturity. 
D) An FI matches the maturity of its assets and liabilities. 
E) All of the options. 
A) An FI issues $10 million of liabilities of one-year maturity to finance the purchase of $10 million of assets with a two-year maturity. 
B) An FI issues $10 million of liabilities of two-year maturity to finance the purchase of $10 million of assets with a two-year maturity. 
C) An FI issues $10 million of liabilities of three-year maturity to finance the purchase of $10 million of assets with a two-year maturity. 
D) An FI matches the maturity of its assets and liabilities. 
E) All of the options.

Question 15

FIs that make long-term loans are less exposed to credit risk than if they make short-term loans.

Accepted Answer

A) True 
 B)False

Question 16

Bank regulators typically view tradable assets as those held for one month or less.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following refers to an FI's ability to generate cost synergies by producing more than one output with the same inputs?

Accepted Answer

A) Market intermediation. 
B) Economies of scope. 
C) Break-even point. 
D) Economies of scale. 
E) Business continuity plan. 
A) Market intermediation. 
B) Economies of scope. 
C) Break-even point. 
D) Economies of scale. 
E) Business continuity plan.

Question 18

Matching the foreign currency book of assets and liability maturity does not protect the FI from

Accepted Answer

A) sovereign country risk. 
B) interest rate risk. 
C) liquidity risk. 
D) foreign exchange risk. 
E) off-balance-sheet risk. 
A) sovereign country risk. 
B) interest rate risk. 
C) liquidity risk. 
D) foreign exchange risk. 
E) off-balance-sheet risk.

Question 19

Economically speaking, OBS activities are contractual claims that

Accepted Answer

A) may or may not occur. 
B) if the contingency does occur, the asset or liability is transferred onto the FI's balance sheet. 
C) impact the economic value of the equity. 
D) if the contingency never occurs, there is virtually no economic meaning to the OBS activity. 
E) all of the options. 
A) may or may not occur. 
B) if the contingency does occur, the asset or liability is transferred onto the FI's balance sheet. 
C) impact the economic value of the equity. 
D) if the contingency never occurs, there is virtually no economic meaning to the OBS activity. 
E) all of the options.

Question 20

Off-balance sheet activities never have an effect on the value of equity the FI holds.

Accepted Answer

A) True 
 B)False

Exam 7: Risks of Financial Institutions

Credit risk and interest rate risk cannot affect insolvency risk.

Employee fraud is a type of operational risk to a financial institution.

The risk that many depositors withdraw their funds from an FI at once is

General macroeconomic risks may affect all risks of a financial institution.

Politically motivated limitations on payments of foreign currency may expose an FI to

Which of the following would one typically find in the trading portfolio of an FI?

Event risks often cause sudden and unanticipated changes in financial market conditions.

Unanticipated diseconomies of scale or scope are a result of

An FI is only exposed to market risk in its trading portfolio if interest rates change over time.

Technology risk is the uncertainty that economies of scale or scope will be realized from the investment in new technologies.

Individuals have an advantage over FIs in that individuals more easily can diversify away some of the credit risk of their asset portfolios.

A lower level of equity capital increases the risk of insolvency to a financial institution.

Which function of an FI involves buying primary securities and issuing secondary securities?

Which of the following situations pose a refinancing risk for an FI?

FIs that make long-term loans are less exposed to credit risk than if they make short-term loans.

Bank regulators typically view tradable assets as those held for one month or less.

Which of the following refers to an FI's ability to generate cost synergies by producing more than one output with the same inputs?

Matching the foreign currency book of assets and liability maturity does not protect the FI from

Economically speaking, OBS activities are contractual claims that

Off-balance sheet activities never have an effect on the value of equity the FI holds.

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

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

Off-Balance-Sheet 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