Exam 7: Risks of Financial Institutions

This risk of default is associated with general economy-wide or macro conditions affecting all borrowers.

Bank of the Atlantic has liabilities of $4 million with an average maturity of two years paying interest rates of 4.0 percent annually.It has assets of $5 million with an average maturity of 5 years earning interest rates of 6.0 percent annually.What is the maximum interest rate that it can refinance its $4 million liability and still break even on its net interest income in dollars?

Which term refers to the risk that the cost of rolling over or re-borrowing funds will rise above the returns being earned on asset investments?

Bank of the Atlantic has liabilities of $4 million with an average maturity of two years paying interest rates of 4.0 percent annually.It has assets of $5 million with an average maturity of 5 years earning interest rates of 6.0 percent annually.What is the bank's net interest income for the current year?

Foreign exchange risk includes interest rate risk and credit risk as well as changes in the foreign exchange rate between two countries.

The risk that an FI may not have enough capital to offset a sudden decline in the value of its assets relative to its liabilities is referred to as

For an FI to exactly hedge the foreign investment risk, the foreign currency assets must equal the foreign currency liabilities.

Insolvency risk is reduced when the leverage of an FI is also reduced.

What type of risk focuses upon mismatched asset and liability maturities and durations?

Financial claims issued by corporations and held by FIs promise a limited or fixed upside return.

Foreign exchange risk is that the value of assets and liabilities may change because of changes in the level of interest rates.

The risk that a foreign government may devalue the currency relates to

Off-balance-sheet risk occurs because of activities that do not appear on the balance sheet.

Systematic credit risk can be reduced significantly by diversification.