Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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 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

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 5

One way to completely protect the lender against interest rate risk on a loan commitment is for the lender to price the loan at a variable rate against some index.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

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 drawn 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 8

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 9

An FI has assets of $800 million and liabilities of $740 million. If the FI had contingent assets of $40 million and contingent liabilities of $160 million, calculate the stockholder's true net worth (ignore the option mentioned in previous question).

Accepted Answer

A) -$60 million. 
B) $60 million. 
C) $70 million. 
D) -$160 million. 
E) $190 million. 
A) -$60 million. 
B) $60 million. 
C) $70 million. 
D) -$160 million. 
E) $190 million.

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Takedown risk in a loan commitment exposes the FI to

Accepted Answer

A) immediate liquidity risk. 
B) basis risk. 
C) spread risk. 
D) externality effects. 
E) future liquidity risk. 
A) immediate liquidity risk. 
B) basis risk. 
C) spread risk. 
D) externality effects. 
E) future liquidity risk.

Question 12

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) are nonstandard contracts between two parties to deliver and pay for an asset in the future, and are standardized contract guaranteed by organized exchanges to deliver and pay for an asset in the future. 
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) are nonstandard contracts between two parties to deliver and pay for an asset in the future, and are standardized contract guaranteed by organized exchanges to deliver and pay for an asset in the future.

Question 13

As compared to LCs, 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 14

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

Accepted Answer

A) True 
 B)False

Question 15

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 using discounted cash flows? That is, the return has to be estimated at the beginning of the loan period using present values. Assume there are reserve requirements of 10 percent on demand deposits.

Accepted Answer

A) 12.00 percent. 
B) 12.26 percent. 
C) 12.59 percent. 
D) 13.01 percent. 
E) 13.26 percent. 
A) 12.00 percent. 
B) 12.26 percent. 
C) 12.59 percent. 
D) 13.01 percent. 
E) 13.26 percent.

Question 16

If an option's price increases 1.4 percent for every 2 percent change in the price of the underlying security, what is the value of the option's delta?

Accepted Answer

A) 0.60. 
B) 1.40. 
C) 0.70. 
D) 2.00. 
E) 3.00. 
A) 0.60. 
B) 1.40. 
C) 0.70. 
D) 2.00. 
E) 3.00.

Question 17

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 18

Which of the following is true of an 'adverse material change in conditions clause' used in a loan commitment?

Accepted Answer

A) It allows the FI to cancel or reprice a loan commitment. 
B) It protects the lender against takedown risk. 
C) It protects the lender against basis risk. 
D) Exercise of the clause helps defaulted borrowers. 
E) It is exercised frequently by most FIs. 
A) It allows the FI to cancel or reprice a loan commitment. 
B) It protects the lender against takedown risk. 
C) It protects the lender against basis risk. 
D) Exercise of the clause helps defaulted borrowers. 
E) It is exercised frequently by most FIs.

Question 19

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 20

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. Assume 50 percent of the loan is drawn and that there are reserve requirements of 10 percent on demand deposits. What should the bank charge as back-end fees if they require an expected return of 13.63 percent? Do not take future values of fees or interest income received.

Accepted Answer

A) 5 basis points. 
B) 10 basis points. 
C) 15 basis points. 
D) 20 basis points. 
E) 25 basis points. 
A) 5 basis points. 
B) 10 basis points. 
C) 15 basis points. 
D) 20 basis points. 
E) 25 basis points.

Exam 16: Off-Balance-Sheet Risk

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

Loan loss reserves are classified as

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

Rediscounted bankers' acceptances are classified as

One way to completely protect the lender against interest rate risk on a loan commitment is for the lender to price the loan at a variable rate against some index.

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

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 drawn down, the back-end fee is

Standby letters of credit are classified as

An FI has assets of $800 million and liabilities of $740 million. If the FI had contingent assets of $40 million and contingent liabilities of $160 million, calculate the stockholder's true net worth (ignore the option mentioned in previous question).

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

Takedown risk in a loan commitment exposes the FI to

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

As compared to LCs, SLCs typically are used to cover contingencies that potentially are more severe and which may not be trade related.

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

If an option's price increases 1.4 percent for every 2 percent change in the price of the underlying security, what is the value of the option's delta?

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

Which of the following is true of an 'adverse material change in conditions clause' used in a loan commitment?

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

Why Are Financial Institutions Special

Deposit-Taking Institutions

Finance Companies

Securities, Brokerage, and Investment Banking

Mutual Funds, Hedge Funds, and Pension Funds

Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loans

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Technology and Other Operational 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 Index

Filters