Question 1

Which of the following ratios do FIs and regulators often use as a simple measure of solvency?

Accepted Answer

A) Current ratio. 
B) Capital to assets. 
C) Earnings before interest and taxes to total assets. 
D) Quick ratio. 
E) Asset turnover ratio. 
A) Current ratio. 
B) Capital to assets. 
C) Earnings before interest and taxes to total assets. 
D) Quick ratio. 
E) Asset turnover ratio.

Question 2

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 3

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 4

If a commercial bank engages in OBS activities, there are no additional capital requirements imposed by regulators.

Accepted Answer

A) True 
 B)False

Question 5

Back-end fees on loan commitments are charged as a certain percentage of

Accepted Answer

A) commitment size. 
B) loan taken down. 
C) utilized portion of commitment size. 
D) unused portion of commitment size. 
E) interest payable on the loan commitment. 
A) commitment size. 
B) loan taken down. 
C) utilized portion of commitment size. 
D) unused portion of commitment size. 
E) interest payable on the loan commitment.

Question 6

The delta of an option is the sensitivity of an option's value to a unit change in the value of the underlying asset.

Accepted Answer

A) True 
 B)False

Question 7

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 8

What is a possible reason behind restricted supply of spot loans to borrowers during a credit crunch?

Accepted Answer

A) Expansionary monetary policy actions of the Federal Reserve. 
B) FI's increased aversion toward lending. 
C) Shift to the right in the loan supply function at all interest rates. 
D) Low aggregate demand from borrowers to take down loan commitments. 
E) Decrease in cost of funds. 
A) Expansionary monetary policy actions of the Federal Reserve. 
B) FI's increased aversion toward lending. 
C) Shift to the right in the loan supply function at all interest rates. 
D) Low aggregate demand from borrowers to take down loan commitments. 
E) Decrease in cost of funds.

Question 9

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 10

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 11

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 12

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 13

Funds transferred on CHIPS are settled immediately.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following is the newest addition to the derivative securities markets?

Accepted Answer

A) Options contracts. 
B) Futures contracts. 
C) Swap agreements. 
D) Forward contracts. 
E) Credit derivatives. 
A) Options contracts. 
B) Futures contracts. 
C) Swap agreements. 
D) Forward contracts. 
E) Credit derivatives.

Question 15

The present value of an off-balance-sheet item is its notional value.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is an out-of-the-money counterparty?

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 17

When an FI pre-commits to lending at a fixed rate, it is exposed to

Accepted Answer

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

Question 18

If an FI is a counterparty to a swap arrangement, it must record the notional value of the swap as the market value.

Accepted Answer

A) True 
 B)False

Question 19

Settlement risk on wire transfers involves intraday credit risk.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 16: Off-Balance-Sheet Risk

Which of the following ratios do FIs and regulators often use as a simple measure of solvency?

If a commercial bank engages in OBS activities, there are no additional capital requirements imposed by regulators.

Back-end fees on loan commitments are charged as a certain percentage of

The delta of an option is the sensitivity of an option's value to a unit change in the value of the underlying asset.

Loan commitments are classified as

What is a possible reason behind restricted supply of spot loans to borrowers during a credit crunch?

Which of the following refers to the fee charged on the unused balance of a 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?

Funds transferred on CHIPS are settled immediately.

Which of the following is the newest addition to the derivative securities markets?

The present value of an off-balance-sheet item is its notional value.

Which of the following is an out-of-the-money counterparty?

When an FI pre-commits to lending at a fixed rate, it is exposed to

If an FI is a counterparty to a swap arrangement, it must record the notional value of the swap as the market value.

Settlement risk on wire transfers involves intraday credit risk.

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

Why Are Financial Institutions Special

Deposit-Taking Institutions

Finance Companies

Securities, Brokerage, and Investment Banking

Mutual Funds, Hedge Funds, and Pension Funds

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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

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