Question 1

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

Accepted Answer

A) True 
 B)False  True

Question 2

Exactly matching the maturities of assets and liabilities will provide a perfect hedge against interest rate risk for an FI.

Accepted Answer

A) True 
 B)False  False

Question 3

Control of the future supply of funds available to a foreign country is one method to ensure the repayment of an existing debt.

Accepted Answer

A) True 
 B)False  True

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Holding corporate bonds with fixed interest rates involves

Accepted Answer

A) default risk only. 
B) interest rate risk only. 
C) liquidity risk and interest rate risk only. 
D) default risk and interest rate risk. 
E) default and liquidity risk only. 
A) default risk only. 
B) interest rate risk only. 
C) liquidity risk and interest rate risk only. 
D) default risk and interest rate risk. 
E) default and liquidity risk only.

Question 6

Effective use of diversification principles allows an FI to reduce the total default risk in a portfolio.

Accepted Answer

A) True 
 B)False

Question 7

Credit risk stems from non-repayment or delays in repayment of either principal or interest on FI assets.

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

What type of risk focuses upon mismatched currency positions?

Accepted Answer

A) Liquidity risk. 
B) Interest rate risk. 
C) Credit risk. 
D) Foreign exchange rate risk. 
E) Off-balance sheet risk. 
A) Liquidity risk. 
B) Interest rate risk. 
C) Credit risk. 
D) Foreign exchange rate risk. 
E) Off-balance sheet risk.

Question 10

FIs typically are concerned about the value at risk of their trading portfolios.

Accepted Answer

A) True 
 B)False

Question 11

Active trading of assets and liabilities creates market risk.

Accepted Answer

A) True 
 B)False

Question 12

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?

Accepted Answer

A) 6.5 percent. 
B) 7.0 percent. 
C) 7.5 percent. 
D) 8.0 percent. 
E) 8.5 percent. 
A) 6.5 percent. 
B) 7.0 percent. 
C) 7.5 percent. 
D) 8.0 percent. 
E) 8.5 percent.

Question 13

What type of risk focuses upon future contingencies?

Accepted Answer

A) Liquidity risk. 
B) Interest rate risk. 
C) Credit risk. 
D) Foreign exchange rate risk. 
E) Off-balance sheet risk. 
A) Liquidity risk. 
B) Interest rate risk. 
C) Credit risk. 
D) Foreign exchange rate risk. 
E) Off-balance sheet risk.

Question 14

An FI is net long in foreign assets if it holds more foreign liabilities than foreign assets.

Accepted Answer

A) True 
 B)False

Question 15

Returns from domestic and foreign investments may not be perfectly correlated because of different economic infrastructures and growth rates.

Accepted Answer

A) True 
 B)False

Question 16

Canada National Bank has 10 million British pounds (£) in one-year assets and £8 million in one-year liabilities. In addition, it has one-year liabilities of 4 million euros (€). Assets are earning 8 percent and both liabilities are being paid at a rate of 8 percent. All interest and principal will be paid at the end of the year. What is the net interest income in dollars if the spot prices at the end of the year are $1.50/£ and €1.65/$?

Accepted Answer

A) $46,060.61. 
B) $320,000. 
C) $1,200,000. 
D) $266,666.67. 
E) $720,000. 
A) $46,060.61. 
B) $320,000. 
C) $1,200,000. 
D) $266,666.67. 
E) $720,000.

Question 17

Canada National Bank has 10 million British pounds (£) in one-year assets and £8 million in one-year liabilities. In addition, it has one-year liabilities of 4 million euros (€). Assets are earning 8 percent and both liabilities are being paid at a rate of 8 percent. All interest and principal will be paid at the end of the year. If the year-end spot exchange rate for the British pound is $1.50/£ and the liabilities pay 8 percent, what is the maximum that the € can appreciate and the bank still maintain a zero profit?

Accepted Answer

A) €1.30/$. 
B) €1.33/$. 
C) €1.35/$. 
D) €1.50/$. 
E) €1.60/$. 
A) €1.30/$. 
B) €1.33/$. 
C) €1.35/$. 
D) €1.50/$. 
E) €1.60/$.

Question 18

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

Accepted Answer

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

Question 19

Economies of scale refer to an FI's ability to

Accepted Answer

A) lower its average costs of operations by expanding its output of financial services. 
B) generate cost synergies by producing more than one output with the same inputs. 
C) understand each risk and its interaction with other risks. 
D) finance its assets completely with borrowed funds. 
E) moderate the long-tailed downside risk of the return distribution. 
A) lower its average costs of operations by expanding its output of financial services. 
B) generate cost synergies by producing more than one output with the same inputs. 
C) understand each risk and its interaction with other risks. 
D) finance its assets completely with borrowed funds. 
E) moderate the long-tailed downside risk of the return distribution.

Question 20

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

Accepted Answer

A) Liquidity risk. 
B) Interest rate risk. 
C) Credit risk. 
D) Foreign exchange rate risk. 
E) Off-balance sheet risk. 
A) Liquidity risk. 
B) Interest rate risk. 
C) Credit risk. 
D) Foreign exchange rate risk. 
E) Off-balance sheet risk.

Exam 7: Risks of Financial Institutions

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

Exactly matching the maturities of assets and liabilities will provide a perfect hedge against interest rate risk for an FI.

Control of the future supply of funds available to a foreign country is one method to ensure the repayment of an existing debt.

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

Holding corporate bonds with fixed interest rates involves

Effective use of diversification principles allows an FI to reduce the total default risk in a portfolio.

Credit risk stems from non-repayment or delays in repayment of either principal or interest on FI assets.

Unanticipated diseconomies of scale or scope are a result of

What type of risk focuses upon mismatched currency positions?

FIs typically are concerned about the value at risk of their trading portfolios.

Active trading of assets and liabilities creates market risk.

What type of risk focuses upon future contingencies?

An FI is net long in foreign assets if it holds more foreign liabilities than foreign assets.

Returns from domestic and foreign investments may not be perfectly correlated because of different economic infrastructures and growth rates.

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

Economies of scale refer to an FI's ability to

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

Why Are Financial Institutions Special

Deposit-Taking Institutions

Finance Companies

Securities, Brokerage, and Investment Banking

Mutual Funds, Hedge Funds, and Pension Funds

Insurance Companies

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

Off-Balance-Sheet 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