Question 1

The risk that a computer system may malfunction during the processing of data is an example of operational risk.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

An advantage FIs have over individual household investors is that they are able to diversify away credit risk by holding a large portfolio of loans to different entities. This reduces

Accepted Answer

A) firm-specific credit risk. 
B) systematic credit risk. 
C) interest rate risk. 
D) market risk. 
E) political risk. 
A) firm-specific credit risk. 
B) systematic credit risk. 
C) interest rate risk. 
D) market risk. 
E) political risk.

Question 4

An FI that finances a euro (€) loan with Canadian dollar ($) deposits is exposed to

Accepted Answer

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

Question 5

An FI is short-funded when the maturity of its liabilities is less than the maturity of its assets.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

When the U.S. dollar declines against the euro, it is

Accepted Answer

A) potentially harmful for European banks only. 
B) potentially harmful for U.S. banks only. 
C) potentially harmful for those banks that have financed U.S. dollar assets with liabilities denominated in euros. 
D) potentially harmful for those banks that have financed euro-denominated assets with U.S. dollar liabilities. 
E) irrelevant for global banks. 
A) potentially harmful for European banks only. 
B) potentially harmful for U.S. banks only. 
C) potentially harmful for those banks that have financed U.S. dollar assets with liabilities denominated in euros. 
D) potentially harmful for those banks that have financed euro-denominated assets with U.S. dollar liabilities. 
E) irrelevant for global banks.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Unanticipated withdrawals by liability holders are a major part of liquidity risk.

Accepted Answer

A) True 
 B)False

Question 10

The increased opportunity for a bank to securitize loans into liquid and tradable assets is likely to affect which type of risk?

Accepted Answer

A) Sovereign risk. 
B) Market risk. 
C) Insolvency risk. 
D) Technological risk. 
E) Interest rate risk. 
A) Sovereign risk. 
B) Market risk. 
C) Insolvency risk. 
D) Technological risk. 
E) Interest rate risk.

Question 11

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?

Accepted Answer

A) Reinvestment risk. 
B) Credit risk. 
C) Refinancing risk. 
D) Liquidity risk. 
E) Sovereign risk. 
A) Reinvestment risk. 
B) Credit risk. 
C) Refinancing risk. 
D) Liquidity risk. 
E) Sovereign risk.

Question 12

The risk that an investor will be forced to place earnings from a loan or security into a lower yielding investment is known as

Accepted Answer

A) liquidity risk. 
B) reinvestment risk. 
C) credit risk. 
D) foreign exchange risk. 
E) off-balance-sheet risk. 
A) liquidity risk. 
B) reinvestment risk. 
C) credit risk. 
D) foreign exchange risk. 
E) off-balance-sheet risk.

Question 13

Market risk is present whenever an FI takes an open position and prices change in a direction opposite to that expected.

Accepted Answer

A) True 
 B)False

Question 14

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 in dollars in year 3, after it refinances all of its liabilities at a rate of 6.0 percent?

Accepted Answer

A) -$60,000. 
B) -$140,000. 
C) +$140,000. 
D) +$60,000. 
E) +$800,000. 
A) -$60,000. 
B) -$140,000. 
C) +$140,000. 
D) +$60,000. 
E) +$800,000.

Question 15

The risk that a debt security's price will fall, subjecting the investor to a potential capital loss is

Accepted Answer

A) credit risk. 
B) market risk. 
C) currency risk. 
D) liquidity risk. 
E) political risk. 
A) credit risk. 
B) market risk. 
C) currency risk. 
D) liquidity risk. 
E) political risk.

Question 16

Which of the following may occur when a sufficient number of borrowers are unable to repay interest and principal on loans, thus causing an FI's equity to approach zero?

Accepted Answer

A) Insolvency risk. 
B) Sovereign risk. 
C) Foreign exchange risk. 
D) Liquidity risk. 
E) Interest rate risk. 
A) Insolvency risk. 
B) Sovereign risk. 
C) Foreign exchange risk. 
D) Liquidity risk. 
E) Interest rate risk.

Question 17

Interest rate risk management for financial intermediaries deals primarily with

Accepted Answer

A) controlling the overall size of the institution. 
B) controlling the scope of the institution's activities. 
C) limiting the geographic spread of the institution's offices. 
D) limiting the mismatches on the institution's balance sheet. 
E) continuously and carefully complying with all government regulations. 
A) controlling the overall size of the institution. 
B) controlling the scope of the institution's activities. 
C) limiting the geographic spread of the institution's offices. 
D) limiting the mismatches on the institution's balance sheet. 
E) continuously and carefully complying with all government regulations.

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Economies of scope involve the ability to lower the average cost of operations by expanding the output of financial services.

Accepted Answer

A) True 
 B)False

Question 20

Similar to loans, non-government bonds expose a lender to principal payment default risk.

Accepted Answer

A) True 
 B)False

Exam 7: Risks of Financial Institutions

The risk that a computer system may malfunction during the processing of data is an example of operational risk.

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

An advantage FIs have over individual household investors is that they are able to diversify away credit risk by holding a large portfolio of loans to different entities. This reduces

An FI that finances a euro (€) loan with Canadian dollar ($) deposits is exposed to

An FI is short-funded when the maturity of its liabilities is less than the maturity of its assets.

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

When the U.S. dollar declines against the euro, it is

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

Unanticipated withdrawals by liability holders are a major part of liquidity risk.

The increased opportunity for a bank to securitize loans into liquid and tradable assets is likely to affect which type of risk?

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?

The risk that an investor will be forced to place earnings from a loan or security into a lower yielding investment is known as

Market risk is present whenever an FI takes an open position and prices change in a direction opposite to that expected.

The risk that a debt security's price will fall, subjecting the investor to a potential capital loss is

Which of the following may occur when a sufficient number of borrowers are unable to repay interest and principal on loans, thus causing an FI's equity to approach zero?

Interest rate risk management for financial intermediaries deals primarily with

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

Economies of scope involve the ability to lower the average cost of operations by expanding the output of financial services.

Similar to loans, non-government bonds expose a lender to principal payment default risk.

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