Question 1

An FI that invests $100 million into corporate bonds is exposed to the following risks:

Accepted Answer

A)   credit and interest rate risk.
B)   liquidity and technology risk.
C)   solvency and technology risk.
D)   off-balance-sheet and interest rate risk. A

Question 2

FIs that make loans or buy bonds with long maturity liabilities are more exposed to interest rate risk than FIs that make loans or buy bonds with short maturity liabilities.

Accepted Answer

A) True 
 B)False  False

Question 3

The potential exercise of unanticipated contingencies can result in:

Accepted Answer

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

Question 4

The BIS definition 'the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events' encompasses which of the following risks?

Accepted Answer

A)   credit risk and liquidity risk
B)   operational risk and technology risk
C)   credit risk and market risk
D)   technology risk and liquidity risk

Question 5

The market risk of an FI increases with:

Accepted Answer

A)   increasing volatility of asset prices.
B)   increasingly large unhedged short positions in bonds, equities and other commodities.
C)   increasingly large unhedged long positions in bonds, equities and other commodities.
D)   All of the listed options are correct.

Question 6

Based on the case of Indymac Bank, explain how liquidity risk and insolvency risk caused a bank failure despite deposit insurance. Outline the chain of events that led to this financial institution's illiquidity and eventual closure.

Accepted Answer

The answer of Based on the case of Indymac Bank,...

Question 7

The increased opportunity for a bank to securitise 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

Question 8

A bank has liabilities of $4 million with an average maturity of two years paying interest rates of 4 per cent annually. It has assets of $5 million with an average maturity of 5 years earning interest rates of 6 per cent annually. To what risk is the bank exposed?

Accepted Answer

A)   reinvestment risk
B)   refinancing risk
C)   interest rate risk
D)   refinancing risk and interest rate risk

Question 9

Market risk is defined as the risk:

Accepted Answer

A)   incurred by granting loans to companies that do not hold a large market share.
B)   incurred in the trading of assets and liabilities due to changes in interest rates, exchange rates and other asset prices.
C)   that a sudden surge in liability withdrawals may require FIs to liquidate assets at less than fair market prices.
D)   that an FI loses market share.

Question 10

A 'fire-sale' means that an FI increases its liquidity position by selling part of its assets at the assets' fair market values.

Accepted Answer

A) True 
 B)False

Question 11

An FI with a low level of leverage, such as a high level of capitalisation:

Accepted Answer

A)   is generally less profitable.
B)   is better able to withstand losses.
C)   has improved ability to remain solvent.
D)   All of the listed options are correct.

Question 12

A mortgage loan officer is found to have provided false documentation that resulted in a lower interest rate on a loan approved for one of her friends. The loan was subsequently added to a loan pool, securitised and sold. Which of the following risks applies to the false documentation by the employee?

Accepted Answer

A)   Market risk.
B)   Credit risk.
C)   Operational risk.
D)   Technological risk.

Question 13

What type of risk focuses upon future contingencies?

Accepted Answer

A)   liquidity risk
B)   interest rate risk
C)   credit risk
D)   off-balance-sheet risk

Question 14

An FI that finances a German euro loan with US dollar deposits is exposed to:

Accepted Answer

A)   technology risk.
B)   interest rate risk.
C)   credit risk.
D)   foreign exchange risk.

Question 15

The major difference between firm-specific credit risk and systematic credit risk is that:

Accepted Answer

A)   FIs can diversify systematic credit risk, while firm-specific credit risk cannot be diversified.
B)   FIs can diversify firm-specific credit risk, while systematic credit risk cannot be diversified.
C)   None of the listed options are correct, as FIs can diversify both types of credit risk.
D)   None of the listed options are correct, as FIs cannot diversify either type of credit risk.

Question 16

Many of the various risks, such as interest rate risk, market risk, credit risk and off-balance-sheet risk, faced by an FI often are interrelated with each other.

Accepted Answer

A) True 
 B)False

Question 17

What does systematic credit risk mean?

Accepted Answer

A)   The risk of default of the borrowing firm that arises from the borrowing firm's specific projects.
B)   The risk of default associated with micro economic conditions affecting some borrowers.
C)   The risk of default associated with general macroeconomic conditions affecting all borrowers.
D)   The risk of default associated with general macroeconomic conditions affecting some borrowers.

Question 18

The major source of risk exposure resulting from issuance of standby letters of credit is:

Accepted Answer

A)   interest rate risk.
B)   credit risk.
C)   foreign exchange risk.
D)   balance sheet risk.

Question 19

An Australian FI that holds a net short asset position in $US is exposed to foreign exchange rate risk if the $US appreciates against the $A over the investment period.

Accepted Answer

A) True 
 B)False

Question 20

An FI that holds more short-term assets relative to long-term liabilities is:

Accepted Answer

A)   exposed to refinancing risk.
B)   exposed to restructuring risk.
C)   exposed to reinvestment risk.
D)   not exposed to any risks.

Exam 4: Risk of Financial Institutions

An FI that invests $100 million into corporate bonds is exposed to the following risks:

FIs that make loans or buy bonds with long maturity liabilities are more exposed to interest rate risk than FIs that make loans or buy bonds with short maturity liabilities.

The potential exercise of unanticipated contingencies can result in:

The BIS definition 'the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events' encompasses which of the following risks?

The market risk of an FI increases with:

Based on the case of Indymac Bank, explain how liquidity risk and insolvency risk caused a bank failure despite deposit insurance. Outline the chain of events that led to this financial institution's illiquidity and eventual closure.

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

A bank has liabilities of $4 million with an average maturity of two years paying interest rates of 4 per cent annually. It has assets of $5 million with an average maturity of 5 years earning interest rates of 6 per cent annually. To what risk is the bank exposed?

Market risk is defined as the risk:

A 'fire-sale' means that an FI increases its liquidity position by selling part of its assets at the assets' fair market values.

An FI with a low level of leverage, such as a high level of capitalisation:

What type of risk focuses upon future contingencies?

An FI that finances a German euro loan with US dollar deposits is exposed to:

The major difference between firm-specific credit risk and systematic credit risk is that:

Many of the various risks, such as interest rate risk, market risk, credit risk and off-balance-sheet risk, faced by an FI often are interrelated with each other.

What does systematic credit risk mean?

The major source of risk exposure resulting from issuance of standby letters of credit is:

An Australian FI that holds a net short asset position in $US is exposed to foreign exchange rate risk if the $US appreciates against the $A over the investment period.

An FI that holds more short-term assets relative to long-term liabilities is: