Question 1

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 2

Technological risk:

Accepted Answer

A) can only lead to an FI's short-term distress 
B) refers to the scenario that technological investments produce the anticipated cost savings 
C) can result in major losses and the long-term viability of the FI 
D) refers to the scenario that technological investments do not produce the anticipated savings, and can cause major losses and impact on the viability of the FI

Question 3

Assume that you are a financial advisor to ABC Bank.The bank wishes to invest $50 million in loans with an average maturity of three years.The average interest rate on these loans is 12 per cent per annum.The bank can either grant the loans at a variable rate or at a fixed rate for the time of the investment.ABC Bank has the choice of funding these loans through either at-call deposits or through five-year maturity term deposits.Explain the different types of risks that ABC Bank faces when funding its loans.

Accepted Answer

The answer of Assume that you are a financial advisor...

Question 4

A decrease in interest rates means that the discount rate on cash flows is:

Accepted Answer

A) decreased and thus the market value of an FI's assets and liabilities decreases. 
B) increased and thus the market value of an FI's assets and liabilities decreases. 
C) increased and thus the market value of an FI's assets and liabilities increases. 
D) decreased and thus the market value of an FI's assets and liabilities increases.

Question 5

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

Question 6

Systematic credit risk can be reduced by diversification.

Accepted Answer

A) True 
 B)False

Question 7

Politically motivated limitations on payments of foreign currency may expose the FI to:

Accepted Answer

A) sovereign or country risk 
B) interest rate risk 
C) credit risk 
D) foreign exchange risk

Question 8

The risk that borrowers are unable to repay their loans on time is called:

Accepted Answer

A) credit risk 
B) sovereign risk 
C) currency risk 
D) liquidity risk

Question 9

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 10

Which of the following situations pose a refinancing risk for an FI?

Accepted Answer

A) An FI issues $10 million of liabilities of one-year maturity to finance the purchase of $10 million of assets with a two-year maturity. 
B) An FI issues $10 million of liabilities of two-year maturity to finance the purchase of $10 million of assets with a two-year maturity. 
C) An FI issues $10 million of liabilities of three-year maturity to finance the purchase of $10 million of assets with a two-year maturity. 
D) An FI matches the maturity of its assets and liabilities.

Question 11

Matching the foreign currency book does not protect the FI from:

Accepted Answer

A) sovereign country risk 
B) interest rate risk 
C) liquidity risk 
D) foreign exchange risk

Question 12

An FI that matches the maturities of its assets and liabilities is perfectly hedged against interest rate risk.

Accepted Answer

A) True 
 B)False

Question 13

Credit risk puts both the principal loaned and expected interest payments at risk.As a result, FIs issue financial claims that have a risk-return profile with:

Accepted Answer

A) high probability of fixed upside return 
B) high probability of large downside risk 
C) low probability of large downside risk 
D) both high probability of fixed upside return and low probability of large downside risk

Question 14

An increase in interest rates means that the discount rate on cash flows is:

Accepted Answer

A) decreased and thus the market value of an FI's assets and liabilities decreases 
B) increased and thus the market value of an FI's assets and liabilities decreases 
C) increased and thus the market value of an FI's assets and liabilities increases 
D) decreased and thus the market value of an FI's assets and liabilities increases

Question 15

A high-quality loan book for Australian banks during the global financial crisis (GFC) meant that:

Accepted Answer

A) their non-performing loans as a percentage of their total domestic loan portfolio fell during the GFC 
B) their non-performing loans as a percentage of their total domestic loan portfolio increased above 2 per cent during the GFC 
C) Australian banks' profitability fell and Australian FIs were severely impacted by the GFC 
D) Australian banks' profitability was maintained and Australian FIs were not severely impacted by the GFC

Question 16

An example of refinancing risk is a case in which an FI:

Accepted Answer

A) funds two-year maturity assets with one-year maturity liabilities 
B) funds one-year maturity assets with two-year maturity liabilities 
C) funds two-year maturity assets with two-year maturity liabilities 
D) None of the listed options are correct.

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 microeconomic 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

An example of a discrete risk is sudden changes in:

Accepted Answer

A) the interest rate 
B) banking regulations 
C) foreign exchange rates 
D) commodity prices

Question 19

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 20

Why are depository institutions and life insurance companies more exposed to credit risk than, for instance, money market managed funds and general insurance companies?

Accepted Answer

A) Because the average maturities of their assets are longer than those of money market managed funds/general insurance companies. 
B) Because the average maturities of their assets are shorter than those of money market managed funds/general insurance companies. 
C) They are not exposed to more risk. 
D) Because they are not specialised in credit risk management.

Exam 4: Risks of Financial Institutions

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

Technological risk:

A decrease in interest rates means that the discount rate on cash flows is:

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.

Systematic credit risk can be reduced by diversification.

Politically motivated limitations on payments of foreign currency may expose the FI to:

The risk that borrowers are unable to repay their loans on time is called:

What type of risk focuses upon future contingencies?

Which of the following situations pose a refinancing risk for an FI?

Matching the foreign currency book does not protect the FI from:

An FI that matches the maturities of its assets and liabilities is perfectly hedged against interest rate risk.

Credit risk puts both the principal loaned and expected interest payments at risk.As a result, FIs issue financial claims that have a risk-return profile with:

An increase in interest rates means that the discount rate on cash flows is:

A high-quality loan book for Australian banks during the global financial crisis (GFC) meant that:

An example of refinancing risk is a case in which an FI:

What does systematic credit risk mean?

An example of a discrete risk is sudden changes 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?

Why are depository institutions and life insurance companies more exposed to credit risk than, for instance, money market managed funds and general insurance companies?