Question 1

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 2

The relationship of a limited or fixed upside return with a high probability and the potential large downside loss with a small probability is an example of an asset's credit risk to an FI.

Accepted Answer

A) True 
 B)False

Question 3

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 4

Insolvency risk is a consequence of the other risks to which FI is exposed.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

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

Question 6

For an FI investing in risky loans or bonds,the probability is relatively the lowest for which of the following occurrences?

Accepted Answer

A)  Repayment of principal and promised interest in full.
B)  Partial default on interest payments.
C)  Complete default on interest payments.
D)  Partial default of the principal remaining on a loan.
E)  Complete default on principal and interest.

Question 7

The potential exercise of unanticipated contingencies can result in

Accepted Answer

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

Question 8

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 9

As commercial banks move from their traditional banking activities of deposit taking and lending and shift more of their activities to trading,they are more subject to

Accepted Answer

A)  credit risk.
B)  market risk.
C)  political risk.
D)  sovereign risk.

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

Which term refers to the risk that interest income will decrease as maturing assets are replaced with new,more current assets?

Accepted Answer

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

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 bank's net interest income for the current year?

Accepted Answer

A)  $300,000.
B)  $140,000.
C)  $160,000.
D)  $280,000.

Question 13

When the U.S.dollar declines against European currencies,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 European currencies.
D)  potentially harmful for those banks that have financed European currency assets with U.S.dollar liabilities.

Question 14

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

Accepted Answer

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

Question 15

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.

Question 16

Off-balance sheet activities never have an effect on the value of equity the FI holds.

Accepted Answer

A) True 
 B)False

Question 17

When the assets and liabilities of an FI are not equal in size,efficient hedging of interest rate risk can be achieved by

Accepted Answer

A)  increasing the duration of assets and increasing the duration of equity.
B)  issuing more equity and reducing the amount of borrowed funds.
C)  not exactly matching the maturities of assets and liabilities.
D)  issuing more equity and investing the funds in higher-yielding assets.

Question 18

One objective of technological expansion is to achieve economies of scale at the expense of diseconomies of scope.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

The asset transformation function potentially exposes the FI to

Accepted Answer

A)  foreign exchange risk.
B)  technology risk.
C)  operational risk.
D)  trading risk.
E)  interest rate risk.

Exam 7: Risks of Financial Institutions

Correct Answer
verified

Insolvency risk is a consequence of the other risks to which FI is exposed.

Correct Answer
verified

When the assets and liabilities of an FI are not equal in size,efficient hedging of interest rate risk can be achieved by

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

The relationship of a limited or fixed upside return with a high probability and the potential large downside loss with a small probability is an example of an asset's credit risk to an FI.

Correct Answer
verified

As commercial banks move from their traditional banking activities of deposit taking and lending and shift more of their activities to trading,they are more subject to

Correct Answer
verified

The asset transformation function potentially exposes the FI to

Correct Answer
verified

Which term refers to the risk that interest income will decrease as maturing assets are replaced with new,more current assets?

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

Off-balance sheet activities never have an effect on the value of equity the FI holds.

Correct Answer
verified

One objective of technological expansion is to achieve economies of scale at the expense of diseconomies of scope.

Correct Answer
verified

When the U.S.dollar declines against European currencies,it is

Correct Answer
verified

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

Correct Answer
verified

For an FI investing in risky loans or bonds,the probability is relatively the lowest for which of the following occurrences?

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

The potential exercise of unanticipated contingencies can result in

Correct Answer
verified

Exam 7: Risks of Financial Institutions

Correct AnswerverifiedShow Answer

Insolvency risk is a consequence of the other risks to which FI is exposed.

Correct AnswerverifiedShow Answer

When the assets and liabilities of an FI are not equal in size,efficient hedging of interest rate risk can be achieved by

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The relationship of a limited or fixed upside return with a high probability and the potential large downside loss with a small probability is an example of an asset's credit risk to an FI.

Correct AnswerverifiedShow Answer

As commercial banks move from their traditional banking activities of deposit taking and lending and shift more of their activities to trading,they are more subject to

Correct AnswerverifiedShow Answer

The asset transformation function potentially exposes the FI to

Correct AnswerverifiedShow Answer

Which term refers to the risk that interest income will decrease as maturing assets are replaced with new,more current assets?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Off-balance sheet activities never have an effect on the value of equity the FI holds.

Correct AnswerverifiedShow Answer

One objective of technological expansion is to achieve economies of scale at the expense of diseconomies of scope.

Correct AnswerverifiedShow Answer

When the U.S.dollar declines against European currencies,it is

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

For an FI investing in risky loans or bonds,the probability is relatively the lowest for which of the following occurrences?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The potential exercise of unanticipated contingencies can result in

Correct AnswerverifiedShow Answer

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