Advanced Financial Institutions Management Exam Review
Course Introduction
Advanced Financial Institutions Management delves into the operations, regulation, and strategic decision-making processes of modern financial institutions, including commercial banks, investment banks, insurance companies, and asset management firms. The course explores risk management techniques, regulatory frameworks, and the evolving landscape of financial intermediation. Students will analyze case studies on liquidity management, capital adequacy, technological innovation, and global financial crises, gaining insights into institutional responses to market and regulatory challenges. Through quantitative analysis and real-world examples, participants will develop critical skills required to assess performance, manage risks, and formulate strategies within complex and dynamic financial environments.
Recommended Textbook
Financial Institutions Management 4th Edition by SAUNDERS
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Page 2
Chapter 1: Why Are Financial Institutions Special
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Q1) A loan covenant is:
A)a legal clause in a borrowing contract that requires the lender to avoid certain actions
B)a legal clause in a borrowing contract that requires the lender to take certain actions
C)a legal clause in a borrowing contract that requires the borrower to take certain actions
D)a legal clause in a borrowing contract that requires the borrower to either take certain actions or avoid certain actions.
Answer: D
Q2) An action by an economic agent that imposes costs on other economic agents is referred to as a:
A)negative endogenous reaction
B)positive endogenous reaction
C)positive externality
D)negative externality
Answer: D
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Chapter 2: The Financial Service Industry: Depository
Institutions
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Q1) Responding to the financial crisis, the Australian government introduced a number of measures to ease liquidity issues and included the following:
A)a permanent financial claims scheme (FCS) in October 2008, which explicitly guaranteed bank deposits with a $1 million cap
B)a semi-permanent financial claims scheme (FCS), which implicitly guaranteed bank deposits
C)a permanent guarantee scheme for large deposits and wholesale funding which, for a fee, guaranteed bank deposits greater than $1 million
D)a permanent financial claims scheme (FCS) in October 2008, which explicitly guaranteed bank deposits with a $1 million cap; the guarantee was reduced to $250 000 per depositor from 2012
Answer: D
Q2) Authorised depository institutions include:
A)banks, building societies, credit unions
B)banks, building societies
C)banks, credit unions
D)only banks
Answer: A
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Chapter 3: The Financial Service Industry: Other Financial Institutions
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Q1) Which of the following statements is true?
A)Net asset value refers to the book value of assets in a managed fund portfolio divided by the number of shares outstanding.
B)Net asset value refers to the book value of assets in a managed fund portfolio multiplied by the number of shares outstanding.
C)Net asset value refers to the market value of assets in a managed fund portfolio multiplied by the number of shares outstanding.
D)None of the listed options are correct.
Answer: D
Q2) Insurance policy benefits are classified on an insurance company's balance sheet as:
A)liabilities, because the insurance company may have to pay out the benefits
B)assets, because policy benefits are valuable to the company
C)liabilities, because customers may fall behind on their premium payments
D)assets, because policy benefits are fully covered by premium payments
Answer: A
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5
Chapter 4: Risks of Financial Institutions
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Q1) Non-performing loans are defined as loans that:
A)are either in default or close to being in default and are at least 90 days in arrears
B)have been written off and loans that are at least 80 days in arrears
C)are either in default or close to being in default and are at least 60 days in arrears
D)have been written off and loans that are at least 60 days in arrears
Q2) In which of the following situations is an Australian FI exposed to a depreciation of the euro against the Australian dollar?
A)The FI holds 00 million in assets and 70 million in liabilities.
B)The FI holds 100 million in assets and 100 million in liabilities.
C)The FI holds 70 million in assets and 100 million in liabilities.
D)The FI does not hold any assets or liabilities in euros, but considers doing so in the future.
Q3) The risk that borrowers are unable to repay their loans on time is called:
A)credit risk
B)sovereign risk
C)currency risk
D)liquidity risk
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Chapter 5: Interest Rate Risk Measurement: The Repricing Model
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Q1) The term 'rate-sensitive assets' refers to assets:
A)whose interest rate will be repriced over some future period
B)with a particularly high interest rate
C)with a particularly low interest rate
D)for which demand is highly dependent on the level of interest rates
Q2) Which of the following statements is false?
A)A major reason for cheque accounts to be included in an FI's interest-sensitive liabilities is that the majority of these accounts are core deposits.
B)Cheque accounts should be treated as interest-sensitive liabilities because if interest rates rise, deposits might be withdrawn and thus will need to be replaced by higher-yielding deposits.
C)The final decision whether or not to include cheque accounts as rate-sensitive liabilities must be made after an analysis of the actual deposit history.
D)None of the listed options are correct.
Q3) Outline what is meant by the CGAP effect and explain the relationship between interest rate changes and changes in net interest income.Specifically, indicate whether a FI would wish to hold a negative or positive CGAP and under which interest rate conditions.
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Chapter 6: Interest Rate Risk Measurement: the Duration
Model
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Q1) It is not possible to measure the duration of a perpetuity as a perpetuity has no maturity.
A)True
B)False
Q2) The larger the numerical value of the duration of an asset or liability, the less sensitive the price of that asset or liability is to changes in the interest rate.
A)True
B)False
Q3) Using the duration gap to measure the change in an FI's net worth in case of large interest rate shocks:
A)produces exact results
B)only produces exact results if interest rates change instantaneously
C)produces approximate results only due to concavity
D)produces approximate results only due to convexity
Q4) The leverage adjusted duration gap reflects the degree of duration mismatch in an FI's balance sheet.
A)True
B)False
Page 8
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Chapter 7: Managing Interest Rate Risk Using
Off-Balance-Sheet Instruments
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Q1) An FI portfolio manager holds 10-year $1 million face value bonds.At time 0, these bonds are valued at $95 per $100 of face value and the manager expects interest rates to rise over the next three months.What should the manager do?
A)The FI portfolio manager should leave the position untouched as changes in the interest rate have no impact on bond prices.
B)The FI portfolio manager should leave the position untouched as an increase in interest rates will lead to higher bond prices.
C)The FI portfolio manager should hedge the position by selling a three months forward contract with a face value of $1 million.
D)The FI portfolio manager should hedge the position by buying a three months forward contract with a face value of $1 million.
Q2) Which of the following is a common use of FRAs?
A)To lock in an interest rate on relatively shorter term borrowings.
B)To lock in an interest rate on medium-term borrowings.
C)To lock in an interest rate on relatively longer term borrowings.
D)To lock in an interest rate on any term of borrowings.
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Page 9
Chapter 8: Managing Interest Rate Risk Using Securitisation
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Q1) What is NOT true of loan assignments?
A)All rights are transferred on sale.
B)The loan buyer holds a direct claim on the borrower.
C)Ownership rights are generally much clearer in a loan sale by assignment.
D)Contract terms are unrestrictive from the seller's perspective.
Q2) Collateralised debt obligation (CDO) is:
A)an asset-backed bond issued in multiple classes or tranches
B)a mortgage issued in multiple classes or tranches
C)unsecured notes issued in multiple classes or tranches
D)commercial paper issued with collateral
Q3) A buyer of a loan participation is exposed to:
A)risk exposure to the original borrower defaulting
B)risk exposure to the failure of the selling bank
C)moral hazard problems because the borrower is no longer monitored by the seller
D)risk exposure to the original borrower defaulting and risk exposure to the failure of the selling bank
Q4) What are four reasons why an FI may prefer the use of either pass-through securities or CMOs to the use of MBBs?
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Page 10
Chapter 9: Market Risk
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Q1) Which of the following statements is true?
A)Under BIS, the capital charge is calculated as DEAR multiplied by the square root of 10 multiplied by 3.
B)The idea of a minimum multiplication factor of 3 is to create a scheme that is 'incentive compatible'.
C)Regulators can punish FIs that underestimate their capital charges by raising the multiplication factor to as high as 5.
D)Under BIS, the capital charge is calculated as DEAR multiplied by the square root of 10 multiplied by 3 and the idea of a minimum multiplication factor of 3 is to create a scheme that is 'incentive compatible'.
Q2) RiskMetrics weights more recent observations more highly than past observations, which allows more recent news to be more heavily reflected in the calculation of the standard deviation.
A)True
B)False
Q3) Describe the process of the fuller risk factor approach.
Q4) Explain the basic concept of the RiskMetric model.What are the major disadvantages? How can the major disadvantages be addressed?
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Page 11
Chapter 10: Credit Risk I: Individual Loan Risk
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Q1) The zone of ignorance in the Altman Z-score model indicates that it is difficult to predict whether or not the prospective borrower will default in the future.
A)True
B)False
Q2) Which of the following statements is true?
A)Marginal mortality rate is the historic default rate experience of a bond or loan.
B)The mortality rate is the probability of a bond or loan defaulting over a specified multi-year period.
C)Marginal mortality rate is the probability of a bond or loan defaulting in any given year of issue.
D)Marginal mortality rate is the probability of a bond or loan defaulting over a specified multi-year period.
Q3) Which of the following is the correct definition of leverage?
A)Leverage is the ratio of equity to debt.
B)Leverage is the ratio of assets to debt.
C)Leverage is the ratio of debt to assets.
D)Leverage is the ratio of debt to equity.
Q4) What are the major ideas behind KMV's Credit Monitor model?
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Page 12
Chapter 11: Credit Risk II: Loan Portfolio and Concentration
Risk
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Q1) Which of the following statements is true?
A)The risk of a loan reflects the volatility of the loan's default rate around its expected value times the amount lost given default.
B)The product of the volatility of the default rate and the loss give default (LGD) is called the 'unexpected loss'.
C)The product of the volatility of the default rate and the loss give default (LGD) is a measure of the loan's risk.
D)All of the listed options are correct.
Q2) Financial institutions do not use options to hedge credit risk exposures as credit risk is a natural risk that comes with the core activities of the bank, namely lending.
A)True B)False
Q3) The most important swap contract in terms of quantity is the credit swap. A)True B)False
Q4) Explain the basic concept of loan loss ratio based models.
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Chapter 12: Sovereign Risk
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Q1) The Euromoney Country Risk Index is based on the spread in the Euromarket of the required interest rate on a country's debt over the LIBOR.
A)True
B)False
Q2) Debt moratorium refers to a:
A)clause that allows the lender to call in the debt during a particular period
B)delay in repaying interest and/or principal on debt
C)clause that allows the lender to charge higher interest if debt is not repaid in time
D)clause that allows the borrower to repay debt early
Q3) Which of the following are benefits that accrue to the lender resulting from rescheduling?
A)increase of consumption
B)tax benefits
C)lower present value payments
D)loans become similar to long-term bonds
Q4) Debt repudiations were more common before World War II compared to now.
A)True
B)False
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Chapter 13: Foreign Exchange Risk
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Q1) Assume an FI holds US$250 000 in assets and US$350 000 in liabilities.Which of the following statements is true?
A)The FI has a net long in US$.
B)The FI has a net short in US$.
C)The FI has a net exposure of US$100,000.
D)The FI has a net exposure of -US$100,000.
Q2) Explain how forward contracts can be used to hedge an FI's FX exposures.
Q3) Indirect quote shows the amount of home currency received for one unit of the foreign currency exchanged.
A)True
B)False
Q4) According to PPP, foreign currency exchange rates between two countries adjust to reflect changes in each country's:
A)unemployment rates
B)export competitiveness
C)inflation rates
D)foreign exchange reserves
Q5) Explain the concept of the interest rate parity theorem (IRPT) and its implications for FIs?
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Chapter 14: Liquidity Risk
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Q1) Fire-sale price refers to the price received for:
A)an asset that has to be sold at half price
B)a liability that has to be sold at half price
C)an asset that has to be sold immediately
D)a liability that has to be sold immediately
Q2) Fire-sale price refers to the price received for an asset that has to be sold immediately.
A)True
B)False
Q3) Trend liquidity needs are liquidity needs that relate to the:
A)trends occurring in the community where, for example, loan growth exceeds deposits growth.
B)trends occurring in the community where, for example, deposit growth exceeds loan growth.
C)demand for liquidity that fluctuates with seasonal factors.
D)demand for liquidity that fluctuates with seasonal factors within a community
Q4) Core deposits are those deposits that provide a DI with a long-term funding source
A)True
B)False
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Chapter 15: Liability and Liquidity Management
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Q1) Commercial bills (or non-bank bills) are bills of exchange issued by a non-bank drawer to raise funds for its business purposes and accepted by a non-bank corporation
A)True
B)False
Q2) Which of the following statements is true?
A)In the current situation, only small FIs have to hold 9% of their liabilities in specified high-quality liquefiable assets.
B)Currently, FIs are required to have in place a regulator-approved liquidity management strategy.
C)Currently, FIs are not subject to the user-pays approach.
D)Currently, FIs are required to have in place a regulator-approved liquidity management strategy and only small FIs have to hold 9% of their liabilities in specified high-quality liquefiable assets.
Q3) What are the withdrawal risks and costs associated with the following types of liabilities?
Q4) Graphically show the relationship between funding cost and funding or withdrawal risk.Explain your graph.
Q5) What are the withdrawal risks and costs associated with the covered bonds?
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Chapter 16: Off-Balance-Sheet Activities
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Q1) The term 'recourse' refers to the ability to put an asset or loan back to the seller should the:
A)asset need to be entirely written off
B)credit quality of that asset improve
C)buyer not need the asset any longer
D)credit quality of that asset deteriorate
Q2) Settlement in case of 'when issued' (WI) trading must be completed on:
A)the date on which the counterparties agree
B)Tuesday
C)Wednesday
D)Thursday
Q3) Which of the following statements is true?
A)For an in-the-money call option the price of the underlying security is below the option's exercise price.
B)For an in-the-money call option the price of the underlying security is equal to the option's exercise price.
C)For an in-the-money call option the price of the underlying security exceeds the option's exercise price.
D)The answer to the question depends on the type of the call option.
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Page 18
Chapter 17: Technology and Other Operational Risks
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Q1) The term daylight overdraft refers to a situation in which an FI's reserve account at the central bank is negative at the end of a banking day.
A)True
B)False
Q2) According to studies, which of the following may better explain cost differences and operating cost efficiencies among FIs?
A)diseconomies of scale
B)economies of scale
C)economies of scope
D)X-inefficiencies
Q3) According to economic theory involving economies of scale, larger and more cost-efficient FIs should prevail over smaller, less cost-efficient FIs.
A)True
B)False
Q4) The term daylight overdraft refers to a situation in which an FI's reserve account at the central bank becomes negative within the banking day.
A)True
B)False
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Chapter 18: Capital Management and Adequacy
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Q1) Assume you are presented with the following data regarding an FI's asset and liability values: \[\begin{array} { | l | l | }
\hline \text { Bookvalue of assets } & \$ 50000 \\
\hline \text { Bookvalue of liabilities } & \$ 42000 \\
\hline \text { Market value of assets } & \$ 48000 \\
\hline \text { Market value of liabilities } & \$ 45000 \\
\hline
\end{array}\] Which of the following statements is true?
A)The net worth of the FI is $2000.
B)The net worth of the FI is -$3000.
C)The net worth of the FI is $3000.
D)The net worth of the FI is -$1000.
Q2) Why is a regulatory capital charge against operational risk necessary?
Q3) The risk of loss owing to changes in the general level of market prices or interest rates, arising from positions in interest rate, equities, foreign exchange and commodities is:
A)specific risk
B)general market risk
C)beta
D)total risk
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