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Financial Institutions Management explores the structure, functions, and operations of financial institutions such as commercial banks, investment banks, insurance companies, credit unions, and non-bank financial intermediaries. The course examines the regulatory environment, risk management practices, and the role of financial institutions in the global economy. Key topics include asset-liability management, interest rate risk, liquidity management, the impact of technological innovations, and responses to financial crises. Students will analyze case studies and current events to understand how financial institutions create value, manage risks, and adapt to emerging economic and regulatory challenges.
Recommended Textbook
Financial Institutions Management 5th Canadian Edition by Anthony Saunders
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26 Chapters
2430 Verified Questions
2430 Flashcards
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90 Verified Questions
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Sample Questions
Q1) Which function of an FI reduces transaction and information costs between a corporation and individual which may encourage a higher rate of savings?
A)Brokerage services.
B)Asset transformation services.
C)Information production services.
D)Money supply management.
E)Administration of the payments mechanism.
Answer: A
Q2) The efficiency with which FIs provide payment services directly benefits the economy.
A)True
B)False
Answer: True
Q3) Firms in industries that have low costs of entry tend to enjoy larger profits than firms in industries with high costs of entry.
A)True
B)False
Answer: False
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Q1) Lehman Brothers failed during the recent financial crisis despite having access to the low cost sources of funds offered by the Federal Reserve.
A)True
B)False
Answer: False
Q2) The securitization of mortgages involves the pooling of mortgage loans for sale in the financial markets.
A)True
B)False
Answer: True
Q3) As with other DTIs, profits or return on assets (ROA) is the primary goal of credit union management.
A)True
B)False
Answer: False
Q4) Retail deposits comprise the largest portion of deposits for Canadian banks.
A)True
B)False
Answer: True
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Q1) General Electric Capital Corporation is considered a captive finance company.
A)True
B)False Answer: True
Q2) Finance companies are subject to regulations that restrict the types of products and services they can offer to small business customers.
A)True
B)False
Answer: False
Q3) During the period from 1977 to 2012,
A)total assets in finance companies grew over 1,000%.
B)commercial paper became a less important source of funds for finance companies.
C)assets in finance companies became less diversified.
D)mortgage lending declined in importance to finance companies.
E)in finance companies, consumer lending increased as a percent of total assets.
Answer: A
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Q1) Market makers in a stock are obligated to buy shares from sellers even when the market for the stock is declining.
A)True
B)False
Q2) The largest source of funding for securities service firms and investment banks as an industry is repurchase agreements.
A)True
B)False
Q3) Which of the following is most typical of broker-dealers?
A)They assist in underwriting of new securities.
B)They assist in trading of existing securities.
C)They assist in issuing new securities.
D)They assist in underwriting and distribution of new securities.
E)All of these.
Q4) Securities underwriting and trading is an activity that requires a considerable investment in long-term assets and relatively small investments in short-term assets.
A)True
B)False
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Sample Questions
Q1) Duties of a mutual fund chief compliance officer include
A)policing the trading by non-fund managers.
B)ensuring the accuracy of information provided to fund managers.
C)reviewing fund business practices such as marketing and administration.
D)reporting any wrongdoing directly to fund directors.
E)All of these.
Q2) The chief compliance officer of a mutual fund reports directly to the senior executives of the fund management company.
A)True
B)False
Q3) Historical evidence indicates that load funds perform better than no-load funds.
A)True
B)False
Q4) Mutual funds often offer multiple share classes which differentiate between different methods of paying the sales loads and management fees.
A)True
B)False
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Q1) Property & casualty underwriting risk only exists when the premiums generated on a given insurance line are less than the claims (losses) on the line.
A)True
B)False
Q2) Loss adjustment expenses refer to the costs surrounding the loss settlement process.
A)True
B)False
Q3) Property & casualty insurance involves
A)insurance coverage related to the loss of real and personal property.
B)insurance protection against legal liability exposure.
C)insurance protection against injuries in employment related work.
D)insurance coverage related to the loss of real and personal property, and insurance protection against legal liability exposure.
E)insurance coverage related to the loss of real and personal property, and insurance protection against injuries in employment related work.
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Sample Questions
Q1) 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?
A)$300,000.
B)$140,000.
C)$160,000.
D)$280,000.
E)$80,000.
Q2) 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 maximum interest rate that it can refinance its $4 million liability and still break even on its net interest income in dollars?
A)6.5 percent.
B)7.0 percent.
C)7.5 percent.
D)8.0 percent.
E)8.5 percent.
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Q1) For a given change in interest rates, fixed-rate liabilities with longer-term maturities will have smaller changes in price than liabilities with shorter maturities.
A)True
B)False
Q2) In the repricing gap model, assets or liabilities are rate sensitive within a given time period if the dollar values of each are subject to receiving a different interest rate should market rates change.
A)True
B)False
Q3) The term structure of interest rates assumes that
A)the risk of all assets is the same.
B)the time to maturity for all assets is the same.
C)the coupon rate of all assets is the same.
D)The market value of assets is the same.
E)All of these.
Q4) The repricing gap model is a book value accounting based model.
A)True
B)False
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Q1) For a given change in required yields, short-duration securities suffer a smaller capital loss or receive a smaller capital gain than do long-duration securities.
A)True
B)False
Q2) Duration normally is less than the maturity for a fixed income asset.
A)True
B)False
Q3) The smaller the leverage adjusted duration gap, the more exposed the FI is to interest rate shocks.
A)True
B)False
Q4) One method of changing the positive leverage adjusted duration gap for the purpose of immunizing the net worth of a typical depository institution is to increase the duration of the assets and to decrease the duration of the liabilities.
A)True
B)False
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Q1) Default by a large corporation is seldom a problem for FIs since these corporations have many different sources of borrowed funds.
A)True
B)False
Q2) All other things equal, longer term loans are more likely to be
A)variable-rate loans.
B)fixed-rate loans.
C)commitment loans.
D)lowest risk category loans.
E)high interest rate loans.
Q3) Which of the following refers to the term "mortality rate"?
A)The success rate of new investments.
B)A one-period rate of interest expected on a bond issued at some date in the future.
C)The probability that a borrower will default in any given year.
D)Historic default rate experience of a bond or loan.
E)The probability that a borrower will default over a specified multiyear period.
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Q1) Most portfolio managers will accept some level of risk above the minimum risk portfolio if they expect to receive higher returns.
A)True
B)False
Q2) A Hypothetical Rating Migration, or Transition Matrix, reflects all of the following EXCEPT
A)rating at which the portfolio ended the year.
B)transition probabilities.
C)rating at which the portfolio of loans began the year.
D)future migration expected in the portfolio.
E)the average proportions of loans that began the year.
Q3) In the use of modern portfolio theory (MPT), the sum of the credit risks of loans under estimates the risk of the whole portfolio.
A)True
B)False
Q4) The simple model of migration analysis tracks the credit ratings of companies that have borrowed from the FI.
A)True
B)False
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Sample Questions
Q1) The surrender value of an insurance policy is
A)its promised payoff.
B)normally a portion of the contract's face value.
C)its value upon bankruptcy.
D)the value of the junk bonds in the insurance company's portfolio.
E)its holdup value.
Q2) It is impossible for money market mutual fund share prices to fall below $1.00.
A)True
B)False
Q3) Which of the following is a measure of the potential losses an FI could suffer as the result of fire-sale disposal of assets?
A)Quick ratio.
B)Liquidity index.
C)Financing gap and financing requirement.
D)Peer group ratio.
E)Current ratio.
Q4) A problem exists with the net stable funds ratio (NSFR) in that it does not include off-balance-sheet activities.
A)True
B)False

Page 14
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Sample Questions
Q1) An FI has purchased (borrowed) a one-year $10 million Eurodollar deposit at an annual interest rate of 6 percent. It has invested these proceeds in one-year Euro ( ) bonds at an annual rate of 6.5 percent after converting them at the current spot rate of 1.75/$. Both interest and principal are paid at the end of the year. What is the spread earned if the bank can sell one-year forward Euros at 1.755/$?
A)-0.70 percent.
B)-0.25 percent.
C)0.00 percent.
D)0.20 percent.
E)0.50 percent.
Q2) An FI can control its FX risk exposure by on-balance-sheet and off-balance-sheet hedging.
A)True
B)False
Q3) On-balance-sheet hedging involves making changes in the on-balance-sheet assets and liabilities to protect FI profits from FX risk without the use of derivative securities.
A)True
B)False
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Q1) Sovereign risk involves restrictions placed on borrowers and investors regarding the movement of funds into and out of a foreign country.
A)True
B)False
Q2) From the perspective of the lending FI, the risk of a well-diversified portfolio of loans should be less than weighted average risk of the individual loans.
A)True
B)False
Q3) Which of the following is a benefit to the lender in a loan rescheduling?
A)The FI may become locked into a particular loan portfolio structure.
B)Rescheduling may close the market for future loans.
C)Rescheduling may create interruptions in the flow of international trade since letters of credit may be more difficult to acquire.
D)Rescheduling may lower the present value of future payments in hard currencies.
E)The FI may receive additional fees, collateral, and option features on the loan.
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Sample Questions
Q1) Sumitomo Bank's risk manager has estimated that the VaRs of two of its major assets in its trading portfolio, foreign exchange and bonds, are -$150,000 and -$250,000, respectively. What is the 10-day VAR of Sumitomo's trading portfolio if the correlation among assets is assumed to be -1.0?
A)-$100,000.
B)-$316,228.
C)-$1,106,797.
D)-$1,204,161.
E)-$1,264,911.
Q2) Monte-Carlo simulation is a process of creating asset returns based on actual trading days so that the probabilities of occurrence are consistent with recent historical experience.
A)True
B)False
Q3) In the early 2000s the market risk capital requirement uniformly was a large proportion of the total risk capital requirements for the largest international banks.
A)True
B)False
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Sample Questions
Q1) Loans sold without recourse have contingent liability off-balance-sheet implications for the FI that sells the loan.
A)True
B)False
Q2) Off-balance-sheet activities generally have risk-reducing attributes, but seldom have risk-increasing attributes.
A)True
B)False
Q3) As compared to LCs, SLCs typically are used to cover contingencies that potentially are more severe and which may not be trade related.
A)True
B)False
Q4) Which of the following ratios do FIs and regulators often use as a simple measure of solvency?
A)Current ratio.
B)Capital to assets.
C)Earnings before interest and taxes to total assets.
D)Quick ratio.
E)Asset turnover ratio.
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Sample Questions
Q1) Which of the following are the two basic approaches to analyzing the cost functions of FIs?
A)Basic indicator approach and standardized approach.
B)Standardized approach and advanced measurement approach.
C)Production approach and intermediation approach.
D)Basic indicator approach and advanced measurement approach.
E)Intermediation approach and advanced measurement approach.
Q2) Usury ceilings place caps on interest rates that FIs can charge on certain types of loans and are established by OSFI.
A)True
B)False
Q3) Which of the following observations concerning e-money is NOT true?
A)Check writing lays the foundation of e-money.
B)E-money removes the middleman from a transaction.
C)The e-money user transfers the money from his or her bank account to the account of the funds' receiver.
D)The primary function of e-money is to facilitate transactions on the Internet.
E)E-money is not a cost efficient way of managing transactions that are small in value.
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Sample Questions
Q1) Deposits with low withdrawal risk typically are the lowest cost deposits for a DI.
A)True
B)False
Q2) Implicit interest involves the process of crediting the interest payment directly to a deposit account as opposed to sending an explicit interest check to the customer.
A)True
B)False
Q3) Holding small amounts of liquid assets could cause an FI to be unable to meet the claims of liability holders.
A)True
B)False
Q4) One reason FIs such as deposit-taking institutions and life insurance companies are exposed to liquidity risk is the relatively illiquid nature of their liabilities.
A)True
B)False
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Q1) When risk-taking is not actuarially fairly priced into deposit insurance premiums
A)depositors are required to pay the shortfall in funds collected.
B)there is an increase in the incentives for owners of DTIs to take additional risk.
C)deposit insurance premiums are more costly than economically justified.
D)depositors will be unprotected should the DTI become insolvent and fail.
E)the insurance provider is forced to find other sources of funds to continue coverage for the institution.
Q2) What is the benefit of a regulatory guarantee or insurance program for liability holders of FIs?
A)It decreases the likelihood contagious runs.
B)It increases concerns about the asset quality of FI.
C)It increases concerns about solvency of an FI.
D)It provides incentives to liability holders to engage in runs.
E)It provides preference to those who are first in line to withdraw funds over those last in line.
Q3) A run on a bank is not necessarily a bad occurrence.
A)True
B)False
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Q1) The Basel capital requirements are based upon the premise that A)banks with riskier assets should have higher capital ratios.
B)banks with riskier assets should have lower capital ratios.
C)banks with riskier assets should have lower absolute amounts of capital.
D)banks with riskier assets should have higher absolute amounts of capital.
E)there is no relationship between asset risk and capital.
Q2) Basel II attempts to encourage market discipline by having banks disclose capital structure, risk exposures, and capital adequacy in a systematic manner.
A)True
B)False
Q3) Under Basel III, OSFI requires Canadian banks to hold a total capital to credit risk-adjusted assets equal to 8 percent to be adequately capitalized. A)True B)False
Q4) Operational risk has increased to a point that the Bank for International Settlements (BIS) requires DTIs to account for it in the capital adequacy standards under Basel II. A)True
B)False
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Sample Questions
Q1) Which of the following is an advantage to an FI of expanding globally?
A)Exposure to nationalization or expropriation.
B)Economies of scale.
C)High fixed costs.
D)Costs of complying with different regulatory requirements.
E)Information and monitoring costs.
Q2) Firewalls are
A)barriers introduced to protect the bank against losses.
B)mechanisms to insure bank shareholders against loss.
C)regulations restricting the proliferation of Section 20 subsidiaries.
D)limitations on capital flows to the parent company.
E)safety codes required in tall skyscrapers.
Q3) The conflict of interest that occurs when a bank suggests the issuance of capital market debt for the purpose of reducing bank loans under conditions of deteriorating or questionable firm financial health is commonly referred to as bankruptcy risk transference.
A)True
B)False
Q4) When banks have the power to sell nonbank products, employees may no longer give dispassionate, or unbiased, advice to customers.
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Q1) Tailing-the-hedge normally requires an FI manager to utilize more futures contracts to hedge a cash position than are warranted by the initial analysis.
A)True
B)False
Q2) An FI has a 1-year 8-percent US$160 million loan financed with a 1-year 7-percent UK£100 million CD. The current exchange rate is $1.60/£. If the current (spot) rate for one-year British pound futures is currently at $1.58/£ and each contract size is £62,500, how many contracts are required to be purchased or sold in order to fully hedge against the pound exposure? (Assume no basis risk).
A)Sell 1,600 BP futures.
B)Buy 1,600 BP futures.
C)Sell 1,712 BP futures.
D)Buy 2,560 BP futures.
E)Buy 1,712 BP futures.
Q3) Futures contracts are the primary security that insurance companies and banks use to hedge interest rate risk prior to originating mortgages.
A)True
B)False
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Q1) In April 2012, an FI bought a one-month sterling T-bill paying £100 million in May 2012. The FI's liabilities are in dollars, and current exchange rate is $1.6401/£1. The bank can buy one-month options on sterling at an exercise price of $1.60/£1. Each contract has a size of £31,250, and the contracts currently have a premium of $0.014 per £. Alternatively, options on foreign currency futures contracts, which have a size of £62,500, are available for $0.0106 per £. What is the foreign exchange risk that the FI is facing, and what type of currency option should be purchased to hedge this risk?
A)The FI should use put options to hedge the depreciation of the dollar.
B)The FI should use call options to hedge the depreciation of the pound sterling.
C)The FI should use put options to hedge the depreciation of the pound sterling.
D)The FI should use call options to hedge the depreciation of the dollar.
E)The FI should use put options to hedge the appreciation of the pound sterling.
Q2) What is the advantage of a futures hedge over an options hedge?
A)The futures hedge has lower credit risk exposure.
B)The futures hedge reduces volatility in profit gains on both sides.
C)The futures hedge is marked to market less frequently.
D)The futures hedge offers the least downside risk protection.
E)The futures hedge completely offsets losses but only partly offsets gains.
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Q1) A credit union has funded 10 percent fixed-rate assets with variable-rate liabilities at LIBOR + 2 (L + 2) percent. A bank has funded variable-rate assets with fixed-rate liabilities at 6 percent. The bank's variable-rate assets earn LIBOR + 1 (L + 1) percent. The credit union and the bank have reached agreement on an interest-rate swap with the fixed-rate swap payment at 6 percent and the variable-rate swap payment at LIBOR. What will be the net after-swap cost of funds for the credit union if the cash market liabilities are included in the analysis?
A)Variable-rate at LIBOR.
B)Fixed-rate at 8 percent.
C)Fixed-rate at 1 percent.
D)Fixed-rate at 2 percent.
E)None of these.
Q2) The credit risk on an interest rate swap is generally much less than on an individual loan.
A)True
B)False
Q3) A pure credit swap is similar to buying credit insurance.
A)True
B)False
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Q1) Selling loans without recourse is a way for FIs to remove loans from their balance sheet for the purpose of reducing the cost associated with reserve requirements.
A)True
B)False
Q2) The primary sellers of domestic loans are medium-sized credit unions.
A)True
B)False
Q3) Banks that sell many of their loans
A)utilize more of a dealer intermediation approach.
B)utilize more of a broker intermediation approach.
C)utilize more of a trader intermediation approach.
D)utilize more of a market maker intermediation approach.
E)relinquish some of their roles as financial intermediaries.
Q4) Historically, correspondent banking relationships have been important in the sale of bank loans.
A)True
B)False
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Q1) An FI operating in the United States funds a US$5 million residential mortgage in 2014 by allocating capital and by issuing demand deposits. The mortgage represents a loan-to-value of 70 percent. The demand deposits have a reserve requirement of 10 percent and a deposit insurance premium to FDIC of 23 basis points. What would have been the capital requirements if the FI had securitized the mortgage?
A)$0.
B)$400,000.
C)$200,000.
D)$500,000.
E)$5,000,000.
Q2) Investors in mortgage-backed pass-through securities are exposed to a variety of risks. Compared to other fixed-income securities, the most unique of these risks is
A)prepayment risk
B)default risk
C)credit risk
D)interest rate risk
E)liquidity risk
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