Money and Banking Exam Solutions
Course Introduction
Money and Banking explores the fundamental roles of money, financial institutions, and the banking system within the economy. The course examines how money is created and regulated, analyzing the operations and significance of commercial banks, central banks, and other financial intermediaries. Students gain an understanding of monetary policy, interest rates, inflation, and the mechanisms through which central banks, such as the Federal Reserve, influence economic activity. Topics also include the structure of financial markets, risk management, the role of regulation, and current issues in banking and finance, providing students with a comprehensive overview of the modern financial system.
Recommended Textbook
Financial Institutions Management 4th Edition by SAUNDERS
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18 Chapters
1337 Verified Questions
1337 Flashcards
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Page 2
Chapter 1: Why Are Financial Institutions Special
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68 Verified Questions
68 Flashcards
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Sample Questions
Q1) Why do households prefer to use FIs as intermediaries to invest their surplus funds?
A)Transaction costs are low to the household since FIs are more efficient in monitoring and gathering investment information.
B)To receive the benefits of diversification that households may not be able to achieve on their own.
C)The FI can benefit from combining funds and negotiating lower asset prices and transaction costs
D)All of the listed options are correct.
Answer: D
Q2) Which of the following are areas of institution-specific specialness?
A)money supply transmission
B)payment services
C)intergenerational transfers
D)All of the listed options are correct.
Answer: D
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3
Chapter 2: The Financial Service Industry: Depository
Institutions
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78 Verified Questions
78 Flashcards
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Sample Questions
Q1) Covered bonds:
A)were introduced following the GFC to ease liquidity pressures on the bank's balance sheet
B)are issued by a bank, backed by a pool of assets, which remain on the balance sheet of the issuing bank
C)are issued by a bank, backed by a pool of assets, which are off-balance-sheet items of the issuing bank
D)are issued by the Reserve Bank of Australia to FIs with liquidity problems
Answer: B
Q2) CUBS means credit unions and building societies.
A)True
B)False
Answer: True
Q3) PAIRS provides APRA with a score-card approach to assessing the risk of FI failure and the impact of any failure by detailing the 12 risk elements separately and disclosing the result to the FI being investigated.
A)True
B)False
Answer: False
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Chapter 3: The Financial Service Industry: Other Financial Institutions
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68 Verified Questions
68 Flashcards
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Sample Questions
Q1) Which of the following statements are true in the context of general insurance?
A)Loss rates on all general property policies are adversely affected by unexpected increases in inflation.
B)Long-tail losses arise where the peril occurs during a coverage period but a claim is not made until many years later.
C)Long-tail losses arise where the peril occurs during a coverage period but a claim is not made until many years later and loss rates are more predictable on low-severity high-frequency lines than on high-severity low-frequency lines.
D)Loss rates on all general property policies are adversely affected by unexpected increases in inflation; long-tail losses arise where the peril occurs during a coverage period but a claim is not made until many years later and loss rates are more predictable on low-severity high-frequency lines than on high-severity low-frequency lines.
Answer: D
Q2) Investments in hedge funds are restricted to more wealthy clients.
A)True
B)False
Answer: True
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Chapter 4: Risks of Financial Institutions
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76 Verified Questions
76 Flashcards
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Sample Questions
Q1) What are the major objectives of technological expansion?
A)To lower operating costs, increase profits and capture new markets.
B)To stabilise operating costs, increase profits and capture new markets.
C)To lower operating costs, stabilise profits and capture new markets.
D)To lower operating costs, increase profits and stabilise the existing market share.
Q2) Economically speaking, contingent assets and liabilities are not contractual claims that directly impact the economic value of the equity holders' stake in an FI.
A)True
B)False
Q3) The risk that an investor will be forced to place earnings from a loan or security into a lower yielding investment is known as:
A)liquidity risk
B)reinvestment risk
C)credit risk
D)foreign exchange risk
Q4) A short-funded FI is exposed to increasing interest rates.
A)True
B)False
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6
Chapter 5: Interest Rate Risk Measurement: The Repricing Model
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78 Verified Questions
78 Flashcards
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Sample Questions
Q1) 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.
Q2) Would you consider the repricing model to be a good and well-founded interest rate risk measurement and management tool? Why or why not?
Q3) The term core deposits refers to those deposits that:
A)act as long-term sources of funds for the FI
B)reflect the true or core nature of the FI's operations
C)support the core of the FI's operations
D)None of the listed options are correct.
Q4) What is meant by the 'runoff' problem and how can bank managers deal with this problem?
Page 7
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Chapter 6: Interest Rate Risk Measurement: the Duration
Model
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73 Verified Questions
73 Flashcards
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Sample Questions
Q1) Consider a security with a face value of $100 000 to be repaid at maturity.The maturity of the security is three years.The coupon rate is 9% per annum and coupon payments are made semi-annually.The current discount rate is 12% per annum.What is the security's price (round your answer to two decimals)?
A)$127,000.00
B)$100,000.00
C)$76,046.08
D)$92,624.01
Q2) As interest rates increase the price of an asset or liability: A)remains constant
B)decreases
C)increases
D)increases and it increases at a faster rate
Q3) Discuss the following proposition: While in theory duration matching allows an FI to immunise against interest rate risk, the reality is that it is too costly and too time consuming to be useful.
Q4) The maturity of a fixed-income security is always smaller than its duration.
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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75 Verified Questions
75 Flashcards
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Sample Questions
Q1) Firm-specific risk is a residual risk that arises because the movement in a spot (cash) asset's price is not perfectly correlated with the movement in the price of the asset delivered under a futures or forward contract.
A)True
B)False
Q2) Which of the following is true of the market price of a futures contract over time?
A)It is set at time 0.
B)It is fixed over the life of the contract.
C)It changes based on the market value of the underlying asset.
D)It decreases with time to expiration.
Q3) A forward contract is an agreement between a buyer and seller at time 0, when there is a contractual agreement that an asset will be exchanged for cash at some later date.
A)True B)False
Q4) All call options are eventually exercised and the underlying asset must be delivered. A)True B)False
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Chapter 8: Managing Interest Rate Risk Using Securitisation
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75 Verified Questions
75 Flashcards
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Sample Questions
Q1) This propensity to prepay means:
A)realised coupons/cash flows on pass-through securities would conform to expected cash flows
B)realised coupons/cash flows on pass-through securities can often deviate substantially from the stated or expected coupon flows
C)realised coupons/cash flows on pass-through securities are prepaid
D)None of the listed options are correct.
Q2) Interest rate swaps are used to assist in interest rate risk management of the securitised assets.
A)True B)False
Q3) The move towards market value accounting:
A)increases banks' incentives to sell loans to avoid reporting capital losses
B)decreases banks' incentives to sell loans to avoid reporting capital losses
C)increases banks' incentives to sell loans since all assets will automatically be marked to market
D)decreases banks' incentives to sell loans since all assets will automatically be marked to market
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Chapter 9: Market Risk
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61 Verified Questions
61 Flashcards
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Sample Questions
Q1) Assume the dollar market value of an FI's position is $200 000 with a modified duration of four years.The potential adverse move in the yield is 16.5 basis points.What is the VAR of the position if the FI is required to hold the position for 6 days (round to two decimals)?
A)$1320.00
B)$3233.33
C)$330.00
D)$200,000.00
Q2) Which of the following statements is true?
A)The assumption that yield changes are normally distributed will result in an exact estimation of extreme outcomes.
B)The assumption that yield changes are normally distributed will generally result in overestimating extreme outcomes.
C)The assumption that yield changes are normally distributed will generally result in underestimating extreme outcomes.
D)Assumptions regarding the distribution of yields are not significant in market risk measurement models.
Q3) Describe the process of the partial risk factor approach.
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11
Chapter 10: Credit Risk I: Individual Loan Risk
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75 Verified Questions
75 Flashcards
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Sample Questions
Q1) The term 'loan rating' refers to the process of individual loans being given credit rating by:
A)rating agencies dependent on the lender's credit assessment
B)rating agencies independent of the lender's credit assessment
C)lenders dependent on a credit rating agency's credit assessment
D)lenders independent of a credit rating agency's credit assessment
Q2) The term 'spot loan' refers to a loan:
A)that is granted on the spot
B)that needs to be repaid on the spot
C)granted at the spot rate
D)for which the full loan amount is withdrawn by the borrower on the spot
Q3) Linear discriminant models rely on a company's forecasted financial data so that the FI manager is able to assess the borrower's future payment ability.
A)True
B)False
Q4) By selecting and combining different economic and financial borrower characteristics, an FI manager may be able to improve the pricing of default risk.
A)True
B)False
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Chapter 11: Credit Risk II: Loan Portfolio and Concentration
Risk
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76 Verified Questions
76 Flashcards
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Sample Questions
Q1) Which of the following statements is true?
A)The correlation coefficient reflects the joint movement of asset returns or default risk in the case of loans and lies between the values -1 \(\le\) r \(\le\) + 1, where r is the correlation coefficient.
B)The correlation coefficient reflects the joint movement of asset returns or default risk in the case of loans and lies between the values 0 \(\le\) r \(\le\) + 1, where r is the correlation coefficient.
C)The correlation coefficient reflects the joint movement of asset returns or default risk in the case of loans and lies between the values +1 \(\le\) r \(\le\) + 2, where r is the correlation coefficient.
D)The correlation coefficient reflects the joint movement of asset returns or default risk in the case of loans and lies between the values -1 \(\le\) r \(\le\) 0, where r is the correlation coefficient.
Q2) Minimum risk portfolios generally generate the highest returns.
A)True
B)False
Q3) Explain the basic concept of loan loss ratio based models.
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Page 13
Chapter 12: Sovereign Risk
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Sample Questions
Q1) Which of the following countries was rated to be the riskiest according to the Institutional Investor's 2012 country credit risk ratings?
A)Eritrea
B)Somalia
C)Afghanistan
D)North Korea
Q2) Debt repudiations were more common before World War II compared to now.
A)True
B)False
Q3) Somalia was rated to be the riskiest according to the Institutional Investor's 2012 country credit risk ratings.
A)True
B)False
Q4) The sovereign risk assessment methods most commonly used by large FIs are logit and probit models.
A)True
B)False
Q5) What are the costs and benefits of rescheduling for the lenders and for the borrowers?
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Chapter 13: Foreign Exchange Risk
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77 Verified Questions
77 Flashcards
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Sample Questions
Q1) Most profits or losses on FX trading for FIs come from taking an open position or speculating in currencies.Revenues from market making-the bid-ask spread-or from acting as agents for retail or wholesale customers generally provide only a secondary or supplementary revenue source.
A)True
B)False
Q2) Forward exchange rate is the exchange rate agreed to today for future (forward) delivery of a currency
A)True
B)False
Q3) Indirect quote shows the amount of foreign currency received for each unit of home currency exchanged.
A)True
B)False
Q4) An FI acts defensively as a hedger to reduce FX exposure if it engages in the purchase and sale of foreign currencies for hedging purposes to offset customer or FI exposure in any given currency.
A)True
B)False
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Chapter 14: Liquidity Risk
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76 Flashcards
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Sample Questions
Q1) Distinguish between liquidity risk arising from the asset side and the liability side of the balance sheet.
Q2) A bank run refers to a sudden:
A)but expected increase in deposit withdrawals from an FI
B)and unexpected increase in deposit withdrawals from an FI
C)and unexpected increase in customers that wish to undertake business with the FI
D)but expected increase in customers that wish to undertake business with the FI
Q3) What are the main components of a liquidity plan? Discuss the vital role such a plan plays in reducing liquidity risk.
Q4) Australia has recently developed a market for deposit insurance guarantee that protects deposit accounts.
A)True
B)False
Q5) An FI's financing gap is the difference between an FI's:
A)average core deposits and average loans
B)average loans and average core deposits
C)assets and liabilities
D)liabilities and assets
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Chapter 15: Liability and Liquidity Management
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Sample Questions
Q1) Subordinated debt is debt that is either unsecured or has a lower priority than that of another debt claim on the same asset or property; also called junior debt
A)True
B)False
Q2) Subordinated debt is:
A)debt that is either unsecured or has a lower priority than that of another debt claim on the same asset or property
B)senior debt
C)hybrid debt
D)None of the listed options are correct.
Q3) Which of the following statements is true?
A)The issuers of Treasury Notes are local governments.
B)The issuers of Treasury Notes are state governments.
C)The issuer of Treasury Notes is the Australian federal government.
D)The issuers of Treasury Notes are corporations.
Q4) Historically, asset liquidity was the primary method by which banks met cash demands.
A)True
B)False
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Chapter 16: Off-Balance-Sheet Activities
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75 Verified Questions
75 Flashcards
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Sample Questions
Q1) Which of the following is an out-of-the-money counterparty?
A)counterparty in a loan commitment contract
B)FI that trades in securities prior to their actual issue
C)counterparty that is currently at an advantage in terms of cash flows
D)counterparty that is currently at a disadvantage in terms of cash flows
Q2) If a future credit crunch occurs, a loan commitment may expose the FI to:
A)credit risk
B)interest rate risk
C)sovereign country risk
D)funding risk
Q3) An adverse material changes in conditions clause is included in loan commitments to protect the FI against:
A)funding risk
B)interest rate risk
C)takedown risk
D)credit risk
Q4) Basis risk refers to the variable spread between a lending rate and a borrowing rate, or between any two interest rates or prices.
A)True
B)False
18
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Chapter 17: Technology and Other Operational Risks
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Sample Questions
Q1) Which of the following statements is true?
A)RTGS stands for Real Transaction Gross Settlement.
B)RTGS allows large transactions to be settled at the end of the banking day.
C)The use of RTGS eliminates settlement risk.
D)RTGS allows detecting any failure to complete settlement during the day that the transactions occur.
Q2) Which of the following statements is true?
A)Internet transactions involve 'open' systems and thus are well protected against interception and fraud.
B)Internet transactions involve 'closed' systems and thus are well protected against interception and fraud.
C)Internet transactions involve 'closed' systems and thus are susceptible to interception and fraud.
D)Internet transactions involve 'open' systems and thus are susceptible to interception and fraud.
Q3) To provide retail financial services, FIs need continuously update and integrate their technology infrastructure.Discuss the specific technological advances FIs must deal with.
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Chapter 18: Capital Management and Adequacy
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Sample Questions
Q1) Choose the correct statement:
A)Basel II provides a better alignment of risks to borrowers than Basel I and remains the basis of the current measurement of credit-risk-adjusted assets.
B)Basel I provides a better alignment of risks to borrowers than Basel II and remains the basis of the current measurement of credit-risk-adjusted assets.
C)Basel III provides a better alignment of risks to borrowers than Basel II and remains the basis of the current measurement of credit-risk-adjusted assets.
D)None of the listed options are correct.
Q2) Market to book ratio is a ratio that shows the discrepancy between the:
A)stock market value of an FI's equity and the book value of its equity
B)historic value of an FI's equity and the book value of its equity
C)US dollar value of an FI's equity and the book value of its equity
D)value of an FI's debt and the book value of its debt
Q3) Current credit exposure is the risk that a counterparty to a derivative securities contract will default in the future.
A)True
B)False
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Page 20