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Exam 7: Risks of Financial Institutions

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Question 41

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With regard to market value risk, rising interest rates

A) increase the value of fixed rate liabilities.
B) increase the value of fixed rate assets.
C) increase the value of variable-rate assets.
D) decrease the value of fixed rate liabilities.
E) decrease the value of variable-rate assets.

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Question 42

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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 in dollars in year 3, if it refinances all of its liabilities at a rate of 8.0 percent?

A) -$20,000.
B) -$10,000.
C) -$15,000.
D) +$20,000.
E) +$10,000.

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Question 43

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In the case where a borrower defaults on a loan, the FI may lose only a portion of the principal that was loaned.

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

Technology risk is the uncertainty that economies of scale or scope will be realized from the investment in new technologies.

The asset transformation function potentially exposes the FI to

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?

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

Which function of an FI involves buying primary securities and issuing secondary securities?

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

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

Foreign exchange risk is that the value of assets and liabilities may change because of changes in the foreign exchange rate between two countries.

"Matching the book" or trying to match the maturities of assets and liabilities is intended to protect the FI from

During a liquidity crisis assets normally must be sold at a loss because of the rising interest rates caused by financial institutions attempting to raise funds.

Many of the various risks faced by an FI often are interrelated with each other.

A Canadian bank has €40 million in assets and €50 million in CDs. All other assets and liabilities are in Canadian dollars. This bank is

Because the economies of Canada and other countries have become more integrated, the risks of financial intermediation have decreased.

An FI can hold assets denominated in a foreign country, but it cannot issue foreign liabilities.

Matching the maturities of assets and liabilities supports the asset transformation function of FIs.

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.