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FIM > FIM Exam > Flashcards

FIM Exam Flashcards

1
Q

Which three variables affect the duration of a multiple payment asset?

A

Coupon rate,
Yield to maturity
The amount of time to maturity

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2
Q

Explain how the duration changes with respect to changes in these three variables?

A

Time to maturity: The longer the maturity, the higher the duration, and the greater the interest rate risk.

Coupon rate: The higher the coupon rate, the lower the duration, and the lower the interest rate risk.

Yield to maturity: Duration is inversely related to the bond’s (YTM)

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3
Q

Examples of Tier 2 capital:

A

Subordinated debt capital instruments

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4
Q

_________________________ measures the amount of debt or leverage a bank has and is one part of the evaluation of the bank’s ROE. It is generally a number larger than one.

A

The leverage ratio

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5
Q

________ _________________ assets, including loans, are those which are past due by 90 days or more.

A

Nonperforming loans

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6
Q

When a bank has a positive duration gap a parallel increase in the interest rates on the assets and liabilities of the bank will lead to a(n) __________ in the bank’s net worth.

A

decline

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7
Q

Why futures contracts are settled every day?

A

Mark-to-market enforces the daily discipline of exchanges profit and loss between open futures positions eliminating any loss or profit carry forwards that might endanger the clearinghouse. Having one final daily settlement for all means every open position is treated equally.

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8
Q

What is initial margin?

A

Initial margin is the percentage of a security’s price (often 50%) that investors must cover with cash or collateral when using a margin account.

Initial margin is held to cover the losses that could arise.

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9
Q

What is maintenance margin?

A

it is the minimum amount of capital that must remain in an investment account in order to hold an investment or trading position.

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10
Q

The ratio of Nonperforming loans to Loans is a measure of ________ in banking industry.

A

credit risk

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11
Q

_______ __________________ assets, including loans, are those which are past due by 90 days or more

A

non-accrual

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12
Q

Core capital such as common stock and surplus, undivided profits, qualifying noncumulative perpetual preferred stock, etc. is referred to as __________________ capital, as defined by the Basel agreement.

A

Tier 1

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13
Q

_____________ is the spread between the cash price and futures price of an underlying asset.

A

Basis

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14
Q

A(n) ________________________ is an agreement between a buyer and a seller today which calls for the delivery of a particular security in exchange for cash at some future date for a set price.

A

forward contract

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15
Q

When investors buy or sell a futures contract, they must deposit a(n) _________ when they first enter into the contract.

A

initial margin

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16
Q

The short hedge in financial futures contracts is most likely to be used in situations where a bank would suffer losses due to falling interest rates.
Is this true or false?

A

False, a long hedge!

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17
Q

The ratio of non-performing assets to total loans and leases is a measure of credit risk in banking industry. Is this true or false?

A

True!

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18
Q

What are the Tier 1 and Tier 2 capital?

Given one example of each!

A

Tier 1 capital is the primary funding source of the bank. Tier 1 capital consists of shareholders’ equity and retained earnings.

Tier 2 capital, or supplementary capital, includes a number of important and legitimate constituents of a bank’s capital requirement. Examples of it are revaluation reserves, hybrid capital instruments and subordinated term debt, general loan-loss reserves, and undisclosed reserves.

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19
Q

Explain what are the first and the second primary reserve in a bank’s balance sheet?

A

The first primary reserve is the first line of defence in case of high liquidity needs. It includes: vault cash, deposits from other banks and cash items in the process of collection.

The second primary reserve is the second line of defence in case of high liquidity needs. It includes items available for sale or exchangeable for cash on short notice. For example: government securities. Money market deposits.

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20
Q

If a bank has a positive interest-sensitive gap, one of the possible management responses would be to:

A

wait for the interest rates to rise or be stable.

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21
Q

The net interest margin of a bank is influenced by:

A

Changes in the level of interest rates.
Changes in the volume of interest-bearing assets and interest-bearing liabilities.
Changes in interest income from loans and investments.
Changes in interest expense on deposits and other borrowed funds.

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22
Q

The principal goal of interest rate hedging strategy is to hold fixed a bank’s:

A

net interest margin.

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23
Q

What do loans and security investments represent for a bank?

A

Earning assets

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24
Q

The risk that a financial institution may be forced to borrow emergency funds excessive cost to cover its immediate cash needs is known as:

A

Liquidity risk.

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25
Q

________________________ risk is one that deals with the quality of the bank’s assets and, in particular, the bank’s loans.

A

Credit

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26
Q

Futures contracts are _______________________ daily, which means that futures contracts are settled each day as their market value changes.

A

marked to market

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27
Q

What is duration of an asset?

A

Duration is the weighted average of the times until the fixed cash flows are received.

It is also is a way of measuring how much bond prices are likely to change if and when interest rates move.

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28
Q

Is the duration of a single payment and a multiple payment asset the same?

A

Yes?

29
Q

What are the four layers of a safety net in the banking regulation?

A

Foreign currency reserves
Swap lines
IMF support
RFAs (Regional Financing Arrangements)

30
Q

A bank’s temporary lending of excess reserves to other banks is labeled on the balance sheet as:

A

Fed funds sold

31
Q

Diamond (1984) theory!

A

Diamond theory states that banks are delegated monitors. Banks can be viewed as a delegated monitor by lenders with respect to borrowers, only when the cost of monitoring taken by banks is inferior to the cost of monitoring by single individuals. The aim of the theory is to prove that the banks are effectively “low cost” delegated monitors when the number of lenders grows large.

32
Q

Describe the Gap strategies when using the forward rate as a benchmark rate?

A

The problem with Gap Strategies is related to the wrong perception in expectations. The rules say that in case interest rate rises over a period, the net present value of an asset-sensitive balance sheet should be greater that the one of liability-sensitive balance sheet. However, these are cases in which the contrary occurs. This is due to the fact that the expectation of bank management is wrong: they don’t consider forward rate as a benchmark rate for their expectations. E.g. they expect interest rate increase from 10% to 11.5% between two given years but the forward rate is 13%. Bank management should thus implement a different strategy considering the forward rate as benchmark: if they expect that interest rate will grow to a value inferior to benchmark, then they should construct a liability-sensitive balance sheet. Otherwise, in case the expect an interest rate growth above the benchmark rate they should build an asset-sensitive balance sheet.

33
Q

The latest revision to the Basel accord is known as __________ and will cover capital, liquidity, and debt positions of individual international banks and also the much broader issues associated with controlling global business cycles and financial system-wide risks.

A

Basel lll

34
Q

If a bank has a negative interest-sensitive gap, in order to avoid the interest rate risk, one of the possible management responses would be to:

A

wait for the interest rates to fall or be stable

35
Q

Which of the following ratios would be a measure of credit risk?

A

Medium loans/asset

36
Q

Jackson State Bank is worried because many of the loans it has made are home mortgages which can be paid off early by the homeowner. What type of risk would this be an example of?

A

Call risk.

37
Q

The amount of initial margin, the settlement price, and other rules regarding trading futures contracts are determined by the:

A

clearing house.

38
Q

A futures contract on a 30-day Eurodollar time deposit is currently selling at an IMM index of 95.10. The IMM index on a 30-day Eurodollar time deposit for immediate delivery is 95.75. What is the basis?

A

65 basis points.

39
Q

Which interest-rate futures contract is not traded on exchanges?

A

Corporate bond futures contract

40
Q

The interest-rate measure often quoted on short-term loans and money market securities such as U.S. Treasury bills is the

A

banks discount rate.

41
Q

For a given duration and change in interest rates, the change in the price of the security will be larger for a lower starting level of interest rates.

A

True!

42
Q

What is an advantage of trading financial futures to hedge interest-rate risk?

A

Only a fraction of the value of the contract must be pledged as collateral and brokers’ commissions are relatively low.

43
Q

A bank with a negative interest-sensitive GAP:

A

has a greater dollar volume of interest-sensitive liabilities than interest-sensitive assets.

44
Q

A financial institution with a negative interest -sensitive gap can reduce the risk of loss due to changing interest rates by:

A

reducing short-term interest-sensitive liabilities

45
Q

Demand deposits falls into the category of bank assets.

A

False!

46
Q

Banks generate their largest portion of income from:

A

loans.

47
Q

Which of the following adjustments are made to gross loans and leases to obtain net loans and leases?

A

Loan and lease loss allowance and unearned income is subtracted from gross loans

48
Q

The noncash expense item on a bank’s Report of Income designed to shelter a bank’s current earnings from taxes and to help prepare for bad loans is called:

A

provision for possible loan losses

49
Q

A financial institution’s bad-debt reserve, as reported on its balance sheet, is called

A

allowance for possible loan losses

50
Q

What financial statement shows the revenues and expenses of a bank over a set period of time?

A

The Report of Income

51
Q

Which of the following accounts is also called the bank’s primary reserves?

A

Cash and deposits due from banks

52
Q

What most accurately describes the principal type(s) of bank non-interest income?

A

Fees, everything with fees.

53
Q

Securities purchased to provide short-term profits from short-term price movements are reported as:

A

Trading account assets

54
Q

A bank’s ROE equals its ROA times its

A

total assets divided by total equity capital

55
Q

A larger proportion of small and medium-size bank’s loans tend to be,

A

higher-interest consumer loans

56
Q

The risk of deterioration in the value of a financial firm’s assets as a result of fluctuating currency prices is known as:

A

foreign-exchange risk

57
Q

Paul Smith is planning to invest in the stock of Capital City Bank. He is examining the ratios of interest sensitive assets to interest sensitive liabilities and uninsured deposits to total deposits. What type of risk is Paul attempting to measure with these ratios?

A

Interest rate risk

58
Q

Chaos State Bank has an old computer system which can go down for weeks at a time, leaving customers unable to access their accounts online. Many customers have left the bank for banks with more reliable computer systems. Which type of risk would this be an example of?

A

Operational risk

59
Q

Brian Smith, the CEO of Carter National Bank, anticipates that interest rates may fall in the future and as a result buys $100 million in 30 year Treasury Bonds for the bank’s security portfolio. Instead, interest rates rise, causing the value of these bonds to fall. This would be an example of which of the following types of risk?

A

Strategic risk

60
Q

The net interest margin of a bank is influenced by:

A

Changes in anything interest related.

61
Q

Which of the following types of banks tend to enjoy the highest net-interest margins in the industry?

A

Small-sized banks

62
Q

A financial institution with a low ROA can achieve a relatively high ROE through:

A

high leverage

63
Q

What is the equity multiplier for a bank whose equity is equal to 10 percent of total assets?

A

10

64
Q

A bank whose interest-sensitive assets total $350 million and its interest-sensitive liabilities amount to $175 million has

A

an asset-sensitive gap of $175 million

65
Q

The European Central Bank has the main goal of

A

ensuring price stability

66
Q

Which of the following has become the principal tool of central bank monetary policy today?

A

Open market operations

67
Q

The law that allows banks to affiliate with insurance companies and securities firms to form financial services conglomerates is:

A

the Gramm-Leach-Bliley Act (Financial Services Modernization Act)

68
Q

Common minimum capital requirements on banks in leading industrialised nations that are based on the riskiness of their assets is imposed by

A

the Basel Agreement

69
Q

The federal law that prohibited federally supervised commercial banks from offering investment banking services on privately issued securities is known as,

A

the Glass-Steagall Act

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