BM_Week2

An FI that invests $100 million into corporate bonds is exposed to the following risks:

• A. credit and interest rate risk.

• B. liquidity and technology risk.

• C. solvency and technology risk.

• D. off-balance-sheet and interest rate risk

An FI that holds more short-term assets relative to long-term liabilities is:

• A. exposed to refinancing risk.

• B. exposed to restructuring risk.

• C. exposed to reinvestment risk.

• D. not exposed to any risks.

An example of refinancing risk is a case in which an FI:

• A. funds 2-year maturity assets with 1-year maturity liabilities.

• B. funds 1-year maturity assets with 2-year maturity liabilities.

• C. funds 2-year maturity assets with 2-year maturity liabilities

• D. None of the listed options are correct.

A decrease in interest rates means that the discount rate on cash flows is:

• A. decreased and thus the market value of an FI's assets and liabilities decreases.

• B. increased and thus the market value of an FI's assets and liabilities decreases.

• C. increased and thus the market value of an FI's assets and liabilities increases.

• D. decreased and thus the market value of an FI's assets and liabilities increases.

Market risk is defined as the risk:

• A. incurred by granting loans to companies that do not hold a large market share.

• B. incurred in the trading of assets and liabilities due to changes in interest rates, exchange rates and other asset prices.

• C. that a sudden surge in liability withdrawals may require FIs to liquidate assets at less than fair market prices.

• D. that an FI loses market share.

The market risk of an FI increases with:

• A. increasing volatility of asset prices.

• B. increasingly large unhedged short positions in bonds, equities and other commodities.

• C. increasingly large unhedged long positions in bonds, equities and other commodities.

• D. All of the listed options are correct.

Why are depository institutions and life insurance companies more exposed to credit risk than, for instance, money market managed funds and general insurance companies?

• A. Because the average maturities of their assets are longer than those of money market managed funds/general

  insurance companies.

• B. Because the average maturities of their assets are shorter than those of money market managed funds/general insurance companies.

• C. They are not exposed to more risk.

• D. Because they are not specialised in credit risk management.

What does systematic credit risk mean?

• A. The risk of default of the borrowing firm that arises from the borrowing firm's specific projects.

• B. The risk of default associated with micro economic conditions affecting some borrowers.

• C. The risk of default associated with general macroeconomic conditions affecting all borrowers.

• D. The risk of default associated with general macroeconomic conditions affecting some borrowers.

The major difference between firm-specific credit risk and systematic credit risk is that:

• A. FIs can diversify systematic credit risk, while firm-specific credit risk cannot be diversified.

• B. FIs can diversify firm-specific credit risk, while systematic credit risk cannot be diversified.

• C. None of the listed options are correct, as FIs can diversify both types of credit risk.

• D. None of the listed options are correct, as FIs cannot diversify either type of credit risk.

Which of the following are typical off-balance-sheet activities?

• A. letters of credit

• B. loan commitments

• C. forward contracts, swaps and other derivative securities

• D. All of the listed options are correct.