WorksheetsPre Exam CICC Day 11
Total questions: 20
Worksheet time: 34mins
A bank uses the following table to determine its target balance sheet mix of asset and liability categories. If total liabilities equal $250 million, calculate the actual policy limit for long-term debt. Balance Sheet Mix Limits
- Indicative Policy Limits as a % of Total Assets: 100%
Cash and cash equivalent 5%
Trade and other receivables 3%
Loans and leases: 65%
Residential mortgages 30%
Commercial loans 20%
Personal loans 10%
Leases 5%
Financial investments 10%
Other investment 12%
Inventories 2%
Intangible assets 3%
- Liabilities: 100%
Interest bearing deposits: 70%
Term deposits 40%
Demand deposits 20%
Brokered deposits 10%
Short-term debt 5%
Long-term debt 13%
Non-interest bearing liabilities 5%
Trade and other payables 4%
Deferred Revenue 3%
$325,000
$3,250,000
$32,500,000
$32,500
What is a "flight to quality"?
A collective demand for depositors' monies.
Financial system instability caused by particular events.
Investors moving at-risk capital to safe locations.
Transferring deposits to investments with higher interest rates.
What is a potential negative side effect of security deposit insurance?
It enables banks to make risky investments without worrying about depositors.
It enables banks to charge higher interest rates on loans.
It enables depositors to recover funds up to the limit in the event of a bank collapse.
It enables depositors to demand higher interest rates on their funds.
What is the purpose of the normal yield curve?
To plot returns on bonds with equal interest rates and credit quality.
To plot returns on bonds with different interest rates and credit quality.
To plot bond interest rates with equal credit quality but different maturity rates.
To plot bond interest rates with equal credit quality and maturity rates.
What is the definition of liquidity risk?
The risk of having excess liquid assets on the balance sheet to meet contractual obligations.
The risk of having more short-term liabilities than long-term liabilities.
The risk of having insufficient liquid assets on the balance sheet to meet contractual obligations.
The risk of having more short-term assets than long-term assets.
What is involved when using risk policy and organisation to manage operational risk?
Linking risk with performance measurement through capital allocation.
Using a certain range of qualitative and quantitative tools to assess, measure, and manage operational risk.
Defining what the bank wants to achieve, and how it will organise itself to reach its objectives.
Deciding whether to implement internal controls or to execute risk transfer strategies.
What kind of risk can be mitigated by using physical security at working locations?
Market risk.
Credit risk.
Operational risk.
Cyber risk.
What are the two main risks faced by banks in their role as financial intermediaries?
Credit risk and interest rate risk.
Credit risk and market risk.
Market risk and liquidity risk.
Systematic risk and market risk.
How are land and land improvements valued on the balance sheet?
At historical cost with no depreciation.
At historical cost less depreciation.
At current market value less depreciation.
At current open market value with no depreciation.
Which of the following risks is most difficult to manage?
Systemic risk
Cyber risk.
Credit risk.
Market risk.
How is gap analysis used to manage liquidity risk?
It analyses the gap created by the likely loss of market value of a portfolio over a predetermined confidence level.
It analyses the gap between different interest rates for loans over a given period of time.
It analyses the gap between interest-rate sensitive assets and interest-rate sensitive liabilities over a given period.
It analyses the gap in the duration created by the weighted-average time when all future cash flows are received.
In reviewing the risk that a borrower will fail the liquidity or solvency test, or both, which may indicate a failure to repay the loan, which area of credit risk is being analysed?
Financial risk.
Management risk.
Market (industry and business) risk.
What sources of repayment does the solvency test focus on?
Liquidation of assets in day-to-day circumstances.
Liquidation of assets in distressed circumstance
Cash flows generated from non-recurring operations.
Cash flows generated from day-to-day operations.
Which factors are included in market (industry and business) risk assessment?
I. Management integrity.
II. Individual business vulnerability.
III. Corporate governance.
IV. Competition.
II and IV only.
I, II and III only.
IV only.
II, III and IV only.
Are external factors relevant to the credit decision process?
As they are beyond management's control, they are not relevant to the credit decision process.
They are relevant only because lenders want to look at them, otherwise they do not add value to the credit decision process.
They need to be considered and evaluated to understand their impact on the credit decision process.
It is up to management to determine whether to include them as being part of the credit decision process.
What step in the loan decision process comes after structuring covenants?
Build analysis assumptions.
Determine pricing.
Analyse financial data.
Screen against loan policy.
Which of the following is a good credit risk assessment practice?
Structure the loan based on the assumption that the borrower will default.
Refrain from approving a loan when there is the slightest risk of borrower default.
Limit evaluation to financial risk.
Analyse the borrower's historical and projected ability to repay credit completely and on time.
Which steps are required to evaluate factors in market (industry and business) risk?
I. Recognise the importance and impact of the competitive marketplace.
II. Comprehend how market (industry and business) risk can affect a borrower's liquidity.
III. Consider the availability of liquidity in the marketplace.
IV. Grasp how financial, market (industry and business) and management risk interact with one another.
II and III only.
I, II and III only.
I, II and IV only.
III and IV only.
What is the key risk you are primarily analysing when determining the likelihood that a business will repay their principal and interest as scheduled?
Reputational risk.
Interest rate risk.
Currency risk.
Credit risk.
For a lender assessing credit risk, what business is likely to have a credit agency report with the most meaningful information?
A non-borrowing large business
A non-borrowing small business
A small business with few suppliers
A medium business with many suppliers
