Bank Management
Final Test Solutions
Course Introduction
Bank Management explores the principles and practices involved in operating and managing banking institutions. This course covers the organizational structure of banks, asset and liability management, risk assessment, regulatory frameworks, and strategic planning in the banking sector. Students will analyze topics such as credit management, liquidity management, investment policies, and the use of technology in banking operations. Emphasis will be placed on understanding the challenges and opportunities facing banks in a dynamic financial environment, preparing students for decision-making roles within financial institutions.
Recommended Textbook
Financial Institution Management 3rd Edition by Helen Lange
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18 Chapters
1156 Verified Questions
1156 Flashcards
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Page 2
Chapter 1: Why Are Financial Institutions Special
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67 Verified Questions
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Sample Questions
Q1) An action by an economic agent that imposes costs on other economic agents is referred to as:
A) negative endogenous reaction.
B) positive endogenous reaction.
C) positive externality.
D) negative externality.
Answer: D
Q2) Advantages of depositing funds into a typical bank account instead of directly buying corporate securities include all of the following except:
A) monitoring done by the bank on your behalf.
B) increased liquidity if funds are needed quickly.
C) increased transactions costs.
D) less price risk when funds are needed.
Answer: C
Q3) In the principal-agent relationship between savers and a borrowing firm the savers are the agents and the borrowing firm is the principal.
A)True
B)False
Answer: False
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Page 3
Chapter 2: The Financial Services Industry: Depository
Institutions
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Sample Questions
Q1) The term 'spread' refers to the difference between an FI's:
A) assets and liabilities.
B) liabilities and equity.
C) short-term lending rates and long-term lending rates.
D) lending and deposit rates.
Answer: D
Q2) The use of off-balance-sheet activities and instruments will always reduce the risk to a bank.
A)True
B)False
Answer: False
Q3) Which of the following statements is true?
A) APRA stands for Australian Prudential Regulation Authority.
B) APRA stands for Australian Payments Regulation Association.
C) APRA stands for Australian Payments Review Authority.
D) None of the listed options are correct.
Answer: A
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Page 4
Chapter 3: The Financial Services Industry: Other Financial Institutions
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Sample Questions
Q1) Superannuation funds manage funds saved throughout an employee's working life with the aim of providing the employee with a retirement income.
A)True
B)False
Answer: True
Q2) Which of the following statements is true?
A) Pure arbitrage involves buying blocks of securities in anticipation of some information release.
B) Risk arbitrage involves buying an asset in one market at one price and selling it immediately in another market at a higher price.
C) Pure arbitrage involves buying blocks of securities in anticipation of some information release, risk arbitrage involves buying an asset in one market at one price and selling it immediately in another market at a higher price and program trading is associated with seeking a pure arbitrage between a cash market price and the futures market price of that instrument.
D) None of the listed options are correct.
Answer: C
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5
Chapter 4: Risk of Financial Institutions
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Sample Questions
Q1) An Australian FI that holds a net short asset position in $US is exposed to foreign exchange rate risk if the $US appreciates against the $A over the investment period.
A)True
B)False
Q2) The collapse of the US bank, IndyMac Bank was an example of:
A) market risk.
B) operational risk.
C) insolvency risk.
D) insolvency and liquidity risk.
Q3) Technological failure, employee fraud and employee errors are all sources of operational risk.
A)True
B)False
Q4) A short-funded FI is exposed to increasing interest rates.
A)True
B)False
Q5) Firm-specific credit risk can be eliminated by diversification.
A)True
B)False
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Chapter 5: Interest Rate Risk Measurement: The Repricing Model
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Sample Questions
Q1) Assume you are the manager of an FI. How would you structure your balance sheet using the repricing gap model if you expected interest rates to increase?
A) I would create a positive gap.
B) I would create a negative gap.
C) I would create a neutral gap.
D) It would depend on my FI's current profitability.
Q2) If the spread between rate sensitive assets and rate sensitive liabilities increases for a bank, future changes in interest rates will lead to an increase in net interest income.
A)True
B)False
Q3) Which of the following statements is true?
A) An FI with a negative repricing gap expects interest rates to remain stable.
B) An FI with a negative repricing gap expects interest rates to rise.
C) An FI with a negative repricing gap expects interest rates to remain fall.
D) An FI with a negative repricing gap has not particular expectations regarding interest rate movements.
Q4) What is meant by the 'run-off' problem and how can bank managers deal with this problem?
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Chapter 6: Interest Rate Risk Measurement: the Duration
Model
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Sample Questions
Q1) Assume that the required yield to maturity on a consol bond increases from 6 per cent to 12 per cent. What is the impact on the consol bond's duration?
A) As there are no intervening cash flows between issue and maturity, the duration will always equal the bond's maturity.
B) As interest rates rise, the duration of consol bonds falls.
C) As interest rates rise, the duration of consol bonds rises.
D) There will be no impact on the bond's duration.
Q2) Using the leverage adjusted duration gap, it is possible to measure the effect of changing interest rates on an FI's net worth.
A)True
B)False
Q3) Duration is seen as a more complete measure of an asset or a liability's interest rate sensitivity than maturity because it takes into account the:
A) size of cash flows.
B) timing of cash flows.
C) size of cash flows and the asset or liability's time to maturity.
D) time of arrival of all cash flows plus the asset or liability's maturity.
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Page 8
Chapter 7: Managing Interest Rate Risk Using Off Balance
Sheet Instruments
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62 Flashcards
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Sample Questions
Q1) Which of the following statements is true?
A) Marking to market refers to the process by which the prices on outstanding futures contracts are adjusted each hour to reflect current futures market conditions.
B) Marking to market refers to the process by which the prices on outstanding futures contracts are adjusted each day to reflect current futures market conditions.
C) Marking to market refers to the process by which the prices on outstanding futures contracts are adjusted each week to reflect current futures market conditions.
D) A Marking to market refers to the process by which the prices on outstanding futures contracts are adjusted each month to reflect current futures market conditions.
Q2) Buying a call option (standing ready to buy bonds at the exercise price) is a strategy that a FI may take when bond prices rise and interest rates are expected to fall.
A)True
B)False
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9
Chapter 8: Credit Risk I: Individual Loan Risk
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Sample Questions
Q1) A normal bond values fall with interest rate increases but the following bond often has a negative duration and therefore it is potentially attractive to banks and non-bank FIs seeking to hedge their regular bond and fixed-income portfolios.
A) A Class
B) B Class
C) Z Class
D) R Class
Q2) Collateralised Debt Obligations (CDOs) were responsible for significant damage and disruption to global financial markets as:
A) investors accepted the recommendations of CDO arrangers and rating agencies.
B) many investors were unable to assess the fairness of prices.
C) the securities' cash flow was based on cash flows from other financial securities and not the cash flows from real assets.
D) the CDOs' cash flows were based on cash flows from real assets and not from other financial securities.
Q3) Credit card facilities is a revolving loan product.
A)True
B)False
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Chapter 9: Market Risk
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Sample Questions
Q1) The general market risk charges reflect the product of the modified durations and interest rate shocks expected for each maturity.
A)True
B)False
Q2) Which of the following is an adequate definition of the term general market risk charge?
A) A charge reflecting the risk of the decline in the liquidity of the trading portfolio.
B) A charge reflecting the modified duration and interest rate shocks for each maturity.
C) A charge reflecting the risk of the decline in the credit risk quality of the trading portfolio.
D) A charge reflecting the duration and interest rate gaps for each maturity.
Q3) A major advantage is that RiskMetrics directly provides a worst-case scenario number, while this is not the case for back simulation.
A)True
B)False
Q4) Why is market risk measurement important?
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Chapter 10: Credit Risk I: Individual Loan Risk
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Sample Questions
Q1) Which of the following statements is true?
A) A line of credit facility is a credit facility with a maximum size and a minimum period of time over which the borrower can withdraw funds.
B) A line of credit facility is a credit facility with a minimum size and a minimum period of time over which the borrower can withdraw funds.
C) A line of credit facility is a credit facility with a maximum size and a maximum period of time over which the borrower can withdraw funds.
D) A line of credit facility is a credit facility with a minimum size and a maximum period of time over which the borrower can withdraw funds.
Q2) The term 'spot loan' refers 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) Banks have been partially responsible for big corporate collapses such as Enron.
A)True
B)False
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Page 12
Chapter 11: Credit Risk II: Loan Portfolio and Concentration
Risk
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50 Verified Questions
50 Flashcards
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Sample Questions
Q1) Financial institutions do not use options to hedge credit risk exposures as credit risk is a natural risk that comes with the core activities of the bank, namely lending.
A)True
B)False
Q2) Which of the following statements is true?
A) The concentration limit on a portfolio can be calculated as the maximum loss as a percentage of capital divided by (one divided by the loss rate).
B) The concentration limit on a portfolio can be calculated as the maximum loss as a percentage of capital divided by (one multiplied by the loss rate).
C) The concentration limit on a portfolio can be calculated as the maximum loss as a percentage of capital multiplied by (one divided by the loss rate).
D) The concentration limit on a portfolio can be calculated as the maximum loss as a percentage of capital multiplied by (one multiplied by the loss rate).
Q3) Minimum risk portfolios generally generate the highest returns.
A)True
B)False
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Chapter 12: Sovereign Risk
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Sample Questions
Q1) Which of the following is an adequate definition of a Brady bond?
A) A bond issued by a less developed country that is swapped for an outstanding loan by that country.
B) A bond issued by a less developed country that serves as collateral for an outstanding loan by that country.
C) A bond issued by a less developed country that is issued in accordance with the terms of the Brady convention of 1973.
D) A bond bought by a less developed country in order to stabilise the country's investments.
Q2) Which of the following statements is true?
A) Debt-for-equity swap programs appear to enhance LCD debt prices.
B) Debt-for-equity swap programs appear to have no impact on LCD debt prices.
C) Debt-for-equity swap programs appear to depress LCD debt prices.
D) Debt-for-equity swaps are not available for traded LCD debt.
Q3) An LDC's export revenues may be highly variable due to quantity risk and price risk.
A)True
B)False
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Chapter 13: Foreign Exchange Risk
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64 Verified Questions
64 Flashcards
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Sample Questions
Q1) The case of the National Australia Bank shows that:
A) FX trading can result in significant losses for an FI.
B) FX trading losses can result in reputational loss for an FI.
C) the announcement of FX trading losses can lead to a fall in the share price of the FI at which the losses occurred.
D) All of the listed options are correct.
Q2) Which of the following statements is true?
A) An open position is a hedged position in a particular currency.
B) An open position is an unhedged position in a particular currency.
C) An open position is an unhedged position in an open market.
D) An open position is a hedged position in an open market.
Q3) A net short position exposes an FI to the risk that the foreign currency could rise in value against its domestic currency.
A)True
B)False
Q4) In a currency swap it is usual to include both principal and interest payments as part of the swap agreement.
A)True
B)False
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Chapter 14: Liquidity Risk
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Sample Questions
Q1) Net asset value is the:
A) product of the price at which a managed fund's shares are sold and the number of outstanding shares.
B) price at which a managed fund's shares are sold.
C) value of an investor's holding in managed fund's shares.
D) None of the listed options are correct.
Q2) Liquidity risk can only arise on the asset-side of an FI's balance sheet as this means that the FI does not hold enough liquid assets such as cash or liquid securities.
A)True
B)False
Q3) 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.
Q4) What are the main components of a liquidity plan? Discuss the vital role such a plan plays in reducing liquidity risk?
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Chapter 15: Liability and Liquidity Management
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Sample Questions
Q1) Which of the following statements is true?
A) FIs are required to hold some liquid assets to lessen the threat of insolvency.
B) FIs are required to hold some liquid assets for the purpose of monetary policy.
C) FIs are required to hold some liquid assets for the purpose of taxation implications.
D) FIs are required to hold some liquid assets to lessen the threat of insolvency, for the purpose of monetary policy and for the purpose of taxation implications.
Q2) Measuring stored liquidity is easy because many assets cannot be clearly classified as liquid or non-liquid.
A)True
B)False
Q3) What are the withdrawal risks and costs associated with the following types of liabilities?
a) cheque account and other demand deposits.
b) fixed-term deposits
c) interbank funds
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Chapter 16: Off-Balance-Sheet Activities
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Sample Questions
Q1) The delta of an option refers to the change in the value of an:
A) option for a large unit change in the price of the underlying security.
B) option for a small unit change in the price of the underlying security.
C) underlying security for a small unit change in the price of the option.
D) underlying security for a large unit change in the price of the option.
Q2) Which of the following statements is true?
A) Economically speaking, contingent assets and liabilities are contractual claims that might or might not impact on the economic value of a bank.
B) Economically speaking, contingent assets and liabilities are contractual claims that do not impact on the economic value of a bank.
C) Economically speaking, contingent assets and liabilities are contractual claims that directly impact on the economic value of a bank.
D) Economically speaking, contingent assets and liabilities are contractual claims that indirectly impact on the economic value of a bank.
Q3) Graphically explain the general set-up of a letter of credit transaction. In this context, explain why letters of credit are important.
Q4) Briefly explain how off-balance-sheet transactions can affect an FI's solvency.
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18
Chapter 17: Technology and Other Operational Risk
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Sample Questions
Q1) Which of the following statements is true?
A) Exchange settlement accounts allow each FI to have settlement for transactions that occur by the adjustment of credit balances held with the central bank.
B) The central bank acts purely as a settlement agent.
C) The central bank is not exposed to any credit risk.
D) All of the listed options are correct.
Q2) Specific problems that can create employee risk include:
A) War; external fraud.
B) Management information.
C) Money laundering; rogue trading and fraud risk
D) Taxation risk; confidentiality breach
Q3) Which of the following occurs if the costs of joint production of FI services are higher than they would be if they were produced independently?
A) economies of scale
B) diseconomies of scale
C) economies of scope
D) diseconomies of scope
Q4) Distinguish between diseconomies of scale and diseconomies of scope. How could they occur?
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Chapter 18: Capital Management and Adequacy
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Sample Questions
Q1) Basel II established minimum capital requirements, procedures to ensure that sound internal process are used to assess capital adequacy and set targets that were commensurate with the risk profile and environment in an endeavour to protect solvency of individual FIs. Basel III introduced liquidity and higher capital levels to protect the financial system in general.
A)True
B)False
Q2) The market risk capital charge is included in capital regulations as regulators recognise that changes in market value can impact on a FI's insolvency risk.
A) Market risk takes into account general market risk, specific market risk and operational risk.
B) FIs with APRA approval can use a combination approach with all risk categories and across all regions.
C) APRA can increase or decrease capital requirements from the internal model if it considers that it doesn't reflect fully the FI's market risk profile.
D) All of the listed options are correct.
Q3) Why is a regulatory capital charge against operational risk necessary?
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