Commercial Banking
Mock Exam
Course Introduction
This course provides a comprehensive overview of commercial banking, focusing on the roles, functions, and operations of banks in the modern economy. Students will explore the structure and regulation of banking institutions, asset-liability management, loan origination and credit analysis, and the development of new banking products. The course also covers risk management practices, the impact of technology on banking, and competitive strategies in a rapidly evolving financial landscape. Through case studies and real-world examples, students will gain insights into how commercial banks contribute to economic growth and stability while managing regulatory, credit, and market risks.
Recommended Textbook
Financial Institutions Management 3rd Edition by Lange
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Page 2
Chapter 1: Why Are Financial Institutions Special
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Sample Questions
Q1) Which of the following refers to the possibility that a firm's owners or managers will take actions contrary to the promises contained in the covenants of the securities the firm issues to raise funds?
A)Liquidity risk.
B)Price risk.
C)Credit risk.
D)Agency costs.
Answer: D
Q2) 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
Q3) The risk that the sale price of an asset will be less than the purchase price of an asset is called liquidity risk.
A)True
B)False
Answer: False
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Chapter 2: The Financial Services Industry: Depository
Institutions
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Sample Questions
Q1) Which of the following statements is true for the Australian banking industry?
A)The Australian banking industry is highly concentrated.
B)There are four major banks in Australia.
C)The four major banks and the five regional banks offer a full range of commercial and investment banking services.
D)All of the listed options are correct.
Answer: D
Q2) Which of the following statements is true?
A)Australian banks' decreased reliance on off-shore funding post GFC led to funding pressures and increased the costs of obtaining funds.
B)Australian banks' increased reliance on off-shore funding post GFC led to funding pressures and increased the costs of funding.
C)Australian banks reduced their reliance on on-shore funding in an effort to reduce the costs of funding and ease pressure on mortgage interest rates.
D)Australian banks increased their reliance on on-shore funding post GFC which led to funding pressures and increased the costs of obtaining funds.
Answer: B
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Chapter 3: The Financial Services Industry: Other Financial Institutions
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Sample Questions
Q1) Which of the following are reasons for underwriting risk to result?
A)Generated premiums are insufficient to cover claims incurred insuring a particular peril.
B)Generated premiums are insufficient to cover the administrative expenses of providing that insurance after taking into account the investment income generated between the time premiums are received and the time claims are paid.
C)Generated premiums are insufficient to cover ordinary business expenses.
D)Generated premiums are insufficient to cover claims incurred insuring a particular peril and generated premiums are insufficient to cover the administrative expenses of providing that insurance after taking into account the investment income generated between the time premiums are received and the time claims are paid.
Answer: D
Q2) Private placement refers to a securities issue placed:
A)with one or a few large institutional investors.
B)in private, that is, without announcing it to the public.
C)by a private person.
D)with one of the stock exchanges.
Answer: A
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Chapter 4: Risk of Financial Institutions
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Sample Questions
Q1) Matching the foreign currency book does not protect the FI from:
A)sovereign country risk.
B)interest rate risk.
C)liquidity risk.
D)foreign exchange risk.
Q2) The major source of risk exposure resulting from issuance of standby letters of credit is:
A)technology risk.
B)interest rate risk.
C)
C)credit risk.
D)off-balance-sheet risk.
Q3) Technological failure, employee fraud and employee errors are all sources of operational risk.
A)True
B)False
Q4) One of the most striking trends for many modern FIs has been the growth in their off-balance-sheet activities and thus their off-balance-sheet risk.Explain what is meant by off-balance-sheet activities and the risk associated with it using an example.
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Chapter 5: Interest Rate Risk Measurement: The Repricing Model
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Sample Questions
Q1) Which of the following statements is true?
A)APRA requires smaller Australian FIs to use the repricing gap method to estimate interest rate exposures in their banking book for capital adequacy.
B)Australian FIs are only required to use the repricing gap method if they are listed on an US stock exchange.
C)APRA does not require Australian FIs to use the repricing gap method to estimate interest rate exposures in their banking book for capital adequacy.
D)Australian FIs are only required to use the repricing gap if they are internationally active.
Q2) The liquidity premium theory of the term structure of interest rates:
A)assumes that investors will hold long-term maturity assets if there is a sufficient premium to compensate for the uncertainty of the long term.
B)assumes that long-term interest rates are an arithmetic average of short-term rates plus a liquidity premium.
C)recognises that forward rates are perfect predictors of future interest rates.
D)assumes that risk premiums increase uniformly with maturity.
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Chapter 6: Interest Rate Risk Measurement: The Duration
Model
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Sample Questions
Q1) One method of changing the positive leverage adjusted duration gap for the purpose of immunising the net worth of a typical depository institution is to increase the duration of the assets and to decrease the duration of the liabilities.
A)True
B)False
Q2) Consider a security with a face value of $100 000 to be repaid at maturity.The maturity of the security is 3 years.The coupon rate is 9 per cent p.a.and coupon payments are made semi-annually.The current discount rate is 12 per cent p.a.What is the security's duration (round your answer to two decimals)?
A)2.68 years
B)2.68 half-years
C)3 years
D)0.38 years
Q3) As interest rates increase (decrease) the value of an asset or a liability decreases (increases).
A)True
B)False
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Chapter 7: Managing Interest Rate Risk Using Off Balance
Sheet Instruments
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Sample Questions
Q1) Which of the following statements is true?
A)In Australian interest rate futures there is no physical settlement of either 10 year or 3 year bond futures.
B)In Australian interest rate futures there is no physical settlement of either 10 year or 5 year bond futures.
C)In Australian interest rate futures there is no physical settlement of either 5 year or 3 year bond futures.
D)In Australian interest rate futures there is always physical settlement.
Q2) The writer of a bond call option:
A)receives a premium and must stand ready to sell the bond at the exercise price.
B)receives a premium and must stand ready to buy bonds at the exercise price.
C)pays a premium and has the right to sell the underlying bond at the agreed exercise price.
D)pays a premium and has the right to buy the underlying bond at the agreed exercise price.
Q3) The Sydney Futures Exchange only offers cash-settled contracts.
A)True
B)False
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Chapter 8: Credit Risk I: Individual Loan Risk
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Sample Questions
Q1) R class is:
A)an accrual class of a CMO that makes a payment to bondholders only when preceding CMO classes have been retired.
B)the residual class of a CMO, giving the owner the right to any remaining collateral in the trust after all other bond classes have been retired plus any reinvestment income earned by the trust.
C)a bond that has some prepayment protection and expected durations of five to seven years depending on the level of interest rates.
D)a bond that has the shortest average life with a minimum of prepayment protection.They are, therefore, of no interest to investors seeking short-duration mortgage-backed assets.
Q2) Assumable mortgage is a mortgage contract that is:
A)transferred from the seller to the buyer of a house.
B)assumed to be paid off.
C)transferred from the buyer to the seller of a house.
D)non-transferrable.
Q3) Banks have been partially responsible for big corporate collapses such as Enron.
A)True
B)False
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Page 10
Chapter 9: Market Risk
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Sample Questions
Q1) Which of the following is an advantage of the back simulation approach?
A)simplicity
B)assumption of normally distributed asset returns
C)calculation of correlations of asset returns
D)All of the listed options are correct.
Q2) Consider the following hypothetical foreign exchange portfolio: What are the daily earnings at risk for the portfolio?
A)$200 / 0.45 = $444.44
B)$200 * 0.45 = $90.00
C)($200 / 0.45) / 100 = $4.44
D)($200 * 0.45) / 100 = $0.90
Q3) Which of the following is a measure of systematic risk?
A)alpha
B)beta
C)gamma
D)sigma
Q4) Daily earnings at risk (DEAR) is the market risk exposure over the next 72 hours.
A)True
B)False
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Chapter 10: Credit Risk I: Individual Loan Risk
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Sample Questions
Q1) The term 'asset-backed loan' refers to a loan that is backed by a:
A)first claim on certain assets of the borrower if default occurs.
B)second claim on certain assets of the borrower at maturity.
C)first claim on certain assets of the borrower at maturity.
D)None of the listed options are correct.
Q2) Non-performing loans are loans:
A)given out to corporations with low credit ratings.
B)that require re-evaluating of credit terms after every six months.
C)characterised by some type of default-from non-payment to delays in payment of interest and/or principal.
D)None of the listed options are correct.
Q3) Which of the following statements is true?
A)Moody's KMV Credit Monitor Model compares loans with the pay-off functions of swaps.
B)Moody's KMV Credit Monitor Model uses rating migrations data to calculate hypothetical loan values.
C)Moody's KMV Credit Monitor Model discriminates between two types of borrowers, i.e.borrowers that are likely to default and borrowers that are unlikely to default.
D)None of the listed options are correct.
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Page 12
Chapter 11: Credit Risk II: Loan Portfolio and Concentration
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Sample Questions
Q1) KMV Portfolio Manager is a model that:
A)was developed by the KMV Corporation and purchased by Moody's in 2002.
B)measures the expected return on a loan to a borrower, the risk of a loan to a borrower and the correlation of default risks between loans made to a borrower and other borrowers.
C)seeks to estimate an efficient frontier for loans.
D)All of the listed options are correct.
Q2) An FI that invests 40 per cent of funds in a loan with an expected return of 10 per cent and 60 per cent of funds in a loan with an expected return of 12 per cent can expect to earn 11 per cent on its portfolio.
A)True
B)False
Q3) Explain the basic concept of loan loss ratio based models.
Q4) The relationship limit on diversification has also been called the 'paradox of credit'.
A)True
B)False
Q5) The most important swap contract in terms of quantity is the credit swap.
A)True
B)False
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Chapter 12: Sovereign Risk
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Sample Questions
Q1) The term LIBOR stands for the London Interbank:
A)offered rate and is the rate charged on prime interbank loans on the Eurodollar market.
B)obligor rate and is the rate charged on prime interbank loans on the Eurodollar market.
C)offered rate and is the rate charged on interbank loans worldwide.
D)obligor rate and is the rate charged on interbank loans worldwide.
Q2) Which of the following statements is true in relation to the Euromoney Index?
A)The Euromoney Index rates country risk by combined economic and political risk on a maximum of 100 points scale.
B)The Euromoney Index is based on the spread in the Euromarket of the required interest rate on a country's debt over the LIBOR, adjusted for the volume and maturity of the issue.
C)The Euromoney Index weighs subjective scores allocated by rating officers by the exposure of each bank to the country in question.
D)None of the listed options are correct.
Q3) Debt repudiations were more common before WWII compared to now.
A)True
B)False
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Page 14
Chapter 13: Foreign Exchange Risk
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Sample Questions
Q1) Assume an FI sells $100 million for euros on the spot currency markets at an exchange rate of $1.20 to 1.00 and invests the euro assets at an interest rate of 11 per cent for one year.What is the weighted annual return on the FI's portfolio assuming that the $100 million are 20 per cent of the FI's total assets and that the remaining assets are invested in Australian dollar assets at an average interest rate of 8 per cent p.a.(round to two decimals)?
A)9.50 per cent p.a.
B)8.60 per cent p.a.
C)20.00 per cent p.a.
D)10.40 per cent p.a.
Q2) When purchasing and selling foreign currencies to allow customers to take positions in foreign real and financial investments, the FI:
A)acts defensively as a hedger.
B)acts aggressively as a speculator.
C)assumes the FX risk itself.
D)acts as an agent.
Q3) Explain how forward contracts can be used to hedge an FI's FX exposures.
Q4) Explain the concept of the interest rate parity theorem (IRPT) and its implications for FIs?
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Chapter 14: Liquidity Risk
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Sample Questions
Q1) A disadvantage of using asset management to manage an FI's liquidity risk is:
A)the resulting shrinkage of the FI's balance sheet.
B)the high cost of purchased liabilities.
C)the accessibility of international money markets.
D)loss of flexibility as a result of dependence upon purchased liabilities.
Q2) Which of the following statements is true?
A)In theory, an FI that has 15 per cent of its liabilities in demand deposits and other transaction accounts must stand ready to pay out that amount by liquidating an equivalent amount of asset on any banking day.
B)In practice, an FI that has 15 per cent of its liabilities in demand deposits and other transaction accounts must stand ready to pay out that amount by liquidating an equivalent amount of asset on any banking day.
C)In theory, an FI that has 15 per cent of its liabilities in demand deposits and other transaction accounts must stand ready to pay out half of that amount by liquidating an equivalent amount of asset on any banking day.
D)In practice, an FI that has 15 per cent of its liabilities in demand deposits and other transaction accounts must stand ready to pay out half of that amount by liquidating an equivalent amount of asset on any banking day.
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Page 16
Chapter 15: Liability and Liquidity Management
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Q1) Assume the average management cost per account per year is $200 and the average fees earned per account per year is $170.The average annual size of account is $1800.What is the average implicit interest rate (round to two decimals)?
A)-1.67 per cent
B)1.67 per cent
C)4.86 per cent
D)15 per cent
Q2) Measuring stored liquidity is easy because many assets cannot be clearly classified as liquid or non-liquid.
A)True
B)False
Q3) Graphically show the relationship between funding cost and funding or withdrawal risk.Explain your graph.
Q4) Authorised depository institutions' liquidity management strategy includes the following elements except:
A)an informal contingency plan to deal with a liquidity crisis.
B)defined managerial responsibilities and controls.
C)a liquidity management policy statement approved by the FI's board.
D)a system for measuring, assessing and reporting liquidity.
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Chapter 16: Off-Balance-Sheet Activities
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Q1) The delta of an option is always greater than one.
A)True
B)False
Q2) Which of the following statements is true?
A)The measure used to measure the change in delta as the underlying security price varies is called vega.
B)The measure used to measure the change in delta as the underlying security price varies is called alpha.
C)The measure used to measure the change in delta as the underlying security price varies is called beta.
D)None of the listed options are correct.
Q3) The change in the value of an option for a small unit change in the price of the underlying security is called the:
A)alpha of an option.
B)gamma of an option.
C)beta of an option.
D)delta of an option.
Q4) Briefly explain how off-balance-sheet transactions can affect an FI's solvency.
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Chapter 17: Technology and Other Operational Risk
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Sample Questions
Q1) The success in technologically related innovation often is dependent on changes in regulations and regulatory procedures.
A)True
B)False
Q2) Outline the main sources of operational risk and why operational risk gained prominence during the GFC.
Q3) According to economic theory involving economies of scale, larger and more cost-efficient FIs should prevail over smaller, less cost-efficient FIs.
A)True
B)False
Q4) How can operating income of an FI be increased by improved technological efficiency?
A)By improving the efficiency of management of information flows.
B)By obtaining access to low cost sources of funds.
C)By linking services to the quality of the FI's technology.
D)By innovating new interest earning products.
Q5) Inputs such as capital and labour cannot be jointly used by FIs.
A)True
B)False
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Chapter 18: Capital Management and Adequacy
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Q1) Choose the correct capital adequacy ratio(s):
A)Total capital (Tier 1 capital plus Tier 2 capital) must be at least 6.5 per cent of risk-weighted assets at all times.
B)Total Tier 1 capital must be at least 9 per cent of risk-weighted assets at all times.
C)Common equity Tier 1 must be at least 7.5 per cent of risk-weighted assets at all times.
D)None of the listed options are correct.
Q2) Which of the following statements is true?
A)The Basel Accord imposes minimum earnings ratios on banks in major industrialised countries.
B)The Basel Accord imposes maximum asset values on banks in major industrialised countries.
C)The Basel Accord imposes minimum liability values on banks in major industrialised countries.
D)The Basel Accord imposes risk-based capital ratios on banks in major industrialised countries.
Q3) What are the major differences between the Basel I and the Basel II approaches to capital regulation?
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Page 20