Financial Services Management
Question Bank
Course Introduction
Financial Services Management provides an in-depth exploration of the financial services industry, focusing on the structures, operations, and regulatory frameworks of banks, insurance companies, investment firms, and other financial institutions. The course examines the range of financial products offered to both individuals and organizations, strategies for risk assessment, client relationship management, and the impact of technology and globalization on financial service delivery. Students will also analyze case studies to understand market trends, ethical issues, and strategic decision-making processes within the competitive, fast-evolving sector of financial services.
Recommended Textbook
Financial Institutions Management A Risk Management Approach 7th Edition by Anthony Saunders Available Study Resources on Quizplus
26 Chapters 2651 Verified Questions
2651 Flashcards
Source URL: https://quizplus.com/study-set/3428
Page 2
Chapter 1: Why Are Financial Institutions Special
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Sample Questions
Q1) 1-11 When an FI functions as a broker,they are selling a financial asset that they have created and will continue to hold on their balance sheet.
A)True
B)False
Answer: False
Q2) 1-93 When a DI makes a shift from an "originate-to-hold" banking model to an "originate-to-sell" model,the change is likely to result in
A)increased operating costs.
B)increased interest rate risk.
C)increased liquidity risk.
D)decreased monitoring costs.
E)decreased fee income.
Answer: D
Q3) 1-48 The standardization of many FI products is evidence of the inefficient institutionalization by financial markets and the mechanisms through which these products trade.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Financial Services: Depository Institutions
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Sample Questions
Q1) 2-40 In general,the banking industry performed at higher levels of profitability in the decade of the 1990s than the decade of the 1980s.
A)True
B)False
Answer: True
Q2) 2-23 The growth in off-balance-sheet activities during the decade of the 1990s was due,in large part,to the use of derivative contracts. A)True
B)False Answer: True
Q3) 2-47 The number of savings associations has been declining since 1990. A)True B)False
Answer: True
Q4) 2-113 This legislation replaced FSLIC with FDIC-SAIF. A)True
B)False Answer: False
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Chapter 3: Financial Services: Insurance
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Sample Questions
Q1) 3-64 The surrender value of an insurance policy is
A)the expected payment commitment on existing policy contracts.
B)a fund established and held separately from the company's other assets.
C)the cash value paid to the policyholder if the policy is terminated before it matures.
D)the same as the endowment payout.
E)the price at which the company may repurchase the policy.
Answer: C
Q2) 3-55 Which of the following involves fixed premium payments and a benefit payout at the time of death that will depend on investment returns over the life of the policy?
A)Term life.
B)Variable life.
C)Whole life.
D)Endowment life.
E)Universal life.
Answer: B
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Chapter 4: Financial Services: Securities Brokerage and Investment Banking
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101 Verified Questions
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Sample Questions
Q1) 4-60 Which of the following is NOT a back-office service function in the securities industry?
A)Correspondent banking services.
B)Escrow services.
C)Clearance of securities transactions.
D)Research services.
E)Services related to settlement of securities transactions.
Q2) 4-93 What is the profit (loss)to the investment banker?
A)Profit of $7,500,000.
B)Profit of $2,000,000.
C)Profit of $7,000,000.
D)Loss of $7,500,000.
E)Loss of $2,000,000.
Q3) 4-82 How much money does TWResearch receive?
A)$ 105,000,000.
B)$ 150,000,000.
C)$ 112,000,000.
D)$ 125,000,000.
E)$ 110,000,000.
Page 6
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Chapter 5: Financial Services: Mutual Funds and Hedge Funds
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Sample Questions
Q1) 5-68 As a result of illegal and abusive activities in recent years,new rules and regulations were imposed on mutual fund companies in 2004.These rules were intended to
A)close legal loopholes that some fund managers had abused.
B)improve fund governance.
C)give investors more information about conflicts of interest.
D)ensure the accuracy of information given to regulators.
E)All of the above.
Q2) 5-19 Since 2002,the amount of assets invested in load funds have exceeded those invested in no-load funds.
A)True
B)False
Q3) 5-37 The SEC requires mutual fund portfolio managers to report their personal trading in individual stocks,but not in the portfolios they manage.
A)True
B)False
Q4) 5-102 Allows the SEC to introduce circuit breakers to halt trading on exchanges.
A)True
B)False
7
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Chapter 6: Financial Services: Finance Companies
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Sample Questions
Q1) 6-33 What is the primary function of finance companies?
A)Protect individuals and corporations from adverse events.
B)Make loans to both individuals and corporations.
C)Extend loans to banks and other financial institutions.
D)Pool the financial resources of individuals and companies and invest in diversified portfolios of assets.
E)Assist in the trading of securities in the secondary markets.
Q2) 6-23 Finance companies prefer to lease equipment rather than to sell and finance it because they receive part of the lease payment in the form of a down payment from the purchaser.
A)True
B)False
Q3) 6-7 Over the last 30 years finance companies have replaced real estate loans and other assets with increasing amounts of consumer and business loans.
A)True
B)False
Q4) 6-1 Finance companies differ from banks in that they do not accept deposits.
A)True
B)False
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Chapter 7: Risks of Financial Institutions
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Sample Questions
Q1) 7-83 As commercial banks move from their traditional banking activities of deposit taking and lending and shift more of their activities to trading,they are more subject to
A)credit risk.
B)market risk.
C)political risk.
D)sovereign risk.
E)liquidity risk.
Q2) 7-41 An FI can hold assets denominated in a foreign country,but it cannot issue foreign liabilities.
A)True
B)False
Q3) 7-107 What is the maximum interest rate that it can refinance its $4 million liability and still break even on its net interest income in dollars?
A)6.5 percent.
B)7.0 percent.
C)7.5 percent.
D)8.0 percent.
E)8.5 percent.
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Chapter 8: Interest Rate Risk I
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Sample Questions
Q1) 8-84 What is the weighted average maturity of assets?
A)5.50 years.
B)6.40 years.
C)5.00 years.
D)4.60 years.
E)10.0 years.
Q2) 8-49 A bank that finances long-term fixed-rate mortgages with short-term deposits is exposed to
A)increases in net interest income and decreases in the market value of equity when interest rates fall.
B)decreases in net interest income and decreases in the market value of equity when interest rates fall.
C)decreases in net interest income and increases in the market value of equity when interest rates increase.
D)increases in net interest income and increases in the market value of equity when interest rates increase.
E)decreases in net interest income and decreases in the market value of equity when interest rates increase.
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10
Chapter 9: Interest Rate Risk Ii
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Sample Questions
Q1) 9-114 What is the leverage adjusted duration gap of the FI?
A)3.61 years.
B)3.74 years.
C)4.01 years.
D)4.26 years.
E)4.51 years.
Q2) 9-55 Which of the following statements about leverage adjusted duration gap is true?
A)It is equal to the duration of the assets minus the duration of the liabilities.
B)Larger the gap in absolute terms,the more exposed the FI is to interest rate shocks.
C)It reflects the degree of maturity mismatch in an FI's balance sheet.
D)It indicates the dollar size of the potential net worth.
E)Its value is equal to duration divided by (1+R).
Q3) 9-10 Duration normally is less than the maturity for a fixed coupon asset.
A)True
B)False
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11
Chapter 10: Market Risk
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Sample Questions
Q1) 10-10 If a trader in charge of an investment portfolio of an FI generates returns that are higher than other traders at the FI,she should be rewarded with higher compensation.
A)True
B)False
Q2) 10-59 A disadvantage of the historic or back simulation model for quantifying market risk includes
A)calculation of a standard deviation of returns is not required.
B)calculation of the correlation between asset returns is not required.
C)estimates of past returns used in the model may not be relevant to the current market returns.
D)it accounts for non-standard return distributions.
E)None of the above.
Q3) 10-36 The root cause of much of the losses of FIs during the financial crisis of 2008-2009 was
A)interest rate risk.
B)market risk.
C)sovereign risk.
D)firm-specific risk.
E)systematic risk.
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Chapter 11: Credit Risk: Individual Loan Risk
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Sample Questions
Q1) 11-84 Which of the following refers to the term "mortality rate"? .
A)The success rate of new investments.
B)A one-period rate of interest expected on a bond issued at some date in the future.
C)The probability that a borrower will default in any given year.
D)Historic default rate experience of a bond or loan.
E)The probability that a borrower will default over a specified multiyear period.
Q2) 11-25 Adjusting interest rates,fees,and other terms upward for increasing amounts of default risk is a way to attempt to realize the expected return on the loan.
A)True
B)False
Q3) 11-96 What is the implied probability of repayment on one-year B?rated debt?
A)95.00 percent.
B)97.17 percent.
C)94.00 percent.
D)97.00 percent.
E)97.09 percent.
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13
Chapter 12: Credit Risk: Loan Portfolio and Concentration
Risk
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Sample Questions
Q1) 12-9 Portfolio risk can be reduced through diversification only if the returns of the loans in the portfolio are negatively correlated.
A)True
B)False
Q2) 12-46 Credit Risk + is a model developed by
A)Standard & Poor's.
B)Moody's.
C)KMV Corporation
D)Credit Suisse Financial Products (CSFP).
E)JP Morgan.
Q3) 12-12 Most portfolio managers will accept some level of risk above the minimum risk portfolio if they expect to receive higher returns.
A)True
B)False
Q4) 12-6 In the use of modern portfolio theory (MPT),the sum of the credit risks of loans under estimates the risk of the whole portfolio.
A)True
B)False
Page 14
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Chapter 13: Off-Balance-Sheet Risk
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Sample Questions
Q1) 13-1 balance-sheet items can generate cash flows that immediately impact the bank's financial performance.
A)True
B)False
Q2) 13-10 The delta of an option is the sensitivity of an option's value to a unit change in the value of the underlying asset.
A)True
B)False
Q3) 13-63 This refers to the fee charged on the unused balance of a loan commitment.
A)Up-front fee.
B)Facility fee.
C)Compensating balance .
D)Commitment fee.
E)Closing costs.
Q4) 13-7 Even though an FI has off-balance-sheet activities,the true net worth is equal to on?balance sheet assets minus on?balance sheet liabilities.
A)True
B)False
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Chapter 14: Foreign Exchange Risk
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Sample Questions
Q1) 14-3 As the U.S.dollar appreciates against the Japanese yen,U.S.goods become less expensive to Japanese consumers.
A)True
B)False
Q2) 14-33 Long-term violations of the interest rate parity relationship may occur if imperfections in the international financial markets are allowed to exist.
A)True
B)False
Q3) 14-35 Which of the following is NOT a source of foreign exchange risk?
A)Trading foreign currencies.
B)Making domestic-currency loans to foreign corporations.
C)Buying foreign-issued securities.
D)Issuing foreign currency-denominated debt.
E)Making foreign currency loans.
Q4) 14-27 Off-balance-sheet hedging involves taking a position in FX forward or other derivative securities even though no FX assets or liabilities are on the balance sheet.
A)True
B)False
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Page 16
Chapter 15: Sovereign Risk
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Sample Questions
Q1) 15-11 Rescheduling loans is easier than renegotiating bonds because the same FIs typically form loan syndicates that create cohesiveness in negotiations.
A)True
B)False
Q2) 15-35 Trading activity and investor confidence in foreign debt increased in the early 2000s.
A)True
B)False
Q3) 15-61 Commodity price and quantity risk is measured by which of the following variables in the credit scoring model to estimate sovereign country risk exposure?
A)The debt service ratio.
B)The import ratio.
C)The variance of export revenue.
D)The investment ratio.
E)Domestic money supply growth.
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Chapter 16: Technology and Other Operational Risks
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Sample Questions
Q1) 16-65 Which of the following implies that small FIs are more cost efficient than large FIs,and that in a freely competitive environment for financial services,small FIs may outperform their larger counterparts?
A)Economies of scale.
B)Diseconomies of scale.
C)Economies of scope.
D)Diseconomies of scope.
E)Constant returns to scale.
Q2) 16-46 The operational risk faced by an FI includes sources other than technology.
A)True
B)False
Q3) 16-115 Bank B plans to acquire Bank A and in the process cut costs by $100,000.What is the combined bank's average costs?
A)12.00 percent.
B)12.67 percent.
C)13.00 percent.
D)13.33 percent.
E)15.00 percent.
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18
Chapter 17: Liquidity Risk
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Sample Questions
Q1) 17-64 What is the impact of a 50 basis point increase in interest rates on the net asset value of an open?end bond mutual fund holding a seven year,$100 million par value 7 percent annual coupon bond? The fund has 10 million shares.
A)An increase of $0.24 per share.
B)A decrease of $0.265 per share.
C)An increase of $0.05 per share.
D)A decrease of $0.05 per share.
E)An increase of $0.265 per share.
Q2) 17-93 What will be the size of the bank if a stored liquidity management strategy is adopted?
A)$9 million.
B)$11 million.
C)$12 million.
D)$14 million.
E)$15 million.
Q3) 17-47 Hedge funds are not susceptible to liquidity risk or a liquidity crisis.
A)True
B)False
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19
Chapter 18: Liability and Liquidity Management
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Q1) 18-39 NOW accounts allow the explicit payment of interest.
A)True
B)False
Q2) 18-116 Is the bank in compliance with the requirements?
A)No,it does not meet the minimum reserve requirements.
B)Yes,it meets the minimum reserve requirements.
C)Yes,it meets the minimum requirement only after using the 2 percent carryover allowance.
D)Yes,it meets the minimum requirement only after using the 4 percent carryover allowance.
E)No,it does not meet the minimum reserve requirements even after using the 4 percent carryover allowance.
Q3) 18-37 NOW accounts are potentially less prone to withdrawal risk than demand deposits.
A)True
B)False
Q4) 18-10 In the U.S.,excess reserves held at the central bank pay interest to the DI.
A)True
B)False
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Chapter 19: Deposit Insurance and Other Liability
Guarantees
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Q1) 19-97 Why are credit unions less affected by financial crises experienced by other thrifts such as savings associations?
A)They hold almost 30 percent of their assets in government securities.
B)They hold relatively high amounts of residential mortgages.
C)Less than 10 percent of their assets are in small consumer loans.
D)They are more diversified than other DIs.
E)Their customers have no other options for their banking needs.
Q2) 19-104 What is the cost to the uninsured depositors if the insured depositor transfer resolution method is used by the regulators to resolve the bank failure?
A)$0.
B)$20 million.
C)$30 million.
D)$40 million.
E)$60 million.
Q3) 19-25 The use of the option pricing model to determine the actuarially fair premium is difficult to apply in practice because the asset values and risks are difficult to determine.
A)True
B)False
Page 21
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Chapter 20: Capital Adequacy
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Q1) 20-131 How would regulators characterize this FI based on the leverage ratio zones of FDICIA?
A)Well capitalized.
B)Undercapitalized.
C)Severely undercapitalized.
D)Overcapitalized.
E)Insolvent.
Q2) 20-4 One function of bank capital is to protect uninsured depositors,bondholders,and creditors in the event of insolvency and liquidation.
A)True
B)False
Q3) 20-138 What is the amount of risk-adjusted assets?
A)$1,000 million.
B)$720 million.
C)$900 million.
D)$600 million.
E)$700 million.
Q4) 20-13 The book value of equity is seldom equal to the market value of equity. A)True
B)False
Page 22
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Chapter 21: Product and Geographic Expansion
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Q1) 21-6 Section 20 affiliates allow banks to transact previously ineligible securities activities.
A)True
B)False
Q2) 21-16 The Financial Services Modernization Act of 1999 has provided for more standardized relationships among financial service sectors and commerce.
A)True
B)False
Q3) 21-114 Which of the following is true of X efficiencies?
A)They result from diseconomies of scope.
B)They are difficult to pin down in a quantitative fashion
C)They result from diseconomies of scale.
D)They are a direct result of significant economies of scope.
E)They are a direct result of significant economies of scale.
Q4) 21-47 U.S.banking offices abroad normally are permitted by the Federal Reserve System to engage in activities that are allowed in the foreign country even when such activities are not permitted in the U.S.
A)True
B)False
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Chapter 22: Futures and Forwards
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Sample Questions
Q1) 22-18 Immunizing the balance sheet against interest rate risk means that gains (losses)from an off-balance-sheet hedge will exactly offset losses (gains)from the balance sheet position.
A)True
B)False
Q2) 22-36 Hedging foreign exchange risk in the futures market may involve uncertainty about all of the transactions necessary to achieve the hedge to fulfillment.
A)True
B)False
Q3) 22-40 In a credit forward agreement hedge,the loss on the balance sheet cash position is offset completely by the gain on the off-balance-sheet credit forward agreement if the characteristics of the benchmark bond and the bank's loan to the borrower are the same.
A)True
B)False
Q4) 22-21 An off-balance-sheet forward position is used to hedge the FI's on-balance-sheet risk exposure.
A)True
B)False
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Chapter 23: Options,caps,floors,and Collars
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Q1) 23-8 The buyer of a bond put option stands to make a profit if changes in market interest rates cause the bond price to fall below the exercise price.
A)True
B)False
Q2) 23-32 Exercise of a put option on futures by the buyer of the option will occur if interest rates have increased.
A)True
B)False
Q3) 23-106 If the exchange rate in one month is $1.55/£1,what action should the FI take in regards to the hedge?
A)Call the £100 million proceeds of the T-bill from the option writer for $160 million
B)Put the £100 million proceeds from the T-bill to the option writer for $160 million.
C)Put the £100 million proceeds from the T-bill to the option writer for $155 million.
D)Call the £100 million proceeds of the T-bill from the option writer for $155 million
E)Allow the option contracts to expire since they are out of the money.
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25
Chapter 24: Swaps
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Q1) 24-7 Both parties in an interest rate swap normally are fully hedged against interest rate risk on the notional amount of the swap.
A)True
B)False
Q2) 24-23 When compared to swap and option contracts,credit risk exposure is greatest with a futures contract.
A)True
B)False
Q3) 24-22 At the end of 2009,the world-wide notational value of swap agreements was less than $400 trillion.
A)True
B)False
Q4) 24-21 The notational value of swaps that are held by commercial banks as of 2009 was over $130 trillion.
A)True B)False
Q5) 24-15 Currency swaps can be designed to reduce foreign exchange risk. A)True B)False
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Chapter 25: Loan Sales
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Sample Questions
Q1) 25-16 Assignments of fixed-rate loans typically do not have difficulties in the calculation and transfer of accrued interest.
A)True
B)False
Q2) 25-67 The traditional interbank loan sale market has been shrinking for which of the following reasons?
A)The barriers to nationwide banking have been largely removed through legislation.
B)Concerns about counterparty risk and moral hazard have increased.
C)The traditional correspondent banking relationships are slowly breaking down.
D)All of the above.
E)Only two of the above.
Q3) 25-66 Which of the following rely on nondistressed HLT loan purchases as a means of diversifying without the high cost of developing costly nationwide banking networks?
A)Bank loan mutual funds.
B)Credit unions.
C)Foreign banks.
D)Investment banks.
E)Vulture funds.
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Chapter 26: Securitization
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Q1) 26-84 These bonds have some prepayment protection and expected durations of five to seven years depending on the level of interest rates and are primarily purchased by pension funds and life insurance companies.
A)Class A bonds.
B)Class R bonds.
C)Class C bonds.
D)Class Z bonds.
E)Class B bonds.
Q2) 26-39 Early prepayments on mortgages backing a CMO are normally allocated to the earliest existing tranche maturity.
A)True
B)False
Q3) 26-21 All tranches in a collateralized mortgage obligation (CMO)have the same prepayment risk exposure.
A)True
B)False
Q4) 26-8 GNMA helps create pass-throughs by providing timing insurance.
A)True
B)False
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