International Banking Test Bank
Course Introduction
International Banking explores the structure, operations, and regulation of banks operating on a global scale. The course covers key topics such as the international financial system, the role of multinational banks, cross-border lending, risk management, and the impact of exchange rates and currency markets. Students will analyze the interaction between international banking institutions and regulatory frameworks, including Basel Accords and anti-money laundering laws. Emphasis is placed on the challenges and opportunities faced by banks in a globalized economy, the effects of financial crises, and the development of innovative financial products and services.
Recommended Textbook
Financial Institutions Management A Risk Management Approach 8th Edition by Saunders
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Page 2
Chapter 1: Why Are Financial Institutions Special
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Sample Questions
Q1) The passage of legislation to prevent discrimination in lending is an example of regulation to protect investors.
A)True
B)False
Answer: False
Q2) 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
Q3) Which function of an FI reduces transaction and information costs between a corporation and individual which may encourage a higher rate of savings?
A)Brokerage services.
B)Asset transformation services.
C)Information production services.
D)Money supply management.
E)Administration of the payments mechanism.
Answer: A
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Chapter 2: Financial Services: Depository Institutions
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Q1) A consumer lending function is performed by each of the following FIs EXCEPT
A)mutual funds.
B)finance companies.
C)pension funds.
D)depository institutions.
E)insurance companies.
Answer: A
Q2) A primary advantage for a depository institution of belonging to the Federal Reserve System is
A)direct access to correspondent banking services.
B)the lower deposit reserves required under the Federal Reserve System.
C)direct access to the discount window of the Fed.
D)commission less trading of U.S.government securities.
E)decreased costs of regulatory compliance.
Answer: C
Q3) In recent years, the number of commercial banks in the U.S. has been increasing.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Financial Services: Finance Companies
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Sample Questions
Q1) Which of the following observations concerning mortgages is NOT valid?
A)They may refer to loans secured by lien on residential houses.
B)They are a minor component in finance company portfolios.
C)Mortgage-backed securities are created by securitization.
D)Home equity loans are examples of second mortgages.
E)The interest on a mortgage loan secured by a primary residence is not tax deductible to the homeowner.
Answer: E
Q2) Finance companies differ from banks in that they do not accept deposits.
A)True
B)False
Answer: True
Q3) Finance companies have had no significant downturns in economic performance over the last two decades.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Financial Services: Securities Brokerage and Investment Banking
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Sample Questions
Q1) A corporate venture capital firm
A)has publicly-traded common stock.
B)provides equity funds to companies that already have publicly traded common stock.
C)is a subsidiary of a nonfinancial corporation.
D)provides debt funding to only to established corporations.
E)is subject to more stringent disclosure requirements than other venture capital firms.
Q2) How much money does NetChoice, Inc. receive?
A)$150,000,000.
B)$157,500,000.
C)$112,000,000.
D)$125,000,000.
E)$105,000,000.
Q3) Venture capital firms often make loans to finance new and often high-risk companies that may have no business history.
A)True
B)False
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6
Chapter 5: Financial Services: Mutual Funds and Hedge Funds
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Sample Questions
Q1) In total, about the percentage of all retirement plan investments are in institutional funds.
A)20 percent
B)40 percent
C)6.0 percent
D)80 percent
E)Zero percent
Q2) An investor purchases fund shares with a 3 percent front-end load and expects to hold the shares for 10 years. The fund has a total fund expense ratio (including 12b-1 fees) of 1 percent per year. The annual total shareholder cost for this fund is _______ per year.
A)3 percent
B)30 percent
C)0.3 percent
D)1.3 percent
E)1 percent
Q3) Class B shares of a mutual fund are typically charged a back-end load when the shares are redeemed.
A)True
B)False
Page 7
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Chapter 6: Financial Services: Insurance
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Sample Questions
Q1) The policy that will pay a specific dollar benefit to beneficiaries and remains in effect as long as premiums are paid is called whole life.
A)True
B)False
Q2) The policyholder can vary the premium payments on an endowment life policy.
A)True
B)False
Q3) The largest asset category on the balance sheet of U.S. life insurance companies as of 2012 was
A)government securities.
B)corporate bonds.
C)corporate stock.
D)cash.
E)mortgages.
Q4) The growth of HMOs has increased the amount of health insurance premiums collected by life insurance companies.
A)True
B)False
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Page 8
Chapter 7: Risks of Financial Institutions
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Sample Questions
Q1) The BIS definition: "the risk of loss resulting from inadequate or failed internal processes, people, and systems or from external events," encompasses which of the following risks?
A)Credit risk and liquidity risk
B)Operational risk and technology risk
C)Credit risk and market risk
D)Technology risk and liquidity risk
E)Sovereign risk and credit risk
Q2) Unanticipated diseconomies of scale or scope are a result of
A)interest rate risk.
B)technology risk.
C)credit risk.
D)foreign exchange risk.
E)off-balance-sheet risk.
Q3) Exactly matching the maturities of assets and liabilities will provide a perfect hedge against interest rate risk for an FI.
A)True
B)False
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Chapter 8: Interest Rate Risk I
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Sample Questions
Q1) Because of its complexity, small depository institutions rarely use the repricing, or funding gap, model.
A)True
B)False
Q2) Because the repricing model ignores the market value effect of changing interest rates, the repricing gap is an incomplete measure of the true interest rate risk exposure of an FI.
A)True
B)False
Q3) The market value of a fixed-rate liability will increase as interest rates rise, although the market value of a fixed-rate asset will decrease as interest rates rise.
A)True
B)False
Q4) An FI's net interest income reflects
A)its asset-liability structure.
B)rates of interest when the assets and liabilities were put on the books.
C)the riskiness of its loans and investments.
D)the cost of its deposit and non-deposit sources of funds.
E)All of the above.
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Chapter 9: Interest Rate Risk II
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Sample Questions
Q1) What is the FI's leverage-adjusted duration gap?
A)0.91 years.
B)0.83 years.
C)0.73 years.
D)0.50 years.
E)0 years.
Q2) What is the effect of a 100 basis point increase in interest rates on the market value of equity of the FI? Use the duration approximation relationship. Assume r = 4 percent.
A)-27.56 million.
B)-28.01 million.
C)-29.85 million.
D)-31.06 million.
E)-33.76 million.
Q3) What is the duration of the municipal notes (the value of x)?
A)1.94 years.
B)2.00 years.
C)1.00 years.
D)1.81 years.
E)0.97 years.
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Chapter 10: Credit Risk: Individual Loan Risk
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Sample Questions
Q1) Which of the following loan applicant characteristics is not relevant in the credit approval decision?
A)Leverage position of the borrower.
B)Borrower income.
C)Value of collateral.
D)Borrower reputation.
E)None of the above.
Q2) Because a compensating balance is the proportion of a loan that must be kept on deposit at the lending institution, the actual return to the lender on the usable portion of these loans is higher.
A)True
B)False
Q3) What is the capital (loan) risk of the loan if the current average level of interest rates for this category of bonds is 12 percent?
A)-$550,000.
B)-$1,564,280.
C)-$1,964,280.
D)-$2,000,000.
E)-$2,200,000.
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Page 12
Chapter 11: Credit Risk: Loan Portfolio and Concentration
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Sample Questions
Q1) What is the FI's expected return on its loan portfolio?
A)15.00 percent.
B)18.00 percent.
C)12.00 percent.
D)14.67 percent.
E)13.33 percent.
Q2) What is the concentration limit (as a percent of capital) for unsecured loans made by Kansas Bank?
A)5 percent.
B)10 percent.
C)15 percent.
D)20 percent.
E)25 percent.
Q3) Portfolio risk can be reduced through diversification only if the returns of the loans in the portfolio are negatively correlated.
A)True
B)False
Q4) Included in the Moody's Analytics model are recovery rates on defaulted loans.
A)True
B)False
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Chapter 12: Liquidity Risk
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Sample Questions
Q1) The liquidity index should be a number that is either greater than one or less than zero.
A)True B)False
Q2) In the event of a bank run, depositor claims on the bank are satisfied on a pro rata basis.
A)True B)False
Q3) A bank must be ready to pay out all demand deposit liabilities on any given day.
A)True
B)False
Q4) Which of the following is NOT included as high-quality liquid assets when computing a liquidity coverage ratio?
A)Sovereign debt.
B)Bank capital.
C)Government guaranteed mortgage-backed securities.
D)Central bank reserves.
E)Cash.
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Page 14
Chapter 13: Foreign Exchange Risk
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Sample Questions
Q1) The reasons nondepository FIs have less FX risk than major money center banks include
A)Smaller asset sizes.
B)Prudent person concerns.
C)Regulations.
D)All of the above.
E)Answers A and C only.
Q2) The use of an exchange rate forward contract assures the FI of the opportunity to buy (or sell) the foreign currency at a future time at a known price.
A)True
B)False
Q3) FX trading income is derived only from profit (or loss) on the FI's speculative currency positions.
A)True
B)False
Q4) Violation of the interest rate parity theorem would allow arbitrage profits.
A)True
B)False
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Page 15
Chapter 14: Sovereign Risk
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Sample Questions
Q1) A lending decision to a firm in a foreign country should involve both a credit risk analysis and a sovereign risk analysis.
A)True
B)False
Q2) Under the doctrine of sovereign immunity, creditors cannot force repayment of the debt.
A)True B)False
Q3) FIs that lend to foreign entities often need to make provisions to their loan loss reserves.
A)True
B)False
Q4) In the statistical modeling of the country risk analysis, the investment ratio is considered to have a negative impact on the probability of rescheduling because the larger expenditures on investment infrastructure leaves less funds for debt payment.
A)True B)False
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Page 16
Chapter 15: Market Risk
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Sample Questions
Q1) As compared to the BIS standardized framework model for measuring market risk, the internal models allowed by the large banks are subject to audit by the regulators.
A)True
B)False
Q2) In the BIS standardized framework model, the general market risk weights reflect the product of the modified durations and interest rate shocks.
A)True
B)False
Q3) One advantage of RiskMetrics over back simulation is that RiskMetrics provides a worst case scenario value.
A)True
B)False
Q4) In the BIS framework, vertical offsets are charges that reflect the modified duration and interest rate shocks for each maturity.
A)True
B)False
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Page 17
Chapter 16: Off-Balance-Sheet Risk
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Sample Questions
Q1) What is a swap?
A)An agreement between two parties to exchange assets or a series of cash flows for a specific period of time at a specified interval.
B)An agreement between a buyer and a seller at time 0 to exchange a nonstandardized asset for cash at some future date.
C)A contract that gives the holder the right, but not the obligation to buy or sell the underlying asset at a specified price within a specified period of time.
D)Trading in securities prior to their actual issue.
E)Contractual commitment to make a loan up to a stated amount at a given interest rate in the future.
Q2) Which of the following ratios do FIs and regulators often use as a simple measure of solvency?
A)Current ratio.
B)Capital to assets.
C)Earnings before interest and taxes to total assets.
D)Quick ratio.
E)Asset turnover ratio.
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18
Chapter 17: Technology and Other Operational Risks
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Sample Questions
Q1) Increases in the rate of innovation of new financial products, whether successful or not, is often credited to advances in technology.
A)True
B)False
Q2) Suppose that the doubling of a bank's deposit funding allows the bank to triple its loan output. What can you conclude about the bank's production technology?
A)It exhibits economies of scale using the production approach.
B)It exhibits diseconomies of scale using the production approach.
C)It exhibits diseconomies of scale using the intermediation approach.
D)It exhibits economies of scale using the intermediation approach.
E)It exhibits neither economies nor diseconomies of scale.
Q3) The U.S. tax burden faced by domestic FIs has been minimized, in part, by the ability to use international wire networks for the transfer of funds.
A)True
B)False
Q4) Funds transferred on CHIPS are settled at the end of the day.
A)True
B)False
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Page 19
Chapter 18: Liability and Liquidity Management
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Q1) Federal funds are excess reserves held by the Federal Reserve Banks that are loaned to banks that have liquidity needs.
A)True
B)False
Q2) What is the average daily reserve required to be held by the bank for their demand deposits during the maintenance period? Suppose that the rules require no reserves for the first $11.5 million, 3 percent for amounts between $11.5 million and $71.0 million, and 10 percent thereafter.
A)$24.285 million.
B)$28.862 million.
C)$29.555 million.
D)$31.561 million.
E)$32.069 million.
Q3) One reason FIs such as depository institutions and life insurance companies are exposed to liquidity risk is the relatively illiquid nature of their liabilities.
A)True
B)False
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Chapter 19: Deposit Insurance and Other Liability
Guarantees
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Q1) After nearly failing, the FDIC's Bank Insurance Fund (BIF) achieved record levels of reserves during the 1990s.
A)True
B)False
Q2) The policy of forbearance practiced by the FSLIC in the late 1980s allowed many commercial banks to remain open even in the face of continuing losses and insolvency.
A)True
B)False
Q3) Because deposit insurance premiums were not priced in an actuarially fair manner during the period from 1933-1980s, instability was created in the credit and monetary system.
A)True
B)False
Q4) The average cost to the FDIC of each bank failure during the decade of the 1980s was larger than the total cost of all bank failures during the period 1933-79.
A)True
B)False
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Chapter 20: Capital Adequacy
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Q1) Counter party credit risk in OBS contracts
A)is the risk that the counterparty will likely default when he is in the money on a contract position.
B)refers to the risk that a counterparty will default when suffering large actual or potential losses on its position.
C)requires the counterparty to return to the market and replace contracts at less favorable terms.
D)All of the above.
E)None of the above.
Q2) Counterparty credit risk is the risk that the other party of a contract will default on contract obligations.
A)True
B)False
Q3) Under Basel II (2006), operational risk can be measured by four different approaches.
A)True
B)False
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Chapter 21: Product and Geographic Expansion
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Q1) Which of the following items is an advantage of international expansion for an FI?
A)An FI faces the political risk that a change in government may lead to the nationalization of fixed assets.
B)A global FI must master the rules and regulations of each market in which it operates.
C)The fixed costs of establishing overseas organizations may be very high in certain markets.
D)International expansions allow an FI to maintain contact with and provide service to the needs of domestic multinational corporations.
E)The absolute level of risk exposure in certain markets can be very high.
Q2) The conflict of interest that occurs when a bank suggests the issuance of capital market debt for the purpose of reducing bank loans under conditions of deteriorating or questionable firm financial health is commonly referred to as bankruptcy risk transference.
A)True
B)False
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Chapter 22: Futures and Forwards
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Q1) What does R<sup>2</sup> = 0 indicate?
A)Changes in the spot rate and changes in the futures price are perfectly correlated.
B)All observations between changes in spot rate and changes in futures price lie on a straight line.
C)The spot and future exchange rates are expected to move imperfectly together.
D)The FI must sell a greater number of futures to hedge the cash position.
E)There is no statistical association between changes in spot rates and changes in futures price.
Q2) An investor sold a $100,000 Treasury bond futures contract at 99-02/32<sup>nds</sup> yesterday. Today the Treasury bond futures settlement price is 99-31/32<sup>nds</sup>. What is the one-day profit or loss on the Treasury bond futures position?
A)A profit of $906.25.
B)A loss of $906.25.
C)A profit of $733.
D)A loss of $733.
E)A loss of $290.
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Page 24
Chapter 23: Options, Caps, Floors, and Collars
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Q1) Managing interest rate risk for less creditworthy FI's by running a cap/floor book may require the backing of external guarantees such as standby letters of credit because of the nature of the options.
A)True
B)False
Q2) Rising interest rates will cause the market value of
A)call options on bonds to increase.
B)put options on bonds to decrease.
C)call options on bonds to decrease.
D)bond futures to increase.
E)Answers A and B only.
Q3) The payoff values on bond options are positively linked to the changes in interest rates.
A)True
B)False
Q4) An FI buys a collar by buying a floor and selling a cap.
A)True
B)False
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Chapter 24: Swaps
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Q1) The credit risk on an interest rate swap is generally much less than on an individual loan.
A)True
B)False
Q2) In a pure credit swap the FI lender makes a payment each period in exchange for the payment of interest in any period that the borrower defaults on the loan.
A)True B)False
Q3) At the end of 2012, the world-wide notational value of swap agreements was less than $400 trillion.
A)True
B)False
Q4) Credit risk is more likely to lead to failure of an FI than either interest rate or foreign-exchange risk.
A)True B)False
Q5) Swaps generally have a shorter maturity than other derivative instruments. A)True B)False
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Chapter 25: Loan Sales
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Q1) Closed-end bank loan mutual funds are restricted to investing in loans only through the loan resale or secondary market.
A)True
B)False
Q2) The growth of the commercial paper market as well as the increased ability of banks to underwrite commercial paper has reduced the importance of short-term segment of the loan sales market.
A)True
B)False
Q3) When an FI sells a loan with recourse, a liability is created on the balance sheet. A)True
B)False
Q4) Floating-rate loan assignments typically occur on the loan repricing date as an effort to minimize confusion regarding the calculation and transfer of accrued interest. A)True B)False
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Chapter 26: Securitization
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Q1) Why are the class C bonds highly attractive to insurance companies and pension funds?
A)Because of their ability to offer perfect prepayment protection.
B)Because of the shortest average life with a minimum of prepayment protection.
C)Because of their long expected duration.
D)Because they are basically zero coupon bonds and hence carry a minimum amount of risk.
E)Answers A and D only.
Q2) The packaging of loans into asset pools and then selling portions of the pool to investors is known as
A)security creation.
B)securitization.
C)loan transfer.
D)loan collateralization.
E)mutual fund management.
Q3) Full amortization of a thirty-year fixed rate mortgage means that monthly payments are equal and include both principal and interest.
A)True
B)False
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Page 28