Money and Banking
Pre-Test Questions
Course Introduction
Money and Banking explores the role of money, financial institutions, and central banks in modern economies. The course examines the functions and types of money, the process of money creation, and the structure and operations of banks and non-bank financial intermediaries. Students learn about the principles of central banking, monetary policy tools, and their effects on inflation, interest rates, and economic growth. The course also covers regulation and supervision of financial systems, along with contemporary issues such as digital currencies, financial innovation, and global banking practices, preparing students to understand and analyze the complex dynamics of financial markets and their influence on the broader economy.
Recommended Textbook
Financial Institutions Management 3rd Edition by Lange
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Chapter 1: Why Are Financial Institutions Special
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Q1) In most countries regulators require financial intermediaries to hold a minimum level of cash reserves against their deposits.There is no such regulation in Australia.
A)True
B)False
Answer: True
Q2) Why do households prefer to use FIs as intermediaries to invest their surplus funds?
A)Transaction costs are low to the household since FIs are more efficient in monitoring and gathering investment information.
B)To receive the benefits of diversification that households may not be able to achieve on their own.
C)The FI can benefit from combining funds and negotiating lower asset prices and transaction costs.
D)All of the listed options are correct.
Answer: D
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Chapter 2: The Financial Services Industry: Depository
Institutions
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Sample Questions
Q1) Which of the following is true of off-balance-sheet activities?
A)They involve generation of fees without exposure to any risk.
B)They include contingent activities recorded in the current balance sheet.
C)They invite regulatory costs and additional 'taxes'.
D)They have both risk-reducing as well as risk-increasing attributes.
Answer: D
Q2) Which of the following statements is true?
A)Australia's current financial regulatory system has its origins in the late 1990s' Financial System Inquiry, commonly known as the Campbell Committee.
B)Australia's current financial regulatory system has its origins in the late 1990s' Financial System Inquiry, commonly known as the Wallis Committee.
C)Australia's current financial regulatory system has its origins in the late 1990s' Financial System Inquiry, commonly known as the Martin Committee.
D)Australia's current financial regulatory system has its origins in the late 1990s' Financial System Inquiry, commonly known as the Valentine Committee.
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 statements is true?
A)Net asset value refers to the book value of assets in a managed fund portfolio divided by the number of shares outstanding.
B)Net asset value refers to the book value of assets in a managed fund portfolio multiplied by the number of shares outstanding.
C)Net asset value refers to the market value of assets in a managed fund portfolio multiplied by the number of shares outstanding.
D)None of the listed options are correct.
Answer: D
Q2) Which of the following are key features of the regulatory and supervisory environment of the insurance industry?
A)Life insurance companies are now freed of capital adequacy regulations.
B)Life insurance companies have additional reporting requirements.
C)Overall, life insurance companies are less regulated than before to enhance innovation in the industry.
D)All of the listed options are correct.
Answer: B
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5
Chapter 4: Risk of Financial Institutions
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Sample Questions
Q1) Credit risk puts both the principal loaned and expected interest payments at risk.As a result FIs issue financial claims that have a risk-return profile with:
A)high probability of fixed upside return.
B)high probability of large downside risk.
C)low probability of large downside risk.
D)both high probability of fixed upside return and low probability of large downside risk.
Q2) Which of the following is a suitable description of the term 'economies of scope'?
A)The use of several inputs to produce one common output.
B)The ability to generate cost savings by producing more than one output with the same inputs.
C)The ability to lower average operating costs by expanding the number of outputs.
D)The ability to lower average operating costs by lowering the number of outputs.
Q3) A short-funded FI is exposed to increasing interest rates.
A)True
B)False
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Chapter 5: Interest Rate Risk Measurement: The Repricing Model
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Q1) Which of the following statements is true?
A)The cumulative repricing gap can also be expressed as a percentage of liabilities.
B)The cumulative repricing gap can also be expressed as a percentage of equity.
C)The cumulative repricing gap can also be expressed as a percentage of assets.
D)None of the listed options are correct.
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) 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.
Q4) Would you consider the repricing model to be a good and well-founded interest rate risk measurement and management tool? Why or why not?
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Chapter 6: Interest Rate Risk Measurement: The Duration
Model
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Sample Questions
Q1) Duration is a less accurate predictor for the change in an FI's net worth in case of large interest rate shocks because it assumes a:
A)linear relationship between the change in an asset or liability's price and the change in the interest rate, while the true relationship is convex.
B)linear relationship between the change in an asset or liability's price and the change in the interest rate, while the true relationship is concave.
C)convex relationship between the change in an asset or liability's price and the change in the interest rate, while the true relationship is linear.
D)concave relationship between the change in an asset or liability's price and the change in the interest rate, while the true relationship is linear.
Q2) The larger the size of an FI, the larger the _________ from any given interest rate shock.
A)duration mismatch
B)immunisation effect
C)net worth exposure
D)net interest income
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8
Chapter 7: Managing Interest Rate Risk Using Off Balance
Sheet Instruments
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Sample Questions
Q1) Which of the following is an adequate definition of conversion factor?
A)A factor used to calculate the invoice price on a futures contract when a bond other than the benchmark bond is delivered to the buyer.
B)A factor used to calculate the invoice price on a futures contract when the benchmark bond is delivered to the buyer.
C)A factor used to calculate the invoice price on a futures contract when a bond other than the benchmark bond is delivered to the seller.
D)A factor used to calculate the invoice price on a futures contract when the benchmark bond is delivered to the seller.
Q2) Which of the following statements is true?
A)Routine hedging seeks to hedge all interest rate risk exposure.
B)Routine hedging seeks to hedge all foreign exchange rate risk exposure.
C)Routine hedging seeks to hedge all liquidity risk exposure.
D)Routine hedging seeks to hedge all capital risk exposure.
Q3) Explain the differences between using futures and options contracts to hedge interest rate risk.Use diagrams where possible to support your points.
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Chapter 8: Credit Risk I: Individual Loan Risk
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Sample Questions
Q1) When an FI sells a loan without recourse, the credit risk of the loan is completely eliminated.
A)True
B)False
Q2) Mortgage-backed bonds (MBB) differ from pass-throughs and collateralised mortgage obligations (CMOs) in which of the following ways?
A)The MBB bondholders have a junior claim to assets of the FI.
B)There is no direct link between the cash flow on the mortgages backing the bond and the interest and principal payments on the MBB.
C)The assets backing a MBB issue are normally removed from the balance sheet of the FI.
D)Tranches of a MBB are treated equally with respect to prepayments on mortgages backing the bond issue.
Q3) Which of the following is true concerning loans sold without recourse?
A)The loan sale is technically removed from the balance sheet ..
B)The buyer cannot put the loan back to the selling FI.
C)The FI has no explicit liability if the loan eventually goes bad.
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Page 10
Chapter 9: Market Risk
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Sample Questions
Q1) Assume the market value of a position is $100 000 and that its modified duration is 3.30 years.Further assume that the potential adverse move in yield is 16.5 basis points.What are the daily earnings at risk for this position (round to two decimals)?
A)$54.45
B)$544.50
C)$54 450.00
D)Not enough information to solve the question.
Q2) Which of the following is a measure of systematic risk?
A)alpha
B)beta
C)gamma
D)sigma
Q3) Monte Carlo simulations address the problems imposed by a limited number of actual observations, by generating additional observations.
A)True
B)False
Q4) Explain the basic concept of the RiskMetric model.What are the major disadvantages? How can the major disadvantages be addressed?
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11
Chapter 10: Credit Risk I: Individual Loan Risk
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Sample Questions
Q1) Moody's KMV Credit Monitor Model compares loans with option payoffs.
A)True
B)False
Q2) Compensating balance is a proportion of:
A)a loan that a borrower is required to hold on deposit at a correspondent bank.
B)a loan that a borrower is required to hold on deposit in foreign reserves.
C)a loan that a borrower is required to hold on deposit at the lending institution.
D)the investment that a borrower is required to hold on deposit at the lending institution.
Q3) The position of the business cycle in the economy is not important in assessing the default probability of a borrower.
A)True
B)False
Q4) What are the major ideas behind KMV's Credit Monitor Model?
Q5) Credit scoring models include:
A)linear probability models.
B)logit models.
C)linear discriminant analysis.
D)All of the listed options are correct.
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Chapter 11: Credit Risk II: Loan Portfolio and Concentration
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Sample Questions
Q1) Which of the following statements is true?
A)The objective of risk-indifferent FI managers is to minimise portfolio risk regardless of the portfolio's return.
B)The objective of risk-indifferent FI managers is to minimise portfolio risk in turn for higher returns on the portfolio.
C)The objective of risk-averse FI managers is to minimise portfolio risk in turn for higher returns on the portfolio.
D)The objective of risk-averse FI managers is to minimise portfolio risk regardless of the portfolio's return.
Q2) Which of the following is not a reason for the credit risk on a swap to be less than the credit risk on a loan?
A)Swap contracts often extend beyond the maturity of normal loan contracts.
B)Swap payments can be netted across more than on contract.
C)Interest rate swaps involve interest, but not principal.
D)Swap contracts often extend beyond the maturity of normal loan contracts, swap payments can be netted across more than on contract and Interest rate swaps involve interest, but not principal.
Q3) Explain the basic concept of loan loss ratio based models.
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Chapter 12: Sovereign Risk
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Q1) Debt repudiations were more common before WWII compared to now.
A)True
B)False
Q2) Which of the following statements is true?
A)There should be a positive relationship between the size of a country's variance of export revenue and the probability of rescheduling.
B)There should be a negative relationship between the size of a country's variance of export revenue and the probability of rescheduling.
C)There should be no relationship between the size of a country's variance of export revenue and the probability of rescheduling.
D)The relationship between the size of a country's variance of export revenue and the probability of rescheduling depends on a set of variables relating to the borrowing country.
Q3) Multi-year restructuring agreement (MYRA) is the official term for the:
A)rescheduling of a sovereign loan.
B)repudiation of a sovereign loan.
C)repayment of a sovereign loan.
D)re-evaluation of a sovereign loan.
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Chapter 13: Foreign Exchange Risk
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Sample Questions
Q1) The dollar loss/gain in a particular currency i can be calculated as:
A)Net exposure in foreign currency i multiplied by the volatility to the ($/foreign currency i) exchange rate.
B)Net exposure in foreign currency i measured in Australian dollars divided by the volatility to the ($/foreign currency i) exchange rate.
C)Net exposure in foreign currency i divided by the volatility to the ($/foreign currency i) exchange rate.
D)Net exposure in foreign currency i measured in Australian dollars multiplied by the volatility to the ($/foreign currency i) exchange rate.
Q2) 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
Q3) The role of the forward FX contract is to offset the uncertainty regarding the future spot rate on a particular currency at the end of the investment horizon.
A)True
B)False
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15
Chapter 14: Liquidity Risk
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Sample Questions
Q1) Which of the following statements is true?
A)In Australia, depositors received preference over other liability holders in the event of a liquidation of an FI.
B)In Australia, depositors receive preference over other liability holders in the event of a liquidation of an FI being replaced by a financial claims scheme to protect deposit accounts.
C)In Australia, only customers of the major banks are covered by deposit insurance.
D)Australia has had a well-developed deposit insurance system for decades that has protected depositors without a bank failure for over a century.
Q2) Fire-sale price refers to the price received for:
A)an asset that has to be sold at half price.
B)a liability that has to be sold at half price.
C)an asset that has to be sold immediately.
D)a liability that has to be sold immediately.
Q3) Discuss the advantages and disadvantages of stored liquidity management and purchased liquidity management.In your opinion, which is the better approach for a DI to adopt?
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Chapter 15: Liability and Liquidity Management
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Q1) FIs are particularly vulnerable to sudden and unexpected demand for funds.Liquidity regulations are imposed for all of the following reasons, except to:
A)ensure that authorised DIs have sufficient liquidity.
B)prevent liquidity problems and possible contagion effects that may spread to other FIs.
C)increase liquidity for prudential management.
D)ensure that authorised DIs have sufficient capital.
Q2) Potential sources of liquidity include investment in:
A)housing loans.
B)new equipment.
C)short-term securities such as treasury notes and bank accepted bills.
D)housing loans and investment in bank accepted bills.
Q3) To reduce liquidity risk, an FI can efficiently manage the liability structure of its portfolio.
A)True
B)False
Q4) Why have regulators of financial service firms in Australia introduced the deposit guarantee programs? Why may regulators seek to provide greater protection to depositors than to other DI creditors?
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Chapter 16: Off-Balance-Sheet Activities
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Q1) How do you interpret a delta of 0.30?
A)A delta of 0.30 means that a one-cent change in the price of the underlying asset of the option leads to a 0.30 cent change in the price of the option.
B)A delta of 0.30 means that a ten-cent change in the price of the underlying asset of the option leads to a 0.30 cent change in the price of the option.
C)A delta of 0.30 means that a one-dollar change in the price of the underlying asset of the option leads to a 0.30 cent change in the price of the option.
D)A delta of 0.30 means that a one-dollar change in the price of the underlying asset of the option leads to a 30 per cent change in the price of the option.
Q2) As compared to LCs, SLCs typically are used to cover contingencies that potentially are more severe and which may not be trade related.
A)True
B)False
Q3) Standby letters of credit can be seen as direct competitors to loan commitments.
A)True
B)False
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Page 18
Chapter 17: Technology and Other Operational Risk
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Q1) Which of the following statements is true?
A)Internet transactions involve 'open' systems and thus are well protected against interception and fraud.
B)Internet transactions involve 'closed' systems and thus are well protected against interception and fraud.
C)Internet transactions involve 'closed' systems and thus are susceptible to interception and fraud.
D)Internet transactions involve 'open' systems and thus are susceptible to interception and fraud.
Q2) Operational risk sources can lead to the following costs for the FI:
A)direct costs, indirect costs and opportunity costs.
B)direct costs and indirect costs only.
C)direct costs and opportunity costs only.
D)indirect costs and opportunity costs only.
Q3) Cost inefficiencies related to managerial performance and other hard-to-quantify factors are also called X-inefficiencies.
A)True
B)False
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Chapter 18: Capital Management and Adequacy
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Q1) Which of the following is the correct way to calculate the historic value of an FI's equity per share?
A)The sum of the par value of equity divided by the number of shares.
B)The market value of ownership shares outstanding divided by the number of shares.
C)The sum of the par value of equity, the surplus value, retained earnings and loan reserves divided by the number of shares.
D)The sum of the par value of equity and retained earnings divided by the number of shares.
Q2) Counterparty credit risk is the risk that the other side of a contract will default on payment obligation, whereby 'the other side' is always the FI.
A)True
B)False
Q3) Credit-risk-adjusted assets are on- and off-balance-sheet assets whose values are adjusted for approximate credit risk.
A)True
B)False
Q4) Why is a regulatory capital charge against operational risk necessary?
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Page 20