Money and Banking Test Questions
Course Introduction
This course provides an in-depth exploration of the fundamental principles and operations of money and banking systems. Topics include the nature and functions of money, the structure and roles of financial institutions, central banking and the conduct of monetary policy, and the mechanisms through which money is created and regulated. Students will examine how banks operate within the financial system, the impact of monetary policy on the broader economy, and contemporary issues such as financial crises, digital currencies, and the global banking environment. The course aims to equip students with a solid understanding of how money and banking influence economic activity and shape financial markets.
Recommended Textbook
Financial Institutions Management 5th Canadian Edition by Anthony Saunders
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Chapter 1: Why Are Financial Institutions Special
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Q1) In recent years, the proportion of savings and demand deposits have decreased and the proportion of pension funds have increased in the financial assets held by Canadian households.
A)True
B)False
Answer: True
Q2) The ability of savers to transfer wealth between youth and old age and across generations is called maturity intermediation.
A)True
B)False Answer: False
Q3) Nondeposit-taking financial institutions are represented by all of the following EXCEPT
A)insurance companies.
B)mutual funds.
C)finance companies.
D)credit unions.
E)securities firms.
Answer: D
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Page 3
Chapter 2: Deposit-Taking Institutions
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Q1) The credit union industry avoided much of the financial distress of the 1980s because of the short maturity and relatively lower credit risk of their assets.
A)True
B)False
Answer: True
Q2) Money market mutual funds have attracted large amounts of retail savings and retail time deposits from commercial banks in recent years.
A)True
B)False
Answer: True
Q3) The securitization of mortgages involves the pooling of mortgage loans for sale in the financial markets.
A)True
B)False
Answer: True
Q4) In recent years, the number of banks in Canada has been increasing.
A)True
B)False
Answer: False
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Chapter 3: Finance Companies
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Sample Questions
Q1) Finance companies often prefer to lease equipment to customers because
A)repossession in the event of default is easier.
B)a lease with little or no down payment is more attractive to business customers.
C)the finance company receives the benefit of depreciation expense.
D)All of these.
E)repossession in the event of default is easier and the finance company receives the benefit of a depreciation expense.
Answer: D
Q2) Wholesale and retail motor vehicle loans and leases constitute the largest subcategory of business loans for finance companies.
A)True
B)False
Answer: True
Q3) Bad debt expense and administrative costs are lower on home equity loans than other typical loans of finance companies.
A)True
B)False
Answer: True
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Chapter 4: Securities, Brokerage, and Investment Banking
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Sample Questions
Q1) An investment banker agrees to underwrite an issue of 10 million shares of stock for TWResearch, Inc. on a firm commitment basis. The investment banker pays $10.50 per share to TWResearch, Inc. for the 10 million shares of stock. It then sells those shares to the public for $11.20 per share. If the investment bank can sell the shares for $9.75 per share, 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.
Q2) Most securities firms are subject to large amounts of interest rate and market risk because of the large amount financial assets on the balance sheet.
A)True
B)False
Q3) In order for an investment bank to perform a firm commitment offering of securities, they must maintain at least 20% equity on their balance sheet.
A)True
B)False
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Chapter 5: Mutual Funds, Hedge Funds, and Pension Funds
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Sample Questions
Q1) The NAV of a closed-end investment company shares is determined at any point in time by
A)the number of shares available.
B)the value of the underlying shares owned by the company.
C)the demand for the investment company's shares.
D)the number of shares available, and the value of the underlying shares owned by the company.
E)the value of the underlying shares owned by the company, and the demand for the investment company's shares.
Q2) Closed-end investment companies
A)have a fixed number of shares.
B)can trade at a price that is greater than, equal to, or less than the NAV.
C)will trade at a different price as the number of shares of the fund changes.
D)have a fixed number of shares, and will trade at a different price as the number of shares in the fund changes.
E)have a fixed number of shares and can trade at a price that is greater than, equal to, or less than the NAV.
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Chapter 6: Insurance Companies
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Q1) One reason for the recent decline in the expense ratio for PC insurers is an increased dependence on independent brokers to sell and distribute insurance policies.
A)True
B)False
Q2) Loss exposures faced by insurers in accident and health lines are more similar to those faced by traditional life insurance than by property & casualty insurance.
A)True
B)False
Q3) 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.
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Chapter 7: Risks of Financial Institutions
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Sample Questions
Q1) The potential exercise of unanticipated contingencies can result in
A)technology risk.
B)interest rate risk.
C)credit risk.
D)foreign exchange risk.
E)off-balance-sheet risk.
Q2) What type of risk focuses upon future contingencies?
A)Liquidity risk.
B)Interest rate risk.
C)Credit risk.
D)Foreign exchange rate risk.
E)Off-balance sheet risk.
Q3) One method of guarding against credit risk is to assess a risk premium based on the estimate of default risk exposure that a borrower carries.
A)True
B)False
Q4) An FI is exposed to reinvestment risk by holding longer-term assets relative to liabilities.
A)True
B)False
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Chapter 8: Interest Rate Risk I
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Sample Questions
Q1) The maturity of a portfolio of assets or liabilities is a weighted average of the maturities of the assets or liabilities that comprise that portfolio.
A)True
B)False
Q2) Which of the following statements is true?
A)An increase in interest rates leads to an increase in the market value of financial securities.
B)Value of longer term securities decreases at a diminishing rate for increases in interest rates.
C)Value of longer term securities increases at an increasing rate for any decline in interest rates.
D)The shorter the maturity of a fixed income asset or liability, the greater the fall in market value for any given interest rate increase.
E)The longer the maturity of a fixed income asset or liability, the greater the fall in market value for any given interest rate decrease.
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Chapter 9: Interest Rate Risk II
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Sample Questions
Q1) Consider a one-year maturity, $100,000 face value bond that pays a 6 percent fixed coupon annually. If the bond is selling at par, what is the percentage price change for the bond if interest rates increase 50 basis points from 6 percent?
A)-0.1033 percent.
B)-0.4766 percent.
C)-0.4695 percent.
D)0.0000 percent.
E)-0.2907 percent.
Q2) What is the duration of an 8 percent annual payment two-year note that currently sells at par?
A)2 years.
B)1.75 years.
C)1.93 years.
D)1.5 years.
E)1.97 years.
Q3) For a given maturity fixed-income asset, duration increases as the promised interest payment declines.
A)True
B)False
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Chapter 10: Credit Risk: Individual Loans
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Sample Questions
Q1) Commercial paper has become an acceptable substitute source for bank loans for many large corporations.
A)True
B)False
Q2) The duration of a soon to be approved loan of $10 million is four years. The 99<sup>th</sup> percentile increase in risk premium for bonds belonging to the same risk category of the loan has been estimated to be 5.5 percent. If the fee income on this loan is 0.4 percent and the spread over the cost of funds to the bank is 1 percent, what is the expected income on this loan for the current year?
A)$40,000.
B)$100,000.
C)$140,000.
D)$180,000.
E)$280,000.
Q3) The payoff function of a loan to a debt holder is similar to writing a call option on the value of the borrower's assets with the face value of the debt as the exercise price.
A)True
B)False
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Chapter 11: Credit Risk: Loan Portfolio and Concentration
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Q1) If a bank's concentration limit (as a percent of capital) is 20 percent, and its expected recovery from defaulted loans is 50 percent, what is the maximum loss it permits to affect its capital in the event of a default?
A)5 percent.
B)10 percent.
C)15 percent.
D)20 percent.
E)25 percent.
Q2) The all-in-spread (AIS) used in the Moody's Analytics model is the difference between the interest rate on a loan and the prime lending rate at the time the loan was originated.
A)True
B)False
Q3) In the past, data availability limited the use of sophisticated portfolio models to set concentration limits.
A)True
B)False
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Page 13
Chapter 12: Liquidity Risk
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Sample Questions
Q1) Mutual funds tend to have less exposure to liquidity risk than banks and credit unions.
A)True
B)False
Q2) The surrender value of an insurance policy is
A)its promised payoff.
B)normally a portion of the contract's face value.
C)its value upon bankruptcy.
D)the value of the junk bonds in the insurance company's portfolio.
E)its holdup value.
Q3) Government securities represent the reserve asset fund for life insurance companies.
A)True
B)False
Q4) Liquidation of a mutual fund causes assets to be liquidated and funds received to the dispersed to shareholders on a first come, first served basis.
A)True
B)False
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Chapter 13: Foreign Exchange Risk
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Sample Questions
Q1) The one-year CD rates for financial institutions with AA ratings are 5 percent in Canada and 8 percent in France. An AA-rated Canadian financial institution can borrow by issuing GICs or lend by purchasing GICs at these rates in either market. The current spot rate is $0.20/Euro. If the bank receives a quote of $0.1975/ for one-year forward rates for the Euro (to buy and to sell), what is the arbitrage profit for the bank if it uses $1,000,000 as the notional amount?
A)$5,000.
B)$16,500.
C)$19,350.
D)$22,000.
E)$25,675.
Q2) Forward contracts in FX are typically written for periods exceeding 6 months.
A)True
B)False
Q3) The exposure to foreign exchange risk by Canadian FIs has decreased with the growth of the various derivative markets.
A)True
B)False
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Chapter 14: Sovereign Risk
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Sample Questions
Q1) Which of the following are normally traded at very deep discounts from 100 percent?
A)Restructured loans.
B)Brady bonds.
C)Sovereign bonds.
D)Performing loans.
E)Nonperforming loans.
Q2) Which of the following is a benefit to the lender in a loan rescheduling?
A)The FI may become locked into a particular loan portfolio structure.
B)Rescheduling may close the market for future loans.
C)Rescheduling may create interruptions in the flow of international trade since letters of credit may be more difficult to acquire.
D)Rescheduling may lower the present value of future payments in hard currencies.
E)The FI may receive additional fees, collateral, and option features on the loan.
Q3) CRA statistical credit scoring models have difficulty measuring political risk events.
A)True
B)False
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Chapter 15: Market Risk
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Q1) The Volker Rule reduces the specialness of banks operating in the U.S. in maturity intermediation by effectively forcing DTIs to hold a matched maturity book.
A)True
B)False
Q2) Calculating the risk of a multi-asset trading portfolio requires the consideration of the correlations of returns between the different assets.
A)True B)False
Q3) 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 these.
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Page 17
Chapter 16: Off-Balance-Sheet Risk
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Q1) 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
Q2) Basis risk occurs on a loan commitment because the spread of a pricing index over the cost of funds may vary.
A)True
B)False
Q3) The current market value or contingent claim value of OBS items overestimates their notional value.
A)True
B)False
Q4) The aggregate commitment funding risk can increase the cost of funds above normal levels.
A)True B)False
Q5) The present value of an off-balance-sheet item is its notional value. A)True B)False
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Chapter 17: Technology and Other Operational Risks
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Q1) How can noninterest operating expenses of an FI be reduced 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.
E)By complying with all government regulations.
Q2) The following information is available on the average costs of the three major banks in a given local market. Bank A has assets of $10 million and average costs are 15 percent, Bank B has assets of $20 million and average costs of 13 percent while Bank C has assets of $30 million with average costs of 12 percent. Average costs are measured as a proportion of total assets. The above figures indicate that
A)there are significant economies of scale still present in the local markets.
B)there are significant diseconomies of scale still present in the local markets.
C)there are significant economies of scope still present in the local markets.
D)there are significant diseconomies of scope still present in the local markets.
E)there is not enough information to determine economies of scale or scope.
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Chapter 18: Liability and Liquidity Management
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Q1) In the U.S. excess reserves held at the central bank pay interest to the DTI.
A)True
B)False
Q2) Savings accounts normally receive a lower interest rate than chequing accounts.
A)True
B)False
Q3) In many countries, regulators often set minimum liquid reserve requirements on FIs.
A)True
B)False
Q4) Which of the following is an outcome of an increase in the reserve requirement ratio?
A)DTIs may hold fewer reserves against their transaction accounts.
B)DTIs are able to lend out a greater percentage of their deposits.
C)Increased credit availability in the economy.
D)DTIs are only able to lend a smaller percentage of their deposits than before.
E)A multiplier effect on the supply of DTI deposits and thus the money supply.
Q5) Excessive amounts of liquid asset holdings can penalize the earnings of a DTI.
A)True
B)False
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Chapter 19: Deposit Insurance and Other Liability
Guarantees
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Q1) Moral hazard at FIs may
A)result when actions and consequences are separated.
B)occur when interest rates are very high and volatile.
C)occur when commodity prices are very high and volatile.
D)be a consequence of strict regulatory supervision.
E)be a consequence of an erosion of family values.
Q2) The provision of deposit insurance by CDIC is similar to having the CDIC ________ on the assets of the bank that buys the deposit insurance.
A)write a call option
B)buy a call option
C)write a put option
D)having a secondary lien
E)enter into a swap agreement
Q3) The Canadian safety net to protect the integrity of the payments system consists of deposit insurance and social welfare.
A)True
B)False
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Page 21
Chapter 20: Capital Adequacy
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Q1) The Asset to Capital Multiple does not account for the risks of off-balance- sheet activities.
A)True B)False
Q2) Market value accounting often is criticized because the error in market valuation of nontraded assets likely will be greater than the error using the original book valuation.
A)True B)False
Q3) Basel I (1993) requires banks in the member countries of the Bank for International Settlements to utilize risk-based capital ratios.
A)True
B)False
Q4) Counterparty credit risk is the risk that the other party of a contract will default on contract obligations.
A)True B)False
Q5) The four (five) risk weight categories in Basel I (Basel II) may not reflect the true credit risk.
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Page 22
Chapter 21: Product and Geographic Expansion
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Q1) Identify the fundamental regulatory philosophy underlying the International Banking Act.
A)Too big to fail.
B)National treatment.
C)Reciprocal arrangement.
D)X efficiencies.
E)Unit banks.
Q2) According to economists, this is the main reason for underpricing of new issues.
A)Lack of competition among existing investment banks.
B)Entry of banks into the investment banking sector.
C)Monopoly power of the existing investment banks.
D)Mismatch of demand and supply of securities.
E)Risk premium for information advantage possessed by issuers.
Q3) Canadian financial institutions have expanded abroad in recent years, although their foreign counterparts have been prohibited from expanding into Canada.
A)True
B)False
Q4) Using lending power to coerce a customer to purchase or use the products sold by an affiliate.
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Chapter 22: Futures and Forwards
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Q1) Commercial banks, investment banks, and broker-dealers are the major forward market participants.
A)True
B)False
Q2) Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. If the portfolio manager put on the hedge when T-bond futures were quoted at 89-00/32<sup>nds</sup>, what is the profit/loss on the futures position if the settlement price is 81-27/32<sup>nds</sup>?
A)Profit of $2,146,875.
B)Loss of $2,146,875.
C)Profit of $1,270,000.
D)Loss of $1,270,000.
E)Loss of $812,700.
Q3) Delivery of the underlying asset almost always occurs in the futures market.
A)True
B)False
Q4) Delivery of the underlying asset almost always occurs in the futures market.
A)True
B)False
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Chapter 23: Options, Caps, Floors, and Collars
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Q1) The losses on a purchased put option position when rates fall are limited to the option premium paid.
A)True
B)False
Q2) An investment company has purchased $100 million of 10 percent annual coupon, 6-year Eurobonds. The bonds have a duration of 4.79 years at the current market yields of 10 percent. The company wishes to hedge these bonds with Treasury-bond options that have a delta of 0.7. The duration of the underlying asset is 8.82, and the market value of the underlying asset is $98,000 per $100,000 face value. Finally, the volatility of the interest rates on the underlying bond of the options and the Eurobond is 0.84. Using the above information, what will happen to the market value of the Eurobonds if market interest rates fall 1 percent to 9 percent?
A)Increase $8,018,182.
B)Decrease $8,018,182.
C)Decrease $4,354,545.
D)Increase $6,735,272.
E)Increase $4,354,545.
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Page 25
Chapter 24: Swaps
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Q1) Why were inverse floaters developed?
A)To exchange specified periodic cash flows in the future based on some underlying instrument.
B)To better manage their interest rate, foreign exchange, and credit risks of corporate enterprises.
C)To lower the cost of financing for government agencies.
D)To determine payments and timing of payments when there is no standardized contract.
E)To keep the swap market liquid by locating or matching counterparties.
Q2) Which of the following describes the process of "netting" in the swap market?
A)Stripping out the "interest rate" sensitive element of total return swaps to reduce the net portfolio risk.
B)Acting as an intermediary by bringing together two FIs with opposing interest rate risk exposures to enter into a swap agreement.
C)Turning fixed-rate liabilities into net variable-rate liabilities.
D)Calculating the net difference between the two payments, and making a single payment for the net difference.
E)Squaring off contracts on or before expiry.
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Chapter 25: Loan Sales
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Q1) Which of the following transactions meets the legal definition of a highly leveraged transaction (HLT)?
A)A buyout that increases debt from $100 million to $150 million resulting in a 25 percent leverage ratio.
B)An investment project that increases debt from $100 million to $250 million resulting in a 55 percent leverage ratio.
C)An acquisition that increases debt from $100 million to $250 million resulting in a 65 percent leverage ratio.
D)An acquisition that increases debt from $100 million to $150 million resulting in a 70 percent leverage ratio.
E)An investment project that results in an 80 percent leverage ratio.
Q2) Loan assignments make up more than 90 percent of the Canadian and U.S. loan sale market because
A)they have lower capital requirements than other types of loan sales.
B)they are riskier than are other types of loan sales.
C)monitoring costs are reduced since all rights are transferred upon sale.
D)regulators prefer these transactions to loan participations.
E)there is no secondary market in loan participations.
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Page 27
Chapter 26: Securitization Index
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Q1) On September 7, 2008, FNMA and FHLMC were placed under conservatorship and both are controlled by a U.S. federal government agency.
A)True
B)False
Q2) Early prepayments on mortgages backing a CMO are normally allocated to the earliest existing tranche maturity.
A)True
B)False
Q3) One cause of residential mortgage prepayment risk is the sale of the mortgaged property.
A)True
B)False
Q4) Why do garbage class bonds often have a negative duration?
A)The value of the returns in this bond class increases when interest rates increase.
B)It gives the rights to collateralization.
C)Bond values fall with interest rate increases.
D)It gives rights to reinvestment income on the cash flows in the CMO trust.
E)Significant risk premium required by the uninsured depositors.
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