Mid-Term Test Paper (CM20488 FRM Sem B 2009_10, Final Version 1)

Mid-Term Test Paper (CM20488 FRM Sem B 2009_10, Final Version 1)

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Multiple Choice Questions (20%; 0.5% for each question) 1. The risk that an investor will be forced to place earnings from a loan or security into a lower yielding investment is known as A. liquidity risk. B. reinvestment risk. C. credit risk. D. foreign exchange risk. 2. Risk management for financial intermediaries deals with A. controlling the overall size of the institution. B. controlling the scope of the institution's activities. C. limiting the geographic spread of the institution's offices. D. limiting the mismatches on the institution's balance sheet. 3. When repricing all interest rate sensitive assets and liabilities in a balance sheet, the cumulative gap will be A. zero. B. one. C. greater than one. D. a negative value. 4. The earnings at risk for an FI is a function of A. the time necessary to liquidate assets. B. the potential adverse move in yield. C. the price sensitivity of the position. D. all of the above. 5. If interest rates decrease 40 basis points for an FI that has a cumulative gap of -$25 million, the expected change in net interest income is A. +$100,000. B. -$100,000. C. -$625,000. D. -$625,000. 1
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6. Which of the following observations concerning floating-rate loans is not true ? A. They are less credit risky than fixed-rate loans. B. They better enable FIs to hedge the cost of rising interest rates on liabilities. C. They pass the risk of interest rate changes onto borrowers. D. In rising interest rate environments, borrowers may find themselves unable to pay the interest on their floating-rate loans. 7. Can an FI immunize itself against interest rate risk exposure even though its maturity gap is not zero ? A. Yes, because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities. B. No, because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities. C. Yes, because the maturity model does not consider the timing of cash flows. D. No, because the timing of cash flows is relevant to immunization against interest rate risk exposure. 8. Consider a 6-year maturity, $100,000 face value bond that pays a 5% fixed coupon annually, what is the price of the bond if market interest rates are 6% ? A. $95,082.68 B. $95,769.55 C. $95,023.00 D. $96,557.87 9. (I) Prices of longer-maturity bonds respond less dramatically to changes in interest rates. (II) Prices & returns for long-term bonds are less volatile than those for shorter-term bonds. A. (I) is true, (II) is false B. (I) is false, (II) is true C. Both are true D. Both are false 2
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10. Compensating balances : A. are a particular form of collateral commonly required on commercial loans B. are the required minimum amount of funds that a borrower must keep in a checking account at the bank C. allow banks to monitor firms’ check payment practices which can yield information about the borrowers’ financial conditions D. all of the above 11.
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This note was uploaded on 03/07/2012 for the course FI FIn 405 taught by Professor Ele during the Spring '12 term at Central Washington University.

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Mid-Term Test Paper (CM20488 FRM Sem B 2009_10, Final Version 1)

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