FIN 480 UPDATED REVISION PAST EXAM QUESTIONS
AND SOLUTIONS GUARANTEE A+
✔✔Interest-Rate Risk - ✔✔When interest rates rise, banks face the risk that the value of
their assets will fall more than the value of their liabilities, reducing the bank's capital
✔✔managing interest-rate risk: - ✔✔determine how sensitive the bank's balance sheet
is to a change in interest rates (gap analysis)
✔✔Trading Risk - ✔✔Risk that the instrument may go down in value rather than up is
called trading risk
✔✔The solution to trading risk - ✔✔The solution to the moral hazard problem is to
compute the risk the traders generate.-Difficult to do in practice
•In theory, the bank's risk manager limits the amount of risk any individual trader is
allowed to assume and monitors closel
✔✔Sovereign risk - ✔✔Sovereign risk arises from the fact that some foreign borrowers
may not repay their loans because their government prohibits them from doing so
✔✔A rumor starts that says a bank has suffered significant losses and may not be able
to honor its promises to depositors. This causes most of the depositors to line up in front
of the bank the next morning wanting to withdraw their deposits. This is an example of
what type of risk - ✔✔liquidity risk.
✔✔interest rate risk arises because - ✔✔B. A bank's liabilities tend to be
more interest rate sensitive than its assets
✔✔Credit risk is a bigger problem for - ✔✔smaller banks because they tend to
have less diversified markets
✔✔There are five major categories of non-depository institutions - ✔✔-Insurance
companies
-Pension funds
-Securities firms, including brokers, mutual-fund companies, and investment banks
-Finance companies
-Government-sponsored enterprises
✔✔In terms of the financial system as a whole, insurance companies specialize in three
of the five functions performed by intermediaries - ✔✔They pool small premiums and
make largeinvestments with them
-They diversify risks across a large population
-They screen and monitor policyholders to mitigate the problem of asymmetric
information
, ✔✔Insurance compnaies assetts include - ✔✔stocks and bonds
✔✔insurance liabilities include - ✔✔promises to policyholders show up as liabilities
✔✔Defined-contribution plans - ✔✔Sometimes referred to as "401(k)"The employer
takes no responsibility for the size of
the employee's retirement income
✔✔Defined-benefit plan - ✔✔Participants receive a life-time retirement income based
on the number of years they worked at the company and their final salary
✔✔Sales finance companies specialize in what type of loans - ✔✔Sales finance
companies specialize in larger loans for major purchases, such as automobiles
✔✔Insurance companies perform all of the following functions performed by financial
intermediaries except - ✔✔supplying liquidity
✔✔In general, finance companies differ from banks - ✔✔In their composition of liabilities
✔✔Banks' fragility arises from the fact that they - ✔✔Banks' fragility arises from the fact
that they provide liquidity to depositors.
-They allow depositors to withdraw their balances on demand
✔✔Insolvent-
Solvent- - ✔✔Insolvent- the banks balance sheet has negative equity
Solvent- the bank has a positive capital base or positive equity.Means that the value of
the bank's assets exceeds the value of its liabilities.
✔✔Shadow Bank-
What's different about this banking system VS a regular banking system. - ✔✔Shadow
Bank- a financial intermediaries that don't take deposits. They act just like a bank
though. What's different about this banking system VS a regular banking system. The
old regular bank system had little regulation just like the showdo banking system now
days. This makes it very easy for rumors to fail a bank.
✔✔What matters during a bank run is not whether a bank is _____________, but
whether it is _________________ - ✔✔Solvent , Liquid.... A bank run occurs when a
bank does not have enough on cash.
✔✔Explain a government safety net - ✔✔Government officials employ a combination of
strategies to protect investors and ensure stability of the financial system.
✔✔There are three reasons for the government to get
AND SOLUTIONS GUARANTEE A+
✔✔Interest-Rate Risk - ✔✔When interest rates rise, banks face the risk that the value of
their assets will fall more than the value of their liabilities, reducing the bank's capital
✔✔managing interest-rate risk: - ✔✔determine how sensitive the bank's balance sheet
is to a change in interest rates (gap analysis)
✔✔Trading Risk - ✔✔Risk that the instrument may go down in value rather than up is
called trading risk
✔✔The solution to trading risk - ✔✔The solution to the moral hazard problem is to
compute the risk the traders generate.-Difficult to do in practice
•In theory, the bank's risk manager limits the amount of risk any individual trader is
allowed to assume and monitors closel
✔✔Sovereign risk - ✔✔Sovereign risk arises from the fact that some foreign borrowers
may not repay their loans because their government prohibits them from doing so
✔✔A rumor starts that says a bank has suffered significant losses and may not be able
to honor its promises to depositors. This causes most of the depositors to line up in front
of the bank the next morning wanting to withdraw their deposits. This is an example of
what type of risk - ✔✔liquidity risk.
✔✔interest rate risk arises because - ✔✔B. A bank's liabilities tend to be
more interest rate sensitive than its assets
✔✔Credit risk is a bigger problem for - ✔✔smaller banks because they tend to
have less diversified markets
✔✔There are five major categories of non-depository institutions - ✔✔-Insurance
companies
-Pension funds
-Securities firms, including brokers, mutual-fund companies, and investment banks
-Finance companies
-Government-sponsored enterprises
✔✔In terms of the financial system as a whole, insurance companies specialize in three
of the five functions performed by intermediaries - ✔✔They pool small premiums and
make largeinvestments with them
-They diversify risks across a large population
-They screen and monitor policyholders to mitigate the problem of asymmetric
information
, ✔✔Insurance compnaies assetts include - ✔✔stocks and bonds
✔✔insurance liabilities include - ✔✔promises to policyholders show up as liabilities
✔✔Defined-contribution plans - ✔✔Sometimes referred to as "401(k)"The employer
takes no responsibility for the size of
the employee's retirement income
✔✔Defined-benefit plan - ✔✔Participants receive a life-time retirement income based
on the number of years they worked at the company and their final salary
✔✔Sales finance companies specialize in what type of loans - ✔✔Sales finance
companies specialize in larger loans for major purchases, such as automobiles
✔✔Insurance companies perform all of the following functions performed by financial
intermediaries except - ✔✔supplying liquidity
✔✔In general, finance companies differ from banks - ✔✔In their composition of liabilities
✔✔Banks' fragility arises from the fact that they - ✔✔Banks' fragility arises from the fact
that they provide liquidity to depositors.
-They allow depositors to withdraw their balances on demand
✔✔Insolvent-
Solvent- - ✔✔Insolvent- the banks balance sheet has negative equity
Solvent- the bank has a positive capital base or positive equity.Means that the value of
the bank's assets exceeds the value of its liabilities.
✔✔Shadow Bank-
What's different about this banking system VS a regular banking system. - ✔✔Shadow
Bank- a financial intermediaries that don't take deposits. They act just like a bank
though. What's different about this banking system VS a regular banking system. The
old regular bank system had little regulation just like the showdo banking system now
days. This makes it very easy for rumors to fail a bank.
✔✔What matters during a bank run is not whether a bank is _____________, but
whether it is _________________ - ✔✔Solvent , Liquid.... A bank run occurs when a
bank does not have enough on cash.
✔✔Explain a government safety net - ✔✔Government officials employ a combination of
strategies to protect investors and ensure stability of the financial system.
✔✔There are three reasons for the government to get
