18 Which of the following is not a characteristic of a loan commitment? A. B. C. D. E. The interest rate on fixed-rate loans is determined at the time of the loan is actually taken down. In a floating-rate loan the borrower pays interest rate in force when the loan is actually taken down. Floating-rate loans transfer the interest rate risk to the borrower. The time period for which the loan is available is negotiated at the time of the loan agreement. The maximum amount of the loan is negotiated at the time of the loan agreement. 19 What is the essential idea behind RAROC? Analyzing historic or past default risk experience. Evaluating the actual or contractually promised annual ROA on a loan. Balancing expected interest and fee income less the cost of funds against the loan's expected risk. Dividing net interest and fees by the amount lent. Extracting expected default rates from the current term structure of interest rates. E. 20 . Why do households prefer to use FIs as intermediaries to invest their money? A. B. C. D. E. The FI has can benefit from combining funds and negotiating lower asset prices and transactions costs. Transaction costs are low to the household since FIS are more efficient in monitoring and gathering investment information. To receive the benefits of diversification that households may not be able to achieve on their own. The FI can provide insurance at relatively low cost that will protect funds under management. All of the above. 21 Which term defines the risk related to the uncertainty of an FI's earnings on its trading portfolio caused by changes, and particularly extreme changes in market conditions? A. B. C D. E. Credit risk. Sovereign risk. Default risk. Market risk. Interest rate risk