FINANCE 1. In an interest rate swap, the firm wishing floating-rate debt: a. has issued fixed rate and is obligated to make fixed-rate payments to its bondholders only if floating-rate payments are received from the other counterparty. b. has issued fixed-rate debt and is obligated to make fixed-rate payments to its bondholders regardless of whether it receives floating-rate payments from the other counterparty. c. has issued floating-rate debt and is obligated to make fixed-rate payments to its bondholders regardless of whether it receives floating-rate payments from the other counterparty. d. has issued floating-rate debt.

2. An interest rate swap is: a. a swap of debt covenant terms. b. an exchange of dividend payments. c. a financial transaction where two borrowers exchange interest payments on their respective debts. d. a loan from a commercial bank.

3. In an interest rate swap: a. the swap dealer faces no credit risk; only the counterparties are exposed. b. there is no credit risk associated with receiving the promised interest rate payments. c. the swap dealer assumes the risk of each counterparty defaulting on its respective principal payments. d. counterparty credit risk has been assumed by the swap dealer.

4. One reason interest rate swaps exist is that: a. commercial banks are not permitted to issue floating-rate debt. b. interest rate swaps allow interest rate risk to be separated from credit risk. c. interest rates are lower because it is easy to fool investors about the credit worthiness of a company with interest rate swaps. d. industrial companies are not permitted to issue fixed-rate debt.

5. A currency swap is: a. an exchange of debt covenant terms in one country for those in another country. b. an exchange of interest payments denominated in one currency for interest payments denominated in another currency c. an exchange of one currency for another currency in the spot exchange market. d. an exchange of floating-rate payments for fixed-rate payments.

6. The "repricing gap" for a bank refers to: a. total assets minus total stockholder's equity. b. ROA minus ROE. c. rate-sensitive assets minus rate-sensitive liabilities. d. net interest income minus overhead expenses.

7. A bank with a negative 1-year repricing gap would expect __________________ if interest rates fall during the coming year. a. an increase in interest expense b. an increase in interest income c. a decrease in net interest income d. an increase in net interest income

8. Asset-side liquidity risk would be exemplified by which of the following? a. unexpected exercise of existing loan commitments b. unexpected changes in demand for checking deposits c. unexpected withdrawals of deposits d. unexpected loan requests e. both unexpected loan requests and unexpected exercise of existing loan commitments

9. In the basic "repricing gap" model, an increase in market interest rates would: a. increase the net interest income of a bank with a positive1-year gap. b. increase the market value of bank assets. c. lower the book value of stockholders' equity of a bank with a negative1-year gap. d. lower the net interest income of a bank with a negative1-year gap.

10. A bank has entered into an agreement whereby they pay a fee of 137.5 bp every six months and, in return, are guaranteed recoupment of interest lost and an adjusted value of bonds if the issue defaults. This agreement is known as a: a. CDS b. TRORS c. Subordinated debt d. Equity tranche e. CLO

11. Note the following tranche schedule for this CDO. Amount ($millions) YTM Term (Mos) Rating CDS Enhanced Tranche A $15 1.98% 30 AAA no Tranche B $85 2.75% 60 AA- no Tranche C $250 3.05% 120 AA- no Tranche D $250 4.87% 240 A yes Tranche Z $50 6.12% 360 A yes Based on the above information, which tranche has the highest likelihood of the occurrence of a credit event? a. Tranche A b. Tranche B c. Tranche C d. Tranche D e. Tranche Z

12. Which of the following statements are true about derivatives? I. Derivatives are securities whose payoff is linked to another security; the payoff is never assured with certainty. II. A swap is a derivative instrument between counterparties that only exchanges a series of cash flows for specific time period at specific intervals; notionals are never swapped. III. Notionals are standardized and tradable derivatives. IV. All derivatives have potential outcomes which may be unfavorable to one of the parties. V. One of the counterparties will always have off-balance-sheet liability risk. a. Only I. is true. b. Only II, III, IV and V are true. c. II and V are false; all others are true d. Only II and III are false, all the others are true e. None are correct (very tricky, professor)

13. True or False? The difference between an interest rate swap and a currency swap is that an interest rate swap is an exchange of fixed-interest payments for floating rate payments, while a currency swap is an exchange of two cash flows from sources denominated in different currencies.

14. True or False? There can be currency swaps that also exchange fixed- for floating-rates.

15. In the "liquidity index" measurement scheme, which of the following is/are true? a. The index is higher if the bank's assets are more liquid. b. The index is higher if the bank's assets are less liquid. c. The index is higher if immediate asset liquidation requires lower prices. d. b and c e. a and c

16. The difference between a bank's average loans and its average deposits is called the: a. financing gap b. liquidity index c. core deposit surplus d. stored liquidity e. purchased liquidity

17. Northridge First National Bank has a portfolio of collateralized debt obligations. Senior management decides to hedge their portfolio against loss of principal. To do so, they would: a. purchase forward interest rate contracts. b. become a counterparty to an interest rate swap. c. purchase credit default swaps. d. short the assets. e. do none of the above.

18. A financial institution buys a $1 million bond issued by a large manufacturing company. The financial institution wants to protect itself from credit risk and pays a counterparty $1,000 annually in return for a promise from the counterparty to pay the financial institution the cash value of the loss from the credit event. As it turns out, trouble in the manufacturing industry causes a credit rating agency to lower the rating of the bonds after two years. As a result, the market value of the bonds falls by $12,000, and the financial institution decides to exercise its CDS on the bonds. In this case, how much is the the notional principal, or notional amount, of the derivative contract? a. $2,000 b. $10,000 c. $12,000 d. $1,000,000

19. Bank solvency crises can be caused by all but which of the following reasons? a. A bank may not be able to fund off-balance sheet loan commitments when they are exercised by the debtor. b. Depositors may elect to withdraw funds from the bank all at once. c. A bank suffers many unexpected loan failures at the same time. d. Banks exercise CDSs to receive principal payment on defaulted bonds.

20. Ways in which banks can remediate liquidity risk includes all of the following except: a. Write repurchase agreements, using short-term U.S. government notes as collateral. b. Issue and sell short-term notes. c. Issue and sell secondary common stock. d. Sell off non-performing loans to a factor. e. Borrow from the Federal Reserve Bank.

21. Consider the following balance sheet positions for a financial institution: Rate-sensitive assets = $200 million. Rate-sensitive liabilities = $100 million Rate-sensitive assets = $100 million. Rate-sensitive liabilities = $150 million Rate-sensitive assets = $150 million. Rate-sensitive liabilities = $140 million What would be total repricing gap and the impact on net interest income of a 1% increase in interest rates for all of the positions? a. Total repricing gap = $60 million; NII = - $600,000 b. Total repricing gap = $60 million; NII = $600,000 c. Total repricing gap = $450 million; NII = $4.5 million d. Total repricing gap = $150 million; NII = $1 million

22. If a bank has a negative repricing gap, falling interest rates increase profitability. True or False?

23. Consider the balance sheet (in millions of $) for First Integrated Bank. What is the FIB's duration gap? (Calculated answer carry only to the tenths place.) AMOUNT DURATION ASSETS $790 MILLION 7.5 YEARS LIABILITIES $650 MILLION 1.5 YEARS

24. Study the following Balance Sheet. Based on its structure, what is the potential liability to the bank if interest rates decrease 1% during a 1-year period? Bank A Balance Sheet (in $1,000,000s) Assets Liabilities Cash & Cash Equivalents $ 5.00 Demand Deposits $ 508.00 Loans: Fixed-Rate Passbook Accounts $ 978.00 <6-month $ 23.00 3-mo comm'l paper 2.70 6-12 months 22.00 time deposits: 1-year 134.00 2,335.50 2-years 142.00 2-year 1,226.80>15-years $ 5,567.00 3-5 year $ 928.40 Loans: Variable-Rate 30-bonds $ 1,705.60 10-year variable $ 345.00 Equity $ 920.00 30-year variable $ 2,367.00 OBS Liabilities TOTAL: $ 8,605.00 $ 8,605.00 a. No risk to the Bank, it has no repricing gap. b. No risk to the Bank, it has a negative repricing gap. c. The bank is exposed to about -$30 million for every 1% increase in interest rates, so the bank has negative repricing gap. d. The bank is exposed to $30 million for every 1% increase in interest rates, so the bank has positive repricing gap. e. None of the above.

25. Standard Acme Bancorp has the following assets. What is its Liquidity Index? (Calculated answer carry only to the tenths place.) Item $ in $1,000s $ in $1,000s Risk-Adjustor Cash 345,000 100% Short-term Treasuries 12,546,800 100% Treasury Bonds 609,765 100% Corporate Bonds 235,680 80% Muni Bonds 125,600 75% Loans 345,075,000 Real Estate Loans 275,680,000 90% Consumer Loans 12,865,000 85% Comml/Bus Loans 56,530,000 95% Real Estate 345,000 65% Goodwill & Other Intangibles 2,675,000 0% $ 359,957,845

26. Your bank has $153 million in loan commitments which are now being drawn upon. You arent sure, but you are beginning to think that the bank may have some problems now. What sort of risk are you concerned about, and how can you remediate it? a. Underwriting risk; tighten credit requirements. b. Liquidity risk; enter the repo market. c. Solvency risk; sell assets or sell a secondary stock issue. d. Interest rate risk; arrange an interest rate swap. e. Off-Balance Sheet Risk; arrange swaps, swaptions or forwards at the time the loan commitment is made.

27. Assuming the following balance sheet, what is the Banks CAR? ASSETS ($1,000,000s) LIABILITIES AND EQUITY ($1,000,000s) Cash 185 Demand Deposits 2187 Fed Reserve Deposits 97 Time Deposits 2210 Treasuries 548 Bonds/Other Debt 258 Mortgages 2561 Equity 270 Commercial Loans 1298 Stocks and Bonds 236 TOTAL ASSETS 4925 TOTAL LIABS & EQUITY 4925

28. Using the statement in Problem 27, if the Bank suffers an outflow of $125 million, how much does the bank need to convert into reserves to satisfy regulatory agencies (answer in millions; i.e., if the answer was $125,000,000 or $125 million, enter 125)?

29. When a bank deals with deposit "drainage" by buying more fed funds or entering the repurchase agreement market, we say the bank is using: a. long-term funding sources. b. core deposits. c. purchased liquidity. d. liquidation of assets. e. brokered deposits.

30. Note the following schedules from the National Bank of Newton. What is the bank's NSFR? $ ASF FACTOR ASF $ RSF FACTOR RSF Demand Deposits $100.86 100% $100.86 Cash $215.03 0% $ - Savings Accounts $25.48 95% $24.21 Dep w/ Fed Res $327.00 0% $ - CDs Maturities < 1 yr $1258.32 90% $1132.49 Net Cash fr Banks $36.41 0% $ - CDs Maturities > 1 yr $1752.30 0% $ - Treasuries $458.65 5% $22.93 Business Accounts $2586.21 50% $1293.11 Loans, Mat < 1 yr $997.25 50% 498.63 Bank Debt $544.88 0% $ - Loans, Mat > 1 yr $1085.62 100% $1085.62 Federal Reserve Loan $251.30 100% $251.30 Mortgages $2050.85 50% $1025.43 EQUITY $685.60 100% $685.60 CMOs, CDOs, MBBs $267.72 65% $174.02 TOT ASF Liab + Eqty $7205.95 $3487.56 TOT RSF $5438.53 $2806.62