Foundations of Financial Markets and Institutions, 4e (Fabozzi/Modigliani/Jones) Chapter 3 Depository Institutions: Activities and Characteristics
Multiple Choice Questions
1 Asset/Liability Problem of Depository Institutions
1) Which of the below statements is TRUE?
A) A depository institution seeks to earn a positive spread between the assets it invests in (deposits and other sources) and the cost of its funds (loans and securities).
B) Interest rate risk refers to the risk that a borrower will default on a loan obligation to the depository institution or that the issuer of a security that the depository institution holds will default on its obligation
C) Regulatory risk is the risk that regulators will change the rules so as to adversely impact the earnings of the institution.
D) If the spread will be positive, it will cost the depository institution more to finance the government securities than it will earn on the funds invested in those securities.
Answer: C
Comment: A depository institution seeks to earn a positive spread between the assets it invests in (loans and securities) and the cost of its funds (deposits and other sources). Credit risk, also called default risk, refers to the risk that a borrower will default on a loan obligation to the depository institution or that the issuer of a security that the depository institution holds will default on its obligation. If the spread will be negative, it will cost the depository institution more to finance the government securities than it will earn on the funds invested in those securities.
Diff: 2
Topic: 3.1 Asset/Liability Problem of Depository Institutions
Objective: 3.1 the role of depository institutions
2) Which of the below statements is FALSE?
A) Absent from any balance sheet of a depository institution is interest rate risk exposure.
B) Managers must be willing to accept some exposure, but they can take various measures to address the interest rate sensitivity of the institution's liabilities and its assets.
C) Regulators impose restrictions on the degree of interest rate risk a depository institution may be exposed to.
D) A depository institution will have an asset/liability committee that is responsible for monitoring the interest rate risk exposure.
Answer: A
Comment: Inherent in any balance sheet of a depository institution is interest rate risk exposure. Diff: 2
Topic: 3.1 Asset/Liability Problem of Depository Institutions
Objective: 3.1 the role of depository institutions
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