2016-FRR Questions Prepare with Learning Information! 2024 Regularly updated
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NEW QUESTION # 129
Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan is
collateralized with $55,000. The loan also has an annual expected default rate of 2%, and loss given default at
50%. In this case, what will the bank's expected loss be?
- A. $750
- B. $1,300
- C. $1,000
- D. $500
Answer: D
NEW QUESTION # 130
To reduce the variability of net interest income, Gamma Bank can swap positions that make its duration gap equal to
- A. 0.5
- B. 0
- C. 1
- D. 2
Answer: C
Explanation:
To minimize the variability of net interest income, Gamma Bank should aim to have a duration gap of zero.
This means that the weighted average duration of assets matches the weighted average duration of liabilities, thus immunizing the bank's net interest income against changes in interest rates.
NEW QUESTION # 131
Beta Insurance Company is only allowed to invest in investment grade bonds. To maximize the interest income, Beta Insurance Company should invest in bonds with which of the following ratings?
- A. AA
- B. A
- C. B
- D. AAA
Answer: B
Explanation:
Beta Insurance Company, which can only invest in investment-grade bonds, should invest in bonds with an
"A" rating to maximize interest income. Investment-grade bonds are rated from AAA to BBB. While AAA bonds offer the highest credit quality, they also offer the lowest yield. Bonds rated A offer a good balance between credit quality and higher interest income compared to AAA and AA bonds.
NEW QUESTION # 132
DeltaFin wants to develop a control scoring method for its RCSA program. Which of the following statements regarding scoring methods are correct?
I. DeltaFin can develop a control scoring method that assesses both the design and the performance of the control.
II. DeltaFin can combine the design and performance scores for each control to produce an overall control effectiveness score.
III. DeltaFin can use the control performance scores to compute an overall risk severity score.
IV. DeltaFin can determine its own appropriate control scoring method.
- A. II and III
- B. I, II and IV
- C. II, III, and IV
- D. I only
Answer: B
Explanation:
* Statement I: DeltaFin can develop a control scoring method that assesses both the design and the performance of the control.
* Verified and correct. It is essential to assess both design and performance to ensure that controls are not only well-designed but also effectively implemented.
* Statement II: DeltaFin can combine the design and performance scores for each control to produce an overall control effectiveness score.
* Verified and correct. Combining both scores provides a comprehensive measure of control effectiveness.
* Statement III: DeltaFin can use the control performance scores to compute an overall risk severity score.
* This is not accurate as the risk severity score typically considers the inherent risk and the residual risk after considering the controls, not just the performance scores.
* Statement IV: DeltaFin can determine its own appropriate control scoring method.
* Verified and correct. Organizations have the flexibility to develop their own scoring methods that best fit their operational risk profiles and needs.
NEW QUESTION # 133
Which of the following attributes of duration gap model typically cause criticism?
I. Basis risk
II. Errors in the linear model
III. Costs of immunization
IV. Constant nature of calculation
- A. II, III, IV
- B. I, III, IV
- C. I, II, III
- D. I, II
Answer: C
NEW QUESTION # 134
Which one of the following statements about futures contracts is correct?
I. Futures contracts are subject to the same risks as the underlying instruments.
II. Futures contracts have additional interest rate risk die to the future delivery date.
III. Futures contracts traded in a clearinghouse system are exposed to credit risk with numerous counterparties.
- A. I
- B. II, III
- C. I, II, III
- D. I, III
Answer: A
NEW QUESTION # 135
Which one of the following four model types would assign an obligor to an obligor class based on the risk
characteristics of the borrower at the time the loan was originated and estimate the default probability based on
the past default rate of the members of that particular class?
- A. Dynamic models
- B. Credit rating models
- C. Historical frequency models
- D. Causal models
Answer: C
NEW QUESTION # 136
Which of the following measure describes the symmetry of a statistical distribution?
- A. Skewness
- B. Standard deviation
- C. Mean
- D. Kurtosis
Answer: A
Explanation:
Skewness measures the asymmetry of the return distribution. Positive skewness indicates a distribution with a longer or fatter right tail, while negative skewness indicates a distribution with a longer or fatter left tail. It is the correct measure for describing the symmetry of a statistical distribution.
NEW QUESTION # 137
Which of the following bank events could stress the bank's liquidity position?
I. Obligations to fund assets like mortgages
II. Unusually large depositor withdrawals
III. Counterparty collateral calls
IV. Nonperforming assets
- A. IV
- B. I, II
- C. I, II, III and IV
- D. III, IV
Answer: C
NEW QUESTION # 138
A bank has a large number of auto loans and would prefer to sell them to raise cash for more funding.
However, selling individual auto loans is difficult. What could the bank do?
- A. Merge with another bank.
- B. Package the loans into a securitized vehicle and sell the low risk portion of the portfolio.
- C. Set up a marketing team to sell individual loans to investors.
- D. Obtain a stronger credit rating so that the bank could borrow at a cheaper rate.
Answer: B
Explanation:
When a bank has a large number of auto loans and finds it difficult to sell them individually, it can take the following steps to raise cash:
* Packaging into a Securitized Vehicle: The bank can package these auto loans into a securitized vehicle, such as a collateralized loan obligation (CLO) or an asset-backed security (ABS). By doing so, the bank can create a portfolio of loans that can be sold as a single security.
* Selling the Low-Risk Portion: Once the loans are securitized, the bank can sell the low-risk portion of the portfolio to investors. This part of the portfolio is more attractive to investors because it typically offers lower risk and stable returns, making it easier to sell compared to individual loans.
References: This approach is detailed in "How Finance Works," where securitization is described as a method for banks to sell illiquid assets by packaging them into marketable securities.
NEW QUESTION # 139
A financial analyst is trying to distinguish credit risk from market risk. A $100 loan collateralized with $200 in
stock has limited ___, but an uncollateralized obligation issued by a large bank to pay an amount linked to the
long-term performance of the Nikkei 225 Index that measures the performance of the leading Japanese stocks
on the Tokyo Stock Exchange likely has more ___ than ___.
- A. Market risk; credit risk; market risk
- B. Legal risk; market risk; credit risk
- C. Market risk; market risk; credit risk
- D. Credit risk, legal risk; market risk
Answer: C
NEW QUESTION # 140
Which one of the following four examples would not be considered a typical source of market risk?
- A. Changes in the oil price due to the discovery of new oil fields.
- B. Unexpected changes in the term structure of interest rates.
- C. The JPY depreciating against the USD.
- D. Increased default rate on commercial mortgages due to higher interest rates.
Answer: D
Explanation:
Market risk typically involves risks that affect the entire market or market segment. These include:
* Unexpected changes in the term structure of interest rates:
* This affects the prices of bonds and other interest-rate-sensitive securities.
* The JPY depreciating against the USD:
* This is an example of foreign exchange risk, which is a type of market risk.
* Changes in the oil price due to the discovery of new oil fields:
* This affects commodities markets and can have broader economic implications.
* Increased default rate on commercial mortgages due to higher interest rates:
* This is more of a credit risk than market risk. It specifically relates to the creditworthiness of borrowers rather than the overall market movements.
Thus, the increased default rate on commercial mortgages due to higher interest rates is not a typical source of market risk.
ReferencesSource: How Finance Works
NEW QUESTION # 141
Forward rate agreements (FRA) are:
- A. OTC derivative contracts that allow banks and customers to obtain the risk/reward profile of long-term
interest rates by relying on long-term funding. - B. Exchange traded derivative contracts that allow banks to take positions in forward interest rates.
- C. Exchange traded derivative contracts that allow banks to take positions in future exchange rates.
- D. OTC derivative contracts that allow banks to take positions in forward interest rates.
Answer: D
NEW QUESTION # 142
Which one of the following four global markets for financial assets or instruments is widely believed to be the
most liquid?
- A. Foreign exchange market.
- B. Commodities market
- C. Equity market.
- D. Fixed income market
Answer: A
NEW QUESTION # 143
Which one of the following four statements about the relationship between exchange rates and option values is correct?
- A. As the dollar appreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate increases.
- B. As the dollar appreciates relative to the pound, the right to sell dollars at a fixed pound exchange rate increases.
- C. As the dollar depreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate increases.
- D. As the dollar appreciates relative to the pound, the right to buy dollars at a fixed pound exchange rate decreases.
Answer: A
Explanation:
When the dollar strengthens against the pound, the value of an option that allows the purchase of dollars at a predetermined exchange rate increases. This is because the option provides the right to buy the appreciating dollar at a rate that becomes more favorable as the market rate moves higher.
NEW QUESTION # 144
Which one of the following four factors typically drives the pricing of wholesale products?
- A. Marketing considerations
- B. Long-term competitiveness
- C. Prevailing market price
- D. Overall risk exposure
Answer: C
Explanation:
The pricing of wholesale products is primarily driven by prevailing market prices. Unlike retail products, where marketing and customer retention strategies might influence pricing, wholesale products are priced based on the current market conditions, supply and demand dynamics, and competitive landscape. This ensures that the prices reflect the true market value and risks associated with the products.
NEW QUESTION # 145
In the United States, foreign exchange derivative transactions typically occur between
- A. A few large internationally active banks, where the risks become concentrated.
- B. Regional banks with international operations, where the risks depend on the specific derivative transactions.
- C. Thrifts and large commercial banks, where the risks become isolated.
- D. All banks with international branches, where the risks become widely distributed based on trading exposures.
Answer: A
Explanation:
In the United States, foreign exchange derivative transactions typically occur between a few large internationally active banks. These banks are major players in the foreign exchange markets and often act as intermediaries, providing liquidity and managing risks for themselves and their clients. The concentration of these transactions among a few large banks leads to a concentration of risks within these institutions.
NEW QUESTION # 146
Which of the following are typical properties of a statistical distribution of potential losses that a bank might
sustain over a period of time?
I. The range of possible losses above the average loss is much greater than those below the average loss.
II. The loss that is most likely to occur is below the average loss.
III. The loss that is most likely to occur is above the average loss.
- A. II
- B. III
- C. I, II
- D. I, III
Answer: A
NEW QUESTION # 147
Which one of the following four statements regarding the current value of a transaction and its purposes is
INCORRECT?
- A. Margin call by futures exchanges are based on the current market value.
- B. For cash settled instrument the final market value is used to settle the transaction with the counterparty
- C. Profit and loss calculations are made by comparing the current values to the intrinsic values.
- D. Counterparty credit risk calculations are made by analyzing the current values of all deals with the same
counterparty.
Answer: C
NEW QUESTION # 148
Which one of the following four options correctly identifies the core difference between bonds and loans?
- A. These instruments cannot be used to estimate credit capital under provisions of the Basel II Accord.
- B. These instruments are subject to different credit counterparty regulations.
- C. These instruments have different pricing drivers.
- D. These instruments receive a different legal treatment.
Answer: D
NEW QUESTION # 149
In analyzing the historical performance of a financial product, you are concerned about "fat tails", the
probability of extreme returns compared to realized returns. Which of the following measures should you use
to determine if the product return distribution of the product has "fat tails"?
- A. Skewness
- B. Standard deviation
- C. Kurtosis
- D. Mean
Answer: C
NEW QUESTION # 150
Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan is collateralized with $55,000. The loan also has an annual expected default rate of 2%, and loss given default at
50%. In this case, what will the bank's expected loss be?
- A. $500
- B. $750
- C. $1,300
- D. $1,000
Answer: D
Explanation:
To determine the bank's expected loss, we need to calculate the expected loss given default (LGD) and then use the annual expected default rate to find the total expected loss.
* Loan Amount (Exposure at Default, EAD): $100,000
* Collateral: $55,000
* Net Exposure (EAD - Collateral): $100,000 - $55,000 = $45,000
* Loss Given Default (LGD): 50% of Net Exposure =50%×$45,000=$22,500LGD
=50%×$45,000=$22,500
* Annual Expected Default Rate: 2%
* Expected Loss: Annual Expected Default Rate × LGD
Expected Loss=2%×$22,500=0.02×22,500=$450Expected Loss=2%×$22,500=0.02×22,500=$450 Hence, the expected loss due to default is $450, but we need to find the total expected loss including the interest, which is typically considered the exposure part.
Total expected loss is primarily focusing on the loan risk and the direct calculation of LGD × Default Rate.
NEW QUESTION # 151
Which one of the following market risk measures evaluates the bank's earnings sensitivity?
- A. Large exposure risk identification
- B. Earnings-at-risk stress testing
- C. Value-at-risk back testing
- D. Cash flow stress testing
Answer: B
Explanation:
Earnings-at-risk stress testing evaluates the bank's earnings sensitivity. This method assesses how changes in economic conditions or other risk factors might impact the bank's earnings, providing insights into the potential volatility in profitability.
NEW QUESTION # 152
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