Started on Friday, 18 October 2019, 12:25 PM

State Finished
Completed on Friday, 18 October 2019, 1:41 PM
Time taken 1 hour 15 mins
Marks 41.00/60.00
Grade 6.83 out of 10.00 (68%)
Question 1
Correct Mark 1.00 out of 1.00
Question text
What is the difference between a retail banking and a wholesale bank?
Retail banks provide finance for international trade or raise finance for business and
governments, whereas Wholesale Banks deal with the general public.
Select one:

a. Retail banks provide finance for the high net worth individuals, whereas wholesale banks
provide the finance for the general public.

b. Retail banks deal with the general public, whereas wholesale banks provide finance for
international trade or raise finance for businesses and governments.
Retail Banks deal with the general public, Wholesale Banks provide finance for international
trade or raise finance for businesses and governments.

c. Retail banks provide finance for international trade or raise finance for business and
governments, whereas Wholesale Banks deal with the general public.

d. Wholesale banks provide finance for high net worth individuals, whereas retail banks provide
the finance for the general public.
Feedback: Your answer is correct.
The correct answer is: Retail banks deal with the general public, whereas wholesale banks
provide finance for international trade or raise finance for businesses and governments.
Question 2
Correct Mark 1.00 out of 1.00
Question text
A bank has $100m in earning assets that are expected to generate a 10% net interest margin
and the bank is prepared to risk a proportionate change in net interest margin of up to 20%
during the year. If the bank expects interest rates will vary by up to 5% what is the target GAP?
Select one:

a. ±$20m.

b. ±$40m.

c. ±$5m.

d. ±$10m.
Feedback: Your answer is correct.
The correct answer is: ±$40m.
Question 3
Incorrect Mark 0.00 out of 1.00
Question text
What will be the profit or loss for the holder of a put option with a strike price of 160 and a
premium of 15 if the underlying asset price is 165 at expiry?
Select one:

a. Loss of 10.
If an option is not exercised the holder suffers their maximum loss of the premium paid. A put
option will only be exercised if the underlying price falls below the strike price which is not the
case here. The holder is, therefore, suffering a loss of 15 (the premium).

b. Loss of 15.

c. Profit of 15.

d. Profit of 10.
Feedback: Your answer is incorrect.
The correct answer is: Loss of 15.
Question 4
Incorrect Mark 0.00 out of 1.00
Question text
Which of the following statements are true?
Select one:

a. The cost of funds does not include administrative expenses.

b. The cost of funds is the total cost incurred for each unit of funds available for investment.
If an option is not exercised the holder suffers their maximum loss of the premium paid. A put
option will only be exercised if the underlying price falls below the strike price which is not the
case here. The holder is, therefore, suffering a loss of 15 (the premium).

c. The cost of funds is the bank’s total borrowing cost.

d. The cost of funds is the cost of which the bank can attract new deposits.
Feedback: Your answer is incorrect.
The correct answer is: The cost of funds does not include administrative expenses.
Question 5
Incorrect Mark 0.00 out of 1.00
Question text
Extracts from a client’s financial statements shows the following.
Interest payable 150
Interest receivable 50
Profit before interest payable and tax 350
Profit after interest payable and tax 200
What is their interest cover to one decimal place?
Select one:

a. 3.4.

b. 1.9.

c. 2.6.
Interest cover can be calculated as:

d. 2.3.
Feedback: Your answer is incorrect.
The correct answer is: 2.3.
Question 6
Correct Mark 1.00 out of 1.00
Question text
The balance sheet gap on a particular portfolio is $12.00m. If interest rates rise by 1%, the
yield falls by 0.8%. Calculate the change in net income from this portfolio if interest rates fall
0.7%.
Select one:

a. –$6.72m

b. +$9.60m

c. +$6.72m
The earnings change ratio or beta for this portfolio is

d. –$9.60m
Feedback: Your answer is correct.
The correct answer is: +$6.72m
Question 7
Incorrect Mark 0.00 out of 1.00
Question text
If a put option position is in-the-money, which of the following must be true?
Select one:

a. Price of the underlying > strike price.

b. Price of the underlying > strike price + premium.

c. Price of the underlying < strike price – premium.

A put option is in-the-money when the price of the underlying is below the strike price. It will
become profitable when the price of the underlying falls below the strike price minus the
premium, however an in-the-money option is not necessarily profitable. In-the-money means
that an option is worth exercising, though this may be simply to reduce losses.

d. Price of the underlying < strike price.

Feedback: Your answer is incorrect.
The correct answer is: Price of the underlying < strike price.
Question 8
Correct Mark 1.00 out of 1.00
Question text
Within the clearing system, what is dwell?
Select one:

a. The float created by either the sending or receiving bank when the funds are under their
control rather than the customers.

b. The time during which funds are under the control of the customer, rather than either the
sending or receiving bank.

c. The time during which funds are under the control of either the sending or receiving bank,
rather than under the control of the customers.
Dwell is the time during which funds are under the control of either the sending or receiving
bank, rather than under the control of the customers.

d. The float created by the sending or receiving bank when the funds are under the control of
the customer rather than under the control of the bank.
Feedback: Your answer is correct.
The correct answer is: The time during which funds are under the control of either the sending
or receiving bank, rather than under the control of the customers.
Question 9
Correct Mark 1.00 out of 1.00
Question text
Which of the following alternatives does not involve discounted cash flow techniques?
I. Payback period.
II. Internal rate of return.
III. Net present value.
IV. Return on investment.
Select one:

a. II and III only.

b. I, II and IV only.

c. I and IV only.
Neither payback period nor return on investment employee discounted cash flow techniques.

d. I and II only.
Feedback: Your answer is correct.
The correct answer is: I and IV only.
Question 10
Correct Mark 1.00 out of 1.00
Question text
A bank is being established with the aim of minimizing costs to customers and the managers
are looking to determine the optimal funding and operational strategies.

Which of the following should you suggest to be most appropriate for the bank?
Select one:

a. Relationship banking using low levels of wholesale funding.

b. Transactional banking using low levels of wholesale funding.

If a bank is seeking to minimise costs it must look for the lowest funding costs (minimum
wholesale funding) and lowest operational costs (transactional banking).
c. Transactional banking using high levels of wholesale funding.

d. Relationship banking using high levels of wholesale funding.

Feedback: Your answer is correct.
The correct answer is: Transactional banking using low levels of wholesale funding.
Question 11
Correct Mark 1.00 out of 1.00
Question text
A traditional relationship bank with a large and expanding retail client base spread across the
entire country is seeing a greater proportion of business being conducted on-line.
What advice would you offer regarding their strategy towards their branches?
I. Expand both the number and size of branches.
II. Expand the number but contract the size of branches.
III. Contract the number but expand the size of branches.
IV. Contract the number and size of branches.
Select one:

a. III or IV only.

b. I or II only.

c. I or III only.

d. II or IV only.
In isolation, a bank with an expanding broadly spread client base should consider expanding
the number of branches though, given technological changes, may look for smaller new
branches.
In isolation, a bank where a greater proportion of business is being conducted on-line will need
fewer branches and less space in each branch.
We can therefore be certain that the average branch size should be reduced but cannot
conclude on the number of branches without knowing the relative impact of the client base
growth and the move to on-line banking.
Feedback: Your answer is correct.
The correct answer is: II or IV only.
Question 12
Incorrect Mark 0.00 out of 1.00
Question text
A bank is concerned that their income levels are quite volatile, being highly exposed and
correlated to interest rate changes. What advice would you offer the bank?
I. Seek to expand sources of non-interest income.
II. Seek to increase the proportion of fixed rate loans advanced.
III. Seek to increase the proportion of floating rate finance.
Select one:

a. I and II only.
A bank can reduce its exposure to interest rates by expanding its sources of non-interest
income. A bank whose income is positively correlated to interest rate movements has a
positive static GAP that it can reduce by either increasing the proportion of fixed rate loans
advanced or increasing the proportion of floating rate finance.

b. II and III only.

c. I and III only.

d. I, II and III only.
Feedback: Your answer is incorrect.
The correct answer is: I, II and III only.
Question 13
Correct Mark 1.00 out of 1.00
Question text
You are provided with the following information from the balance sheet of ABC Bank.
Fixed rate assets $500
Rate sensitive assets $800
Fixed rate liabilities $400
Rate sensitive liabilities $900
What is the static GAP and the implication of a rise in interest rates?
Select one:

a. –100, interest income rises.

b. +100, interest income rises.

c. –100, interest income falls.

–100, interest income rises.
A negative static GAP implies a negative correlation between interest rate movements and
interest income, hence a rise in interest rates for this bank will result in a fall in interest
income.

d. +100, interest income falls.

Feedback: Your answer is correct.
The correct answer is: –100, interest income falls.
Question 14
Incorrect Mark 0.00 out of 1.00
Question text
Which of the following factors have primarily influenced the change in the layout and design of
an ongoing bank branch?
I. Technological developments.
II. Move to electronic payments.
III. Increased use of internet banking.
Select one:

a. I and III only.

b. I, II and III only.

Technological developments have reduced the need for branch bank clerks to record
transactions and the increased use of electronic payments has reduced the need for cash and
large bank vaults. The increased use of the internet will impact on space requirements for new
bank branch as but would not impact upon an existing bank branch.

c. I and II only.

d. II and III only.

Feedback: Your answer is incorrect.
The correct answer is: I and II only.
Question 15
Correct Mark 1.00 out of 1.00
Question text
Which of the following is not an example of market risk?
Select one:

a. Equity index risk

b. Interest rate risk

c. Currency risk

d. Credit risk
Feedback: The correct answer is: Credit risk
Question 16
Correct Mark 1.00 out of 1.00
Question text
A bank believes that bond yields will rise in the coming year.
What action would you recommend it takes with its bond investment portfolio?
Select one:

a. Move to longer dated lower coupon bonds.

b. Move to shorter dated higher coupon bonds.

If the bank feels that bond yields are liable to rise then they expect bond prices to fall, resulting
in a loss on the investment portfolio. To minimise this loss they need to minimise the duration
of their bond holdings that they can do by minimising maturities and maximising coupons.

c. Move to shorter dated lower coupon bonds.

d. Move to longer dated higher coupon bonds.

Feedback: Your answer is correct.
The correct answer is: Move to shorter dated higher coupon bonds.
Question 17
Correct Mark 1.00 out of 1.00
Question text
A bank believes the economy is at position A on the economic cycle.

Select one:

a. Contraction, yield curve steepening

On the diagram shown, the economy has passed the peak and is now contracting. In a
contacting economy the monetary authority is liable to lower short-term interest rates to
provide a stimulus. As a result of the yield curve is liable to steepen.

b. Contraction, yield curve flattening.

c. Recovery, yield curve steepening.

d. Recovery, yield curve flattening.

Feedback: Your answer is correct.
The correct answer is: Contraction, yield curve steepening
Question 18
Incorrect Mark 0.00 out of 1.00
Question text
A bank’s borrowings are exposed to increases in interest rates and it wishes to hedge this
exposure with suitable derivatives. Which of the following would you recommend?
I. Short STIR futures.
II. Sell FRAs.
III. Buy an interest rate swap.
Select one:

a. I only.

b. II and III only.

To hedge against an interest rate rise we can sell STIR futures, buy FRAs or buy interest rate
swaps (contracting to pay fixed and receive floating).

c. I and III only.

d. I and II only.
Feedback: Your answer is incorrect.
The correct answer is: I and III only.
Question 19
Correct Mark 1.00 out of 1.00
Question text
Barriers to entry would form part of which of the following?
Select one:

a. Market or industry risk assessment.

The consideration of any barriers to entry would form part of the assessment of market and
industry risk.

b. Business or operational risk assessment.

c. Documentation and pricing for risk.

d. Financial risk assessment.

Feedback: Your answer is correct.
The correct answer is: Market or industry risk assessment.
Question 20
Correct Mark 1.00 out of 1.00
Question text
Which of the following is NOT one of the principal reasons for a bank to maintain an
investment portfolio?
Select one:

a. To diversify credit risk.

b. To provide liquidity.

c. To manage interest rate exposure.

d. To trade investments with a view of making speculative gains.

Though banks may seek to make a gain in buying and trading investments in a speculative
manner, the primary reasons for a bank to hold an investment portfolio are to help
manage credit risk, liquidity and interest rate exposure.
Feedback: Your answer is correct.
The correct answer is: To trade investments with a view of making speculative gains.

Question 21
Correct Mark 1.00 out of 1.00
Question text
A bank has constructed an immunising portfolio of bonds with duration evenly spread over
time. How would this portfolio be described?
Select one:

a. Bullet portfolio.

b. Barbell portfolio.

c. Ladder portfolio.
An immunising portfolio of bonds with durations evenly spread over time would be referred to
as a ladder portfolio.

d. Focused portfolio.
Feedback: Your answer is correct.
The correct answer is: Ladder portfolio.
Question 22
Incorrect Mark 0.00 out of 1.00
Question text
A bank wishes to hedge bond portfolio exposure against a rate rise. Which of the following
bond derivative techniques would you recommend?
I. Long hedge with futures.
II. Long exchange-traded put option.
III. Short hedge with futures.
Select one:

a. II and III only.

b. I and III only.

c. I and II only.
If rates rise bond prices will fall, so we are looking to hedge against a price fall that we can do
with a short hedge with futures or a long put option. Both of these strategies generate a gain
as prices fall that can be used to offset the asset (bond) loss.

d. I only.
Feedback: Your answer is incorrect.
The correct answer is: II and III only.
Question 23
Correct Mark 1.00 out of 1.00
Question text
A bank has the following asset and derivative positions.

Calculate the absolute minimum Tier 1 capital that the bank must hold to comply with Basel III
which was revised to a lower percentage compare to Basel II.
Select one:

a. $169.6m.

b. $124.2m.
Under Basel III the absolute minimum Tier 1 capital that must be held is 6% of the risk-
weighted assets, i.e.

c. $165.6m.

d. $139.2m.
Feedback: Your answer is correct.
The correct answer is: $124.2m.
Question 24
Correct Mark 1.00 out of 1.00
Question text
A tax exempt bond returns 5%. If the tax rate is 20% what must be the gross (pre- tax) return
on a taxed bond in order to produce the same after-tax return as this tax exempt bond?
Select one:

a. 6.566%.

b. 6.125%.

c. 6.250%.
This can be assessed by the tax equivalent yield which is calculated as:

d. 6.333%.
Feedback: Your answer is correct.
The correct answer is: 6.250%.
Question 25
Correct Mark 1.00 out of 1.00
Question text
A bank just extended a loan to a young and poor couple. What is most likely to happen next?
Select one:

a. The couple is more likely to default if there are any interest rate hikes.
The couple is more likely to default if there are any interest rate hikes.

b. Laudable practice since the couple is granted access to credit at cheaper rates.

c. Require approval from regulators since it is irresponsible lending.

d. The bank will suffer losses as the bank has taken on more risk.
Feedback: Your answer is correct.
The correct answer is: The couple is more likely to default if there are any interest rate hikes.
Question 26
Correct Mark 1.00 out of 1.00
Question text
A bank as opening reserves of $846m and closing reserves of $937m. If profits for the year
were $247m and there have been no other reserve movements how much did the bank pay out
as a dividend for the year?

Select one:

a. $185m.

b. $247m.

c. $91m.

d. $156m.

Feedback: Your answer is correct.

The correct answer is: $156m.
Question 27
Correct Mark 1.00 out of 1.00
Question text
An investment of $15,000 is made at a compound rate of 10% and $1,000 is withdrawn at the
end of each year.
What is its value after eight years?
Select one:

a. $16,420.

b. $20,624.

c. $20,718.
This can be quite a complicated question. The best method is to calculate the PV of the cash
flows, then compound that value for eight years at 10% to give the terminal value

d. $19,901.
Feedback: Your answer is correct.
The correct answer is: $20,718.
Question 28
Incorrect Mark 0.00 out of 1.00
Question text
A bank currently has $1,200 of risk-weighted assets, $90m of common equity and $105m of
Tier 1 capital and is seeking to expand.
In looking to comply with Basel III requirements, what actions would you propose the bank
takes?
Select one:

a. The bank should retain its equity but reduce its Tier 1 capital.

b. The bank should repay some equity and reduce its Tier 1 capital.
The normal minimum level of common equity and Tier 1 capital will be the absolute minimum
levels of 4.5% and 6% plus the conservation buffer of 2.5%, i.e. 7.0% and 8.5%. When applied
to the risk-weighted assets this gives minimum levels of $84m ($1,200 × 7.0%) and
$98m ($1,200 × 8.5%) that are just sufficient to satisfy current needs. An expanding bank
would be advised to hold more that these minimum figures as raising new equity capital is
expensive and time consuming. Since the current common equity and Tier 1 capital levels are
both around 7% above the current minimum needs they would be advised to retain both their
equity and Tier 1 capital.

c. The bank should retain its equity and retain its Tier 1 capital.

d. The bank should repay some equity but maintain its Tier 1 capital.
Feedback: Your answer is incorrect.
The correct answer is: The bank should retain its equity and retain its Tier 1 capital.
Question 29
Correct Mark 1.00 out of 1.00
Question text
Extracts from the balance sheet of bank ABC shows the following information.
$m
Equity 10
Reserves 20
Bonds issued 30
Customer deposits 90
Loans made by a bank 100
Other investments 30
Non-current/fixed assets 10
Liquid assets 20
What is the debt to equity ratio for ABC?
Select one:

a. 400%.

b. 300%.

c. 1,200%.

d. 900%.
Feedback: Your answer is correct.
The correct answer is: 400%.
Question 30
Incorrect Mark 0.00 out of 1.00
Question text
What is consumer credit regulation trying to achieve?
Select one:

a. Aims to set an internationally accepted consumer credit contracts and agreements

regardless of local conditions and laws.

b. Aims to set an internationally accepted consumer credit contracts and agreements

regardless of loan categories (e.g. non-corporate businesses and individuals).
Aims to protect the borrowers who may be in a weaker position than the lender.

c. Aims to protect the lenders who may be subject to excessive competition.

d. Aims to protect the borrowers who may be in a weaker position than the lender.
Feedback
Your answer is incorrect.
The correct answer is: Aims to protect the borrowers who may be in a weaker position than the
lender.
Question 31
Correct Mark 1.00 out of 1.00
Question text
Extracts from the balance sheet of XYZ Bank shows the following information.
$m
Equity 80
Reserves 1,600
Deposits from banks 1,300
Deposits from customers 4,700
Bonds issued 8,000
Securitised mortgage liabilities 5,500
What is the debt to equity ratio for XYZ?
Select one:

a. 11.6.

b. 10.8.

c. 12.2.

d. 8.3.
Feedback: Your answer is correct.
The correct answer is: 11.6.
Question 32
Correct Mark 1.00 out of 1.00
Question text
In respect of non-interest income, which of the following statements is true?
Select one:

a. Non-interest income falls in times of falling interest rates.

Maximising their non-interest income provides banks with more predictable cash flows.

b. Non-interest income is the largest source of income for retail banks.

c. Fee income is 100% profits.

d. Non-interest income falls in times of falling interest rates.

Feedback: Your answer is correct.
The correct answer is: Non-interest income falls in times of falling interest rates.
Question 33
Incorrect Mark 0.00 out of 1.00
Question text
A client approaches you seeking finance for a new project that will cost $13m where annual
returns of $2m are expected each year for the next 10 years, though these are not guaranteed.
Based on the project risk you have determined that the bank should charge a rate of 8%. What
advice would you offer the client?
Select one:

a. The project is just viable with a noticeable risk to the client.

b. The project is just not viable but would be if income levels rose.

c. The project is not viable and cannot realistically become viable.

d. The project is viable with little risk to the client.

Calculating the NPV of the project cash flows based on the rate offered gives

The positive NPV suggests a gain at this lending rate, however just a small change in future
income levels would wipe this gain out. If annual income fell to just $1.93m the project is no
longer viable.
Feedback: Your answer is incorrect.
The correct answer is: The project is just viable with a noticeable risk to the client.
Question 34
Incorrect Mark 0.00 out of 1.00
Question text
A bank has rate sensitive assets of $560m and rate sensitive liabilities of $530m. The durations
of its assets and liabilities are 8 and 15 years respectively. If interest rates are expected to rise
how would you forecast that this will impact on the bank’s income, assets and liabilities?
Select one:

a. Income will rise, asset and liability values will rise with, with assets rising less rapidly than
liabilities.

b. Income will rise, asset and liability values will fall with, with assets falling less rapidly than
liabilities.

c. Income will fall, asset and liability values will fall with, with assets falling less rapidly than
liabilities.

d. Income will fall, asset and liability values will rise with, with assets rising less rapidly than
liabilities.
Static GAP = RSA – RSL = 560m – 530m = $30m
This is a positive static GAP, hence any increase in rates will increase net income as the
relationship is:
Change in net interest income = GAP × Change in interest rates
With rates rising, fixed rate asset and liability values will be falling and, given the similarity in
asset and liability values alongside the disparity in their durations, liability values will fall by
more than asset values.
Feedback: Your answer is incorrect.
The correct answer is: Income will rise, asset and liability values will fall with, with assets falling
less rapidly than liabilities.
Question 35
Correct Mark 1.00 out of 1.00
Question text
Under consumer credit regulation, annual percentage rate needs to include:-
I. Amount of interest.
II. Payment intervals.
III. All fees payable on the loan.
Select one:

a. I and III only.

b. II and III only.

c. I and II only.

d. I, II and III only.

Amount of interest, payment intervels and all fees payable on the loan.
Feedback: Your answer is correct.
The correct answer is: I, II and III only.
Question 36
Incorrect Mark 0.00 out of 1.00
Question text
You are examining the accounts of two banks, A and B. You observe that bank B has a greater
proportion of fee-based income than Bank A and a greater proportion of fixed term finance.
How would you categorise the business models of these two banks?
Select one:

a. A has a more transactional banking focus and uses more wholesale funds.
With a greater proportion of fee-based income, B is more relationship based and A is more
transactional based. With a greater proportion of fixed term finance, B raises a greater
proportion of funds on wholesale markets, A raises a greater proportion from customer deposits
that do not have a fixed term. In conclusion, A has a more transactional banking focus and uses
less wholesale funds.

b. B has a more transactional banking focus and uses more wholesale funds.

c. A has a more transactional banking focus and uses less wholesale funds.

d. B has a more transactional banking focus and uses less wholesale funds.
Feedback: Your answer is incorrect.
The correct answer is: A has a more transactional banking focus and uses less wholesale funds.
Question 37
Incorrect Mark 0.00 out of 1.00
Question text
Facility analysis can be applied when credit analysis is not used. Which of the following factors
will NOT be considered when a facility analysis is being conducted:
Select one:

a. Fees and margin of loan.

b. Securities and safety of loan.

c. Amount and term of loan.

d. Repayment profile and sources of borrower.

Fees and margin of loan.
Feedback: Your answer is incorrect.
The correct answer is: Fees and margin of loan.
Question 38
Correct Mark 1.00 out of 1.00
Question text
What is the minimum level of Tier 1 capital that must be held by banks under Basel III
(inclusive of any capital conservation buffer)?
Select one:

a. 8.5% of risk-weighted assets.

The normal minimum level will be the absolute minimum Tier 1 level of 6% plus the
conservation buffer of 2.5%, i.e. 8.5%.

b. 4.5% of risk-weighted assets.

c. 6.0% of risk-weighted assets.

d. 8.0% of risk-weighted assets.

Feedback: Your answer is correct.
The correct answer is: 8.5% of risk-weighted assets.
Question 39
Correct Mark 1.00 out of 1.00
Question text
What is the liquidity coverage ratio?
Select one:

a. The ratio of liquid assets to net cash payments by the bank during the next 30 days.
The liquidity coverage ratio is the ratio of liquid assets to net cash payments by the bank
during the next 30 days.

b. The ratio of liquid assets to net cash payments by the bank during the next day.

c. The ratio of liquid assets to net cash payments by the bank during the next 90 days.

d. The ratio of liquid assets to net cash payments by the bank during the next 60 days.
Feedback: Your answer is correct.
The correct answer is: The ratio of liquid assets to net cash payments by the bank during the
next 30 days.
Question 40
Correct Mark 1.00 out of 1.00
Question text
You have noticed that a bank’s gearing ratio has been increasing steadily over the last five
years. What does this mean?
Select one:

a. The bank is becoming more exposed to default risk.

If gearing is increased the bank is becoming more exposed to default risk.

b. The bank is operating less efficiently.

c. The bank is operated more efficiently.

d. The bank is becoming less exposed to default risk.

Feedback: Your answer is correct.
The correct answer is: The bank is becoming more exposed to default risk.
Question 41
Incorrect Mark 0.00 out of 1.00
Question text
A bank’s assets are exposed to falling interest rates and it wishes to hedge this exposure with
suitable derivatives.
Which of the following would you recommend?
I. Buy STIR futures.
II. Sell FRAs.
III. Buy an interest rate swap.
Select one:

a. I and II only.

b. I only.

c. II and III only.

d. I and III only.

To hedge against an interest rate fall we can buy STIR futures, sell FRAs or sell interest rate
swaps (contracting to receive fixed and pay floating).
Feedback: Your answer is incorrect.
The correct answer is: I and II only.
Question 42
Correct Mark 1.00 out of 1.00
Question text
Which of the following statements is false?
Select one:

a. Central banks use open market operations to stimulate the economy.

b. Central banks can lower the discount rate charged to banks to stimulate the economy.

c. Central banks can boost the economy by quantitative easing.

d. Central banks physically print more notes to increase the money supply in order to boost the
economy.
Quantitative easing is a method of boosting the economy that is sometimes referred to as
printing money, however no new notes are actually printed.
Feedback: Your answer is correct.
The correct answer is: Central banks physically print more notes to increase the money supply
in order to boost the economy.
Question 43
Correct Mark 1.00 out of 1.00
Question text
What is the main purpose of a bank’s capital?
Select one:

a. To allow the payment of dividends to shareholders.

b. To provide a buffer against losses.
Whilst the bank’s capital must satisfy regulatory requirements, the main purpose is to provide
a buffer against losses.

c. To provide liquidity.

d. To satisfy the regulatory requirements.

Feedback: Your answer is correct.
The correct answer is: To provide a buffer against losses.
Question 44
Correct Mark 1.00 out of 1.00
Question text
An extract from a balance sheet reveals the following:

What is the quick ratio for the business?

Select one:

a. 1.84.

b. 0.92.
The quick ratio can be calculated as:

Note that a long-term bank loan is not a current liability.

c. 1.25.

d. 1.09.
Feedback: Your answer is correct.
The correct answer is: 0.92.
Question 45
Correct Mark 1.00 out of 1.00
Question text
A client’s balance sheet has been summarised as follows.

The client has been trading for many years and business remains profitable, generating profits
before interest of $140m. Last year the debt to equity ratio of the business was 100% and the
interest cover was 1.60.
How would you describe the gearing position of the business based on these two measures?
Select one:

a. Gearing has improved on both measures.

Gearing has improved on both measures.

b. Debt to equity has deteriorated, interest cover has improved.

c. Debt to equity has improved, interest cover has deteriorated.

d. Gearing has deteriorated on both measures.

Feedback: Your answer is correct.
The correct answer is: Gearing has improved on both measures.
Question 46
Correct Mark 1.00 out of 1.00
Question text
A bank was profitable last year but is suffering some significant loan defaults this year.
Assuming no new finance is raised how will this impact on the bank’s gearing and return on
equity when comparing this year to last year?
Select one:

a. Gearing will deteriorate, ROE will not be impacted.

b. Gearing will improve, ROE will not be impacted.

c. Gearing will improve, ROE will fall.

d. Gearing will deteriorate, ROE will fall.

If a bank is incurring losses then shareholders’ funds will be absorbing these and gearing
(either basic gearing or debt to equity) will be rising. With profits last year the ROE will have
been positive, with losses this year it will be negative, hence ROE is falling.
Feedback: Your answer is correct.
The correct answer is: Gearing will deteriorate, ROE will fall.
Question 47
Correct Mark 1.00 out of 1.00
Question text
You obtain the following extracts from the balance sheet of a bank.

Debt to equity last year was 1,100%. What commentary would you give on its debt to equity
ratio?
Select one:

a. Gearing is low for a bank but increasing.

b. Gearing is low for a bank and decreasing.

 c. Gearing is high for a bank but decreasing.

d. Gearing is high for a bank and increasing.

Feedback: Your answer is correct.
The correct answer is: Gearing is low for a bank and decreasing.
Question 48
Correct Mark 1.00 out of 1.00
Question text
An investor has deposited $50 into an account paying simple interest at 7% per annum what is
the value of this deposit at the end of the fifth year?
Select one:

a. $50.0

b. $17.5

c. $67.5

d. $70.0
Feedback: The correct answer is: $67.5
Question 49
Correct Mark 1.00 out of 1.00
Question text
A bank has an asset portfolio valued at $100m and a liability portfolio of $80m. The duration of
the asset portfolio is 10 years and the duration of the liability portfolio is 15 years. Interest
rates are currently 5% and are expected to rise by 25 basis points. On the basis of this
information what change may we anticipate in the value of assets and liabilities?
Select one:

a. Assets fall $2.865m, liabilities fall $2.857m.

b. Assets fall $2.381m, liabilities fall $2.857m.

c. Assets fall $2.865m, liabilities fall $2.769m.

 d. Assets fall $2.381m, liabilities fall $2.769m.
Feedback: Your answer is correct.
The correct answer is: Assets fall $2.381m, liabilities fall $2.857m.
Question 50
Correct Mark 1.00 out of 1.00
Question text
Which of the following is not an advantage of an exchange traded market compared to an over
the counter market?
Select one:

a. Price transparency.

b. Reduced credit risk.

c. High liquidity.

d. Tailored contracts.
Exchange traded markets deal in standardised contracts, contracts can only be tailored on the
OTC market.
Feedback: Your answer is correct.
The correct answer is: Tailored contracts.
Question 51
Incorrect Mark 0.00 out of 1.00
Question text
Which of the following services are not provided by retail banks?
Select one:

a. Deposit taking.

b. Raising finance for a business.

c. Business loans.
Retail banks do not normally raise finance for businesses.

d. Money Transfers.
Feedback: Your answer is incorrect.
The correct answer is: Raising finance for a business.
Question 52
Correct Mark 1.00 out of 1.00
Question text
According to the Basel II agreement, which of the following relationships between Tier 1 capital
and Tier 2 capital must hold true?
Select one:

a. Tier 1 capital must be equal to Tier 2 capital.

b. Tier 1 capital cannot equal to Tier 2 capital.

c. Tier 1 capital cannot exceed Tier 2 capital.

d. Tier 2 capital cannot exceed Tier 1 capital.

Under the Basel II agreement, Tier 2 capital cannot exceed Tier 1 capital.
Feedback: Your answer is correct.
The correct answer is: Tier 2 capital cannot exceed Tier 1 capital.
Question 53
Correct Mark 1.00 out of 1.00
Question text
Economy is expected to be rough in coming months and bank A is anticipating rate cuts from
regulator. It should hence:-
I. Short sell bonds.
II. Undertake reverse repos.
III. Lend cash at variable rate.
Select one:

a. I and III only.

b. I and II only.

c. II only.
Undertake reverse repos.

d. II and III only.

Feedback: Your answer is correct.
The correct answer is: II only.
Question 54
Incorrect Mark 0.00 out of 1.00
Question text
Current mortgage rate is 6%. Investors will start worrying about prepayment risk for mortgage
backed securities when:-
Select one:

a. rate rises by 2%.

b. rate rises by 0.25%.

c. rate stays unchanged.

d. rate falls by 2%.

rate stays unchanged.
Feedback: Your answer is incorrect.
The correct answer is: rate stays unchanged.
Question 55
Correct Mark 1.00 out of 1.00
Question text
Under the bank’s investment policy guidelines, what is the return objective?
Select one:

a. What is the maximum sum to be invested in one issuer’s paper.

b. What maturities should the bank buy and how long should it hold securities.

c. What types of securities the bank can buy and who it can transact with.

d. What return it is looking for and why it wants to invest.

What return it is looking for and why it wants to invest
Feedback: Your answer is correct.
The correct answer is: What return it is looking for and why it wants to invest.
Question 56
Incorrect Mark 0.00 out of 1.00
Question text
A bank has used the bond markets as a major source of fixed rate finance and wishes to hedge
itself against a fall in rates.
Which of the following hedging techniques would you recommend?
I. Long hedge with futures.
II. Long exchange traded call option.
III. Short hedge with futures.
Select one:

a. II and III only.

b. I and III only.

c. I only.
If rates fall bond prices will rise, increasing the bank’s liabilities. The bank will, therefore, be
looking to hedge against a price rise and can do this with a long hedge with futures or a long
exchange-traded call option. Both of these strategies generate a gain as rates fall and prices
rise, and the gain can be used to offset the liability price rise.

d. I and II only.
Feedback: Your answer is incorrect.
The correct answer is: I and II only.
Question 57
Correct Mark 1.00 out of 1.00
Question text
Which of the following are sources of wholesale funds?
Select one:

a. Funds from deposit accounts where the average balance exceeds $1 million

b. Funds from securitised deposit accounts

c. Funds from a wholesale business

d. Funds from money markets

Wholesale funds of funds raised from the money markets.
Feedback: Your answer is correct.
The correct answer is: Funds from money markets
Question 58
Correct Mark 1.00 out of 1.00
Question text
The central bank has stipulated a liquidity reserve ratio of 10% for all banks. You are provided
with the following information in relation to a bank:
$m
Total deposits held at the bank 150
Total deposits from correspondent banks 40
Physical cash held by a bank 10
What is the bank’s reserve requirement?
Select one:
 a. $19 million.

b. $14 million.

c. $20 million.

d. $10 million.

Feedback: Your answer is correct.

The correct answer is: $10 million.
Question 59
Correct Mark 1.00 out of 1.00
Question text
Which of the following stages is least relevant when assessing credit risk?
Select one:

a. Understand the impact of each event if it were to occur

b. Assess the likelihood of each event occurring

c. Investigate and implement a plan to mitigate against these events

A mitigation plan may be important for controlling or limiting credit risk but it is irrelevant in
the assessment of credit risk.

d. Understand and identify what events could happen

Feedback: Your answer is correct.
The correct answer is: Investigate and implement a plan to mitigate against these events
Question 60
Incorrect Mark 0.00 out of 1.00
Question text
A bond fund manager believes that market is efficient. He can adopt:-
Select one:

a. Active strategy through buy-and-hold and incur high transaction cost

Passive strategy through buy-and-hold and incur low transaction cost

b. Passive strategy through buy-and-hold and incur low transaction cost

c. Active strategy through buying underpriced bond and incur high transaction cost

d. Passive strategy through buying underpriced bond and incur high transaction cost
Feedback: Your answer is incorrect.
The correct answer is: Passive strategy through buy-and-hold and incur low transaction cost

Started on Friday, 18 October 2019, 2:20 PM

State Finished
Completed on Friday, 18 October 2019, 2:45 PM
Time taken 25 mins 10 secs
Marks 14.00/20.00
Grade 7.00 out of 10.00 (70%)
Question 1
Correct Mark 1.00 out of 1.00
Question text
QUESTIONS 1 – 5 ARE BASED ON THE FOLLOWING INFORMATION.
A bank’s asset portfolio has a value of $450m, $300m of which are rate sensitive, and the
average asset beta is 0.60. Its liability portfolio has a value of $420m of which $ 320 are rate
sensitive and the average liability beta is 0.65. The duration of the asset portfolio is 9 years
and the duration of the liability portfolio is 10 years. Current interest rates are 4% but the
bank anticipates a rate rise of 30 basis points.
What is the bank’s static GAP?
Select one:

a. +$30m

b. +$20m

c. –$20m

d. –$30m
Feedback: Your answer is correct.
The correct answer is: –$20m
Question 2
Correct Mark 1.00 out of 1.00
Question text
What is the bank’s duration GAP?
Select one:

a. +0.667

b. +0.333

c. –0.333
Duration GAP = Immunisation mismatch between the duration of assets and liabilities, more
specifically:

d. –0.667
Feedback: Your answer is correct.
The correct answer is: –0.333
Question 3
Correct Mark 1.00 out of 1.00
Question text
What is the bank’s income statement GAP?
Select one:

a. +$28m

b. +$18m

c. –$18m

d. –$28m

Feedback: Your answer is correct.

The correct answer is: –$28m
Question 4
Correct Mark 1.00 out of 1.00
Question text
What will be the change in the value of the bank’s assets and liabilities if rates rise as
anticipated?
Select one:

a. Assets fall $11.68m, liabilities fall $12.63m

b. Assets fall $11.68m, liabilities fall $12.12m

c. Assets fall $10.59m, liabilities fall $12.63m

d. Assets fall $10.59m, liabilities fall $12.12m

Feedback: Your answer is correct.
The correct answer is: Assets fall $11.68m, liabilities fall $12.12m
Question 5
Incorrect Mark 0.00 out of 1.00
Question text
Assuming the duration GAP moves to –0.4, by how much will the economic value of equity
change if rates move as anticipated?
Select one:

a. +$52.0m

b. +$0.52m

c. –$0.53m

d. –$52.0m
Feedback: Your answer is incorrect.
The correct answer is: +$0.52m

Question 6
Correct Mark 1.00 out of 1.00
Question text
QUESTIONS 6 – 10 ARE BASED ON THE FOLLOWING INFORMATION.
You are the Compliance and Anti-Money Laundering Officer of a bank that is based in a country
with Anti-Money laundering Legislation. A customer of the bank has been arrested on suspicion
of tax evasion. You read in a newspaper that the client is a Government Minister in an Asian
country where he has been arrested.
Your bank has received a signed letter received from her client, the day before his arrest,
giving written permission for his wife to instruct your bank about the disbursement of his
balances at the bank, which have a total value of $9,000,000. An e-mail from the client's wife
has requested that $4,000,000 is transferred to the client's wife's private bank account in the
Cayman Islands.
You find that there is very little client identification material on record.

In the context of your role as Compliance Officer, the client’s political role as a Government
Minister
Select one:

a. Must be ignored because you learned about it in a newspaper and not in the course of your
work

b. Indicates that no customer due diligence should have been carried out for this client.

c. Indicates that this client should have been subjected to a reduced level of customer due
diligence.

d. Indicates that this client should have been subjected to an enhanced level of customer due
diligence.
Foreign ‘politically exposed persons (PEPs)’ present the risk that they may have abused their
powers and should be subject to an enhanced level of customer due diligence. The client’s role
as a politician should not be ignored just because you learned it from a public source.
Feedback: Your answer is correct.
The correct answer is: Indicates that this client should have been subjected to an enhanced
level of customer due diligence.
Question 7
Correct Mark 1.00 out of 1.00
Question text
You decide that the proposed transfers are suspicious transactions and that further appropriate
checks should be carried out. In the time until these checks are carried out, which of the
following actions should NOT be undertaken?
Select one:

a. Freeze the funds of the client

b. Inform the client’s wife that an investigation is being carried out

Informing the client’s wife of an investigation could amount to ‘tipping off’, which is a criminal
offence.

c. Submit a suspicious transaction report to the authorities

d. Request further information from your bank’s staff

Feedback: Your answer is correct.
The correct answer is: Inform the client’s wife that an investigation is being carried out
Question 8
Correct Mark 1.00 out of 1.00
Question text
Which of the following is NOT normally part of the role of the anti-money laundering officer?
Select one:

a. Ensuring that internal anti-money laundering programmes are carried out.

b. Proper record keeping

c. Ensuring that the level of risk does not determine which procedures are carried out
Procedures carried out should match the level of risk identified: this is the ‘risk-
based’ approach recommended by the FATF.

d. Reporting suspicious transactions

Feedback: Your answer is correct.
The correct answer is: Ensuring that the level of risk does not determine which procedures are
carried out
Question 9
Incorrect Mark 0.00 out of 1.00
Question text
A senior manager notes that a bank employee has been taking much less annual vacation
leave than his entitlement. The manager should be alert to this in the context of the prevention
of money laundering, because it indicates that the employee:
Select one:

a. Could be assisting criminals in the laundering of money.

b. May think that he is suspected of ‘tipping off’.

c. Requires additional training in anti-money laundering procedures.

d. Enjoys an unusually lavish lifestyle.

Banks should be alert for employees being reluctant to take holidays, as this could indicate that
the employee wants to keep collaboration with money launderers concealed.
Feedback: Your answer is incorrect.
The correct answer is: Could be assisting criminals in the laundering of money.
Question 10
Correct Mark 1.00 out of 1.00
Question text
Assuming the bank is based in Malaysia and it is deemed appropriate to file a suspicious
transaction report, this report should be submitted to:
Select one:

a. RMP Counter-Terrorism Unit

b. BNM Financial Intelligence Unit

In Malaysia BNM Financial Intelligence Unit is the competent authority for this purpose.

c. Financial Action Task Force

d. The OECD
Feedback: Your answer is correct.
The correct answer is: BNM Financial Intelligence Unit

Question 11
Correct Mark 1.00 out of 1.00
Question text
QUESTIONS 11 – 15 ARE BASED ON THE FOLLOWING INFORMATION.

You manage your bank’s investment portfolio for the purpose of real investment rather than
speculation or trading. You are given the mandate to invest in various instruments which
include corporate bond, repurchase agreements, Treasury bills, mortgage-backed investments
and government bonds.
You are considering an investment in a 35 day treasury bill that is priced at 99.34. You are also
considering investing in either Bond A, a 3 year 8% annual coupon bond, or Bond B priced at
102.22 with a duration of 2.68 years, both bonds have a GRY of 7%.

Which of the following will be investment portfolio objectives?

I. Generate income
II. Provide liquidity
III. Concentrate credit risk
IV. Manage interest rate exposure
Select one:

a. I and II only

b. I, II and III only

c. I, II and IV only
When managing a bank’s investment portfolio for the purpose of real investment, rather than
speculation or trading, the objectives will be:
I. Generate income
II. Provide liquidity
Diversify (rather than concentrate) credit risk
IV. Manage interest rate exposure
Preserve (rather than risk) the bank’s capital

d. III and IV only

Feedback: Your answer is correct.
The correct answer is: I, II and IV only
Question 12
Incorrect Mark 0.00 out of 1.00
Question text
Which of the following are classified as capital market instruments?
I. Corporate bonds
II. Treasury bills
III. Mortgage-backed investments
IV. Government bonds.
Select one:

a. I, II and III only

b. I, II and IV only

c. I, III and IV only

d. II, III and IV only
Capital market instruments are government bonds (IV), corporate bonds (I) and mortgage-
backed investments (III).
Feedback: Your answer is incorrect.
The correct answer is: I, III and IV only
Question 13
Correct Mark 1.00 out of 1.00
Question text
What will be the annualised yield on the treasury bill if you buy it?
Select one:

a. 4.87%

b. 5.31%

c. 6.14%

d. 6.93%
The money market yield can be calculated as:
Feedback: Your answer is correct.
The correct answer is: 6.93%
Question 14
Correct Mark 1.00 out of 1.00
Question text
Which of the two bonds considered would be optimal if you believe rates are falling?
Select one:

a. Bond A as it has the higher duration.

If we believe rates are falling then bond prices will be rising. In this situation we will wish to
maximise any gain by maximising the duration of our bond holdings.
The duration of Bond A can be calculated as:

b. Bond A as it has the lower duration.

c. Bond B as it has the higher duration.

d. Bond B as it has the lower duration.

Feedback: Your answer is correct.
The correct answer is: Bond A as it has the higher duration.
Question 15
Incorrect Mark 0.00 out of 1.00
Question text
What would be the new price of bond B if rates fell 0.4% based on modified duration alone and
would convexity add to or subtract from that price?
Select one:

a. 101.20 and convexity would add to this price.

b. 101.20 though convexity would deduct from this price

We firstly need to calculate the bond’s modified duration using:
Modified duration/Volatility =
Using modified duration we can calculate the proportionate change in a bond’s price as:
Proportionate change in price =
A positive result, so the price would rise by 1.02 (102.22 × 1.002%) to 103.24 (102.22 +
1.02). In an option-free bond, convexity always results in a price higher than that predicted by
modified duration alone.

c. 103.24 and convexity would add to this price.

d. 103.24 though convexity would deduct from this price.

Feedback: Your answer is incorrect.
The correct answer is: 103.24 and convexity would add to this price.
Question 16
Correct Mark 1.00 out of 1.00

Question text
QUESTIONS 16 – 20 ARE BASED ON THE FOLLOWING INFORMATION.

A bank has $800m of assets of which half are rate sensitive with an earnings change ratio of
0.7 and a quarter of the rest are non-earning assets, all other assets are fixed rate. It has $80m
of equity finance, two thirds of the non-equity finance is rate sensitive with an earnings change
ratio of 0.6, all the remainder is fixed rate finance.
Based on static GAP analysis, what will be the change in the bank’s income if rates fall 0.5%?
Select one:

a. Interest income up $0.40m

Based on the information provided for questions 16 to 20 we have:

b. Interest income up $0.04m

c. Interest income down $0.04m

d. Interest income down $0.40m

Feedback: Your answer is correct.
The correct answer is: Interest income up $0.40m
Question 17
Correct Mark 1.00 out of 1.00
Question text
Based on income GAP analysis, what will be the change in the bank’s income if rates fall 0.5%?
Select one:

a. Interest income up $0.40m

b. Interest income up $0.04m
Based on the information provided for questions 16 to 20 we have:

c. Interest income down $0.04m

d. Interest income down $0.40m

Feedback: Your answer is correct.
The correct answer is: Interest income up $0.04m
Question 18
Incorrect Mark 0.00 out of 1.00
Question text
If the bank wishes to hedge the loss of income from the sensitive assets with Chicago
Mercantile Exchange STIR futures contracts, what position should it take and how many STIR
futures contracts would be required?
Select one:

a. Long 400 contracts

b. Short 400 contracts

c. Long 80 contracts
Based on the information provided for questions 16 to 20 we have:
One CME STIR future based on an underlying value of $1m, so to hedge $400m of assets, 400
contracts would be needed. Asset holders must buy STIR futures to hedge against a fall in
rates, hence long 400 contracts.

d. Short 80 contracts
Feedback: Your answer is incorrect.
The correct answer is: Long 400 contracts
Question 19
Incorrect Mark 0.00 out of 1.00
Question text
Which of the following alternatives could be used to hedge the loss of income from the rate
sensitive assets?
I. Sell an interest rate swap
II. Sell a cap
III. Buy a floor
Select one:

a. I and II only
b. I, II and III only
Based on the information provided for questions 16 to 20 we have:
The seller of a swap enters an agreement to receive fixed and pay floating so the bank could
sell swaps to achieve a fixed rate of income. Buying an interest rate floor protects depositors
(asset holders) from rate falls, an interest rate cap protects borrowers from a rate rise.

c. I and III only

d. II and III only

Feedback: Your answer is incorrect.
The correct answer is: I and III only
Question 20
Correct Mark 1.00 out of 1.00
Question text
If the bank is uncertain about the rate fall and wishes to hedge the potential loss of income
from the rate sensitive assets while keeping cost at a minimum, what would be the best
strategy?
Select one:

a. Zero cost collar

b. Cap

c. Floor

d. Zero cost reverse collar

Based on the information provided for questions 16 to 20 we have:
To protect against a potential loss of income from an asset as a result of falling rates the bank
should buy a floor to give the desired protection, then sell caps to reduce the net cost – a zero-
cost reverse collar.
Feedback: Your answer is correct.
The correct answer is: Zero cost reverse collar