ICBRR Online Practice Questions and Answers

A bank customer chooses a mortgage with low initial payments and payments that increase over time because the customer knows that she will have trouble making payments in the early years of the loan. The bank makes this type of mortgage with the same default assumptions uses for ordinary mortgages, thus underestimating the risk of default and becoming exposed to:

A. Moral hazard

B. Adverse selection

C. Banking speculation

D. Sampling bias

The value of which one of the following four option types is typically dependent on both the final price of its underlying asset and its own price history?

A. Stout options

B. Power options

C. Chooser options

D. Basket options

Which of the following risk types are historically associated with credit derivatives?

A. Documentation risk

II. Definition of credit events

III. Occurrence of credit events

IV. Enterprise risk

B. I, IV

C. I, II

D. I, II, III

E. II, III, IV

Which one of the following is a reason for a bank to keep a commercial loan in its portfolio until maturity?

A. Commercial loans usually have attractive risk-return profile.

II. Commercial loans are difficult to sell due to non standard features.

III. Commercial loans could be used to maintain good relations with important customers.

IV. The credit risk in commercial loans is low.

B. I, II and III

C. III and IV

D. II and IV

E. IV only

A large multinational bank is concerned that their duration measures may not be accurate since the yield curve shifts are not parallel. Which of the following statements would be typically observed regarding variability of interest rates?

A. Short-term rates are more variable than long-term rates.

B. Short-term rates are less variable than long-term rates.

C. Short-term rates are equally variable as long-term rates.

D. Short-term rates and long-term rates always move in opposite directions.

To estimate the required risk-adjusted rate of return on a highly volatile energy stock, a risk associate

compiled the following statistics:

Risk-free rate = 5%

Beta = 2.5

Market Risk = 8%

Using the Capital Asset Pricing Model, she estimates the rate of return to be equal:

A. 10%

B. 15%

C. 25%

D. 40%

The exercise for an American type option prior to expiration day is virtually certain in the following case:

A. In the event of a high dividend for an in-the-money call option

B. In the event of a high dividend for an in-the-money put option

C. In the event of a low dividend for an in-the-money call option

D. In the event of a low dividend for an in-the-money put option

According to the principles of the Basel II Accord, the implementation and relative weights of the elements of the operational risk framework depend on: A. The culture of the financial institution

II. Regulatory drivers

III. Business drivers

IV. The bank's reporting currency

B. I, IV

C. II, III

D. II, IV

E. I, II, III