GARP Financial Risk and Regulation (FRR) Series - 2016-FRR Exam Practice Test

Which one of the following four statements regarding floating rate bonds is incorrect?

Rising TED spread is typically a sign of increase in what type of risk among large banks?
I. Credit risk
II. Market risk
III. Liquidity risk
IV. Operational risk

If the LTV (loan-to-value ratio) is 75%, what is the haircut?

Which of the following statements is a key difference between customer loans and interbank loans?

ThetaBank has extended substantial financing to two mortgage companies, which these mortgage lenders use to finance their own lending. Individually, each of the mortgage companies has an exposure at default (EAD) of $20 million, with a loss given default (LGD) of 100%, and a probability of default of 10%. ThetaBank's risk department predicts the joint probability of default at 5%. If the default risk of these mortgage companies were modeled as independent risks, what would be the probability of a cumulative $40 million loss from these two mortgage borrowers?

Which of the following statements about the option gamma is correct? Gamma is the
I. Second derivative of the option value with respect to the volatility.
II. Percentage change in option value per percentage change in the price of the underlying instrument.
III. Second derivative of the value function with respect to the price of the underlying instrument.
IV. Rate of change of the option delta with respect to changes in the underlying price.

A bank customer expecting to pay its Brazilian supplier BRL 100 million asks Alpha Bank to buy Australian dollars and sell Brazilian reals. Alpha bank does not hold reals so it asks for a quote to buy Brazilian reals in the market. The market rate is 100. The bank quotes a selling rate of 101 to its customer and sells the real at this quoted price. Then the bank immediately buys the real at the market rate and completes foreign exchange matched transaction. What is the impact of this transaction on the bank's risk profile?

Which of the following statements regarding CDO-squared is correct?
I. CDO-squared use other CDOs and CMOs as collateral.
II. Risk assessment of CDO-squared is almost impossible due to their complexity.
III. CDO-squared have lower credit risk than CMOs but higher than CDOs.

An asset and liability manager for a large financial institution has to recognize that retail products ___ include embedded options, which are often not rationally exercised, while wholesale products ___ carry penalties for repayment or include rights to terminate wholesale contracts on very different terms than are common in retail products.

Which one of the following four metrics represents the difference between the expected loss and unexpected loss on a credit portfolio?

While contractually, depositors are not required to keep liquid funds on deposit for very long, in fact they tend to leave their deposits for longer periods of time, even if interest rates rise and the bank does not raise its deposit interest rate. What does a bank consider these deposits to be?

Altman's Z-score incorporates all the following variables that are predictive of bankruptcy EXCEPT:

Under the Standardized Approach in the Basel II Accord, what is the risk weight of a non-performing corporate loan?

A bank considers issuing new capital to increase its Tier 1 capital levels. Which of the following financial instruments would most likely to be considered?

Which of the following risk types are historically associated with credit derivatives?
I. Documentation risk
II. Definition of credit events
III. Occurrence of credit events
IV. Enterprise risk