BUS 410 CH20 EXAM QUESTIONS ANSWERED CORRECTLY LATEST UPDATE 2026
Credit risk - Answers the risk that promised cash flows from loans and securities held by FIs may not
be paid in full.
Liquidity risk - Answers the risk that a sudden and unexpected increase in liability withdrawals may
require an FI to liquidate assets in a very short period of time and at low prices.
Interest rate risk - Answers the risk incurred by an FI when the maturities of its assets and liabilities
are mismatched and interest rates are volatile.
Market risk - Answers the risk incurred in trading assets and liabilities due to changes in interest
rates, exchange rates, and other asset prices.
Off-balance-sheet risk - Answers the risk incurred by an FI as the result of its activities related to
contingent assets and liabilities.
Foreign exchange risk - Answers the risk that exchange rate changes can affect the value of an FI's
assets and liabilities denominated in foreign currencies.
Country or sovereign risk - Answers the risk that repayments by foreign borrowers may be
interrupted because of interference from foreign governments or other political entities.
Technology risk - Answers the risk incurred by an FI when its technological investments do not
produce anticipated cost savings.
Operational risk - Answers the risk that existing technology or support systems may malfunction, that
fraud that impacts the FI's activities may occur, and/or that external shocks such as hurricanes and
floods may occur.
Fintech risk - Answers the risk that fintech firms could disrupt business of financial services firms in
the form of lost customers and lost revenue.
Insolvency risk - Answers the risk that an FI may not have enough capital to offset a sudden decline in
the value of its assets relative to its liabilities.
Firm-specific credit risk - Answers the risk of default for the borrowing firm associated with the
specific types of project risk taken by that firm.
Systemic credit risk - Answers the risk of default associated with general economy-wide or macro-
conditions affecting all borrowers.
Most liquid asset - Answers cash.
What is the primary objective of FI management? - Answers to increase the FI's returns for its
owners.
What is the trade-off for increased returns in FIs? - Answers increased risk.
Which FIs are more exposed to credit risk? - Answers FIs that make loans or buy bonds with long
maturities.
What is an important element in the credit risk management process? - Answers pricing.
What advantage do FIs have over individual investors regarding credit risk? - Answers their ability to
diversify credit risk exposures from a single asset by exploiting the law of large numbers in their asset
investment portfolios.
What happens when an FI charges off loans? - Answers the value of loans falls and this economic loss
must be charged off against the stockholder's equity capital or net worth.
What causes liquidity risk on the asset side of the balance sheet? - Answers loan requests and the
exercise by borrowers of their loan commitments and other credit lines.
What must FIs do to meet the demand for cash by liability holders? - Answers FIs must either
liquidate assets or borrow additional funds.
What happens to the cost of borrowed funds when many FIs face abnormally large cash demands? -
Answers the cost of purchased of borrowed funds rises and the supply of such funds becomes
restricted.
What is the consequence of selling less liquid assets to meet withdrawal demands? - Answers serious
liquidity risk.
Asset transformation - Answers Involves an FI buying primary securities/assets and issuing secondary
securities/liabilities to fund the assets.
Refinancing risk - Answers The risk that the cost of rolling over or reborrowing funds will rise above
the returns being earned on asset investments.
Reinvestment risk - Answers The risk that the returns on funds to be reinvested will fall below the
cost of funds.
Price risk - Answers The risk that the price of the security will change when interest rates change.
Credit risk - Answers the risk that promised cash flows from loans and securities held by FIs may not
be paid in full.
Liquidity risk - Answers the risk that a sudden and unexpected increase in liability withdrawals may
require an FI to liquidate assets in a very short period of time and at low prices.
Interest rate risk - Answers the risk incurred by an FI when the maturities of its assets and liabilities
are mismatched and interest rates are volatile.
Market risk - Answers the risk incurred in trading assets and liabilities due to changes in interest
rates, exchange rates, and other asset prices.
Off-balance-sheet risk - Answers the risk incurred by an FI as the result of its activities related to
contingent assets and liabilities.
Foreign exchange risk - Answers the risk that exchange rate changes can affect the value of an FI's
assets and liabilities denominated in foreign currencies.
Country or sovereign risk - Answers the risk that repayments by foreign borrowers may be
interrupted because of interference from foreign governments or other political entities.
Technology risk - Answers the risk incurred by an FI when its technological investments do not
produce anticipated cost savings.
Operational risk - Answers the risk that existing technology or support systems may malfunction, that
fraud that impacts the FI's activities may occur, and/or that external shocks such as hurricanes and
floods may occur.
Fintech risk - Answers the risk that fintech firms could disrupt business of financial services firms in
the form of lost customers and lost revenue.
Insolvency risk - Answers the risk that an FI may not have enough capital to offset a sudden decline in
the value of its assets relative to its liabilities.
Firm-specific credit risk - Answers the risk of default for the borrowing firm associated with the
specific types of project risk taken by that firm.
Systemic credit risk - Answers the risk of default associated with general economy-wide or macro-
conditions affecting all borrowers.
Most liquid asset - Answers cash.
What is the primary objective of FI management? - Answers to increase the FI's returns for its
owners.
What is the trade-off for increased returns in FIs? - Answers increased risk.
Which FIs are more exposed to credit risk? - Answers FIs that make loans or buy bonds with long
maturities.
What is an important element in the credit risk management process? - Answers pricing.
What advantage do FIs have over individual investors regarding credit risk? - Answers their ability to
diversify credit risk exposures from a single asset by exploiting the law of large numbers in their asset
investment portfolios.
What happens when an FI charges off loans? - Answers the value of loans falls and this economic loss
must be charged off against the stockholder's equity capital or net worth.
What causes liquidity risk on the asset side of the balance sheet? - Answers loan requests and the
exercise by borrowers of their loan commitments and other credit lines.
What must FIs do to meet the demand for cash by liability holders? - Answers FIs must either
liquidate assets or borrow additional funds.
What happens to the cost of borrowed funds when many FIs face abnormally large cash demands? -
Answers the cost of purchased of borrowed funds rises and the supply of such funds becomes
restricted.
What is the consequence of selling less liquid assets to meet withdrawal demands? - Answers serious
liquidity risk.
Asset transformation - Answers Involves an FI buying primary securities/assets and issuing secondary
securities/liabilities to fund the assets.
Refinancing risk - Answers The risk that the cost of rolling over or reborrowing funds will rise above
the returns being earned on asset investments.
Reinvestment risk - Answers The risk that the returns on funds to be reinvested will fall below the
cost of funds.
Price risk - Answers The risk that the price of the security will change when interest rates change.
