GARP 2016-FRR Online Practice Questions and Exam Preparation

GARP 2016-FRR Online Questions & Answers

• Question 241:

  Which of the following statements about endogenous and external types of liquidity are accurate?

  I. Endogenous liquidity is the liquidity inherent in the bank's assets themselves.

  II. External liquidity is the liquidity provided by the bank's liquidity structure to fund its assets and maturing liabilities.

  III. External liquidity is the non-contractual and contingent capital supplied by investors to support the bank in times of liquidity stress.

  IV.

  Endogenous liquidity is the same as funding liquidity.

  A. I, II
  B. I, III
  C. II, III
  D. I, II, IV
  I. Endogenous liquidity is the liquidity inherent in the bank's assets themselves. II. External liquidity is the liquidity provided by the bank's liquidity structure to fund its assets and maturing liabilities. III. External liquidity is the non-contractual and contingent capital supplied by investors to support the bank in times of liquidity stress. IV. Endogenous liquidity is the same as funding liquidity.
  B. I, III

• Question 242:

  Which one of the four following statements about drawdowns is correct?

  A. Drawdown calculates significant losses in a particular business or a book.
  B. Drawdown estimates the effect on bank's liabilities when the bank's credit rating is cut.
  C. Drawdown quantifies the peak-to-trough decline of an investment over a known time period.
  D. Drawdown measures the aggregate decline in market values of assets and positions due to a shock.
  C. Drawdown quantifies the peak-to-trough decline of an investment over a known time period.

• Question 243:

  Suppose Delta Bank enters into a number of long-term commercial and retail loans at fixed rate prevailing at the time the loans are originated. If the interest rates rise:

  A. The bank will have to pay higher interest rates to its depositors and would have to pay higher rates on its debt to the extent the debt interest rate was linked to floating indices, or to the extent the debt used to fund the loans was of a shorter maturity than the loans.
  B. The bank will have to pay higher interest rates to its depositors and would have to pay lower rates on its debt to the extent the debt interest rate was linked to floating indices, or to the extent the debt used to fund the loans was of a shorter maturity than the loans.
  C. The bank will have to pay lower interest rates to its depositors and would have to pay higher rates on its debt to the extent the debt interest rate was linked to floating indices, or to the extent the debt used to fund the loans was of a shorter maturity than the loans.
  D. The bank will have to pay lower interest rates to its depositors and would have to pay lower rates on its debt to the extent the debt interest rate was linked to floating indices, or to the extent the debt used to fund the loans was of a shorter maturity than the loans.
  A. The bank will have to pay higher interest rates to its depositors and would have to pay higher rates on its debt to the extent the debt interest rate was linked to floating indices, or to the extent the debt used to fund the loans was of a shorter maturity than the loans.

• Question 244:

  Alpha Bank, a small bank,has a long position with larger BetaBank and has an identical short position with another larger bank GammaBank. Each large bank requires a 20% initial collateral to support the trade. As prices fluctuate in either direction, one large bank will require additional collateral from the small bank, while the risk of loss to the other large bank will increase. By running the trades through a clearinghouse, the small bank can achieve all of the following objectives EXCEPT:

  A. Eliminating the collateral requirement
  B. Protecting itself against increases in future collateral demands
  C. Protecting against the risk of the failure of one of the large banks
  D. Mitigating option hedging risks and altering margin requirement
  D. Mitigating option hedging risks and altering margin requirement

• Question 245:

  Gamma Bank has a significant number of retail customers and finds its balance sheet shape and structure difficult to manage. Which one of the following characteristics of a bank with wide retail operations is INCORRECT?

  A. Banks with a wide retail base are typically driven by contractual obligations and not simply relationship considerations.
  B. Attracting and retaining customers often involves offering retail products whose features are different from wholesale market products.
  C. Pricing of retail products often has more to do with marketing considerations rather than prevailing market price.
  D. The way retail customers behave in relation to the retail banking products they hold often results in the apparent contractual obligation of the parties providing a poor description of the actual nature of the obligations.
  A. Banks with a wide retail base are typically driven by contractual obligations and not simply relationship considerations.

• Question 246:

  The pricing of credit default swaps is a function of all of the following EXCEPT:

  A. Probability of default
  B. Duration
  C. Loss given default
  D. Market spreads
  B. Duration

• Question 247:

  A credit rating analyst wants to determine the expected duration of the default time for a new three-year loan, which has a 2% likelihood of defaulting in the first year, a 3% likelihood of defaulting in the second year, and a 5% likelihood of defaulting the third year. What is the expected duration for this three-year loan?

  A. 1.5 years
  B. 2.1 years
  C. 2.3 years
  D. 3.7 years
  C. 2.3 years

• Question 248:

  Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one- year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment.

  What may happen to the Delta's initial credit parameter and the value of its loan if the machinery industry experiences adverse structural changes?

  A. Probability of default and loss at default may decrease simultaneously, while duration rises causing the loan value to decrease.
  B. Probability of default and loss at default may decrease simultaneously, while duration falls causing the loan value to decrease.
  C. Probability of default and loss at default may increase simultaneously, while duration rises causing the loan value to decrease.
  D. Probability of default and loss at default may increase simultaneously, while duration falls causing the loan value to decrease.
  D. Probability of default and loss at default may increase simultaneously, while duration falls causing the loan value to decrease.

• Question 249:

  An asset manager just bought a coupon paying bond with principal value $100,000 for $87,000 with a current yield of 4.7%. He assumes that if the yields change to 5.7% the price of the bond would be $84,500. Based on this assumption what is the modified duration of the bond?

  A. 2,507.
  B. 97.12.
  C. 2.97.
  D. 2.88.
  D. 2.88.

• Question 250:

  Which one of the following statements is an advantage of using implied volatility as an input when calculating VaR?

  A. Implied volatility assumes volatilities are constant which makes it easy to implement in models.
  B. Current market data is used to determine implied volatilities, which makes them forward looking measures
  C. Implied volatilities are better at predicting actual volatilities
  D. Loss probabilities from the standard normal distribution are used to compute implied volatilities, which makes it easy to compute the.
  B. Current market data is used to determine implied volatilities, which makes them forward looking measures