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FINANCIAL MARKETS >> The Structure of the Financial Markets
PRM Exam 1 Quiz Sub topic (The Structure of the Financial Markets) with their solutions. After attempt each question, you will be able to see their Correct/Incorrect highlighted answers as well as their solutions. If you are ready to attempt this so Go Ahead to Start Quiz.
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Question 1 of 18
1. Question
1 pointsOTC markets are formally organized financial exchanges.
Correct
b, False.
OvertheCounter (OTC) markets are loosely organized markets. It refers to any financial market transaction that does not take place on a formal exchange.
Incorrect
b, False.
OvertheCounter (OTC) markets are loosely organized markets. It refers to any financial market transaction that does not take place on a formal exchange.

Question 2 of 18
2. Question
1 pointsWhich of the following is/are not recent developments in the global markets?
Correct
d, Only a and c.
In the recent years, distinction between OTC markets and formal financial exchanges are blurred. Equity trading is not a recent development.Incorrect
d, Only a and c.
In the recent years, distinction between OTC markets and formal financial exchanges are blurred. Equity trading is not a recent development. 
Question 3 of 18
3. Question
1 pointsGreater order flow with liquid stocks ensures that large trades can be transacted without adverse price impact.
Correct
a, True.
The amount of order flow determines liquidity. Large order flow means high liquid instruments and vice versa.Incorrect
a, True.
The amount of order flow determines liquidity. Large order flow means high liquid instruments and vice versa. 
Question 4 of 18
4. Question
1 pointsFunding and liquidity close interrelation tends to push trading activity and price formation from cash into _______________.
Correct
d, Derivatives market.
Incorrect
d, Derivatives market.

Question 5 of 18
5. Question
1 pointsLiquidity is the ability to convert into ______ quickly with minimal transaction costs.
Correct
d, Cash.
Incorrect
d, Cash.

Question 6 of 18
6. Question
1 pointsA liquid market exists when the seller/buyer face a __________ demand curve.
Correct
a, Perfectly elastic.
With a perfectly elastic demand curve, an unlimited quantity can be sold / bought at the market price.Incorrect
a, Perfectly elastic.
With a perfectly elastic demand curve, an unlimited quantity can be sold / bought at the market price. 
Question 7 of 18
7. Question
1 pointsInverse floating rate note is an example of structured notes, where return runs parallel with Libor interest rates.
Correct
b, False.
Inverse floating rate note is an example of structured notes, where return varies opposite of Libor interest rates.Incorrect
b, False.
Inverse floating rate note is an example of structured notes, where return varies opposite of Libor interest rates. 
Question 8 of 18
8. Question
1 pointsBefore the global financial crisis of 2008, assetbacked security was a significant source of returns for the banking industry. Assetbacked security was more significant than:
Correct
d, Only a and b.
Incorrect
d, Only a and b.

Question 9 of 18
9. Question
1 pointsWhich of the following is not a service provided by the financial exchanges:
Correct
c, Low protection against counterparty risk.
Incorrect
c, Low protection against counterparty risk.

Question 10 of 18
10. Question
1 pointsLive price information is a major source of exchange revenues.
Correct
a, True.
Incorrect
a, True.

Question 11 of 18
11. Question
1 pointsWhat are the steps that involve in posttrade security transaction processing?
Correct
b, Comparison and confirmation, netting, settlement.
Incorrect
b, Comparison and confirmation, netting, settlement.

Question 12 of 18
12. Question
1 pointsNetting is organized through a central counterparty or a clearing house.
Correct
a, True.
Incorrect
a, True.

Question 13 of 18
13. Question
1 pointsSecurity settlement as a posttrade transaction can be undertaken through:
Correct
d, Only a and b.
Incorrect
d, Only a and b.

Question 14 of 18
14. Question
1 pointsWith the advent of financial technology, everyone can deal directly in the financial markets.
Correct
b, False.
Exchange is limited to members who are well established, professional firms. Only participants who have the technological capacity and credit standing can transact in technologically driven financial markets.Incorrect
b, False.
Exchange is limited to members who are well established, professional firms. Only participants who have the technological capacity and credit standing can transact in technologically driven financial markets. 
Question 15 of 18
15. Question
1 pointsInvestment banks profit from underwriting the issue of bonds and equities in primary markets.
Correct
a, True.
Incorrect
a, True.

Question 16 of 18
16. Question
1 pointsA large proportion of securities and derivative trading is conducted by:
Correct
a, Hedge funds.
Incorrect
a, Hedge funds.

Question 17 of 18
17. Question
1 pointsEffective management of liquidity risk requires an understanding of:
Correct
d, Only a and b.
Incorrect
d, Only a and b.

Question 18 of 18
18. Question
1 pointsInvestment banks retain one competitive advantage over financial technology:
Correct
c, Extensive customer contacts.
In order to manage large market transactions, investment banks utilize their extensive customer contacts. The cost of computers managing large market transactions is very high.Incorrect
c, Extensive customer contacts.
In order to manage large market transactions, investment banks utilize their extensive customer contacts. The cost of computers managing large market transactions is very high.
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FINANCIAL INSTRUMENTS >> Vanilla Options
PRM Exam 1 Quiz Sub topic (Vanilla Options) with their solutions. After attempt each question, you will be able to see their Correct/Incorrect highlighted answers as well as their solutions. If you are ready to attempt this so Go Ahead to Start Quiz.
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Question 1 of 11
1. Question
1 pointsRegarding stock options, premium payment is:Correct
a, Initial contract payment.
Incorrect
a, Initial contract payment.

Question 2 of 11
2. Question
1 pointsWhat factor differentiates between American Options and European Options?Correct
b, Exercise rights before/after expiry.
American Options can be exercised early, before the expiration date. Whereas, European Options can only be exercised at the expiry date.Incorrect
b, Exercise rights before/after expiry.
American Options can be exercised early, before the expiration date. Whereas, European Options can only be exercised at the expiry date. 
Question 3 of 11
3. Question
1 pointsConsider a fund manager that is currently holding 2,000 units of stock at $9.00/unit. She sells European call options with strike price of $10.00, 6 months maturity. At expiration date, stock price remains at $9.00. The fund manager will:
Correct
b, Not exercise call option.
Incorrect
b, Not exercise call option.

Question 4 of 11
4. Question
1 pointsA fund manager buys one call option with a strike of 100, writes an other call option of 120. Both options have the same expiration date. This strategy is called:Correct
e, Only c and d.
This strategy is called bull spread or call spread. It takes advantage of a bull or rising market. The put option payoff is zero below 100, 20 above 120, and linear in between.Incorrect
e, Only c and d.
This strategy is called bull spread or call spread. It takes advantage of a bull or rising market. The put option payoff is zero below 100, 20 above 120, and linear in between. 
Question 5 of 11
5. Question
1 pointsA straddle strategy consists of both put and call options with the same strike price.
Correct
a, True.
Straddle strategy is employed by someone who expects the underlying price to either rise or fall.Incorrect
a, True.
Straddle strategy is employed by someone who expects the underlying price to either rise or fall. 
Question 6 of 11
6. Question
1 pointsThe option value is a function of stock price.Correct
a, True.
If you own a call option, you can buy the stock at a specified price. If the stock price rises, you will earn profit. But if the stock price falls, you could lose all of your investment.Incorrect
a, True.
If you own a call option, you can buy the stock at a specified price. If the stock price rises, you will earn profit. But if the stock price falls, you could lose all of your investment. 
Question 7 of 11
7. Question
1 pointsBinomial model is:
Correct
d, All of the above.
Incorrect
d, All of the above.

Question 8 of 11
8. Question
1 pointsWhich of the following is not a BSM optionpricing model assumption?
Correct
b, High default risk.
There is no default risk.Incorrect
b, High default risk.
There is no default risk. 
Question 9 of 11
9. Question
1 pointsWhich of the following is related to an option price?
Correct
All of the above.
An option price can be measured in various quantities called sensitivities. Sensitivities are also known as Greeks because Greek letters represent them. Greeks are defined as partial derivatives of the option price function.
Incorrect
All of the above.
An option price can be measured in various quantities called sensitivities. Sensitivities are also known as Greeks because Greek letters represent them. Greeks are defined as partial derivatives of the option price function.

Question 10 of 11
10. Question
1 points“What volatility must I use to get the correct market price?” This is known as implied volatility.
Correct
a, True.
Implied volatility is when an asset’s volatility is substituted into the BlackScholes formula. It makes a theoretical price equal to the market price. Or it provides market’s view of volatility over the life of an asset.
Incorrect
a, True.
Implied volatility is when an asset’s volatility is substituted into the BlackScholes formula. It makes a theoretical price equal to the market price. Or it provides market’s view of volatility over the life of an asset.

Question 11 of 11
11. Question
1 pointsAn option’s value consists of two parts:
Correct
d, Only a and b.
Incorrect
d, Only a and b.
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FINANCIAL MARKETS >> The Stock Market
PRM Exam 1 Quiz Sub topic (The Stock Market) with their solutions. After attempt each question, you will be able to see their Correct/Incorrect highlighted answers as well as their solutions. If you are ready to attempt this so Go Ahead to Start Quiz.
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Question 1 of 10
1. Question
1 pointsStocks can exist in the form of:
Correct
d, All of the above.
Incorrect
d, All of the above.

Question 2 of 10
2. Question
1 pointsEquity holder has a claim on the:
Correct
b, Residual assets.
Incorrect
b, Residual assets.

Question 3 of 10
3. Question
1 pointsThe Dividend Discount Model can be simplified to the:
Correct
.
Incorrect
.

Question 4 of 10
4. Question
1 pointsThe major participants of the stock market are:
Correct
d, All of the above.
Incorrect
d, All of the above.

Question 5 of 10
5. Question
1 pointsSecondary market activity can be organized in two ways: matched market and market maker.
Correct
a, True.
Incorrect
a, True.

Question 6 of 10
6. Question
1 pointsInitial public offering is also known as floating on the market or listing.
Correct
a, True.
Incorrect
a, True.

Question 7 of 10
7. Question
1 pointsWhich are the two types of orders for stock exchange transactions?
Correct
d, Only b and c.
Incorrect
d, Only b and c.

Question 8 of 10
8. Question
1 pointsTrading costs can reduce profit and eliminate arbitrage opportunities.
Correct
a, True.
Incorrect
a, True.

Question 9 of 10
9. Question
1 pointsBuying stock on margin consists of:
Correct
d, All of the above.
Buying stock on margin is when an investor takes a cash loan from a broker (i.e. broker call loan) to buy more stock.
Incorrect
d, All of the above.
Buying stock on margin is when an investor takes a cash loan from a broker (i.e. broker call loan) to buy more stock.

Question 10 of 10
10. Question
1 pointsShort selling involves a security sale that the investor:
Correct
e, Only b and c.
Incorrect
e, Only b and c.
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Below are the sample questions from ‘Banks Funds Transfer Pricing (FTP)’ sub topic. Get ready to test your expertise!
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Question 1 of 14
1. Question
1 pointsBank balance sheets are similar to other business entities.
Correct
b, False.
Bank balance sheets are not similar to other business entities. Bank balance sheets have active client activities and products on both asset and liability sides.Incorrect
b, False.
Bank balance sheets are not similar to other business entities. Bank balance sheets have active client activities and products on both asset and liability sides. 
Question 2 of 14
2. Question
1 pointsHow does FTP aid banks in asset and liability management?
Correct
e, All of the above.
FTP stands for funds transfer pricing.Incorrect
e, All of the above.
FTP stands for funds transfer pricing. 
Question 3 of 14
3. Question
1 pointsNIM stands for:
Correct
c, Net interest margin.
Incorrect
c, Net interest margin.

Question 4 of 14
4. Question
1 pointsSources of riskbased value in the NIM are:
Correct
d, All of the above.
Incorrect
d, All of the above.

Question 5 of 14
5. Question
1 pointsFTP process is:
Correct
c, Internally developed by banks.
Incorrect
c, Internally developed by banks.

Question 6 of 14
6. Question
1 pointsFTP applied to front office can create:
Correct
a, Conflicts.
When FTP is applied to front office business and risk management applications, conflicts may arise between a bank’s theoretical business pricing and risk measurement standards.Incorrect
a, Conflicts.
When FTP is applied to front office business and risk management applications, conflicts may arise between a bank’s theoretical business pricing and risk measurement standards. 
Question 7 of 14
7. Question
1 pointsFTP policy and procedures should be directly linked to the ALM interest rate risk management.
Correct
a, True.
Incorrect
a, True.

Question 8 of 14
8. Question
1 pointsFTP policy and procedures should include:
Correct
d, All of the above.
Incorrect
d, All of the above.

Question 9 of 14
9. Question
1 pointsBefore the advent of trading book and financial market activities, banks:
Correct
d, Only a and b.
Incorrect
d, Only a and b.

Question 10 of 14
10. Question
1 pointsWhich of the following is a pooling method?
Correct
d, Only a and b.
Incorrect
d, Only a and b.

Question 11 of 14
11. Question
1 pointsCompared against pooling methods, coterminus assignment methods are considered best practice.
Correct
a, True.
Incorrect
a, True.

Question 12 of 14
12. Question
1 pointsFTP is an analysis tool and a source of profitability.
Correct
b, False.
FTP is an analysis tool. It is not a source of profitability.Incorrect
b, False.
FTP is an analysis tool. It is not a source of profitability. 
Question 13 of 14
13. Question
1 pointsClient businessunitbased pooling results in unequal distribution of assets and liabilities between client activities.
Correct
a, True.
Incorrect
a, True.

Question 14 of 14
14. Question
1 pointsBy the early 1990s, the Libor curve became more liquid than the US Treasury curve.
Correct
a, True.
Incorrect
a, True.
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Below are the sample questions from ‘Portfolio Mathematics’ sub topic. Get ready to test your expertise!
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Question 1 of 10
1. Question
1 pointsMean and variances of asset variances can be described as:
Correct
e, Both c and d.
Means and variances can be explained in two ways. First, as statistical descriptions of past returns, means and variances are calculated from historical data. It gives an overview of historical data. Second,as probabilistic predictions of future returns, means and variances are calculated from random variables. It gives an overview of probability distribution of future returns.Incorrect
e, Both c and d.
Means and variances can be explained in two ways. First, as statistical descriptions of past returns, means and variances are calculated from historical data. It gives an overview of historical data. Second,as probabilistic predictions of future returns, means and variances are calculated from random variables. It gives an overview of probability distribution of future returns. 
Question 2 of 10
2. Question
1 pointsCalculate the mean, variance, and standard deviation of the monthly returns provided below:
3.20% 8.50% 5.20% 0.87% 12.31%Correct
.
Incorrect
.

Question 3 of 10
3. Question
1 pointsCorrelation measures the _________ of the relationship between two assets/portfolios.
Correct
b, Direction and strength.
Incorrect
b, Direction and strength.

Question 4 of 10
4. Question
1 pointsWhat is NOT necessary when calculating the risk of a twoasset portfolio?Correct
.
Incorrect
.

Question 5 of 10
5. Question
1 pointsCalculate the portfolio’s expected return that consists of Assets A and B.
Asset A: Mean = 10 %
Standard Deviation = 30%
Asset B: Mean = 18%
Standard Deviation = 25%
Correlation AB =0.33
Correct
d, 13.2%.
Portfolio expected return is calculated as:
Incorrect
d, 13.2%.
Portfolio expected return is calculated as:

Question 6 of 10
6. Question
1 pointsRationality in terms of the efficient frontier means:Correct
c, Higher expected return and/or lower standard deviation.
A rational investor should only consider portfolios that lie in the upper portion of the efficient frontier.
By moving vertically on the efficient frontier, an investor can get higher expected returns for the same
level of risk.Incorrect
c, Higher expected return and/or lower standard deviation.
A rational investor should only consider portfolios that lie in the upper portion of the efficient frontier.
By moving vertically on the efficient frontier, an investor can get higher expected returns for the same
level of risk. 
Question 7 of 10
7. Question
1 pointsAn investor maximizes the utility function by choosing:
Correct
a, 0≤ w ≤ 1.Various investors prefer different combinations of risk and return on the efficient frontier. Therefore, utility function provides a simple tradeoff between risk and return for each investor.Incorrect
a, 0≤ w ≤ 1.Various investors prefer different combinations of risk and return on the efficient frontier. Therefore, utility function provides a simple tradeoff between risk and return for each investor. 
Question 8 of 10
8. Question
1 pointsOn the efficient frontier, varying the correlation coefficient has ___________ effect on the standard deviations and benefits of diversification.Correct
c, Significant.
On the efficient frontier:
I. When the correlation coefficient = 1 i.e. perfect negative correlation, then the standard deviation of a portfolio is zero or a riskless portfolio.
II. When the correlation coefficient = +1 i.e. perfect positive correlation, then the standard deviation cannot be reduced or diversification is not possible.Incorrect
c, Significant.
On the efficient frontier:
I. When the correlation coefficient = 1 i.e. perfect negative correlation, then the standard deviation of a portfolio is zero or a riskless portfolio.
II. When the correlation coefficient = +1 i.e. perfect positive correlation, then the standard deviation cannot be reduced or diversification is not possible. 
Question 9 of 10
9. Question
1 pointsWhat is the probability of earning $8 million over one year?Portfolio = $12 million investmentAsset A: $8 million Mean = 10 % Standard Deviation = 30%Asset B:$4 million Mean = 18% Standard Deviation = 25%Correlation AB = 0.33Correct
c, P (X> 0.67).
P (12,000,000X > 8,000,000)
P (X > 12,000,000/8,000,000)
P (X > 0.67)Incorrect
c, P (X> 0.67).
P (12,000,000X > 8,000,000)
P (X > 12,000,000/8,000,000)
P (X > 0.67) 
Question 10 of 10
10. Question
1 pointsCorrect
.
Incorrect
.
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Below are the sample questions from ‘Measures of a Location or Central Tendency – Averages’ sub topic. Get ready to test your expertise!
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Question 1 of 5
1. Question
1 pointsCalculate the arithmetic mean of an asset’s quarterly returns for five years i.e. 5%, 2%, 3%, 4%, and 2%.
Correct
.
Incorrect
.

Question 2 of 5
2. Question
1 pointsCorrect
a, True.
Incorrect
a, True.

Question 3 of 5
3. Question
1 pointsThe arithmetic mean is particularly susceptible to:
Correct
c, Extreme values.
Incorrect
c, Extreme values.

Question 4 of 5
4. Question
1 pointsWhich mean is applicable when the discrete returns on an investment are measured over multiple periods?
Correct
b, Geometric mean.
Incorrect
b, Geometric mean.

Question 5 of 5
5. Question
1 pointsConsider a $100 investment with five year returns, 10%, 20%, 15%, 30%, and 20%. Calculate the geometric mean.
Correct
.
Incorrect
.
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Below are the sample questions from ‘Equations and Inequalities’ sub topic. Get ready to test your expertise!
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Question 1 of 10
1. Question
1 pointsConsider the equation: f(x)=2+3x. Is this an example of:
Correct
b, Linear function.
Incorrect
b, Linear function.

Question 2 of 10
2. Question
1 pointsCorrect
a, True.
Incorrect
a, True.

Question 3 of 10
3. Question
1 pointsCorrect
c, Dependent variable.
Incorrect
c, Dependent variable.

Question 4 of 10
4. Question
1 pointsBoth linear inequalities and equalities are calculated in the same exact manner. There are no exceptions.
Correct
b, False.
There are exceptions to linear inequalities. When both sides are multiplied or divided by a negative number, the direction of the inequality must be changed.Incorrect
b, False.
There are exceptions to linear inequalities. When both sides are multiplied or divided by a negative number, the direction of the inequality must be changed. 
Question 5 of 10
5. Question
1 pointsCorrect
a, Constant.
Incorrect
a, Constant.

Question 6 of 10
6. Question
1 pointsThe ____________ method is applied to solving linear equations with more than one unknown.
Correct
c, Elimination.
Incorrect
c, Elimination.

Question 7 of 10
7. Question
1 pointsSolve for x and y.
2x+4y3=0
3x+2y6=0Correct
b, x = 1.125, y = 1.3125.
Incorrect
b, x = 1.125, y = 1.3125.

Question 8 of 10
8. Question
1 pointsQuadratic equation is an example of a nonlinear equation.
Correct
a, True.
Incorrect
a, True.

Question 9 of 10
9. Question
1 pointsA quadratic equation has a minimum of two solutions.
Correct
b, False.
A quadratic equation has a maximum of two solutions.Incorrect
b, False.
A quadratic equation has a maximum of two solutions. 
Question 10 of 10
10. Question
1 pointsPolynomial expressions consist of at least one variable that is raised to a power:
Correct
a, Greater than two.
Incorrect
a, Greater than two.
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Below are the sample questions from ‘Classic Credit Life Cycle’ sub topic. Get ready to test your expertise!
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Question 1 of 10
1. Question
1 pointsThe Latin American Default crisis is an example of:
Correct
a, Sovereign risk.
Incorrect
a, Sovereign risk.

Question 2 of 10
2. Question
1 pointsNINA and NINJA mortgages initiated the US subprime mortgage crisis in 2007.
Correct
a, True.
NINA stands for no income, no asset.
NINJA stands for no income, no job, no assetsIncorrect
a, True.
NINA stands for no income, no asset.
NINJA stands for no income, no job, no assets 
Question 3 of 10
3. Question
1 pointsThe credit life cycle involves the process of:
Correct
e, All of the above.
Incorrect
e, All of the above.

Question 4 of 10
4. Question
1 pointsLending strategy decisions by the banks include:
Correct
e, Only a and b.
I. Lending strategy by the banks includes:
II. Type of lending
III. Counterparties
IV. Industries
V. Products
VI. CountriesIncorrect
e, Only a and b.
I. Lending strategy by the banks includes:
II. Type of lending
III. Counterparties
IV. Industries
V. Products
VI. Countries 
Question 5 of 10
5. Question
1 pointsAn institution must set its policies and procedures for successful credit risk assessment.
Correct
b, False.
For successful credit risk assessment, an institution must consider:
I. Policies and procedures
II. Structured approach
III. Financial conditions of borrower
IV. Ongoing reviewIncorrect
b, False.
For successful credit risk assessment, an institution must consider:
I. Policies and procedures
II. Structured approach
III. Financial conditions of borrower
IV. Ongoing review 
Question 6 of 10
6. Question
1 pointsLenders to retail customers are vulnerable to systematic risks.
Correct
a, True.
Incorrect
a, True.

Question 7 of 10
7. Question
1 pointsMethod of repayment and loan documentation are required before a loan is finalized.
Correct
a, True.
Incorrect
a, True.

Question 8 of 10
8. Question
1 pointsRestructured lending is when repayment terms and conditions are finalized.
Correct
b, False.
Restructured lending is when repayment terms and conditions have been altered from their original form.Incorrect
b, False.
Restructured lending is when repayment terms and conditions have been altered from their original form. 
Question 9 of 10
9. Question
1 pointsRegulatory capital is held by a bank due to capital adequacy legislation.
Correct
a, True.
Incorrect
a, True.

Question 10 of 10
10. Question
1 pointsBasel II suggested _______ approaches for calculating regulatory capital.
Correct
c, Three.
Basel II suggested three approaches for calculating regulatory capital.
I. Standardized approach
II. Foundation internal ratings based approach (IRB)
III. Advanced internal ratings based approach (IRB)Incorrect
c, Three.
Basel II suggested three approaches for calculating regulatory capital.
I. Standardized approach
II. Foundation internal ratings based approach (IRB)
III. Advanced internal ratings based approach (IRB)