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  1. What was the approximate loss of net worth suffered by U.S. households during from September 2007 – December 2008?
    (RM 90-92)  

    A. Less than $500 billion   
    B. $1 trillion – $5 trillion   
    C. More than $10 trillion 
    D. $700 billion – $1 trillion   
    C. More than $10 trillion 

    The collective net worth of U.S. households fell nearly $13 trillion from September 2007 through the end of 2008.
    (this multiple choice question has been scrambled)
  2. Which of the following best describes the risk at the heart of the credit crisis of 2007 – 2009?
    (RM 93)  

    A. Market Risk   
    B. Default risk   
    C. Derivative risk   
    D. Systemic risk 
    D. Systemic risk

    Systemic risk is the risk of the collapse of an entire market or system that is created by interdependencies of securities. The credit crisis arose from the complex interaction of the many risks that were created by markets with virtually no regulation or oversight.
    (this multiple choice question has been scrambled)
  3. All of the following are characteristics of a traditional mortgage contract, EXCEPT:
    (RM 94)   

    A. Credit score of at least 600 
    B. Fixed rate, amortized loan   
    C. Healthy personal wealth   
    D. Substantial down payment   
    A. Credit score of at least 600

    A traditional mortgage contract would be looking for a credit score of at least 700, if not higher.
     
    (this multiple choice question has been scrambled)
  4. Which of the following comprises the bulk of a bank’s capital reserves?
    (RM 94)  

    A. Asset backed securities   
    B. Mortgage assets   
    C. Retained earnings   
    D. SPVs 
    C. Retained earnings

    Retained earnings make up the largest part of capital reserves.
    (this multiple choice question has been scrambled)
  5. Which of the following occur when a bank has a loan default?
    (RM 94)

    I            The loan is removed from the bank’s balance sheet.

    II            Retained income is increased to maintain capitalization. Question 5 of 21
     
    A. Both I and II   
    B. I only   
    C. II only   
    D. Neither I nor II 
    B. I only   

    When a bank loan defaults, the loan is "written off" or taken off the bank’s balance sheet. Retained earnings are reduced to reflect the loss of capital; they are not increased by a default.
    (this multiple choice question has been scrambled)
  6. When a bank loan defaults, the loan is "written off" or taken off the bank’s balance sheet. Retained earnings are reduced to reflect the loss of capital; they are not increased by a default.
    All of the following are part of the securitization process, EXCEPT:
    (RM 96)  

    A. Creating a SPV   
    B. Selling mortgages 
    C. Appointing the trustee   
    D. Selecting mortgages   
    C. Appointing the trustee

    There is no trust or trustee for the special purchase vehicle.
    (this multiple choice question has been scrambled)
  7. Which of the following benefits can a bank receive when it issues a MBS?
    (RM 96-97)

    I            Servicing rights           
    II            Ability to lend more money
    III            Create a less risky portfolio
    IV            Ability to invest Question 7 of 21   
    A. III and IV only   
    B. I only   
    C. I and II only   
    D. I, II, III, and IV 
    D. I, II, III, and IV

    All of the items mentioned are benefits for the bank. The bank sells the selected mortgages to the SPV. Mortgages carry an inherent risk. The money received from the sale of the mortgages may be lent out or invested.
    (this multiple choice question has been scrambled)
  8. All of the following are characteristics of a CMO, EXCEPT:
    (RM 97)
     
    A. Equally distributes risk 
    B. Has tranches   
    C. Backed by mortgages   
    D. Diversifies risk   
    A. Equally distributes risk 

    The tranches of the CMO have varying degrees of risk. The lowest priority carries the most risk.
     
    (this multiple choice question has been scrambled)
  9. The tranches of the CMO have varying degrees of risk. The lowest priority carries the most risk.
    Which of the following carries the highest risk in a CMO?
    (RM 97)

    I            Equity tranche
    II            Lowest priority tranche 
     
    A. II only   
    B. I only   
    C. Neither I nor II 
    D. Both I and II   
    D. Both I and II   

    The equity tranche is by definition the lowest priority tranche of a CMO.
     
    (this multiple choice question has been scrambled)
  10. Which of the following would be rated the least risky?
    (RM 97-98)   

    A. High priority tranche of a CDO   
    B. Low priority tranche of a CMO   
    C. Equity tranche of a CMO   
    D. High yield tranche of a CMO 
    A. High priority tranche of a CDO

    The high priority tranche of a collateralized debt obligation (CDO) will receive the highest rating available despite the fact that the portfolio consists of CMOs with junk bond status. Equity tranche is the most risky of the tranches offered by a CMO because it is the lowest priority in receiving payments.
    (this multiple choice question has been scrambled)
  11. Which of the following assets would most likely be part of a CDO?
    (RM 98)

    I            Low risk CMO tranche
    II            High Priority CMO tranche

    A. Neither I nor II 
    B. II only   
    C. I only   
    D. Both I and II   
    A. Neither I nor II 

    Collateralized debt obligations (CDOs) are generally comprised of the highest risk tranches of a CMO.
    (this multiple choice question has been scrambled)
  12. All of the following are asset backed securities, EXCEPT:
    (RM 98-100)
     
    A. Collateralized debt obligations   
    B. Credit default swaps   
    C. Collateralized mortgage obligations   
    D. Pass-through MBSs
    • B. Credit default swaps  
    •  
    • A credit default swap is a financial derivative but it is a form of insurance rather than an asset back security. The other securities are asset backed securities and are backed by mortgage loans.
    •  
  13. In which of the following ways is a credit default swap like an insurance policy?
    (RM 100-102)

    I            Both are subject to the requirement of an insurable interest.

    II            Reserves must be maintained to pay losses for both.

    A. I only   
    B. II only   
    C. Both I and II   
    D. Neither I nor II 
    • D. Neither I nor II While insurance policies are subject to the requirement of an insurable interest, credit default swaps are not. While insurers are required to keep reserves against losses on insurance policies, there is no such requirement with credit default swaps.
    •  
  14. Which of the following is (are) associated with the Federal Reserve?
    (RM 103-104)

    I            Fiscal policy

    II            Discount window

    A. Neither I nor II 
    B. Both I and II   
    C. I only   
    D. II only   
    D. II only

    The discount window is where member banks may come to borrow from the Fed. It is the "bank of last resort. The Fed handles monetary policy. Congress creates fiscal policy.
    (this multiple choice question has been scrambled)
  15. Which of the following is (are) true of the SEC?
    (RM 103-105)

    I            It is a U.S. Agency

    II            It regulates investment banks

    A. Neither I nor II 
    B. II only   
    C. Both I and II   
    D. I only   
    B. II only   

    The SEC is not a U.S. agency.
     
    (this multiple choice question has been scrambled)
  16. Which of the following are characteristics of investment banks?
    (RM 104-105)

    I            Regulation by the SEC of investment banks is more stringent than the regulation of commercial banks.

    II            Underwriting new issues is a revenue source.  

    A. Neither I nor II
    B. II only   
    C. Both I and II   
    D. I only   
    B. II only

    Investment banks are subject to less stringent regulation by the SEC than the regulation of commercial banks.
     
    (this multiple choice question has been scrambled)
  17. A leverage ratio of 10-to-1 indicates:
    (RM 104-105)

    I            For every $10 of reserves, the bank may lend $1.
    II            For every $10 of loans, the bank must reserve $1.
    III            It is a commercial bank.
    IV            It is an investment bank.

    A. II and III only   
    B. II and IV only 
    C. I and III only   
    D. I and IV only   
    A. II and III only

    The leverage ratio is loans to reserves. Investment banks are not subject to leverage ratios.
    (this multiple choice question has been scrambled)
  18. Which of the following was (were) allowed to fail?
    (RM 105-106)

    I            Bear Stearns
    II            Lehman Brothers
    III            Merrill Lynch
    IV            Goldman Sachs 

    A. II only   
    B. I, II, III, and IV only 
    C. I and II only   
    D. I only   
    A. II only

    Although the government was involved with all of the institutions mentioned, Lehman Brothers was the only bank to actually fail.
    (this multiple choice question has been scrambled)
  19. Which of the following did the government take control of?
    (RM 105-106, 109)

    I            AIG
    II            Bear Stearns
    III            Goldman Sachs
    IV            Lehman Brothers

    A. I and II only   
    B. IV only 
    C. I only   
    D. II and IV only   
    C. I only

    Even though the government "bailed out" Bear Stearns and Goldman Sachs, they did not take control of them. Lehman Brothers was allowed to fail.
    (this multiple choice question has been scrambled)
  20. What is the approximate total of all funds the U.S. government made available to AIG?
    (RM 107)  

    A. Between $200 – $400 billion   
    B. Between $70 – $100 billion   
    C. More than $500 billion 
    D. Between $100 – $200 billion   
    D. Between $100 – $200 billion

    The total amount that AIG received was $185 billion. It came in two separate payments; the first for $85 billion in October of 2008 and the second for $100 billion in March of 2009.
    (this multiple choice question has been scrambled)
  21. All of the following are components of the "Obama Plan," EXCEPT:
    (RM 107-108) 

    A. Financial Intermediary Oversight Council   
    B. Consumer Financial Protection Agency   
    C. Federal oversight of insurers 
    D. Broader role for the Federal Reserve   
    A. Financial Intermediary Oversight Council   

    The Financial Intermediary Oversight Council is fictitious.
    (this multiple choice question has been scrambled)

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