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CAIIB - RISK MANAGEMENT MULTIPLE CHOICE QUESTIONS MODULE A – Asset Liability Management MODULE B – Risk Management 1.

A bank suffers loss due to adverse market movement of a security. The security was however held beyond the defeasance period. What is the type of the risk that the bank has suffered ? (i) (ii) (iii) (iv) Market Risk Operational Risk* Market Liquidation Risk Credit Risk

2. 8% Government of India security is quoted at RS 120/- The current yield on the security, will be---(i) (ii) (iii) (iv) 12% 9.6% 6.7%* 8%

3. A company declares RS 2/- dividend on the equity share of face value of RS 5/-. The share is quoted in the market at Rs 80/- the dividend yield will be---(i) (ii) (iii) (iv) 20% 4% 40% 2.5%

4. From following table find number of accounts that have suffered rating migration during 200607 Last No. of Present Rating Rating Accounts A++ A+ A B+ B C Default A 100 1 1 79 10 4 3 2 (i) (ii) (iii) (iv) 2 19* 21 25

5. A debenture of face value of As. 100 carries a coupon of 15%. If the current yield is 12.5%. What is the current market price ? (i) (ii) (iii) (iv) Rs.100 Rs.120* Rs.150 Rs.125

6. An increase in cash reserve ratio will cause yield curve to (i) (ii) (iii) (iv) Shift downward * Remain unchanged Become steeper Become flatter

7. 109 Rs. If interest rates go down by 1%. A transaction where financial securities are issued against the cash flow generated from a pool of assets is called (i) (ii) (iii) (iv) Securitization* Credit Default Swaps Credit Linked Notes Total Return Swaps 12.120. ii. i.133. False True * Difficult to say Remains same 10. VaR is not enough to assess market risk of a portfolio. False ii. Demand is unaffected 11. prices of fixed interest bonds – (i) (ii) (iii) Go up Go down* Remain unchanged 8.3 * Rs. When interest rates go up. 12% Government of India security is quoted at Rs. Difficult to say* iv. (i) (ii) (iii) (iv) Rs. iii. What is the risk that the bank is facing ? (i) (ii) Market risk Operational risk . 120 Rs. the market price of the security will be.. Large Government borrowing can cause yield curve to shift upward.. Stress testing is desirable because (i) (ii) (iii) (iv) It helps in calibrating VaR module It helps as an additional risk measure It helps in assessing risk due to abnormal movement of market parameters* It is used as VaR measure is not accurate enough 9. True iii.. A bank expects fall in price of a security if it sells it in the market.. Operational Risk does not arise from 1) 2) 3) 4) Inadequate or failed internal processes People and systems External Events Defaults by own customers* 13. A fall in interest rates reduces the demand for bonds in the secondary market i. 140 14. iv.

110.000 with 95% confidence level. who provide the input for LGD. Under advanced IRB approach.5% 15% 11. In a period of six months (125 working days) how many times the loss on the portfolio may exceed Rs. True iii. EAD and M. I do not know 20. False* ii.11%* 10% 22.100 carrying 15% coupon rate is quoted in the market at Rs. which is not adhering to regulations Failure of two banks simultaneously due to bankruptcy of one bank Where a group of banks fail due to contagion effect Failure of entire banking system* 18. Difficult to say iv.500. Capital charge for credit risk requires input for PD. 1 day VaR of a portfolio is Rs. LGD. Systemic risk is the risk due to (i) (ii) (iii) (iv) Failure of a bank. (i) (ii) (iii) (iv) Bank * Supervisor Function provided by BCBS None of the above 21.500. i.000 ? (i) (ii) (iii) (iv) 4 days 5 days* 6 days 7 days 16. A debenture of Rs.(iii) (iv) Asset Liquidation risk* Market liquidity risk 15. Back testing is done to (i) (ii) (iii) (iv) Test a model Compare model results and actual performance* Record performance None of the above 19.135/-. Falling interest rates cause NAVs of debt mutual fund to go down. the yield will be – (i) (ii) (iii) (iv) 11% 10%* 9% None of these 17. 11% Government of India security is quoted at Rs. The current yield on this debenture will be (i) (ii) (iii) (iv) 13. Investment in Post Office time deposit is .

Premature payment of a term loan will result in interest rate risk of type (i) Basis risk (ii) Yield curve risk (iii) Embedded option risk* (iv) Mismatch risk 24. What is its 16 days volatility approximately ? (i) (ii) (iii) (iv) 3% 10% 1% 4%* 26. A branch sanctions Rs.per share) makes gross profit of Rs.25 crores. Apart from credit and operational risks. A bank funds its assets from a pool of composite liabilities. it faces (i) (ii) (iii) (iv) Basis risk* Mismatch risk Market risk Liquidity risk 28.(i) (ii) (iii) (iv) Zero risk investment* Low risk investment Medium risk investment High risk investment 23. A company with equity capital of Rs.1 core loan to a borrower.? (i) (ii) (iii) (iv) All the statements are correct Statements 1 and 2 are correct Statements 2 and 3 are correct Statement 3 is correct * 27.50. If the market price of its equity share is Rs. which of the following risks the branch is taking 1) Liquidity risk 2) Interest rate risk 3) Market risk 4) Credit risk 5) Operational risk (i) All of them . Daily volatility of a stock is 1%.10/. Capital charge component of pricing accounts for 1) Cost of capital 2) Internal generation of capital 3) Capital that is required to be provided Which of the following is true.70 crores and net profit after tax of Rs.50 crores (Face Value of Rs. the PE ratio will be (i) (ii) (iii) (iv) 50 5 10* 20 25.

c.10 crores. d.4 and 5 only 1. Financial Risk is defined as (i) (ii) (iii) (iv) Uncertainties resu1ting in adverse variation of profitability or outright losses* Uncertainties that result in outright losses Uncertainties in cash flow Variations in net cash flows 30.(ii) (iii) (iv) 1. (i) (ii) (iii) (iv) Rs.66 Rs.16.* b. Strategic Risk is a type of (i) (ii) (iii) (iv) Interest Rate Risk Operation Risk Liquidity Risk None of the above* 31. Placement of volatile portion and core portion of Saving and Current deposit may be done as under: a. A mutual fund charges 1% entry load and no exit load.16 Rs.15.33. volatile portion in day 1 time bucket and core portion in 1-3 year bucket. c. Q.* b.16.16* 32.2.34* Rs. none of above.84 Rs.15. A company with equity capital of Rs. 8-14 days.2 and 3 only 1. . Volatile portion in 2-7 days time bucket and core portion in 1 year time bucket.16 and Rs.16.15 crores and PAT of Rs. 2-7 days. Cash should be shown under which time bucket for inflow: a. (i) (ii) (iii) True False* Difficult to say 33.16 and Rs.4 and 5 only* 29. 1 day. Asset Liability management is only management of maturity mismatch and has no bearing on profit augmentation.50 Rs.84 and Rs.16 and Rs. The face value of its share is Rs. the market price will be ---------. Volatile portion in 7 day time bucket and core portion in 5 year bucket.15 crores makes PBIDT of Rs.15. its sale and repurchase price will ----(i) (ii) (iii) (iv) Rs.80 Rs. Its NAV is Rs.5 and PE is 10.100 Q.

Over 2 year Bucket. 2-7. measuring banks interest rate risk exposure.d. 1-3 year time bucket. None of above. Repo d. In a given time band a negative or liability sensitive gap occurs when a.* b. None of above. . risk of lower current yield . c. d. Rate sensitive assets exceed rate sensitive liabilities. d. d. Gap method is basically used for a. d. Market Value of an asset is conceptually equal to a. Q. Investment in shares and mutual fund (open ended) should be shown in a. Present value of current and future cash flows from that asset and liability. The net cumulative negative mismatches during the day 1. d. Q. Bills discounting c. c. Term Loans to be shown under: a. Interest and principal of the loan under residual maturity bucket. Q. Yield Curve Risk is known as: a.* Q. Q. One year. None of above. Market borrowings ( call /term) b. In over 1 year bucket. None of above. Q. Q. Rate sensitive liabilities exceed rate sensitive assets. Present value of asset and future value of liability. Principal under residual maturity bucket. Q. Over 5 years time bucket.* b. All the above. In over 5 year bucket. None of above. In over 3 year bucket. d. measure maturity mismatch c.* b. Risk owing to altering of yields across maturities and its impact on NII* b. c. future value of current and future cash flows from that asset and liability. None of above. All above. all in 5 year and above bucket. c. over 3 year time bucket. Over 5 year bucket* b. None of above. d. Core portion of Cash credit advances may be shown under a. d. Measure potential losses from off balance sheet exposure.* b. Over 1 year bucket. c. c. Risk owing to wrong drawing of yield curve by Bank staff. Investment in subsidiaries and joint ventures to be shown a. c.* b. None of above. 8-14 and 15-28 days buckets if exceed the prudential limits may be financed from market by a. Q.* b.

* b. Weekly basis. Monthly basis.* b. YEAR 1 2 3 4 5 TOTAL CASH FLOW 8 8 8 8 108 140 DISCOUNT RATE 8% 10% 0. d. A swap has invariably two legs of transaction. an increase in market interest rates could cause a a. A swap only one leg of transaction. Futures are a. c.* b. Right to buy but not obligation to buy c.* b. Futures are marked to market on a. None of above. all the above. None are allowed.8264 0. All above.8573 0. Both are allowed. Under Call option the buyer has a. Q. Which of the following is true: a.7350 0. None of above. European option are allowed. Right to receive interest payments. Q. Over the counter products. Right to buy but not obligation to buy b. d.9091 0.6830 0.5030 100 Suppose that current expectation of yield is 10%.8587 6. Increase in net interest income. None of above. b. Under Put option the buyer has a. d. c.7938 0. Exchange traded. d. In India only a. Only American option are allowed.7513 0.6209 PRESENT VALUE at 8% 7. Right to sell but not obligation to sell* b. right to sell but not obligation to buy c. All the above. c. Q. None of above.* c. d. Daily basis and margin is adjusted.6806 0.4074 6. right to either sell or buy Q. c. d. with a negative gap . What will be the market price? Ans: Rs 92.Q. None of above. decline in net interest income.9259 0. .4184 Q.8802 73. d. None of above.3507 5. Q. Q.

through World bank d. Q. Provisions and inter office adjustments are a. Q. all of above. held till maturity and reflected in Banking book at market cost. c. None of above. None of above. b.Q. True. False * c.* b.* b. c. Partly true d. None of above. c. partly false. all of above. Rate non sensitive. Reserves and Surplus are a. Interest Rate Sensitive. none of above. b. b. Trading book includes : a.* b. Systemic risk can be diversified a. assets which are held till maturity. d. Capital . assets which are purchased in market. Rate sensitive. Which is true: a. Banking Book relates to assets which are a held till maturity and reflected in Balance sheet at acquisition cost. All of above. d. Q. Current account balance is a. Non interest rate sensitive. False* c. Q.* c. Q. Basel Committee (BCBS) possess formal super national supervisory authority and its conclusions have legal force: a.* b. None of above. .* c. through the central bank of the country. Risk associated with portfolio is always more than the weighted average of risks of individual items in portfolio. Risk associated with portfolio is equal to weighted average of risks of individual items in a portfolio. Rate non sensitive. b. Risk associated with portfolio is always less than the weighted average of risks of individual items in portfolio. d. Q. Rate sensitive. Risk of the portfolio cannot be related to the risks in individual items Q. d. c. assets a which normally not held till maturity and mark to market system is followed. True. d.

potential worst case loss at a specific confidence level over a certain period of time.30 crore (excluding current year’s profits) and long terms debt of Rs.x 10 10 = 10 ------.x 10 = Rs. It incurs interest cost of Rs. A company with equity of Rs.x 100 45 = 22.2% (iv) Debt-equity ratio = 35: 45 = 7:9 (v) P/E ratio . Mcaulay duration* yield change. Its share of Rs. d. It pays 50% dividends and transfer remaining profit to reserves.10 crore as tax. Q. potential worst case loss over indefinite period of time.5 crore and pays Rs. potential for gain over a selected period CASE STUDIES 1.Q. Maturity*yield change. It has reserve of Rs.35 crore depreciation of Rs. earns PBIDT of Rs. * c. None of above. d. none of above.x 10 Equity = (ii) 30 – (5 + 5 + 10) -------------------. Bond price changes can be estimated using modified duration using following relationship a. VaR is a.45 (iii) Return on Net worth PAT = ---------------NW 10 = -------------.30 crore.10 crore.35 crore. c.150/Find the following---(i) Earning per share PAT = ----------------. b. modified duration* yield change.10 10 Book value of share = Equity + Reserves = 10 + 30 + 5 = Rs.* b.10 face value is quoted at Rs.

5 crore and pays tax of Rs. = EPs x PE 200 = 20 x PE PE = 10 (vi) Payout ratio 50% Dividend ----------PAT 10 = ---.= NW 50 -----.50 (ii) Earning per share EPS = PAT / Equity = 40 – ( 5+5+10) = -----------------.. Suppose the market value of Rs 100 (face value) bond carrying coupon of 13 per cent p. Find the following : (i) Book value of share after current year's profit transferred to reserves.20 10 Return on net worth 40% Return on net worth = PAT x 100 -----------. Calculation of YTM: An example would further help to understand the mechanics of the YTM. maturing after 7 years is quoted Rs 109. 10 crore.5 crore.x 100 = 50% 10 2. It incurs interest of Rs. depreciation of Rs. The YTM of the bond is found by . 10 crore earns PBIDT of Rs.P.a. 10 face value is quoted at price of Rs.= 50% 20 3. It pays 100% dividend and transfers remaining profit to reserves. Its share of Rs.PE = MP / EPS (vi) Payout ratio = 150 / 10 = 15 Dividend = ----------. 40 crore.x 100 = 40% 50 (iv) Debt-equity ratio 1:1 Debt equity ratio = 1:1 (v) P/E ratio 10 M. It has reserves of Rs. Book Value = Equity + Reserves + Current year’s (PAT – Div) = 10 + 30 + (20 – 10) = Rs. 30 crore (Excluding current years profits) and long term debt of Rs.x 100 PAT = 5 -------.x 10 10 (iii) 20 --.45 in the market.= 50 20 ------.x 10 = Rs. 200. 50 crore. A company with equity of Rs.

725 = 13 + (– 9. 13 + (100 –109.45)/ 7 YTM = ————————————— (100 + 109. if the above bond is held by the buyer till maturity the overall return from the Bond will be 11 per cent.45/7) ————————— 104. YTM can be found by approximation as follows.712) + 100 x (0.12% 104. C + (A – P)/n YTM = ————————— X 100 (A + P) /2 Where C A P n = coupon = Face Value/maturity Value = Price paid for the Bond = term to maturity Applying this in the above example.482) = Rs 109.725 .35 = —————— X 100 = 11. Accordingly for 7 years (PVIFA) at 11% and for 7 years (PVIF) at 11% = = 4.45 PVIFA being the Price Value Interest Factor for the 7 year Annuity and PVIF the Price Value Interest Factor for 7 years to be taken from the PVIFA table and PVIF table (available in all standard Finance Text Books) for a 7 year term.712 0. say ‘r’ so that the Present value of such cash flows sums to Rs 109.45 Rs 13 (PVIFA) + Rs 100 (PVIF) = Rs 109.482 Then LHS of the equation becomes 13 x (4.45 Then 11 per cent is said to be the YTM of the bond. in the above example. However as the above process will be time consuming. by trial and error method.45)/ 2 13 – 1. In other words. also described as the Internal Rate of Return. (IRR).discounting the yearly coupon flows of Rs 13 in the next 6 years and Rs 113 (Principal of Rs 100 + coupon of Rs 13) at the end of 7 year at a rate (to be found by trial & error method).