Question

True or False Questions

Please state whether each of the following statements is true or false and provide a short explanation.

1. Northern Rock bank failed because it was highly exposed to the subprime mortgages.

2. Continental Illinois had a lower operation costs because they had fewer branches and heavily relied on the wholesale funding.

3. In Risk adjusted Return on Capital (RAROC) calculation, we use duration model to assess the loan risk and adjust the interest rate risk of the return.

4. An R class tranche of a CMO has a negative duration.

5. Salary is one of the factors for FICO score calculation.

6. FDIC is an ex-post deposit insurance scheme.

Answer 1

Q1:

True Northern Rock had huge exposures to subprime mortgages and failed in 2007 due to the same reason.

Q2:

True ; They focussed on reducing branches and relied on large corporates to increase their profitability.

Q3:

False; We dont use duration in this whereas risk weighted assets to find percentage of loan risk

Q4:

True: R tranche is likely to have negative duration where its prices increase with interest rates

Q5:

False; Fico score are calculated based on Amounts owed, new credit, length of credit history, credit mix, and payment history

Q6:

False FDIC is not a scheme; Federal Deposit Insurance Corporation is an agency that provide deposit insurance to depositors in US and it regulates credit unions.