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FRM Exam Part 1 Full Access
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Question 1 of 30
1. Question
Which of the following three forms can be expressed as Market liquidity?
I. Rollover risk
II. Bid-ask spread
III. Market depth
IV. Market resiliency
Correct
Market liquidity can be expressed in the following three forms:
- Bid-ask spread
- Market depth
- Market resiliency
Incorrect
Market liquidity can be expressed in the following three forms:
- Bid-ask spread
- Market depth
- Market resiliency
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Question 2 of 30
2. Question
‘The risk that depositors will withdraw funds from banks, or that investors will redeem their shares (e.g., from mutual funds)’.
Which of the following matches the above description?
Correct
Redemption risk: The risk that depositors will withdraw funds from banks, or that investors will redeem their shares (e.g., from mutual funds).
Incorrect
Redemption risk: The risk that depositors will withdraw funds from banks, or that investors will redeem their shares (e.g., from mutual funds).
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Question 3 of 30
3. Question
A risk that arises when a decline in the collateral value of an asset results in an increase in marginrequirement, requiring additional equity capital.
Which of the following matches the above description?
Correct
Margin/haircut funding risk: A risk that arises when a decline in the collateral value of an asset results in an increase in margin requirement, requiring additional equity capital.
Incorrect
Margin/haircut funding risk: A risk that arises when a decline in the collateral value of an asset results in an increase in margin requirement, requiring additional equity capital.
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Question 4 of 30
4. Question
‘The number of units of an asset a trader can buy or sell at the current market quote (bid and ask prices). The greater the market depth, the higher the market liquidity. ‘
Which of the following matches the above description?
Correct
Market depth refers to the number of units of an asset a trader can buy or sell at the current market quote (bid and ask prices). The greater the market depth, the higher the market liquidity.
Incorrect
Market depth refers to the number of units of an asset a trader can buy or sell at the current market quote (bid and ask prices). The greater the market depth, the higher the market liquidity.
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Question 5 of 30
5. Question
‘The length of time it will take an asset to regain its price after the price has fallen temporarily.’
Which of the following matches the above description?
Correct
Market resiliency describes the length of time it will take an asset to regain its price after the price has fallen temporarily.
Incorrect
Market resiliency describes the length of time it will take an asset to regain its price after the price has fallen temporarily.
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Question 6 of 30
6. Question
There are two ways of raising funds for Funding Liquidity and Market Liquidity. Which of the following are the two ways of raising funds?
I. Buying as asset
II. Selling an asset
III. Exchange an asset
IV. Using an asset as collateral to borrow money against it
Correct
Consider two ways of raising funds: (1) selling an asset, or (2) using an asset as collateral to borrow money against it.
Incorrect
Consider two ways of raising funds: (1) selling an asset, or (2) using an asset as collateral to borrow money against it.
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Question 7 of 30
7. Question
What can trigger a significant and sudden decline in, or even disappearance of, liquidity, transforming a relatively small shock into a financial disaster?
Correct
Interaction of funding liquidity and market liquidity can trigger a significant and sudden decline in, or even disappearance of, liquidity, transforming a relatively small shock into a financial disaster.
Incorrect
Interaction of funding liquidity and market liquidity can trigger a significant and sudden decline in, or even disappearance of, liquidity, transforming a relatively small shock into a financial disaster.
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Question 8 of 30
8. Question
To maintain a particular margin (or leverage ratio) in the face of a market decline, what does an investor need to do to ensure that the overall value of the position aligns with the current smaller amount of equity capital and the lower borrowing capacity?
Correct
To maintain a particular margin (or leverage ratio) in the face of a market decline, an investor may need to sell a portion of assets to ensure that the overall value of the position aligns with the current smaller amount of equity capital and the lower borrowing capacity.
Incorrect
To maintain a particular margin (or leverage ratio) in the face of a market decline, an investor may need to sell a portion of assets to ensure that the overall value of the position aligns with the current smaller amount of equity capital and the lower borrowing capacity.
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Question 9 of 30
9. Question
Which of the following describes how a situation become a loss spiral?
Correct
This situation becomes a loss spiral when the decline leads to a cycle of further price decreases and further forced sales.
Incorrect
This situation becomes a loss spiral when the decline leads to a cycle of further price decreases and further forced sales.
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Question 10 of 30
10. Question
Which of the following will sustain a greater loss in a forced sale compared to an asset with higher market liquidity?
Correct
An asset with low market liquidity will sustain a greater loss in a forced sale compared to an asset with higher market liquidity.
Incorrect
An asset with low market liquidity will sustain a greater loss in a forced sale compared to an asset with higher market liquidity.
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Question 11 of 30
11. Question
‘Creating a situation in which the seller, already distressed from reducing his position, is forced to sell at an unnaturally low price’
Which of the following matches the above description?
Correct
Predatory trading— creating a situation in which the seller, already distressed from reducing his position, is forced to sell at an unnaturally low price.
Incorrect
Predatory trading— creating a situation in which the seller, already distressed from reducing his position, is forced to sell at an unnaturally low price.
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Question 12 of 30
12. Question
‘The forced sale of an asset as a result of an increase in margins or, equivalently speaking, a decline in the leverage ratio’.
Which of the following best describe the above description?
Correct
A margin spiral refers to the forced sale of an asset as a result of an increase in margins or, equivalently speaking, a decline in the leverage ratio.
Incorrect
A margin spiral refers to the forced sale of an asset as a result of an increase in margins or, equivalently speaking, a decline in the leverage ratio.
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Question 13 of 30
13. Question
What does an investor have to do to satisfy the increased margin requirements?
Correct
To satisfy the increased margin requirements, an investor may have to sell even more assets than under a loss spiral event in which margins and leverage ratios are held constant.
Incorrect
To satisfy the increased margin requirements, an investor may have to sell even more assets than under a loss spiral event in which margins and leverage ratios are held constant.
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Question 14 of 30
14. Question
What can the necessity to deleverage produce in an environment of declining prices and general tightening of lending?
I. An ongoing cycle of forced sales
II. Erosion of equity capital
III. Continued downward pressure on prices.
IV. Continued upward pressure on prices.
Correct
In an environment of declining prices and general tightening of lending, the necessity to deleverage can produce an ongoing cycle of forced sales, erosion of equity capital, and continued downward pressure on prices.
Incorrect
In an environment of declining prices and general tightening of lending, the necessity to deleverage can produce an ongoing cycle of forced sales, erosion of equity capital, and continued downward pressure on prices.
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Question 15 of 30
15. Question
‘Arises as a result of an increase in counterparty credit risk, particularly in an environment of market stress’.
Which of the following matches the above description?
Correct
Network risk arises as a result of an increase in counterparty credit risk, particularly in an environment of market stress.
Incorrect
Network risk arises as a result of an increase in counterparty credit risk, particularly in an environment of market stress.
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Question 16 of 30
16. Question
What happened is the first half of 2007, causing several subprime mortgage lenders to file for bankruptcy and subsequently fail?
Correct
In the first half of 2007, housing prices in the United States started to decline, causing several subprime mortgage lenders to file for bankruptcy and subsequently fail.
Incorrect
In the first half of 2007, housing prices in the United States started to decline, causing several subprime mortgage lenders to file for bankruptcy and subsequently fail.
-
Question 17 of 30
17. Question
Asset-backed commercial paper (ABCP) is the bundling of longer-term debt from which of the following?
I. Rent
II. Mortgages
III. Credit card receivables
IV. Other loans
Correct
ABCP is the bundling of longer-term debt from mortgages, credit card receivables, and other loans.
Incorrect
ABCP is the bundling of longer-term debt from mortgages, credit card receivables, and other loans.
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Question 18 of 30
18. Question
Which of the following description best describe Bank run or “run”?
Correct
Bank run or “run”. A bank run occurs when depositors withdraw cash from a bank thinking the bank is about to fail.
Incorrect
Bank run or “run”. A bank run occurs when depositors withdraw cash from a bank thinking the bank is about to fail.
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Question 19 of 30
19. Question
‘A financial institution other than a regulated depository institution’.
Which of the following matches the above description?
Correct
A shadow bank is a financial institution other than a regulated depository institution.
Incorrect
A shadow bank is a financial institution other than a regulated depository institution.
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Question 20 of 30
20. Question
Which of the following are examples of regulated depository institutions?
I. Commercial banks
II. Thrifts
III. Credit cards
IV. Credit unions
Correct
Examples of regulated depository institutions are commercial banks, thrifts, and credit unions.
Incorrect
Examples of regulated depository institutions are commercial banks, thrifts, and credit unions.
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Question 21 of 30
21. Question
Which of the following are examples of shadow banks?
I. Private equity funds
II. Investment banks
III. Hedge funds
IV. Mortgage lenders and insurance companies.
Correct
Examples of shadow banks are private equity funds, investment banks, hedge funds, mortgage lenders, and insurance companies.
Incorrect
Examples of shadow banks are private equity funds, investment banks, hedge funds, mortgage lenders, and insurance companies.
-
Question 22 of 30
22. Question
‘Involve an institutional investor making a short- term deposit of cash with a shadow bank that in turn pays the investor interest on the cash’.
Which of the following matches the above description?
Correct
Repurchase agreements (repos). Repos involve an institutional investor making a short- term deposit of cash with a shadow bank that in turn pays the investor interest on the cash (called the repo rate).
Incorrect
Repurchase agreements (repos). Repos involve an institutional investor making a short- term deposit of cash with a shadow bank that in turn pays the investor interest on the cash (called the repo rate).
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Question 23 of 30
23. Question
‘The amount of collateral in a repo agreement in relation to a deposit’
Which of the following matches the above description?
Correct
Haircut: A haircut is the amount of collateral in a repo agreement in relation to a deposit.
Incorrect
Haircut: A haircut is the amount of collateral in a repo agreement in relation to a deposit.
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Question 24 of 30
24. Question
What was the main vulnerability of commercial paper?
Correct
During the financial crisis of 2007-2009, a significant amount of the mortgages in ABCP were subprime mortgages, which subsequently became worthless as MBSs were downgraded. Thus, the ABCP became vulnerable as investors withdrew their money from the shadow banks that were issuing ABCP.
Incorrect
During the financial crisis of 2007-2009, a significant amount of the mortgages in ABCP were subprime mortgages, which subsequently became worthless as MBSs were downgraded. Thus, the ABCP became vulnerable as investors withdrew their money from the shadow banks that were issuing ABCP.
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Question 25 of 30
25. Question
The main financial market participants in the financial crisis starting in 2007 were institutional investors, such as:
I. Money market mutual funds
II. Nonfinancial firms
III. Municipalities and state governments
IV. Other large entities investing large amounts of cash with shadow banks.
Correct
The main financial market participants in the financial crisis starting in 2007 were institutional investors, such as money market mutual funds, nonfinancial firms, municipalities and state governments, and other large entities investing large amounts of cash with shadow banks.
Incorrect
The main financial market participants in the financial crisis starting in 2007 were institutional investors, such as money market mutual funds, nonfinancial firms, municipalities and state governments, and other large entities investing large amounts of cash with shadow banks.
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Question 26 of 30
26. Question
What is the main trigger of the financial crisis describe as by former U.S. Federal Reserve Chairman Ben Bernanke?
Correct
The main trigger of the financial crisis, as described by former U.S. Federal Reserve Chairman Ben Bernanke, was the prospect of losses on subprime mortgages.
Incorrect
The main trigger of the financial crisis, as described by former U.S. Federal Reserve Chairman Ben Bernanke, was the prospect of losses on subprime mortgages.
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Question 27 of 30
27. Question
What resulted in a run on MMFs by institutional and other large investors, which further exacerbated the liquidity crisis as investors withdrew their money?
Correct
The declining ABCP prices resulted in a run on MMFs by institutional and other large investors, which further exacerbated the liquidity crisis as investors withdrew their money.
Incorrect
The declining ABCP prices resulted in a run on MMFs by institutional and other large investors, which further exacerbated the liquidity crisis as investors withdrew their money.
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Question 28 of 30
28. Question
What happens when housing prices declined and homeowners defaulted on their mortgage loans?
Correct
When housing prices declined and homeowners defaulted on their mortgage loans, it reduced the value and prices of ABCP (which held mortgages).
Incorrect
When housing prices declined and homeowners defaulted on their mortgage loans, it reduced the value and prices of ABCP (which held mortgages).
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Question 29 of 30
29. Question
What happened during the bankruptcy filing in September 2008?
Correct
The bankruptcy filing in September 2008 is considered the tipping point in the financial crisis.
Incorrect
The bankruptcy filing in September 2008 is considered the tipping point in the financial crisis.
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Question 30 of 30
30. Question
The major impact of Lehman Brothers filing for bankruptcy was:
Correct
The major impact of Lehman filing for bankruptcy was a run on money market mutual funds starting with Reserve Primary. Reserve Primary contained Lehman commercial paper. After the bankruptcy filing, Reserve Primary was not able to maintain their $ 1 net asset value, which resulted in a run on Reserve Primary by investors. This led to a run on other money market mutual funds, starting a contagion effect that spread to other nonmortgage- related assets and other financial markets.
Incorrect
The major impact of Lehman filing for bankruptcy was a run on money market mutual funds starting with Reserve Primary. Reserve Primary contained Lehman commercial paper. After the bankruptcy filing, Reserve Primary was not able to maintain their $ 1 net asset value, which resulted in a run on Reserve Primary by investors. This led to a run on other money market mutual funds, starting a contagion effect that spread to other nonmortgage- related assets and other financial markets.