Question 1:

True/False
1. T
2. T
3. F
4. F
5. T
6. T
7. T
8. T
9. F
10. F
11. T
12. F
13. T
14. F
15. T
16. T
17. T
18. F
19. T
20. F

3
Term deposit:
pays a fixed interest rate for the nominated fixed investment period
rate of interest will be banks carded rate for that term and amount
interest may be payable periodically (e.g. monthly) or at maturity
principal is repaid at maturity.

Certificate of deposit:
discount security issued by a bank
an investor will purchase the CD at less than the face value
the investor will receive the full face value back at maturity
price is the face value discounted by the yield
yield/price relationship will vary with changes in market rates.
Risk-reward trade-offs:
a call deposit will pay a very low rate of interest but will be
essentially risk free
a CD is a highly liquid form of investment that will pay a higher
rate than the call deposit
a CD can easily be sold into the money market to obtain funds,
whereas with a term deposit there is a loss of liquidity as the
funds are locked-up for the fixed period
however, a term deposit may pay a higher rate of return.

7
a.
A transaction that is conducted by a bank that is not recorded on
the balance sheet. A contingent liability that will only be recorded on
the balance sheet if some specified condition or event occurs.
b.
Direct credit substitutessupport a clients financial obligations,
such as a stand-by letter of credit or a financial guarantee
Trade and performance related itemssupport a clients nonfinancial obligations, such as a performance guarantee or a
documentary letter of credit
Commitmentsa financial commitment of the bank to advance
funds or underwrite a debt or equity issue. For example, the
unused credit limit on a credit card, or a housing loan approval
where the funds have not yet been used
Foreign exchange, interest rate and other market rate related
contractsprincipally derivative products such as futures,
forwards, options and swaps used to manage f/x and interest rate
risk exposures.

9
a.
Equity and quasi-equity capital is a source of long-term funds for an
institution; it provides the equity funding base that enables on-going
growth in a business.
b.
The prudential standard requires an institution, at a minimum, to
maintain a risk-based capital ratio of 8.00 per cent at all times.
At least half of the risk-based capital ratio must take the form of
tier 1 capital. The remainder of the capital requirement may be
held as tier 2 (upper and lower) capital.
Where considered appropriate, a regulator may require an
institution to maintain a minimum capital ratio above 8.00 per
cent.
10a
The Bank for International Settlements categorises operational risk as:
internal and external fraud
employment practices and workplace safety
clients, products and business practices
damage to physical assets
business disruption and system failures
execution, delivery and process management.

11a
Market risk is the risk of losses resulting from movements in market prices for capital
adequacy purposes there is general market risk and specific market risk.
General market risk relates to changes in overall market for interest rates, equities,
foreign exchange and commodities.
Specific risk is the risk that the value of a security will change due to issuer specific
factors, such as a change in the creditworthiness of the issuer. This is only relevant to
interest rate and equity positions.