Bcom Bachelor of Commerce Bachelor of Commerce: Banking & Insurance 4 — Questions and Answers
Question 1: What is a 'credit default swap' (CDS)?
- A loan in which collateral is exchanged between two banks
- A financial derivative that transfers credit risk from one party to another (Correct answer)
- A type of government bond with variable interest
- An agreement to swap fixed and floating interest rate payments
Correct answer: A financial derivative that transfers credit risk from one party to another
A credit default swap is a derivative contract in which a buyer makes periodic payments to a seller in exchange for protection against a credit event like default.
Question 2: Under the principle of 'indemnity' in insurance, what is the insurer's obligation?
- To pay the insured the maximum policy limit regardless of loss
- To restore the insured to the same financial position as before the loss (Correct answer)
- To pay the insured a fixed benefit amount
- To replace any lost item with a brand new equivalent
Correct answer: To restore the insured to the same financial position as before the loss
The principle of indemnity ensures that insurance compensates the insured for actual loss, preventing them from profiting from a claim.
Question 3: What is 'fractional reserve banking'?
- A system where banks only accept partial deposits from customers
- A banking system where banks hold only a fraction of deposits as reserves and lend the rest (Correct answer)
- Banks lending money only to a fraction of approved applicants
- A reserve fund held by central banks for emergencies
Correct answer: A banking system where banks hold only a fraction of deposits as reserves and lend the rest
Fractional reserve banking allows banks to keep only a portion of deposits as reserves and lend out the remainder, effectively creating money through lending.
Question 4: Which regulatory body primarily supervises federally chartered commercial banks in the United States?
- The Securities and Exchange Commission (SEC)
- The Office of the Comptroller of the Currency (OCC) (Correct answer)
- The Federal Deposit Insurance Corporation (FDIC)
- The Consumer Financial Protection Bureau (CFPB)
Correct answer: The Office of the Comptroller of the Currency (OCC)
The OCC charters, regulates, and supervises all national banks and federal savings associations in the United States.
Question 5: What is a 'reinsurance' arrangement?
- An insurer selling policies directly to consumers without agents
- An insurance company purchasing insurance from another insurer to limit its own risk exposure (Correct answer)
- A government-backed guarantee on insurance policies
- Renewing an existing insurance policy at the end of its term
Correct answer: An insurance company purchasing insurance from another insurer to limit its own risk exposure
Reinsurance is insurance for insurers — a primary insurer transfers a portion of its risk to a reinsurance company to reduce potential large losses.
Question 6: What does 'net present value' (NPV) mean in bank loan analysis?
- The current outstanding balance of a loan
- The total interest earned over the life of a loan
- The difference between present value of cash inflows and outflows over a project's life (Correct answer)
- The face value of a bond minus accrued interest
Correct answer: The difference between present value of cash inflows and outflows over a project's life
NPV measures whether a loan or investment will generate more value than it costs by discounting future cash flows to today's dollars.
Question 7: What is an 'endowment policy' in life insurance?
- A policy that only pays if the insured dies during the term
- A policy that pays either on death or when the insured reaches a specified age/date (Correct answer)
- A group life insurance plan funded by an employer
- A policy with no fixed premium that adjusts annually
Correct answer: A policy that pays either on death or when the insured reaches a specified age/date
An endowment policy combines life insurance and savings, paying a lump sum either upon the insured's death or at the end of a specified term, whichever comes first.
Bcom Bachelor of Commerce Bachelor of Commerce: Banking & Insurance 4
What is a 'credit default swap' (CDS)?