Question 1:True/False1. T2. T3. F4. F5. T6. T7. T8. T9. F10. F11. T12. F13. T14. F15. T16. T17. T18. F19. T20. F

3Term 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.

7a.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 non-financial 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.

9a.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.

10aThe 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.

11aMarket 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.