Financial Intermediaries

A corporate bond returns 12 percent of its cost (in PV terms) in the first year, 11 percent in the second year, 10 percent in the third year and the remainder in the fourth year. What is the bond's duration in years? A)3.32 years B)3.68 years C)3.75 years D)2.50 years E)4.00 years

A) 3.32 years 3.32 = (12% × 1) + (11% × 2) + (10% × 3) + (67% × 4)

The age group that holds the most stock as of April 2016 is the ____________ group. A)55 and older B)65 and older C)35-54 D)under 35

A) 55 and older

ou buy a stock for $30 per share and sell it for $33 after holding it for slightly over a year and collecting a $0.75 per share dividend. Your ordinary income tax rate is 28 percent and your capital gains tax rate is 20 percent. Your after-tax rate of return is ___________________. A)9.80 percent B)12.50 percent C)10.25 percent D)8.00 percent E)8.75 percent

A) 9.80 percent [((33 − 30) × (1 − 0.20)) + (0.75 × (1 − 0.28))]/30 = 2.94/30 = 9.8%

The _______________ is a nationwide network jointly operated by the Fed and private institutions that electronically process credit and debit transfers of funds. A)ACH B)CHIPS C)Fedwire D)NASDAQ E)SWIFT

A) ACH

Core deposits typically include all except which one of the following? A)Eurodollar deposits B)Passbook savings accounts C)Demand deposits D)NOW accounts E)MMDAs

A) Eurodollar deposits

Money markets trade securities that I. mature in one year or less. II. have little chance of loss of principal. III. must be guaranteed by the federal government. A)I and II only B)II only C)I, II, and III D)I only E)I and III only

A) I and II only

What factors are encouraging financial institutions to offer overlapping financial services such as banking, investment banking, brokerage, etc.? I. Regulatory changes allowing institutions to offer more services II. Technological improvements reducing the cost of providing financial services III. Increasing competition from full-service global financial institutions IV. Reduction in the need to manage risk at financial institutions A)I, II, and III only B)I, II, and IV only C)I, II, III, and IV D)I only E)II and III only

A) I, II, and III only

_________ and __________ allow a financial intermediary to offer safe liquid liabilities such as deposits while investing the depositors' money in riskier illiquid assets. A)Monitoring; diversification B)Free riders; regulations C)Price risk; collateral D)Primary markets; foreign exchange markets E)Diversification; high equity returns

A) Monitoring; diversification

The major monetary policy-making arm of the Federal Reserve is the A)None of these choices are correct. B)Federal Reserve Bank of New York. C)Council of Federal Reserve Bank presidents. D)Board of Governors. E)Office of the Comptroller of the Currency.

A) None of these choices are correct.

Nationally chartered banks receive chartering and merger approval from the A)Office of Comptroller of the Currency. B)Federal Deposit Insurance Corporation. C)All of these choices are correct. D)Office of Thrift Supervision. E)Federal Reserve System.

A) Office of Comptroller of the Currency.

A bond that you held to maturity had a realized return of 8 percent, but when you bought it, it had an expected return of 6 percent. If no default occurred, which one of the following must be true? A)The coupons were reinvested at a higher rate than expected. B)The bond was purchased at a premium to par. C)The required return was greater than 6 percent. D)The coupon rate was 8 percent. E)The bond must have been a zero coupon bond.

A) The coupons were reinvested at a higher rate than expected.

Depository institutions include A)banks and thrifts. B)thrifts. C)banks. D)all of these choices are correct. E)finance companies.

A) banks and thrifts.

Commercial banks are the __________________ financial intermediary in the United States as measured by asset size. A)largest B)fourth-largest C)second-largest D)fifth-largest E)third-largest

A) largest

An ILC is a type of A)nonbank bank. B)thrift institution. C)finance company. D)foreign-owned loan corporation. E)credit card bank.

A) nonbank bank.

According to the unbiased expectations theory, A)the long-term spot rate is an average of the current and expected future short-term interest rates. B)liquidity premiums are negative and time varying. C)markets are segmented and buyers stay in their own segment. D)forward rates are less than the expected future spot rates. E)the term structure will most often be upward sloping.

A) the long-term spot rate is an average of the current and expected future short-term interest rates.

A bank has an interest rate spread of 150 basis points on $30 million in earning assets funded by interest-bearing liabilities. However, the interest rate on its assets is fixed and the interest rate on its liabilities is variable. If all interest rates go up 50 basis points, the bank's new pretax net interest income will be __________. A)$600,000 B)$300,000 C)$450,000 D)$250,000 E)$175,000

B) $300,000 (1.50% − 0.50%) × $30 million

Households are increasingly likely to both directly purchase securities (perhaps via a broker) and also place some money with a bank or thrift to meet different needs. Match up the given investor's desire with the appropriate intermediary or direct security. I. Money likely to be needed within six months II. Money to be set aside for college in 10 years III. Money to provide supplemental retirement income IV. Money to be used to provide for children in the event of death 1.Depository institutions 2.Insurer 3.Pension fund 4.Stocks or bonds A)3, 2, 1, 4 B)1, 4, 3, 2 C)1, 4, 2, 3 D)4, 2, 1, 3 E)2, 3, 4, 1

B) 1, 4, 3, 2

You go to the Wall Street Journal and notice that yields on almost all corporate and Treasury bonds have decreased. The yield decreases may be explained by which one of the following? A)An increase in current and expected future returns of real corporate investments B)A decrease in U.S. inflationary expectations C)Decreased Japanese purchases of U.S. Treasury bills/bonds D)Newly expected decline in the value of the dollar E)Increases in the U.S. government budget deficit

B) A decrease in U.S. inflationary expectations

Suppose that over the last 10 to 15 years significantly large numbers of investors have been able to earn abnormal returns from using the firm's publicly available financial information to forecast growth in earnings and dividends. This would be evidence that the markets are not I. weak form efficient. II. semi-strong form efficient. III. strong form efficient. A)III only B)I and II only C)I, II, and III D)II and III only E)I only

B) I and II only

The required rate of return on a bond is A)less than the E(r) for discount bonds and greater than the E(r) for premium bonds. B)None of these choices are correct. C)the interest rate that equates the current market price of the bond with the present value of all future cash flows received. D)equivalent to the current yield for nonpar bonds. E)inversely related to a bond's risk and coupon.

B) None of these choices are correct.

A decrease in reserve requirements could lead to an A)increase in the discount rate. B)increase in bank lending and an increase in the money supply. C)increase in bank lending. D)increase in bank lending and an increase in the discount rate. E)increase in the money supply.

B) increase in bank lending and an increase in the money supply.

A 10-year annual payment corporate coupon bond has an expected return of 11 percent and a required return of 10 percent. The bond's market price is A)$1,000.00. B)less than its PV. C)less than its E(r). D)greater than its PV. E)less than par.

B) less than its PV.

The stamp on a prospectus accompanying a new issue that indicates the issue has not yet been approved for sale by the SEC is called the A)eagle stamp. B)red herring. C)seal of approval. D)green hornet. E)Reg FD.

B) red herring.

Duration is A)greater than maturity for deep discount bonds and less than maturity for premium bonds. B)the weighted average time to maturity of the bond's cash flows. C)the second derivative of the bond price formula with respect to the YTM. D)the elasticity of a security's value to small coupon changes. E)the time until the investor recovers the price of the bond in today's dollars.

B) the weighted average time to maturity of the bond's cash flows.

An investment pays $400 in one year, X amount of dollars in two years, and $500 in three years. The total present value of all the cash flows (including X) is equal to $1,500. If i is 6 percent, what is X? A)$822.41 B)$789.70 C)$749.67 D)$600.00 E)$702.83

B)$789.70 X = [1,500 − (400/1.06) − (500/1.06^3)] × 1.06^2

An annual payment bond has a 9 percent required return. Interest rates are projected to fall 25 basis points. The bond's duration is 12 years. What is the predicted price change? A)1.95 percent B)2.75 percent C)33.33 percent D)−1.95 percent E)−2.75 percent

B)2.75 percent −12 × (−0.0025/1.09) = 0.0275

Common stocks typically have which of the following that bonds do NOT have? I. Voting rights II. Fixed cash flows III. Set maturity date IV. Tax deductibility of cash flows to investors A)IV only B)I, II, III, and IV C)I only D)II, III, and IV only E)I, II, and IV only

C) I only

The Federal Reserve does all but which one of the following? A)Serves as the commercial bank for the U.S. Treasury B)Supervises and regulates bank activities C)Insures deposits D)Operates check clearing and wire transfer facilities E)Conducts monetary policy

C) Insures deposits

Advantages of going global for U.S. banks include all but which one of the following? A)Conducting business in less regulated environments B)Greater opportunities to exploit economies of scale C)Low fixed costs involved in international expansion D)Diversification of earnings E)Greater sources of funds

C) Low fixed costs involved in international expansion

A negotiable CD is A)a time draft payable to a seller of goods, with payment guaranteed by a bank. B)a loan to an individual or business to purchase a home, land, or other real property. C)a marketable bank-issued time deposit that specifies the interest rate earned and a fixed maturity date. D)a short-term fund transferred between financial institutions usually for no more than one day. E)a short-term unsecured promissory note issued by a company to raise funds for a short time period.

C) a marketable bank-issued time deposit that specifies the interest rate earned and a fixed maturity date.

The largest capital market security outstanding in 2016 measured by market value was A)corporate bonds. B)securitized mortgages. C)corporate stocks. D)Treasury bonds. E)municipal bonds.

C) corporate stocks.

On the NASDAQ system, the inside quotes are the A)highest bid and highest ask. B)None of these choices are correct. C)highest bid and lowest ask. D)lowest bid and highest ask. E)lowest ask and lowest bid.

C) highest bid and lowest ask.

Convexity arises because A)duration increases at higher interest rates. B)duration is an increasing function of maturity. C)present values are a nonlinear function of interest rates. D)bonds pay interest semiannually. E)coupon changes are the opposite sign of interest rate changes.

C) present values are a nonlinear function of interest rates.

IBM creates and sells additional stock to the investment banker Morgan Stanley. Morgan Stanley then resells the issue to the U.S. public through its mutual funds. This transaction is an example of a(n) A)money market transaction. B)forward transaction. C)primary market transaction. D)foreign exchange transaction. E)asset transformation by Morgan Stanley.

C) primary market transaction.

T/F A seasoned equity offering occurs when an issuer that already has equity publicly trading issues new shares to the public.

True

T/F A zero coupon bond has a duration equal to its maturity and a convexity equal to zero.

True

T/F According to the market segmentation theory, short-term investors will not normally switch to intermediate- or long-term investments.

True

T/F An increase in the marginal tax rates for all U.S. taxpayers would probably result in reduced supply of funds by households.

True

T/F An order to buy shares of stock at a specified price or better is called a limit order.

True

T/F Banks have an average total debt ratio of about 90 percent.

True

T/F Business loans have dropped in importance since 1987 as measured by the proportion of these loans on the bank balance sheet.

True

T/F Four seats on the FOMC are allocated to Federal Reserve Bank presidents on an rotating basis.

True

T/F If interest rates increase, the value of a fixed income contract decreases and vice versa.

True

T/F On average, bank liabilities tend to have shorter maturities and greater liquidity than bank assets.

True

T/F Preferred stockholders have a claim senior to common stock but junior to bondholders.

True

T/F Primary markets are markets in which users of funds raise cash by selling securities to funds suppliers.

True

T/F Simple interest calculations assume that interest earned is never reinvested.

True

T/F The NYSE is an example of a secondary market.

True

T/F The risk that a security cannot be sold at a predictable price with low transaction costs at short notice is called liquidity risk.

True

T/F The term structure of interest rates is the relationship between interest rates on bonds similar in terms except for maturity.

True

T/F The traditional liquidity premium theory states that long-term interest rates are greater than the average of current and expected future short-term interest rates.

True

T/F When the quantity of a financial security supplied or demanded changes at every given interest rate in response to a change in a factor, this causes a shift in the supply or demand curve.

True

Reasons behind the drop in bank profitability in the second half of this decade include I. flattening of the yield curve. II. increase in competitive pressures on asset pricing. III. increases in foreclosures in the mortgage market. IV. increases in net interest margin. A)I only B)III and IV only C)II, III, and IV only D)II and III only E)I, II, and III only

E) I, II, and III only

In a ____________ the firm preregisters with the SEC any securities it wishes to sell over the next two years. A)rights B)full underwritten C)general cash D)shelf registration E)best efforts

D) shelf registration

Currently the Fed sets monetary policy by targeting A)the level of nonborrowed reserves. B)the prime rate. C)the stock market. D)the Fed funds rate. E)the level of borrowed reserves.

D) the Fed funds rate.

A bond that pays interest annually has a 6 percent promised yield and a price of $1,025. Annual interest rates are now projected to fall 50 basis points. The bond's duration is six years. What is the predicted new bond price after the interest rate change? (Watch your rounding.) A)$1,042.33 B)$987.44 C)None of these choices are correct. D)$995.99 E)$1,054.01

E) $1,054.01 1,025 + [−6 × (−0.0050/1.06) × $1,025] = 1,054

YIELD CURVE FOR ZERO COUPON BONDS RATED AA Maturity YTM Maturity YTM Maturity YTM 1year 8.00% 7year 9.15% 13year 10.45% 2year 8.11% 8year 9.25% 14year 10.65% 3year 8.20% 9year 9.35% 15year 10.75% 4year 8.50% 10year 9.47% 16year 10.95% 5year 8.75% 11year 9.52% 17year 11.00% 6year 8.85% 12year 9.77% 18year 11.25% Assume that there are no liquidity premiums. To the nearest basis point, what is the expected interest rate on a four-year maturity AA zero coupon bond purchased six years from today? A)10.56 percent B)9.96 percent C)10.05 percent D)9.16 percent E)10.41 percent

E) 10.41 percent ((1.0947^10/1.0885^6))^(1/4) − 1

oday, Stock A is worth $20 and has 1,000 shares outstanding. Stock B costs $30 and has 500 shares outstanding. Stock C is priced at $50 per share and has 1,200 shares outstanding. If, tomorrow, Stock A is priced at $22, Stock B at $35, and Stock C is worth $48, what would the value-weighted index amount equal? (The index has a base period value of 100.) A)101.45 B)105.00 C)35.00 D)108.44 E)102.21

E) 102.21 {(22 × 1000) + (35 × 500) + (48 × 1200)} / {(20 × 1000) + (30 × 500) + (50 × 1200)} = 102.21

Equity capital at commercial banks in 2016 comprised about ____________ of liabilities and equity. A)25 percent B)5 percent C)21 percent D)55 percent E)11 percent

E) 11 percent

An annual payment bond with a $1,000 par has a 5 percent quoted coupon rate, a 6 percent promised YTM, and six years to maturity. What is the bond's duration? A)4.76 years B)3.19 years C)5.25 years D)4.16 years E)5.31 years

E) 5.31 years Σ[(t × CFt/(1.06)t)]/$950.83

Bank A (Dollars in Millions)Assets Liability and EquityCash$850 Deposits$6,475 Securities 1,925 Other Borrowing 1,645 Loans 5,400 Equity 1,030 Others 975 Total$9,150 Total$9,150 Income StatementInterest income on loans$450 Interest income on securities 95 Interest expenses 246 Noninterest income 78 Nonincome expenses 112 Provision for loan loss 35 Taxes 115 NI$115 The bank's asset utilization ratio is A)4.29 percent. B)6.12 percent. C)58.04 percent. D)5.46 percent. E)6.81 percent.

E) 6.81 percent. (450 + 95 + 78)/9,150 = 6.81%

A semiannual payment bond with a $1,000 par has a 7 percent quoted coupon rate, a 7 percent promised YTM, and 10 years to maturity. What is the bond's duration? A)10.00 years B)8.39 years C)5.20 years D)6.45 years E)7.35 years

E) 7.35 years Σ[(t × CFt/(1.035)t)]/($1,000)

In 2007 the NYSE merged with _________________. A)London Stock Exchange B)American Exchange C)Chicago Mercantile Exchange D)NASDAQ E)Euronext

E) Euronext

Which of the following bond types pays interest that is exempt from federal taxation? A)Municipal bonds and Treasury bonds B)Treasury bonds C)Corporate bonds D)Convertible bonds E)Municipal bonds

E) Municipal bonds

Which of the following is/are money market instrument(s)? A)Common stock B)4-year maturity corporate bond C)Negotiable CDs, common stock, and T-bonds D)T-bonds E)Negotiable CDs

E) Negotiable CDs

The Fed offers three types of discount window loans. ______________ credit is offered to small institutions with demonstrable patterns of financing needs, _____________ credit is offered for short-term temporary funds outflows, and _____________ credit may be offered at a higher rate to troubled institutions with more severe liquidity problems. A)Adjustment; seasonal; extended B)Seasonal; extended; adjustment C)Adjustment; extended; seasonal D)Extended; adjustment; seasonal E)Seasonal; primary; secondary

E) Seasonal; primary; secondary

A 10-year annual payment corporate bond has a market price of $1,050. It pays annual interest of $100 and its required rate of return is 9 percent. By how much is the bond mispriced? A)Overpriced by $9.32 B)Overpriced by $14.18 C)$0.00 D)Underpriced by $9.32 E)Underpriced by $14.18

E) Underpriced by $14.18 PV = 100 × PVIFA [9%, 10 yrs.] + 1,000 × PVIF (9%, 10 yrs.) = $1,064.18 Calculator Method:N = 10PMT = 100I/Y = 9FV = 1,000Solve for PV which is $1064.18; Market value is underpriced by $14.18.

A corporation seeking to sell new equity securities to the public for the first time in order to raise cash for capital investment would most likely A)place an ad in the Wall Street Journal soliciting retail suppliers of funds. B)engage in a secondary market sale of equity. C)conduct a private placement to a large number of potential buyers. D)issue bonds with the assistance of a dealer. E)conduct an IPO with the assistance of an investment banker.

E) conduct an IPO with the assistance of an investment banker.

he provision of banking services to other banks, such as check clearing, foreign exchange trading, and so forth, is an example of A)credit derivatives. B)trust services. C)off-balance-sheet assets. D)economies of scope. E)correspondent banking.

E) correspondent banking.

The Securities Exchange Commission (SEC) does not A)monitor the major securities exchanges. B)attempt to reduce excessive price fluctuations. C)require exchanges to monitor trading to prevent insider trading. D)decide whether a firm making a public issue has provided enough information for investors to decide whether the issue is fairly priced. E)decide whether a public issue is fairly priced.

E) decide whether a public issue is fairly priced.

The major liability of the Federal Reserve is A)U.S. Treasury securities. B)currency outside banks. C)gold and foreign exchange. D)vault cash of commercial banks. E)depository institution reserves.

E) depository institution reserves.

If a bank has more purchased funds than the average bank, you would not be surprised to see a higher than average ____________________ ratio. A)tax B)noninterest expense C)None of these choices are correct. D)provision for loan loss E)interest expense

E) interest expense

The primary policy tool used by the Fed to meet its monetary policy goals is A)changing reserve requirements. B)devaluing the currency. C)changing bank regulations. D)changing the discount rate. E)open market operations.

E) open market operations.

Liquidity risk at a financial intermediary (FI) is the risk A)risk that an FI may not have enough capital to offset a sudden decline in the value of its assets. B)incurred by an FI when the maturities of its assets and liabilities do not match. C)that promised cash flows from loans and securities held by FIs may not be paid in full. D)incurred by an FI when its investments in technology do not result in cost savings or revenue growth. E)that a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices.

E) that a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices.

T/F At almost all banks noninterest expense is greater than noninterest income; hence, the overhead efficiency ratio is usually greater than 100 percent.

False

T/F Dual class stock refers to firms with both common and preferred stock outstanding.

False

T/F Everything else equal, the interest rate required on a callable bond will be less than the interest rate on a convertible bond.

False

T/F Federal Reserve interest rate decisions can be vetoed by the U.S. president or the Congress.

False

T/F In cumulative voting, a stockholder who owns 51 percent of the shares can be assured of the ability to elect the entire board of directors.

False

T/F Rate-sensitive funding sources at a bank are termed core deposits.

False

T/F Secondary markets are markets used by corporations to raise cash by issuing securities for a short time period.

False

T/F Since 1980, the number of banks in the United States has been increasing dramatically due to deregulation of the industry.

False

T/F Small banks control about 70 percent of banking industry assets.

False

T/F The NYSE merged with the London Stock Exchange to form the merged company NYSE Euronext.

False

T/F The major asset of the Federal Reserve is currency outside banks and the major liability is U.S. Treasury securities.

False

T/F The majority of banks are nationally chartered and insured by the FDIC.

False

Financial intermediaries (FIs) can offer savers a safer, more liquid investment than a capital market security, even though the intermediary invests in risky illiquid instruments because A)the federal government requires them to do so. B)FIs can diversify away some of their risk and the federal government requires them to do so. C)FIs can diversify away some of their risk. D)FIs closely monitor the riskiness of their assets. E)FIs can diversify away some of their risk and closely monitor the riskiness of their assets.

E) FIs can diversify away some of their risk and closely monitor the riskiness of their assets.

If the Fed wishes to stimulate the economy, it could I. buy U.S. government securities. II. raise the discount rate. III. lower reserve requirements. A)II only B)II and III only C)I and II only D)I, II, and III E)I and III only

E) I and III only

Secondary markets help support primary markets because secondary markets I. offer primary market purchasers liquidity for their holdings. II. update the price or value of the primary market claims. III. reduce the cost of trading the primary market claims. A)I only B)II only C)II and III only D)I and II only E)I, II, and III

E) I, II, and III

A 15-year corporate bond pays $40 interest every six months. What is the bond's price if the bond's promised YTM is 5.5 percent? A)$1,263.45 B)$1,261.32 C)$1,250.94 D)$1,253.12 E)$1,264.79

D) $1,253.12 Using P/Y2 for semiannual; FV $1,000; PMT $40; N 15 years; and I/Y 5.5 percent. Solve bond price (PV) = $1,253.12. Calculator Method:N = 30PMT = 40I/Y = 2.75FV = 1,000Solve for PV which is $1,253.12.

A 15-payment annual annuity has its first payment in nine years. If the payment amount is $1,400 and the interest rate is 7 percent, what is the most you should be willing to pay today for this investment? A)$12,751.08 B)$6,935.74 C)$5,825.11 D)$7,421.24 E)$6,416.67

D) $7,421.24 PV0 = $1,400 × {[1 - 1.07^-15]/0.07}/1.07^8

Which of the following is the major monetary policy-making body of the U.S. Federal Reserve System? A)Group of Eight B)FRB bank presidents C)OCC D)FOMC E)U.S. Congress

D) FOMC

Which of the following is the primary regulator of bank holding company activities? A)Federal Bank Holding Company Board B)U.S. Treasury C)State regulatory agency in the chartering states D)Federal Reserve E)FDIC

D) Federal Reserve

As of 2016, which one of the following derivatives instruments had the greatest amount of notional principal outstanding? A)Bonds B)Futures C)Options D)Swaps E)Forwards

D) Swaps

The major asset of the Federal Reserve is A)currency outside banks. B)depository institution reserves. C)vault cash of commercial banks. D)U.S. Treasury securities. E)gold and foreign exchange.

D) U.S. Treasury securities.

Commercial paper is A)a marketable bank-issued time deposit that specifies the interest rate earned and a fixed maturity date. B)a loan to an individual or business to purchase a home, land, or other real property. C)short-term funds transferred between financial institutions usually for no more than one day. D)a short-term unsecured promissory note issued by a company to raise funds for a short time period. E)a time draft payable to a seller of goods, with payment guaranteed by a bank.

D) a short-term unsecured promissory note issued by a company to raise funds for a short time period.

If the Fed is targeting interest rates and money demand increases, an appropriate policy response would be to A)increase government spending. B)increase reserve requirements. C)increase the discount rate. D)buy U.S. Treasury securities from government bond dealers. E)None of these choices are correct.

D) buy U.S. Treasury securities from government bond dealers.

A six-year maturity bond has a five-year duration. Over the next year maturity will decline by one year and duration will decline by A)more than one year. B)one year. C)N/(N − 1) years. D)less than one year. E)N years.

D) less than one year.

State chartered banks ________________ be members of the Federal Reserve System and nationally chartered banks ________________ be members of the Federal Reserve System. A)may; may B)must; may C)must; must D)may; must

D) may; must

Insolvency risk at a financial intermediary (FI) is the risk A)incurred by an FI when the maturities of its assets and liabilities do not match. B)that a sudden surge in liability withdrawals may require an FI to liquidate assets quickly at fire sale prices. C)that promised cash flows from loans and securities held by FIs may not be paid in full. D)risk that an FI may not have enough capital to offset a sudden decline in the value of its assets. E)incurred by an FI when its investments in technology do not result in cost savings or revenue growth.

D) risk that an FI may not have enough capital to offset a sudden decline in the value of its assets.