PRMIA Exam 8004 Topic 1 Question 27 Discussion

Actual exam question for PRMIA's 8004 exam

Question #: 27
Topic #: 1

[All 8004 Questions]

According to the Northern Rock Case Study, what is Forced Insolvency?

AThe bank is insolvent in that the current value of its assets (measured at book value) is less than the value of its liabilities; thus even if the bank were to liquidate all of its assets it would not be able to repay all depositors and other creditors

BThe bank is legally solvent but if, because it cannot fund its operations, it is forced to liquidate assets it could do so only at less than nominal values (fire sale) and this would make it legally insolvent (value of assets falls below those of liabilities)

CThe bank is legally solvent but its current funding costs (which are likely to continue) exceed the average rate of return on its assets and hence it would soon become insolvent as it would be making losses and would eventually exhaust its equity capital

DThe bank is solvent in that the current value of its assets (measured at book value) is more than the value of its liabilities; so even if the bank were to liquidate all of its assets it would be able to repay all depositors and other creditors

Show Suggested Answer

Suggested Answer: D

by Jani at Jul 03, 2024, 07:05 AM

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Jarod

10 months ago

I agree with Maxima, the board better not be padding their own pockets at the expense of shareholders! C seems like the best answer.

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11 months ago

D is the correct answer. All of those responsibilities are part of the board and audit committee's duties.

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Lezlie

10 months ago

Yes, that's true. They also need to thoroughly review compensation plans for consistency with corporate risk appetite and fiduciary responsibility to shareholders.

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Kimberlie

11 months ago

I think it's important for the board to clearly articulate the corporate risk appetite to senior management.

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Vilma

11 months ago

I agree with Geoffrey, the Board and Audit Committees should focus on articulating risk appetite, reviewing compensation plans, and being accountable to shareholders.

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Geoffrey

11 months ago

I think the answer is B) I, II and IV only.

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Socorro

11 months ago

I think the answer is C. The board and audit committee must clearly articulate the risk appetite, review compensation plans, and have a single member responsible for understanding the risk management infrastructure.

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Erick

11 months ago

User2

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Raelene

11 months ago

User1

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