Question 1

The repricing model incorporates cash flow effects of off-balance sheet activities of DIs.

Accepted Answer

A) True 
 B)False  False

Question 2

If the average maturity of assets is 4 years and the average maturity of liabilities is 4 years, then the FI has no interest rate risk exposure.

Accepted Answer

A) True 
 B)False  False

Question 3

The yield curve

Accepted Answer

A) relates rates for different maturities of assets. 
B) for U.S.Treasury securities is the most commonly reported yield curve. 
C) may change shape over time. 
D) which is inverted does not last very long. 
E) All of the options. 
A) relates rates for different maturities of assets. 
B) for U.S.Treasury securities is the most commonly reported yield curve. 
C) may change shape over time. 
D) which is inverted does not last very long. 
E) All of the options. E

Question 4

What is the change in the value of its liabilities if all interest rates decrease by 1 percent?

Accepted Answer

A) Approximately $2.003 million. 
B) Approximately -$2.355 million. 
C) Approximately $2.697 million. 
D) Approximately $2.906 million. 
E) Approximately $3.211 million.
[Refer to: 8-113] 
A) Approximately $2.003 million. 
B) Approximately -$2.355 million. 
C) Approximately $2.697 million. 
D) Approximately $2.906 million. 
E) Approximately $3.211 million.
[Refer to: 8-113]

Question 5

The market value of a fixed-rate liability will decrease as interest rates rise, just as the market value of a fixed-rate asset will decrease as interest rates rise.

Accepted Answer

A) True 
 B)False

Question 6

One reason to include demand deposits when estimating a bank's repricing gap is because rising interest rates could lead to high withdrawals from these accounts.

Accepted Answer

A) True 
 B)False

Question 7

What is market value of the one-year CD if all market interest rates increase by 2 percent?

Accepted Answer

A) $49.065 million. 
B) $50.481 million. 
C) $49.528 million. 
D) $50.971 million. 
E) $50.000 million. [Refer to: 8-105] 
A) $49.065 million. 
B) $50.481 million. 
C) $49.528 million. 
D) $50.971 million. 
E) $50.000 million. [Refer to: 8-105]

Question 8

The market segmentation theory of the term structure of interest rates

Accepted Answer

A) assumes that investors will hold long-term maturity assets if there is a sufficient premium to compensate for the uncertainty of the long-term. 
B) assumes that the yield curve reflects the market's current expectations of future short-term interest rates. 
C) assumes that market rates are determined by supply and demand conditions within fairly distinct time or maturity buckets. 
D) fails to recognize that forward rates are not perfect predictors of future interest rates. 
E) assumes that both investors and borrowers are willing to shift from one maturity sector to another to take advantage of opportunities arising from changing yields. 
A) assumes that investors will hold long-term maturity assets if there is a sufficient premium to compensate for the uncertainty of the long-term. 
B) assumes that the yield curve reflects the market's current expectations of future short-term interest rates. 
C) assumes that market rates are determined by supply and demand conditions within fairly distinct time or maturity buckets. 
D) fails to recognize that forward rates are not perfect predictors of future interest rates. 
E) assumes that both investors and borrowers are willing to shift from one maturity sector to another to take advantage of opportunities arising from changing yields.

Question 9

Which theory of term structure posits that long-term rates are a geometric average of current and expected short-term interest rates?

Accepted Answer

A) The unbiased expectations theory. 
B) The liquidity premium theory. 
C) The loanable funds theory. 
D) The market segmentation theory. 
E) None of the options. 
A) The unbiased expectations theory. 
B) The liquidity premium theory. 
C) The loanable funds theory. 
D) The market segmentation theory. 
E) None of the options.

Question 10

The change in economic value of a fixed-rate liability for a decrease in interest rates is considered to be good news.

Accepted Answer

A) True 
 B)False

Question 11

A bank that finances long-term fixed-rate mortgages with short-term deposits is exposed to

Accepted Answer

A) increases in net interest income and decreases in the market value of equity when interest rates fall. 
B) decreases in net interest income and decreases in the market value of equity when interest rates fall. 
C) decreases in net interest income and increases in the market value of equity when interest rates increase. 
D) increases in net interest income and increases in the market value of equity when interest rates increase. 
E) decreases in net interest income and decreases in the market value of equity when interest rates increase. 
A) increases in net interest income and decreases in the market value of equity when interest rates fall. 
B) decreases in net interest income and decreases in the market value of equity when interest rates fall. 
C) decreases in net interest income and increases in the market value of equity when interest rates increase. 
D) increases in net interest income and increases in the market value of equity when interest rates increase. 
E) decreases in net interest income and decreases in the market value of equity when interest rates increase.

Question 12

One reason to exclude NOW accounts when estimating a bank's repricing gap is because the interest rates paid on these accounts typically do not change with the level of market rates.

Accepted Answer

A) True 
 B)False

Question 13

For a given change in interest rates, the change in price for each additional year of maturity of a fixed-rate asset is smaller as the maturity increases.

Accepted Answer

A) True 
 B)False

Question 14

What is the repricing gap if a 3-year maturity gap is used? Ignore runoffs.

Accepted Answer

A) $21 million. 
B) $44 million. 
C) -$80 million. 
D) -$60 million. 
E) -$120 million. [Refer to: 8-101 
A) $21 million. 
B) $44 million. 
C) -$80 million. 
D) -$60 million. 
E) -$120 million. [Refer to: 8-101

Question 15

Which of the following relationships does NOT hold in the pricing of fixed-rate assets given changes in market rate?

Accepted Answer

A) A decrease in interest rates generally leads to an increase in the value of assets. 
B) Longer maturity assets have greater changes in price than shorter maturity assets for given changes in interest rates. 
C) The absolute change in price per unit of maturity time for given changes in interest rates decreases over time, although the relative changes actually increase. 
D) For a given percentage decrease in interest rates, assets will increase in price more than they will decrease in price for the same, but opposite increase in rates. 
E) None of the options. 
A) A decrease in interest rates generally leads to an increase in the value of assets. 
B) Longer maturity assets have greater changes in price than shorter maturity assets for given changes in interest rates. 
C) The absolute change in price per unit of maturity time for given changes in interest rates decreases over time, although the relative changes actually increase. 
D) For a given percentage decrease in interest rates, assets will increase in price more than they will decrease in price for the same, but opposite increase in rates. 
E) None of the options.

Question 16

An FI's net interest income reflects

Accepted Answer

A) its asset-liability structure. 
B) rates of interest when the assets and liabilities were put on the books. 
C) the riskiness of its loans and investments. 
D) the cost of its deposit and non-deposit sources of funds. 
E) All of the options. 
A) its asset-liability structure. 
B) rates of interest when the assets and liabilities were put on the books. 
C) the riskiness of its loans and investments. 
D) the cost of its deposit and non-deposit sources of funds. 
E) All of the options.

Question 17

The maturity of a portfolio of assets or liabilities is a weighted average of the maturities of the assets or liabilities that comprise that portfolio.

Accepted Answer

A) True 
 B)False

Question 18

What is spread effect?

Accepted Answer

A) Periodic cash flow of interest and principal amortization payments on long-term assets that can be reinvested at market rates. 
B) The effect that a change in the spread between rates on RSAs and RSLs has on net interest income as interest rates change. 
C) The effect of mismatch of asset and liabilities within a maturity bucket. 
D) The premium paid to compensate for the future uncertainty in a security's value. 
E) The value of an FI to its owners. 
A) Periodic cash flow of interest and principal amortization payments on long-term assets that can be reinvested at market rates. 
B) The effect that a change in the spread between rates on RSAs and RSLs has on net interest income as interest rates change. 
C) The effect of mismatch of asset and liabilities within a maturity bucket. 
D) The premium paid to compensate for the future uncertainty in a security's value. 
E) The value of an FI to its owners.

Question 19

Is the bank exposed to interest rate increases or decreases and why?

Accepted Answer

A) Interest rate increases because the value of its assets will rise more than its liabilities. 
B) Interest rate increases because the value of its assets will fall more than its liabilities. 
C) Interest rate decreases because the value of its assets will rise less than its liabilities. 
D) Interest rate decreases because the value of its assets will fall more than its liabilities. 
E) Interest rate increases because the value of its assets will fall less than its liabilities.
[Refer to: 8-113] 
A) Interest rate increases because the value of its assets will rise more than its liabilities. 
B) Interest rate increases because the value of its assets will fall more than its liabilities. 
C) Interest rate decreases because the value of its assets will rise less than its liabilities. 
D) Interest rate decreases because the value of its assets will fall more than its liabilities. 
E) Interest rate increases because the value of its assets will fall less than its liabilities.
[Refer to: 8-113]

Question 20

An FI finances a $250,000 2-year fixed-rate loan with a $200,000 1-year fixed-rate CD.Use the repricing model to determine (a) the FI's repricing (or funding) gap using a 1-year maturity bucket, and (b) the impact of a 100 basis point (0.01) decrease in interest rates on the FI's annual net interest income?

Accepted Answer

A) $0; $0. 
B) -$200,000; +$2,000. 
C) -$200,000; -$2,000. 
D) +$50,000; -$500. 
E) -$200,000; -$1,000. 
A) $0; $0. 
B) -$200,000; +$2,000. 
C) -$200,000; -$2,000. 
D) +$50,000; -$500. 
E) -$200,000; -$1,000.

Exam 8: Interest Rate Risk I

The repricing model incorporates cash flow effects of off-balance sheet activities of DIs.

If the average maturity of assets is 4 years and the average maturity of liabilities is 4 years, then the FI has no interest rate risk exposure.

The yield curve

What is the change in the value of its liabilities if all interest rates decrease by 1 percent?

The market value of a fixed-rate liability will decrease as interest rates rise, just as the market value of a fixed-rate asset will decrease as interest rates rise.

One reason to include demand deposits when estimating a bank's repricing gap is because rising interest rates could lead to high withdrawals from these accounts.

What is market value of the one-year CD if all market interest rates increase by 2 percent?

The market segmentation theory of the term structure of interest rates

Which theory of term structure posits that long-term rates are a geometric average of current and expected short-term interest rates?

The change in economic value of a fixed-rate liability for a decrease in interest rates is considered to be good news.

A bank that finances long-term fixed-rate mortgages with short-term deposits is exposed to

One reason to exclude NOW accounts when estimating a bank's repricing gap is because the interest rates paid on these accounts typically do not change with the level of market rates.

For a given change in interest rates, the change in price for each additional year of maturity of a fixed-rate asset is smaller as the maturity increases.

What is the repricing gap if a 3-year maturity gap is used? Ignore runoffs.

Which of the following relationships does NOT hold in the pricing of fixed-rate assets given changes in market rate?

An FI's net interest income reflects

The maturity of a portfolio of assets or liabilities is a weighted average of the maturities of the assets or liabilities that comprise that portfolio.

What is spread effect?

Is the bank exposed to interest rate increases or decreases and why?

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Fintech Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters