Exam 8: Interest Rate Risk I

To be more precise in measuring interest rate risk, the runoff component of long-term mortgages should be considered in the time buckets in which the maturities actually occur.

What is the impact on net interest income in year two if interest rates increase by 50 basis points at the end of year one? Ignore runoffs.

The repricing model is a simplistic approach to focusing on the exposure of net interest income to changes in market levels of interest rates for given maturity periods.

When a bank's repricing gap is positive, net interest income is positively related to changes in interest rates.

Reinvestment risk is the risk that the returns on funds to be reinvested will fall below the cost of the funds.

In general, the interest rate spread (spread effect) between rate-sensitive assets and rate sensitive liabilities is positively related to the change in net interest income.

Total one-year rate-sensitive assets is

Because of its complexity, small depository institutions rarely use the repricing, or funding gap, model.

Can an FI immunize itself against interest rate risk exposure even though its maturity gap is not zero?

An assumption of the repricing model is that interest rate changes will equally affect rate-sensitive assets and rate-sensitive liabilities.

A positive repricing gap implies that a decrease in interest rates will cause interest expense to decrease more than the decrease in interest income.

An interest rate increase

The Bank for International Settlements (BIS) requires depository institutions to have interest rate risk management systems.

The spread effect demonstrates that, regardless of the direction of a change in market interest rates, a positive relation exists between the changes in spread and changes in net interest income.

A positive gap implies that an increase in interest rates will cause _______ in net interest income.

The gap ratio expresses the reprice gap for a given time period as a percentage of

A bank with a negative repricing (or funding) gap faces refinancing risk.

How will a decrease of 25 basis points in all interest rates affect Gotbuck's net interest income over a planning period of 91 days?

The gap ratio is useful because it indicates the scale of the interest rate exposure by dividing the gap by the asset size of the institution.

The cumulative repricing gap position of an FI for a given extended time period is the sum of the repricing gap values for the individual time periods that make up the extended time period.