Question 1

Overaggregation within maturity buckets using the repricing model causes inaccurate accounting of asset and liability cash flows and, ultimately, net interest income.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements is true regarding market value effects?

Accepted Answer

A) the repricing model highlights market value effects. 
B) interest rate changes have a market value effect in addition to an income effect on asset and liability values. 
C) when assuming a book value accounting approach, market value effects are considered. 
D) none of the above are true. 
E) all of the above are true. 
A) the repricing model highlights market value effects. 
B) interest rate changes have a market value effect in addition to an income effect on asset and liability values. 
C) when assuming a book value accounting approach, market value effects are considered. 
D) none of the above are true. 
E) all of the above are true.

Question 3

Total one-year rate-sensitive liabilities is

Accepted Answer

A) $540 million. 
B) $580 million. 
C) $555 million. 
D) $415 million. 
E) $720 million.
[Reference: 8-84] 
A) $540 million. 
B) $580 million. 
C) $555 million. 
D) $415 million. 
E) $720 million.
[Reference: 8-84]

Question 4

What is the weighted average maturity of liabilities?

Accepted Answer

A) 5.50 years. 
B) 6.40 years. 
C) 1.44 years. 
D) 1.30 years. 
E) 1.10 years. [Refer to: 8-105] 
A) 5.50 years. 
B) 6.40 years. 
C) 1.44 years. 
D) 1.30 years. 
E) 1.10 years. [Refer to: 8-105]

Question 5

Runoff in demand deposits in a repricing model is typically lower during periods of falling interest rates.

Accepted Answer

A) True 
 B)False

Question 6

An increase in interest rates

Accepted Answer

A) increases the market value of the FI's financial assets and liabilities. 
B) decreases the market value of the FI's financial assets and liabilities. 
C) decreases the book value of the FI's financial assets and liabilities. 
D) increases the book value of the FI's financial assets and liabilities. 
E) has no impact on the market value of the FI's financial assets and liabilities. 
A) increases the market value of the FI's financial assets and liabilities. 
B) decreases the market value of the FI's financial assets and liabilities. 
C) decreases the book value of the FI's financial assets and liabilities. 
D) increases the book value of the FI's financial assets and liabilities. 
E) has no impact on the market value of the FI's financial assets and liabilities.

Question 7

What is this FI's maturity gap?

Accepted Answer

A) 4.00 years. 
B) 4.28 years. 
C) 3.16 years. 
D) 4.06 years. 
E) 5.10 years. [Refer to: 8-105] 
A) 4.00 years. 
B) 4.28 years. 
C) 3.16 years. 
D) 4.06 years. 
E) 5.10 years. [Refer to: 8-105]

Question 8

If all interest rates decrease by 15 basis points, what is the expected impact on the FI's net interest income? (Hint: Use the repricing model to answer this question.)

Accepted Answer

A) +$150,000. 
B) -$150,000. 
C) -$750,000. 
D) +$750,000. 
E) No change. [Refer to: 8-99] 
A) +$150,000. 
B) -$150,000. 
C) -$750,000. 
D) +$750,000. 
E) No change. [Refer to: 8-99]

Question 9

If the interest rate spread between rate sensitive-assets and rate sensitive liabilities increases for a bank, future increases in interest rates will lead to an increase in net interest income.

Accepted Answer

A) True 
 B)False

Question 10

Large banks have adopted interest rate risk measurement models based on market value accounting and duration.

Accepted Answer

A) True 
 B)False

Question 11

What is the impact over the next 30 days on the dealer's net interest income if all interest rates increase by 50 basis points?

Accepted Answer

A) Net interest income will decrease by $50,000. 
B) Net interest income will decrease by $2.125 million. 
C) Net interest income will decrease by $475,000. 
D) Net interest income will decrease by $2.375 million. 
E) Net interest income will increase by $750,000. [Refer to: 8-89] 
A) Net interest income will decrease by $50,000. 
B) Net interest income will decrease by $2.125 million. 
C) Net interest income will decrease by $475,000. 
D) Net interest income will decrease by $2.375 million. 
E) Net interest income will increase by $750,000. [Refer to: 8-89]

Question 12

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

Accepted Answer

A) $40.381 million. 
B) $39.626 million. 
C) $40.000 million. 
D) $38.573 million. 
E) $40.769 million. [Refer to: 8-105] 
A) $40.381 million. 
B) $39.626 million. 
C) $40.000 million. 
D) $38.573 million. 
E) $40.769 million. [Refer to: 8-105]

Question 13

Which of the following statements is true?

Accepted Answer

A) An increase in interest rates will benefit the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities. 
B) An increase in interest rates will harm the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities. 
C) An increase in interest rates will harm the FI since the decrease in the market value of assets will be greater than the decrease in the market value of liabilities. 
D) A decrease in interest rates will harm the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities. 
E) A decrease in interest rates will benefit the FI since the increase in the market value of assets will be smaller than the increase in the market value of liabilities. 
A) An increase in interest rates will benefit the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities. 
B) An increase in interest rates will harm the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities. 
C) An increase in interest rates will harm the FI since the decrease in the market value of assets will be greater than the decrease in the market value of liabilities. 
D) A decrease in interest rates will harm the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities. 
E) A decrease in interest rates will benefit the FI since the increase in the market value of assets will be smaller than the increase in the market value of liabilities.

Question 14

If interest rates decrease 50 basis points for an FI that has a gap of +$5 million, the expected change in net interest income is

Accepted Answer

A) + $2,500. 
B) + $25,000. 
C) + $250,000. 
D) - $250,000. 
E) - $25,000. 
A) + $2,500. 
B) + $25,000. 
C) + $250,000. 
D) - $250,000. 
E) - $25,000.

Question 15

The repricing model measures the impact of unanticipated changes in interest rates on

Accepted Answer

A) the market value of equity. 
B) net interest income. 
C) both market value of equity and net interest income. 
D) the FI's capital position. 
E) the prices of assets and liabilities. 
A) the market value of equity. 
B) net interest income. 
C) both market value of equity and net interest income. 
D) the FI's capital position. 
E) the prices of assets and liabilities.

Question 16

What is the FI's maturity gap?

Accepted Answer

A) -2.03 years. 
B) -2.50 years. 
C) -1.07 years. 
D) -0.70 years. 
E) -0.40 years.
[Refer to: 8-113] 
A) -2.03 years. 
B) -2.50 years. 
C) -1.07 years. 
D) -0.70 years. 
E) -0.40 years.
[Refer to: 8-113]

Question 17

The gap ratio is

Accepted Answer

A) .015. 
B) -.015. 
C) .025. 
D) -.144. 
E) .154.
[Reference: 8-84] 
A) .015. 
B) -.015. 
C) .025. 
D) -.144. 
E) .154.
[Reference: 8-84]

Question 18

The maturity model of measuring interest rate risk was a first attempt to include the impact on profitability of interest rate changes

Accepted Answer

A) True 
 B)False

Question 19

The average maturity of the liabilities of an FI's balance sheet is equal to

Accepted Answer

A) the weighted-average of the liabilities where the weights are determined relative to the total liabilities and equity of the FI. 
B) the weighted-average of the liabilities where the weights are determined relative to the total liabilities of the FI. 
C) the weighted-average of the liabilities where the weights are determined relative to the total assets of the FI. 
D) the weighted-average of the liabilities where the weights are determined using market values of liabilities. 
E) None of the options.
The balance sheet of XYZ Bank appears below.All figures in millions of U.S.dollars.
\(
~Assets~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Liabilities\
\begin{array}{|l|r|r|l|l|r|}
\hline 1 & \begin{array}{l}
\text { Short-term consumer } \
\text { loans (one-year maturity) }
\end{array} & \$ 150 & 1 & \text { Equity capital (fixed) } & \$ 120 \
\hline 2 & \begin{array}{l}
\text { Long-term consumer } \
\text { loans }
\end{array} & 125 & 2 & \begin{array}{l}
\text { Demand deposits } \
\text { (two-year maturity) }
\end{array} & 40 \
\hline 3 & \begin{array}{l}
\text { Three-month Treasury } \
\text { bills }
\end{array} & 130 & 3 & \text { Passbook savings } & 130 \
\hline 4 & \text { Six-month Treasury notes } & 135 & 4 & \text { Three-month CDs } & 140 \
\hline 5 & \text { Three-year Treasury bond } & 170 & 5 & \begin{array}{l}
\text { Three-month bankers } \
\text { acceptances }
\end{array} & 120 \
\hline 6 & \begin{array}{l}
10 \text {-year, fixed-rate } \
\text { mortgages }
\end{array} & 120 & 6 & \begin{array}{l}
\text { Six-month } \
\text { commercial paper }
\end{array} & 160 \
\hline 7 & \begin{array}{l}
30 \text {-year, floating-rate } \
\text { mortgages (rate adjusted } \
\text { every nine months) }
\end{array} & 140 & 7 & \begin{array}{l}
\text { One-year time } \
\text { deposits }
\end{array} & 120 \
\hline & && 8 & \begin{array}{l}
\text { Two-year time } \
\text { deposits }
\end{array} & 40 \
\hline
&&\$970&&&\$970\
\hline
\end{array}\)
[Reference: 8-84] 
A) the weighted-average of the liabilities where the weights are determined relative to the total liabilities and equity of the FI. 
B) the weighted-average of the liabilities where the weights are determined relative to the total liabilities of the FI. 
C) the weighted-average of the liabilities where the weights are determined relative to the total assets of the FI. 
D) the weighted-average of the liabilities where the weights are determined using market values of liabilities. 
E) None of the options.
The balance sheet of XYZ Bank appears below.All figures in millions of U.S.dollars.
\(
~Assets~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Liabilities\
\begin{array}{|l|r|r|l|l|r|}
\hline 1 & \begin{array}{l}
\text { Short-term consumer } \
\text { loans (one-year maturity) }
\end{array} & \$ 150 & 1 & \text { Equity capital (fixed) } & \$ 120 \
\hline 2 & \begin{array}{l}
\text { Long-term consumer } \
\text { loans }
\end{array} & 125 & 2 & \begin{array}{l}
\text { Demand deposits } \
\text { (two-year maturity) }
\end{array} & 40 \
\hline 3 & \begin{array}{l}
\text { Three-month Treasury } \
\text { bills }
\end{array} & 130 & 3 & \text { Passbook savings } & 130 \
\hline 4 & \text { Six-month Treasury notes } & 135 & 4 & \text { Three-month CDs } & 140 \
\hline 5 & \text { Three-year Treasury bond } & 170 & 5 & \begin{array}{l}
\text { Three-month bankers } \
\text { acceptances }
\end{array} & 120 \
\hline 6 & \begin{array}{l}
10 \text {-year, fixed-rate } \
\text { mortgages }
\end{array} & 120 & 6 & \begin{array}{l}
\text { Six-month } \
\text { commercial paper }
\end{array} & 160 \
\hline 7 & \begin{array}{l}
30 \text {-year, floating-rate } \
\text { mortgages (rate adjusted } \
\text { every nine months) }
\end{array} & 140 & 7 & \begin{array}{l}
\text { One-year time } \
\text { deposits }
\end{array} & 120 \
\hline & && 8 & \begin{array}{l}
\text { Two-year time } \
\text { deposits }
\end{array} & 40 \
\hline
&&\$970&&&\$970\
\hline
\end{array}\)
[Reference: 8-84]

Question 20

Duration gap considers the degree of leverage on an FI's balance sheet as well as the timing of the payment or arrival of cash flows on assets and liabilities.

Accepted Answer

A) True 
 B)False

Exam 8: Interest Rate Risk I

Overaggregation within maturity buckets using the repricing model causes inaccurate accounting of asset and liability cash flows and, ultimately, net interest income.

Which of the following statements is true regarding market value effects?

Total one-year rate-sensitive liabilities is

What is the weighted average maturity of liabilities?

Runoff in demand deposits in a repricing model is typically lower during periods of falling interest rates.

An increase in interest rates

What is this FI's maturity gap?

If all interest rates decrease by 15 basis points, what is the expected impact on the FI's net interest income? (Hint: Use the repricing model to answer this question.)

If the interest rate spread between rate sensitive-assets and rate sensitive liabilities increases for a bank, future increases in interest rates will lead to an increase in net interest income.

Large banks have adopted interest rate risk measurement models based on market value accounting and duration.

What is the impact over the next 30 days on the dealer's net interest income if all interest rates increase by 50 basis points?

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

Which of the following statements is true?

If interest rates decrease 50 basis points for an FI that has a gap of +$5 million, the expected change in net interest income is

The repricing model measures the impact of unanticipated changes in interest rates on

What is the FI's maturity gap?

The gap ratio is

The maturity model of measuring interest rate risk was a first attempt to include the impact on profitability of interest rate changes

The average maturity of the liabilities of an FI's balance sheet is equal to

Duration gap considers the degree of leverage on an FI's balance sheet as well as the timing of the payment or arrival of cash flows on assets and liabilities.

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