Question 1

Use the repricing model to determine the funding gap for a maturity bucket of 30 days.

Accepted Answer

A) -$425 million. 
B) -$95 million. 
C) -$10 million. 
D) -$475 million. 
E) +$150 million. [Refer to: 8-89] 
A) -$425 million. 
B) -$95 million. 
C) -$10 million. 
D) -$475 million. 
E) +$150 million. [Refer to: 8-89]

Question 2

The repricing gap model is a book value accounting based model.

Accepted Answer

A) True 
 B)False

Question 3

Can the FI immunize itself from interest rate risk exposure by setting the maturity gap equal to zero?

Accepted Answer

A) Yes, because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities. 
B) No, because with a maturity gap of zero, the change in the market value of assets exactly offsets the change in the market value of liabilities. 
C) No, because the maturity model does not consider the timing of cash flows. 
D) Yes, because the timing of cash flows is not relevant to immunization against interest rate risk exposure. 
E) No, because a representative bank will always have a positive maturity gap.
Duration Bank has the following assets and liabilities as of year-end.All assets and liabilities are currently priced at par and pay interest annually.
$$\begin{array} { | l | r | c | l | r | r | } 
\hline \text { Assets } & \begin{array} { l } 
\text { Amount } \
\text { (\$ millions) }
\end{array} & \begin{array} { l } 
\text { Annual } \
\text { Rate }
\end{array} & \text { Liabilities } & \begin{array} { l } 
\text { Amount } \
\text { (\$ millions) }
\end{array} & \begin{array} { l } 
\text { Annual } \
\text { Rate }
\end{array} \
\hline \text { 2-year loans } & \$ 40 & 8 \% & \text { 3-year CD } & \$ 60 & 7 \% \
\hline \text { 3-year loans } & \$ 60 & 8 \% & \text { 5-year term deposit } & \$ 30 & 6 \% \
\hline & & & \text { Equity } & \$ 10 & \
\hline \text { Total } & \$ 100 & & \text { Total } & \$ 100 & \
\hline
\end{array}$$ [Reference: 8-113] 
A) Yes, because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities. 
B) No, because with a maturity gap of zero, the change in the market value of assets exactly offsets the change in the market value of liabilities. 
C) No, because the maturity model does not consider the timing of cash flows. 
D) Yes, because the timing of cash flows is not relevant to immunization against interest rate risk exposure. 
E) No, because a representative bank will always have a positive maturity gap.
Duration Bank has the following assets and liabilities as of year-end.All assets and liabilities are currently priced at par and pay interest annually.
$$\begin{array} { | l | r | c | l | r | r | } 
\hline \text { Assets } & \begin{array} { l } 
\text { Amount } \
\text { (\$ millions) }
\end{array} & \begin{array} { l } 
\text { Annual } \
\text { Rate }
\end{array} & \text { Liabilities } & \begin{array} { l } 
\text { Amount } \
\text { (\$ millions) }
\end{array} & \begin{array} { l } 
\text { Annual } \
\text { Rate }
\end{array} \
\hline \text { 2-year loans } & \$ 40 & 8 \% & \text { 3-year CD } & \$ 60 & 7 \% \
\hline \text { 3-year loans } & \$ 60 & 8 \% & \text { 5-year term deposit } & \$ 30 & 6 \% \
\hline & & & \text { Equity } & \$ 10 & \
\hline \text { Total } & \$ 100 & & \text { Total } & \$ 100 & \
\hline
\end{array}$$ [Reference: 8-113]

Question 4

Changes in short term interest rates rarely affect the entire term structure of interest rates

Accepted Answer

A) True 
 B)False

Question 5

The repricing model ignores market value effects of interest rate changes.

Accepted Answer

A) True 
 B)False

Question 6

Which theory of term structure argues that individual investors have specific maturity preferences?

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 7

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

Accepted Answer

A) $40.000 million. 
B) $44.916 million. 
C) $37.830 million. 
D) $42.356 million. 
E) $35.827 million. [Refer to: 8-105] 
A) $40.000 million. 
B) $44.916 million. 
C) $37.830 million. 
D) $42.356 million. 
E) $35.827 million. [Refer to: 8-105]

Question 8

The cumulative one-year repricing gap (CGAP) for the bank is

Accepted Answer

A) $25 million. 
B) $-140 million. 
C) $15 million. 
D) $-150 million. 
E) $-15 million.
[Reference: 8-84] 
A) $25 million. 
B) $-140 million. 
C) $15 million. 
D) $-150 million. 
E) $-15 million.
[Reference: 8-84]

Question 9

Retail passbook savings accounts are included as part of rate-sensitive liabilities because the rates on these accounts rarely change.

Accepted Answer

A) True 
 B)False

Question 10

If interest rates decrease 40 basis points (0.40 percent) for an FI that has a cumulative gap of -$25 million, the expected change in net interest income is

Accepted Answer

A) +$100,000. 
B) -$100,000. 
C) -$625,000. 
D) -$250,000. 
E) +$250,000. 
A) +$100,000. 
B) -$100,000. 
C) -$625,000. 
D) -$250,000. 
E) +$250,000.

Question 11

What is the weighted average maturity of the assets of the FI?

Accepted Answer

A) 2.0 years. 
B) 2.3 years. 
C) 2.5 years. 
D) 2.6 years. 
E) 3.0 years.
[Refer to: 8-113] 
A) 2.0 years. 
B) 2.3 years. 
C) 2.5 years. 
D) 2.6 years. 
E) 3.0 years.
[Refer to: 8-113]

Question 12

What is the effect on the value of the FI's equity if interest rates decrease by 1 percent?

Accepted Answer

A) Gain of $0.697 million. 
B) Gain of $0.338 million. 
C) Loss of $1.622 million. 
D) No change in equity. 
E) Loss of $0.605 million.
[Refer to: 8-113] 
A) Gain of $0.697 million. 
B) Gain of $0.338 million. 
C) Loss of $1.622 million. 
D) No change in equity. 
E) Loss of $0.605 million.
[Refer to: 8-113]

Question 13

Which of the following observations about the repricing model is correct?

Accepted Answer

A) Its information value is limited. 
B) It accounts for the problem of rate-insensitive asset and liability runoffs and prepayments. 
C) It accommodates cash flows from off-balance-sheet activities. 
D) It helps to determine an FI's profit exposure to interest rate changes. 
E) It considers market value effects of interest rate changes. 
A) Its information value is limited. 
B) It accounts for the problem of rate-insensitive asset and liability runoffs and prepayments. 
C) It accommodates cash flows from off-balance-sheet activities. 
D) It helps to determine an FI's profit exposure to interest rate changes. 
E) It considers market value effects of interest rate changes.

Question 14

If the average maturity of assets is 5 years and the average maturity of liabilities is 7 years, then the FI has no interest rate risk exposure.

Accepted Answer

A) True 
 B)False

Question 15

The repricing model is based on an accounting world that reports asset and liability values at

Accepted Answer

A) their market value. 
B) their book value. 
C) their historic values or costs. 
D) their current value or cost. 
E) their book value and their historic values or costs. 
A) their market value. 
B) their book value. 
C) their historic values or costs. 
D) their current value or cost. 
E) their book value and their historic values or costs.

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

Which theory of term structure states that long-term rates are equal to the geometric average of current and expected short-term rates plus a risk premium that increases with the maturity of the security?

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 18

In the repricing gap model, assets or liabilities are rate-sensitive within a given time period if the dollar values of each are subject to receiving a different interest rate should market rates change.

Accepted Answer

A) True 
 B)False

Question 19

Defining buckets of time over a range of maturities assures the capture of all relevant information necessary to accurately assess the interest rate risk exposure of an FI.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following indicates a positive gap according to the repricing model?

Accepted Answer

A) the book value of rate-sensitive liabilities is less than the book value of rate-sensitive assets. 
B) the book value of rate-sensitive assets is less than the book value of rate-sensitive liabilities. 
C) the market value of rate-sensitive assets is less than the market value of rate-sensitive liabilities. 
D) the book value of rate-sensitive liabilities is greater than the book value of rate-sensitive assets. 
E) the market value of rate sensitive assets is greater than the market value rate sensitive liabilities. 
A) the book value of rate-sensitive liabilities is less than the book value of rate-sensitive assets. 
B) the book value of rate-sensitive assets is less than the book value of rate-sensitive liabilities. 
C) the market value of rate-sensitive assets is less than the market value of rate-sensitive liabilities. 
D) the book value of rate-sensitive liabilities is greater than the book value of rate-sensitive assets. 
E) the market value of rate sensitive assets is greater than the market value rate sensitive liabilities.

Exam 8: Interest Rate Risk I

Use the repricing model to determine the funding gap for a maturity bucket of 30 days.

The repricing gap model is a book value accounting based model.

Can the FI immunize itself from interest rate risk exposure by setting the maturity gap equal to zero?

Changes in short term interest rates rarely affect the entire term structure of interest rates

The repricing model ignores market value effects of interest rate changes.

Which theory of term structure argues that individual investors have specific maturity preferences?

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

The cumulative one-year repricing gap (CGAP) for the bank is

Retail passbook savings accounts are included as part of rate-sensitive liabilities because the rates on these accounts rarely change.

If interest rates decrease 40 basis points (0.40 percent) for an FI that has a cumulative gap of -$25 million, the expected change in net interest income is

What is the weighted average maturity of the assets of the FI?

What is the effect on the value of the FI's equity if interest rates decrease by 1 percent?

Which of the following observations about the repricing model is correct?

If the average maturity of assets is 5 years and the average maturity of liabilities is 7 years, then the FI has no interest rate risk exposure.

The repricing model is based on an accounting world that reports asset and liability values at

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

Which theory of term structure states that long-term rates are equal to the geometric average of current and expected short-term rates plus a risk premium that increases with the maturity of the security?

In the repricing gap model, assets or liabilities are rate-sensitive within a given time period if the dollar values of each are subject to receiving a different interest rate should market rates change.

Defining buckets of time over a range of maturities assures the capture of all relevant information necessary to accurately assess the interest rate risk exposure of an FI.

Which of the following indicates a positive gap according to the repricing model?

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