Question 1

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

Accepted Answer

A) Approximately $1.613 million. 
B) Approximately $2.297 million. 
C) Approximately -$1.937 million. 
D) Approximately $2.209 million. 
E) Approximately $2.524 million.
[Refer to: 8-113] 
A) Approximately $1.613 million. 
B) Approximately $2.297 million. 
C) Approximately -$1.937 million. 
D) Approximately $2.209 million. 
E) Approximately $2.524 million.
[Refer to: 8-113]

Question 2

Suppose that interest rates rise by 2 percent on both RSAs and RSLs.The expected annual change in net interest income of the bank is

Accepted Answer

A) -$300,000. 
B) $500,000. 
C) -$2,800,000. 
D) -$3,000,000. 
E) $300,000.
[Reference: 8-84] 
A) -$300,000. 
B) $500,000. 
C) -$2,800,000. 
D) -$3,000,000. 
E) $300,000.
[Reference: 8-84]

Question 3

What is the weighted average maturity of assets?

Accepted Answer

A) 5.50 years. 
B) 6.40 years. 
C) 5.00 years. 
D) 4.60 years. 
E) 10.0 years. [Refer to: 8-105] 
A) 5.50 years. 
B) 6.40 years. 
C) 5.00 years. 
D) 4.60 years. 
E) 10.0 years. [Refer to: 8-105]

Question 4

Because the repricing model ignores the market value effect of changing interest rates, the repricing gap is an incomplete measure of the true interest rate risk exposure of an FI.

Accepted Answer

A) True 
 B)False

Question 5

If interest rates increase 75 basis points for an FI that has a gap of -$15 million, the expected change in net interest income is

Accepted Answer

A) -$112,500. 
B) +$112,500. 
C) +$1,125,0000. 
D) -$1,125,0000. 
E) -$150,000. 
A) -$112,500. 
B) +$112,500. 
C) +$1,125,0000. 
D) -$1,125,0000. 
E) -$150,000.

Question 6

Similar to the repricing gap model, duration gap considers market values and the maturity distributions of an FI's assets and liabilities.

Accepted Answer

A) True 
 B)False

Question 7

The repricing model estimates the difference between interest earned and interest paid during a given period of time.

Accepted Answer

A) True 
 B)False

Question 8

Use the repricing model to determine the funding gap for a maturity bucket of 365 days.

Accepted Answer

A) +$15 million. 
B) -$20 million. 
C) -$350 million. 
D) -$450 million. 
E) -$290 million. [Refer to: 8-89] 
A) +$15 million. 
B) -$20 million. 
C) -$350 million. 
D) -$450 million. 
E) -$290 million. [Refer to: 8-89]

Question 9

Use the repricing model to determine the funding gap for a maturity bucket of 91 days.

Accepted Answer

A) -$60 million. 
B) -$150 million. 
C) $0. 
D) -$250 million. 
E) -$300 million. [Refer to: 8-89] 
A) -$60 million. 
B) -$150 million. 
C) $0. 
D) -$250 million. 
E) -$300 million. [Refer to: 8-89]

Question 10

Of the following institutions, which will be subject to refinancing risk within a particular reprice bucket?

Accepted Answer

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

Question 11

The repricing gap does not accurately measure FI interest rate risk exposure because

Accepted Answer

A) FIs cannot accurately predict the magnitude change in future interest rates. 
B) FIs cannot accurately predict the direction of change in future interest rates. 
C) accounting systems are not accurate enough to allow the calculation of precise gap measures. 
D) it does not recognize timing differences in cash flows within the same maturity grouping. 
E) equity is omitted. 
A) FIs cannot accurately predict the magnitude change in future interest rates. 
B) FIs cannot accurately predict the direction of change in future interest rates. 
C) accounting systems are not accurate enough to allow the calculation of precise gap measures. 
D) it does not recognize timing differences in cash flows within the same maturity grouping. 
E) equity is omitted.

Question 12

The unbiased expectations theory of the term structure of interest rates

Accepted Answer

A) assumes that long-term interest rates are an arithmetic average of short-term rates. 
B) assumes that the yield curve reflects the market's current expectations of future short-term interest rates. 
C) recognizes that forward rates are perfect predictors of future interest rates. 
D) assumes that risk premiums increase uniformly with maturity. 
E) None of the options. 
A) assumes that long-term interest rates are an arithmetic average of short-term rates. 
B) assumes that the yield curve reflects the market's current expectations of future short-term interest rates. 
C) recognizes that forward rates are perfect predictors of future interest rates. 
D) assumes that risk premiums increase uniformly with maturity. 
E) None of the options.

Question 13

If an FI's repricing gap is less than zero, then

Accepted Answer

A) it is deficient in its required reserves. 
B) it is deficient in its capital ratio requirement. 
C) its liability costs are more sensitive to changing market interest rates than are its asset yields. 
D) its liability costs are less sensitive to changing market interest rates than are its asset yields. 
E) the duration of the FI's liabilities exceeds the duration of FI's assets. 
A) it is deficient in its required reserves. 
B) it is deficient in its capital ratio requirement. 
C) its liability costs are more sensitive to changing market interest rates than are its asset yields. 
D) its liability costs are less sensitive to changing market interest rates than are its asset yields. 
E) the duration of the FI's liabilities exceeds the duration of FI's assets.

Question 14

Which of the following is a weakness of the repricing model to measure interest rate risk?

Accepted Answer

A) Potential for overaggregation of assets and liabilities within each maturity bucket. 
B) It ignores how changes in interest rates affect the market value of assets and liabilities. 
C) It ignores the reinvestment of loan interest and principal payments that are reinvested at current market rates. 
D) It fails to recognize off-balance-sheet activities that may be rate-sensitive. 
E) All of the options. 
A) Potential for overaggregation of assets and liabilities within each maturity bucket. 
B) It ignores how changes in interest rates affect the market value of assets and liabilities. 
C) It ignores the reinvestment of loan interest and principal payments that are reinvested at current market rates. 
D) It fails to recognize off-balance-sheet activities that may be rate-sensitive. 
E) All of the options.

Question 15

What is the repricing gap if a 0 to 3 month maturity gap is used? Ignore runoffs.

Accepted Answer

A) $60 million. 
B) $40 million. 
C) -$80 million. 
D) -$120 million. 
E) -$180 million. [Refer to: 8-101] 
A) $60 million. 
B) $40 million. 
C) -$80 million. 
D) -$120 million. 
E) -$180 million. [Refer to: 8-101]

Question 16

The maturity gap for a bank is the weighted average maturity of the assets minus the weighted average maturity of the liabilities.

Accepted Answer

A) True 
 B)False

Question 17

The term structure of interest rates assumes that

Accepted Answer

A) the risk of all assets is the same. 
B) the time to maturity for all assets is the same. 
C) the coupon rate of all assets is the same. 
D) The market value of assets is the same. 
E) All of the options. 
A) the risk of all assets is the same. 
B) the time to maturity for all assets is the same. 
C) the coupon rate of all assets is the same. 
D) The market value of assets is the same. 
E) All of the options.

Question 18

For a given change in interest rates, fixed-rate liabilities with longer-term maturities will have smaller changes in price than liabilities with shorter maturities.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is true?

Accepted Answer

A) An increase in interest rates leads to an increase in the market value of financial securities. 
B) Value of longer term securities decreases at a diminishing rate for increases in interest rates. 
C) Value of longer term securities increases at an increasing rate for any decline in interest rates. 
D) The shorter the maturity of a fixed income asset or liability, the greater the fall in market value for any given interest rate increase. 
E) The longer the maturity of a fixed income asset or liability, the greater the fall in market value for any given interest rate decrease. 
A) An increase in interest rates leads to an increase in the market value of financial securities. 
B) Value of longer term securities decreases at a diminishing rate for increases in interest rates. 
C) Value of longer term securities increases at an increasing rate for any decline in interest rates. 
D) The shorter the maturity of a fixed income asset or liability, the greater the fall in market value for any given interest rate increase. 
E) The longer the maturity of a fixed income asset or liability, the greater the fall in market value for any given interest rate decrease.

Question 20

Defining buckets of time over wider intervals creates greater accuracy in the use of the repricing model because fewer calculations are required.

Accepted Answer

A) True 
 B)False

Exam 8: Interest Rate Risk I

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

Suppose that interest rates rise by 2 percent on both RSAs and RSLs.The expected annual change in net interest income of the bank is

What is the weighted average maturity of assets?

Because the repricing model ignores the market value effect of changing interest rates, the repricing gap is an incomplete measure of the true interest rate risk exposure of an FI.

If interest rates increase 75 basis points for an FI that has a gap of -$15 million, the expected change in net interest income is

Similar to the repricing gap model, duration gap considers market values and the maturity distributions of an FI's assets and liabilities.

The repricing model estimates the difference between interest earned and interest paid during a given period of time.

Use the repricing model to determine the funding gap for a maturity bucket of 365 days.

Use the repricing model to determine the funding gap for a maturity bucket of 91 days.

Of the following institutions, which will be subject to refinancing risk within a particular reprice bucket?

The repricing gap does not accurately measure FI interest rate risk exposure because

The unbiased expectations theory of the term structure of interest rates

If an FI's repricing gap is less than zero, then

Which of the following is a weakness of the repricing model to measure interest rate risk?

What is the repricing gap if a 0 to 3 month maturity gap is used? Ignore runoffs.

The maturity gap for a bank is the weighted average maturity of the assets minus the weighted average maturity of the liabilities.

The term structure of interest rates assumes that

For a given change in interest rates, fixed-rate liabilities with longer-term maturities will have smaller changes in price than liabilities with shorter maturities.

Which of the following statements is true?

Defining buckets of time over wider intervals creates greater accuracy in the use of the repricing model because fewer calculations are required.

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