Question 1

To hedge a positive duration gap a bank could sell interest rate futures.

Accepted Answer

A) True 
 B)False

Question 2

A bank wishing to avoid higher borrowing costs would be most likely to:

Accepted Answer

A)  short sell futures. 
B)  buy futures. 
C)  buy call options on bonds. 
D)  use a floor. 
A)  short sell futures. 
B)  buy futures. 
C)  buy call options on bonds. 
D)  use a floor.

Question 3

Which one of the following is a source of liquidity risk for a bank?

Accepted Answer

A)  Predicted increase in net deposit withdraws before holidays 
B)  Small town local high school football team unexpectedly wins divisional and must travel to state championship 
C)  Corporation calls in a bond the bank is holding 
D)  Maturation of notes payable due to the bank 
A)  Predicted increase in net deposit withdraws before holidays 
B)  Small town local high school football team unexpectedly wins divisional and must travel to state championship 
C)  Corporation calls in a bond the bank is holding 
D)  Maturation of notes payable due to the bank

Question 4

Earnings simulations that estimate proforma income statements and balance sheets for different detailed economic and interest rate scenarios for 1‐ or 2‐year periods are called ______ analysis.

Accepted Answer

A)  rate sensitivity gap 
B)  duration gap 
C)  EVA 
D)  VaR 
A)  rate sensitivity gap 
B)  duration gap 
C)  EVA 
D)  VaR

Question 5

Refer to the information below for questions 
Formosa Independence Bank has the following balance sheet:
  
-If all interest rates on the two sides of balance sheet decline by 65 basis points, when other things are equal, what is the change in net interest income for Formosa Independence Bank over the year?

Accepted Answer

A)  $0 
B)  $1,400,000 
C)  -$1,400,000 
D)  $1,592,500 
E)  -$1,592,500 
A)  $0 
B)  $1,400,000 
C)  -$1,400,000 
D)  $1,592,500 
E)  -$1,592,500

Question 6

A bank has a negative duration gap and wishes to hedge to use an interest rate swap to hedge its interest rate risk. The bank should

Accepted Answer

A)  pay a variable rate of interest and receive a fixed rate of interest. 
B)  pay a fixed rate of interest and receive a variable rate of interest. 
C)  pay a fixed rate of interest and receive a fixed rate of interest. 
D)  pay a variable rate of interest and receive a variable rate of interest. 
A)  pay a variable rate of interest and receive a fixed rate of interest. 
B)  pay a fixed rate of interest and receive a variable rate of interest. 
C)  pay a fixed rate of interest and receive a fixed rate of interest. 
D)  pay a variable rate of interest and receive a variable rate of interest.

Question 7

What can a bank do to reduce its credit risk?

Accepted Answer

The bank can employ internal credit rati

Question 8

A bond has a duration of 7.5 years. Its current market price is $1,125. Interest rates in the market are 7% today. It has been forecasted that interest rates will rise to 9% over the next couple of weeks. How will this bond's price change in percentage terms?

Accepted Answer

A)  This bond's price will rise by 2 percent. 
B)  This bond's price will fall by 2 percent. 
C)  This bond's price will not change 
D)  This bond's price will rise by 14.02 percent 
E)  This bond's price will fall by 14 .02 percent 
A)  This bond's price will rise by 2 percent. 
B)  This bond's price will fall by 2 percent. 
C)  This bond's price will not change 
D)  This bond's price will rise by 14.02 percent 
E)  This bond's price will fall by 14 .02 percent

Question 9

A major problem with VaR analysis is that

Accepted Answer

A)  it does not indicate the maximum possible loss. 
B)  it only works for individual assets rather than portfolios. 
C)  regulators do not understand VaR and so they don't allow its use. 
D)  it encourages excessive risk taking since it does not correctly account for asset correlations. 
A)  it does not indicate the maximum possible loss. 
B)  it only works for individual assets rather than portfolios. 
C)  regulators do not understand VaR and so they don't allow its use. 
D)  it encourages excessive risk taking since it does not correctly account for asset correlations.

Question 10

The risk of direct or indirect loss resulting from inadequate or failed internal processes, people, and systems, or from external events is called

Accepted Answer

A)  solvency risk. 
B)  interest rate risk. 
C)  credit risk. 
D)  operational risk. 
E)  systemic risk. 
A)  solvency risk. 
B)  interest rate risk. 
C)  credit risk. 
D)  operational risk. 
E)  systemic risk.

Question 11

A bank that has made 30 year adjustable rate mortgages that reprice in 6 months that are funded with one year CDs will have a positive $GAP over a 1 year period and a negative Duration Gap all else equal.

Accepted Answer

A) True 
 B)False

Question 12

Relying on liquid assets to meet liquidity requirements is ______ than relying on liability management, but the former is ______.

Accepted Answer

A)  safer; less profitable 
B)  riskier; more profitable 
C)  easier; more volatile 
D)  more volatile; preferred by regulators 
A)  safer; less profitable 
B)  riskier; more profitable 
C)  easier; more volatile 
D)  more volatile; preferred by regulators

Question 13

Which of the following could be used to reduce a bank's credit risk exposure? 
I. Increase its loan to deposit ratio
II. Increase its allowable concentration ratio
III. Increase its required minimum credit score
IV. Participate in loans in other geographic areas

Accepted Answer

A)  I and II 
B)  I, II and III 
C)  I, II and IV 
D)  III and IV 
E)  I, II, III and IV 
A)  I and II 
B)  I, II and III 
C)  I, II and IV 
D)  III and IV 
E)  I, II, III and IV

Question 14

Microhedging is hedging the interest rate risk of a specific transaction.

Accepted Answer

A) True 
 B)False

Question 15

ABC Bank has $39 million invested in T-Bonds with a 16-year duration, $39 million in 6 month maturity T-Bills, and $75 million invested in consumer loans with a 3 year duration. Based only on this data, what is the duration of the bank's asset portfolio in years?

Accepted Answer

A)  5.95 years 
B)  5.68 years 
C)  7.23 years 
D)  8.78 years 
E)  9.51 years 
A)  5.95 years 
B)  5.68 years 
C)  7.23 years 
D)  8.78 years 
E)  9.51 years

Question 16

A bank has an average asset duration of 5 years and an average liability duration of 3 years. This bank has total assets of $500 million and total liabilities of $250 million. Currently, market interest rates are 10 percent. If interest rates fall to 8 percent, what is this bank's change in net worth?

Accepted Answer

A)  Net worth will decrease by $31.82 million 
B)  Net worth will increase by $31.82 million 
C)  Net worth will increase by $27.27 million 
D)  Net worth will decrease by $27.27 million 
E)  Net worth will not change at all 
A)  Net worth will decrease by $31.82 million 
B)  Net worth will increase by $31.82 million 
C)  Net worth will increase by $27.27 million 
D)  Net worth will decrease by $27.27 million 
E)  Net worth will not change at all

Question 17

A bank has an average asset duration of 1.15 years and an average liability duration of 2.70 years. This bank has $250 million in total assets and $225 million in total liabilities. This bank has:

Accepted Answer

A)  A negative duration gap of 1.55 years. 
B)  A positive duration gap of 1.28 years. 
C)  A negative duration gap of 3.85 years. 
D)  A negative duration gap of 1.28 years. 
A)  A negative duration gap of 1.55 years. 
B)  A positive duration gap of 1.28 years. 
C)  A negative duration gap of 3.85 years. 
D)  A negative duration gap of 1.28 years.

Question 18

Swaps are usually the best hedging tool to use to hedge short term risks occurring in a half year or less.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following could be appropriately used to reduce the $Gap for a bank that specializes in mortgage lending? 
I. Issue more ARMs
II. Securitize and sell mortgages
III. Buy futures on long term Treasury bonds
IV. Enter into a swap to pay fixed and receive a variable rate of interest

Accepted Answer

A)  I and II 
B)  I, II and III 
C)  I, II and IV 
D)  II, III and IV 
E)  I, II, III and IV 
A)  I and II 
B)  I, II and III 
C)  I, II and IV 
D)  II, III and IV 
E)  I, II, III and IV

Question 20

The most liquid asset on the bank balance sheet are ______ and the highest earning category of assets are ______.

Accepted Answer

A)  investments; secondary reserves 
B)  primary reserves; secondary reserves 
C)  loans; deposits 
D)  deposits; loans 
E)  primary reserves; loans 
A)  investments; secondary reserves 
B)  primary reserves; secondary reserves 
C)  loans; deposits 
D)  deposits; loans 
E)  primary reserves; loans

To hedge a positive duration gap a bank could sell interest rate futures.

A bank wishing to avoid higher borrowing costs would be most likely to:

Which one of the following is a source of liquidity risk for a bank?

Earnings simulations that estimate proforma income statements and balance sheets for different detailed economic and interest rate scenarios for 1‐ or 2‐year periods are called ______ analysis.

A bank has a negative duration gap and wishes to hedge to use an interest rate swap to hedge its interest rate risk. The bank should

What can a bank do to reduce its credit risk?

A bond has a duration of 7.5 years. Its current market price is $1,125. Interest rates in the market are 7% today. It has been forecasted that interest rates will rise to 9% over the next couple of weeks. How will this bond's price change in percentage terms?

A major problem with VaR analysis is that

The risk of direct or indirect loss resulting from inadequate or failed internal processes, people, and systems, or from external events is called

A bank that has made 30 year adjustable rate mortgages that reprice in 6 months that are funded with one year CDs will have a positive $GAP over a 1 year period and a negative Duration Gap all else equal.

Relying on liquid assets to meet liquidity requirements is than relying on liability management, but the former is .

Which of the following could be used to reduce a bank's credit risk exposure? I. Increase its loan to deposit ratio II. Increase its allowable concentration ratio III. Increase its required minimum credit score IV. Participate in loans in other geographic areas

Microhedging is hedging the interest rate risk of a specific transaction.

ABC Bank has $39 million invested in T-Bonds with a 16-year duration, $39 million in 6 month maturity T-Bills, and $75 million invested in consumer loans with a 3 year duration. Based only on this data, what is the duration of the bank's asset portfolio in years?

A bank has an average asset duration of 1.15 years and an average liability duration of 2.70 years. This bank has $250 million in total assets and $225 million in total liabilities. This bank has:

Swaps are usually the best hedging tool to use to hedge short term risks occurring in a half year or less.

Which of the following could be appropriately used to reduce the $Gap for a bank that specializes in mortgage lending? I. Issue more ARMs II. Securitize and sell mortgages III. Buy futures on long term Treasury bonds IV. Enter into a swap to pay fixed and receive a variable rate of interest

The most liquid asset on the bank balance sheet are and the highest earning category of assets are .

An Overview of Financial Markets and Institutions

The Federal Reserve and Its Powers

The Fed and Interest Rates

The Level of Interest Rates

Bond Prices and Interest Rate Risk

The Structure of Interest Rates

Money Markets 1

Bond Markets

Mortgage Markets and Mortgagebacked Securities

Equity Markets

Derivatives Markets

International Markets

Commercial Bank Operations

International Banking

Regulation of Financial Institutions

Thrift Institutions and Finance Companies

Insurance Companies and Pension Funds

Investment Banking

Investment Companies

Filters

Exam 20: Risk Management in Financial Institutions

To hedge a positive duration gap a bank could sell interest rate futures.

A bank wishing to avoid higher borrowing costs would be most likely to:

Which one of the following is a source of liquidity risk for a bank?

Earnings simulations that estimate proforma income statements and balance sheets for different detailed economic and interest rate scenarios for 1‐ or 2‐year periods are called ______ analysis.

A bank has a negative duration gap and wishes to hedge to use an interest rate swap to hedge its interest rate risk. The bank should

What can a bank do to reduce its credit risk?

A bond has a duration of 7.5 years. Its current market price is $1,125. Interest rates in the market are 7% today. It has been forecasted that interest rates will rise to 9% over the next couple of weeks. How will this bond's price change in percentage terms?

A major problem with VaR analysis is that

The risk of direct or indirect loss resulting from inadequate or failed internal processes, people, and systems, or from external events is called

A bank that has made 30 year adjustable rate mortgages that reprice in 6 months that are funded with one year CDs will have a positive $GAP over a 1 year period and a negative Duration Gap all else equal.

Relying on liquid assets to meet liquidity requirements is ______ than relying on liability management, but the former is ______.

Which of the following could be used to reduce a bank's credit risk exposure? I. Increase its loan to deposit ratio II. Increase its allowable concentration ratio III. Increase its required minimum credit score IV. Participate in loans in other geographic areas

Microhedging is hedging the interest rate risk of a specific transaction.

ABC Bank has $39 million invested in T-Bonds with a 16-year duration, $39 million in 6 month maturity T-Bills, and $75 million invested in consumer loans with a 3 year duration. Based only on this data, what is the duration of the bank's asset portfolio in years?

A bank has an average asset duration of 1.15 years and an average liability duration of 2.70 years. This bank has $250 million in total assets and $225 million in total liabilities. This bank has:

Swaps are usually the best hedging tool to use to hedge short term risks occurring in a half year or less.

Which of the following could be appropriately used to reduce the $Gap for a bank that specializes in mortgage lending? I. Issue more ARMs II. Securitize and sell mortgages III. Buy futures on long term Treasury bonds IV. Enter into a swap to pay fixed and receive a variable rate of interest

The most liquid asset on the bank balance sheet are ______ and the highest earning category of assets are ______.

An Overview of Financial Markets and Institutions

The Federal Reserve and Its Powers

The Fed and Interest Rates

The Level of Interest Rates

Bond Prices and Interest Rate Risk

The Structure of Interest Rates

Money Markets 1

Bond Markets

Mortgage Markets and Mortgagebacked Securities

Equity Markets

Derivatives Markets

International Markets

Commercial Bank Operations

International Banking

Regulation of Financial Institutions

Thrift Institutions and Finance Companies

Insurance Companies and Pension Funds

Investment Banking

Investment Companies

Filters

Relying on liquid assets to meet liquidity requirements is than relying on liability management, but the former is .

The most liquid asset on the bank balance sheet are and the highest earning category of assets are .