Question 1

A(n)____________ is an agreement for a fee to receive payments when the interest rate of a particular security rises above a specified level by a specified date.

Accepted Answer

A) interest rate cap 
B) interest rate futures contract 
C) interest rate swap 
D) maximum rate contract 
A) interest rate cap 
B) interest rate futures contract 
C) interest rate swap 
D) maximum rate contract A

Question 2

If Bank A has a negative gap and Bank B has a positive gap, which of the following is true?

Accepted Answer

A) Bank A is favorably affected by rising interest rates. 
B) Bank B is favorably affected by falling interest rates. 
C) Bank A is adversely affected by falling interest rates. 
D) None of these are correct. 
A) Bank A is favorably affected by rising interest rates. 
B) Bank B is favorably affected by falling interest rates. 
C) Bank A is adversely affected by falling interest rates. 
D) None of these are correct. D

Question 3

Most loan sales enable the bank originating the loan to continue servicing the loan.

Accepted Answer

A) True 
 B)False  True

Question 4

A gap ratio of less than 1.00 suggests that

Accepted Answer

A) rate-sensitive assets exceed rate-sensitive liabilities. 
B) an increase in interest rates would increase the bank's net interest margin. 
C) rate-sensitive liabilities exceed rate-sensitive assets. 
D) a decrease in interest rates would decrease the bank's net interest margin. 
E) an increase in interest rates would increase the bank's net interest margin AND a decrease in interest rates would decrease the bank's net interest margin. 
A) rate-sensitive assets exceed rate-sensitive liabilities. 
B) an increase in interest rates would increase the bank's net interest margin. 
C) rate-sensitive liabilities exceed rate-sensitive assets. 
D) a decrease in interest rates would decrease the bank's net interest margin. 
E) an increase in interest rates would increase the bank's net interest margin AND a decrease in interest rates would decrease the bank's net interest margin.

Question 5

Petri Bank had interest revenues of $70 million last year and $30 million in interest expenses. About $300 million of Petri's $800 million in assets are rate sensitive, while $600 million of its liabilities are rate sensitive. Petri Bank's net interest margin is ____ percent.

Accepted Answer

A) 4.0 
B) 3.6 
C) 6.7 
D) 5.0 
A) 4.0 
B) 3.6 
C) 6.7 
D) 5.0

Question 6

Bank A has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million. Bank A's net interest margin is

Accepted Answer

A) $1 million. 
B) - $1 million. 
C) - 5 percent. 
D) 5 percent. 
A) $1 million. 
B) - $1 million. 
C) - 5 percent. 
D) 5 percent.

Question 7

International diversification of loans can best reduce a bank's overall credit risk if

Accepted Answer

A) the loans are made in countries in a single continent. 
B) the loans are made in countries whose economic cycles do not move together over time. 
C) the loans are made in countries in a single continent AND  the loans are made in countries whose economic cycles do not move together over time. 
D) None of these are correct. 
A) the loans are made in countries in a single continent. 
B) the loans are made in countries whose economic cycles do not move together over time. 
C) the loans are made in countries in a single continent AND  the loans are made in countries whose economic cycles do not move together over time. 
D) None of these are correct.

Question 8

Which of the following is a measure for banks to use to assess their exposure to interest rate risk?

Accepted Answer

A) capital ratio 
B) leverage measure 
C) duration 
D) gap ratio 
E) duration AND gap ratio 
A) capital ratio 
B) leverage measure 
C) duration 
D) gap ratio 
E) duration AND gap ratio

Question 9

For a commercial bank, when the average duration of assets exceeds the average duration of liabilities, the duration gap is

Accepted Answer

A) zero. 
B) positive. 
C) negative. 
D) either b or c, depending on the maturities of the assets . 
A) zero. 
B) positive. 
C) negative. 
D) either b or c, depending on the maturities of the assets .

Question 10

An effective way to align bank managers' interests with shareholders' goal of higher returns is to compensate the managers with fixed salaries without a bonus.

Accepted Answer

A) True 
 B)False

Question 11

Leskar Bank has $2 million in rate-sensitive liabilities and $3 million in rate-sensitive assets. Leskar's gap ratio is ____.

Accepted Answer

A) 1.5 
B) 0.67 
C) $1 million 
D) None of these are correct. 
A) 1.5 
B) 0.67 
C) $1 million 
D) None of these are correct.

Question 12

In a sensitivity  analysis using a bank's stock return, an interest rate proxy, and market returns, a ____ coefficient for the interest rate variable suggests that the bank's performance is ____ affected by ____ interest rates.

Accepted Answer

A) positive; adversely; rising 
B) positive; favorably; declining 
C) negative; adversely; rising 
D) negative; favorably; rising 
A) positive; adversely; rising 
B) positive; favorably; declining 
C) negative; adversely; rising 
D) negative; favorably; rising

Question 13

If a bank that relies heavily on short-term deposits for its funds replaces its investment in long-term Treasury securities with more floating-rate commercial loans, it is likely that the bank's exposure to

Accepted Answer

A) credit risk would decrease. 
B) credit risk would increase. 
C) interest rate risk would increase. 
D) None of the above. 
A) credit risk would decrease. 
B) credit risk would increase. 
C) interest rate risk would increase. 
D) None of the above.

Question 14

For most banks, the average duration of liabilities exceeds the average duration of assets, so the duration gap is positive.

Accepted Answer

A) True 
 B)False

Question 15

During a period of rising interest rates, a bank's net interest margin will likely ____ if its liabilities are ____ its assets.

Accepted Answer

A) increase; more rate sensitive than 
B) decrease; more rate sensitive than 
C) increase; equally rate sensitive as 
D) decrease; equally rate sensitive as 
A) increase; more rate sensitive than 
B) decrease; more rate sensitive than 
C) increase; equally rate sensitive as 
D) decrease; equally rate sensitive as

Question 16

The risk of a loss due to closing out a transaction is referred to as ____ risk.

Accepted Answer

A) credit 
B) settlement 
C) interest rate 
D) exchange rate 
E) None of these are correct. 
A) credit 
B) settlement 
C) interest rate 
D) exchange rate 
E) None of these are correct.

Question 17

ROE is defined as

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 18

Banks can reduce their credit risk by restructuring their asset portfolio to contain fewer ____ and more ____.

Accepted Answer

A) Treasury bonds; corporate bonds 
B) Treasury bonds; municipal bonds 
C) Treasury bonds; commercial loans 
D) None of these are correct. 
A) Treasury bonds; corporate bonds 
B) Treasury bonds; municipal bonds 
C) Treasury bonds; commercial loans 
D) None of these are correct.

Question 19

Other things being equal, assets with ____ maturities and ____ frequent coupon payments have longer durations.

Accepted Answer

A) shorter; more 
B) shorter; less 
C) longer; more 
D) longer; less 
A) shorter; more 
B) shorter; less 
C) longer; more 
D) longer; less

Question 20

A bank has the following asset and liability portfolios. What is the gap?

Accepted Answer

A) $750 million 
B) - $750 million 
C) 1.12 
D) .896 
E) None of these are correct. 
A) $750 million 
B) - $750 million 
C) 1.12 
D) .896 
E) None of these are correct.

Exam 19: Bank Management

A(n)____________ is an agreement for a fee to receive payments when the interest rate of a particular security rises above a specified level by a specified date.

If Bank A has a negative gap and Bank B has a positive gap, which of the following is true?

Most loan sales enable the bank originating the loan to continue servicing the loan.

A gap ratio of less than 1.00 suggests that

Petri Bank had interest revenues of $70 million last year and $30 million in interest expenses. About $300 million of Petri's $800 million in assets are rate sensitive, while $600 million of its liabilities are rate sensitive. Petri Bank's net interest margin is ____ percent.

Bank A has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million. Bank A's net interest margin is

International diversification of loans can best reduce a bank's overall credit risk if

Which of the following is a measure for banks to use to assess their exposure to interest rate risk?

For a commercial bank, when the average duration of assets exceeds the average duration of liabilities, the duration gap is

An effective way to align bank managers' interests with shareholders' goal of higher returns is to compensate the managers with fixed salaries without a bonus.

Leskar Bank has $2 million in rate-sensitive liabilities and $3 million in rate-sensitive assets. Leskar's gap ratio is ____.

In a sensitivity analysis using a bank's stock return, an interest rate proxy, and market returns, a ____ coefficient for the interest rate variable suggests that the bank's performance is ____ affected by ____ interest rates.

If a bank that relies heavily on short-term deposits for its funds replaces its investment in long-term Treasury securities with more floating-rate commercial loans, it is likely that the bank's exposure to

For most banks, the average duration of liabilities exceeds the average duration of assets, so the duration gap is positive.

During a period of rising interest rates, a bank's net interest margin will likely ____ if its liabilities are ____ its assets.

The risk of a loss due to closing out a transaction is referred to as ____ risk.

ROE is defined as

Banks can reduce their credit risk by restructuring their asset portfolio to contain fewer ____ and more ____.

Other things being equal, assets with ____ maturities and ____ frequent coupon payments have longer durations.

A bank has the following asset and liability portfolios. What is the gap?

Role of Financial Markets and Institutions

Determination of Interest Rates

Structure of Interest Rates

Functions of the Fed

Monetary Policy

Money Markets

Bond Markets

Bond Valuation and Risk

Mortgage Markets

Stock Offerings and Investor Monitoring

Stock Valuation and Risk

Market Microstructure and Strategies

Financial Futures Markets

Options Markets

Swap Markets

Foreign Exchange Derivative Markets

Commercial Bank Operations

Bank Regulation

Bank Performance

Thrift Operations

Finance Company Operations

Mutual Fund Operations

Securities Operations

Insurance and Pension Fund Operations

Pension Fund Operations

Filters

In a sensitivity analysis using a bank's stock return, an interest rate proxy, and market returns, a coefficient for the interest rate variable suggests that the bank's performance is affected by interest rates.

During a period of rising interest rates, a bank's net interest margin will likely if its liabilities are its assets.

Banks can reduce their credit risk by restructuring their asset portfolio to contain fewer and more .

Other things being equal, assets with maturities and frequent coupon payments have longer durations.