Question 1

The ____ of interest rate futures ____ the potential adverse effect of rising interest rates on a bank's interest expenses.

Accepted Answer

A)  sale; increases 
B)  sale; reduces 
C)  purchase; reduces 
D)  both A and C are correct 
A)  sale; increases 
B)  sale; reduces 
C)  purchase; reduces 
D)  both A and C are correct B

Question 2

A bank has a return on assets of 2 percent, $40 million in assets, and $4 million in equity. What is the return on equity?

Accepted Answer

A)  10 percent 
B)  .2 percent 
C)  2 percent 
D)  20 percent 
E)  none of the above 
A)  10 percent 
B)  .2 percent 
C)  2 percent 
D)  20 percent 
E)  none of the above D

Question 3

Banks can improve their liquidity position by restructuring their asset portfolio to contain fewer ____ and more ____.

Accepted Answer

A)  excess reserves; Treasury bills 
B)  Treasury bonds; corporate bonds 
C)  loans; Treasury bills 
D)  none of the above 
A)  excess reserves; Treasury bills 
B)  Treasury bonds; corporate bonds 
C)  loans; Treasury bills 
D)  none of the above C

Question 4

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 more favorably affected by rising interest rates. 
B)  Bank B is more favorably affected by falling interest rates. 
C)  Bank A is adversely affected by falling interest rates. 
D)  none of the above 
A)  Bank A is more favorably affected by rising interest rates. 
B)  Bank B is more favorably affected by falling interest rates. 
C)  Bank A is adversely affected by falling interest rates. 
D)  none of the above

Question 5

The Sarbanes-Oxley Act has had little impact on the monitoring conducted by the board members of commercial banks.

Accepted Answer

A) True 
 B)False

Question 6

Banks tend to focus their loans in one industry so that they can specialize on that industry and reduce the credit risk of their loan portfolio.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A)  exceeds; zero 
B)  exceeds; negative 
C)  exceeds; positive 
D)  is less than; negative 
A)  exceeds; zero 
B)  exceeds; negative 
C)  exceeds; positive 
D)  is less than; negative

Question 8

When a bank makes an international loan containing a clause that allows repayment in a foreign currency, the bank is exposed to

Accepted Answer

A)  loan settlement risk. 
B)  exchange rate risk. 
C)  global exchange risk. 
D)  currency transaction risk. 
A)  loan settlement risk. 
B)  exchange rate risk. 
C)  global exchange risk. 
D)  currency transaction risk.

Question 9

The duration of zero-coupon bonds will be ____ the duration of coupon bonds with the same maturity.

Accepted Answer

A)  lower than 
B)  higher than 
C)  the same as 
D)  A or B, depending on the size of the coupon payment 
A)  lower than 
B)  higher than 
C)  the same as 
D)  A or B, depending on the size of the coupon payment

Question 10

The greater the ____, the greater the amount of assets per dollar's worth of equity.

Accepted Answer

A)  leverage measure 
B)  ratio of equity to debt 
C)  capital ratio 
D)  proportion of loans to securities in the asset portfolio 
A)  leverage measure 
B)  ratio of equity to debt 
C)  capital ratio 
D)  proportion of loans to securities in the asset portfolio

Question 11

The performance of a bank that continually concentrates on short-term deposits in euros and adjustable-rate dollar loans with equal rate sensitivity is

Accepted Answer

A)  unaffected if euro interest rates increase and U.S. rates decrease. 
B)  unaffected if U.S. interest rates increase and euro interest rates decrease. 
C)  adversely affected if euro interest rates increase and U.S. rates decrease. 
D)  adversely affected if U.S. interest rates increase and euro rates decrease. 
E)  A and B 
A)  unaffected if euro interest rates increase and U.S. rates decrease. 
B)  unaffected if U.S. interest rates increase and euro interest rates decrease. 
C)  adversely affected if euro interest rates increase and U.S. rates decrease. 
D)  adversely affected if U.S. interest rates increase and euro rates decrease. 
E)  A and B

Question 12

If a bank attempts to reduce exposure to interest rate risk by replacing long-term marketable securities with more floating-rate commercial loans, it is likely that the bank's

Accepted Answer

A)  credit risk would decrease. 
B)  credit risk would increase. 
C)  liquidity risk would increase. 
D)  liquidity risk would decrease. 
E)  B and C 
A)  credit risk would decrease. 
B)  credit risk would increase. 
C)  liquidity risk would increase. 
D)  liquidity risk would decrease. 
E)  B and C

Question 13

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)  B or C 
A)  zero 
B)  positive. 
C)  negative. 
D)  B or C

Question 14

The measure of interest rate risk that uses the difference between rate-sensitive assets and rate-sensitive liabilities is called

Accepted Answer

A)  gap measurement. 
B)  duration measurement. 
C)  duration ratio. 
D)  gap ratio. 
A)  gap measurement. 
B)  duration measurement. 
C)  duration ratio. 
D)  gap ratio.

Question 15

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 the above 
A)  credit 
B)  settlement 
C)  interest rate 
D)  exchange rate 
E)  none of the above

Question 16

Which of the following statements is incorrect?

Accepted Answer

A)  Managers may be tempted to make decisions that are in their own best interests rather than shareholder interests. 
B)  Directors are responsible for making most of the bank's decisions regarding loans to customers, which encourages a loan department to extend loans with a very high concern for risk. 
C)  To prevent agency problems, some banks provide stock as compensation to managers. 
D)  The underlying goal behind the managerial policies of a bank is to maximize the wealth of the bank's shareholders 
A)  Managers may be tempted to make decisions that are in their own best interests rather than shareholder interests. 
B)  Directors are responsible for making most of the bank's decisions regarding loans to customers, which encourages a loan department to extend loans with a very high concern for risk. 
C)  To prevent agency problems, some banks provide stock as compensation to managers. 
D)  The underlying goal behind the managerial policies of a bank is to maximize the wealth of the bank's shareholders

Question 17

In a regression 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 18

A gap ratio of less than one 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)  B and D 
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)  B and D

Question 19

If the duration of all banks assets with a maturity of greater than one year is similar to that of its liabilities with a maturity greater than one year, , interest rate risk is nonexistent.

Accepted Answer

A) True 
 B)False

Question 20

If a bank expects interest rates to consistently ____ over time, it will consider allocating most of its funds to rate-____ assets.

Accepted Answer

A)  decrease; sensitive 
B)  increase; insensitive 
C)  increase; sensitive 
D)  answers A and B are correct 
E)  none of the above 
A)  decrease; sensitive 
B)  increase; insensitive 
C)  increase; sensitive 
D)  answers A and B are correct 
E)  none of the above

Exam 19: Bank Management

The ____ of interest rate futures ____ the potential adverse effect of rising interest rates on a bank's interest expenses.

A bank has a return on assets of 2 percent, $40 million in assets, and $4 million in equity. What is the return on equity?

Banks can improve their liquidity position by restructuring their asset portfolio to contain fewer ____ and more ____.

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

The Sarbanes-Oxley Act has had little impact on the monitoring conducted by the board members of commercial banks.

Banks tend to focus their loans in one industry so that they can specialize on that industry and reduce the credit risk of their loan portfolio.

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

When a bank makes an international loan containing a clause that allows repayment in a foreign currency, the bank is exposed to

The duration of zero-coupon bonds will be ____ the duration of coupon bonds with the same maturity.

The greater the ____, the greater the amount of assets per dollar's worth of equity.

The performance of a bank that continually concentrates on short-term deposits in euros and adjustable-rate dollar loans with equal rate sensitivity is

If a bank attempts to reduce exposure to interest rate risk by replacing long-term marketable securities with more floating-rate commercial loans, it is likely that the bank's

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

The measure of interest rate risk that uses the difference between rate-sensitive assets and rate-sensitive liabilities is called

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

Which of the following statements is incorrect?

In a regression 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.

A gap ratio of less than one suggests that

If the duration of all banks assets with a maturity of greater than one year is similar to that of its liabilities with a maturity greater than one year, , interest rate risk is nonexistent.

If a bank expects interest rates to consistently ____ over time, it will consider allocating most of its funds to rate-____ assets.

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 Operations

Pension Fund Operations

Filters

The of interest rate futures the potential adverse effect of rising interest rates on a bank's interest expenses.

Banks can improve their liquidity position by restructuring their asset portfolio to contain fewer and more .

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

In a regression 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 expects interest rates to consistently over time, it will consider allocating most of its funds to rate- assets.