Question 1

Floating-rate loans completely eliminate interest rate risk.

Accepted Answer

A) True 
 B)False

Question 2

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 3

____________ 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

Question 4

Which of the following is not a likely method used by a bank to reduce interest rate risk?

Accepted Answer

A)  maturity matching 
B)  using fixed-rate loans 
C)  using interest rate futures contracts 
D)  using interest rate caps 
A)  maturity matching 
B)  using fixed-rate loans 
C)  using interest rate futures contracts 
D)  using interest rate caps

Question 5

Banks can resolve cash deficiencies by

Accepted Answer

A)  creating additional liabilities 
B)  selling assets 
C)  buying back common stock 
D)  increasing dividend payouts 
E)  A or B 
A)  creating additional liabilities 
B)  selling assets 
C)  buying back common stock 
D)  increasing dividend payouts 
E)  A or B

Question 6

Floating-rate loans cannot completely eliminate interest rate risk; if the cost of funds is changing more frequently than the rate on assets, the bank's net interest margin is still affectedbyinterest rate fluctuations.

Accepted Answer

A) True 
 B)False

Question 7

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 the above 
A)  1.5 
B)  0.67 
C)  $1 million 
D)  none of the above

Question 8

A bank can usually simultaneously maximize its return on assets and minimize credit risk.

Accepted Answer

A) True 
 B)False

Question 9

____ is not a method used to assess interest rate risk.

Accepted Answer

A)  Gap analysis 
B)  Ratio analysis 
C)  Duration analysis 
D)  Regression analysis 
E)  All of the above are methods to assess interest rate risk. 
A)  Gap analysis 
B)  Ratio analysis 
C)  Duration analysis 
D)  Regression analysis 
E)  All of the above are methods to assess interest rate risk.

Question 10

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

Accepted Answer

A)  the countries where loans are given are clustered together in a single continent. 
B)  the countries where loans are given have economic cycles that do not move together over time. 
C)  A and B 
D)  none of the above 
A)  the countries where loans are given are clustered together in a single continent. 
B)  the countries where loans are given have economic cycles that do not move together over time. 
C)  A and B 
D)  none of the above

Question 11

Ringo Bank has a profit after taxes of $3 million, total assets of $300 million, and shareholder's equity of $30 million. Ringo's return on equity (ROE) is ____ percent.

Accepted Answer

A)  1 
B)  10 
C)  3 
D)  none of the above 
A)  1 
B)  10 
C)  3 
D)  none of the above

Question 12

Other things being equal, assets with shorter maturities have ____ durations. Assets that generate more frequent coupon payments have ____ durations.

Accepted Answer

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

Question 13

____ is (are) least likely to be used as a method of reducing interest rate risk.

Accepted Answer

A)  Maturity matching 
B)  Floating-rate loans 
C)  Stock options 
D)  Interest rate swaps 
E)  Interest rate caps 
A)  Maturity matching 
B)  Floating-rate loans 
C)  Stock options 
D)  Interest rate swaps 
E)  Interest rate caps

Question 14

During a period of rising interest rates, a bank's net interest margin will likely decline if it has a large amount of

Accepted Answer

A)  rate-sensitive assets and no rate-sensitive liabilities. 
B)  rate-sensitive liabilities and no rate-sensitive assets. 
C)  loans to technology firms. 
D)  real estate loans. 
A)  rate-sensitive assets and no rate-sensitive liabilities. 
B)  rate-sensitive liabilities and no rate-sensitive assets. 
C)  loans to technology firms. 
D)  real estate loans.

Question 15

Crazer Bank has a profit after taxes of $2 million, total assets of $100 million, and shareholder's equity of $10 million. Crazer's return on equity (ROE) is ____ percent.

Accepted Answer

A)  18 
B)  210 
C)  15 
D)  20 
E)  none of the above 
A)  18 
B)  210 
C)  15 
D)  20 
E)  none of the above

Question 16

Banks generally ____ loans and ____ their purchases of low-risk securities when the economy is weak.

Accepted Answer

A)  increase; increase 
B)  reduce; reduce 
C)  increase; reduce 
D)  reduce; increase 
A)  increase; increase 
B)  reduce; reduce 
C)  increase; reduce 
D)  reduce; increase

Question 17

Banks increase their risk by increasing their capital as a percentage of assets

Accepted Answer

A) True 
 B)False

Question 18

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

Question 19

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

Accepted Answer

A)  decrease; sensitive 
B)  decrease; insensitive 
C)  increase; insensitive 
D)  none of the above 
A)  decrease; sensitive 
B)  decrease; insensitive 
C)  increase; insensitive 
D)  none of the above

Question 20

In an interest rate swap, a bank whose liabilities are ____ rate sensitive than its assets can swap payments with a ____ interest rate in exchange for payments with a ____ interest rate.

Accepted Answer

A)  more; fixed; variable 
B)  more; variable; fixed 
C)  less; fixed; variable 
D)  less; fixed; fixed 
E)  none of the above 
A)  more; fixed; variable 
B)  more; variable; fixed 
C)  less; fixed; variable 
D)  less; fixed; fixed 
E)  none of the above

Exam 19: Bank Management

Floating-rate loans completely eliminate interest rate risk.

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

____________ 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.

Which of the following is not a likely method used by a bank to reduce interest rate risk?

Banks can resolve cash deficiencies by

Floating-rate loans cannot completely eliminate interest rate risk; if the cost of funds is changing more frequently than the rate on assets, the bank's net interest margin is still affectedbyinterest rate fluctuations.

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

A bank can usually simultaneously maximize its return on assets and minimize credit risk.

____ is not a method used to assess interest rate risk.

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

Ringo Bank has a profit after taxes of $3 million, total assets of $300 million, and shareholder's equity of $30 million. Ringo's return on equity (ROE) is ____ percent.

Other things being equal, assets with shorter maturities have ____ durations. Assets that generate more frequent coupon payments have ____ durations.

____ is (are) least likely to be used as a method of reducing interest rate risk.

During a period of rising interest rates, a bank's net interest margin will likely decline if it has a large amount of

Crazer Bank has a profit after taxes of $2 million, total assets of $100 million, and shareholder's equity of $10 million. Crazer's return on equity (ROE) is ____ percent.

Banks generally ____ loans and ____ their purchases of low-risk securities when the economy is weak.

Banks increase their risk by increasing their capital as a percentage of assets

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

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

In an interest rate swap, a bank whose liabilities are ____ rate sensitive than its assets can swap payments with a ____ interest rate in exchange for payments with a ____ interest rate.

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

Other things being equal, assets with shorter maturities have durations. Assets that generate more frequent coupon payments have durations.

Banks generally loans and their purchases of low-risk securities when the economy is weak.

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

In an interest rate swap, a bank whose liabilities are rate sensitive than its assets can swap payments with a interest rate in exchange for payments with a interest rate.