Question 1

If DA > kDL,then falling interest rates will cause the market value of equity to rise.

Accepted Answer

A) True 
 B)False

Question 2

If a bank wishes to have a positive balance sheet repricing gap and a negative balance sheet duration gap,then the bank should predominantly have short-term rate-sensitive assets funded by long-term fixed-rate liabilities.

Accepted Answer

A) True 
 B)False

Question 3

A thrift has an annual CGAP of -$25 million. A credit union has an annual CGAP of +$5 million. The thrift has total assets of $500 million and net income of $7.5 million,and the credit union has total assets of $40 million and net income of $0.7 million.

Accepted Answer

Calculate each institution's CGAP as a p

Question 4

A bank has a positive repricing gap. This implies that

Accepted Answer

A) some RSAs are financed by fixed-rate liabilities. 
B) some RSLs are financing fixed-rate assets. 
C) some RSAs are financing equity. 
D) the bank has no fixed-rate assets. 
A) some RSAs are financed by fixed-rate liabilities. 
B) some RSLs are financing fixed-rate assets. 
C) some RSAs are financing equity. 
D) the bank has no fixed-rate assets.

Question 5

The "runoff" of fixed income contracts is itself rate-sensitive.

Accepted Answer

A) True 
 B)False

Question 6

Explain how an FI's capital protects against credit risk and interest rate risk.

Accepted Answer

Credit risk: Equity is written down when

Question 7

A bank has the following balance sheet:   If the spread effect is zero and all interest rates decline 50 basis points,the bank's NII will change by ________________ over the year.

Accepted Answer

A) $0 
B) $400,000 
C) -$400,000 
D) $700,000 
E) -$700,000 
A) $0 
B) $400,000 
C) -$400,000 
D) $700,000 
E) -$700,000

Question 8

A bank has a negative repricing gap and estimates that the spread between RSAs and RSLs will move inversely with interest rates. If interest rates increase,NII will

Accepted Answer

A) rise. 
B) fall. 
C) be unchanged. 
D) rise or fall depending on the size of the spread effect relative to the size of the CGAP effect. 
A) rise. 
B) fall. 
C) be unchanged. 
D) rise or fall depending on the size of the spread effect relative to the size of the CGAP effect.

Question 9

Explain how interest rate risk could change at banks,thrifts,and other institutions that originate and sell fixed-rate mortgages but are funded with deposits if these institutions lose the ability to securitize and sell mortgages. What could be the effect on the economy?

Accepted Answer

Banks,thrifts,and other institutions tha

Question 10

The effect of an interest rate change on the market value of an FI's equity is a function of three things. What are they and how do they affect the equity value change?

Accepted Answer

*The Duration gap (D_A - k D_L). The larger

Question 11

In a bank's three-month maturity bucket,a 30-year ARM with a rate reset in six months would be considered a fixed-rate asset,but in its one-year maturity bucket,this ARM would be considered a rate-sensitive asset.

Accepted Answer

A) True 
 B)False

Question 12

A bank has an average asset duration of 2.25 years,the average duration of the liabilities is 1.25 years,and the bank has total assets of $2 billion and $200 million in equity. The bank has an ROE of 9.00 percent. If all interest rates decrease 50 basis points,the predicted change in the bank's market value of equity is ___________.

Accepted Answer

A) -2.85 percent 
B) -3.55 percent 
C) 3.55 percent 
D) 2.85 percent 
E) 5.16 percent 
A) -2.85 percent 
B) -3.55 percent 
C) 3.55 percent 
D) 2.85 percent 
E) 5.16 percent

Question 13

In each of the following cases indicate whether the change in profits due to the spread effect was (i)greater than (ii)less than,or (iii)equal to the change in profitability due to the repricing GAP. In some cases you may not be able to tell; indicate which ones.

Accepted Answer

@#IMG-DLM& ∆ spread
(A)Can't t

Question 14

For a nine-month maturity bucket,the bank has _________________ in fixed-rate assets and _________________ in fixed-rate liabilities.

Accepted Answer

A) $425; $285 
B) $285; $425 
C) $285; $359 
D) $359; $285 
E) $250; $66 
A) $425; $285 
B) $285; $425 
C) $285; $359 
D) $359; $285 
E) $250; $66

Question 15

A bank has a positive repricing gap and estimates that the spread between RSAs and RSLs will move directly with interest rates. If interest rates fall,the bank's overall NII will

Accepted Answer

A) rise. 
B) fall. 
C) be unchanged. 
D) rise or fall depending on the size of the spread effect relative to the size of the CGAP effect. 
A) rise. 
B) fall. 
C) be unchanged. 
D) rise or fall depending on the size of the spread effect relative to the size of the CGAP effect.

Question 16

The structure of a bank's balance sheet as evidenced by its repricing gap and its duration gap affects a bank's sensitivity to interest rate changes. Which one of the following statements about the two types of gaps is true?

Accepted Answer

A) The repricing gap immunizes the present value of all future cash flows,whereas managing the duration gap can stabilize future cash flows,but not their present value. 
B) The duration gap considers all cash flows up to and including maturity,whereas the repricing gap really only considers how cash flows will change within the maturity bucket. 
C) If a bank could only manage one type of gap,the bank would limit its interest rate risk the most by managing its repricing gap instead of its duration gap. 
D) The repricing gap is superior to the duration gap since the repricing gap has a well-defined maturity bucket. 
E) It is virtually impossible for an institution to have both a positive duration gap and a negative repricing gap at the same time. 
A) The repricing gap immunizes the present value of all future cash flows,whereas managing the duration gap can stabilize future cash flows,but not their present value. 
B) The duration gap considers all cash flows up to and including maturity,whereas the repricing gap really only considers how cash flows will change within the maturity bucket. 
C) If a bank could only manage one type of gap,the bank would limit its interest rate risk the most by managing its repricing gap instead of its duration gap. 
D) The repricing gap is superior to the duration gap since the repricing gap has a well-defined maturity bucket. 
E) It is virtually impossible for an institution to have both a positive duration gap and a negative repricing gap at the same time.

Question 17

A bank has a negative repricing gap using a six-month maturity bucket. Which one of the following statements is most correct if MMDAs are rate-sensitive liabilities?

Accepted Answer

A) If all interest rates are projected to increase,to limit a profit decline when this occurs,the bank could encourage its retail deposit customers to switch from two-year CDs at current rates to three-month CDs. 
B) If all interest rates are projected to decrease,to limit a profit decline when this occurs,the bank could encourage its retail deposit customers to switch from MMDAs to two-year CDs at current rates. 
C) If all interest rates are projected to decrease,to limit a profit decline when this occurs,the bank could encourage its retail deposit customers to switch from three-month CDs to two-year CDs at current rates. 
D) If all interest rates are projected to increase,to limit a profit decline when this occurs,the bank could encourage its retail deposit customers to switch from two-year CDs at current rates to MMDAs. 
E) If all interest rates are projected to increase,to limit a profit decline when this occurs,the bank could encourage its retail deposit customers to switch from MMDAs to two-year CDs at current rates. 
A) If all interest rates are projected to increase,to limit a profit decline when this occurs,the bank could encourage its retail deposit customers to switch from two-year CDs at current rates to three-month CDs. 
B) If all interest rates are projected to decrease,to limit a profit decline when this occurs,the bank could encourage its retail deposit customers to switch from MMDAs to two-year CDs at current rates. 
C) If all interest rates are projected to decrease,to limit a profit decline when this occurs,the bank could encourage its retail deposit customers to switch from three-month CDs to two-year CDs at current rates. 
D) If all interest rates are projected to increase,to limit a profit decline when this occurs,the bank could encourage its retail deposit customers to switch from two-year CDs at current rates to MMDAs. 
E) If all interest rates are projected to increase,to limit a profit decline when this occurs,the bank could encourage its retail deposit customers to switch from MMDAs to two-year CDs at current rates.

Question 18

A thrift has an annual CGAP of -$25 million. A credit union has an annual CGAP of +$5 million. The thrift has total assets of $500 million and net income of $7.5 million,and the credit union has total assets of $40 million and net income of $0.7 million. Assuming a zero spread effect,if all interest rates decrease 50 basis points,what is the change in NII for the thrift?
 For the credit union?

Accepted Answer

Thrift: ∆NII = -$25 million x

Question 19

Due to convexity problems,banks are actually better off using the simpler repricing model to manage interest rate risk rather than the duration model.

Accepted Answer

A) True 
 B)False

Question 20

After interest rate and yield curve changes,a bank's market value of assets increased $4 million and the market value of its liabilities fell $6 million. The book value of equity _____________ and the market value of equity ____________.

Accepted Answer

A) increased $2 million; was unchanged 
B) fell $2 million; was unchanged 
C) was unchanged; fell $2 million 
D) was unchanged; fell $10 million 
E) was unchanged; increased $10 million 
A) increased $2 million; was unchanged 
B) fell $2 million; was unchanged 
C) was unchanged; fell $2 million 
D) was unchanged; fell $10 million 
E) was unchanged; increased $10 million

Exam 22: Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

If DA > kDL,then falling interest rates will cause the market value of equity to rise.

If a bank wishes to have a positive balance sheet repricing gap and a negative balance sheet duration gap,then the bank should predominantly have short-term rate-sensitive assets funded by long-term fixed-rate liabilities.

A thrift has an annual CGAP of -$25 million. A credit union has an annual CGAP of +$5 million. The thrift has total assets of $500 million and net income of $7.5 million,and the credit union has total assets of $40 million and net income of $0.7 million.

A bank has a positive repricing gap. This implies that

The "runoff" of fixed income contracts is itself rate-sensitive.

Explain how an FI's capital protects against credit risk and interest rate risk.

A bank has the following balance sheet: If the spread effect is zero and all interest rates decline 50 basis points,the bank's NII will change by ________________ over the year.

A bank has a negative repricing gap and estimates that the spread between RSAs and RSLs will move inversely with interest rates. If interest rates increase,NII will

Explain how interest rate risk could change at banks,thrifts,and other institutions that originate and sell fixed-rate mortgages but are funded with deposits if these institutions lose the ability to securitize and sell mortgages. What could be the effect on the economy?

The effect of an interest rate change on the market value of an FI's equity is a function of three things. What are they and how do they affect the equity value change?

In a bank's three-month maturity bucket,a 30-year ARM with a rate reset in six months would be considered a fixed-rate asset,but in its one-year maturity bucket,this ARM would be considered a rate-sensitive asset.

In each of the following cases indicate whether the change in profits due to the spread effect was (i)greater than (ii)less than,or (iii)equal to the change in profitability due to the repricing GAP. In some cases you may not be able to tell; indicate which ones.

For a nine-month maturity bucket,the bank has _________________ in fixed-rate assets and _________________ in fixed-rate liabilities.

A bank has a positive repricing gap and estimates that the spread between RSAs and RSLs will move directly with interest rates. If interest rates fall,the bank's overall NII will

The structure of a bank's balance sheet as evidenced by its repricing gap and its duration gap affects a bank's sensitivity to interest rate changes. Which one of the following statements about the two types of gaps is true?

A bank has a negative repricing gap using a six-month maturity bucket. Which one of the following statements is most correct if MMDAs are rate-sensitive liabilities?

Due to convexity problems,banks are actually better off using the simpler repricing model to manage interest rate risk rather than the duration model.

After interest rate and yield curve changes,a bank's market value of assets increased $4 million and the market value of its liabilities fell $6 million. The book value of equity _____________ and the market value of equity ____________.

Introduction

Determinants of Interest Rates

Interest Rates and Security Valuation

The Federal Reserve System, Monetary Policy, and Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Stock Markets

Foreign Exchange Markets

Derivative Securities Markets

Commercial Banks: Industry Overview

Commercial Banks Financial Statements and Analysis

Regulation of Commercial Banks

Other Lending Institutions: Savings Institutions, Credit Unions, and Finance Companies

Insurance Companies

Securities Firms and Investment Banks

Investment Companies

Pension Funds

Types of Risks Incurred by Financial Institutions

Managing Credit Risk on the Balance Sheet

Managing Liquidity Risk on the Balance Sheet

Managing Risk Off the Balance Sheet With Derivative Securities

Managing Risk Off the Balance Sheet With Loan Sales and Securitization

Filters

If D_A > kD_L,then falling interest rates will cause the market value of equity to rise.

For a nine-month maturity bucket,the bank has _ in fixed-rate assets and _ in fixed-rate liabilities.

After interest rate and yield curve changes,a bank's market value of assets increased $4 million and the market value of its liabilities fell $6 million. The book value of equity _ and the market value of equity .