Exam 8: Interest Rate Risk I

If the interest rate spread between rate sensitive-assets and rate sensitive liabilities increases for a bank,future increases in interest rates will lead to an increase in net interest income.

Because of its simplicity,smaller depository institutions still use this model as their primary measure of interest rate risk.

If an FI's repricing gap is less than zero,then

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually. -What is the impact on the FI's equity of a 2 percent overall increase in market interest rates on all fixed-rate instruments?

The following is the balance sheet of Boston Bank. The average maturity of demand deposits is estimated at 2 years. -What is the repricing gap if a 3-year maturity gap is used? Ignore runoffs.

A positive repricing gap implies that a decrease in interest rates will cause interest expense to decrease more than the decrease in interest income.

The market segmentation theory of the term structure of interest rates

The balance sheet of XYZ Bank appears below. All figures in millions of U.S. dollars. -Total one-year rate-sensitive assets is

Large banks have adopted interest rate risk measurement models based on market value accounting and duration.

The balance sheet of XYZ Bank appears below. All figures in millions of U.S. dollars. -Suppose that interest rates rise by 2 percent on both RSAs and RSLs.The expected annual change in net interest income of the bank is

The repricing model is based on an accounting world that reports asset and liability values at

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually. -What is the weighted average maturity of assets?

The economic insolvency of many thrift institutions during the 1980s was due,at least in part,to unexpected increases in interest rates.

Because the repricing model ignores the market value effect of changing interest rates,the repricing gap is an incomplete measure of the true interest rate risk exposure of an FI.

Which theory of term structure argues that individual investors have specific maturity preferences?

When interest rates increase,banks are more likely to be forced to increase rate-sensitive liabilities to replace decreased balances in demand deposits and savings accounts.

Because the increased level of financial market integration has increased the speed with which interest rate changes are transmitted among countries,control of U.S.interest rates by the Federal Reserve is more difficult and less certain.

The yield curve

The spread effect demonstrates that,regardless of the direction of a change in market interest rates,a positive relation exists between the changes in spread and changes in net interest income.

Which theory of term structure posits that long-term rates are a geometric average of current and expected short-term interest rates?