Question 1

The following are the assets and liabilities of a government security dealer.
 
-Use the repricing model to determine the funding gap for a maturity bucket of 91 days.

Accepted Answer

A) -$60 million. 
B) -$150 million. 
C) $0. 
D) -$250 million. 
A) -$60 million. 
B) -$150 million. 
C) $0. 
D) -$250 million.

Question 2

Which of the following is a weakness of the repricing model to measure interest rate risk?

Accepted Answer

A) Potential for overaggregation of assets and liabilities within each maturity bucket. 
B) It ignores how changes in interest rates affect the market value of assets and liabilities. 
C) It ignores the reinvestment of loan interest and principal payments that are reinvested at current market rates. 
D) It fails to recognize off-balance-sheet activities that may be rate-sensitive. 
E) All of the options. 
A) Potential for overaggregation of assets and liabilities within each maturity bucket. 
B) It ignores how changes in interest rates affect the market value of assets and liabilities. 
C) It ignores the reinvestment of loan interest and principal payments that are reinvested at current market rates. 
D) It fails to recognize off-balance-sheet activities that may be rate-sensitive. 
E) All of the options.

Question 3

Which of the following statements is true?

Accepted Answer

A) An increase in interest rates will benefit the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities. 
B) An increase in interest rates will harm the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities. 
C) An increase in interest rates will harm the FI since the decrease in the market value of assets will be greater than the decrease in the market value of liabilities. 
D) A decrease in interest rates will harm the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities. 
A) An increase in interest rates will benefit the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities. 
B) An increase in interest rates will harm the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities. 
C) An increase in interest rates will harm the FI since the decrease in the market value of assets will be greater than the decrease in the market value of liabilities. 
D) A decrease in interest rates will harm the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities.

Question 4

An assumption of the repricing model is that interest rate changes will equally affect rate-sensitive assets and rate-sensitive liabilities.

Accepted Answer

A) True 
 B)False

Question 5

All FIs tend to mismatch the maturities of their assets and liabilities to some extent.

Accepted Answer

A) True 
 B)False

Question 6

In general,the interest rate spread (spread effect)between rate-sensitive assets and rate sensitive liabilities is positively related to the change in net interest income.

Accepted Answer

A) True 
 B)False

Question 7

The unbiased expectations theory of the term structure of interest rates

Accepted Answer

A) assumes that long-term interest rates are an arithmetic average of short-term rates. 
B) assumes that the yield curve reflects the market's current expectations of future short-term interest rates. 
C) recognizes that forward rates are perfect predictors of future interest rates. 
D) assumes that risk premiums increase uniformly with maturity. 
A) assumes that long-term interest rates are an arithmetic average of short-term rates. 
B) assumes that the yield curve reflects the market's current expectations of future short-term interest rates. 
C) recognizes that forward rates are perfect predictors of future interest rates. 
D) assumes that risk premiums increase uniformly with maturity.

Question 8

The cumulative repricing gap position of an FI for a given extended time period is the sum of the repricing gap values for the individual time periods that make up the extended time period.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following describes the condition known as runoff in the repricing model approach to measuring interest rate risk of an FI?

Accepted Answer

A) Periodic cash flow of interest and principal amortization payments on long-term assets that can be reinvested at market rates. 
B) The effect that a change in the spread between rates on RSAs and RSLs has on net interest income as interest rates change. 
C) Mismatch of asset and liabilities within a maturity bucket. 
D) The relations between changes in interest rates and changes in net interest income. 
A) Periodic cash flow of interest and principal amortization payments on long-term assets that can be reinvested at market rates. 
B) The effect that a change in the spread between rates on RSAs and RSLs has on net interest income as interest rates change. 
C) Mismatch of asset and liabilities within a maturity bucket. 
D) The relations between changes in interest rates and changes in net interest income.

Question 10

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually.
 
-What is market value of the ten-year loan if all market interest rates increase by 2 percent?

Accepted Answer

A) $40.000 million. 
B) $44.916 million. 
C) $37.830 million. 
D) $42.356 million. 
E) $35.827 million. 
A) $40.000 million. 
B) $44.916 million. 
C) $37.830 million. 
D) $42.356 million. 
E) $35.827 million.

Question 11

Which of the following observations about the repricing model is correct?

Accepted Answer

A) Its information value is limited. 
B) It accounts for the problem of rate-insensitive asset and liability runoffs and prepayments. 
C) It accommodates cash flows from off-balance-sheet activities. 
D) It helps to determine an FI's profit exposure to interest rate changes. 
A) Its information value is limited. 
B) It accounts for the problem of rate-insensitive asset and liability runoffs and prepayments. 
C) It accommodates cash flows from off-balance-sheet activities. 
D) It helps to determine an FI's profit exposure to interest rate changes.

Question 12

The net worth of a bank is the difference between the

Accepted Answer

A) value of retained earnings and the provision for loan losses. 
B) market value of assets and the market value of liabilities. 
C) book value of assets and book value of liabilities. 
D) rate-sensitive assets and rate-sensitive liabilities. 
A) value of retained earnings and the provision for loan losses. 
B) market value of assets and the market value of liabilities. 
C) book value of assets and book value of liabilities. 
D) rate-sensitive assets and rate-sensitive liabilities.

Question 13

Defining buckets of time over wider intervals creates greater accuracy in the use of the repricing model because fewer calculations are required.

Accepted Answer

A) True 
 B)False

Question 14

The change in economic value of a fixed-rate liability for a decrease in interest rates is considered to be good news.

Accepted Answer

A) True 
 B)False

Question 15

What is the effect on the value of the FI's equity if interest rates decrease by 1 percent?

Accepted Answer

A) Gain of $0.697 million. 
B) Gain of $0.338 million. 
C) Loss of $1.622 million. 
D) No change in equity. 
E) Loss of $0.605 million. 
A) Gain of $0.697 million. 
B) Gain of $0.338 million. 
C) Loss of $1.622 million. 
D) No change in equity. 
E) Loss of $0.605 million.

Question 16

Which of the following statements is true?

Accepted Answer

A) An increase in interest rates leads to an increase in the market value of financial securities. 
B) Value of longer term securities decreases at a diminishing rate for increases in interest rates. 
C) Value of longer term securities increases at an increasing rate for any decline in interest rates. 
D) The shorter the maturity of a fixed income asset or liability,the greater the fall in market value for any given interest rate increase. 
A) An increase in interest rates leads to an increase in the market value of financial securities. 
B) Value of longer term securities decreases at a diminishing rate for increases in interest rates. 
C) Value of longer term securities increases at an increasing rate for any decline in interest rates. 
D) The shorter the maturity of a fixed income asset or liability,the greater the fall in market value for any given interest rate increase.

Question 17

The repricing gap approach calculates the gaps in each maturity bucket by subtracting the

Accepted Answer

A) current assets from the current liabilities. 
B) long term liabilities from the fixed assets. 
C) rate-sensitive assets from the total assets. 
D) rate-sensitive liabilities from the rate-sensitive assets. 
A) current assets from the current liabilities. 
B) long term liabilities from the fixed assets. 
C) rate-sensitive assets from the total assets. 
D) rate-sensitive liabilities from the rate-sensitive assets.

Question 18

When a bank's repricing gap is positive,net interest income is positively related to changes in interest rates.

Accepted Answer

A) True 
 B)False

Question 19

The maturity gap for a bank is the weighted average maturity of the assets minus the weighted average maturity of the liabilities.

Accepted Answer

A) True 
 B)False

Question 20

The following information is from First Yaupon Savings Association.  
-What is the repricing gap over the 1-year maturity bucket?

Accepted Answer

A) +$100 million. 
B) -$500 million. 
C) -$100 million. 
D) +$500 million. 
A) +$100 million. 
B) -$500 million. 
C) -$100 million. 
D) +$500 million.

Exam 8: Interest Rate Risk I

The following are the assets and liabilities of a government security dealer. -Use the repricing model to determine the funding gap for a maturity bucket of 91 days.

Which of the following is a weakness of the repricing model to measure interest rate risk?

Which of the following statements is true?

An assumption of the repricing model is that interest rate changes will equally affect rate-sensitive assets and rate-sensitive liabilities.

All FIs tend to mismatch the maturities of their assets and liabilities to some extent.

In general,the interest rate spread (spread effect)between rate-sensitive assets and rate sensitive liabilities is positively related to the change in net interest income.

The unbiased expectations theory of the term structure of interest rates

The cumulative repricing gap position of an FI for a given extended time period is the sum of the repricing gap values for the individual time periods that make up the extended time period.

Which of the following describes the condition known as runoff in the repricing model approach to measuring interest rate risk of an FI?

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually. -What is market value of the ten-year loan if all market interest rates increase by 2 percent?

Which of the following observations about the repricing model is correct?

The net worth of a bank is the difference between the

Defining buckets of time over wider intervals creates greater accuracy in the use of the repricing model because fewer calculations are required.

The change in economic value of a fixed-rate liability for a decrease in interest rates is considered to be good news.

What is the effect on the value of the FI's equity if interest rates decrease by 1 percent?

Which of the following statements is true?

The repricing gap approach calculates the gaps in each maturity bucket by subtracting the

When a bank's repricing gap is positive,net interest income is positively related to changes in interest rates.

The maturity gap for a bank is the weighted average maturity of the assets minus the weighted average maturity of the liabilities.

The following information is from First Yaupon Savings Association. -What is the repricing gap over the 1-year maturity bucket?

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Firms and Investment Banks

Financial Services: Mutual Fund and Hedge Fund Companies

Financial Services: Insurance Companies

Risks of Financial Institutions

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

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