Question 1

What is duration gap analysis and why is it important to a bank?

Accepted Answer

Duration gap analysis is a financial ass

Question 2

Banks' attempts to solve adverse selection and moral hazard problems help explain loan management principles such as

Accepted Answer

A)  screening and monitoring of loan applicants. 
B)  collateral and compensating balances. 
C)  credit rationing. 
D)  all of the above. 
E)  only A and B of the above. 
A)  screening and monitoring of loan applicants. 
B)  collateral and compensating balances. 
C)  credit rationing. 
D)  all of the above. 
E)  only A and B of the above.

Question 3

What steps do banks take to reduce their exposure to credit risk?

Accepted Answer

Steps Taken by banks to reduce exposure

Question 4

Table 23.2
First National Bank
  
-Referring to Table 23.2,First National Bank has a gap of ________.

Accepted Answer

A)  -10 
B)  10 
C)  20 
D)  0 
A)  -10 
B)  10 
C)  20 
D)  0

Question 5

Income gap analysis and duration gap analysis are basically the same thing,so hedging against one gap automatically hedges against the other.

Accepted Answer

A) True 
 B)False

Question 6

How do the concepts of adverse selection and moral hazard explain the credit risk management principles that banks adopt?

Accepted Answer

Concepts of adverse selection and moral

Question 7

Discuss some of the problems in using income gap and duration gap analysis to manage interest rate risk in a financial institution.

Accepted Answer

Income gap and duration gap analysis are

Question 8

What is the difference between credit risk and interest-rate risk?

Accepted Answer

Credit risk is the risk that arise when

Question 9

Effective screening and information collection together form an important principle of credit risk management.

Accepted Answer

A) True 
 B)False

Question 10

Developing and maintaining long-term customer relationships help to reduce banks' costs of screening and monitoring borrowers.

Accepted Answer

A) True 
 B)False

Question 11

From the standpoint of ________,specialization in lending is surprising but makes perfect sense when one considers the ________ problem.

Accepted Answer

A)  moral hazard; diversification 
B)  diversification; moral hazard 
C)  adverse selection; diversification 
D)  diversification; adverse selection 
A)  moral hazard; diversification 
B)  diversification; moral hazard 
C)  adverse selection; diversification 
D)  diversification; adverse selection

Question 12

A bank that wants to monitor the check payment practices of its commercial borrowers,so that moral hazard can be prevented,will require borrowers to

Accepted Answer

A)  place a bank officer on their board of directors. 
B)  place a corporate officer on the bank's board of directors. 
C)  keep compensating balances in a checking account at the bank. 
D)  do all of the above. 
E)  do only A and B of the above. 
A)  place a bank officer on their board of directors. 
B)  place a corporate officer on the bank's board of directors. 
C)  keep compensating balances in a checking account at the bank. 
D)  do all of the above. 
E)  do only A and B of the above.

Question 13

A bank manager concerned about interest income who expects interest rates to rise and who knows the bank currently has a positive gap should ________ rate-sensitive assets and ________ rate-sensitive liabilities.

Accepted Answer

A)  increase; increase 
B)  decrease; increase 
C)  decrease; decrease 
D)  increase; decrease 
A)  increase; increase 
B)  decrease; increase 
C)  decrease; decrease 
D)  increase; decrease

Question 14

Lines of credit and long-term relationships between banks and their customers

Accepted Answer

A)  reduce the costs of information collection. 
B)  make it easier for banks to screen good risks from bad. 
C)  enable banks to deal with moral hazard contingencies that are neither anticipated nor specified in restrictive covenants. 
D)  do all of the above. 
E)  do only A and B of the above. 
A)  reduce the costs of information collection. 
B)  make it easier for banks to screen good risks from bad. 
C)  enable banks to deal with moral hazard contingencies that are neither anticipated nor specified in restrictive covenants. 
D)  do all of the above. 
E)  do only A and B of the above.

Question 15

The difference between rate-sensitive liabilities and rate-sensitive assets is known as the duration gap.

Accepted Answer

A) True 
 B)False

Question 16

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is called ________.

Accepted Answer

A)  basic duration analysis 
B)  basic gap analysis 
C)  interest-exposure analysis 
D)  gap-exposure analysis 
A)  basic duration analysis 
B)  basic gap analysis 
C)  interest-exposure analysis 
D)  gap-exposure analysis

Question 17

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals by the change in the interest rate is called duration analysis.

Accepted Answer

A) True 
 B)False

Question 18

If a bank has ________ rate-sensitive assets than rate-sensitive liabilities,then a(n)________ in interest rates will increase bank profits.

Accepted Answer

A)  more; decline 
B)  more; increase 
C)  less; increase 
D)  both A and C 
A)  more; decline 
B)  more; increase 
C)  less; increase 
D)  both A and C

Question 19

Compensating balances

Accepted Answer

A)  are a particular form of collateral commonly required on commercial loans. 
B)  are a required minimum amount of funds that a borrower (i.e., a firm receiving a loan) must keep in a checking account at the bank. 
C)  allow banks to monitor firms' check payment practices, which can yield information about their borrowers' financial conditions. 
D)  are all of the above. 
A)  are a particular form of collateral commonly required on commercial loans. 
B)  are a required minimum amount of funds that a borrower (i.e., a firm receiving a loan) must keep in a checking account at the bank. 
C)  allow banks to monitor firms' check payment practices, which can yield information about their borrowers' financial conditions. 
D)  are all of the above.

Question 20

Table 23.2
First National Bank
  
-Referring to Table 23.2,if interest rates rise by 5 percentage points,then bank profits (measured using gap analysis)will

Accepted Answer

A)  decline by $0.5 million. 
B)  decline by $1.5 million. 
C)  decline by $2.5 million. 
D)  increase by $2.0 million. 
A)  decline by $0.5 million. 
B)  decline by $1.5 million. 
C)  decline by $2.5 million. 
D)  increase by $2.0 million.

Exam 23: Risk Management in Financial Institutions

What is duration gap analysis and why is it important to a bank?

Banks' attempts to solve adverse selection and moral hazard problems help explain loan management principles such as

What steps do banks take to reduce their exposure to credit risk?

Table 23.2 First National Bank -Referring to Table 23.2,First National Bank has a gap of ________.

Income gap analysis and duration gap analysis are basically the same thing,so hedging against one gap automatically hedges against the other.

How do the concepts of adverse selection and moral hazard explain the credit risk management principles that banks adopt?

Discuss some of the problems in using income gap and duration gap analysis to manage interest rate risk in a financial institution.

What is the difference between credit risk and interest-rate risk?

Effective screening and information collection together form an important principle of credit risk management.

Developing and maintaining long-term customer relationships help to reduce banks' costs of screening and monitoring borrowers.

From the standpoint of ________,specialization in lending is surprising but makes perfect sense when one considers the ________ problem.

A bank that wants to monitor the check payment practices of its commercial borrowers,so that moral hazard can be prevented,will require borrowers to

A bank manager concerned about interest income who expects interest rates to rise and who knows the bank currently has a positive gap should ________ rate-sensitive assets and ________ rate-sensitive liabilities.

Lines of credit and long-term relationships between banks and their customers

The difference between rate-sensitive liabilities and rate-sensitive assets is known as the duration gap.

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is called ________.

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals by the change in the interest rate is called duration analysis.

If a bank has ________ rate-sensitive assets than rate-sensitive liabilities,then a(n)________ in interest rates will increase bank profits.

Compensating balances

Table 23.2 First National Bank -Referring to Table 23.2,if interest rates rise by 5 percentage points,then bank profits (measured using gap analysis)will

Why Study Financial Markets and Institutions?

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation?

Why Do Interest Rates Change?

How Do Risk and Term Structure Affect Interest Rates?

Are Financial Markets Efficient?

Why Do Financial Institutions Exist?

Why Do Financial Crises Occur and

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Hedging with Financial Derivatives

Financial Crises In Emerging Market Economies

Savings Associations and Credit Unions

Finance Companies

Filters

From the standpoint of ,specialization in lending is surprising but makes perfect sense when one considers the problem.

A bank manager concerned about interest income who expects interest rates to rise and who knows the bank currently has a positive gap should rate-sensitive assets and rate-sensitive liabilities.

If a bank has rate-sensitive assets than rate-sensitive liabilities,then a(n) in interest rates will increase bank profits.