Exam 23: Risk Management in Financial Institutions

One problem with duration gap analysis is that it

Liabilities that are partially,but not fully,rate-sensitive include ________.

Banks face the problem of ________ in loan markets because bad credit risks are the ones most likely to seek bank loans.

Banks face the problem of adverse selection in loan markets because bad credit risks are the ones most likely to seek bank loans.

If a bank has a duration gap of 2 years,then a fall in interest rates from 6 percent to 3 percent will lead to

Duration gap analysis

In one sense,________ appears surprising since it means that the bank is not ________ its portfolio of loans and thus is exposing itself to more risk.

To use the concept of duration to analyze the effect of changes in interest rates on the market value of an asset,a bank manager would multiply

If borrowers with the most risky investment projects are more likely to seek bank loans than borrowers with the safest investment projects,banks face the problem of ________.

When banks offer borrowers smaller loans than they have requested,banks are said to ________.

Table 23.2 First National Bank -Refer to Table 23.2.Assuming that the average duration of the bank's assets is four years,while the average duration of its liabilities is three years,a rise in interest rates from 5 percent to 10 percent will cause the net worth of First National to ________ by ________ of the total original asset value.

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

Credit rationing occurs when a bank

Table 23.1 First National Bank -Refer to Table 23.1.Assuming that the average duration of its assets is five years,while the average duration of its liabilities is three years,a rise in interest rates from 5% to 10% will cause the net worth of First National to ________ by ________ of the total original asset value.

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

If First National Bank has a gap equal to a negative $30 million,then a 5 percentage point increase in interest rates will cause profits to

Because larger loans create greater incentives for borrowers to engage in undesirable activities that make it less likely they will repay the loans,banks

Banks attempt to screen good credit risks from bad to reduce the incidence of loan defaults.To do this,banks

What special assumptions do income and duration gap analyses make about interest rate changes and the yield curve?

One problem with basic gap analysis is that it