\[\begin{array} { | l | r | r | l | r | c | } \hline \text { Assets } & \begin{array} { l } \text { Amount } \\ \text { (\$ millions) } \end{array} & \begin{array} { l } \text { Annual } \\ \text { Rate } \end{array} & \text { Liabilities } & \begin{array} { l } \text { Amount } \\ \text { (\$ millions) } \end{array} & \begin{array} { l } \text { Annual } \\ \text { Rate } \end{array} \\ \hline \text { 2-year loans } & \$ 40 & 8 \% & \text { 3-year CD } & \$ 60 & 7 \% \\ \hline \text { 3-year loans } & \$ 60 & 8 \% & \text { 5-year term deposit } & \$ 30 & 6 \% \\ \hline & & & \text { Equity } & \$ 10 & \\ \hline \text { Total } & \$ 100 & & \text { Total } & \$ 100 & \\ \hline \end{array}\] -What is the weighted average maturity of the assets of the FI?

A) 2.0 years. B) 2.3 years. C) 2.5 years. D) 2.6 years. E) 3.0 years. A) 2.0 years. B) 2.3 years. C) 2.5 years. D) 2.6 years. E) 3.0 years. D

\[\begin{array} { | l | r | l | l | r | l | } \hline \text { Assets } & \begin{array} { l } \text { Amount } \\ \text { (\$ millions) } \end{array} & \begin{array} { l } \text { Annual } \\ \text { Rate } \end{array} & \text { Liabilities } & \begin{array} { l } \text { Amount } \\ \text { (\$ millions) } \end{array} & \begin{array} { l } \text { Annual } \\ \text { Rate } \end{array} \\ \hline \text { 1-year bonds } & \$ 60 & 7 \% & \text { 1-year CD } & \$ 50 & 5 \% \\ \hline \text { 10-year loan } & \$ 40 & 12 \% & \text { 2-year CD } & \$ 40 & 6 \% \\ \hline & & & \text { Equity } & \$ 10 & \\ \hline \text { Total } & \$ 100 & & \text { Total } & \$ 100 & \\ \hline \end{array}\] -What is the weighted average maturity of assets?

A) 5.50 years. B) 6.40 years. C) 5.00 years. D) 4.60 years. E) 10.0 years. A) 5.50 years. B) 6.40 years. C) 5.00 years. D) 4.60 years. E) 10.0 years.

Exam 8: Interest Rate Risk I

Assets Amount (\ millions) Annual Rate Liabilities Amount (\ millions) Annual Rate 2-year loans \ 40 8\% 3-year CD \ 60 7\% 3-year loans \ 60 8\% 5-year term deposit \ 30 6\% Equity \ 10 Total \ 100 Total \ 100 -What is the weighted average maturity of the assets of the FI?

Free

(Multiple Choice)

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Question 1

Correct Answer:

Verified

D

Can the FI immunize itself from interest rate risk exposure by setting the maturity gap equal to zero?

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(Multiple Choice)

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Question 2

Correct Answer:

Verified

C

An increase in interest rates

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(Multiple Choice)

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Question 3

Correct Answer:

Verified

B

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.

(True/False)

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Question 4

If interest rates decrease 50 basis points for an FI that has a gap of +$5 million, the expected change in net interest income is

(Multiple Choice)

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Question 5

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.

(True/False)

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Question 6

If interest rates increase 75 basis points for an FI that has a gap of -$15 million, the expected change in net interest income is

(Multiple Choice)

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Question 7

For a given change in interest rates, fixed-rate liabilities with longer-term maturities will have smaller changes in price than liabilities with shorter maturities.

(True/False)

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Question 8

If the average maturity of assets is 4 years and the average maturity of liabilities is 4 years, then the FI has no interest rate risk exposure.

(True/False)

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Question 9

The following information details the current rate sensitivity report for Gotbucks Bank, Inc. ($million). -How will a decrease of 25 basis points in all interest rates affect Gotbuck's net interest income over a planning period of 91 days?

(Multiple Choice)

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Question 10

A bank with a negative repricing (or funding) gap faces reinvestment risk.

(True/False)

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Question 11

Assets Amount (\ millions) Annual Rate Liabilities Amount (\ millions) Annual Rate 1-year bonds \ 60 7\% 1-year CD \ 50 5\% 10-year loan \ 40 12\% 2-year CD \ 40 6\% Equity \ 10 Total \ 100 Total \ 100 -What is the weighted average maturity of assets?

(Multiple Choice)

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Question 12

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.

(True/False)

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Question 13

The following information details the current rate sensitivity report for Gotbucks Bank, Inc. ($million). -Calculate the funding gap for Gotbucks Bank using (a) a 30 day maturity period and (b) a 91 day maturity period?

(Multiple Choice)

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Question 14

Is the bank exposed to interest rate increases or decreases and why?

(Multiple Choice)

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Question 15

In the repricing gap model, assets or liabilities are rate sensitive within a given time period if the dollar values of each are subject to receiving a different interest rate should market rates change.

(True/False)

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Question 16

The market value of a fixed-rate liability will increase as interest rates rise, although the market value of a fixed-rate asset will decrease as interest rates rise.

(True/False)

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Question 17

One reason to exclude demand deposits when estimating a bank's repricing gap is because, by regulation, explicit interest cannot be paid on these deposits.

(True/False)

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Question 18

An FI's net interest income reflects

(Multiple Choice)

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Question 19

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

(Multiple Choice)

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Question 20

Exam 8: Interest Rate Risk I

Assets Amount (\ millions) Annual Rate Liabilities Amount (\ millions) Annual Rate 2-year loans \ 40 8\% 3-year CD \ 60 7\% 3-year loans \ 60 8\% 5-year term deposit \ 30 6\% Equity \ 10 Total \ 100 Total \ 100 -What is the weighted average maturity of the assets of the FI?

Can the FI immunize itself from interest rate risk exposure by setting the maturity gap equal to zero?

An increase in interest rates

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.

If interest rates decrease 50 basis points for an FI that has a gap of +$5 million, the expected change in net interest income is

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.

If interest rates increase 75 basis points for an FI that has a gap of -$15 million, the expected change in net interest income is

For a given change in interest rates, fixed-rate liabilities with longer-term maturities will have smaller changes in price than liabilities with shorter maturities.

If the average maturity of assets is 4 years and the average maturity of liabilities is 4 years, then the FI has no interest rate risk exposure.

The following information details the current rate sensitivity report for Gotbucks Bank, Inc. ($million). -How will a decrease of 25 basis points in all interest rates affect Gotbuck's net interest income over a planning period of 91 days?

A bank with a negative repricing (or funding) gap faces reinvestment risk.

Assets Amount (\ millions) Annual Rate Liabilities Amount (\ millions) Annual Rate 1-year bonds \ 60 7\% 1-year CD \ 50 5\% 10-year loan \ 40 12\% 2-year CD \ 40 6\% Equity \ 10 Total \ 100 Total \ 100 -What is the weighted average maturity of assets?

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.

The following information details the current rate sensitivity report for Gotbucks Bank, Inc. ($million). -Calculate the funding gap for Gotbucks Bank using (a) a 30 day maturity period and (b) a 91 day maturity period?

Is the bank exposed to interest rate increases or decreases and why?

In the repricing gap model, assets or liabilities are rate sensitive within a given time period if the dollar values of each are subject to receiving a different interest rate should market rates change.

The market value of a fixed-rate liability will increase as interest rates rise, although the market value of a fixed-rate asset will decrease as interest rates rise.

One reason to exclude demand deposits when estimating a bank's repricing gap is because, by regulation, explicit interest cannot be paid on these deposits.

An FI's net interest income reflects

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

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

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

Loan Sales

Securitization

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