Question 1

The balance sheet of XYZ Bank appears below. All figures in millions of US Dollars.  
-Total one-year rate-sensitive liabilities is

Accepted Answer

A) $540 million. 
B) $580 million. 
C) $555 million. 
D) $415 million. 
E) $720 million. 
A) $540 million. 
B) $580 million. 
C) $555 million. 
D) $415 million. 
E) $720 million.

Question 2

What is the change in the value of its assets if all interest rates decrease by 1 percent?

Accepted Answer

A) Approximately $1.613 million. 
B) Approximately $2.297 million. 
C) Approximately -$1.937 million. 
D) Approximately $2.209 million. 
E) Approximately $2.524 million. 
A) Approximately $1.613 million. 
B) Approximately $2.297 million. 
C) Approximately -$1.937 million. 
D) Approximately $2.209 million. 
E) Approximately $2.524 million.

Question 3

$$\begin{array} { | l | l | l | l | l | l | } 
\hline \text { Assets } & \text { Par Amount } & \text { Rate } & \text { Liabilities } & \text { Par Amount } & \text { Rate } \
\hline \text { 2-year commercial loans } & \$ 600 \text { million } & 10 \% & \text { 1-year CDs } & \$ 900 \text { million } & 7 \% \
\hline \text { 1-year Treasury bills } & \$ 400 \text { million } & & \text { Net Worth } & \$ 100 \text { million } & \
\hline
\end{array}$$
-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. 
E) -$900 million. 
A) +$100 million. 
B) -$500 million. 
C) -$100 million. 
D) +$500 million. 
E) -$900 million.

Question 4

$$\begin{array} { | l | c | l | l | c | c | } 
\hline & \text { Face Value } & \begin{array} { l } 
\text { Runoff } \
< \mathbf { 1 } \text { year }
\end{array} & & \text { Face Value } & \begin{array} { c } 
\text { Runoff } \
< \mathbf { 1 } \text { year }
\end{array} \
\hline \text { 3-mo. T-Bills } & \$ 60 \mathrm {~m} & & \text { Demand Dep. } & \$ 180 \mathrm {~m} & 10 \text { percent } \
\hline \text { 2-yr Bonds } & \$ 60 \mathrm {~m} & 5 \text { percent } & \text { Equity } & \$ 20 \mathrm {~m} & \
\hline \text { 5-yr Bonds } & \$ 80 \mathrm {~m} & 10 \text { percent } & & & \
\hline
\end{array}$$
-What is the impact on net interest income in year two if interest rates increase by 50 basis points at the end of year one? Ignore runoffs.

Accepted Answer

A) +$0.210 million. 
B) +$0.300 million. 
C) -$0.300 million. 
D) -$0.210 million. 
E) +$0.600 million. 
A) +$0.210 million. 
B) +$0.300 million. 
C) -$0.300 million. 
D) -$0.210 million. 
E) +$0.600 million.

Question 5

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. 
E) A decrease in interest rates will benefit the FI since the increase in the market value of assets will be smaller 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. 
E) A decrease in interest rates will benefit the FI since the increase in the market value of assets will be smaller than the increase in the market value of liabilities.

Question 6

The gap ratio expresses the reprice gap for a given time period as a percentage of

Accepted Answer

A) equity. 
B) total liabilities. 
C) current liabilities. 
D) total assets. 
E) current assets. 
A) equity. 
B) total liabilities. 
C) current liabilities. 
D) total assets. 
E) current assets.

Question 7

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.

Accepted Answer

A) True 
 B)False

Question 8

$$\begin{array} { | l | c | c | l | c | c | } 
\hline \text { Assets } & \text { Amount } & \text { Rate } & \text { Liabilities } & \text { Amount } & \text { Rate } \
\hline \begin{array} { l } 
\text { Rate } \
\text { Sensitive }
\end{array} & \$ 35,000,000 & 10 \% & \begin{array} { l } 
\text { Rate } \
\text { Sensitive }
\end{array} & \$ 40,000,000 & 8 \% \
\hline \text { Fixed Rate } & \$ 21,000,000 & 9 \% & \text { Fixed Rate } & \$ 12,000,000 & 7 \% \
\hline \text { Non-earning } & \$ 4,000,000 & & \text { Equity } & \$ 8,000,000 & \
\hline
\end{array}$$
-Suppose short-term interest rates increase by 1 percent. Calculate the change in net interest income after the interest rate increase.

Accepted Answer

A) $50,000. 
B) $18,900. 
C) $40,400. 
D) $53,900. 
E) $32,000. 
A) $50,000. 
B) $18,900. 
C) $40,400. 
D) $53,900. 
E) $32,000.

Question 9

An interest rate increase

Accepted Answer

A) benefits the FI by increasing the market value of the FI's liabilities. 
B) harms the FI by increasing the market value of the FI's liabilities. 
C) harms the FI by decreasing the market value of the FI's liabilities. 
D) benefits the FI by decreasing the market value of the FI's liabilities. 
E) benefits the FI by decreasing the market value of the FI's assets. 
A) benefits the FI by increasing the market value of the FI's liabilities. 
B) harms the FI by increasing the market value of the FI's liabilities. 
C) harms the FI by decreasing the market value of the FI's liabilities. 
D) benefits the FI by decreasing the market value of the FI's liabilities. 
E) benefits the FI by decreasing the market value of the FI's assets.

Question 10

Can an FI immunize itself against interest rate risk exposure even though its maturity gap is not zero?

Accepted Answer

A) Yes, because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities. 
B) No, because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities. 
C) Yes, because the maturity model does not consider the timing of cash flows. 
D) No, because the timing of cash flows is relevant to immunization against interest rate risk exposure. 
E) No, because a representative bank will always have a positive maturity gap. 
A) Yes, because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities. 
B) No, because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities. 
C) Yes, because the maturity model does not consider the timing of cash flows. 
D) No, because the timing of cash flows is relevant to immunization against interest rate risk exposure. 
E) No, because a representative bank will always have a positive maturity gap.

Question 11

Retail passbook savings accounts should be considered as part of rate sensitive liabilities because the rates on these accounts rarely change.

Accepted Answer

A) True 
 B)False

Question 12

The repricing model measures the impact of unanticipated changes in interest rates on

Accepted Answer

A) the market value of equity. 
B) net interest income. 
C) both market value of equity and net interest income. 
D) the FI's capital position. 
E) the prices of assets and liabilities. 
A) the market value of equity. 
B) net interest income. 
C) both market value of equity and net interest income. 
D) the FI's capital position. 
E) the prices of assets and liabilities.

Question 13

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. 
E) It considers market value effects of 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. 
E) It considers market value effects of interest rate changes.

Question 14

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

Accepted Answer

A) The unbiased expectations theory. 
B) The liquidity premium theory. 
C) The loanable funds theory. 
D) The market segmentation theory. 
E) None of the above. 
A) The unbiased expectations theory. 
B) The liquidity premium theory. 
C) The loanable funds theory. 
D) The market segmentation theory. 
E) None of the above.

Question 15

The market segmentation theory of the term structure of interest rates

Accepted Answer

A) assumes that investors will hold long-term maturity assets if there is a sufficient premium to compensate for the uncertainty of the long-term. 
B) assumes that the yield curve reflects the market's current expectations of future short-term interest rates. 
C) assumes that market rates are determined by supply and demand conditions within fairly distinct time or maturity buckets. 
D) fails to recognize that forward rates are not perfect predictors of future interest rates. 
E) assumes that both investors and borrowers are willing to shift from one maturity sector to another to take advantage of opportunities arising from changing yields. 
A) assumes that investors will hold long-term maturity assets if there is a sufficient premium to compensate for the uncertainty of the long-term. 
B) assumes that the yield curve reflects the market's current expectations of future short-term interest rates. 
C) assumes that market rates are determined by supply and demand conditions within fairly distinct time or maturity buckets. 
D) fails to recognize that forward rates are not perfect predictors of future interest rates. 
E) assumes that both investors and borrowers are willing to shift from one maturity sector to another to take advantage of opportunities arising from changing yields.

Question 16

The following are the assets and liabilities of a government security dealer. $$\begin{array} { | l | l | } 
\hline \text { Assets: } & \text { \$150 million } 30 \text { day Treasury bills } \
\hline & \text { \$275 million } 91 \text { day Treasury bills } \
\hline & \text { \$90 million } 180 \text { day municipal notes } \
\hline & \$ 350 \text { million } 2 \text { year Treasury notes } \
\hline & \
\hline \text { Liabilities: } & \text { \$575 million } 14 \text { day repurchase agreements } \
\hline & \$ 290 \text { million } 1 \text { year commercial paper } \
\hline
\end{array}$$
-Use the repricing model to determine the funding gap for a maturity bucket of 365 days.

Accepted Answer

A) +$15 million. 
B) -$20 million. 
C) -$350 million. 
D) -$450 million. 
E) -$290 million. 
A) +$15 million. 
B) -$20 million. 
C) -$350 million. 
D) -$450 million. 
E) -$290 million.

Question 17

The repricing model is a simplistic approach to focusing on the exposure of net interest income to changes in market levels of interest rates for given maturity periods.

Accepted Answer

A) True 
 B)False

Question 18

The following are the assets and liabilities of a government security dealer. $$\begin{array} { | l | l | } 
\hline \text { Assets: } & \text { \$150 million } 30 \text { day Treasury bills } \
\hline & \text { \$275 million } 91 \text { day Treasury bills } \
\hline & \text { \$90 million } 180 \text { day municipal notes } \
\hline & \$ 350 \text { million } 2 \text { year Treasury notes } \
\hline & \
\hline \text { Liabilities: } & \text { \$575 million } 14 \text { day repurchase agreements } \
\hline & \$ 290 \text { million } 1 \text { year commercial paper } \
\hline
\end{array}$$
-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

Accepted Answer

A) -$300,000. 
B) $500,000. 
C) -$2,800,000. 
D) -$3,000,000. 
E) $300,000. 
A) -$300,000. 
B) $500,000. 
C) -$2,800,000. 
D) -$3,000,000. 
E) $300,000.

Question 19

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. 
E) current liabilities from tangible 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. 
E) current liabilities from tangible assets.

Question 20

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.

Exam 8: Interest Rate Risk I

The balance sheet of XYZ Bank appears below. All figures in millions of US Dollars. -Total one-year rate-sensitive liabilities is

What is the change in the value of its assets if all interest rates decrease by 1 percent?

Assets Par Amount Rate Liabilities Par Amount Rate 2-year commercial loans \ 600 million 10\% 1-year CDs \ 900 million 7\% 1-year Treasury bills \ 400 million Net Worth \ 100 million -What is the repricing gap over the 1-year maturity bucket?

Which of the following statements is true?

The gap ratio expresses the reprice gap for a given time period as a percentage of

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.

An interest rate increase

Can an FI immunize itself against interest rate risk exposure even though its maturity gap is not zero?

Retail passbook savings accounts should be considered as part of rate sensitive liabilities because the rates on these accounts rarely change.

The repricing model measures the impact of unanticipated changes in interest rates on

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

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

The market segmentation theory of the term structure of interest rates

The repricing model is a simplistic approach to focusing on the exposure of net interest income to changes in market levels of interest rates for given maturity periods.

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

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

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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