Question 1

The economic insolvency of many thrift institutions during the 1980s was due, at least in part, to unexpected increases in interest rates.

Accepted Answer

A) True 
 B)False

Question 2

The yield curve

Accepted Answer

A) relates rates for different maturities of assets. 
B) for U.S.Treasury securities is the most commonly reported yield curve. 
C) may change shape over time. 
D) which is inverted does not last very long. 
E) All of the above. 
A) relates rates for different maturities of assets. 
B) for U.S.Treasury securities is the most commonly reported yield curve. 
C) may change shape over time. 
D) which is inverted does not last very long. 
E) All of the above.

Question 3

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. 
E) The longer the maturity of a fixed income asset or liability, the greater the fall in market value for any given interest rate decrease. 
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. 
E) The longer the maturity of a fixed income asset or liability, the greater the fall in market value for any given interest rate decrease.

Question 4

What is spread effect?

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) The effect of mismatch of asset and liabilities within a maturity bucket. 
D) The premium paid to compensate for the future uncertainty in a security's value. 
E) The value of an FI to its owners. 
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) The effect of mismatch of asset and liabilities within a maturity bucket. 
D) The premium paid to compensate for the future uncertainty in a security's value. 
E) The value of an FI to its owners.

Question 5

To be more precise in measuring interest rate risk, the runoff component of long-term mortgages should be considered in the time buckets in which the maturities actually occur.

Accepted Answer

A) True 
 B)False

Question 6

The repricing gap does not accurately measure FI interest rate risk exposure because

Accepted Answer

A) FIs cannot accurately predict the magnitude change in future interest rates. 
B) FIs cannot accurately predict the direction of change in future interest rates. 
C) accounting systems are not accurate enough to allow the calculation of precise gap measures. 
D) it does not recognize timing differences in cash flows within the same maturity grouping. 
E) equity is omitted. 
A) FIs cannot accurately predict the magnitude change in future interest rates. 
B) FIs cannot accurately predict the direction of change in future interest rates. 
C) accounting systems are not accurate enough to allow the calculation of precise gap measures. 
D) it does not recognize timing differences in cash flows within the same maturity grouping. 
E) equity is omitted.

Question 7

For a given change in interest rates, the change in price for each additional year of maturity of a fixed-rate asset is smaller as the maturity increases.

Accepted Answer

A) True 
 B)False

Question 8

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 9

A method of measuring the interest rate or gap exposure of an FI is

Accepted Answer

A) the duration model. 
B) the maturity model. 
C) the repricing model. 
D) the funding gap model. 
E) All of the above. 
A) the duration model. 
B) the maturity model. 
C) the repricing model. 
D) the funding gap model. 
E) All of the above.

Question 10

The maturity gap model estimates the difference between interest earned and interest paid during a given period of time.

Accepted Answer

A) True 
 B)False

Question 11

A bank that finances long-term fixed-rate mortgages with short-term deposits is exposed to

Accepted Answer

A) increases in net interest income and decreases in the market value of equity when interest rates fall. 
B) decreases in net interest income and decreases in the market value of equity when interest rates fall. 
C) decreases in net interest income and increases in the market value of equity when interest rates increase. 
D) increases in net interest income and increases in the market value of equity when interest rates increase. 
E) decreases in net interest income and decreases in the market value of equity when interest rates increase. 
A) increases in net interest income and decreases in the market value of equity when interest rates fall. 
B) decreases in net interest income and decreases in the market value of equity when interest rates fall. 
C) decreases in net interest income and increases in the market value of equity when interest rates increase. 
D) increases in net interest income and increases in the market value of equity when interest rates increase. 
E) decreases in net interest income and decreases in the market value of equity when interest rates increase.

Question 12

The repricing model ignores information regarding the distribution of assets and liabilities within maturity buckets. This limitation of the model refers to

Accepted Answer

A) market value effect. 
B) overaggregation. 
C) runoffs and pre-payments. 
D) OBS activities. 
E) the spread effect. 
A) market value effect. 
B) overaggregation. 
C) runoffs and pre-payments. 
D) OBS activities. 
E) the spread effect.

Question 13

If the average maturity of assets is 5 years and the average maturity of liabilities is 7 years, then the FI has no interest rate risk exposure.

Accepted Answer

A) True 
 B)False

Question 14

One reason to include demand deposits when estimating a bank's repricing gap is because rising interest rates could lead to high withdrawals.

Accepted Answer

A) True 
 B)False

Question 15

An FI finances a $250,000 2-year fixed-rate loan with a $200,000 1-year fixed-rate CD. Use the repricing model to determine (a) the FI's repricing (or funding) gap using a 1-year maturity bucket, and (b) the impact of a 100 basis point (0.01) decrease in interest rates on the FI's annual net interest income?

Accepted Answer

A) $0; $0. 
B) -$200,000; +$2,000. 
C) -$200,000; -$2,000. 
D) +$50,000; -$500. 
E) -$200,000; -$1,000. 
A) $0; $0. 
B) -$200,000; +$2,000. 
C) -$200,000; -$2,000. 
D) +$50,000; -$500. 
E) -$200,000; -$1,000.

Question 16

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 17

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. 
E) Those deposits that act as an FI's long-term sources of funds. 
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. 
E) Those deposits that act as an FI's long-term sources of funds.

Question 18

The average maturity of the liabilities of an FI's balance sheet is equal to

Accepted Answer

A) the weighted-average of the liabilities where the weights are determined relative to the total liabilities and equity of the FI. 
B) the weighted-average of the liabilities where the weights are determined relative to the total liabilities of the FI. 
C) the weighted-average of the liabilities where the weights are determined relative to the total assets of the FI. 
D) the weighted-average of the liabilities where the weights are determined using market values of liabilities. 
E) None of the abovE. 
A) the weighted-average of the liabilities where the weights are determined relative to the total liabilities and equity of the FI. 
B) the weighted-average of the liabilities where the weights are determined relative to the total liabilities of the FI. 
C) the weighted-average of the liabilities where the weights are determined relative to the total assets of the FI. 
D) the weighted-average of the liabilities where the weights are determined using market values of liabilities. 
E) None of the abovE.

Question 19

The Bank for International Settlements (BIS) requires depository institutions to have interest rate risk management systems.

Accepted Answer

A) True 
 B)False

Question 20

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. 
E) None of the above. 
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. 
E) None of the above.

Exam 8: Interest Rate Risk I

The economic insolvency of many thrift institutions during the 1980s was due, at least in part, to unexpected increases in interest rates.

The yield curve

Which of the following statements is true?

What is spread effect?

To be more precise in measuring interest rate risk, the runoff component of long-term mortgages should be considered in the time buckets in which the maturities actually occur.

The repricing gap does not accurately measure FI interest rate risk exposure because

For a given change in interest rates, the change in price for each additional year of maturity of a fixed-rate asset is smaller as the maturity increases.

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

A method of measuring the interest rate or gap exposure of an FI is

The maturity gap model estimates the difference between interest earned and interest paid during a given period of time.

A bank that finances long-term fixed-rate mortgages with short-term deposits is exposed to

The repricing model ignores information regarding the distribution of assets and liabilities within maturity buckets. This limitation of the model refers to

If the average maturity of assets is 5 years and the average maturity of liabilities is 7 years, then the FI has no interest rate risk exposure.

One reason to include demand deposits when estimating a bank's repricing gap is because rising interest rates could lead to high withdrawals.

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

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

The average maturity of the liabilities of an FI's balance sheet is equal to

The Bank for International Settlements (BIS) requires depository institutions to have interest rate risk management systems.

The unbiased expectations theory of the term structure of interest rates

Why Are Financial Institutions Special

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Technology and Other Operational Risks

Liability and Liquidity Management

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Capital Adequacy

Product and Geographic Expansion

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Swaps

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