Question 1

When the Fed finds it necessary to slow economic activity, it allows interest rates to fall.

Accepted Answer

A) True 
 B)False

Question 2

$$\begin{array} { | l | c | l | l | c | c | } 
\hline & \text { Face Value } & \begin{array} { l } 
\text { Runoff } \
< \mathbf { 1 } \text { year }
\end{array} & & \text { Face Value } & \begin{array} { c } 
\text { Runoff } \
< \mathbf { 1 } \text { year }
\end{array} \
\hline \text { 3-mo. T-Bills } & \$ 60 \mathrm {~m} & & \text { Demand Dep. } & \$ 180 \mathrm {~m} & 10 \text { percent } \
\hline \text { 2-yr Bonds } & \$ 60 \mathrm {~m} & 5 \text { percent } & \text { Equity } & \$ 20 \mathrm {~m} & \
\hline \text { 5-yr Bonds } & \$ 80 \mathrm {~m} & 10 \text { percent } & & & \
\hline
\end{array}$$
-What is the repricing gap if a 0 to 3 month maturity gap is used? Ignore runoffs.

Accepted Answer

A) $60 million. 
B) $40 million. 
C) -$80 million. 
D) -$120 million. 
E) -$180 million. 
A) $60 million. 
B) $40 million. 
C) -$80 million. 
D) -$120 million. 
E) -$180 million.

Question 3

The maturity of a portfolio of assets or liabilities is a weighted average of the maturities of the assets or liabilities that comprise that portfolio.

Accepted Answer

A) True 
 B)False

Question 4

The gap ratio is useful because it indicates the scale of the interest rate exposure by dividing the gap by the asset size of the institution.

Accepted Answer

A) True 
 B)False

Question 5

If the chosen maturity buckets have a time period that is too long, the repricing model may produce inaccurate results because

Accepted Answer

A) as the time to maturity increases, the price volatility increases. 
B) price changes will be overestimated. 
C) there may be large differentials in the time to repricing for different securities within each maturity bucket. 
D) the FI will be unable to accurately measure the quantity of rate sensitive assets. 
E) the FI will be unable to accurately measure the quantity of rate sensitive liabilities. 
A) as the time to maturity increases, the price volatility increases. 
B) price changes will be overestimated. 
C) there may be large differentials in the time to repricing for different securities within each maturity bucket. 
D) the FI will be unable to accurately measure the quantity of rate sensitive assets. 
E) the FI will be unable to accurately measure the quantity of rate sensitive liabilities.

Question 6

$$\begin{array} { | l | r | l | l | r | l | } 
\hline \text { Assets } & \begin{array} { l } 
\text { Amount } \
\text { (\$ millions) }
\end{array} & \begin{array} { l } 
\text { Annual } \
\text { Rate }
\end{array} & \text { Liabilities } & \begin{array} { l } 
\text { Amount } \
\text { (\$ millions) }
\end{array} & \begin{array} { l } 
\text { Annual } \
\text { Rate }
\end{array} \
\hline \text { 1-year bonds } & \$ 60 & 7 \% & \text { 1-year CD } & \$ 50 & 5 \% \
\hline \text { 10-year loan } & \$ 40 & 12 \% & \text { 2-year CD } & \$ 40 & 6 \% \
\hline & & & \text { Equity } & \$ 10 & \
\hline \text { Total } & \$ 100 & & \text { Total } & \$ 100 & \
\hline
\end{array}$$
-What is market value of the one-year CD if all market interest rates increase by 2 percent?

Accepted Answer

A) $49.065 million. 
B) $50.481 million. 
C) $49.528 million. 
D) $50.971 million. 
E) $50.000 million. 
A) $49.065 million. 
B) $50.481 million. 
C) $49.528 million. 
D) $50.971 million. 
E) $50.000 million.

Question 7

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 91 days.

Accepted Answer

A) -$60 million. 
B) -$150 million. 
C) $0. 
D) -$250 million. 
E) -$300 million. 
A) -$60 million. 
B) -$150 million. 
C) $0. 
D) -$250 million. 
E) -$300 million.

Question 8

$$\begin{array} { | l | c | l | l | c | c | } 
\hline & \text { Face Value } & \begin{array} { l } 
\text { Runoff } \
< \mathbf { 1 } \text { year }
\end{array} & & \text { Face Value } & \begin{array} { c } 
\text { Runoff } \
< \mathbf { 1 } \text { year }
\end{array} \
\hline \text { 3-mo. T-Bills } & \$ 60 \mathrm {~m} & & \text { Demand Dep. } & \$ 180 \mathrm {~m} & 10 \text { percent } \
\hline \text { 2-yr Bonds } & \$ 60 \mathrm {~m} & 5 \text { percent } & \text { Equity } & \$ 20 \mathrm {~m} & \
\hline \text { 5-yr Bonds } & \$ 80 \mathrm {~m} & 10 \text { percent } & & & \
\hline
\end{array}$$
-What is the repricing gap if a 1-year maturity gap is used if runoffs are also considered?

Accepted Answer

A) -22 million. 
B) +$22 million. 
C) +$53 million. 
D) -$40 million. 
E) -$70 million. 
A) -22 million. 
B) +$22 million. 
C) +$53 million. 
D) -$40 million. 
E) -$70 million.

Question 9

When a bank's repricing gap is positive, net interest income is positively related to changes in interest rates.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following relationships does NOT hold in the pricing of fixed-rate assets given changes in market rate?

Accepted Answer

A) A decrease in interest rates generally leads to an increase in the value of assets. 
B) Longer maturity assets have greater changes in price than shorter maturity assets for given changes in interest rates. 
C) The absolute change in price per unit of maturity time for given changes in interest rates decreases over time, although the relative changes actually increase. 
D) For a given percentage decrease in interest rates, assets will increase in price more than they will decrease in price for the same, but opposite increase in rates. 
E) None of the above. 
A) A decrease in interest rates generally leads to an increase in the value of assets. 
B) Longer maturity assets have greater changes in price than shorter maturity assets for given changes in interest rates. 
C) The absolute change in price per unit of maturity time for given changes in interest rates decreases over time, although the relative changes actually increase. 
D) For a given percentage decrease in interest rates, assets will increase in price more than they will decrease in price for the same, but opposite increase in rates. 
E) None of the above.

When the Fed finds it necessary to slow economic activity, it allows interest rates to fall.

Face Value Runoff < year Face Value Runoff < year 3-mo. T-Bills \ 60 Demand Dep. \ 180 10 percent 2-yr Bonds \ 60 5 percent Equity \ 20 5-yr Bonds \ 80 10 percent -What is the repricing gap if a 0 to 3 month maturity gap is used? Ignore runoffs.

The maturity of a portfolio of assets or liabilities is a weighted average of the maturities of the assets or liabilities that comprise that portfolio.

The gap ratio is useful because it indicates the scale of the interest rate exposure by dividing the gap by the asset size of the institution.

If the chosen maturity buckets have a time period that is too long, the repricing model may produce inaccurate results because

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 market value of the one-year CD if all market interest rates increase by 2 percent?

Face Value Runoff < year Face Value Runoff < year 3-mo. T-Bills \ 60 Demand Dep. \ 180 10 percent 2-yr Bonds \ 60 5 percent Equity \ 20 5-yr Bonds \ 80 10 percent -What is the repricing gap if a 1-year maturity gap is used if runoffs are also considered?

When a bank's repricing gap is positive, net interest income is positively related to changes in interest rates.

Which of the following relationships does NOT hold in the pricing of fixed-rate assets given changes in market rate?

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

Filters

Exam 8: Interest Rate Risk I

When the Fed finds it necessary to slow economic activity, it allows interest rates to fall.

Face Value Runoff < year Face Value Runoff < year 3-mo. T-Bills \ 60 Demand Dep. \ 180 10 percent 2-yr Bonds \ 60 5 percent Equity \ 20 5-yr Bonds \ 80 10 percent -What is the repricing gap if a 0 to 3 month maturity gap is used? Ignore runoffs.

The maturity of a portfolio of assets or liabilities is a weighted average of the maturities of the assets or liabilities that comprise that portfolio.

The gap ratio is useful because it indicates the scale of the interest rate exposure by dividing the gap by the asset size of the institution.

If the chosen maturity buckets have a time period that is too long, the repricing model may produce inaccurate results because

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 market value of the one-year CD if all market interest rates increase by 2 percent?

Face Value Runoff < year Face Value Runoff < year 3-mo. T-Bills \ 60 Demand Dep. \ 180 10 percent 2-yr Bonds \ 60 5 percent Equity \ 20 5-yr Bonds \ 80 10 percent -What is the repricing gap if a 1-year maturity gap is used if runoffs are also considered?

When a bank's repricing gap is positive, net interest income is positively related to changes in interest rates.

Which of the following relationships does NOT hold in the pricing of fixed-rate assets given changes in market rate?

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

Filters