Exam 23: Risk Management in Financial Institutions

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

Table 23.1 -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.

If a bank has a duration gap of 2 years, then a rise in interest rates from 6 percent to 9 percent will lead to

A bank manager concerned about interest income who expects interest rates to rise and who knows the bank currently has a positive gap should ________ rate-sensitive assets and ________ rate-sensitive liabilities.

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

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

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

Of the following methods that banks might use to reduce moral hazard problems, the one not legally permitted in the United States is the requirement that

What steps do banks take to reduce their exposure to credit risk?

Credit rationing occurs when lenders charge higher interest rates on the loans they make to riskier borrowers.

Explain how banks benefit from long-term customer relationships.

How is credit risk related to the concepts of adverse selection and moral hazard?

When a lender refuses to make a loan, even though borrowers are willing to pay the stated interest rate or even a higher rate, it is said to engage in ________.

From the standpoint of ________, specialization in lending is surprising but makes perfect sense when one considers the ________ problem.

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

If interest rates rise by 5 percentage points, then bank profits (measured using gap analysis)will increase regardless of the income gap.

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 ________.

Credit rationing occurs when a bank

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap for several maturity subintervals by the change in the interest rate is called duration analysis.

Table 23.1 -Referring to Table 23.1, if interest rates rise by 5 percentage points, then bank profits (measured using gap analysis)will