Question 1

Liabilities that are partially, but not fully, rate-sensitive include ________.

Accepted Answer

A) checkable deposits 
B) federal funds 
C) non-negotiable CDs 
D) fixed-rate mortgages 
E) money market deposit accounts 
A) checkable deposits 
B) federal funds 
C) non-negotiable CDs 
D) fixed-rate mortgages 
E) money market deposit accounts

Question 2

Explain how banks benefit from specialization in lending.

Accepted Answer

Banks benefit from specialization in len

Question 3

Table 23.2
-Refer to Table 23.2. Assuming that the average duration of the bank's assets is four years, while the average duration of its liabilities is three years, a rise in interest rates from 5 percent to 10 percent will cause the net worth of First National to ________ by ________ of the total original asset value.

Accepted Answer

A) decline; 5% 
B) decline; 1.3% 
C) decline; 6.2% 
D) increase; 5% 
A) decline; 5% 
B) decline; 1.3% 
C) decline; 6.2% 
D) increase; 5%

Question 4

The difference between rate-sensitive liabilities and rate-sensitive assets is known as the ________.

Accepted Answer

A) duration 
B) interest-sensitivity index 
C) interest-rate risk index 
D) gap 
A) duration 
B) interest-sensitivity index 
C) interest-rate risk index 
D) gap

Question 5

If First State Bank has a gap equal to a positive $20 million, then a 5 percentage point drop in interest rates will cause profits to

Accepted Answer

A) increase by $10 million. 
B) increase by $1.0 million. 
C) decline by $10 million. 
D) decline by $1.0 million. 
A) increase by $10 million. 
B) increase by $1.0 million. 
C) decline by $10 million. 
D) decline by $1.0 million.

Question 6

Banks attempt to screen good credit risks from bad to reduce the incidence of loan defaults. To do this, banks

Accepted Answer

A) specialize in lending to certain industries or regions. 
B) write restrictive covenants into loan contracts. 
C) expend resources to acquire accurate credit histories of their potential loan customers. 
D) do all of the above. 
A) specialize in lending to certain industries or regions. 
B) write restrictive covenants into loan contracts. 
C) expend resources to acquire accurate credit histories of their potential loan customers. 
D) do all of the above.

Question 7

Table 23.2
-Referring to Table 23.2, First National Bank has a gap of ________.

Accepted Answer

A) -10 
B) 10 
C) 20 
D) 0 
A) -10 
B) 10 
C) 20 
D) 0

Question 8

One problem with duration gap analysis is that it

Accepted Answer

A) is calculated assuming that the yield curve is flat. 
B) is calculated assuming that the yield curve does not change. 
C) does not measure the sensitivity of net worth to interest rate changes. 
D) does not measure the sensitivity of income to interest rate changes. 
E) applies only to financial institutions. 
A) is calculated assuming that the yield curve is flat. 
B) is calculated assuming that the yield curve does not change. 
C) does not measure the sensitivity of net worth to interest rate changes. 
D) does not measure the sensitivity of income to interest rate changes. 
E) applies only to financial institutions.

Question 9

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is called ________.

Accepted Answer

A) basic duration analysis 
B) basic gap analysis 
C) interest-exposure analysis 
D) gap-exposure analysis 
A) basic duration analysis 
B) basic gap analysis 
C) interest-exposure analysis 
D) gap-exposure analysis

Question 10

What special assumptions do income and duration gap analyses make about interest rate changes and the yield curve?

Accepted Answer

The answer of What special assumptions do income and duration...

Question 11

Which of the following are not generally rate-sensitive assets?

Accepted Answer

A) securities with a maturity of less than one year 
B) variable-rate mortgages 
C) fixed-rate mortgages 
D) all of the above are rate-sensitive assets 
E) none of the above are rate-sensitive assets 
A) securities with a maturity of less than one year 
B) variable-rate mortgages 
C) fixed-rate mortgages 
D) all of the above are rate-sensitive assets 
E) none of the above are rate-sensitive assets

Question 12

Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the

Accepted Answer

A) adverse selection problem. 
B) lemon problem. 
C) adverse credit risk problem. 
D) moral hazard problem. 
A) adverse selection problem. 
B) lemon problem. 
C) adverse credit risk problem. 
D) moral hazard problem.

Question 13

If a bank has a negative gap, then a decrease in interest rates will increase income.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) basic gap analysis. 
B) the segmented maturity approach to gap analysis. 
C) the maturity bucket approach to gap analysis. 
D) the segmented maturity approach to interest-exposure analysis. 
E) none of the above. 
A) basic gap analysis. 
B) the segmented maturity approach to gap analysis. 
C) the maturity bucket approach to gap analysis. 
D) the segmented maturity approach to interest-exposure analysis. 
E) none of the above.

Question 15

What is the difference between credit risk and interest-rate risk?

Accepted Answer

The answer of What is the difference between credit risk...

Question 16

How do the concepts of adverse selection and moral hazard explain the credit risk management principles that banks adopt?

Accepted Answer

The answer of How do the concepts of adverse selection...

Question 17

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

Accepted Answer

A) increase; increase 
B) increase; reduce 
C) decline; reduce 
D) decline; not affect 
A) increase; increase 
B) increase; reduce 
C) decline; reduce 
D) decline; not affect

Question 18

Banks' attempts to solve adverse selection and moral hazard problems help explain loan management principles such as

Accepted Answer

A) screening and monitoring of loan applicants. 
B) collateral and compensating balances. 
C) credit rationing. 
D) all of the above. 
E) only A and B of the above. 
A) screening and monitoring of loan applicants. 
B) collateral and compensating balances. 
C) credit rationing. 
D) all of the above. 
E) only A and B of the above.

Question 19

If First National Bank has a gap equal to a negative $30 million, then a 5 percentage point increase in interest rates will cause profits to

Accepted Answer

A) increase by $15 million. 
B) increase by $1.5 million. 
C) decline by $15 million. 
D) decline by $1.5 million. 
A) increase by $15 million. 
B) increase by $1.5 million. 
C) decline by $15 million. 
D) decline by $1.5 million.

Question 20

Developing and maintaining long-term customer relationships help to reduce banks' costs of screening and monitoring borrowers.

Accepted Answer

A) True 
 B)False

Exam 23: Risk Management in Financial Institutions

Liabilities that are partially, but not fully, rate-sensitive include ________.

Explain how banks benefit from specialization in lending.

The difference between rate-sensitive liabilities and rate-sensitive assets is known as the ________.

If First State Bank has a gap equal to a positive $20 million, then a 5 percentage point drop in interest rates will cause profits to

Banks attempt to screen good credit risks from bad to reduce the incidence of loan defaults. To do this, banks

Table 23.2 -Referring to Table 23.2, First National Bank has a gap of ________.

One problem with duration gap analysis is that it

Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap times the change in the interest rate is called ________.

What special assumptions do income and duration gap analyses make about interest rate changes and the yield curve?

Which of the following are not generally rate-sensitive assets?

Because borrowers, once they have a loan, are more likely to invest in high-risk investment projects, banks face the

If a bank has a negative gap, then a decrease in interest rates will increase income.

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

What is the difference between credit risk and interest-rate risk?

How do the concepts of adverse selection and moral hazard explain the credit risk management principles that banks adopt?

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

Banks' attempts to solve adverse selection and moral hazard problems help explain loan management principles such as

If First National Bank has a gap equal to a negative $30 million, then a 5 percentage point increase in interest rates will cause profits to

Developing and maintaining long-term customer relationships help to reduce banks' costs of screening and monitoring borrowers.

Why Study Financial Markets and Institutions

Overview of the Financial System

What Do Interest Rates Mean and What Is Their Role in Valuation

Why Do Interest Rates Change

How Do Risk and Term Structure Affect Interest Rates

Are Financial Markets Efficient

Why Do Financial Institutions Exist

Why Do Financial Crises Occur and Why Are They so Damaging to the Economy

Central Banks and the Federal Reserve System

Conduct of Monetary Policy: Tools, Goals, Strategy, and Tactics

The Money Markets

The Bond Market

The Stock Market

The Mortgage Markets

The Foreign Exchange Market

The International Financial System

Banking and the Management of Financial Institutions

Financial Regulation

Banking Industry: Structure and Competition

The Mutual Fund Industry

Insurance Companies and Pension Funds

Investment Banks, Security Brokers and Dealers, and Venture Capital Firms

Hedging With Financial Derivatives

Savings Associations and Credit Unions

Finance Companies

Filters

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