Question 1

Table 23.2
-Referring to Table 23.2, if interest rates rise by 5 percentage points, then bank profits (measured using gap analysis)will

Accepted Answer

A) decline by $0.5 million. 
B) decline by $1.5 million. 
C) decline by $2.5 million. 
D) increase by $2.0 million. 
A) decline by $0.5 million. 
B) decline by $1.5 million. 
C) decline by $2.5 million. 
D) increase by $2.0 million.

Question 2

Provisions in loan contracts that proscribe borrowers from engaging in specified risky activities are called ________.

Accepted Answer

A) proscription bonds 
B) collateral clauses 
C) restrictive covenants 
D) liens 
A) proscription bonds 
B) collateral clauses 
C) restrictive covenants 
D) liens

Question 3

If a bank has more rate-sensitive liabilities than assets, then an increase in interest rates will reduce bank profits.

Accepted Answer

A) True 
 B)False

Question 4

Duration analysis involves comparing the average duration of the bank's ________ to the average duration of its ________.

Accepted Answer

A) securities portfolio; nondeposit liabilities 
B) loan portfolio; nondeposit liabilities 
C) loan portfolio; rate-sensitive liabilities 
D) rate-sensitive assets; rate-sensitive liabilities 
E) assets; liabilities 
A) securities portfolio; nondeposit liabilities 
B) loan portfolio; nondeposit liabilities 
C) loan portfolio; rate-sensitive liabilities 
D) rate-sensitive assets; rate-sensitive liabilities 
E) assets; liabilities

Question 5

In one sense, ________ appears surprising since it means that the bank is not ________ its portfolio of loans and thus is exposing itself to more risk.

Accepted Answer

A) specialization in lending; diversifying 
B) specialization in lending; rationing 
C) credit rationing; diversifying 
D) screening; rationing 
A) specialization in lending; diversifying 
B) specialization in lending; rationing 
C) credit rationing; diversifying 
D) screening; rationing

Question 6

Lines of credit and long-term relationships between banks and their customers

Accepted Answer

A) reduce the costs of information collection. 
B) make it easier for banks to screen good risks from bad. 
C) enable banks to deal with moral hazard contingencies that are neither anticipated nor specified in restrictive covenants. 
D) do all of the above. 
E) do only A and B of the above. 
A) reduce the costs of information collection. 
B) make it easier for banks to screen good risks from bad. 
C) enable banks to deal with moral hazard contingencies that are neither anticipated nor specified in restrictive covenants. 
D) do all of the above. 
E) do only A and B of the above.

Question 7

Because larger loans create greater incentives for borrowers to engage in undesirable activities that make it less likely they will repay the loans, banks

Accepted Answer

A) ration credit, granting borrowers smaller loans than they have requested. 
B) ration credit, charging higher interest rates to borrowers who want large loans than to those who want small loans. 
C) ration credit, charging higher fees as a percentage of the loan to borrowers who want large loans than to those who want small loans. 
D) do none of the above. 
A) ration credit, granting borrowers smaller loans than they have requested. 
B) ration credit, charging higher interest rates to borrowers who want large loans than to those who want small loans. 
C) ration credit, charging higher fees as a percentage of the loan to borrowers who want large loans than to those who want small loans. 
D) do none of the above.

Question 8

Credit rationing reduces adverse selection problems.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

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

Accepted Answer

A) constrained lending 
B) strategic refusal 
C) credit rationing 
D) collusive behavior 
A) constrained lending 
B) strategic refusal 
C) credit rationing 
D) collusive behavior

Question 11

What is gap analysis and why is it important to a bank?

Accepted Answer

Gap analysis is a methodical approach us

Question 12

Duration gap analysis

Accepted Answer

A) is a refinement of basic gap analysis that accounts for interest-rate changes over a multiyear period. 
B) is a refinement of basic gap analysis that accounts for how long a gap will last. 
C) is a complement to basic gap analysis that accounts for the effect of interest rate changes on market value. 
D) is a complement to basic gap analysis that accounts for the influence of partially rate-sensitive assets. 
A) is a refinement of basic gap analysis that accounts for interest-rate changes over a multiyear period. 
B) is a refinement of basic gap analysis that accounts for how long a gap will last. 
C) is a complement to basic gap analysis that accounts for the effect of interest rate changes on market value. 
D) is a complement to basic gap analysis that accounts for the influence of partially rate-sensitive assets.

Question 13

If a rise in interest rates causes the market value of a bank's net worth to rise, then the bank must have a ________.

Accepted Answer

A) negative duration gap 
B) positive duration gap 
C) negative gap 
D) positive gap 
A) negative duration gap 
B) positive duration gap 
C) negative gap 
D) positive gap

Question 14

What is duration gap analysis and why is it important to a bank?

Accepted Answer

Duration gap analysis is a financial ass

Question 15

A bank that wants to monitor the check payment practices of its commercial borrowers, so that moral hazard can be prevented, will require borrowers to

Accepted Answer

A) place a bank officer on their board of directors. 
B) place a corporate officer on the bank's board of directors. 
C) keep compensating balances in a checking account at the bank. 
D) do all of the above. 
E) do only A and B of the above. 
A) place a bank officer on their board of directors. 
B) place a corporate officer on the bank's board of directors. 
C) keep compensating balances in a checking account at the bank. 
D) do all of the above. 
E) do only A and B of the above.

Question 16

Compensating balances

Accepted Answer

A) are a particular form of collateral commonly required on commercial loans. 
B) are a required minimum amount of funds that a borrower (i.e., a firm receiving a loan)must keep in a checking account at the bank. 
C) allow banks to monitor firms' check payment practices, which can yield information about their borrowers' financial conditions. 
D) are all of the above. 
A) are a particular form of collateral commonly required on commercial loans. 
B) are a required minimum amount of funds that a borrower (i.e., a firm receiving a loan)must keep in a checking account at the bank. 
C) allow banks to monitor firms' check payment practices, which can yield information about their borrowers' financial conditions. 
D) are all of the above.

Question 17

Table 23.1
-Referring to Table 23.1, First National Bank has a gap of ________.

Accepted Answer

A) -30 
B) +30 
C) 60 
D) 0 
A) -30 
B) +30 
C) 60 
D) 0

Question 18

One problem with basic gap analysis is that it

Accepted Answer

A) is calculated assuming interest rates on all maturities are equal. 
B) is calculated assuming interest rates on all maturities change by equal amounts. 
C) measures 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 interest rates on all maturities are equal. 
B) is calculated assuming interest rates on all maturities change by equal amounts. 
C) measures 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 19

If a bank has a duration gap of 2 years, then a fall in interest rates from 6 percent to 3 percent will lead to

Accepted Answer

A) a rise in the market value of its net worth of 5.66 percent. 
B) a fall in the market value of its net worth of 5.66 percent. 
C) a rise in net interest income of 5.66 percent. 
D) a fall in net interest income of 5.66 percent. 
E) an unknown change. 
A) a rise in the market value of its net worth of 5.66 percent. 
B) a fall in the market value of its net worth of 5.66 percent. 
C) a rise in net interest income of 5.66 percent. 
D) a fall in net interest income of 5.66 percent. 
E) an unknown change.

Question 20

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

Accepted Answer

A) increase; increase 
B) decrease; increase 
C) decrease; decrease 
D) increase; decrease 
A) increase; increase 
B) decrease; increase 
C) decrease; decrease 
D) increase; decrease

Exam 23: Risk Management in Financial Institutions

Table 23.2 -Referring to Table 23.2, if interest rates rise by 5 percentage points, then bank profits (measured using gap analysis)will

Provisions in loan contracts that proscribe borrowers from engaging in specified risky activities are called ________.

If a bank has more rate-sensitive liabilities than assets, then an increase in interest rates will reduce bank profits.

Duration analysis involves comparing the average duration of the bank's ________ to the average duration of its ________.

In one sense, ________ appears surprising since it means that the bank is not ________ its portfolio of loans and thus is exposing itself to more risk.

Lines of credit and long-term relationships between banks and their customers

Because larger loans create greater incentives for borrowers to engage in undesirable activities that make it less likely they will repay the loans, banks

Credit rationing reduces adverse selection problems.

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

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

What is gap analysis and why is it important to a bank?

Duration gap analysis

If a rise in interest rates causes the market value of a bank's net worth to rise, then the bank must have a ________.

What is duration gap analysis and why is it important to a bank?

A bank that wants to monitor the check payment practices of its commercial borrowers, so that moral hazard can be prevented, will require borrowers to

Compensating balances

Table 23.1 -Referring to Table 23.1, First National Bank has a gap of ________.

One problem with basic gap analysis is that it

If a bank has a duration gap of 2 years, then a fall in interest rates from 6 percent to 3 percent will lead to

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

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

Duration analysis involves comparing the average duration of the bank's to the average duration of its .

In one sense, appears surprising since it means that the bank is not its portfolio of loans and thus is exposing itself to more risk.

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