Question 1

The duration gap model is a more complete measure of interest rate risk than the repricing model.

Accepted Answer

A) True 
 B)False  True

Question 2

A bank has a negative repricing gap using a six-month maturity bucket. Which one of the following statements is most correct if MMDAs are rate-sensitive liabilities?

Accepted Answer

A) If all interest rates are projected to increase,to limit a profit decline when this occurs,the bank could encourage its retail deposit customers to switch from two-year CDs at current rates to three-month CDs. 
B) If all interest rates are projected to decrease,to limit a profit decline when this occurs,the bank could encourage its retail deposit customers to switch from MMDAs to two-year CDs at current rates. 
C) If all interest rates are projected to decrease,to limit a profit decline when this occurs,the bank could encourage its retail deposit customers to switch from three-month CDs to two-year CDs at current rates. 
D) If all interest rates are projected to increase,to limit a profit decline when this occurs,the bank could encourage its retail deposit customers to switch from two-year CDs at current rates to MMDAs. 
E) If all interest rates are projected to increase,to limit a profit decline when this occurs,the bank could encourage its retail deposit customers to switch from MMDAs to two-year CDs at current rates. 
A) If all interest rates are projected to increase,to limit a profit decline when this occurs,the bank could encourage its retail deposit customers to switch from two-year CDs at current rates to three-month CDs. 
B) If all interest rates are projected to decrease,to limit a profit decline when this occurs,the bank could encourage its retail deposit customers to switch from MMDAs to two-year CDs at current rates. 
C) If all interest rates are projected to decrease,to limit a profit decline when this occurs,the bank could encourage its retail deposit customers to switch from three-month CDs to two-year CDs at current rates. 
D) If all interest rates are projected to increase,to limit a profit decline when this occurs,the bank could encourage its retail deposit customers to switch from two-year CDs at current rates to MMDAs. 
E) If all interest rates are projected to increase,to limit a profit decline when this occurs,the bank could encourage its retail deposit customers to switch from MMDAs to two-year CDs at current rates. E

Question 3

A bank has a negative repricing gap and estimates that the spread between RSAs and RSLs will move inversely with interest rates. If interest rates increase,NII will

Accepted Answer

A) rise. 
B) fall. 
C) be unchanged. 
D) rise or fall depending on the size of the spread effect relative to the size of the CGAP effect. 
E) None of the options are correct. 
A) rise. 
B) fall. 
C) be unchanged. 
D) rise or fall depending on the size of the spread effect relative to the size of the CGAP effect. 
E) None of the options are correct. B

Question 4

The "runoff" of fixed-income contracts is itself rate-sensitive.

Accepted Answer

A) True 
 B)False

Question 5

The repricing gap is the most comprehensive measure of interest rate risk used by financial intermediaries.

Accepted Answer

A) True 
 B)False

Question 6

The loss in value caused by credit risk is borne first by the liability holders,and then by the equity holders.

Accepted Answer

A) True 
 B)False

Question 7

A bank has DA = 2.4 years and DL= 0.9 years. The bank has total equity of $82 million and total assets of $850 million. Interest rates are at 6 percent.
To get DE to equal zero to protect the equity value in the event of an interest rate change,the bank could

Accepted Answer

A) reduce DA to 1.21 years. 
B) increase DL to 2.44 years. 
C) increase DL to 3.10 years. 
D) reduce DA to zero. 
E) increase DL to 2.76 years. 
A) reduce DA to 1.21 years. 
B) increase DL to 2.44 years. 
C) increase DL to 3.10 years. 
D) reduce DA to zero. 
E) increase DL to 2.76 years.

Question 8

If DA > kDL,then falling interest rates will cause the market value of equity to rise.

Accepted Answer

A) True 
 B)False

Question 9

What are arguments for and against requiring banks to mark all assets and liabilities to market continuously? Relate your arguments to managing credit risk and interest rate risk.

Accepted Answer

Arguments for: When banks mark to market

Question 10

A bank has a positive repricing gap and estimates that the spread between RSAs and RSLs will move directly with interest rates. If interest rates fall,the bank's overall NII will

Accepted Answer

A) rise. 
B) fall. 
C) be unchanged. 
D) rise or fall depending on the size of the spread effect relative to the size of the CGAP effect. 
E) None of the options are correct. 
A) rise. 
B) fall. 
C) be unchanged. 
D) rise or fall depending on the size of the spread effect relative to the size of the CGAP effect. 
E) None of the options are correct.

Question 11

A bank has an average asset duration of 2.25 years,the average duration of the liabilities is 1.25 years,and the bank has total assets of $2 billion and $200 million in equity. The bank has an ROE of 9.00 percent. If all interest rates decrease 50 basis points,the predicted change in the bank's market value of equity is ________.

Accepted Answer

A) −2.85 percent 
B) −3.55 percent 
C) 3.55 percent 
D) 2.85 percent 
E) 5.16 percent 
A) −2.85 percent 
B) −3.55 percent 
C) 3.55 percent 
D) 2.85 percent 
E) 5.16 percent

Question 12

According to the CGAP effect,when CGAP is positive the change in NII is negatively related to the change in interest rates.

Accepted Answer

A) True 
 B)False

Question 13

The maturity bucket is the time window over which the dollar amounts of assets and liabilities are measured.

Accepted Answer

A) True 
 B)False

Question 14

A bank has a positive duration gap. Which one of the following statements is most correct?

Accepted Answer

A) If all interest rates are projected to increase,to limit a net value decline before rates rise,the bank should increase long-term loans and decrease short-term loans. 
B) If all interest rates are projected to decrease,to limit a net value decline before rates fall,the bank should increase long-term loans and decrease short-term loans. 
C) If all interest rates are projected to increase,to limit a net value decline before rates rise,the bank should increase short-term loans and decrease long-term loans. 
D) If all interest rates are projected to decrease,to limit a net value decline before rates fall,the bank should increase long-term bonds issued by the bank and decrease short-term bonds. 
E) None of the options are correct. 
A) If all interest rates are projected to increase,to limit a net value decline before rates rise,the bank should increase long-term loans and decrease short-term loans. 
B) If all interest rates are projected to decrease,to limit a net value decline before rates fall,the bank should increase long-term loans and decrease short-term loans. 
C) If all interest rates are projected to increase,to limit a net value decline before rates rise,the bank should increase short-term loans and decrease long-term loans. 
D) If all interest rates are projected to decrease,to limit a net value decline before rates fall,the bank should increase long-term bonds issued by the bank and decrease short-term bonds. 
E) None of the options are correct.

Question 15

In a bank's three-month maturity bucket,a 30-year ARM with a rate reset in six months would be considered a fixed-rate asset,but in its one-year maturity bucket,this ARM would be considered a rate-sensitive asset.

Accepted Answer

A) True 
 B)False

Question 16

Convexity arises because a fixed-income's price is a nonlinear function of interest rates.

Accepted Answer

A) True 
 B)False

Question 17

A thrift has an annual CGAP of −$25 million. A credit union has an annual CGAP of +$5 million. The thrift has total assets of $500 million and net income of $7.5 million,and the credit union has total assets of $40 million and net income of $0.7 million.
In each of the following cases indicate whether the change in profits due to the spread effect was (i)greater than (ii)less than,or (iii)equal to the change in profitability due to the repricing GAP. In some cases you may not be able to tell; indicate which ones.

Accepted Answer

∆ spread (A)Can't te

Question 18

Due to convexity problems,banks are actually better off using the simpler repricing model to manage interest rate risk rather than the duration model.

Accepted Answer

A) True 
 B)False

Question 19

The effect of an interest rate change on the market value of an FI's equity is a function of three things. What are they and how do they affect the equity value change?

Accepted Answer

*The Duration gap (DA - kDL).The larger

Question 20

The structure of a bank's balance sheet as evidenced by its repricing gap and its duration gap affects a bank's sensitivity to interest rate changes. Which one of the following statements about the two types of gaps is true?

Accepted Answer

A) The repricing gap immunizes the present value of all future cash flows,whereas managing the duration gap can stabilize future cash flows,but not their present value. 
B) The duration gap considers all cash flows up to and including maturity,whereas the repricing gap really only considers how cash flows will change within the maturity bucket. 
C) If a bank could only manage one type of gap,the bank would limit its interest rate risk the most by managing its repricing gap instead of its duration gap. 
D) The repricing gap is superior to the duration gap since the repricing gap has a well-defined maturity bucket. 
E) It is virtually impossible for an institution to have both a positive duration gap and a negative repricing gap at the same time. 
A) The repricing gap immunizes the present value of all future cash flows,whereas managing the duration gap can stabilize future cash flows,but not their present value. 
B) The duration gap considers all cash flows up to and including maturity,whereas the repricing gap really only considers how cash flows will change within the maturity bucket. 
C) If a bank could only manage one type of gap,the bank would limit its interest rate risk the most by managing its repricing gap instead of its duration gap. 
D) The repricing gap is superior to the duration gap since the repricing gap has a well-defined maturity bucket. 
E) It is virtually impossible for an institution to have both a positive duration gap and a negative repricing gap at the same time.

Exam 22: Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

The duration gap model is a more complete measure of interest rate risk than the repricing model.

A bank has a negative repricing gap using a six-month maturity bucket. Which one of the following statements is most correct if MMDAs are rate-sensitive liabilities?

A bank has a negative repricing gap and estimates that the spread between RSAs and RSLs will move inversely with interest rates. If interest rates increase,NII will

The "runoff" of fixed-income contracts is itself rate-sensitive.

The repricing gap is the most comprehensive measure of interest rate risk used by financial intermediaries.

The loss in value caused by credit risk is borne first by the liability holders,and then by the equity holders.

A bank has DA = 2.4 years and DL= 0.9 years. The bank has total equity of $82 million and total assets of $850 million. Interest rates are at 6 percent. To get DE to equal zero to protect the equity value in the event of an interest rate change,the bank could

If DA > kDL,then falling interest rates will cause the market value of equity to rise.

What are arguments for and against requiring banks to mark all assets and liabilities to market continuously? Relate your arguments to managing credit risk and interest rate risk.

A bank has a positive repricing gap and estimates that the spread between RSAs and RSLs will move directly with interest rates. If interest rates fall,the bank's overall NII will

According to the CGAP effect,when CGAP is positive the change in NII is negatively related to the change in interest rates.

The maturity bucket is the time window over which the dollar amounts of assets and liabilities are measured.

A bank has a positive duration gap. Which one of the following statements is most correct?

In a bank's three-month maturity bucket,a 30-year ARM with a rate reset in six months would be considered a fixed-rate asset,but in its one-year maturity bucket,this ARM would be considered a rate-sensitive asset.

Convexity arises because a fixed-income's price is a nonlinear function of interest rates.

Due to convexity problems,banks are actually better off using the simpler repricing model to manage interest rate risk rather than the duration model.

The effect of an interest rate change on the market value of an FI's equity is a function of three things. What are they and how do they affect the equity value change?

The structure of a bank's balance sheet as evidenced by its repricing gap and its duration gap affects a bank's sensitivity to interest rate changes. Which one of the following statements about the two types of gaps is true?

Introduction

Determinants of Interest Rates

Interest Rates and Security Valuation

The Federal Reserve System, monetary Policy, and Interest Rates

Money Markets

Bond Markets

Mortgage Markets

Stock Markets

Foreign Exchange Markets

Derivative Securities Markets

Commercial Banks: Industry Overview

Commercial Banks Financial Statements and Analysis

Regulation of Commercial Banks

Other Lending Institutions: Savings Institutions, credit Unions, and Finance Companies

Insurance Companies

Securities Firms and Investment Banks

Investment Companies

Pension Funds

Types of Risks Incurred by Financial Institutions

Managing Credit Risk on the Balance Sheet

Managing Liquidity Risk on the Balance Sheet

Managing Risk Off the Balance Sheet With Derivative Securities

Managing Risk Off the Balance Sheet With Loan Sales and Securitization

Filters