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

If a bank wishes to have a positive balance sheet repricing gap and a negative balance sheet duration gap,then the bank should predominantly have short-term rate-sensitive assets funded by long-term fixed-rate liabilities.

A bank has three assets. It has $75 million invested in consumer loans with a three-year duration,$39 million invested in T-bonds with a 16-year duration,and $39 million in six-month maturity T-bills. What is the duration of the bank's asset portfolio in years?

A bank has a negative repricing gap. This implies that

The cash flow from the interest a bank receives on a long-term loan that is normally reinvested is called the runoff from the loan.

A bank has a positive repricing gap. This implies that

A bank is facing a forecast of rising interest rates. How should it set the repricing and duration gap?

A bank manager would want to set the repricing gap greater than zero when interest rates are expected to rise.

For a bank with a positive duration gap,an increase in interest rates will

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. Calculate each institution's CGAP as a percent of assets. Based on the gap,which institution's NII is more sensitive to interest rates? Explain.

For large interest rate declines,duration ________ the increases in the bond's price,and for large interest rate decreases,it ________ the decline in the bond's price.

A rate-sensitive asset is one that either matures within the maturity bucket or one that will have a payment change within the maturity bucket if interest rates change.

For a one-year maturity bucket,the repricing model assumes that a nine-month loan is as equally rate-sensitive as a three-month loan.

If a bank has a negative repricing gap,falling interest rates increase profitability.

A bank has the following balance sheet: If the spread effect is zero and all interest rates decline 50 basis points,the bank's NII will change by ________ over the year.

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

A bank manager would want to set the duration gap greater than zero when interest rates are expected to rise.

Weaknesses of the repricing model include the fact that I. it ignores changes in present values caused by changes in interest rates. II. it ignores different cash flow sensitivities within a maturity bucket. III. it fails to account for runoffs and prepayments.

A bank has the following balance sheet: For a nine-month maturity bucket,the bank has ________ in fixed-rate assets and ________ in fixed-rate liabilities.