Question 1

Which of the following relationships does NOT hold in the pricing of fixed-rate assets given changes in market rate?

Accepted Answer

A) A decrease in interest rates generally leads to an increase in the value of assets. 
B) Longer maturity assets have greater changes in price than shorter maturity assets for given changes in interest rates. 
C) The absolute change in price per unit of maturity time for given changes in interest rates decreases over time, although the relative changes actually increase. 
D) For a given percentage decrease in interest rates, assets will increase in price more than they will decrease in price for the same, but opposite increase in rates. 
E) None of these. 
A) A decrease in interest rates generally leads to an increase in the value of assets. 
B) Longer maturity assets have greater changes in price than shorter maturity assets for given changes in interest rates. 
C) The absolute change in price per unit of maturity time for given changes in interest rates decreases over time, although the relative changes actually increase. 
D) For a given percentage decrease in interest rates, assets will increase in price more than they will decrease in price for the same, but opposite increase in rates. 
E) None of these. C

Question 2

For a given change in interest rates, fixed-rate liabilities with longer-term maturities will have smaller changes in price than liabilities with shorter maturities.

Accepted Answer

A) True 
 B)False  False

Question 3

For a given change in interest rates, the change in price for each additional year of maturity of a fixed-rate asset is smaller as the maturity increases.

Accepted Answer

A) True 
 B)False  True

Question 4

When interest rates increase, banks are more likely to be forced to increase rate-sensitive liabilities to replace decreased balances in demand deposits and savings accounts.

Accepted Answer

A) True 
 B)False

Question 5

The balance sheet of XYZ Bank appears below. All figures in millions of Canadian dollars.   Total one-year rate-sensitive assets is

Accepted Answer

A) $540 million. 
B) $580 million. 
C) $555 million. 
D) $415 million. 
E) $720 million. 
A) $540 million. 
B) $580 million. 
C) $555 million. 
D) $415 million. 
E) $720 million.

Question 6

The repricing gap does not accurately measure FI interest rate risk exposure because

Accepted Answer

A) FIs cannot accurately predict the magnitude change in future interest rates. 
B) FIs cannot accurately predict the direction of change in future interest rates. 
C) accounting systems are not accurate enough to allow the calculation of precise gap measures. 
D) it does not recognize timing differences in cash flows within the same maturity grouping. 
E) equity is omitted. 
A) FIs cannot accurately predict the magnitude change in future interest rates. 
B) FIs cannot accurately predict the direction of change in future interest rates. 
C) accounting systems are not accurate enough to allow the calculation of precise gap measures. 
D) it does not recognize timing differences in cash flows within the same maturity grouping. 
E) equity is omitted.

Question 7

A positive repricing gap implies that a decrease in interest rates will cause interest expense to decrease more than the decrease in interest income.

Accepted Answer

A) True 
 B)False

Question 8

The repricing model is based on an accounting world that reports asset and liability values at

Accepted Answer

A) their market value. 
B) their book value. 
C) their historic values or costs. 
D) All of these. 
E) their book value, and their historic values or costs 
A) their market value. 
B) their book value. 
C) their historic values or costs. 
D) All of these. 
E) their book value, and their historic values or costs

Question 9

The gap ratio expresses the repricing gap for a given time period as a percentage of

Accepted Answer

A) equity. 
B) total liabilities. 
C) current liabilities. 
D) total assets. 
E) current assets. 
A) equity. 
B) total liabilities. 
C) current liabilities. 
D) total assets. 
E) current assets.

Question 10

The repricing model ignores information regarding the distribution of assets and liabilities within maturity buckets. This limitation of the model refers to

Accepted Answer

A) market value effect. 
B) overaggregation. 
C) runoffs and pre-payments. 
D) OBS activities. 
E) the spread effect. 
A) market value effect. 
B) overaggregation. 
C) runoffs and pre-payments. 
D) OBS activities. 
E) the spread effect.

Question 11

Duration Bank has the following assets and liabilities as of year-end. All assets and liabilities are currently priced at par and pay interest annually.   What is the change in the value of its assets if all interest rates decrease by 1 percent?

Accepted Answer

A) Approximately $1.613 million. 
B) Approximately $2.297 million. 
C) Approximately -$1.937 million. 
D) Approximately $2.209 million. 
E) Approximately $2.524 million. 
A) Approximately $1.613 million. 
B) Approximately $2.297 million. 
C) Approximately -$1.937 million. 
D) Approximately $2.209 million. 
E) Approximately $2.524 million.

Question 12

The maturity gap model estimates the difference between interest earned and interest paid during a given period of time.

Accepted Answer

A) True 
 B)False

Question 13

The following are the assets and liabilities of a government security dealer.   What is the impact over the next 30 days on the dealer's net interest income if all interest rates increase by 50 basis points?

Accepted Answer

A) Net interest income will decrease by $50,000. 
B) Net interest income will decrease by $2.125 million. 
C) Net interest income will decrease by $475,000. 
D) Net interest income will decrease by $2.375 million. 
E) Net interest income will increase by $750,000. 
A) Net interest income will decrease by $50,000. 
B) Net interest income will decrease by $2.125 million. 
C) Net interest income will decrease by $475,000. 
D) Net interest income will decrease by $2.375 million. 
E) Net interest income will increase by $750,000.

Question 14

The cumulative repricing gap position of an FI for a given extended time period is the sum of the repricing gap values for the individual time periods that make up the extended time period.

Accepted Answer

A) True 
 B)False

Question 15

When a bank's repricing gap is positive, net interest income is positively related to changes in interest rates.

Accepted Answer

A) True 
 B)False

Question 16

An interest rate increase

Accepted Answer

A) benefits the FI by increasing the market value of the FI's liabilities. 
B) harms the FI by increasing the market value of the FI's liabilities. 
C) harms the FI by decreasing the market value of the FI's liabilities. 
D) benefits the FI by decreasing the market value of the FI's liabilities. 
E) benefits the FI by decreasing the market value of the FI's assets. 
A) benefits the FI by increasing the market value of the FI's liabilities. 
B) harms the FI by increasing the market value of the FI's liabilities. 
C) harms the FI by decreasing the market value of the FI's liabilities. 
D) benefits the FI by decreasing the market value of the FI's liabilities. 
E) benefits the FI by decreasing the market value of the FI's assets.

Question 17

The unbiased expectations theory of the term structure of interest rates

Accepted Answer

A) assumes that long-term interest rates are an arithmetic average of short-term rates. 
B) assumes that the yield curve reflects the market's current expectations of future short-term interest rates. 
C) recognizes that forward rates are perfect predictors of future interest rates. 
D) assumes that risk premiums increase uniformly with maturity. 
E) None of these. 
A) assumes that long-term interest rates are an arithmetic average of short-term rates. 
B) assumes that the yield curve reflects the market's current expectations of future short-term interest rates. 
C) recognizes that forward rates are perfect predictors of future interest rates. 
D) assumes that risk premiums increase uniformly with maturity. 
E) None of these.

Question 18

One reason to exclude demand deposits when estimating a bank's repricing gap is because, by regulation, OSFI requires Canadian banks to exclude them.

Accepted Answer

A) True 
 B)False

Question 19

The following are the assets and liabilities of a government security dealer.   Use the repricing model to determine the funding gap for a maturity bucket of 365 days.

Accepted Answer

A) +$15 million. 
B) -$20 million. 
C) -$350 million. 
D) -$450 million. 
E) -$290 million. 
A) +$15 million. 
B) -$20 million. 
C) -$350 million. 
D) -$450 million. 
E) -$290 million.

Question 20

If the average maturity of assets is 5 years and the average maturity of liabilities is 7 years, then the FI has no interest rate risk exposure.

Accepted Answer

A) True 
 B)False

Exam 8: Interest Rate Risk I

Which of the following relationships does NOT hold in the pricing of fixed-rate assets given changes in market rate?

For a given change in interest rates, fixed-rate liabilities with longer-term maturities will have smaller changes in price than liabilities with shorter maturities.

For a given change in interest rates, the change in price for each additional year of maturity of a fixed-rate asset is smaller as the maturity increases.

When interest rates increase, banks are more likely to be forced to increase rate-sensitive liabilities to replace decreased balances in demand deposits and savings accounts.

The balance sheet of XYZ Bank appears below. All figures in millions of Canadian dollars. Total one-year rate-sensitive assets is

The repricing gap does not accurately measure FI interest rate risk exposure because

A positive repricing gap implies that a decrease in interest rates will cause interest expense to decrease more than the decrease in interest income.

The repricing model is based on an accounting world that reports asset and liability values at

The gap ratio expresses the repricing gap for a given time period as a percentage of

The repricing model ignores information regarding the distribution of assets and liabilities within maturity buckets. This limitation of the model refers to

Duration Bank has the following assets and liabilities as of year-end. All assets and liabilities are currently priced at par and pay interest annually. What is the change in the value of its assets if all interest rates decrease by 1 percent?

The maturity gap model estimates the difference between interest earned and interest paid during a given period of time.

The following are the assets and liabilities of a government security dealer. What is the impact over the next 30 days on the dealer's net interest income if all interest rates increase by 50 basis points?

The cumulative repricing gap position of an FI for a given extended time period is the sum of the repricing gap values for the individual time periods that make up the extended time period.

When a bank's repricing gap is positive, net interest income is positively related to changes in interest rates.

An interest rate increase

The unbiased expectations theory of the term structure of interest rates

One reason to exclude demand deposits when estimating a bank's repricing gap is because, by regulation, OSFI requires Canadian banks to exclude them.

The following are the assets and liabilities of a government security dealer. Use the repricing model to determine the funding gap for a maturity bucket of 365 days.

If the average maturity of assets is 5 years and the average maturity of liabilities is 7 years, then the FI has no interest rate risk exposure.

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