Question 1

Which theory of term structure argues that individual investors have specific maturity preferences?

Accepted Answer

A) The unbiased expectations theory. 
B) The liquidity premium theory. 
C) The loanable funds theory. 
D) The market segmentation theory. 
E) None of these. 
A) The unbiased expectations theory. 
B) The liquidity premium theory. 
C) The loanable funds theory. 
D) The market segmentation theory. 
E) None of these.

Question 2

A bank with a negative repricing (or funding) gap faces reinvestment risk.

Accepted Answer

A) True 
 B)False

Question 3

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 91 days.

Accepted Answer

A) -$60 million. 
B) -$150 million. 
C) $0. 
D) -$250 million. 
E) -$300 million. 
A) -$60 million. 
B) -$150 million. 
C) $0. 
D) -$250 million. 
E) -$300 million.

Question 4

If an FI's repricing gap is less than zero, then

Accepted Answer

A) it is deficient in its required reserves. 
B) it is deficient in its capital ratio requirement. 
C) its liability costs are more sensitive to changing market interest rates than are its asset yields. 
D) its liability costs are less sensitive to changing market interest rates than are its asset yields. 
E) the duration of the FI's liabilities exceeds the duration of FI's assets. 
A) it is deficient in its required reserves. 
B) it is deficient in its capital ratio requirement. 
C) its liability costs are more sensitive to changing market interest rates than are its asset yields. 
D) its liability costs are less sensitive to changing market interest rates than are its asset yields. 
E) the duration of the FI's liabilities exceeds the duration of FI's assets.

Question 5

Which of the following statements is true?

Accepted Answer

A) An increase in interest rates leads to an increase in the market value of financial securities. 
B) Value of longer term securities decreases at a diminishing rate for increases in interest rates. 
C) Value of longer term securities increases at an increasing rate for any decline in interest rates. 
D) The shorter the maturity of a fixed income asset or liability, the greater the fall in market value for any given interest rate increase. 
E) The longer the maturity of a fixed income asset or liability, the greater the fall in market value for any given interest rate decrease. 
A) An increase in interest rates leads to an increase in the market value of financial securities. 
B) Value of longer term securities decreases at a diminishing rate for increases in interest rates. 
C) Value of longer term securities increases at an increasing rate for any decline in interest rates. 
D) The shorter the maturity of a fixed income asset or liability, the greater the fall in market value for any given interest rate increase. 
E) The longer the maturity of a fixed income asset or liability, the greater the fall in market value for any given interest rate decrease.

Question 6

The repricing gap model is a book value accounting based model.

Accepted Answer

A) True 
 B)False

Question 7

Because the repricing model ignores the market value effect of changing interest rates, the repricing gap is an incomplete measure of the true interest rate risk exposure of an FI.

Accepted Answer

A) True 
 B)False

Question 8

The following is the balance sheet of Victoria Bank. The average maturity of demand deposits is estimated at 2 years.   What is the impact on net interest income in year two if interest rates increase by 50 basis points at the end of year one? Ignore runoffs.

Accepted Answer

A) +$0.210 million. 
B) +$0.300 million. 
C) -$0.300 million. 
D) -$0.210 million. 
E) +$0.600 million. 
A) +$0.210 million. 
B) +$0.300 million. 
C) -$0.300 million. 
D) -$0.210 million. 
E) +$0.600 million.

Question 9

One reason to include demand deposits when estimating a bank's repricing gap is because rising interest rates could lead to high withdrawals.

Accepted Answer

A) True 
 B)False

Question 10

Runoff in demand deposits in a repricing model is typically lower during periods of falling interest rates.

Accepted Answer

A) True 
 B)False

Question 11

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually.   Which of the following statements is true?

Accepted Answer

A) An increase in interest rates will benefit the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities. 
B) An increase in interest rates will harm the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities. 
C) An increase in interest rates will harm the FI since the decrease in the market value of assets will be greater than the decrease in the market value of liabilities. 
D) A decrease in interest rates will harm the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities. 
E) A decrease in interest rates will benefit the FI since the increase in the market value of assets will be smaller than the increase in the market value of liabilities. 
A) An increase in interest rates will benefit the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities. 
B) An increase in interest rates will harm the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities. 
C) An increase in interest rates will harm the FI since the decrease in the market value of assets will be greater than the decrease in the market value of liabilities. 
D) A decrease in interest rates will harm the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities. 
E) A decrease in interest rates will benefit the FI since the increase in the market value of assets will be smaller than the increase in the market value of liabilities.

Question 12

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually.   Can the FI immunize itself from interest rate risk exposure by setting the maturity gap equal to zero?

Accepted Answer

A) Yes, because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities. 
B) No, because with a maturity gap of zero, the change in the market value of assets exactly offsets the change in the market value of liabilities. 
C) No, because the maturity model does not consider the timing of cash flows. 
D) Yes, because the timing of cash flows is not relevant to immunization against interest rate risk exposure. 
E) No, because a representative bank will always have a positive maturity gap. 
A) Yes, because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities. 
B) No, because with a maturity gap of zero, the change in the market value of assets exactly offsets the change in the market value of liabilities. 
C) No, because the maturity model does not consider the timing of cash flows. 
D) Yes, because the timing of cash flows is not relevant to immunization against interest rate risk exposure. 
E) No, because a representative bank will always have a positive maturity gap.

Question 13

The balance sheet of XYZ Bank appears below. All figures in millions of Canadian dollars.   Suppose that interest rates rise by 2 percent on both RSAs and RSLs. The expected annual change in net interest income of the bank is

Accepted Answer

A) -$300,000. 
B) $500,000. 
C) -$2,800,000. 
D) -$3,000,000. 
E) $300,000. 
A) -$300,000. 
B) $500,000. 
C) -$2,800,000. 
D) -$3,000,000. 
E) $300,000.

Question 14

The net worth of a bank is the difference between the

Accepted Answer

A) value of retained earnings and the provision for loan losses. 
B) market value of assets and the market value of liabilities. 
C) book value of assets and book value of liabilities. 
D) rate-sensitive assets and rate-sensitive liabilities. 
E) None of these. 
A) value of retained earnings and the provision for loan losses. 
B) market value of assets and the market value of liabilities. 
C) book value of assets and book value of liabilities. 
D) rate-sensitive assets and rate-sensitive liabilities. 
E) None of these.

Question 15

If interest rates decrease 50 basis points for an FI that has a gap of +$5 million, the expected change in net interest income is

Accepted Answer

A) + $2,500. 
B) + $25,000. 
C) + $250,000. 
D) - $250,000. 
E) - $25,000. 
A) + $2,500. 
B) + $25,000. 
C) + $250,000. 
D) - $250,000. 
E) - $25,000.

Question 16

If the interest rate spread between rate sensitive assets and rate sensitive liabilities increases for a bank, future increases in interest rates will lead to an increase in net interest income.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is a weakness of the repricing model to measure interest rate risk?

Accepted Answer

A) Potential for overaggregation of assets and liabilities within each maturity bucket. 
B) It ignores how changes in interest rates affect the market value of assets and liabilities. 
C) It ignores the reinvestment of loan interest and principal payments that are reinvested at current market rates. 
D) It fails to recognize off-balance-sheet activities that may be rate sensitive. 
E) All of these. 
A) Potential for overaggregation of assets and liabilities within each maturity bucket. 
B) It ignores how changes in interest rates affect the market value of assets and liabilities. 
C) It ignores the reinvestment of loan interest and principal payments that are reinvested at current market rates. 
D) It fails to recognize off-balance-sheet activities that may be rate sensitive. 
E) All of these.

Question 18

The balance sheet of ARGH Insurance shows the following fixed and rate sensitive assets and liabilities.   What is the repricing gap for the FI?

Accepted Answer

A) $0. 
B) $5,000,000. 
C) $9,800,000. 
D) -$5,000,000. 
E) -$8,000,000. 
A) $0. 
B) $5,000,000. 
C) $9,800,000. 
D) -$5,000,000. 
E) -$8,000,000.

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 30 days.

Accepted Answer

A) -$425 million. 
B) -$95 million. 
C) -$10 million. 
D) -$475 million. 
E) +$150 million. 
A) -$425 million. 
B) -$95 million. 
C) -$10 million. 
D) -$475 million. 
E) +$150 million.

Question 20

If the chosen maturity buckets have a time period that is too long, the repricing model may produce inaccurate results because

Accepted Answer

A) as the time to maturity increases, the price volatility increases. 
B) price changes will be overestimated. 
C) there may be large differentials in the time to repricing for different securities within each maturity bucket. 
D) the FI will be unable to accurately measure the quantity of rate sensitive assets. 
E) the FI will be unable to accurately measure the quantity of rate sensitive liabilities. 
A) as the time to maturity increases, the price volatility increases. 
B) price changes will be overestimated. 
C) there may be large differentials in the time to repricing for different securities within each maturity bucket. 
D) the FI will be unable to accurately measure the quantity of rate sensitive assets. 
E) the FI will be unable to accurately measure the quantity of rate sensitive liabilities.

Exam 8: Interest Rate Risk I

Which theory of term structure argues that individual investors have specific maturity preferences?

A bank with a negative repricing (or funding) gap faces reinvestment risk.

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 91 days.

If an FI's repricing gap is less than zero, then

Which of the following statements is true?

The repricing gap model is a book value accounting based model.

Because the repricing model ignores the market value effect of changing interest rates, the repricing gap is an incomplete measure of the true interest rate risk exposure of an FI.

The following is the balance sheet of Victoria Bank. The average maturity of demand deposits is estimated at 2 years. What is the impact on net interest income in year two if interest rates increase by 50 basis points at the end of year one? Ignore runoffs.

One reason to include demand deposits when estimating a bank's repricing gap is because rising interest rates could lead to high withdrawals.

Runoff in demand deposits in a repricing model is typically lower during periods of falling interest rates.

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually. Which of the following statements is true?

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually. Can the FI immunize itself from interest rate risk exposure by setting the maturity gap equal to zero?

The balance sheet of XYZ Bank appears below. All figures in millions of Canadian dollars. Suppose that interest rates rise by 2 percent on both RSAs and RSLs. The expected annual change in net interest income of the bank is

The net worth of a bank is the difference between the

If interest rates decrease 50 basis points for an FI that has a gap of +$5 million, the expected change in net interest income is

If the interest rate spread between rate sensitive assets and rate sensitive liabilities increases for a bank, future increases in interest rates will lead to an increase in net interest income.

Which of the following is a weakness of the repricing model to measure interest rate risk?

The balance sheet of ARGH Insurance shows the following fixed and rate sensitive assets and liabilities. What is the repricing gap for the FI?

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 30 days.

If the chosen maturity buckets have a time period that is too long, the repricing model may produce inaccurate results because

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