Question 1

If interest rates increase 75 basis points for an FI that has a gap of -$15 million, the expected change in net interest income is

Accepted Answer

A) -$112,500. 
B) +$112,500. 
C) +$1,125,0000. 
D) -$1,125,0000. 
E) -$150,000. 
A) -$112,500. 
B) +$112,500. 
C) +$1,125,0000. 
D) -$1,125,0000. 
E) -$150,000.

Question 2

A method of measuring the interest rate or gap exposure of an FI is

Accepted Answer

A) the duration model. 
B) the maturity model. 
C) the repricing model. 
D) the funding gap model. 
E) All of these. 
A) the duration model. 
B) the maturity model. 
C) the repricing model. 
D) the funding gap model. 
E) All of these.

Question 3

What is spread effect?

Accepted Answer

A) Periodic cash flow of interest and principal amortization payments on long-term assets that can be reinvested at market rates. 
B) The effect that a change in the spread between rates on RSAs and RSLs has on net interest income as interest rates change. 
C) The effect of mismatch of asset and liabilities within a maturity bucket. 
D) The premium paid to compensate for the future uncertainty in a security's value. 
E) The value of an FI to its owners. 
A) Periodic cash flow of interest and principal amortization payments on long-term assets that can be reinvested at market rates. 
B) The effect that a change in the spread between rates on RSAs and RSLs has on net interest income as interest rates change. 
C) The effect of mismatch of asset and liabilities within a maturity bucket. 
D) The premium paid to compensate for the future uncertainty in a security's value. 
E) The value of an FI to its owners.

Question 4

Can an FI immunize itself against interest rate risk exposure even though its maturity gap is not 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) Yes, because the maturity model does not consider the timing of cash flows. 
D) No, because the timing of cash flows is 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) Yes, because the maturity model does not consider the timing of cash flows. 
D) No, because the timing of cash flows is relevant to immunization against interest rate risk exposure. 
E) No, because a representative bank will always have a positive maturity gap.

Question 5

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually.   What is the weighted average maturity of assets?

Accepted Answer

A) 5.50 years. 
B) 6.40 years. 
C) 5.00 years. 
D) 4.60 years. 
E) 10.0 years. 
A) 5.50 years. 
B) 6.40 years. 
C) 5.00 years. 
D) 4.60 years. 
E) 10.0 years.

Question 6

The repricing gap approach calculates the gaps in each maturity bucket by subtracting the

Accepted Answer

A) current assets from the current liabilities. 
B) long term liabilities from the fixed assets. 
C) rate sensitive assets from the total assets. 
D) rate sensitive liabilities from the rate sensitive assets. 
E) current liabilities from tangible assets. 
A) current assets from the current liabilities. 
B) long term liabilities from the fixed assets. 
C) rate sensitive assets from the total assets. 
D) rate sensitive liabilities from the rate sensitive assets. 
E) current liabilities from tangible assets.

Question 7

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually.   What is market value of the one-year bond if all market interest rates increase by 2 percent?

Accepted Answer

A) $60.000 million. 
B) $60.566 million. 
C) $59.444 million. 
D) $58.899 million. 
E) $61.142 million. 
A) $60.000 million. 
B) $60.566 million. 
C) $59.444 million. 
D) $58.899 million. 
E) $61.142 million.

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 repricing gap if a 0 to 3 month maturity gap is used? Ignore runoffs.

Accepted Answer

A) $60 million. 
B) $40 million. 
C) -$80 million. 
D) -$120 million. 
E) -$180 million. 
A) $60 million. 
B) $40 million. 
C) -$80 million. 
D) -$120 million. 
E) -$180 million.

Question 9

In the repricing gap model, assets or liabilities are rate sensitive within a given time period if the dollar values of each are subject to receiving a different interest rate should market rates change.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following observations about the repricing model is correct?

Accepted Answer

A) Its information value is limited. 
B) It accounts for the problem of rate-insensitive asset and liability runoffs and prepayments. 
C) It accommodates cash flows from off-balance-sheet activities. 
D) It helps to determine an FI's profit exposure to interest rate changes. 
E) It considers market value effects of interest rate changes. 
A) Its information value is limited. 
B) It accounts for the problem of rate-insensitive asset and liability runoffs and prepayments. 
C) It accommodates cash flows from off-balance-sheet activities. 
D) It helps to determine an FI's profit exposure to interest rate changes. 
E) It considers market value effects of interest rate changes.

Question 11

The market value of a fixed-rate liability will increase as interest rates rise, although the market value of a fixed-rate asset will decrease as interest rates rise.

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

The term structure of interest rates assumes that

Accepted Answer

A) the risk of all assets is the same. 
B) the time to maturity for all assets is the same. 
C) the coupon rate of all assets is the same. 
D) The market value of assets is the same. 
E) All of these. 
A) the risk of all assets is the same. 
B) the time to maturity for all assets is the same. 
C) the coupon rate of all assets is the same. 
D) The market value of assets is the same. 
E) All of these.

Question 14

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 liabilities if all interest rates decrease by 1 percent?

Accepted Answer

A) Approximately $2.003 million. 
B) Approximately -$2.355 million. 
C) Approximately $2.697 million. 
D) Approximately $2.906 million. 
E) Approximately $3.211 million. 
A) Approximately $2.003 million. 
B) Approximately -$2.355 million. 
C) Approximately $2.697 million. 
D) Approximately $2.906 million. 
E) Approximately $3.211 million.

Question 15

The following is the balance sheet of Victoria Bank. The average maturity of demand deposits is estimated at 2 years.   What is the repricing gap if a 1-year maturity gap is used if runoffs are also considered?

Accepted Answer

A) -22 million. 
B) +$22 million. 
C) +$53 million. 
D) -$40 million. 
E) -$70 million. 
A) -22 million. 
B) +$22 million. 
C) +$53 million. 
D) -$40 million. 
E) -$70 million.

Question 16

An FI finances a $250,000 2-year fixed-rate loan with a $200,000 1-year fixed-rate CD. Use the repricing model to determine (a) the FI's repricing (or funding) gap using a 1-year maturity bucket, and (b) the impact of a 100 basis point (0.01) decrease in interest rates on the FI's annual net interest income?

Accepted Answer

A) $0; $0. 
B) -$200,000; +$2,000. 
C) -$200,000; -$2,000. 
D) +$50,000; -$500. 
E) -$200,000; -$1,000. 
A) $0; $0. 
B) -$200,000; +$2,000. 
C) -$200,000; -$2,000. 
D) +$50,000; -$500. 
E) -$200,000; -$1,000.

Question 17

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 weighted average maturity of the assets of the FI?

Accepted Answer

A) 2.0 years. 
B) 2.3 years. 
C) 2.5 years. 
D) 2.6 years. 
E) 3.0 years. 
A) 2.0 years. 
B) 2.3 years. 
C) 2.5 years. 
D) 2.6 years. 
E) 3.0 years.

Question 18

The average maturity of the liabilities of an FI's balance sheet is equal to

Accepted Answer

A) the weighted-average of the liabilities where the weights are determined relative to the total liabilities and equity of the FI. 
B) the weighted-average of the liabilities where the weights are determined relative to the total liabilities of the FI. 
C) the weighted-average of the liabilities where the weights are determined relative to the total assets of the FI. 
D) the weighted-average of the liabilities where the weights are determined using market values of liabilities. 
E) None of these. 
A) the weighted-average of the liabilities where the weights are determined relative to the total liabilities and equity of the FI. 
B) the weighted-average of the liabilities where the weights are determined relative to the total liabilities of the FI. 
C) the weighted-average of the liabilities where the weights are determined relative to the total assets of the FI. 
D) the weighted-average of the liabilities where the weights are determined using market values of liabilities. 
E) None of these.

Question 19

When repricing all interest sensitive assets and all interest sensitive liabilities in a balance sheet, the cumulative gap will be

Accepted Answer

A) zero. 
B) one. 
C) greater than one. 
D) a negative value. 
E) infinity. 
A) zero. 
B) one. 
C) greater than one. 
D) a negative value. 
E) infinity.

Question 20

The market value of a fixed-rate liability will decrease as interest rates rise, just as the market value of a fixed-rate asset will decrease as interest rates rise.

Accepted Answer

A) True 
 B)False

Exam 8: Interest Rate Risk I

If interest rates increase 75 basis points for an FI that has a gap of -$15 million, the expected change in net interest income is

A method of measuring the interest rate or gap exposure of an FI is

What is spread effect?

Can an FI immunize itself against interest rate risk exposure even though its maturity gap is not zero?

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually. What is the weighted average maturity of assets?

The repricing gap approach calculates the gaps in each maturity bucket by subtracting the

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually. What is market value of the one-year bond if all market interest rates increase by 2 percent?

The following is the balance sheet of Victoria Bank. The average maturity of demand deposits is estimated at 2 years. What is the repricing gap if a 0 to 3 month maturity gap is used? Ignore runoffs.

In the repricing gap model, assets or liabilities are rate sensitive within a given time period if the dollar values of each are subject to receiving a different interest rate should market rates change.

Which of the following observations about the repricing model is correct?

The market value of a fixed-rate liability will increase as interest rates rise, although the market value of a fixed-rate asset will decrease as interest rates rise.

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

The term structure of interest rates assumes that

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 liabilities if all interest rates decrease by 1 percent?

The following is the balance sheet of Victoria Bank. The average maturity of demand deposits is estimated at 2 years. What is the repricing gap if a 1-year maturity gap is used if runoffs are also considered?

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 weighted average maturity of the assets of the FI?

The average maturity of the liabilities of an FI's balance sheet is equal to

When repricing all interest sensitive assets and all interest sensitive liabilities in a balance sheet, the cumulative gap will be

The market value of a fixed-rate liability will decrease as interest rates rise, just as the market value of a fixed-rate asset will decrease as interest rates rise.

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