Question 1

Which theory of term structure posits that long-term rates are a geometric average of current and expected short-term interest rates?

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

The maturity of a portfolio of assets or liabilities is a weighted average of the maturities of the assets or liabilities that comprise that portfolio.

Accepted Answer

A) True 
 B)False

Question 3

The balance sheet of ARGH Insurance shows the following fixed and rate sensitive assets and liabilities.   What will be the FI's net interest income at year-end if interest rates do not change?

Accepted Answer

A) $3.20 million. 
B) $5.39 million. 
C) $4.04 million. 
D) $1.89 million. 
E) $1.35 million. 
A) $3.20 million. 
B) $5.39 million. 
C) $4.04 million. 
D) $1.89 million. 
E) $1.35 million.

Question 4

When the Bank of Canada finds it necessary to slow economic activity, it allows interest rates to fall.

Accepted Answer

A) True 
 B)False

Question 5

If interest rates decrease 40 basis points (0.40 percent) for an FI that has a cumulative gap of -$25 million, the expected change in net interest income is

Accepted Answer

A) +$100,000. 
B) -$100,000. 
C) -$625,000. 
D) -$250,000. 
E) +$250,000. 
A) +$100,000. 
B) -$100,000. 
C) -$625,000. 
D) -$250,000. 
E) +$250,000.

Question 6

The gap ratio is useful because it indicates the scale of the interest rate exposure by dividing the gap by the asset size of the institution.

Accepted Answer

A) True 
 B)False

Question 7

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 3-year maturity gap is used? Ignore runoffs.

Accepted Answer

A) $21 million. 
B) $44 million. 
C) -$80 million. 
D) -$60 million. 
E) -$120 million. 
A) $21 million. 
B) $44 million. 
C) -$80 million. 
D) -$60 million. 
E) -$120 million.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Because of its complexity, small deposit-taking institutions rarely use the repricing, or funding gap, model.

Accepted Answer

A) True 
 B)False

Question 10

Which theory of term structure states that long-term rates are equal to the geometric average of current and expected short-term rates plus a risk premium that increases with the maturity of the security?

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 11

The Bank for International Settlements (BIS) requires deposit-taking institutions to have interest rate risk management systems.

Accepted Answer

A) True 
 B)False

Question 12

An FI's net interest income reflects

Accepted Answer

A) its asset-liability structure. 
B) rates of interest when the assets and liabilities were put on the books. 
C) the riskiness of its loans and investments. 
D) the cost of its deposit and non-deposit sources of funds. 
E) All of these. 
A) its asset-liability structure. 
B) rates of interest when the assets and liabilities were put on the books. 
C) the riskiness of its loans and investments. 
D) the cost of its deposit and non-deposit sources of funds. 
E) All of these.

Question 13

The following information is from First Yaupon Savings Association.   What is the repricing gap over the 1-year maturity bucket?

Accepted Answer

A) +$100 million. 
B) -$500 million. 
C) -$100 million. 
D) +$500 million. 
E) -$900 million. 
A) +$100 million. 
B) -$500 million. 
C) -$100 million. 
D) +$500 million. 
E) -$900 million.

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.   Is the bank exposed to interest rate increases or decreases and why?

Accepted Answer

A) Interest rate increases because the value of its assets will rise more than its liabilities. 
B) Interest rate increases because the value of its assets will fall more than its liabilities. 
C) Interest rate decreases because the value of its assets will rise less than its liabilities. 
D) Interest rate decreases because the value of its assets will fall more than its liabilities. 
E) Interest rate increases because the value of its assets will fall less than its liabilities. 
A) Interest rate increases because the value of its assets will rise more than its liabilities. 
B) Interest rate increases because the value of its assets will fall more than its liabilities. 
C) Interest rate decreases because the value of its assets will rise less than its liabilities. 
D) Interest rate decreases because the value of its assets will fall more than its liabilities. 
E) Interest rate increases because the value of its assets will fall less than its liabilities.

Question 15

The market segmentation theory of the term structure of interest rates

Accepted Answer

A) assumes that investors will hold long-term maturity assets if there is a sufficient premium to compensate for the uncertainty of the long-term. 
B) assumes that the yield curve reflects the market's current expectations of future short-term interest rates. 
C) assumes that market rates are determined by supply and demand conditions within fairly distinct time or maturity buckets. 
D) fails to recognize that forward rates are not perfect predictors of future interest rates. 
E) assumes that both investors and borrowers are willing to shift from one maturity sector to another to take advantage of opportunities arising from changing yields. 
A) assumes that investors will hold long-term maturity assets if there is a sufficient premium to compensate for the uncertainty of the long-term. 
B) assumes that the yield curve reflects the market's current expectations of future short-term interest rates. 
C) assumes that market rates are determined by supply and demand conditions within fairly distinct time or maturity buckets. 
D) fails to recognize that forward rates are not perfect predictors of future interest rates. 
E) assumes that both investors and borrowers are willing to shift from one maturity sector to another to take advantage of opportunities arising from changing yields.

Question 16

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 liabilities of the FI?

Accepted Answer

A) 3.67 years. 
B) 3.30 years. 
C) 3.00 years. 
D) 5.00 years. 
E) 4.33 years. 
A) 3.67 years. 
B) 3.30 years. 
C) 3.00 years. 
D) 5.00 years. 
E) 4.33 years.

Question 17

The following information details the current rate sensitivity report for Gotbucks Bank, Inc. ($million).   What does Gotbucks Bank's 91-day gap positions reveal about the bank management's interest rate forecasts and the bank's interest rate risk exposure?

Accepted Answer

A) The bank is exposed to interest rate decreases and positioned to gain when interest rates decline. 
B) The bank is exposed to interest rate increases and positioned to gain when interest rates decline. 
C) The bank is exposed to interest rate increases and positioned to gain when interest rates increase. 
D) The bank is exposed to interest rate decreases and positioned to gain when interest rates increase. 
E) Insufficient information. 
A) The bank is exposed to interest rate decreases and positioned to gain when interest rates decline. 
B) The bank is exposed to interest rate increases and positioned to gain when interest rates decline. 
C) The bank is exposed to interest rate increases and positioned to gain when interest rates increase. 
D) The bank is exposed to interest rate decreases and positioned to gain when interest rates increase. 
E) Insufficient information.

Question 18

In general, the interest rate spread (spread effect) between rate sensitive assets and rate sensitive liabilities is positively related to the change in net interest income.

Accepted Answer

A) True 
 B)False

Question 19

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually.   What is this FI's maturity gap?

Accepted Answer

A) 4.00 years. 
B) 4.28 years. 
C) 3.16 years. 
D) 4.06 years. 
E) 5.10 years. 
A) 4.00 years. 
B) 4.28 years. 
C) 3.16 years. 
D) 4.06 years. 
E) 5.10 years.

Question 20

Which of the following describes the condition known as runoff in the repricing model approach to measuring interest rate risk of an FI?

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) Mismatch of asset and liabilities within a maturity bucket. 
D) The relations between changes in interest rates and changes in net interest income. 
E) Those deposits that act as an FI's long-term sources of funds. 
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) Mismatch of asset and liabilities within a maturity bucket. 
D) The relations between changes in interest rates and changes in net interest income. 
E) Those deposits that act as an FI's long-term sources of funds.

Exam 8: Interest Rate Risk I

Which theory of term structure posits that long-term rates are a geometric average of current and expected short-term interest rates?

The maturity of a portfolio of assets or liabilities is a weighted average of the maturities of the assets or liabilities that comprise that portfolio.

The balance sheet of ARGH Insurance shows the following fixed and rate sensitive assets and liabilities. What will be the FI's net interest income at year-end if interest rates do not change?

When the Bank of Canada finds it necessary to slow economic activity, it allows interest rates to fall.

If interest rates decrease 40 basis points (0.40 percent) for an FI that has a cumulative gap of -$25 million, the expected change in net interest income is

The gap ratio is useful because it indicates the scale of the interest rate exposure by dividing the gap by the asset size of the institution.

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 3-year maturity gap is used? Ignore runoffs.

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

Because of its complexity, small deposit-taking institutions rarely use the repricing, or funding gap, model.

Which theory of term structure states that long-term rates are equal to the geometric average of current and expected short-term rates plus a risk premium that increases with the maturity of the security?

The Bank for International Settlements (BIS) requires deposit-taking institutions to have interest rate risk management systems.

An FI's net interest income reflects

The following information is from First Yaupon Savings Association. What is the repricing gap over the 1-year maturity bucket?

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. Is the bank exposed to interest rate increases or decreases and why?

The market segmentation theory of the term structure of interest rates

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 liabilities of the FI?

The following information details the current rate sensitivity report for Gotbucks Bank, Inc. ($million). What does Gotbucks Bank's 91-day gap positions reveal about the bank management's interest rate forecasts and the bank's interest rate risk exposure?

In general, the interest rate spread (spread effect) between rate sensitive assets and rate sensitive liabilities is positively related to the change in net interest income.

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually. What is this FI's maturity gap?

Which of the following describes the condition known as runoff in the repricing model approach to measuring interest rate risk of an FI?

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