Question 1

The change in economic value of a fixed-rate liability for a decrease in interest rates is considered to be good news.

Accepted Answer

A) True 
 B)False

Question 2

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 ten-year loan if all market interest rates increase by 2 percent?

Accepted Answer

A) $40.000 million. 
B) $44.916 million. 
C) $37.830 million. 
D) $42.356 million. 
E) $35.827 million. 
A) $40.000 million. 
B) $44.916 million. 
C) $37.830 million. 
D) $42.356 million. 
E) $35.827 million.

Question 3

Retail savings accounts are considered as part of rate sensitive liabilities because the rates on these accounts rarely change.

Accepted Answer

A) True 
 B)False

Question 4

An increase in interest rates

Accepted Answer

A) increases the market value of the FI's financial assets and liabilities. 
B) decreases the market value of the FI's financial assets and liabilities. 
C) decreases the book value of the FI's financial assets and liabilities. 
D) increases the book value of the FI's financial assets and liabilities. 
E) has no impact on the market value of the FI's financial assets and liabilities. 
A) increases the market value of the FI's financial assets and liabilities. 
B) decreases the market value of the FI's financial assets and liabilities. 
C) decreases the book value of the FI's financial assets and liabilities. 
D) increases the book value of the FI's financial assets and liabilities. 
E) has no impact on the market value of the FI's financial assets and liabilities.

Question 5

If the average maturity of assets is 4 years and the average maturity of liabilities is 4 years, then the FI has no interest rate risk exposure.

Accepted Answer

A) True 
 B)False

Question 6

The balance sheet of XYZ Bank appears below. All figures in millions of Canadian dollars.   Total one-year rate-sensitive liabilities 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 7

Because of its simplicity, smaller deposit-taking institutions still use this model as their primary measure of interest rate risk.

Accepted Answer

A) The repricing model. 
B) The maturity model. 
C) The duration model. 
D) The convexity model. 
E) The option pricing model. 
A) The repricing model. 
B) The maturity model. 
C) The duration model. 
D) The convexity model. 
E) The option pricing model.

Question 8

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 liabilities?

Accepted Answer

A) 5.50 years. 
B) 6.40 years. 
C) 1.44 years. 
D) 1.30 years. 
E) 1.10 years. 
A) 5.50 years. 
B) 6.40 years. 
C) 1.44 years. 
D) 1.30 years. 
E) 1.10 years.

Question 9

A positive gap implies that an increase in interest rates will cause _______ in net interest income.

Accepted Answer

A) no change 
B) a decrease 
C) an increase 
D) an unpredictable change 
E) Either no change or a decrease. 
A) no change 
B) a decrease 
C) an increase 
D) an unpredictable change 
E) Either no change or a decrease.

Question 10

The liquidity premium 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 long-term interest rates are an arithmetic average of short-term rates plus a liquidity premium. 
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 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 long-term interest rates are an arithmetic average of short-term rates plus a liquidity premium. 
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 11

The maturity gap for a bank is the weighted average maturity of the assets minus the weighted average maturity of the liabilities.

Accepted Answer

A) True 
 B)False

Question 12

Defining buckets of time over a range of maturities assures the capture of all relevant information necessary to accurately assess the interest rate risk exposure of an FI.

Accepted Answer

A) True 
 B)False

Question 13

The following information is from First Yaupon Savings Association.   If all interest rates decrease by 15 basis points, what is the expected impact on the FI's net interest income? (Hint: Use the repricing model to answer this question.)

Accepted Answer

A) +$150,000. 
B) -$150,000. 
C) -$750,000. 
D) +$750,000. 
E) No change. 
A) +$150,000. 
B) -$150,000. 
C) -$750,000. 
D) +$750,000. 
E) No change.

Question 14

The following information details the current rate sensitivity report for Gotbucks Bank, Inc. ($million).   How will a decrease of 25 basis points in all interest rates affect Gotbucks' net interest income over a planning period of 91 days?

Accepted Answer

A) +$0.1875 million. 
B) +$0.1250 million. 
C) -$0.1375 million. 
D) +$0.0625 million. 
E) 0 
A) +$0.1875 million. 
B) +$0.1250 million. 
C) -$0.1375 million. 
D) +$0.0625 million. 
E) 0

Question 15

A bank that finances long-term fixed-rate mortgages with short-term deposits is exposed to

Accepted Answer

A) increases in net interest income and decreases in the market value of equity when interest rates fall. 
B) decreases in net interest income and decreases in the market value of equity when interest rates fall. 
C) decreases in net interest income and increases in the market value of equity when interest rates increase. 
D) increases in net interest income and increases in the market value of equity when interest rates increase. 
E) decreases in net interest income and decreases in the market value of equity when interest rates increase. 
A) increases in net interest income and decreases in the market value of equity when interest rates fall. 
B) decreases in net interest income and decreases in the market value of equity when interest rates fall. 
C) decreases in net interest income and increases in the market value of equity when interest rates increase. 
D) increases in net interest income and increases in the market value of equity when interest rates increase. 
E) decreases in net interest income and decreases in the market value of equity when interest rates increase.

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 FI's maturity gap?

Accepted Answer

A) -2.03 years. 
B) -2.50 years. 
C) -1.07 years. 
D) -0.70 years. 
E) -0.40 years. 
A) -2.03 years. 
B) -2.50 years. 
C) -1.07 years. 
D) -0.70 years. 
E) -0.40 years.

Question 17

The balance sheet of XYZ Bank appears below. All figures in millions of Canadian dollars.   The cumulative one-year repricing gap (CGAP) for the bank is

Accepted Answer

A) $25 million. 
B) $-140 million. 
C) $15 million. 
D) $-150 million. 
E) $-15 million. 
A) $25 million. 
B) $-140 million. 
C) $15 million. 
D) $-150 million. 
E) $-15 million.

Question 18

The balance sheet of XYZ Bank appears below. All figures in millions of Canadian dollars.   The gap ratio is

Accepted Answer

A) .015. 
B) -.015. 
C) .025. 
D) -.144. 
E) .154. 
A) .015. 
B) -.015. 
C) .025. 
D) -.144. 
E) .154.

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 market value of the two-year GIC if all market interest rates increase by 2 percent?

Accepted Answer

A) $40.381 million. 
B) $39.626 million. 
C) $40.000 million. 
D) $38.573 million. 
E) $40.769 million. 
A) $40.381 million. 
B) $39.626 million. 
C) $40.000 million. 
D) $38.573 million. 
E) $40.769 million.

Question 20

The yield curve

Accepted Answer

A) relates rates for different maturities of assets. 
B) for U.S. Treasury securities is the most commonly reported yield curve. 
C) may change shape over time. 
D) which is inverted does not last very long. 
E) All of these. 
A) relates rates for different maturities of assets. 
B) for U.S. Treasury securities is the most commonly reported yield curve. 
C) may change shape over time. 
D) which is inverted does not last very long. 
E) All of these.

Exam 8: Interest Rate Risk I

The change in economic value of a fixed-rate liability for a decrease in interest rates is considered to be good news.

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 ten-year loan if all market interest rates increase by 2 percent?

Retail savings accounts are considered as part of rate sensitive liabilities because the rates on these accounts rarely change.

An increase in interest rates

If the average maturity of assets is 4 years and the average maturity of liabilities is 4 years, then the FI has no interest rate risk exposure.

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

Because of its simplicity, smaller deposit-taking institutions still use this model as their primary measure of interest rate risk.

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 liabilities?

A positive gap implies that an increase in interest rates will cause _______ in net interest income.

The liquidity premium theory of the term structure of interest rates

The maturity gap for a bank is the weighted average maturity of the assets minus the weighted average maturity of the liabilities.

Defining buckets of time over a range of maturities assures the capture of all relevant information necessary to accurately assess the interest rate risk exposure of an FI.

The following information is from First Yaupon Savings Association. If all interest rates decrease by 15 basis points, what is the expected impact on the FI's net interest income? (Hint: Use the repricing model to answer this question.)

The following information details the current rate sensitivity report for Gotbucks Bank, Inc. ($million). How will a decrease of 25 basis points in all interest rates affect Gotbucks' net interest income over a planning period of 91 days?

A bank that finances long-term fixed-rate mortgages with short-term deposits is exposed 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 FI's maturity gap?

The balance sheet of XYZ Bank appears below. All figures in millions of Canadian dollars. The cumulative one-year repricing gap (CGAP) for the bank is

The balance sheet of XYZ Bank appears below. All figures in millions of Canadian dollars. The gap ratio is

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 two-year GIC if all market interest rates increase by 2 percent?

The yield curve

Why Are Financial Institutions Special

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Insurance Companies

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Interest Rate Risk II

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Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

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Technology and Other Operational Risks

Liability and Liquidity Management

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Capital Adequacy

Product and Geographic Expansion

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Swaps

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