Question 1

When a change in interest rate affects the value of assets,liabilities and future cash flows,this is called _____ interest rate risk.

Accepted Answer

A)  basis 
B)  direct 
C)  indirect 
D)  reinvestment 
A)  basis 
B)  direct 
C)  indirect 
D)  reinvestment B

Question 2

Interest rate risk is the sensitivity of balance-sheet assets and their associated cash flows to movements in interest rates.

Accepted Answer

A) True 
 B)False  False

Question 3

When a firm raises funds from a range of different sources,this is known as liability diversification.

Accepted Answer

A) True 
 B)False  True

Question 4

If a company has a three-year loan from a bank at 7% per annum,and interest rate dropped to 5% near the end of the term,the bank is exposed to:

Accepted Answer

A)  interest rate risk. 
B)  reinvestment risk. 
C)  yield-to-maturity risk. 
D)  systematic risk. 
A)  interest rate risk. 
B)  reinvestment risk. 
C)  yield-to-maturity risk. 
D)  systematic risk.

Question 5

If a bank expects interest rates to fall,then it will want to:

Accepted Answer

A)  achieve a positive ARBL. 
B)  achieve a negative ARBL. 
C)  lower the rate on its loans before it lowers the rates on its deposits. 
D)  increase the rates on its loans before it lowers the rates on its deposits. 
A)  achieve a positive ARBL. 
B)  achieve a negative ARBL. 
C)  lower the rate on its loans before it lowers the rates on its deposits. 
D)  increase the rates on its loans before it lowers the rates on its deposits.

Question 6

If a financial organisation has a positive repricing gap,what happens if managers do not take action when interest rates decline?

Accepted Answer

A)  Interest-sensitive liability costs stabilise 
B)  Interest-sensitive assets returns decline 
C)  The rate differential on the repricing gap remains unaffected 
D)  Expected pre-tax profits will not change, as the cost of interest-sensitive liabilities will decrease 
A)  Interest-sensitive liability costs stabilise 
B)  Interest-sensitive assets returns decline 
C)  The rate differential on the repricing gap remains unaffected 
D)  Expected pre-tax profits will not change, as the cost of interest-sensitive liabilities will decrease

Question 7

If an organisation has _______ interest-sensitive assets than liabilities,a/an _______ in interest rates will increase the organisation's profits.

Accepted Answer

A)  more; reduction 
B)  more; increase 
C)  less; increase 
D)  both [more; reduction] and [less; increase] are correct 
A)  more; reduction 
B)  more; increase 
C)  less; increase 
D)  both [more; reduction] and [less; increase] are correct

Question 8

An interest-sensitive asset or liability must:

Accepted Answer

A)  have a maturity of less than 90 days. 
B)  have a rate that shifts in the opposite direction to market changes. 
C)  have a rate that changes as market conditions alter during the organisation's specified planning period. 
D)  always be an asset issued for a short-term period. 
A)  have a maturity of less than 90 days. 
B)  have a rate that shifts in the opposite direction to market changes. 
C)  have a rate that changes as market conditions alter during the organisation's specified planning period. 
D)  always be an asset issued for a short-term period.

Question 9

The acronym ARBL used in risk management stands for:

Accepted Answer

A)  assets repackaged by means of their liquidity. 
B)  assets repriced before liquidity. 
C)  assets repriced before liabilities. 
D)  acceptance risk balanced limits. 
A)  assets repackaged by means of their liquidity. 
B)  assets repriced before liquidity. 
C)  assets repriced before liabilities. 
D)  acceptance risk balanced limits.

Question 10

When interest rates rise,a three-year bond with a lower duration has the greater interest rate exposure than a four-year corporate bond with a higher duration.

Accepted Answer

A) True 
 B)False

Question 11

If an organisation has more interest-sensitive liabilities than assets,a _______ in interest rates will _______ the organisation's profits.

Accepted Answer

A)  rise; increase 
B)  rise; decrease 
C)  fall; increase 
D)  fall; not affect 
A)  rise; increase 
B)  rise; decrease 
C)  fall; increase 
D)  fall; not affect

Question 12

Within the context of an interest rate exposure management system,discuss strategies that an organisation may develop to measure and manage its interest rate risk exposures.

Accepted Answer

The strategies will relate to the types

Question 13

If an organisation has a repricing gap equal to a positive $20 million,a 500 basis point increase in interest rates will cause profits to:

Accepted Answer

A)  rise by $1.0 million. 
B)  rise by $10 million. 
C)  fall by $1.0 million. 
D)  fall by $10 million. 
A)  rise by $1.0 million. 
B)  rise by $10 million. 
C)  fall by $1.0 million. 
D)  fall by $10 million.

Question 14

Everything else being equal,the _______ the time to maturity on a fixed-interest security,the _______ sensitive it is to changes in interest rates.

Accepted Answer

A)  longer; less 
B)  longer; more 
C)  shorter; more 
D)  shorter; extra 
A)  longer; less 
B)  longer; more 
C)  shorter; more 
D)  shorter; extra

Question 15

If a bond investor's holding period is longer than the term to maturity of a bond,the investor is exposed to:

Accepted Answer

A)  interest rate risk. 
B)  reinvestment risk. 
C)  yield-to-maturity risk. 
D)  systematic risk. 
A)  interest rate risk. 
B)  reinvestment risk. 
C)  yield-to-maturity risk. 
D)  systematic risk.

Question 16

The analysis that involves measuring an organisation's sensitivity of profits to changes in interest rates,by multiplying the difference in rate-sensitive assets and liabilities by the changes in interest rate,is called:

Accepted Answer

A)  basic duration analysis. 
B)  repricing gap analysis. 
C)  interest exposure analysis. 
D)  gap-exposure analysis. 
A)  basic duration analysis. 
B)  repricing gap analysis. 
C)  interest exposure analysis. 
D)  gap-exposure analysis.

Question 17

In relation to re-pricing gap analysis which of the following is a constraint on the model?

Accepted Answer

A)  The appropriate planning period. 
B)  The timing of cash flows within a planning period. 
C)  The assumption of an even interest rate change. 
D)  All of the given answers. 
A)  The appropriate planning period. 
B)  The timing of cash flows within a planning period. 
C)  The assumption of an even interest rate change. 
D)  All of the given answers.

Question 18

Which of the following is a technique that an institution with rate-sensitive assets could perform in order to reduce interest rate risk?

Accepted Answer

A)  Buy short-term Treasury bills 
B)  Issuing long-term certificates of deposit 
C)  Purchasing longer term assets 
D)  None of the given choices 
A)  Buy short-term Treasury bills 
B)  Issuing long-term certificates of deposit 
C)  Purchasing longer term assets 
D)  None of the given choices

Question 19

If a bank has a duration gap of two years,a rise in interest rates from 5 to 8% per annum will lead to a/an:

Accepted Answer

A)  increase of 5.71% in the market value of its net worth. 
B)  fall of 5.71% in the market value of its net worth. 
C)  increase of 5.71% in net interest income. 
D)  fall of 5.71% in net interest income. 
A)  increase of 5.71% in the market value of its net worth. 
B)  fall of 5.71% in the market value of its net worth. 
C)  increase of 5.71% in net interest income. 
D)  fall of 5.71% in net interest income.

Question 20

If interest rates are forecast to rise and a company has achieved a positive ARBL this means:

Accepted Answer

A)  it is disadvantaged if interest rates rise. 
B)  it can benefit in the short-term if interest rates increase. 
C)  its profits may be adversely affected. 
D)  it has a negative impact on its profit margins. 
A)  it is disadvantaged if interest rates rise. 
B)  it can benefit in the short-term if interest rates increase. 
C)  its profits may be adversely affected. 
D)  it has a negative impact on its profit margins.

Exam 14: Interest Rate Risk

When a change in interest rate affects the value of assets,liabilities and future cash flows,this is called _____ interest rate risk.

Interest rate risk is the sensitivity of balance-sheet assets and their associated cash flows to movements in interest rates.

When a firm raises funds from a range of different sources,this is known as liability diversification.

If a company has a three-year loan from a bank at 7% per annum,and interest rate dropped to 5% near the end of the term,the bank is exposed to:

If a bank expects interest rates to fall,then it will want to:

If a financial organisation has a positive repricing gap,what happens if managers do not take action when interest rates decline?

If an organisation has _______ interest-sensitive assets than liabilities,a/an _______ in interest rates will increase the organisation's profits.

An interest-sensitive asset or liability must:

The acronym ARBL used in risk management stands for:

When interest rates rise,a three-year bond with a lower duration has the greater interest rate exposure than a four-year corporate bond with a higher duration.

If an organisation has more interest-sensitive liabilities than assets,a _______ in interest rates will _______ the organisation's profits.

Within the context of an interest rate exposure management system,discuss strategies that an organisation may develop to measure and manage its interest rate risk exposures.

If an organisation has a repricing gap equal to a positive $20 million,a 500 basis point increase in interest rates will cause profits to:

Everything else being equal,the _______ the time to maturity on a fixed-interest security,the _______ sensitive it is to changes in interest rates.

If a bond investor's holding period is longer than the term to maturity of a bond,the investor is exposed to:

The analysis that involves measuring an organisation's sensitivity of profits to changes in interest rates,by multiplying the difference in rate-sensitive assets and liabilities by the changes in interest rate,is called:

In relation to re-pricing gap analysis which of the following is a constraint on the model?

Which of the following is a technique that an institution with rate-sensitive assets could perform in order to reduce interest rate risk?

If a bank has a duration gap of two years,a rise in interest rates from 5 to 8% per annum will lead to a/an:

If interest rates are forecast to rise and a company has achieved a positive ARBL this means:

A Modern Financial System: An Overview

Commercial Banks

Non-Bank Financial Institutions

The Share Market and the Corporation

Corporations Issuing Equity in the Share Market

Investors in the Share Market

Forecasting Share Price Movements

Mathematics of Finance: An Introduction to Basic Concepts and Calculations

Short-Term Debt

Medium-To-Long-Term Debt

International Debt Markets

Government Debt, monetary Policy and the Payments System

An Introduction to Interest Rate Determination and Forecasting

Foreign Exchange: The Structure and Operation of the Fx Market

Foreign Exchange: Factors That Influence the Exchange Rate

Foreign Exchange: Risk Identification and Management

An Introduction to Risk Management and Derivatives

Future Contracts and Forward Rate Agreements

Options

Interest Rate Swaps, Cross-Currency Swaps and Credit Default

Filters

If an organisation has _ interest-sensitive assets than liabilities,a/an _ in interest rates will increase the organisation's profits.

If an organisation has more interest-sensitive liabilities than assets,a _ in interest rates will _ the organisation's profits.

Everything else being equal,the _ the time to maturity on a fixed-interest security,the _ sensitive it is to changes in interest rates.