Question 1

Which of the following statements is true?

Accepted Answer

A) An FI with a repricing gap of zero is unsure about interest rate movements. 
B) An FI with a repricing gap of zero expects interest rates to rise. 
C) An FI with a repricing gap of zero expects interest rates to remain fall. 
D) An FI with a repricing gap of zero does not measure and manage its interest rate exposures. 
A) An FI with a repricing gap of zero is unsure about interest rate movements. 
B) An FI with a repricing gap of zero expects interest rates to rise. 
C) An FI with a repricing gap of zero expects interest rates to remain fall. 
D) An FI with a repricing gap of zero does not measure and manage its interest rate exposures. A

Question 2

What is meant by the 'run-off' problem and how can bank managers deal with this problem?

Accepted Answer

In the simple repricing model, we assume that loans of one type mature at the same time; for example, all one-year consumer loans mature in one year's time and all 10-year fixed-rate mortgages mature in 10 years' time.
In reality, the bank continuously originates and retires consumer mortgages and all types of loans as it creates and retires deposits.For example, today some 10-year fixed-rate mortgages may only have one year left before they are repriced; that is, they are in their 9th year.In addition, virtually all housing mortgages pay at least some principal back to the bank each month.
As a result, the bank receives a runoff cash flow from its conventional mortgage portfolio that can be reinvested at current market rates, making this runoff component rate sensitive.The bank manager can easily deal with this in the repricing model by identifying for each asset and liability item the estimated dollar cash flow that will runoff, reprice or mature within the next year and adding these amounts to the rate-sensitive assets and liabilities.

Question 3

Would you consider the repricing model to be a good and well-founded interest rate risk measurement and management tool? Why or why not?

Accepted Answer

The repricing gap is a measure of interest rate risk which uses book or historical values of assets and liabilities.It is conceptually easy to understand and can be used to forecast changes in profitability for given changes in interest rates.In this way it can assist FI managers to decide the structure of their balance sheet in light of projected interest rate changes.However, because of the book value approach, the repricing model concentrates on the net interest income effects of rate changes and ignores the market value effects.In addition, the model ignores important cash flow issues associated with over-aggregation, runoffs and off-balance-sheet activities.As such, the model does not provide an accurate picture of an FI's interest rate risk exposure.More complete measures of interest rate risk are provided by duration and the duration gap model

Question 4

Repricing gap refers to the:

Accepted Answer

A) difference between rate-sensitive assets and rate-sensitive liabilities. 
B) sum of rate-sensitive assets and rate-sensitive liabilities. 
C) difference between rate-sensitive liabilities and rate-sensitive assets. 
D) difference between rate-insensitive assets and rate-insensitive liabilities. 
A) difference between rate-sensitive assets and rate-sensitive liabilities. 
B) sum of rate-sensitive assets and rate-sensitive liabilities. 
C) difference between rate-sensitive liabilities and rate-sensitive assets. 
D) difference between rate-insensitive assets and rate-insensitive liabilities.

Question 5

Consider the following information to answer the question:   What is the repricing gap for the FI?

Accepted Answer

A) $0 
B) $5 000 000 
C) $9 800 000 
D) -$5 000 000 
A) $0 
B) $5 000 000 
C) $9 800 000 
D) -$5 000 000

Question 6

Which of the following statements is true?

Accepted Answer

A) A major reason for cheque accounts to be excluded from an FI's interest-sensitive liabilities is that the majority of these accounts are core deposits. 
B) Cheque accounts should be treated as interest-sensitive liabilities because if interest rates fall, deposits might be withdrawn and thus will need to be replaced by higher-yielding deposits. 
C) The final decision whether or not to include cheque accounts as rate sensitive liabilities must be made by predicting depositors' behaviours. 
D) None of the listed options are correct. 
A) A major reason for cheque accounts to be excluded from an FI's interest-sensitive liabilities is that the majority of these accounts are core deposits. 
B) Cheque accounts should be treated as interest-sensitive liabilities because if interest rates fall, deposits might be withdrawn and thus will need to be replaced by higher-yielding deposits. 
C) The final decision whether or not to include cheque accounts as rate sensitive liabilities must be made by predicting depositors' behaviours. 
D) None of the listed options are correct.

Question 7

Which of the following statements is true?

Accepted Answer

A) An FI with a positive repricing gap expects interest rates to remain stable. 
B) An FI with a positive repricing gap expects interest rates to rise. 
C) An FI with a positive repricing gap expects interest rates to remain fall. 
D) An FI with a positive repricing gap has not particular expectations regarding interest rate movements. 
A) An FI with a positive repricing gap expects interest rates to remain stable. 
B) An FI with a positive repricing gap expects interest rates to rise. 
C) An FI with a positive repricing gap expects interest rates to remain fall. 
D) An FI with a positive repricing gap has not particular expectations regarding interest rate movements.

Question 8

Consider the following repricing buckets and gaps:   What is the annualised change in the bank's future net interest income if the average rate change for assets and liabilities that can be repriced over five years is an increase of 50 basis points?

Accepted Answer

A) $7500 
B) $7500. 
C) $0 
D) Not enough information to answer the question. 
A) $7500 
B) $7500. 
C) $0 
D) Not enough information to answer the question.

Question 9

An FI with a positive repricing gap expects interest rates to decrease.

Accepted Answer

A) True 
 B)False

Question 10

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) 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) 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 11

Which of the following statements is true?

Accepted Answer

A) As opposed to the duration gap model, the repricing gap model captures the capital loss and capital gain effect. 
B) The repricing gap model is a market-value based approach, while the duration model is a book-value based approach. 
C) The repricing gap model does not consider the size and timing of cash flows. 
D) The duration gap model focuses on the impact interest rate changes have on an FI's net interest income. 
A) As opposed to the duration gap model, the repricing gap model captures the capital loss and capital gain effect. 
B) The repricing gap model is a market-value based approach, while the duration model is a book-value based approach. 
C) The repricing gap model does not consider the size and timing of cash flows. 
D) The duration gap model focuses on the impact interest rate changes have on an FI's net interest income.

Question 12

Assume you are the manager of an FI.How would you structure your balance sheet using the repricing gap model if you expected interest rates to increase?

Accepted Answer

A) I would create a positive gap. 
B) I would create a negative gap. 
C) I would create a neutral gap. 
D) It would depend on my FI's current profitability. 
A) I would create a positive gap. 
B) I would create a negative gap. 
C) I would create a neutral gap. 
D) It would depend on my FI's current profitability.

Question 13

The term 'rate-sensitive assets' refers to assets:

Accepted Answer

A) whose interest rate will be repriced over some future period. 
B) with a particularly high interest rate. 
C) with a particularly low interest rate. 
D) for which demand is highly dependent on the level of interest rates. 
A) whose interest rate will be repriced over some future period. 
B) with a particularly high interest rate. 
C) with a particularly low interest rate. 
D) for which demand is highly dependent on the level of interest rates.

Question 14

Consider the following table:   How does a decrease in the average one-year interest rate of 50 basis points affect the FI's future net interest income?

Accepted Answer

A) The NII decreases by $0.435. 
B) The NII increases by $0.435. 
C) The NII remains constant. 
D) The NII decreases by $0.39. 
A) The NII decreases by $0.435. 
B) The NII increases by $0.435. 
C) The NII remains constant. 
D) The NII decreases by $0.39.

Question 15

Consider the following table:   How does an increase in the average one-year interest rate of 50 basis points affect the FI's future net interest income ?

Accepted Answer

A) The NII will not change. 
B) The NII will increase by $50. 
C) The NII will increase by $5. 
D) The NII will decrease by $50. 
A) The NII will not change. 
B) The NII will increase by $50. 
C) The NII will increase by $5. 
D) The NII will decrease by $50.

Question 16

The repricing gap focuses on the interest income effect.

Accepted Answer

A) True 
 B)False

Question 17

Consider the following repricing buckets and gaps:   What is the annualised change in the bank's future net interest income if the overnight interest rate increased by 100 basis points?
A)-$700
B)$700
C)-$7000
D)$700

Accepted Answer

The answer of Consider the following repricing buckets and gaps:...

Question 18

Outline what is meant by the CGAP effect and explain the relationship between interest rate changes and changes in net interest income.Specifically indicate whether a FI would wish to hold a negative or positive CGAP and under which interest rate conditions.

Accepted Answer

The CGAP effect describes the relations

Question 19

Which of the following statements is true?

Accepted Answer

A) As opposed to the duration model, the repricing gap model is a market-value based approach. 
B) As opposed to the maturity model, the repricing gap model is a market-value based approach. 
C) The capital loss effect is captured by the repricing model. 
D) None of the listed options are correct. 
A) As opposed to the duration model, the repricing gap model is a market-value based approach. 
B) As opposed to the maturity model, the repricing gap model is a market-value based approach. 
C) The capital loss effect is captured by the repricing model. 
D) None of the listed options are correct.

Question 20

The bank has a negative repricing gap.Is it exposed to interest rate increases or decreases and why?

Accepted Answer

A) Interest rate increases because the interest income on its assets will rise more than the interest expenses on its liabilities and net interest income will rise. 
B) Interest rate increases because the interest income on its assets will rise by less than the interest expenses on its liabilities and net interest income will fall. 
C) Interest rate decreases because the interest income on its assets will rise more than the interest expenses on its liabilities and net interest income will rise. 
D) Interest rate decreases because the interest income on its assets will rise by less than the interest expenses on its liabilities and net interest income will fall. 
A) Interest rate increases because the interest income on its assets will rise more than the interest expenses on its liabilities and net interest income will rise. 
B) Interest rate increases because the interest income on its assets will rise by less than the interest expenses on its liabilities and net interest income will fall. 
C) Interest rate decreases because the interest income on its assets will rise more than the interest expenses on its liabilities and net interest income will rise. 
D) Interest rate decreases because the interest income on its assets will rise by less than the interest expenses on its liabilities and net interest income will fall.

Which of the following statements is true?

What is meant by the 'run-off' problem and how can bank managers deal with this problem?

Would you consider the repricing model to be a good and well-founded interest rate risk measurement and management tool? Why or why not?

Repricing gap refers to the:

Consider the following information to answer the question: What is the repricing gap for the FI?

Which of the following statements is true?

Which of the following statements is true?

Consider the following repricing buckets and gaps: What is the annualised change in the bank's future net interest income if the average rate change for assets and liabilities that can be repriced over five years is an increase of 50 basis points?

An FI with a positive repricing gap expects interest rates to decrease.

The market segmentation theory of the term structure of interest rates:

Which of the following statements is true?

Assume you are the manager of an FI.How would you structure your balance sheet using the repricing gap model if you expected interest rates to increase?

The term 'rate-sensitive assets' refers to assets:

Consider the following table: How does a decrease in the average one-year interest rate of 50 basis points affect the FI's future net interest income?

Consider the following table: How does an increase in the average one-year interest rate of 50 basis points affect the FI's future net interest income ?

The repricing gap focuses on the interest income effect.

Consider the following repricing buckets and gaps: What is the annualised change in the bank's future net interest income if the overnight interest rate increased by 100 basis points? A)-$700 B)$700 C)-$7000 D)$700

Outline what is meant by the CGAP effect and explain the relationship between interest rate changes and changes in net interest income.Specifically indicate whether a FI would wish to hold a negative or positive CGAP and under which interest rate conditions.

Which of the following statements is true?

The bank has a negative repricing gap.Is it exposed to interest rate increases or decreases and why?

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters

Exam 5: Interest Rate Risk Measurement: The Repricing Model

Which of the following statements is true?

What is meant by the 'run-off' problem and how can bank managers deal with this problem?

Would you consider the repricing model to be a good and well-founded interest rate risk measurement and management tool? Why or why not?

Repricing gap refers to the:

Consider the following information to answer the question: What is the repricing gap for the FI?

Which of the following statements is true?

Which of the following statements is true?

Consider the following repricing buckets and gaps: What is the annualised change in the bank's future net interest income if the average rate change for assets and liabilities that can be repriced over five years is an increase of 50 basis points?

An FI with a positive repricing gap expects interest rates to decrease.

The market segmentation theory of the term structure of interest rates:

Which of the following statements is true?

Assume you are the manager of an FI.How would you structure your balance sheet using the repricing gap model if you expected interest rates to increase?

The term 'rate-sensitive assets' refers to assets:

Consider the following table: How does a decrease in the average one-year interest rate of 50 basis points affect the FI's future net interest income?

Consider the following table: How does an increase in the average one-year interest rate of 50 basis points affect the FI's future net interest income ?

The repricing gap focuses on the interest income effect.

Consider the following repricing buckets and gaps: What is the annualised change in the bank's future net interest income if the overnight interest rate increased by 100 basis points? A)-$700 B)$700 C)-$7000 D)$700

Outline what is meant by the CGAP effect and explain the relationship between interest rate changes and changes in net interest income.Specifically indicate whether a FI would wish to hold a negative or positive CGAP and under which interest rate conditions.

Which of the following statements is true?

The bank has a negative repricing gap.Is it exposed to interest rate increases or decreases and why?

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters