Question 1

Which of the following is not a weakness of the repricing model to measure interest rate risk?

Accepted Answer

A) Potential for over-aggregation of assets and liabilities within each maturity bucket. 
B) It ignores how changes in interest rates affect the market value of assets and liabilities. 
C) It ignores the reinvestment of loan interest and principal payments that are reinvested at current market rates and it fails to recognise off-balance-sheet activities that may be rate sensitive. 
D) It ignores how changes in currency exchange rates affect the market value of assets and liabilities. 
A) Potential for over-aggregation of assets and liabilities within each maturity bucket. 
B) It ignores how changes in interest rates affect the market value of assets and liabilities. 
C) It ignores the reinvestment of loan interest and principal payments that are reinvested at current market rates and it fails to recognise off-balance-sheet activities that may be rate sensitive. 
D) It ignores how changes in currency exchange rates affect the market value of assets and liabilities.

Question 2

The repricing gap focuses on the interest income effect.

Accepted Answer

A) True 
 B)False

Question 3

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) recognises that forward rates are perfect predictors of future interest rates. 
D) assumes that risk premiums increase uniformly with maturity. 
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) recognises that forward rates are perfect predictors of future interest rates. 
D) assumes that risk premiums increase uniformly with maturity.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Consider the following repricing buckets and gaps: $$\begin{array} { | l | r | r | r | } 
\hline \text { Repricing bucket } &  { \text { Assets } } & { \text { Liabilities } } &  { \text { Gaps } } \
\hline \text { 1 day } & \$ 50000 & \$ 120000 & - \$ 70000 \
\hline \text { 1 day to 3 months } & \$ 100000 & \$ 70000 & \$ 30000 \
\hline \text { 3 to 6 months } & \$ 100000 & \$ 100000 & \$ 0 \
\hline \text { 6 to 12 months } & \$ 250000 & \$ 80000 & \$ 170000 \
\hline 1 \text { to 5 years } & \$ 75000 & \$ 130000 & - \$ 55000 \
\hline \text { Over 5 years } & \$ 25000 & \$ 100000 & - \$ 75000 \
\hline
\end{array}$$ 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 within one year is a decrease of 100 basis points?

Accepted Answer

A) $17 000 
B) -$17 000 
C) $13 000 
D) -$13 000 
A) $17 000 
B) -$17 000 
C) $13 000 
D) -$13 000

Question 6

Spread effect is periodic cash flow of interest and principal amortisation payments on long-term assets that can be reinvested at market rates.

Accepted Answer

A) True 
 B)False

Question 7

If an FI's repricing gap is less than zero, then:

Accepted Answer

A) it is deficient in its required reserves 
B) it is deficient in its capital ratio requirement 
C) its liability costs are more sensitive to changing market interest rates than are its asset yields 
D) its liability costs are less sensitive to changing market interest rates than are its asset yields 
A) it is deficient in its required reserves 
B) it is deficient in its capital ratio requirement 
C) its liability costs are more sensitive to changing market interest rates than are its asset yields 
D) its liability costs are less sensitive to changing market interest rates than are its asset yields

Question 8

Interest rate spread is the difference between the earning assets interest rate and the interest rate paid on interest-bearing liability.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements is true?

Accepted Answer

A) APRA requires smaller Australian FIs to use the repricing gap method to estimate interest rate exposures in their banking book for capital adequacy. 
B) Australian FIs are only required to use the repricing gap method if they are listed on an US stock exchange. 
C) APRA does not require Australian FIs to use the repricing gap method to estimate interest rate exposures in their banking book for capital adequacy. 
D) Australian FIs are only required to use the repricing gap if they are internationally active. 
A) APRA requires smaller Australian FIs to use the repricing gap method to estimate interest rate exposures in their banking book for capital adequacy. 
B) Australian FIs are only required to use the repricing gap method if they are listed on an US stock exchange. 
C) APRA does not require Australian FIs to use the repricing gap method to estimate interest rate exposures in their banking book for capital adequacy. 
D) Australian FIs are only required to use the repricing gap if they are internationally active.

Question 10

Which of the following statements is false?

Accepted Answer

A) A major reason for cheque accounts to be included in 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 rise, 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 after an analysis of the actual deposit history. 
D) None of the listed options are correct. 
A) A major reason for cheque accounts to be included in 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 rise, 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 after an analysis of the actual deposit history. 
D) None of the listed options are correct.

Question 11

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

Accepted Answer

In the simple repricing model, we assume

Question 12

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 13

The bank has a positive 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 fall more 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 fall more 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 fall more 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 fall more than the interest expenses on its liabilities and net interest income will fall.

Question 14

Which of the following statements is true?

Accepted Answer

A) Cheque accounts are a type of interest-sensitive asset. 
B) Cheque accounts are a type of interest-sensitive liability. 
C) There are strong arguments for and against the inclusion of cheque accounts as a type of interest-sensitive asset. 
D) There are strong arguments for and against the inclusion of cheque accounts as a type of interest-sensitive liability. 
A) Cheque accounts are a type of interest-sensitive asset. 
B) Cheque accounts are a type of interest-sensitive liability. 
C) There are strong arguments for and against the inclusion of cheque accounts as a type of interest-sensitive asset. 
D) There are strong arguments for and against the inclusion of cheque accounts as a type of interest-sensitive liability.

Question 15

Which of the following statements is true?

Accepted Answer

A) A negative gap indicates that a rise in interest rates would lower the bank's net interest income. 
B) A positive gap indicates that a rise in interest rates would lower the bank's net interest income. 
C) A negative gap indicates that a rise in interest rates would increase the bank's net interest income. 
D) None of the listed options are correct. 
A) A negative gap indicates that a rise in interest rates would lower the bank's net interest income. 
B) A positive gap indicates that a rise in interest rates would lower the bank's net interest income. 
C) A negative gap indicates that a rise in interest rates would increase the bank's net interest income. 
D) None of the listed options are correct.

Question 16

Which of the following is a weakness of the repricing model to measure interest rate risk?

Accepted Answer

A) Potential for over-aggregation of assets and liabilities within each maturity bucket. 
B) It ignores how changes in interest rates affect the market value of assets and liabilities. 
C) It ignores the reinvestment of loan interest and principal payments that are reinvested at current market rates and it fails to recognise off-balance-sheet activities that may be rate sensitive. 
D) All of the listed options are correct. 
A) Potential for over-aggregation of assets and liabilities within each maturity bucket. 
B) It ignores how changes in interest rates affect the market value of assets and liabilities. 
C) It ignores the reinvestment of loan interest and principal payments that are reinvested at current market rates and it fails to recognise off-balance-sheet activities that may be rate sensitive. 
D) All of the listed options are correct.

Question 17

Consider the following repricing buckets and gaps: $$\begin{array} { | l | r | r | r | } 
\hline \text { Repricing bucket } &  { \text { Assets } } &  { \text { Liabilities } } & { \text { Gaps } } \
\hline \text { 1 day } & \$ 50000 & \$ 120000 & - \$ 70000 \
\hline \text { 1 day to 3 months } & \$ 100000 & \$ 70000 & \$ 30000 \
\hline \text { 3 to 6 months } & \$ 100000 & \$ 100000 & \$ 0 \
\hline \text { 6 to 12 months } & \$ 250000 & \$ 80000 & \$ 170000 \
\hline 1 \text { to 5 years } & \$ 75000 & \$ 130000 & - \$ 55000 \
\hline \text { Over 5 years } & \$ 25000 & \$ 100000 & - \$ 75000 \
\hline
\end{array}$$ What is the annualised change in the bank's future net interest income if the overnight interest rate decreased by 100 basis points?

Accepted Answer

A) -$700 
B) $700 
C) -$7000 
D) $7000 
A) -$700 
B) $700 
C) -$7000 
D) $7000

Question 18

CGAP effect is the relationship between changes in interest rates and changes in net interest income.

Accepted Answer

A) True 
 B)False

Question 19

Consider the following repricing buckets and gaps: $$\begin{array} { | l | r | r | r | } 
\hline \text { Repricing bucket } & { \text { Assets } } &  { \text { Liabilities } } &{ \text { Gaps } } \
\hline \text { 1 day } & \$ 50000 & \$ 120000 & - \$ 70000 \
\hline \text { 1 day to 3 months } & \$ 100000 & \$ 70000 & \$ 30000 \
\hline \text { 3 to 6 months } & \$ 100000 & \$ 100000 & \$ 0 \
\hline \text { 6 to 12 months } & \$ 250000 & \$ 80000 & \$ 170000 \
\hline 1 \text { to 5 years } & \$ 75000 & \$ 130000 & - \$ 55000 \
\hline \text { Over 5 years } & \$ 25000 & \$ 100000 & - \$ 75000 \
\hline
\end{array}$$ What is the annualised change in the bank's future net interest income if the overnight interest rate increased by 100 basis points?

Accepted Answer

A) -$700 
B) $700 
C) -$7000 
D) $7000 
A) -$700 
B) $700 
C) -$7000 
D) $7000

Question 20

How do you interpret the position of an FI with a negative on-balance-sheet gap and a positive off-balance-sheet gap?

Accepted Answer

A) The FI uses its on-balance-sheet activities to hedge its off-balance-sheet activities. 
B) The FI uses its off-balance-sheet activities to hedge its on-balance-sheet activities. 
C) The FI believes that interest rates will decrease and made a mistake in setting its gap for off-balance-sheet activities. 
D) The FI believes that interest rates will decrease and made a mistake in setting its gap for on-balance-sheet activities. 
A) The FI uses its on-balance-sheet activities to hedge its off-balance-sheet activities. 
B) The FI uses its off-balance-sheet activities to hedge its on-balance-sheet activities. 
C) The FI believes that interest rates will decrease and made a mistake in setting its gap for off-balance-sheet activities. 
D) The FI believes that interest rates will decrease and made a mistake in setting its gap for on-balance-sheet activities.

Which of the following is not a weakness of the repricing model to measure interest rate risk?

The repricing gap focuses on the interest income effect.

The liquidity premium theory of the term structure of interest rates:

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

Spread effect is periodic cash flow of interest and principal amortisation payments on long-term assets that can be reinvested at market rates.

If an FI's repricing gap is less than zero, then:

Interest rate spread is the difference between the earning assets interest rate and the interest rate paid on interest-bearing liability.

Which of the following statements is true?

Which of the following statements is false?

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

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

Which of the following statements is true?

Which of the following statements is true?

Which of the following is a weakness of the repricing model to measure interest rate risk?

CGAP effect is the relationship between changes in interest rates and changes in net interest income.

How do you interpret the position of an FI with a negative on-balance-sheet gap and a positive off-balance-sheet gap?

Why Are Financial Institutions Special

The Financial Service Industry: Depository Institutions

The Financial Service Industry: Other Financial Institutions

Risks of Financial Institutions

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off-Balance-Sheet Instruments

Managing Interest Rate Risk Using Securitisation

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 Risks

Capital Management and Adequacy

Filters

Exam 5: Interest Rate Risk Measurement: The Repricing Model

Which of the following is not a weakness of the repricing model to measure interest rate risk?

The repricing gap focuses on the interest income effect.

The liquidity premium theory of the term structure of interest rates:

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

Spread effect is periodic cash flow of interest and principal amortisation payments on long-term assets that can be reinvested at market rates.

If an FI's repricing gap is less than zero, then:

Interest rate spread is the difference between the earning assets interest rate and the interest rate paid on interest-bearing liability.

Which of the following statements is true?

Which of the following statements is false?

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

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

Which of the following statements is true?

Which of the following statements is true?

Which of the following is a weakness of the repricing model to measure interest rate risk?

CGAP effect is the relationship between changes in interest rates and changes in net interest income.

How do you interpret the position of an FI with a negative on-balance-sheet gap and a positive off-balance-sheet gap?

Why Are Financial Institutions Special

The Financial Service Industry: Depository Institutions

The Financial Service Industry: Other Financial Institutions

Risks of Financial Institutions

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off-Balance-Sheet Instruments

Managing Interest Rate Risk Using Securitisation

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 Risks

Capital Management and Adequacy

Filters