Question 1

What is spread effect?

Accepted Answer

A) Periodic cash flow of interest and principal amortisation payments on long-term assets that can be reinvested at market rates. 
B) The effect that a change in the spread between rates on rate-sensitive assets and rate-sensitive liabilities has on net interest income as interest rates change. 
C) The effect of mismatch of asset and liabilities within a maturity bucket. 
D) The premium paid to compensate for the future uncertainty in a security's value. 
A) Periodic cash flow of interest and principal amortisation payments on long-term assets that can be reinvested at market rates. 
B) The effect that a change in the spread between rates on rate-sensitive assets and rate-sensitive liabilities has on net interest income as interest rates change. 
C) The effect of mismatch of asset and liabilities within a maturity bucket. 
D) The premium paid to compensate for the future uncertainty in a security's value.

Question 2

The Reserve Bank of Australia's (RBA) monetary policy can reduce an FI's interest rate risk:

Accepted Answer

A) by smoothing or targeting the level of interest rates it increases unexpected interest rate shocks and interest volatility. 
B) by smoothing or targeting the level of interest rates it decreases unexpected interest rate shocks and interest volatility. 
C) by letting interest rates find their own level it increases interest volatility. 
D) All of the listed options are correct. 
A) by smoothing or targeting the level of interest rates it increases unexpected interest rate shocks and interest volatility. 
B) by smoothing or targeting the level of interest rates it decreases unexpected interest rate shocks and interest volatility. 
C) by letting interest rates find their own level it increases interest volatility. 
D) All of the listed options are correct.

Question 3

Which of the following statements is true?

Accepted Answer

A) An FI that has a positive on-balance-sheet gap and a negative off-balance-sheet gap is not sure about interest movements. 
B) An FI that has a positive on-balance-sheet gap and a negative off-balance-sheet gap has made a mistake in hedging its interest rate risk. 
C) An FI that has a positive on-balance-sheet gap and a negative off-balance-sheet gap is using its off-balance-sheet position to hedge its on-balance-sheet position. 
D) None of the listed options are correct. 
A) An FI that has a positive on-balance-sheet gap and a negative off-balance-sheet gap is not sure about interest movements. 
B) An FI that has a positive on-balance-sheet gap and a negative off-balance-sheet gap has made a mistake in hedging its interest rate risk. 
C) An FI that has a positive on-balance-sheet gap and a negative off-balance-sheet gap is using its off-balance-sheet position to hedge its on-balance-sheet position. 
D) None of the listed options are correct.

Question 4

Which of the following statements is true?

Accepted Answer

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

Question 5

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 6

The repricing gap considers the timing and size of cash flows.

Accepted Answer

A) True 
 B)False

Question 7

The term 'rate-sensitive assets' refers to assets with a particularly high interest rate.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following are rate-sensitive assets?

Accepted Answer

A) Short-term consumer loans, cheque accounts and three-month Treasury Notes 
B) Ten-year fixed rate mortgages, short-term consumer loans and long-term consumer loans 
C) Short-term consumer loans, 10-year fixed-rate mortgages and one-year term deposits 
D) Short-term consumer loans, six-month Treasury Notes and three-year Treasury Bonds 
A) Short-term consumer loans, cheque accounts and three-month Treasury Notes 
B) Ten-year fixed rate mortgages, short-term consumer loans and long-term consumer loans 
C) Short-term consumer loans, 10-year fixed-rate mortgages and one-year term deposits 
D) Short-term consumer loans, six-month Treasury Notes and three-year Treasury Bonds

Question 9

An FI with a positive gap of $30 million suffers a $0.15 million decrease in its net interest income if interest rates increase by 0.5 per cent.

Accepted Answer

A) True 
 B)False

Question 10

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 11

Over-aggregation and runoffs are the major problems associated with the repricing gap.

Accepted Answer

A) True 
 B)False

Question 12

A positive correlation between the inflation rate and the RBA's target cash rate decision suggests that when inflation is on the increase, the RBA generally increases its targeted cash rate.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is true?

Accepted Answer

A) Expressing the repricing gap as a percentage of assets tells us the direction of the interest rate exposure. 
B) Expressing the repricing gap as a percentage of liabilities tells us the scale of the interest rate exposure. 
C) Expressing the repricing gap as a percentage of equity tells us the scale of the interest rate exposure. 
D) Expressing the repricing gap as a percentage of liabilities tells us the direction of the interest rate exposure. 
A) Expressing the repricing gap as a percentage of assets tells us the direction of the interest rate exposure. 
B) Expressing the repricing gap as a percentage of liabilities tells us the scale of the interest rate exposure. 
C) Expressing the repricing gap as a percentage of equity tells us the scale of the interest rate exposure. 
D) Expressing the repricing gap as a percentage of liabilities tells us the direction of the interest rate exposure.

Question 14

Because the repricing model ignores the market value effect of changing interest rates, the repricing gap is an incomplete measure of the true interest rate risk exposure of an FI.

Accepted Answer

A) True 
 B)False

Question 15

The unbiased expectations theory of the term structure of interest rates:

Accepted Answer

A) assumes that long-term interest rates are an arithmetic average of short-term rates 
B) assumes that the yield curve reflects the market's current expectations of future short-term interest rates 
C) recognises that forward rates are perfect predictors of future interest rates 
D) assumes that risk premiums increase uniformly with maturity 
A) assumes that long-term interest rates are an arithmetic average of short-term rates 
B) assumes that the yield curve reflects the market's current expectations of future short-term interest rates 
C) recognises that forward rates are perfect predictors of future interest rates 
D) assumes that risk premiums increase uniformly with maturity

Question 16

Which of the following statements is true?

Accepted Answer

A) The size of the range over which bucket gaps are calculated does not matter as the repricing gap will always lead to exact results. 
B) The shorter the range over which bucket gaps are calculated, the greater the potential error. 
C) The shorter the range over which bucket gaps are calculated, the smaller the potential error. 
D) None of the listed options are correct. 
A) The size of the range over which bucket gaps are calculated does not matter as the repricing gap will always lead to exact results. 
B) The shorter the range over which bucket gaps are calculated, the greater the potential error. 
C) The shorter the range over which bucket gaps are calculated, the smaller the potential error. 
D) None of the listed options are correct.

Question 17

The term core deposits refers to those deposits that:

Accepted Answer

A) act as long-term sources of funds for the FI 
B) reflect the true or core nature of the FI's operations 
C) support the core of the FI's operations 
D) None of the listed options are correct. 
A) act as long-term sources of funds for the FI 
B) reflect the true or core nature of the FI's operations 
C) support the core of the FI's operations 
D) None of the listed options are correct.

Question 18

The Reserve Bank of Australia (RBA) undertook actions in regards to their open market operation in the post global financial crisis environment to move financial markets towards greater stability.This was achieved by:

Accepted Answer

A) increasing the maturity of repos to reduce money pressure in the money market over the longer term. 
B) increasing RBA holdings of non-government securities for use with repos due to the shortage of government securities. 
C) increasing the supply of deposits held by banks and other authorised deposit-taking institutions in their exchange settlement accounts held with the RBA. 
D) All of the listed options are correct. 
A) increasing the maturity of repos to reduce money pressure in the money market over the longer term. 
B) increasing RBA holdings of non-government securities for use with repos due to the shortage of government securities. 
C) increasing the supply of deposits held by banks and other authorised deposit-taking institutions in their exchange settlement accounts held with the RBA. 
D) All of the listed options are correct.

What is spread effect?

The Reserve Bank of Australia's (RBA) monetary policy can reduce an FI's interest rate risk:

Which of the following statements is true?

Which of the following statements is true?

Repricing gap refers to the:

The repricing gap considers the timing and size of cash flows.

The term 'rate-sensitive assets' refers to assets with a particularly high interest rate.

Which of the following are rate-sensitive assets?

An FI with a positive gap of $30 million suffers a $0.15 million decrease in its net interest income if interest rates increase by 0.5 per cent.

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?

Over-aggregation and runoffs are the major problems associated with the repricing gap.

A positive correlation between the inflation rate and the RBA's target cash rate decision suggests that when inflation is on the increase, the RBA generally increases its targeted cash rate.

Which of the following statements is true?

Because the repricing model ignores the market value effect of changing interest rates, the repricing gap is an incomplete measure of the true interest rate risk exposure of an FI.

The unbiased expectations theory of the term structure of interest rates:

Which of the following statements is true?

The term core deposits refers to those deposits that:

The Reserve Bank of Australia (RBA) undertook actions in regards to their open market operation in the post global financial crisis environment to move financial markets towards greater stability.This was achieved by:

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

What is spread effect?

The Reserve Bank of Australia's (RBA) monetary policy can reduce an FI's interest rate risk:

Which of the following statements is true?

Which of the following statements is true?

Repricing gap refers to the:

The repricing gap considers the timing and size of cash flows.

The term 'rate-sensitive assets' refers to assets with a particularly high interest rate.

Which of the following are rate-sensitive assets?

An FI with a positive gap of $30 million suffers a $0.15 million decrease in its net interest income if interest rates increase by 0.5 per cent.

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?

Over-aggregation and runoffs are the major problems associated with the repricing gap.

A positive correlation between the inflation rate and the RBA's target cash rate decision suggests that when inflation is on the increase, the RBA generally increases its targeted cash rate.

Which of the following statements is true?

Because the repricing model ignores the market value effect of changing interest rates, the repricing gap is an incomplete measure of the true interest rate risk exposure of an FI.

The unbiased expectations theory of the term structure of interest rates:

Which of the following statements is true?

The term core deposits refers to those deposits that:

The Reserve Bank of Australia (RBA) undertook actions in regards to their open market operation in the post global financial crisis environment to move financial markets towards greater stability.This was achieved by:

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