Question 1

To perfectly immunize a bank's economic value of equity from changes in interest rate risk, it should:

Accepted Answer

A) adjust assets and liabilities such that its duration gap is equal to one. 
B) adjust assets and liabilities such that its duration gap is greater than zero. 
C) adjust assets and liabilities such that its duration gap is equal to zero. 
D) adjust assets and liabilities such that its GAP is equal to zero. 
E) adjust assets and liabilities such that its GAP is less than one. 
A) adjust assets and liabilities such that its duration gap is equal to one. 
B) adjust assets and liabilities such that its duration gap is greater than zero. 
C) adjust assets and liabilities such that its duration gap is equal to zero. 
D) adjust assets and liabilities such that its GAP is equal to zero. 
E) adjust assets and liabilities such that its GAP is less than one. C

Question 2

Which of the following allows a security's cash flows to change when interest rates change?

Accepted Answer

A) Modified duration 
B) Macaulay's duration 
C) Effective duration 
D) Balance sheet duration 
E) Income statement duration 
A) Modified duration 
B) Macaulay's duration 
C) Effective duration 
D) Balance sheet duration 
E) Income statement duration C

Question 3

Which of the following is false regarding duration gap analysis?

Accepted Answer

A) Duration gap analysis does not classify assets as rate-sensitive. 
B) Duration gap analysis indicates the potential change in a bank's net interest income. 
C) Duration gap accounts for bank leverage. 
D) Duration gap accounts for the present value of cash flows associated with all liabilities. 
E) Duration gap analysis indicates the potential change in a bank's market value of equity. 
A) Duration gap analysis does not classify assets as rate-sensitive. 
B) Duration gap analysis indicates the potential change in a bank's net interest income. 
C) Duration gap accounts for bank leverage. 
D) Duration gap accounts for the present value of cash flows associated with all liabilities. 
E) Duration gap analysis indicates the potential change in a bank's market value of equity. B

Question 4

An asset that is rate-sensitive is generally not price sensitive.

Accepted Answer

A) True 
 B)False

Question 5

If the yield curve is inverted, a portfolio manager can take advantage of this by:

Accepted Answer

A) pricing more deposits on a fixed-rate basis. 
B) buying more long-term securities 
C) making variable-rate, callable loans. 
D) increasing the number of rate-sensitive assets. 
E) All of the above. 
A) pricing more deposits on a fixed-rate basis. 
B) buying more long-term securities 
C) making variable-rate, callable loans. 
D) increasing the number of rate-sensitive assets. 
E) All of the above.

Question 6

What are the weaknesses of using static GAP analysis versus duration gap analysis?

Accepted Answer

A) Static GAP ignores the time value of money. 
B) Static GAP ignores the cumulative impact of interest rate changes on a bank's risk profile. 
C) Static GAP does not proscribe the treatment of demand deposits. 
D) All of the above are weaknesses of using static GAP analysis versus duration gap analysis. 
E) a.and b. 
A) Static GAP ignores the time value of money. 
B) Static GAP ignores the cumulative impact of interest rate changes on a bank's risk profile. 
C) Static GAP does not proscribe the treatment of demand deposits. 
D) All of the above are weaknesses of using static GAP analysis versus duration gap analysis. 
E) a.and b.

Question 7

Use the following bank information for questions 
  
-What is the bank's duration gap?

Accepted Answer

A) 0.53 
B) 0.73 
C) 0.91 
D) 2.03 
E) 4.58 
A) 0.53 
B) 0.73 
C) 0.91 
D) 2.03 
E) 4.58

Question 8

Use the following bank information for questions 
  
-If interest rates rise 1% for all assets and liabilities, what is the approximate expected change in the economic value of equity?

Accepted Answer

A) -$2.56 
B) $5.84 
C) -$5.84 
D) $22.19 
E) -$22.19 
A) -$2.56 
B) $5.84 
C) -$5.84 
D) $22.19 
E) -$22.19

Question 9

Use the following bank information for questions 
  
-What is the bank's expected economic net interest income?

Accepted Answer

A) $14.75 
B) $32.25 
C) $44.00 
D) $76.25 
E) $120.25 
A) $14.75 
B) $32.25 
C) $44.00 
D) $76.25 
E) $120.25

Question 10

Duration gap analysis:

Accepted Answer

A) applies he the concept of duration to the bank's entire balance sheet. 
B) applies he the concept of duration to the bank's entire income statement. 
C) applies he the concept of duration to the bank's retained earnings. 
D) indicates the difference in the GAP in the time it takes to collect on loan payments versus the time to attract deposits. 
E) estimates when embedded options will be exercised. 
A) applies he the concept of duration to the bank's entire balance sheet. 
B) applies he the concept of duration to the bank's entire income statement. 
C) applies he the concept of duration to the bank's retained earnings. 
D) indicates the difference in the GAP in the time it takes to collect on loan payments versus the time to attract deposits. 
E) estimates when embedded options will be exercised.

Question 11

EVE analysis: is essentially a _____________ analysis.

Accepted Answer

A) profitability 
B) quality 
C) liquidity 
D) liquidation 
E) earnings 
A) profitability 
B) quality 
C) liquidity 
D) liquidation 
E) earnings

Question 12

A 10-year annual coupon bond is currently selling for its par value of $1,000 with an annual yield of 5%.If the bond is callable at par, what is the effective duration of the bond, assuming rates change by 1%?

Accepted Answer

A) 10 years 
B) 7.36 years 
C) 5.52 years 
D) 4.60 years 
E) 3.68 years 
A) 10 years 
B) 7.36 years 
C) 5.52 years 
D) 4.60 years 
E) 3.68 years

Question 13

Discuss why a bank may have to sacrifice yield to vary its duration gap.

Accepted Answer

A bank may have to sacrifice yield to va

Question 14

A bond has a Macaulay's duration of 10.7 years.If rates fall from 7% to 6%, the bonds price will:

Accepted Answer

A) increase by approximately 1%. 
B) decrease by approximately 1%. 
C) increase by approximately 10%. 
D) decrease by approximately 10%. 
E) Not enough information is given to answer the question. 
A) increase by approximately 1%. 
B) decrease by approximately 1%. 
C) increase by approximately 10%. 
D) decrease by approximately 10%. 
E) Not enough information is given to answer the question.

Question 15

How does effective duration differ from modified duration?

Accepted Answer

Effective duration and modified duration

Question 16

For a bank that has a negative duration gap, a decrease in interest rates will cause a(n) _______ in the economic value of assets, a(n) _______ in the economic value of liabilities, and a(n) _______ in the economic value of equity.

Accepted Answer

A) increase, decrease, increase 
B) increase, increase, decrease 
C) increase, increase, increase 
D) decrease, decrease, increase 
E) decrease, increase, decrease 
A) increase, decrease, increase 
B) increase, increase, decrease 
C) increase, increase, increase 
D) decrease, decrease, increase 
E) decrease, increase, decrease

Question 17

Which of the following is true regarding duration gap analysis?

Accepted Answer

A) The magnitude of the duration gap is related to the amount of interest rate risk a bank is subject to. 
B) Management can adjust the duration gap to speculate on future interest rate changes. 
C) A positive duration gap means a bank's market value of equity will decrease with an increase in interest rates. 
D) All of the above are true. 
E) a.and c. 
A) The magnitude of the duration gap is related to the amount of interest rate risk a bank is subject to. 
B) Management can adjust the duration gap to speculate on future interest rate changes. 
C) A positive duration gap means a bank's market value of equity will decrease with an increase in interest rates. 
D) All of the above are true. 
E) a.and c.

Question 18

Use the following bank information for questions 
  
-What is the bank's weighted average cost of liabilities?

Accepted Answer

A) $24.9 
B) $34.5 
C) $80.0 
D) $94.3 
E) $102.1 
A) $24.9 
B) $34.5 
C) $80.0 
D) $94.3 
E) $102.1

Question 19

A 30-year zero coupon bond with a face value of $10,000 is currently selling for $2,313.77.Using the bond's modified duration, what is the approximate change in the price of the bond if interest rates rise by 15 basis points?

Accepted Answer

A) -15.00% 
B) -4.29% 
C) -0.43% 
D) -0.15% 
E) Not enough information is given to answer the question. 
A) -15.00% 
B) -4.29% 
C) -0.43% 
D) -0.15% 
E) Not enough information is given to answer the question.

Question 20

What does a bank's duration gap measure?

Accepted Answer

A) The duration of short-term buckets minus the duration of long-term buckets. 
B) The duration of the bank's assets minus the duration of its liabilities. 
C) The duration of all rate-sensitive assets minus the duration of rate-sensitive liabilities. 
D) The duration of the bank's liabilities minus the duration of its assets. 
E) The duration of all rate-sensitive liabilities minus the duration of rate-sensitive assets. 
A) The duration of short-term buckets minus the duration of long-term buckets. 
B) The duration of the bank's assets minus the duration of its liabilities. 
C) The duration of all rate-sensitive assets minus the duration of rate-sensitive liabilities. 
D) The duration of the bank's liabilities minus the duration of its assets. 
E) The duration of all rate-sensitive liabilities minus the duration of rate-sensitive assets.

To perfectly immunize a bank's economic value of equity from changes in interest rate risk, it should:

Which of the following allows a security's cash flows to change when interest rates change?

Which of the following is false regarding duration gap analysis?

An asset that is rate-sensitive is generally not price sensitive.

If the yield curve is inverted, a portfolio manager can take advantage of this by:

What are the weaknesses of using static GAP analysis versus duration gap analysis?

Use the following bank information for questions -What is the bank's duration gap?

Use the following bank information for questions -If interest rates rise 1% for all assets and liabilities, what is the approximate expected change in the economic value of equity?

Use the following bank information for questions -What is the bank's expected economic net interest income?

Duration gap analysis:

EVE analysis: is essentially a _____________ analysis.

A 10-year annual coupon bond is currently selling for its par value of $1,000 with an annual yield of 5%.If the bond is callable at par, what is the effective duration of the bond, assuming rates change by 1%?

Discuss why a bank may have to sacrifice yield to vary its duration gap.

A bond has a Macaulay's duration of 10.7 years.If rates fall from 7% to 6%, the bonds price will:

How does effective duration differ from modified duration?

For a bank that has a negative duration gap, a decrease in interest rates will cause a(n) ___ in the economic value of assets, a(n) _ in the economic value of liabilities, and a(n) _____ in the economic value of equity.

Which of the following is true regarding duration gap analysis?

Use the following bank information for questions -What is the bank's weighted average cost of liabilities?

A 30-year zero coupon bond with a face value of $10,000 is currently selling for $2,313.77.Using the bond's modified duration, what is the approximate change in the price of the bond if interest rates rise by 15 basis points?

What does a bank's duration gap measure?

Banking and the Financial Services Industry

Government Policies and Regulation

Analyzing Bank Performance

Managing Noninterest Income and Noninterest Expense

The Performance of Nontraditional Banking Companies

Pricing Fixed-Income Securities

Managing Interest Rate Risk: Gap and Earnings Sensitivity

Using Derivatives to Manage Interest Rate Risk

Funding the Bank

Managing Liquidity

The Effective Use of Capital

Overview of Credit Policy and Loan Characteristics

Evaluating Commercial Loan Requests and Managing Credit Risk

Evaluating Consumer Loans

Managing the Investment Portfolio

Global Banking Activities

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Exam 8: Managing Interest Rate Risk: Economic Value of Equity

To perfectly immunize a bank's economic value of equity from changes in interest rate risk, it should:

Which of the following allows a security's cash flows to change when interest rates change?

Which of the following is false regarding duration gap analysis?

An asset that is rate-sensitive is generally not price sensitive.

If the yield curve is inverted, a portfolio manager can take advantage of this by:

What are the weaknesses of using static GAP analysis versus duration gap analysis?

Use the following bank information for questions -What is the bank's duration gap?

Use the following bank information for questions -If interest rates rise 1% for all assets and liabilities, what is the approximate expected change in the economic value of equity?

Use the following bank information for questions -What is the bank's expected economic net interest income?

Duration gap analysis:

EVE analysis: is essentially a _____________ analysis.

A 10-year annual coupon bond is currently selling for its par value of $1,000 with an annual yield of 5%.If the bond is callable at par, what is the effective duration of the bond, assuming rates change by 1%?

Discuss why a bank may have to sacrifice yield to vary its duration gap.

A bond has a Macaulay's duration of 10.7 years.If rates fall from 7% to 6%, the bonds price will:

How does effective duration differ from modified duration?

For a bank that has a negative duration gap, a decrease in interest rates will cause a(n) _______ in the economic value of assets, a(n) _______ in the economic value of liabilities, and a(n) _______ in the economic value of equity.

Which of the following is true regarding duration gap analysis?

Use the following bank information for questions -What is the bank's weighted average cost of liabilities?

A 30-year zero coupon bond with a face value of $10,000 is currently selling for $2,313.77.Using the bond's modified duration, what is the approximate change in the price of the bond if interest rates rise by 15 basis points?

What does a bank's duration gap measure?

Banking and the Financial Services Industry

Government Policies and Regulation

Analyzing Bank Performance

Managing Noninterest Income and Noninterest Expense

The Performance of Nontraditional Banking Companies

Pricing Fixed-Income Securities

Managing Interest Rate Risk: Gap and Earnings Sensitivity

Using Derivatives to Manage Interest Rate Risk

Funding the Bank

Managing Liquidity

The Effective Use of Capital

Overview of Credit Policy and Loan Characteristics

Evaluating Commercial Loan Requests and Managing Credit Risk

Evaluating Consumer Loans

Managing the Investment Portfolio

Global Banking Activities

Filters

For a bank that has a negative duration gap, a decrease in interest rates will cause a(n) ___ in the economic value of assets, a(n) _ in the economic value of liabilities, and a(n) _____ in the economic value of equity.