Question 1

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.

Question 2

For a bank that has a positive duration gap, an increase in interest rates will cause a(n) _______ in the economic value of assets, that is _______ than the _________ in the economic value of liabilities, and a(n) _______ in the economic value of equity.

Accepted Answer

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

Question 3

Discuss the differences between assets and liabilities that are price sensitive and those that are rate sensitive.

Accepted Answer

Price sensitive assets and liabilities r

Question 4

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 5

Which of the following is likely to have a negative effective duration?

Accepted Answer

A)  A high coupon, interest only mortgage-backed security that is pre-paying at a high rate. 
B)  A low coupon U.S. Treasury bond. 
C)  Fed Funds purchased. 
D)  Demand deposits 
E)  None of the above can have a negative effective duration. 
A)  A high coupon, interest only mortgage-backed security that is pre-paying at a high rate. 
B)  A low coupon U.S. Treasury bond. 
C)  Fed Funds purchased. 
D)  Demand deposits 
E)  None of the above can have a negative effective duration.

Question 6

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

Accepted Answer

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

Question 7

Effective duration considers a security's embedded options.

Accepted Answer

A) True 
 B)False

Question 8

Use the following bank information for questions .
 $\begin{array}{|l|l|l|l|l|l|l|l|}
\hline &\begin{array}{c}
\text { Market } \
\text { Value }
\end{array} &\text { Rate } & \begin{array}{c}
\text { Duration } \
\text { (Years) }
\end{array} & \begin{array}{c}\text { Liabilities }\
\text { and } \
\text { Equity }
\end{array} & \begin{array}{c}
\text { Market } \
\text { Value }
\end{array} & \text { Rate } & \begin{array}{c}
\text { Duration } \
\text { (Years) }
\end{array} \
\hline\text { Cash } & \$  200 & && \text {Time Deposits } & \$  600 &2.0 \% & 1.500 \
\hline \text { Loans } & \$ 800 & 8.0 \% & 3.750 &\text { CDs } & \$  500 & 4.5 \% & 3.125 \
\hline\text { T-Bonds }&\$250&4.0\%&7.250&\text { Equity }&\$150&&\
\hline\text { Total }&\$1,250&&&&\$1,250\
\hline
\end{array}$
-What is the bank's expected economic net interest income?

Accepted Answer

A)  $34.5 
B)  $32.3 
C)  $39.5 
D)  $44.0 
E)  $120.5 
A)  $34.5 
B)  $32.3 
C)  $39.5 
D)  $44.0 
E)  $120.5

Question 9

Duration gap analysis focuses on changes in net interest income.

Accepted Answer

A) True 
 B)False

Question 10

Banks should never assume any interest rate risk.

Accepted Answer

A) True 
 B)False

Question 11

The duration of a liability that does not pay interest must be equal to 0.

Accepted Answer

A) True 
 B)False

Question 12

The yield curve is typically inverted at the peak of the business cycle.

Accepted Answer

A) True 
 B)False

Question 13

Use the following bank information for questions .
 $\begin{array}{|l|l|l|l|l|l|l|l|}
\hline &\begin{array}{c}
\text { Market } \
\text { Value }
\end{array} &\text { Rate } & \begin{array}{c}
\text { Duration } \
\text { (Years) }
\end{array} & \begin{array}{c}\text { Liabilities }\
\text { and } \
\text { Equity }
\end{array} & \begin{array}{c}
\text { Market } \
\text { Value }
\end{array} & \text { Rate } & \begin{array}{c}
\text { Duration } \
\text { (Years) }
\end{array} \
\hline\text { Cash } & \$  200 & && \text {Time Deposits } & \$  600 &2.0 \% & 1.500 \
\hline \text { Loans } & \$ 800 & 8.0 \% & 3.750 &\text { CDs } & \$  500 & 4.5 \% & 3.125 \
\hline\text { T-Bonds }&\$250&4.0\%&7.250&\text { Equity }&\$150&&\
\hline\text { Total }&\$1,250&&&&\$1,250\
\hline
\end{array}$
-If interest rates decrease 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 14

Use the following bank information for questions .
 $\begin{array}{|l|l|l|l|l|l|l|l|}
\hline &\begin{array}{c}
\text { Market } \
\text { Value }
\end{array} &\text { Rate } & \begin{array}{c}
\text { Duration } \
\text { (Years) }
\end{array} & \begin{array}{c}\text { Liabilities }\
\text { and } \
\text { Equity }
\end{array} & \begin{array}{c}
\text { Market } \
\text { Value }
\end{array} & \text { Rate } & \begin{array}{c}
\text { Duration } \
\text { (Years) }
\end{array} \
\hline\text { Cash } & \$  150 & && \text {Time Deposits } & \$  500 & 4 \% & 1.25 \
\hline \text { Loans } & \$  675 & 10 \% & 2.50 &\text { CDs } & \$  400 & 6 \% & 3.00 \
\hline\text { T-Bonds }&\$175&5\%&5.00&\text { Equity }&\$100&&\
\hline\text { Total }&\$1,000&&&&\$1,000\
\hline
\end{array}$
-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 15

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

Accepted Answer

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

Question 16

Which of the following would generally be considered price sensitive?

Accepted Answer

A)  Fed funds purchased 
B)  Fed funds sold 
C)  Repurchase agreements 
D)  Demand deposits 
E)  A 20-year zero coupon bond 
A)  Fed funds purchased 
B)  Fed funds sold 
C)  Repurchase agreements 
D)  Demand deposits 
E)  A 20-year zero coupon bond

Question 17

Use the following bank information for questions .
 $\begin{array}{|l|l|l|l|l|l|l|l|}
\hline &\begin{array}{c}
\text { Market } \
\text { Value }
\end{array} &\text { Rate } & \begin{array}{c}
\text { Duration } \
\text { (Years) }
\end{array} & \begin{array}{c}\text { Liabilities }\
\text { and } \
\text { Equity }
\end{array} & \begin{array}{c}
\text { Market } \
\text { Value }
\end{array} & \text { Rate } & \begin{array}{c}
\text { Duration } \
\text { (Years) }
\end{array} \
\hline\text { Cash } & \$  150 & && \text {Time Deposits } & \$  500 & 4 \% & 1.25 \
\hline \text { Loans } & \$  675 & 10 \% & 2.50 &\text { CDs } & \$  400 & 6 \% & 3.00 \
\hline\text { T-Bonds }&\$175&5\%&5.00&\text { Equity }&\$100&&\
\hline\text { Total }&\$1,000&&&&\$1,000\
\hline
\end{array}$
-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)  $6.78 
E)  -$6.78 
A)  -$2.56 
B)  $5.84 
C)  -$5.84 
D)  $6.78 
E)  -$6.78

Question 18

Which of the following is NOT a weakness of duration gap analysis?

Accepted Answer

A)  It is difficult to accurately compute duration. 
B)  Each future cash flow must be discounted by the appropriate future interest rate. 
C)  The duration of a portfolio must be constantly monitored. 
D)  It is difficult to estimate the duration on zero coupon bonds. 
E)  All of the above are weaknesses of duration gap analysis. 
A)  It is difficult to accurately compute duration. 
B)  Each future cash flow must be discounted by the appropriate future interest rate. 
C)  The duration of a portfolio must be constantly monitored. 
D)  It is difficult to estimate the duration on zero coupon bonds. 
E)  All of the above are weaknesses of duration gap analysis.

Question 19

Use the following bank information for questions .
 $\begin{array}{|l|l|l|l|l|l|l|l|}
\hline &\begin{array}{c}
\text { Market } \
\text { Value }
\end{array} &\text { Rate } & \begin{array}{c}
\text { Duration } \
\text { (Years) }
\end{array} & \begin{array}{c}\text { Liabilities }\
\text { and } \
\text { Equity }
\end{array} & \begin{array}{c}
\text { Market } \
\text { Value }
\end{array} & \text { Rate } & \begin{array}{c}
\text { Duration } \
\text { (Years) }
\end{array} \
\hline\text { Cash } & \$  200 & && \text {Time Deposits } & \$  600 &2.0 \% & 1.500 \
\hline \text { Loans } & \$ 800 & 8.0 \% & 3.750 &\text { CDs } & \$  500 & 4.5 \% & 3.125 \
\hline\text { T-Bonds }&\$250&4.0\%&7.250&\text { Equity }&\$150&&\
\hline\text { Total }&\$1,250&&&&\$1,250\
\hline
\end{array}$
-What is the weighted average duration of liabilities?

Accepted Answer

A)  2.0 years 
B)  2.24 years 
C)  3.25 years 
D)  4.5 years 
E)  6.5 years 
A)  2.0 years 
B)  2.24 years 
C)  3.25 years 
D)  4.5 years 
E)  6.5 years

Question 20

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

Accepted Answer

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

Which of the following is false regarding duration gap analysis?

For a bank that has a positive duration gap, an increase in interest rates will cause a(n) ___ in the economic value of assets, that is _ than the _ in the economic value of liabilities, and a(n) _ in the economic value of equity.

Discuss the differences between assets and liabilities that are price sensitive and those that are rate sensitive.

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

Which of the following is likely to have a negative effective duration?

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

Effective duration considers a security's embedded options.

Duration gap analysis focuses on changes in net interest income.

Banks should never assume any interest rate risk.

The duration of a liability that does not pay interest must be equal to 0.

The yield curve is typically inverted at the peak of the business cycle.

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

Which of the following would generally be considered price sensitive?

Which of the following is NOT a weakness of duration gap analysis?

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

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

Exam 8: Managing Interest Rate Risk: Duration Gap and Economic Value of Equity

Which of the following is false regarding duration gap analysis?

For a bank that has a positive duration gap, an increase in interest rates will cause a(n) _______ in the economic value of assets, that is _______ than the _________ in the economic value of liabilities, and a(n) _______ in the economic value of equity.

Discuss the differences between assets and liabilities that are price sensitive and those that are rate sensitive.

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

Which of the following is likely to have a negative effective duration?

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

Effective duration considers a security's embedded options.

Duration gap analysis focuses on changes in net interest income.

Banks should never assume any interest rate risk.

The duration of a liability that does not pay interest must be equal to 0.

The yield curve is typically inverted at the peak of the business cycle.

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

Which of the following would generally be considered price sensitive?

Which of the following is NOT a weakness of duration gap analysis?

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

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 positive duration gap, an increase in interest rates will cause a(n) ___ in the economic value of assets, that is _ than the _ in the economic value of liabilities, and a(n) _ in the economic value of equity.

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

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

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