Deck 7: Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques

Question 1

A(n)__________________________ means that the bank has more interest-sensitive liabilities than interest-sensitive assets.

Answer 1

negative interest-sensitive gap (liability sensitive

Question 2

A(n)__________________________ gap means that for a parallel increase in all interest rates,the market value of net worth will tend to increase.

Answer 2

negative-duration

Question 3

__________________________ is the coordinated management of both the bank's assets and its liabilities.

Answer 3

Funds management

Question 4

Recent decades have ushered in dramatic changes in banking.The goal of __________________ was simply to gain control of the bank's sources of funds.

Question 5

The __________________ premium on a bond reflects the differences in the ease and ability to sell the bond in the secondary market at a favorable price.

Question 6

The bank's __________________________ takes into account the idea that the speed (sensitivity)of interest rate changes will differ for different types of assets and liabilities.

Question 7

The __________________ shows the relationship between the time to maturity and the yield to maturity of bonds.

Question 8

The ___________________ view of assets and liabilities held that the amount and types of deposits was primarily determined by customers and hence the key decision a bank needed to make was with the assets.

Question 9

__________________________ are those assets which mature or must be repriced within the planning period.

Question 10

The __________________________ is the rate of return on a financial instrument using a 360-day year relative to the instrument's face value.

Question 11

__________________________ is the difference between the dollar-weighted duration of the asset portfolio and the dollar-weighted duration of the liability portfolio.

Question 12

__________________________ is the risk due to changes in market interest rates which can adversely affect the bank's net interest margin,assets,liabilities,and equity.

Question 13

The __________________________ component of interest rates is the risk premium due to the probability that the borrower will miss some payments or will not repay the loan.

Question 14

The __________________ premium on a bond allows the investor to be compensated for their projected loss in purchasing power from the increase in the prices of goods and services in the future.

Question 15

A(n)__________________________ gap means that for a parallel increase in all interest rates,the market value of net worth will tend to decline.

Question 16

The __________________________ is the interest rate that equalizes the current market price of a bond with the present value of the future cash flows.

Question 17

The __________________________ is equal to the duration of each individual type of asset weighted by the market value of each type of asset out of the total market value of all assets.

Question 18

__________________________ is the difference between interest-sensitive assets and interest-sensitive liabilities.

Question 19

The __________________________ is equal to the duration of each individual type of liability in the portfolio weighted by the market value of each type of liability in the portfolio out of the total market value of all liabilities.

Question 20

__________________ is the weighted average maturity for a stream of future cash flows.

Question 21

One of the government-created giant mortgage banking firm which has subsequently been privatized is the ____________________________________.

Question 22

The change in a financial institution's __________________ is equal to difference between the average duration of assets times the change in the interest rate divided by (1+ original discount rate)times the dollar amount of total assets and the average duration of liabilities times the change in the interest rate divided by 1+ original discount rate times the dollar amount of total liabilities.

Question 23

In recent decades,banks have aggressively sought to insulate their assets and liability portfolios and profits from the ravages of changing interest rates.Many banks now conduct their asset-liability management strategy with the help of a(n)_____________________.

Question 24

When a bank has a negative duration gap,a parallel decrease in the interest rates on the assets and liabilities of the bank will lead to a(n)_________________________ in the bank's net worth.

Question 25

_______________________ is a measure of interest-rate risk exposure which is the total difference in dollars between those assets and liabilities that can be repriced over a designated time period.

Question 26

_____________________________ are those liabilities that mature or must be repriced within the planning period.

Question 27

___________________________ is the phenomenon by which interest rates attached to various assets often change by different amounts and at different speeds than interest rates attached to various liabilities.

Question 28

Most lending institutions tend to do better when the yield curve is upward-sloping because they tend to have ____________ maturity gap positions.

Question 29

One part of interest-rate risk is ____________________.This part of interest-rate risk reflects that as interest rates fall,any cash flows that are received are invested at a lower interest rate.

Question 30

The relationship between a change in an asset's price and an asset's change in the yield or interest rate is captured by _________________________.

Question 31

__________________________ is interest income from loans and investments less interest expenses on deposits and borrowed funds divided by total earning assets.

Question 32

Variable rate loans and securities are included as part of _______________________ for banks.

Question 33

Money market deposits are included as part of ______________________ for banks.

Question 34

A bank is __________________ against changes in its net worth if its duration gap is equal to zero.

Question 35

One part of interest-rate risk is _____________________.This part of interest-rate risk reflects that as interest rates rise,prices of securities tend to fall.

Question 36

Interest sensitive assets divided by interest sensitive liabilities is known as: ____________________________.

Question 37

The interest-rate risk which arises when a borrower has the right to pay off a loan early reducing the lender's expected rate of return is called ______________.

Question 38

When a bank has a positive duration gap a parallel increase in the interest rates on the assets and liabilities of the bank will lead to a(n)__________________ in the bank's net worth.

Question 39

Interest sensitive assets less interest sensitive liabilities divided by total assets of the bank is known as _______________________.

Question 40

One of the principal goals of asset-liability management is to maximize or at least stabilize a bank's margin or spread.

Question 41

Interest-sensitive gap and weighted interest-sensitive gap will always reach the same conclusion as to whether a bank is asset sensitive or liability sensitive.

Question 42

Interest-sensitive gap techniques do not consider the impact of changing interest rates on stockholders' equity.

Question 43

Banks with a positive cumulative interest-sensitive gap will benefit if interest rates rise,but lose income if interest rates decline.

Question 44

Under the so-called liability management view in banking,the key control lever banks possess over the volume and mix of their liabilities is price.

Question 45

Banks with a negative cumulative interest-sensitive gap will benefit if interest rates rise,but lose income if interest rates decline.

Question 46

A financial institution is liability sensitive,if its interest-sensitive liabilities are less than its interest-sensitive assets.

Question 47

A liability-sensitive bank will experience an increase in its net interest margin if interest rates rise.

Question 48

The ultimate goal of liability management is to gain control over a financial institution's sources of funds.

Question 49

If interest rates fall when a bank is in an asset-sensitive position,its net interest margin will rise.

Question 50

Weighted interest-sensitive gap is less accurate than interest-sensitive gap in determining the effect of changes in interest rates on net interest margin.

Question 51

Repriceable liabilities include long-term savings and retirement accounts.

Question 52

If a bank's interest-sensitive assets and liabilities are equal,then its interest revenues from assets and funding costs from liabilities will change in the same proportion relative to changes in market interest rates.

Question 53

Financial securities that are the same in all other ways may have differences in interest rates that reflect the differences in the ease of selling the security in the secondary market at a favorable price.

Question 54

Interest-sensitive gap,relative interest-sensitive gap,and the interest-sensitivity ratio will often reach different conclusions as to whether the bank is asset or liability sensitive.

Question 55

Asset management strategy in banking assumes that the amount and kinds of deposits and other borrowed funds a bank attracts are determined largely by its management.

Question 56

Financial institutions face two major kinds of interest-rate risk.These risks include price risk and reinvestment risk.

Question 57

Bankers cannot determine the level or trend of market interest rates;instead,they can only react to the level and trend of rates.

Question 58

The yield curve is constructed using corporate bonds with different default risks,so that the bank can determine the risk/return tradeoff for default risk.

Question 59

Under the so-called funds management view,bank management's control over assets must be coordinated with its control over liabilities,so that asset and liability management are internally consistent.

Question 60

Short-term interest rates tend to rise more slowly than long-term interest rates and to fall more slowly when the long-term interest rates in the market are headed down.

Question 61

A bank with a duration gap of zero is immunized against changes in the value of net worth due to changes in interest rates in the market.

Question 62

Convexity is the idea that the rate of change of an asset's price varies with the change in interest rates depending on the prevailing interest rates.

Question 63

Duration is a direct measure of the price risk but not the reinvestment risk of a bond.

Question 64

Financial institutions laden with home mortgages tend be immune to interest-rate risk.

Question 65

A bank with a negative duration gap experiencing a decrease in interest rates will experience an increase in its net worth.

Question 66

Long-term interest rates tend to change very little with the cycle of economic activity.

Question 67

Convexity is a direct measure of the price risk of a bond.

Question 68

The principal goal of interest rate hedging strategy is to hold fixed a bank's:

A)net interest margin.
B)net income before taxes.
C)value of loans and securities.
D)interest sensitive assets.
E)None of the options is correct.

Question 69

Duration is the weighted average maturity of a promised stream of future cash flows.

Question 70

A bank with a positive duration gap experiencing a decrease in interest rates will experience an increase in its net worth.

Question 71

A bond with a greater duration will have a smaller price change in percentage terms when interest rates change.

Question 72

A bank's IS GAP is defined as:

A)the dollar amount of interest-sensitive assets divided by the dollar amount of interest-sensitive liabilities.
B)the dollar amount of earning assets divided by the dollar amount of total liabilities.
C)the dollar amount of interest-sensitive assets minus the dollar amount of interest-sensitive liabilities.
D)the dollar amount of interest-sensitive liabilities minus the dollar amount of interest-sensitive assets.
E)the dollar amount of earning assets times the average liability interest rate.

Question 73

A bank with a negative duration gap experiencing a rise in interest rates will experience an increase in its net worth.

Question 74

Net interest margin tends to rise for U.S.banks having positive maturity gap positions when the yield curve is upward-sloping.

Question 75

A bank is asset-sensitive if its:

A)loans and securities are affected by changes in interest rates.
B)interest-sensitive assets exceed its interest-sensitive liabilities.
C)interest-sensitive liabilities exceed its interest-sensitive assets.
D)deposits and borrowings are affected by changes in interest rates.
E)None of the options is correct.

Question 76

A bank with a positive duration gap experiencing a rise in interest rates will experience an increase in its net worth.

Question 77

If a financial institution's net interest margin is immune to interest-rate risk,then so is its net worth.

Question 78

U.S.banks having positive maturity gap positions tend to do better when the yield curve is upward-sloping.

Question 79

The change in the market price of an asset due to a change in market interest rates is roughly equal to the asset's duration times the relative change in interest rates attached to that particular asset.

Question 80

The maturing of the liability management techniques,coupled with more volatile interest rates,gave birth to the __________________ approach,which dominates banking today.

A)liability management
B)asset management
C)risk management
D)funds management
E)None of the options is correct.