Deck 7: Managing Interest Rate Risk: Gap and Earnings Sensitivity

Question 1

If a bank has a positive GAP, an increase in interest rates will cause interest income to __________, interest expense to__________, and net interest income to __________.

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

Answer 1

A

Question 2

Which of the following will cause a bank's 1-year cumulative GAP to decrease, everything else the same.

A) An increase in 3-month loans and an offsetting increase in 9-month loans. b. A decrease in 6-month loans and an offsetting increase in 2-year CDs.
C) An increase in 9-month CD's and an offsetting increase in 5-year CDs.
D) a. and c.
E) b. and c.

Answer 2

E

Question 3

Which of the following will cause a bank's 1-year cumulative GAP to increase, everything else the same.

A) An increase in 3-month loans and an offsetting decrease in 6-month loans. b. An increase in 3-month loans and an offsetting increase in 3-month CDs.
C) A decrease in 3-month CD's and an offsetting increase in 3-year CDs.
D) a. and c.
E) b. and c.

Answer 3

C

Question 4

Which of the following does not affect net interest income?

A) Changes in the level of interest rates.
B) Changes in the volume of earning assets.
C) Changes in the portfolio mix of earning assets.
D) The yield curve changing from upward sloping to inverted.
E) All of the above affect net interest income.

Question 5

If a bank has a negative GAP, a decrease in interest rates will cause interest income to __________, interest expense to__________, and net interest income to __________.

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

Question 6

Interest rate risk:

A) varies inversely with a bank's GAP.
B) can be measured by the volatility of a bank's net interest income given changes in the level of interest rates.
C) can be eliminated by matching fixed rate assets with variable rate liabilities.
D) rarely has an impact on bank earnings.
E) All of the above

Question 7

A bank's cumulative GAP:

A) is defined as the dollar amount of rate-sensitive assets divided by the dollar amount of rate-sensitive liabilities.
B) is defined as the dollar amount of earning assets divided by the dollar amount of total liabilities.
C) compares rate-sensitive assets with rate-sensitive liabilities across all time buckets.
D) compares rate-sensitive assets with rate-sensitive liabilities across a single time bucket.
E) compares the dollar amount of earning assets times the average liability interest rate.

Question 8

A bank has a 1-year $1,000,000 loan outstanding, payable in four equal quarterly installments. What dollar amount of the loan would be considered rate sensitive in the 0 - 90 day bucket?

A) $0
B) $250,000
C) $500,000
D) $750,000
E) $1,000,000

Question 9

When is interest rate risk for a bank greatest?

A) When interest rates are volatile.
B) When interest rates are stable.
C) When inflation is high.
D) When inflation is low.
E) When loan defaults are high.

Question 10

If rate-sensitive assets equal $600 million and rate-sensitive liabilities equals $800 million, what is the expected change in net interest income if rates increase by 1%?

A) Net interest income will increase by $2 million.
B) Net interest income will fall by $2 million.
C) Net interest income will increase by $20 million.
D) Net interest income will fall by $20 million.
E) Net interest income will be unchanged.

Question 11

Keeping all other factors constant, banks can reduce the volatility of net interest income by:

A) adjusting the dollar amount of rate-sensitive assets. b. adjusting the dollar amount of fixed-rate liabilities.
C) using interest rate swaps.
D) Bank can reduce volatility of net interest income by doing all of the above.
E) a. and c. only

Question 12

If a bank has a negative GAP, an increase in interest rates will cause interest income to __________, interest expense to__________, and net interest income to __________.

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

Question 13

A bank's periodic GAP:

A) is defined as the dollar amount of rate-sensitive assets divided by the dollar amount of rate-sensitive liabilities.
B) is defined as the dollar amount of earning assets divided by the dollar amount of total liabilities.
C) compares rate-sensitive assets with rate-sensitive liabilities across all time buckets.
D) compares rate-sensitive assets with rate-sensitive liabilities across a single time bucket.
E) compares the dollar amount of earning assets times the average liability interest rate.

Question 14

If rate-sensitive assets equal $500 million and rate-sensitive liabilities equals $400 million, what is the expected change in net interest income if rates fall by 1%?

A) Net interest income will increase by $1 million.
B) Net interest income will fall by $1 million.
C) Net interest income will increase by $10 million.
D) Net interest income will fall by $10 million.
E) Net interest income will be unchanged.

Question 15

Put the following steps for conducting a Static GAP analysis in the proper chronological order.
I. Forecast changes in net interest income for a variety of interest rate scenarios.
II. Select the sequential time intervals for determining when assets and liabilities are rate-sensitive.
III. Group assets and liabilities into time “buckets.”
IV. Develop interest rate forecasts.

A) I, II, III, IV
B) IV, I, III, II
C) IV, I, II, III
D) II, III, IV, I
E) IV, II, III, I

Question 16

If rate-sensitive assets equal $500 million and rate-sensitive liabilities equals $400 million, what is the expected change in net interest income if rates increase by 1%?

A) Net interest income will increase by $1 million.
B) Net interest income will fall by $1 million.
C) Net interest income will increase by $10 million.
D) Net interest income will fall by $10 million.
E) Net interest income will be unchanged.

Question 17

If a bank has a positive GAP, a decrease in interest rates will cause interest income to __________, interest expense to__________, and net interest income to __________.

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

Question 18

If rate-sensitive assets equal $600 million and rate-sensitive liabilities equals $800 million, what is the expected change in net interest income if rates fall by 1%?

A) Net interest income will increase by $2 million.
B) Net interest income will fall by $2 million.
C) Net interest income will increase by $20 million.
D) Net interest income will fall by $20 million.
E) Net interest income will be unchanged.

Question 19

An asset would normally be classified as rate-sensitive if:

A) it matures during the examined time period. b. it represents a partial principal payment.
C) the outstanding principal on a loan can be re-priced when the base rate changes.
D) All of the above.
E) a. and c. only

Question 20

A bank's GAP is defined as:

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

Question 21

A shift from core deposits to non-core deposits will:

A) always increase the amount of fixed rate assets. b. always increase the amount of rate-sensitive assets.
C) generally increase the amount of non-earning assets.
D) generally reduce net interest income.
E) b. and d.

Question 22

Earnings-at-risk:

A) considers only interest rate "shocks."
B) is only an effective measure for 90 day intervals or less.
C) examines the change in asset composition, given a change in bank liabilities.
D) examines the variation in net interest income associated with various changes in interest rates.
E) None of the above.

Question 23

Static GAP analysis focuses on the market value of stockholder's equity.

Question 24

Static GAP analysis focuses on managing net interest income in the short-run.

Question 25

Which of the following is an advantage of static GAP analysis?

A) Static GAP analysis considers the time value of money.
B) Static GAP analysis indicates the specific balance sheet items that are responsible for the interest rate risk.
C) Static GAP analysis considers the cumulative impact of interest rate changes on the bank's position.
D) Static GAP analysis considers the embedded options in loans, such as mortgage pre-payments.
E) All of the above are advantages of static GAP analysis.

Question 26

To decrease asset sensitivity, a bank can:

A) buy longer-term securities.
B) pay premiums on subordinated debt.
C) shorten loan maturities.
D) make fewer fixed rate loans.
E) All of the above.

Question 27

Earnings sensitivity analysis does not consider:

A) changes in interest rates.
B) changes in the volume of rate-sensitive assets due to a change in interest rates.
C) changes in the volume of fixed-rate liabilities due to a change in interest rates.
D) mortgage prepayments.
E) Earnings sensitivity analysis considers all of the above.

Question 28

Which of the following does not have an embedded option?

A) A callable Federal Home Loan Bank bond.
B) Demand deposit accounts.
C) A home mortgage loan.
D) An auto loan.
E) All of the above have embedded options.

Question 29

Interest rate risk for banks arises largely from assets and liabilities that do not reprice at the same time.

Question 30

What type of GAP analysis directly measures a bank's net interest sensitivity through the last day of the analysis period?

A) Earnings
B) Net Income
C) Maturity
D) Periodic
E) Cumulative

Question 31

If a bank expects interest rates to increase in the coming year, it should:

A) increase its GAP.
B) issue fewer variable rate loans.
C) issue more 3-month CDs.
D) issue more fixed rate loans.
E) become more liability sensitive.

Question 32

Which of the following is not a disadvantage of static GAP analysis?

A) Static GAP analysis depends on the forecasted interest rates.
B) Static GAP analysis often considers demand deposits as non-rate sensitive.
C) Static GAP analysis does not consider the cumulative impact of interest rate changes on the bank's position.
D) Static GAP analysis does not consider a depositor's early withdrawal option.
E) All of the above are disadvantages of static GAP analysis.

Question 33

To decrease liability sensitivity, a bank can:

A) buy longer-term securities.
B) attract more non-core deposits.
C) increase the number of floating rate loans.
D) pay premiums on longer-term deposits.
E) All of the above.

Question 34

To increase asset sensitivity, a bank can:

A) buy longer-term securities.
B) pay premiums on subordinated debt.
C) shorten loan maturities.
D) make more fixed rate loans.
E) All of the above.

Question 35

A bank's cumulative GAP will always be:

A) greater than the periodic GAP.
B) less than the periodic GAP.
C) positive.
D) negative.
E) the sum of the interim periodic GAPs.

Question 36

Earnings sensitivity analysis differs from static GAP analysis by:

A) looking at a wide range of interest rate environments.
B) using perfect interest rate forecasts.
C) calculating a change in net interest income given a change in interest rates.
D) Earnings sensitivity analysis differs from static GAP analysis in all of the above ways.
E) Earnings sensitivity analysis and static GAP analysis do not differ. They are different names for the exact same analysis.

Question 37

If a bank expects interest rates to decrease in the coming year, it should:

A) increase its GAP.
B) issue long-term subordinated debt today.
C) increase the rates paid on long-term deposits.
D) issue more variable rate loans.
E) become more liability sensitive.

Question 38

Which of the following is a way to increase liability sensitivity?

A) Lengthen the maturities of loans.
B) Issue long-term subordinated debt.
C) Borrow more via noncore purchased liabilities.
D) All of the above.
E) None of the above.

Question 39

The GAP ratio:

A) is always greater than one for bank's with a negative periodic GAP.
B) is equal to the volume of rate-sensitive liabilities times the volume of rate-sensitive assets.
C) is equal to the volume of rate-sensitive liabilities divided by the volume of rate-sensitive assets.
D) is equal to the volume of rate-sensitive assets divided by the volume of rate-sensitive liabilities.
E) is always less than one for bank's with a positive cumulative GAP.

Question 40

Income statement GAP considers:

A) changes in interest rates.
B) changes in the volume of rate-sensitive assets due to a change in interest rates.
C) changes in the volume of fix-rate liabilities due to a change in interest rates.
D) mortgage prepayments.
E) Income statement GAP considers all of the above.

Question 41

Non-earning assets are classified as rate-sensitive assets for GAP analysis purposes.

Question 42

Discuss the similarities and differences between earnings sensitivity analysis and income statement GAP analysis.

Question 43

Income statement GAP is also known as Omega GAP..

Question 44

What are the advantages and disadvantages of static GAP analysis?

Question 45

Periodic GAP analysis compares rate-sensitive assets and rate-sensitive liabilities across each single "time bucket."

Question 46

A GAP ratio of less than one is consistent with a negative gap.

Question 47

GAP is defined as the difference between fixed-rate assets and fixed-rate liabilities.

Question 48

Discuss the steps banks can take to reduce risk in the context of effective GAP management.

Question 49

A bank with a negative GAP is said to be liability sensitive.

Question 50

Discuss how changes in each of the following affect net interest income:
a. Rate
b. Volume

Question 51

Discuss three factors that affect net interest income.

Question 52

There is a constant relationship between changes in a bank's portfolio mix and net interest income.

Question 53

Discuss the difference between a bank's periodic and cumulative GAP.