Question 1

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?

Accepted Answer

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

Question 2

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.

Accepted Answer

The answer of When a bank has a positive duration...

Question 3

The fact that a consumer who purchases a particular basket of goods for $100 today has to pay $105 next year for the same basket of goods is an example of which of the following risks?

Accepted Answer

A) Inflation risk 
B) Default risk 
C) Liquidity risk 
D) Price risk 
E) Maturity risk

Question 4

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.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

The answer of Most lending institutions tend to do better...

Question 6

If interest rates on both assets and liabilities rise by 2 percent in the next 90 days,what would be this bank's net interest margin?

Accepted Answer

A) 4.2 percent 
B) 5.3 percent 
C) 5.8 percent 
D) 6.2 percent 
E) 7.8 percent

Question 7

The interest rate on one year Treasury Bonds is 5 percent.The interest rate on five year Treasury Bonds is 7.5 percent.The interest rate on ten year Treasury Bonds is 10 percent.What is true about the yield curve?

Accepted Answer

A) It is upward sloping. 
B) It is downward sloping. 
C) It is a horizontal curve. 
D) It is a vertical curve. 
E) It is parallel to the x-axis.

Question 8

If a bank has a negative interest-sensitive gap,one of the possible management responses would be to:

Accepted Answer

A) lengthen asset maturities. 
B) shorten liability maturities. 
C) increase interest-sensitive liabilities. 
D) decrease interest-sensitive assets. 
E) wait for the interest rates to fall or be stable.

Question 9

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.

Accepted Answer

The answer of The __________________ premium on a bond reflects...

Question 10

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

Accepted Answer

The answer of __________________________ is the difference between the dollar-weighted...

Question 11

Maryellen Epplin notices that a particular T-Bill has a banker's discount rate of 9 percent in the Wall Street Journal.She knows that this T-Bill has 20 days to maturity and has a face value of $10,000.
What price is this T-Bill selling for in the market?

Accepted Answer

A) $9,100 
B) $10,000 
C) $9,950 
D) $1,900 
E) None of the options is correct.

Question 12

Jackson State Bank is worried because many of the loans it has made are home mortgages which can be paid off early by the homeowner.What type of risk would this be an example of?

Accepted Answer

A) Default risk 
B) Inflation risk 
C) Liquidity risk 
D) Call risk 
E) Basis risk

Question 13

If interest rates on both assets and liabilities decrease by 2 percent in the next 90 days,what would be this bank's net interest margin?

Accepted Answer

A) 3.4 percent 
B) 4 percent 
C) 0.4 percent 
D) 5.6 percent 
E) 2 percent

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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 ______________.

Accepted Answer

The answer of The interest-rate risk which arises when a...

Question 16

What is the dollar interest-sensitive gap of this bank?

Accepted Answer

A) $400 
B) -$1,100 
C) -$500 
D) $1,000 
E) None of the options is correct.

Question 17

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

Accepted Answer

The answer of The __________________ shows the relationship between the...

Question 18

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.

Accepted Answer

The answer of When a bank has a negative duration...

Question 19

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

Accepted Answer

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 20

A bank has an average asset duration of 5 years and an average liability duration of 9 years.This bank has total assets of $1,000 million and total liabilities of $850 million.Currently,market interest rates are 5 percent.What will be this bank's leverage-adjusted duration gap?

Accepted Answer

A) -4 years 
B) 4 years 
C) 2.65 years 
D) -2.65 years 
E) 3.65 years

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