Question 1

If the interest rate spread between rate sensitive-assets and rate sensitive liabilities increases for a bank,future increases in interest rates will lead to an increase in net interest income.

Accepted Answer

A) True 
 B)False

Question 2

Because of its simplicity,smaller depository institutions still use this model as their primary measure of interest rate risk.

Accepted Answer

A) The repricing model. 
B) The maturity model. 
C) The duration model. 
D) The convexity model.

Question 3

If an FI's repricing gap is less than zero,then

Accepted Answer

A) it is deficient in its required reserves. 
B) it is deficient in its capital ratio requirement. 
C) its liability costs are more sensitive to changing market interest rates than are its asset yields. 
D) its liability costs are less sensitive to changing market interest rates than are its asset yields.

Question 4

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually.

-What is the impact on the FI's equity of a 2 percent overall increase in market interest rates on all fixed-rate instruments?

Accepted Answer

A) Equity rises by $4.318 million. 
B) Equity declines by $2.912 million. 
C) Equity rises by $2.060 million. 
D) Equity declines by $1.880 million.

Question 5

The following is the balance sheet of Boston Bank. The average maturity of demand deposits is estimated at 2 years. 
-What is the repricing gap if a 3-year maturity gap is used? Ignore runoffs.

Accepted Answer

A) $21 million. 
B) $44 million. 
C) -$80 million. 
D) -$60 million.

Question 6

A positive repricing gap implies that a decrease in interest rates will cause interest expense to decrease more than the decrease in interest income.

Accepted Answer

A) True 
 B)False

Question 7

The market segmentation theory of the term structure of interest rates

Accepted Answer

A) assumes that investors will hold long-term maturity assets if there is a sufficient premium to compensate for the uncertainty of the long-term. 
B) assumes that the yield curve reflects the market's current expectations of future short-term interest rates. 
C) assumes that market rates are determined by supply and demand conditions within fairly distinct time or maturity buckets. 
D) fails to recognize that forward rates are not perfect predictors of future interest rates.

Question 8

The balance sheet of XYZ Bank appears below. All figures in millions of U.S. dollars. 
 
-Total one-year rate-sensitive assets is

Accepted Answer

A) $540 million. 
B) $580 million. 
C) $555 million. 
D) $415 million.

Question 9

Large banks have adopted interest rate risk measurement models based on market value accounting and duration.

Accepted Answer

A) True 
 B)False

Question 10

The balance sheet of XYZ Bank appears below. All figures in millions of U.S. dollars. 
 
-Suppose that interest rates rise by 2 percent on both RSAs and RSLs.The expected annual change in net interest income of the bank is

Accepted Answer

A) -$300,000. 
B) $500,000. 
C) -$2,800,000. 
D) -$3,000,000. 
E) $300,000.

Question 11

The repricing model is based on an accounting world that reports asset and liability values at

Accepted Answer

A) their market value. 
B) their book value. 
C) their historic values or costs. 
D) their current value or cost. 
E) their book value and their historic values or costs.

Question 12

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually.

-What is the weighted average maturity of assets?

Accepted Answer

A) 5.50 years. 
B) 6.40 years. 
C) 5.00 years. 
D) 4.60 years.

Question 13

The economic insolvency of many thrift institutions during the 1980s was due,at least in part,to unexpected increases in interest rates.

Accepted Answer

A) True 
 B)False

Question 14

Because the repricing model ignores the market value effect of changing interest rates,the repricing gap is an incomplete measure of the true interest rate risk exposure of an FI.

Accepted Answer

A) True 
 B)False

Question 15

Which theory of term structure argues that individual investors have specific maturity preferences?

Accepted Answer

A) The unbiased expectations theory. 
B) The liquidity premium theory. 
C) The loanable funds theory. 
D) The market segmentation theory.

Question 16

When interest rates increase,banks are more likely to be forced to increase rate-sensitive liabilities to replace decreased balances in demand deposits and savings accounts.

Accepted Answer

A) True 
 B)False

Question 17

Because the increased level of financial market integration has increased the speed with which interest rate changes are transmitted among countries,control of U.S.interest rates by the Federal Reserve is more difficult and less certain.

Accepted Answer

A) True 
 B)False

Question 18

The yield curve

Accepted Answer

A) relates rates for different maturities of assets. 
B) for U.S.Treasury securities is the most commonly reported yield curve. 
C) may change shape over time. 
D) which is inverted does not last very long. 
E) All of the options.

Question 19

The spread effect demonstrates that,regardless of the direction of a change in market interest rates,a positive relation exists between the changes in spread and changes in net interest income.

Accepted Answer

A) True 
 B)False

Question 20

Which theory of term structure posits that long-term rates are a geometric average of current and expected short-term interest rates?

Accepted Answer

A) The unbiased expectations theory. 
B) The liquidity premium theory. 
C) The loanable funds theory. 
D) The market segmentation theory.

Exam 8: Interest Rate Risk I

If the interest rate spread between rate sensitive-assets and rate sensitive liabilities increases for a bank,future increases in interest rates will lead to an increase in net interest income.

Because of its simplicity,smaller depository institutions still use this model as their primary measure of interest rate risk.

If an FI's repricing gap is less than zero,then

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually. -What is the impact on the FI's equity of a 2 percent overall increase in market interest rates on all fixed-rate instruments?

The following is the balance sheet of Boston Bank. The average maturity of demand deposits is estimated at 2 years. -What is the repricing gap if a 3-year maturity gap is used? Ignore runoffs.

A positive repricing gap implies that a decrease in interest rates will cause interest expense to decrease more than the decrease in interest income.

The market segmentation theory of the term structure of interest rates

The balance sheet of XYZ Bank appears below. All figures in millions of U.S. dollars. -Total one-year rate-sensitive assets is

Large banks have adopted interest rate risk measurement models based on market value accounting and duration.

The balance sheet of XYZ Bank appears below. All figures in millions of U.S. dollars. -Suppose that interest rates rise by 2 percent on both RSAs and RSLs.The expected annual change in net interest income of the bank is

The repricing model is based on an accounting world that reports asset and liability values at

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually. -What is the weighted average maturity of assets?

The economic insolvency of many thrift institutions during the 1980s was due,at least in part,to unexpected increases in interest rates.

Because the repricing model ignores the market value effect of changing interest rates,the repricing gap is an incomplete measure of the true interest rate risk exposure of an FI.

Which theory of term structure argues that individual investors have specific maturity preferences?

When interest rates increase,banks are more likely to be forced to increase rate-sensitive liabilities to replace decreased balances in demand deposits and savings accounts.

Because the increased level of financial market integration has increased the speed with which interest rate changes are transmitted among countries,control of U.S.interest rates by the Federal Reserve is more difficult and less certain.

The yield curve

The spread effect demonstrates that,regardless of the direction of a change in market interest rates,a positive relation exists between the changes in spread and changes in net interest income.

Which theory of term structure posits that long-term rates are a geometric average of current and expected short-term interest rates?