Chapter 7 Flashcards
1
Q
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.
A
asset management
2
Q
Recent decades have ushered in dramatic changes in banking. The goal of __________________ was simply to gain control of the bank’s sources of funds.
A
liability management
3
Q
The __________________________ is the interest rate that equalizes the current market price of a bond with the present value of the future cash flows.
A
yield to maturity (YTM)
4
Q
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.
A
inflation-risk
5
Q
The __________________ shows the relationship between the time to maturity and the yield to maturity of bonds.
A
yield curve
6
Q
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.
A
liquidity-risk
7
Q
__________________________ are those assets which mature or must be repriced within the planning period.
A
Interest-sensitive assets
8
Q
__________________________ is the difference between interest-sensitive assets and interest- sensitive liabilities.
A
Dollar interest-sensitive gap
9
Q
A(n) __________________________ means that the bank has more interest-sensitive liabilities than interest-sensitive assets.
A
negative interest-sensitive gap (liability sensitive)
10
Q
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.
A
weighted interest-sensitive gap
11
Q
__________________________ is the coordinated management of both the bank’s assets and its liabilities.
A
Funds management
12
Q
__________________________ is the risk due to changes in market interest rates which can adversely affect the bank’s net interest margin, assets, liabilities, and equity.
A
Interest-rate risk
13
Q
The __________________________ is the rate of return on a financial instrument using a 360- day year relative to the instrument’s face value.
A
bank discount rate
14
Q
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.
A
default-risk premium
15
Q
__________________ is the weighted average maturity for a stream of future cash flows.
A
Duration
16
Q
__________________________ is the difference between the dollar-weighted duration of the asset portfolio and the dollar-weighted duration of the liability portfolio.
A
Duration gap
17
Q
A(n) __________________________ gap means that for a parallel increase in all interest rates, the market value of net worth will tend to decline.
A
positive-duration
18
Q
A(n) __________________________ gap means that for a parallel increase in all interest rates, the market value of net worth will tend to increase.
A
negative-duration
19
Q
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.
A
duration of the asset portfolio.
20
Q
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.
A
duration of the liability portfolio
21
Q
A bank is __________________ against changes in its net worth if its duration gap is equal to zero.
A
immunized (insulated or protected)
22
Q
The relationship between a change in an asset’s price and an asset’s change in the yield or interest rate is captured by _________________________.
A
convexity
23
Q
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.
A
net worth
24
Q
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.
A
decrease
25
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.
decrease
26
Most lending institutions tend to do better when the yield curve is upward-sloping because they tend to have ____________ maturity gap positions.
positive
27
One of the government-created giant mortgage banking firm which has subsequently been privatized is the ____________________________________.
FNMA or Fannie Mae (or FHLMC or Freddie Mac)
28
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.
price risk
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.
reinvestment risk
30
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 ______________.
call risk
31
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) _____________________.
asset-liability committee
32
__________________________ is interest income from loans and investments less interest expenses on deposits and borrowed funds divided by total earning assets.
Net interest margin (NIM)
33
_____________________________ are those liabilities that mature or must be repriced within the planning period.
Interest-sensitive liabilities
34
Variable rate loans and securities are included as part of _______________________ for banks.
repriceable assets
35
Money market deposits are included as part of ______________________ for banks.
repriceable liabilities
36
Interest sensitive assets less interest sensitive liabilities divided by total assets of the bank is known as _______________________.
relative interest sensitive gap
37
Interest sensitive assets divided by interest sensitive liabilities is known as: ____________________________.
interest sensitivity ratio
38
_______________________ 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.
Cumulative gap
39
___________________________ 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.
Basis risk
40
One of the principal goals of asset-liability management is to maximize or at least stabilize a bank's margin or spread.
TRUE
41
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.
FALSE
42
The ultimate goal of liability management is to gain control over a financial institution's sources of funds.
TRUE
43
If interest rates fall when a bank is in an asset-sensitive position, its net interest margin will rise.
FALSE
44
A liability-sensitive bank will experience an increase in its net interest margin if interest rates rise.
FALSE
45
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.
TRUE
46
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.
TRUE
47
Bankers cannot determine the level or trend of market interest rates; instead, they can only react to the level and trend of rates.
TRUE
48
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.
FALSE
49
A financial institution is liability sensitive, if its interest-sensitive liabilities are less than its interest-sensitive assets.
FALSE
50
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.
TRUE
51
Banks with a positive cumulative interest-sensitive gap will benefit if interest rates rise, but lose income if interest rates decline.
TRUE
52
Banks with a negative cumulative interest-sensitive gap will benefit if interest rates rise, but lose income if interest rates decline.
FALSE
53
Repriceable liabilities include long-term savings and retirement accounts.
FALSE
54
Interest-sensitive gap techniques do not consider the impact of changing interest rates on stockholders' equity.
TRUE
55
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.
FALSE
56
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.
FALSE
57
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.
TRUE
58
Financial institutions face two major kinds of interest-rate risk. These risks include price risk and reinvestment risk.
TRUE
59
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.
FALSE
60
Weighted interest-sensitive gap is less accurate than interest-sensitive gap in determining the effect of changes in interest rates on net interest margin.
FALSE
61
A bank with a positive duration gap experiencing a rise in interest rates will experience an increase in its net worth.
FALSE
62
A bank with a negative duration gap experiencing a rise in interest rates will experience an increase in its net worth.
TRUE
63
Duration is a direct measure of the price risk but not the reinvestment risk of a bond.
FALSE
64
A bank with a positive duration gap experiencing a decrease in interest rates will experience an increase in its net worth.
TRUE
65
A bank with a negative duration gap experiencing a decrease in interest rates will experience an increase in its net worth.
FALSE
66
Duration is the weighted average maturity of a promised stream of future cash flows.
TRUE
67
Convexity is a direct measure of the price risk of a bond.
TRUE
68
A bond with a greater duration will have a smaller price change in percentage terms when interest rates change.
FALSE
69
Long-term interest rates tend to change very little with the cycle of economic activity.
TRUE
70
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.
TRUE
71
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.
TRUE
72
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.
TRUE
73
U.S. banks having positive maturity gap positions tend to do better when the yield curve is upward-sloping.
TRUE
74
Net interest margin tends to rise for U.S. banks having positive maturity gap positions when the yield curve is upward-sloping.
TRUE
75
Financial institutions laden with home mortgages tend be immune to interest-rate risk.
FALSE
76
If a financial institution's net interest margin is immune to interest-rate risk, then so is its net worth.
FALSE
77
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.
C
78
```
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.
```
D
79
```
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.
```
A
80
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.
B
81
```
The change in a bank's net income that occurs due to changes in interest rates equals the overall change in market interest rates (in percentage points) times ____________.
A. volume of interest-sensitive assets
B. price risk of the bank's assets
C. price risk of the bank's liabilities
D. size of the bank's cumulative gap
E. None of the options is correct
```
D
82
A bank with a negative interest-sensitive GAP:
A. has a greater dollar volume of interest-sensitive liabilities than interest-sensitive assets.
B. will generate a higher interest margin if interest rates rise.
C. will generate a lower interest margin if interest rates fall.
D. has assets and liabilities with the same duration.
E. has liabilities with a greater duration than its assets.
A
83
The net interest margin of a bank is influenced by:
A. changes in the level of interest rates.
B. changes in the volume of interest-bearing assets and interest-bearing liabilities.
C. changes in interest income from loans and investments.
D. changes in interest expense on deposits and other borrowed funds.
E. All of the options are correct.
E
84
```
The discount rate that equalizes the current market value of a loan or security with the expected stream of future income payments from that loan or security is known as:
A. bank discount rate.
B. yield to maturity.
C. annual percentage rate.
D. net interest margin.
E. None of the options is correct.
```
B
85
```
The interest-rate measure often quoted on short-term loans and money market securities such as U.S. Treasury bills is the
A. bank discount rate.
B. yield to maturity.
C. annual percentage rate.
D. net interest margin.
E. None of the options is correct.
```
A
86
A bank whose interest-sensitive assets total $350 million and its interest-sensitive liabilities amount to $175 million has:
A. an asset-sensitive gap of $525 million.
B. a liability-sensitive gap of $175 million.
C. an asset-sensitive gap of $175 million.
D. a liability-sensitive gap of $350 million.
E. None of the options is correct.
C
87
```
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
```
B
88
A bank has Federal funds totaling $25 million with an interest-rate sensitivity weight of 1.0. This bank also has loans of $105 million and investments of $65 million with interest rate sensitivity weights of 1.40 and 1.15 respectively. It also has $135 million in interest-bearing deposits with an interest rate sensitivity weight of 0.90 and other money market borrowings of $75 million with an interest rate sensitivity weight of 1.0. What is the weighted interest- sensitive gap for this bank?
A. $50.25 million B. -$15.00 million C. -$50.25 million D. $34.25 million E. $196.5 million
A
89
A bond has a face value of $1,000 and five years to maturity. This bond has a coupon rate of 13 percent and is selling in the market today for $902. Coupon payments are made annually on this bond. What is the yield to maturity (YTM) for this bond?
A. 13 percent
B. 12.75 percent C. 16 percent
D. 11.45 percent E. 12 percent
C
90
A treasury bill currently sells for $9,845, has a face value of $10,000 and has 46 days to maturity. What is the bank discount rate on this security?
A. 12.49 percent B. 12.13 percent C. 12.30 percent D. 2 percent
E. None of the options is correct.
B
91
The _______________ is determined by the demand and supply for loanable funds in the
market.
A. coupon rate
B. reserve requirement
C. interest-sensitive gap
D. risk-free real rate of interest E. duration gap
D
92
```
As per the __________________ strategy, financial-service managers set interest-sensitive gap as close to zero as possible to reduce the expected volatility of net interest income.
A. aggressive GAP management
B. defensive GAP management
C. cumulative GAP management
D. weighted GAP management
E. asset-sensitive GAP management
```
B
93
```
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?
A. Inflation risk
B. Default risk
C. Liquidity risk
D. Price risk
E. Maturity risk
```
A
94
```
A bank has Federal Funds totaling $25 million with an interest-rate sensitivity weight of 1.0. This bank also has loans of $105 million and investments of $65 million with interest rate sensitivity weights of 1.40 and 1.15 respectively. It also has $135 million in interest-bearing deposits with an interest rate sensitivity weight of 0.90 and other money market borrowings of $75 million with an interest rate sensitivity weight of 1.0. What is the dollar interest-sensitive gap for this bank?
A. $50.25 million
B. -$15 million
C. -$50.25 million
D. $34.25 million
E. None of the options is correct.
```
B
95
If a bank has a positive interest-sensitive gap, one of the possible management responses would be to:
A. wait for the interest rates to rise or be stable.
B. shorten asset maturities.
C. decrease interest-sensitive liabilities.
D. increase interest-sensitive assets.
E. extend liability maturities.
A
96
If a bank has a negative interest-sensitive gap, one of the possible management responses
would be to:
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.
E
97
```
A treasury bill currently selling for $9,845, has a face value of $10,000 and has 46 days to maturity. What is the yield to maturity equivalent on this security?
A. 12.49 percent
B. 12.13 percent
C. 12.30 percent
D. 2 percent
E. None of the options is correct.
```
A
98
```
The Third National Bank of Edmond reports a net interest margin of 5.83 percent. It has total interest revenues of $275 million and total interest expenses of $210 million. What will be the bank's earning assets total?
A. $4,717 million
B. $3,602 million
C. $1,115 million
D. $3,790 million
E. None of the options is correct.
```
C
99
```
The Third National Bank of Edmond reports a net interest margin of 5.83 percent. It has total interest revenues of $275 million and total interest expenses of $210 million. This bank has earnings assets of $1,115. Suppose this bank's interest revenues rise by 8 percent and its interest expenses and earnings assets rise by 10 percent next year, what is this bank's new net interest margin?
A. 5.83 percent
B. 7.09 percent
C. 3.59 percent
D. 5.38 percent
E. 7.80 percent
```
D
100
```
Financial firms devote greater attention to opening up new sources of funding and monitoring the mix and cost of their deposit and non-deposit liabilities under the _______________________ strategy.
A. asset management
B. liabilities management
C. interest-sensitive gap management
D. weighted gap management
E. duration gap management
```
B
101
```
If Fifth National Bank's asset duration exceeds its liability duration and if interest rates rise, the bank's net worth will _________________.
A. decrease
B. increase
C. stabilize
D. be unaffected
E. None of the options is correct.
```
A
102
```
Main Street Bank has $100 million in commercial loans with an average duration of 0.40 years; $40 million in consumer loans with an average duration of 1.75 years; and $30 million in U.S. Treasury bonds with an average duration of 6 years. What will be the bank's dollar- weighted asset portfolio duration?
A. 0.4 years
B. 1.7 years
C. 2.7 years
D. 4.1 years
E. None of the options is correct.
```
B
103
```
A an average asset duration of 4.7 years and an average liability duration of 3.3 years. This bank has $750 million in total assets and $500 million in total liabilities. This bank's leverage- adjusted duration gap is a:
A. positive gap of 8.0 years.
B. negative gap of 2.5 years.
C. positive gap of 1.4 years.
D. positive gap of 2.5 years.
E. None of the options is correct.
```
D
104
```
A bank has an average asset duration of 1.15 years and an average liability duration of 2.70 years. This bank has $250 million in total assets and $225 million in total liabilities. This bank's leverage-adjusted duration gap is a:
A. negative gap of 1.55 years.
B. positive gap of 1.28 years.
C. negative gap of 3.85 years.
D. negative gap of 1.28 years.
E. None of the options is correct.
```
D
105
The duration of a bond is the weighted average maturity of the future cash flows expected to be received on a bond. Which of the following statements concerning duration is true?
A. The longer the time to maturity, the greater the duration.
B. The higher the coupon rate, the lower the duration.
C. The shorter the duration, the greater the price volatility.
D. All of the options are true.
E. None of the options is true.
A
106
A bond has a duration of 7.5 years. Its current market price is $1,125. Interest rates in the market are 7 percent today. It has been forecasted that interest rates will rise to 9 percent over the next couple of weeks. How will the bond's price change in percentage terms?
A. The bond's price will rise by 2 percent.
B. The bond's price will fall by 2 percent.
C. The bond's price will fall by 14.02 percent.
D. The bond's price will rise by 14.02 percent.
E. The bond's price will not change.
C
107
A bank has an average asset duration of 5 years and an average liability duration of 3 years. This bank has total assets of $500 million and total liabilities of $250 million. Currently, market interest rates are 10 percent. If interest rates fall by 2 percent (to 8 percent), what is this bank's change in net worth?
A. Net worth will decrease by $31.81 million.
B. Net worth will increase by $31.81 million.
C. Net worth will increase by $27.27 million.
D. Net worth will decrease by $27.27 million.
E. Net worth will not change at all.
B
108
```
A bank has an average asset duration of 5 years and an average liability duration of 3 years. This bank has total assets of $500 million and total liabilities of $250 million. Currently, market interest rates are 10 percent. What will be this bank's leverage-adjusted duration gap?
A. 2 years
B. -2 years
C. 3.5 years
D. -3.5 years
E. None of the options is correct.
```
C
109
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. If interest rates rise by 2 percent (to 7 percent), what is this bank's change in net worth?
A. Net worth will decrease by $50.47 million.
B. Net worth will increase by $50.47 million.
C. Net worth will decrease by $240.95 million.
D. Net worth will increase by $240.95 million.
E. Net worth will not change at all.
B
110
```
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?
A. -4 years
B. 4 years
C. 2.65 years
D. -2.65 years
E. 3.65 years
```
D
111
A bank has $100 million of investment grade bonds with a duration of 9.0 years. This bank also has $500 million of commercial loans with a duration of 5.0 years. This bank has $300 million of consumer loans with a duration of 2.0 years. This bank has deposits of $600 million with a duration of 1.0 year and non-deposit borrowings of $100 million with an average duration of .25 years. What is this bank's duration gap? These are all of the assets and liabilities this bank has.
A. This bank has a duration gap of 14.75 years.
B. This bank has a duration gap of 15.03 years.
C. This bank has a duration gap of 3.55 years.
D. This bank has a duration gap of 3.75 years.
E. This bank has a duration gap of 5.15 years.
C
112
Which of the following statements concerning a bank's leverage-adjusted duration gap is true?
A. If it has a positive duration gap and interest rates rise, its net worth will decline.
B. If it has a positive duration gap and interest rates fall, its net worth will decline.
C. If it has a negative duration gap and interest rates rise, its net worth will decline.
D. If it has a negative duration gap and interest rates fall, its net worth will increase.
E. All of the options are correct.
A
113
```
A bank has an average duration for its asset portfolio of 5.5 years. The bank has total assets of $1,000 million and total liabilities of $750 million. If this bank's leverage-adjusted duration gap is zero, what must be the duration of its liabilities portfolio?
A. 7.33 years
B. 4.125 years
C. 7.5 years
D. 5.5 years
E. None of the options is correct.
```
A
114
```
A bond has a face value of $1,000 and coupon payments of $80 annually. This bond matures in three years and is selling for $1,000 in the market. Market interest rate is 8 percent. What is this bond's duration?
A. 3 years
B. 2.78 years
C. 1.95 years
D. 4.31 years
E. None of the options is correct.
```
B
115
```
A bond has a face value of $1,000 and coupon payments of $120 annually. This bond matures in three years and is selling in the market for $1,160. Market interest rate is 6 percent. What is this bond's duration?
A. 3 years
B. 5.71 years
C. 1.96 years
D. 2.71 years
E. None of the options is correct.
```
D
116
A bond is selling in the market for $950 and has a duration of 6 years. Market interest rates are 9 percent and are expected to decrease to 7 percent in the near future. What will this bond's price be after the change in market interest rates?
A. $969 B. $931 C. $1,055 D. $854 E. $950
C
117
A bond is selling in the market for $1,100 and has a duration of 4.5 years. Market interest rates are 5 percent and are expected to increase to 7 percent in the near future. What will this bond's price be after the change in market interest rates?
A. $1,006 B. $1,194 C. $1,122 D. $1,078 E. $1,100
A
118
Which of the following is a true statement?
A. The longer the time to maturity of a security, the smaller will be the duration
B. The lower the coupon rate of a security, the higher the duration
C. For a given duration and change in interest rates, the change in the price of the security
will be larger for a lower starting level of interest rates
D. The duration of a security remains constant no matter the level of market interest rates
E. All of the options are true statements.
C
119
```
The fact that the rate of change in an asset's price varies with the level of interest rates is known as:
A. portfolio.
B. convexity.
C. maturity.
D. yield.
E. None of the options is correct.
```
B
120
```
U.S. banks tend to fare best when the yield curve is:
A. horizontal.
B. downward-sloping.
C. vertical.
D. upward-sloping.
E. None of the options is correct.
```
D
121
```
Carolina National Bank knows that the interest rate on its loans change faster and by a larger amount than the interest rate on its deposits. What type of risk is this an example of?
A. Default risk
B. Inflation risk
C. Liquidity risk
D. Call risk
E. Basis risk
```
E
122
Havoc State Bank has a loan that it fears will not be repaid because the company is going into
bankruptcy. What type of risk would this be an example of?
A. Default risk
B. Inflation risk
C. Liquidity risk
D. Call risk
E. Basis risk
A
123
```
Carter National Bank is worried because it knows that the municipal bonds it has in its bond portfolio can be difficult to sell quickly. What type of risk would this be an example of?
A. Default risk
B. Inflation risk
C. Liquidity risk
D. Call risk
E. Basis risk
```
C
124
```
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?
A. Default risk
B. Inflation risk
C. Liquidity risk
D. Call risk
E. Basis risk
```
D
125
A bank is liability sensitive, if its:
A. deposits and non-deposit borrowings are not 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. loans and securities are affected by changes in interest rates.
E. None of the options is correct.
C
126
Which of the following would be an example of a repriceable asset?
A. Money the bank has borrowed from the money market
B. Cash in the vault
C. Demand deposits that do not pay interest
D. Short-term securities issued by the government about to mature
E. All of the options are correct.
D
127
Which of the following would be an example of a repriceable liability?
A. Money the bank has borrowed from the money market
B. Cash in the vault
C. Demand deposits that do not pay an interest rate
D. Short term securities issued by the government about to mature
E. All of the options are correct.
A
128
Which of the following would be an example of a nonrepriceable asset?
A. Money the bank has borrowed from the money market
B. Cash in the vault
C. Demand deposits that do not pay an interest rate
D. Short term securities issued by the government about to mature
E. All of the options are correct.
B
129
Which of the following would be an example of a nonrepriceable liability?
A. Money the bank has borrowed from the money market
B. Cash in the vault
C. Demand deposits that do not pay an interest rate
D. Short term securities issued by the government about to mature
E. All of the options are correct.
C
130
The Arnold National Bank has a bond portfolio that consists of bonds with 5 years to maturity and a 9 percent coupon rate having a face value of $1,000. These bonds are selling in the market for $1,126. Coupon payments are made annually on this bond.
What is the yield to maturity on these bonds?
A. 3 percent
B. 6 percent
C. 9 percent
D. 12 percent
E. None of the options is correct.
B
131
```
The Arnold National Bank has a bond portfolio that consists of bonds with 5 years to maturity and a 9 percent coupon rate having a face value of $1,000. These bonds are selling in the market for $1,126. Coupon payments are made annually on this bond.
What is duration of these bonds?
A. 3.77 years
B. 4.23 years
C. 5 years
D. 9 years
E. None of the options is correct.
```
B
132
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?
A. $9,100
B. $10,000
C. $9,950
D. $1,900
E. None of the options is correct.
C
133
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 is the yield to maturity on this T-Bill?
A. 9 percent
B. 0.5 percent
C. 4.5 percent
D. 9.17 percent
E. None of the options is correct.
D
134
```
The Raymond Burr National Bank has $1,000 in assets with an average duration of 5 years. This bank has $800 in liabilities with an average duration of 6.25 years. What is the duration gap of this bank?
A. -1.25 years
B. 0 years
C. 1.25 years
D. -2.25 years
E. None of the options is correct.
```
B
135
```
The Raymond Burr National Bank has $1,000 in assets with an average duration of 5 years. This bank has $800 in liabilities with an average duration of 6.25 years. Market interest rates start at 6 percent and fall by 1 percent. What is the change in net worth of this bank?
A. $11.29
B. -$11.29
C. $0
D. -$22.22
E. $22.22
```
C
136
```
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?
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.
```
A
137
The assets and liabilities of Finacle Bank as on December 31, 2015, are as follows:
$20,000 of short-term securities issued by governments and private borrowers (about to mature), $12,000 of borrowings from the money market, $15,000 of short-term savings accounts, $12,000 of variable-rate loans and securities, $18,000 of long-term loans made at a fixed interest rate, $25,000 of long-term savings and retirement accounts, $22,000 of deposits in the Central Bank (held as legal reserves), $550,000 of equity capital provided by the bank's owners, and $500,000 of building and equipment.
What is the total of repriceable assets held by the bank as on December 31, 2015?
A. $32,000
B. $50,000
C. $45,000
D. $55,000
E. $52,000
A
138
The assets and liabilities of Finacle Bank as on December 31, 2015, are as follows:
$20,000 of short-term securities issued by governments and private borrowers (about to mature), $12,000 of borrowings from the money market, $15,000 of short-term savings accounts, $12,000 of variable-rate loans and securities, $18,000 of long-term loans made at a fixed interest rate, $25,000 of long-term savings and retirement accounts, $22,000 of deposits in the Central Bank (held as legal reserves), $550,000 of equity capital provided by the bank's owners, and $500,000 of building and equipment.
Which of the following is a repriceable liability for Finacle Bank?
A. Long-term savings and retirement accounts
B. Variable-rate loans and securities
C. Borrowings from the money market
D. Equity capital provided by the owners
E. Long-term loans made at a fixed interest rate
C
139
Brendon Brothers Bank reports interest-sensitive assets at $35 million, interest-sensitive liabilities at $60 million and total assets at $80 million. What is the relative IS GAP of the bank?
A. -0.29 B. 0.29 C. -0.31 D. 0.31 E. -0.33
C
