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Banking
Q:
What is the bank's expected economic net interest income?a. $34.5b. $32.3c. $39.5d. $44.0e. $120.5
Q:
What is the bank's weighted average cost of liabilities?a. $24.9b. $34.5c. $80.0d. $94.3e. $102.1
Q:
What is the bank's duration gap?a. 0.53b. 0.73c. 0.91d. 1.88e. 4.58
Q:
What is the weighted average duration of assets?a. 2.56 yearsb. 3.85 yearsc. 4.85 yearsd. 5.00 yearse. 7.5 years
Q:
If interest rates rise 1% for all assets and liabilities, what is the approximate expected change in the economic value of equity?a. —$2.56b. $5.84c. —$5.84d. $6.85e. -$6.85
Q:
What is the bank's expected economic net interest income?a. $14.75b. $32.25c. $44.00d. $76.25e. $120.25
Q:
What is the bank's weighted average cost of liabilities?a. $44b. $76c. $80d. $94e. $102
Q:
What is the bank's duration gap?a. 0.53b. 0.73c. 0.91d. 2.03e. 4.58
Q:
What is the weighted average duration of assets?a. 2.56 yearsb. 3.75 yearsc. 4.85 yearsd. 5.00 yearse. 7.5 years
Q:
Which of the following is false regarding duration gap analysis?a. Duration gap analysis does not classify assets as rate-sensitive.b. Duration gap analysis indicates the potential change in a bank's net interest income.c. Duration gap accounts for bank leverage.d. Duration gap accounts for the present value of cash flows associated with all liabilities.e. Duration gap analysis indicates the potential change in a bank's market value of equity.
Q:
Put the following steps in duration gap analysis in the proper order.
I. Estimate the economic value of assets, liabilities and equity.
II. Forecast the change in the economic value of equity for various interest rates.
III. Forecast future interest rates.
IV. Estimate the duration of assets and liabilities.
a. III, I, IV, II
b. I, II, III, IV
c. III, IV, I, II
d. IV, I, II, III
e. II, IV, I, III
Q:
Which of the following would generally be considered price sensitive?
a. Fed funds purchased
b. Fed funds sold
c. Repurchase agreements
d. Demand deposits
e. A 20-year zero coupon bond
Q:
Which of the following is true regarding duration gap analysis?
a. The magnitude of the duration gap is related to the amount of interest rate risk a bank is subject to.
b. Management can adjust the duration gap to speculate on future interest rate changes.
c. A positive duration gap means a bank's market value of equity will decrease with an increase in interest rates.
d. All of the above are true.
e. a. and c.
Q:
Which of the following allows a security's cash flows to change when interest rates change?
a. Modified duration
b. Macaulay's duration
c. Effective duration
d. Balance sheet duration
e. Income statement duration
Q:
What does a bank's duration gap measure?
a. The duration of short-term buckets minus the duration of long-term buckets.
b. The duration of the bank's assets minus the duration of its liabilities.
c. The duration of all rate-sensitive assets minus the duration of rate-sensitive liabilities.
d. The duration of the bank's liabilities minus the duration of its assets.
e. The duration of all rate-sensitive liabilities minus the duration of rate-sensitive assets.
Q:
Which of the following is likely to have a negative effective duration?
a. A high coupon, interest only mortgage-backed security that is pre-paying at a high rate.
b. A low coupon U.S. Treasury bond.
c. Fed Funds purchased.
d. Demand deposits
e. None of the above can have a negative effective duration.
Q:
A 20-year annual coupon bond is currently selling for its par value of $10,000 with an annual yield of 7%. If the bond is callable at par, what is the effective duration of the bond, assuming rates change by 2%?
a. 25.00 years
b. 20.00 years
c. 5.52 years
d. 4.56 years
e. 3.68 years
Q:
A 10-year annual coupon bond is currently selling for its par value of $1,000 with an annual yield of 5%. If the bond is callable at par, what is the effective duration of the bond, assuming rates change by 1%?
a. 10 years
b. 7.36 years
c. 5.52 years
d. 4.60 years
e. 3.68 years
Q:
A 30-year zero coupon bond with a face value of $10,000 is currently selling for $2,313.77. Using the bond's modified duration, what is the approximate change in the price of the bond if interest rates rise by 15 basis points?
a. -15.00%
b. -4.29%
c. -0.43%
d. -0.15%
e. Not enough information is given to answer the question.
Q:
A 20-year zero coupon bond with a face value of $1,000 is currently selling for $214.55. Using the bond's modified duration, what is the approximate change in the price of the bond if interest rates rise by 25 basis points?
a. -49.63%
b. -46.39%
c. -4.96%
d. -4.63%
e. Not enough information is given to answer the question.
Q:
A bond has a Macaulay's duration of 56 years. If rates rise from 6.25% to 6.50%, the bonds price will:
a. increase by approximately 6.25%.
b. decrease by approximately 6.25%.
c. increase by approximately 6.50%.
d. decrease by approximately 6.50%.
e. Not enough information is given to answer the question.
Q:
A bond has a Macaulay's duration of 21 years. If rates rise from 5% to 5.5%, the bonds price will:
a. increase by approximately 1%.
b. decrease by approximately 1%.
c. increase by approximately 10%.
d. decrease by approximately 10%.
e. Not enough information is given to answer the question.
Q:
A bond has a Macaulay's duration of 7 years. If rates fall from 7% to 6%, the bonds price will:
a. increase by approximately 1%.
b. decrease by approximately 1%.
c. increase by approximately 10%.
d. decrease by approximately 10%.
e. Not enough information is given to answer the question.
Q:
Effective duration:
a. estimates when embedded options will be used.
b. directly indicates how much the price of a security will change given a change in interest rates.
c. is always greater than maturity.
d. is a weighted average of the time until cash flows are received.
e. All of the above
Q:
Modified duration:
a. estimates when embedded options will be used.
b. directly indicates how much the price of a security will change given a change in interest rates.
c. is always greater than maturity.
d. All of the above
e. a. and b.
Q:
Macaulay's duration:
a. is a weighted average of the time until cash flows are received.
b. is always greater than maturity.
c. is never equal to maturity.
d. directly indicates how much the price of a security will change given a change in interest rates.
e. estimates when embedded options will be used.
Q:
Duration gap analysis:
a. applies he the concept of duration to the bank's entire balance sheet.
b. applies he the concept of duration to the bank's entire income statement.
c. applies he the concept of duration to the bank's retained earnings.
d. indicates the difference in the GAP in the time it takes to collect on loan payments versus the time to attract deposits.
e. estimates when embedded options will be exercised.
Q:
EVE analysis: is essentially a _____________ analysis.
a. profitability
b. quality
c. liquidity
d. liquidation
e. earnings
Q:
Income statement GAP is also known as Omega GAP..
Q:
A GAP ratio of less than one is consistent with a negative gap.
Q:
A bank with a negative GAP is said to be liability sensitive.
Q:
There is a constant relationship between changes in a bank's portfolio mix and net interest income.
Q:
Periodic GAP analysis compares rate-sensitive assets and rate-sensitive liabilities across each single "time bucket."
Q:
Non-earning assets are classified as rate-sensitive assets for GAP analysis purposes.
Q:
GAP is defined as the difference between fixed-rate assets and fixed-rate liabilities.
Q:
Static GAP analysis focuses on the market value of stockholder's equity.
Q:
Static GAP analysis focuses on managing net interest income in the short-run.
Q:
Interest rate risk for banks arises largely from assets and liabilities that do not reprice at the same time.
Q:
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.
Q:
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.
Q:
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.
Q:
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.
Q:
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.
Q:
The earnings change ratio:
a. is defined as yield on rate-sensitive liabilities divided by the yield on rate-sensitive assets.
b. measures how the yield on an asset is assumed to change given a 1% change in some base rate.
c. measures the change in net interest income for a given change in some base rate.
d. All of the above.
e. a. and c.
Q:
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.
Q:
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.
Q:
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.
Q:
Which of the following are likely to occur when interest rates rise sharply?
a. Fixed-rate loans are pre-paid.
b. Bonds are called.
c. Deposits are withdrawn early.
d. All of the above occur when interest rates rise sharply.
e. a. and b.
Q:
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.
Q:
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.
Q:
A bank has $100 million in earning assets, a net interest margin of 5%, and a 1-year cumulative GAP of $10 million. Interest rates are expected to increase by 2%. If the bank does not want net interest income to fall by more than 25% during the next year, how large can the cumulative GAP be to achieve the allowable change in net interest income.
a. $2 million
b. $12 million
c. $15 million
d. $50 million
e. $62.5 million
Q:
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.
Q:
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.
Q:
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.
Q:
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.
Q:
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
Q:
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.
Q:
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.
Q:
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.
Q:
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.
Q:
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.
Q:
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.
Q:
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
Q:
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
Q:
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
Q:
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
Q:
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
Q:
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
Q:
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.
Q:
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.
Q:
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
Q:
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.
Q:
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.
Q:
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
Q:
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.
Q:
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
Q:
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.
Q:
Using a 360-day year results in higher returns than using a 365-day year.
Q:
There is an inverse relationship between a bond's duration and its price volatility.
Q:
The duration of any security with interim cash flows will be less than the security's maturity.