Q&A Hero

Q: The Harris State Bank has $2,000 in total assets (all of which are earning assets), $500 of which will be repriced in the next 90 days. This bank also has $1,600 in total liabilities, $1,000 of which will be repriced in 90 days. The bank currently earns 9 percent on its assets and pays 4 percent on its liabilities.If interest rates on both assets and liabilities fall by 2 percent in the next 90 days, what should happen to this bank's net interest margin? A. It should rise by 0.5 percent.B. It should fall by 0.5 percent.C. It should stay the same.D. It should rise by 2 percent.E. It should fall by 2 percent.

Q: 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.

Q: If interest rates on both assets and liabilities decrease by 2 percent in the next 90 days, what should happen to this bank's net interest margin? A. It should fall by 2 percent. B. It should fall by 0.6 percent. C. It should fall by 4 percent. D. It should fall by 1 percent. E. It should not show any fall.

Q: If interest rates on both assets and liabilities rise by 2 percent in the next 90 days, what should happen to this bank's net interest margin? A. It should rise by 0.60 percent. B. It should rise by 2 percent. C. It should rise by 4 percent. D. It should rise by 1 percent. E. It should not show any rise.

Q: What is the dollar interest-sensitive gap of this bank? A. -$200 B. -$100 C. $200 D. $300 E. $600

Q: If interest rates do not change in the next 90 days, what is this bank's net interest margin? A. 8 percent B. 5 percent C. 4 percent D. 1.4 percent E. 3 percent

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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

Q: 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

Q: 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

Q: 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

Q: 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.

Q: 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.

Q: 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.

Q: 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

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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

Q: 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

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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

Q: 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

Q: 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

Q: 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.

Q: 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

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 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: 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

Q: 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.

Q: 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.

Q: 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.

Q: 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.

Q: If a financial institution's net interest margin is immune to interest-rate risk, then so is its net worth.

Q: Financial institutions laden with home mortgages tend be immune to interest-rate risk.

Q: Net interest margin tends to rise for U.S. banks having positive maturity gap positions when the yield curve is upward-sloping.

Q: U.S. banks having positive maturity gap positions tend to do better when the yield curve is upward-sloping.

Q: 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.

Q: 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.

Q: 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.

Q: Long-term interest rates tend to change very little with the cycle of economic activity.

Q: A bond with a greater duration will have a smaller price change in percentage terms when interest rates change.

Q: Convexity is a direct measure of the price risk of a bond.

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

Q: A bank with a negative duration gap experiencing a decrease in interest rates will experience an increase in its net worth.

Q: A bank with a positive duration gap experiencing a decrease in interest rates will experience an increase in its net worth.

Q: Duration is a direct measure of the price risk but not the reinvestment risk of a bond.

Q: A bank with a negative duration gap experiencing a rise in interest rates will experience an increase in its net worth.

Q: A bank with a positive duration gap experiencing a rise in interest rates will experience an increase in its net worth.

Q: Weighted interest-sensitive gap is less accurate than interest-sensitive gap in determining the effect of changes in interest rates on net interest margin.

Q: 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.

Q: Financial institutions face two major kinds of interest-rate risk. These risks include price risk and reinvestment risk.

Q: 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.

Q: 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.

Q: 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.

Q: Interest-sensitive gap techniques do not consider the impact of changing interest rates on stockholders' equity.

Q: Repriceable liabilities include long-term savings and retirement accounts.

Q: Banks with a negative cumulative interest-sensitive gap will benefit if interest rates rise, but lose income if interest rates decline.

Q: Banks with a positive cumulative interest-sensitive gap will benefit if interest rates rise, but lose income if interest rates decline.

Q: 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.

Q: A financial institution is liability sensitive, if its interest-sensitive liabilities are less than its interest-sensitive assets.

Q: 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.