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Finance
Q:
A bank has DA = 2.4 years and DL= 0.9 years. The bank has total equity of $82 million and total assets of $850 million. Interest rates are at 6%.
A bank has an average asset duration of 2.25 years, the average duration of the liabilities is 1.25 years, and the bank has total assets of $2 billion and $200 million in equity. The bank has an ROE of 9.00%. If all interest rates decrease 50 basis points, the predicted change in the bank's market value of equity is ___________.
A. -2.85%
B. -3.55%
C. 3.55%
D. 2.85%
E. 5.16%
Q:
A bank has three assets. It has $75 million invested in consumer loans with a 3-year duration, $39 million invested in T-Bonds with a 16-year duration, and $39 million in 6-month maturity T-Bills. What is the duration of the bank's asset portfolio in years?A. 3.95 yearsB. 4.83 yearsC. 6.50 yearsD. 7.38 yearsE. 11.51 years
Q:
Weaknesses of the repricing model include the fact thatI. it ignores changes in present values caused by changes in interest rates.II. it ignores different cash flow sensitivities within a maturity bucket.III. it fails to account for runoffs and prepayments.A. I onlyB. I and II onlyC. I and III onlyD. II and III onlyE. I, II, and III
Q:
A bank has a negative repricing gap and estimates that the spread between RSAs and RSLs will move inversely with interest rates. If interest rates increase, NII willA. rise.B. fall.C. be unchanged.D. rise or fall depending on the size of the spread effect relative to the size of the CGAP effect.
Q:
A bank has a positive repricing gap and estimates that the spread between RSAs and RSLs will move directly with interest rates. If interest rates fall, the bank's overall NII willA. rise.B. fall.C. be unchanged.D. rise or fall depending on the size of the spread effect relative to the size of the CGAP effect.
Q:
For a 9-month maturity bucket the bank has _________________ in fixed-rate assets and _________________ in fixed-rate liabilities.A. $425; $285B. $285; $425C. $285; $359D. $359; $285E. $250; $66
Q:
If the spread effect is zero and all interest rates decline 50 basis points, the bank's NII will change by ________________ over the year.A. $0B. $400,000C. -$400,000D. $700,000E. -$700,000
Q:
The bank's one-year repricing gap is (Million $)A. $425.B. $285.C. $74.D. $140.E. $66.
Q:
With a 6-month maturity bucket, a 9-month fixed rate loan would be considered a ________________ asset and a 30-year mortgage with a rate adjustment in 3 months would be classified as a _______________ asset.
A. rate-sensitive; fixed-rate
B. rate-sensitive; rate-sensitive
C. fixed-rate; fixed-rate
D. fixed-rate; rate-sensitive
E. fixed-rate; non-earning
Q:
A bank has a negative duration gap. Interest rates decline. Which one of the following best describes the effects of the interest rate change?
A. The bank's market value of equity is unchanged since the market value of its assets and liabilities move in the same direction.
B. The bank's market value of equity goes up because the market value of its assets goes up by more than the market value of its liabilities goes down.
C. The bank's market value of equity goes down because the market value of its assets goes up by more than the market value of its liabilities goes down.
D. The bank's market value of equity goes down because the market value of its assets goes down by more than the market value of its liabilities goes down.
E. The bank's market value of equity goes down because the market value of its liabilities increases by more than the market value of its assets increases.
Q:
A bank is facing a forecast of rising interest rates. How should they set the repricing and duration gap?
A. Positive repricing gap and negative duration gap
B. Negative repricing gap and positive duration gap
C. Positive repricing gap and positive duration gap
D. Negative repricing gap and negative duration gap
Q:
A bank has a negative duration gap. Which one of the following statements is most correct?
A. If all interest rates are projected to increase, to limit a net value decline, before rates rise the bank should increase the amount of short-term loans on the balance sheet.
B. If all interest rates are projected to increase, to limit a net value decline, before rates rise the bank should increase the amount of short-term bonds issued by the bank.
C. If all interest rates are projected to decrease, to limit a net value decline, before rates fall the bank should increase the amount of long-term loans on the balance sheet.
D. If all interest rates are projected to decrease, to limit a net value decline, before rates fall the bank should increase the amount of long-term bonds issued by the bank.
Q:
The structure of a bank's balance sheet as evidenced by its repricing gap and its duration gap affects a bank's sensitivity to interest rate changes. Which one of the following statements about the two types of gaps is true?
A. The repricing gap immunizes the present value of all future cash flows, whereas managing the duration gap can stabilize future cash flows, but not their present value.
B. The duration gap considers all cash flows up to and including maturity, whereas the repricing gap really only considers how cash flows will change within the maturity bucket.
C. If a bank could only manage one type of gap, the bank would limit its interest rate risk the most by managing its repricing gap instead of its duration gap.
D. The repricing gap is superior to the duration gap since the repricing gap has a well-defined maturity bucket.
E. It is virtually impossible for an institution to have both a positive duration gap and a negative repricing gap at the same time.
Q:
A bank has a positive repricing gap using a 6-month maturity bucket. Which one of the following statements is most correct?
A. If all interest rates are projected to increase, to limit a profit decline when this occurs, the bank could encourage its retail loan customers to switch from 1-year adjustable rate loans to Fed Funds loans.
B. If all interest rates are projected to decrease, to limit a profit decline when this occurs, the bank could encourage its retail loan customers to switch from 1-month reset floating rate loans to 3-year fixed-rate loans at current rates.
C. If all interest rates are projected to decrease, to limit a profit decline when this occurs, the bank could encourage its retail loan customers to switch from fixed-rate mortgages to adjustable rate mortgages.
D. If all interest rates are projected to increase, to limit a profit decline when this occurs, the bank could encourage its retail loan customers to switch from 3-year to 5-year auto loans.
E. If all interest rates are projected to decrease, to limit a profit decline when this occurs, the bank could encourage its retail loan customers to switch from their bank to another bank.
Q:
A bank has a negative repricing gap using a 6-month maturity bucket. Which one of the following statements is most correct if MMDAs are rate-sensitive liabilities?
A. If all interest rates are projected to increase, to limit a profit decline when this occurs, the bank could encourage its retail deposit customers to switch from 2-year CDs at current rates to 3-month CDs.
B. If all interest rates are projected to decrease, to limit a profit decline when this occurs, the bank could encourage its retail deposit customers to switch from MMDAs to 2-year CDs at current rates.
C. If all interest rates are projected to decrease, to limit a profit decline when this occurs, the bank could encourage its retail deposit customers to switch from 3-month CDs to 2-year CDs at current rates.
D. If all interest rates are projected to increase, to limit a profit decline when this occurs, the bank could encourage its retail deposit customers to switch from 2-year CDs at current rates to MMDAs.
E. If all interest rates are projected to increase, to limit a profit decline when this occurs, the bank could encourage its retail deposit customers to switch from MMDAs to 2-year CDs at current rates.
Q:
Convexity arises because a fixed income's price is a nonlinear function of interest rates.
Q:
A bond's price changes 2% when interest rates drop. The duration model would predict a price increase of more than 2%.
Q:
Due to convexity problems, banks are actually better off using the simpler repricing model to manage interest rate risk rather than the duration model.
Q:
The repricing gap is the most comprehensive measure of interest rate risk used by financial intermediaries.
Q:
If DA > kDL, then falling interest rates will cause the market value of equity to rise.
Q:
The cash flow from the interest a bank receives on a long-term loan that is normally reinvested is called the runoff from the loan.
Q:
For a one-year maturity bucket, the repricing model assumes that a 9-month loan is as equally rate-sensitive as a 3-month loan.
Q:
The "runoff" of fixed income contracts is itself rate-sensitive.
Q:
The repricing gap fails to consider how the value of fixed income accounts will change when rates change.
Q:
If a bank wishes to have a positive balance sheet repricing gap and a negative balance sheet duration gap, then the bank should predominantly have short-term rate-sensitive assets funded by long-term fixed-rate liabilities.
Q:
If a bank has a negative repricing gap, falling interest rates increase profitability.
Q:
A rate-sensitive asset is one that either matures within the maturity bucket or one that will have a payment change within the maturity bucket if interest rates change.
Q:
In a bank's three-month maturity bucket, a 30-year ARM with a rate reset in six months would be considered a fixed rate asset, but in its one-year maturity bucket, this ARM would be considered a rate-sensitive asset.
Q:
The duration gap model is a more complete measure of interest rate risk than the repricing model.
Q:
Insolvency occurs when an institution's duration gap becomes negative.
Q:
The Fed now operates the discount window differently than it used to. What are the major changes?
Q:
Why might a bank face abnormal deposit drains?
Q:
What are the tradeoffs involved between storing liquidity and purchasing liquidity as needed for a bank?
Q:
We rarely see bank runs since the advent of Federal deposit insurance, but runs on life insurers and mutual funds do occur even though claimants have pro rata claims in the event of default. Why do these runs still occur?
Q:
Describe the major components of a liquidity plan.
Q:
Does a positive or a negative financing gap indicate greater liquidity risk? Explain.
Q:
Explain the relationship between each of the following ratios and liquidity risk.
a) Loan-to-deposit ratio
b) Borrowed funds to total assets
c) Loan commitments to total assets
Q:
What are the major sources of liquidity risk for a bank? For a life insurer?
Q:
Explain how liquidity risk can lead to insolvency risk.
Q:
The BIS maturity ladder approach to managing liquidity includes which of the following?I. Assessing expected cash inflows and outflows in different time periods.II. Calculation of daily and cumulative funding requirements.III. Estimating funding requirements under different scenarios.IV. Minimizing the securities holdings to increase the bank's ROE.A. I and II onlyB. II and III onlyC. I, II, and IV onlyD. I, II, and III onlyE. I, II, III, and IV
Q:
The greater the _________________ ratio the more liquid is the institution, ceteris paribus.A. borrowed funds to total assetsB. core deposits to total assetsC. loans to depositsD. unused commitments to lend to total assetsE. unused commitments to lend to liquid assets
Q:
The amount that a policyholder receives when they cash in an insurance policy is called theA. cash value.B. surrender value.C. face value.D. policy value.E. fair market value.
Q:
Discount window borrowing is available toI. banks.II. thrifts.III. investment banks.IV. nonfinancial corporations.A. I and II onlyB. I and III onlyC. I, II, and III onlyD. II, III, and IV onlyE. I, II, III, and IV
Q:
Which of the following statements, if any, is(are) true?I. Mutual funds never have runs.II. Funds invested with insurers are as safe as deposits at a bank.III. Pension funds generally have less liquidity risk than banks.A. All three are trueB. Only I is trueC. Only II and III are trueD. Only III is trueE. None are true
Q:
How does reliance on purchased liquidity rather than core deposits affect a bank?I. Increases the risk of a liquidity crisisII. Allows the bank to adjust to deposit drains without affecting bank sizeIII. Increases overall interest sensitivity of the bank's profits to interest ratesA. I onlyB. II onlyC. I and II onlyD. II and III onlyE. I, II, and III
Q:
In the absence of deposit insurance, a deposit is a _______________ to the bank's assets.A. pro rata claimB. first come/first serve claimC. full pay or no pay claimD. both A and BE. both B and C
Q:
The two main reasons why runs on U.S. banks no longer occur areA. reserve requirements and higher bank liquidity ratios.B. a required positive financing gap and bank use of purchased liquidity.C. the FDIC and the discount window.D. insurance funds operated by individual states and tighter bank regulations.E. none of the above
Q:
Runs on insurance firms are more likely to occur than runs on banks even in states with guaranty funds for insurers because these funds generallyA. lack a permanent reserve fund.B. do not repay insurance policyholders immediately.C. lack federal government backing.D. all of the above
Q:
Which of the following can create liquidity risk for a life insurer?I. Unexpectedly high number of policy surrendersII. Unexpectedly low number of new policies soldIII. Unexpectedly high insurance claims filed by policyholdersA. I onlyB. II onlyC. I and II onlyD. II and III onlyE. I, II, and III
Q:
A married couple each has an IRA and deposits at a bank. The couple also has one child. If they had the money, what is the total amount of their accounts that could be insured at one bank?A. $250,000B. $750,000C. $1,250,000D. $1,500,000E. $2,000,000
Q:
Insurance industry guarantee funds do not eliminate runs on insurers becauseI. the funds are not backed by the federal government.II. the funds lack permanent reserves to back policies.III. the funds have low maximum annual contribution amounts that limit insurer's liability.A. I onlyB. II onlyC. III onlyD. I and III onlyE. I, II, and III
Q:
An increasingly positive financing gap can indicate ________________ liquidity risk because it may indicate _______________ deposits and/or rising loan commitments.A. increasing; increasingB. decreasing; decreasingC. increasing; decreasingD. decreasing; increasing
Q:
When calculating the liquidity index, the larger the discount from fair value, the ______________ the liquidity index and the _________________ the liquidity risk the FI faces.A. larger; greaterB. smaller; greaterC. larger; lowerD. smaller; lower
Q:
A financial intermediary has two assets in its investment portfolio. It has 35% of its security portfolio invested in one-month Treasury bills and 65% in real estate loans. If it liquidated the bills today, the bank would receive $98 per hundred of face value. If the real estate loans were sold today, they would be worth $85 per 100 of face value. In one month, the real estate loans could be liquidated at $94 per 100 of face value. What is the intermediary's one-month liquidity index?A. 0.93B. 0.92C. 0.91D. 0.90E. 0.89
Q:
The BIS recommends that depository institutions do which of the following to realistically measure liquidity risk?I. Construct a maturity ladder of funding requirements over both the short and long run.II. Conduct scenario analyses of the bank's implied liquidity position under different bank and economic conditions.III. Always keep the loan to deposit ratio less than one.A. I onlyB. II onlyC. I and II onlyD. II and III onlyE. I, II, and III
Q:
Core deposits include all but which of the following?A. Retail demand depositsB. NOW accountsC. MMDAsD. Savings accountsE. Negotiable CDs
Q:
Bank A has a loan to deposit ratio of 110%, core deposits equal 55% of total assets, and borrowed funds are 25% of assets. Bank B has a loan to deposit ratio of 80%. Core deposits are 65% of assets and borrowed funds are 5% of assets. Which bank has more liquidity risk? Ceteris paribus, which bank will probably be more profitable when interest rates are low?A. Bank A; Bank AB. Bank A; Bank BC. Bank B; Bank AD. Bank B; Bank BE. You can't tell
Q:
Which one of the following is a source of liquidity risk for a bank?A. Predicted increase in net deposit drain before ChristmasB. Maturation of notes payableC. Corporation calls in a bond the bank is holdingD. A natural disaster in the bank's communityE. None of the above
Q:
If a bank relies solely on purchased liquidity, the bank will likelyA. maintain large amounts of liquid assets.B. fund its loan commitments with asset sales.C. be required to borrow money at short notice.D. be required to raise equity capital quickly.E. be forced to liquidate liabilities at fire sale prices.
Q:
What is Second National Bank's total net liquidity?A. $6,520B. $13,500C. $14,200D. $12,280E. $5,760
Q:
What are Second National Bank's total uses of liquidity?A. $6,520B. $13,500C. $14,200D. $12,280E. $5,760
Q:
What are Second National Bank's total sources of liquidity?A. $6,520B. $13,500C. $14,200D. $12,280E. $5,760
Q:
A bank meets a deposit withdrawal with one of the following alternatives. Which one of the following is an example of using stored liquidity to meet a deposit withdrawal?A. Increase in Euro dollar depositsB. Contacting an investment banker to find new corporate depositsC. Increasing Fed funds borrowedD. Issuance of a negotiable CDE. Selling the bank's holdings of T-bills
Q:
Which of the following results in a net liquidity drain?A. Demand deposits increase $100; loans increase $50B. Demand deposits decrease $100; loan repayments are $150C. Repurchase agreements increase $100; demand deposits decrease $50D. Reverse repurchase agreements increase $50; demand deposits decrease $50E. None of the above
Q:
Which one of the following situations creates the most liquidity risk?A. Long-term assets funded by long-term liabilitiesB. Short-term assets funded by short-term liabilitiesC. Long-term assets funded by short-term liabilitiesD. Short-term assets funded by long-term liabilitiesE. Long-term liabilities funded by short-term assets
Q:
If FNBNA is expecting a $20 million net deposit drain and the bank wishes to fund the drain by borrowing more money, how much will pre-tax net income change if the borrowing cost is the same as on its existing borrowed funds?A. $600,000B. -$312,000C. -$2,000,000D. -$600,000E. $312,000
Q:
The fear that liquidity problems at one bank may cause depositors to worry about the solvency of other banks is called the disease effect.
Q:
The greater the discount required to sell assets quickly, the higher the value of the bank's liquidity index.
Q:
The financing gap is defined as average core deposits minus average borrowed funds.
Q:
Closed-end mutual funds have less need to maintain liquid asset holdings than open-end mutual funds.
Q:
Relying on purchased liquidity is more risky than relying on stored liquidity.
Q:
Property and casualty insurers have a greater need for liquidity than life insurers.
Q:
Using stored liquidity to offset a deposit drain will reduce the size of the bank, but using purchased liquidity to offset the drain will not.
Q:
When money market interest rates are higher than deposit rates, using purchased liquidity to replace deposit drains can reduce a bank's profit margin.
Q:
Repos and fed funds borrowed are examples of stored liquidity.
Q:
A bank's financing gap is calculated as average loans minus average deposits plus liquid assets.
Q:
If a bank's brokered deposits increase $3 million and their savings accounts decrease $1 million, then core deposits decreased.
Q:
A corporation informs the bank they will immediately draw down the maximum amount on their credit line. This is an example of liability side risk.
Q:
If a bank meets a net deposit drain by borrowing money in the fed funds market, it is using purchased liquidity.
Q:
Individuals with higher levels of income must have higher GDS and TDS ratios to qualify for a loan.