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Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Tech, Exams of Banking and Finance

Balikesir UniversityBanking and Finance

Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques

Typology: Exams

2019/2020

Uploaded on 02/04/2022

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edanur-inci 🇹🇷

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Bank408
1. 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. (asset management)
2. Recent decades have ushered in dramatic changes in banking. The goal of
__________________ was simply to gain control of the bank's sources of funds.
(liability management)
3. The__________________________ is the interest rate that equalizes the current market
price of a bond with the present value of the future cash flows. (YTM)
4. The __________________ risk 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. (inflation)
5. The __________________ shows the relationship between the time to maturity and the
yield to maturity of a bond. It is usually constructed using treasury securities since they
are assumed to have no default risk. (yield curve)
6. The __________________ risk premium on a bond reflects the differences in the ease
and ability to sell the bond in the secondary market at a favorable price. (liquidity)
7. __________________________ are those assets which mature or must be repriced
within the planning period. (interest-sensitive assets)
8. __________________________ is the difference between interest-sensitive assets and
interest-sensitive liabilities. (dollar interest-sensitive gap)
9. 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. (A)
10. A bank's IS 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.
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Bank

  1. 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. (asset management)
  2. Recent decades have ushered in dramatic changes in banking. The goal of __________________ was simply to gain control of the bank's sources of funds. (liability management)
  3. The__________________________ is the interest rate that equalizes the current market price of a bond with the present value of the future cash flows. (YTM)
  4. The __________________ risk 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. (inflation)
  5. The __________________ shows the relationship between the time to maturity and the yield to maturity of a bond. It is usually constructed using treasury securities since they are assumed to have no default risk. (yield curve)
  6. The __________________ risk premium on a bond reflects the differences in the ease and ability to sell the bond in the secondary market at a favorable price. (liquidity)
  7. __________________________ are those assets which mature or must be repriced within the planning period. (interest-sensitive assets)
  8. __________________________ is the difference between interest-sensitive assets and interest-sensitive liabilities. (dollar interest-sensitive gap)
  9. 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. (A)
  10. A bank's IS 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. Answer: C

  1. According to the textbook, the maturing of the liability management techniques, coupled with more volatile interest rates, gave birth to the __________________ approach which dominates banking today. The term that correctly fills in the blank in the preceding sentence is: A) Liability management B) Asset management C) Risk management D) Funds management E) None of the above. (D)
  2. 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) Noninterest spread E) None of the above. (A)
  3. 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 above. (B)
  4. 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 _____________. The choice below that correctly fills in the blank in the preceding sentence is: 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 above. (D)
  5. 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 higher interest margin if interest rates fall. D) A and B. E) A and C. (E)

million in interest-bearing deposits with an interest rate sensitivity weight of .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. B) $- C) -$50. D) $34. E) None of the above (A)

  1. A bond has a face value of $1000 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% B) 12.75% C) 16% D) 11.45% E) Cannot be calculated from the information given (C)
  2. 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% B) 12.13% C) 12.30% D) 2% E) None of the above (B)
  3. The _______________ is determined by the demand and supply for loanable funds in the market. The term that correctly fills in the blank in the preceding sentence is: A) The yield to maturity B) The banker's discount rate C) The holding period return D) The risk-free real rate of interest E) The market rate of interest on a risky loan (D)
  4. A bank with a positive interest-sensitive gap will have a decrease in net interest income when interest rates in the market: A) Rise B) Fall C) Stay the same D) A bank with a positive interest-sensitive gap will never have a decrease in net interest income (B)
  5. he 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)

  1. 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. This bank also has $ million in interest-bearing deposits with an interest rate sensitivity weight of .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. B) $- C) -$50. D) $34. E) None of the above (B)
  2. 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 (A)
  3. 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 (E)
  4. A treasury bill currently sells for $9,845, has a face value of $10,000 and has 46 days to maturity. What is the yield to maturity on this security? A) 12.49% B) 12.13% C) 12.30% D) 2% E) None of the above (A)
  5. The Third National Bank of Edmond reports a net interest margin of 5.83%. It has total interest revenues of $275 million and total interest expenses of $210 million. What does this bank's earnings assets have to be? A) $4717 million B) $3602 million

bank has: A) A positive duration gap of 8.0 years. B) A negative duration gap of 2.5 years. C) A positive duration gap of 1.4 years. D) A positive duration gap of 2.5 years. E) None of the above. (D)

  1. 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 has: A) A negative duration gap of 1.55 years. B) A positive duration gap of 1.28 years. C) A negative duration gap of 3.85 years. D) A negative duration gap of 1.28 years. E) None of the above. (D)
  2. 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 is a true statement concerning duration? A) The longer the time to maturity, the greater the duration B) The higher the coupon rate, the higher the duration C) The shorter the duration, the greater the price volatility D) All of the above are true E) None of the above are true (A)
  3. A bond has a duration of 7.5 years. Its current market price is $1125. Interest rates in the market are 7% today. It has been forecasted that interest rates will rise to 9% over the next couple of weeks. How will this bank's price change in percentage terms? A) This bond's price will rise by 2 percent. B) This bond's price will fall by 2 percent. C) This bond's price will fall by 14 .02 percent D) This bond's price will rise by 14.02 percent E) This bond's price will not change (C)
  4. 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)
  1. 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 duration gap? A) 2 years B) -2 years C) 3.5 years D) -3.5 years E) None of the above (C)
  2. A bank has an average asset duration of 5 years and an average liability duration of 9 years. This bank has total assets of $1000 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)
  3. A bank has an average asset duration of 5 years and an average liability duration of 9 years. This bank has total assets of $1000 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 duration gap? A) -4 years B) 4 years C) 2.65 years D) -2.65 years E) 12.65 years (D)
  4. 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 years and nondeposit 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 (D)
  5. Which of the following statements is true concerning a bank's duration gap? A) If a bank has a positive duration gap and interest rates rise, the bank's net worth will decline B) A bank with a positive duration gap has a longer average duration for its assets than for its liabilities
  1. A bank's IS GAP is defined as: (The dollar amount of rate-sensitive assets minus the dollar amount of rate-sensitive liabilities.)
  2. According to the textbook, the maturing of the liability management techniques, coupled with more volatile interest rates, gave birth to the __________________ approach which dominates banking today. The term that correctly fills in the blank in the preceding sentence is: (Funds management)
  3. he principal goal of interest-rate hedging strategy is to hold fixed a bank's: (Net interest margin)
  4. A bank is asset sensitive if its: (Interest-sensitive assets exceed its interest-sensitive liabilities)
  5. 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 _____________. The choice below that correctly fills in the blank in the preceding sentence is: (Size of the bank's cumulative gap)
  6. 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 higher interest margin if interest rates fall. D) A and B. E) A and C. Answer: E
  7. 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 the mix of assets and liabilities in the bank's portfolio. D) All of the above.
  8. 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 the: (YTM)
  9. The interest-rate measure often quoted on short-term loans and money market securities such as U.S. Treasury bills is the: Bank discount rate
  10. A bank whose interest-sensitive assets total $350 million and its interest-sensitive liabilities amount to $175 million has: (An asset-sensitive gap of $175 million)
  11. 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? (B) $250,
  1. 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. This bank also has $ million in interest-bearing deposits with an interest rate sensitivity weight of .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)
  2. A bond has a face value of $1000 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? (C) 16%)
  3. 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? (B) 12.13%)
  4. The _______________ is determined by the demand and supply for loanable funds in the market. The term that correctly fills in the blank in the preceding sentence is (The risk-free real rate of interest)
  5. A bank with a positive interest-sensitive gap will have a decrease in net interest income when interest rates in the market: (fall)
  6. 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: (inflation risk)
  7. 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. This bank also has $ million in interest-bearing deposits with an interest rate sensitivity weight of .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? $-
    1. 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
    1. 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 __________. E) Decrease, decrease, increase
    1. A treasury bill currently sells for $9,845, has a face value of $10,000 and has 46 days to maturity. What is the yield to maturity on this security? A) 12.49%

B) Net worth will increase by $31.81 million

    1. 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 duration gap? 3.5 years
    1. A bank has an average asset duration of 5 years and an average liability duration of 9 years. This bank has total assets of $1000 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? Net worth will increase by $50.47 million
    1. A bank has an average asset duration of 5 years and an average liability duration of 9 years. This bank has total assets of $1000 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 duration gap? -2.65 years
    1. 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 years and nondeposit borrowings of $ 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. This bank has a duration gap of 3.75 years
    1. Which of the following statements is true concerning a bank's duration gap? A) If a bank has a positive duration gap and interest rates rise, the bank's net worth will decline B) A bank with a positive duration gap has a longer average duration for its assets than for its liabilities C) If a bank has a zero duration gap and interest rates rise, the bank's net worth will not change D) If a bank has a negative duration gap and interest rates rise, the bank's net worth will increase E) All of the above are true statements
    1. A bank has an average duration for its asset portfolio of 5.5 years. This bank has total assets of $1000 million and total liabilities of $750 million. If this bank has a zero duration gap, what must the duration of its liabilities portfolio be? A) 7.33 years
    1. A bond has a face value of $1000 and coupon payments of $80 annually. This bond matures in three years and is selling for $1000 in the market. Market interest rates are 8%. What is this bond's duration B) 2.78 years
    1. A bond has a face value of $1000 and coupon payments of $120 annually. This bond matures in three years and is selling in the market for $1160. Market interest rates are 6%. What is this bond's duration? D) 2.71 years
    1. A bond is selling in the market for $950 and has a duration of 6 years. Market interest rates are 9% and are expected to decrease to 7% in the near future. What will this bond's price be after the change in market interest rates? C) $
    1. A bond is selling in the market for $1100 and has a duration of 4.5 years. Market interest rates are 5% and are expected to increase to 7% in the near future. What will this bond's price be after the change in market interest rates? 1006
    1. Which of the following is a true statement? 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
    1. The fact that the rate of change in an asset's price varies with the level of interest rates is known as: Convexity
    1. U.S. banks tend to fare best when the yield curve is: Upward-sloping
    1. 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? Basis risk
    1. 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
    1. The 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? (Liquidity risk)
    1. The 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? D) Call risk
  11. A bank is liability sensitive if its: B) Interest-sensitive liabilities exceed its interest-sensitive assets
  12. Which of the following would be an example of a repriceable asset? C) Short term securities issued by the government about to mature owned by the bank
  13. Which of the following would be an example of a repriceable liability? A) Money the bank has borrowed from the money market

c. may limit discretionary cash outlays by firms. d. are seldom enforced. e. often result in the lender's bankruptcy.(C)

  1. When a bank's claim to collateral is superior to all other creditors, the claim is said to be: a. developed. b. guaranteed. c. certified. d. perfected. e. endorsed. (D)
  2. Which of the following would be considered a "negative" loan covenant? a. The firm's current ratio cannot fall below 2. b. All property must be maintained in good condition c. The firm's net worth must exceed $10,000, d. The firm must carry property insurance on all collateral. e. Cash dividends cannot exceed 50% of earnings. (E)
  3. Which of the following is a factor in determining the mix of loans that a bank has? E. All of the above are factors in determining the mix of loans for a bank
  4. A lender's secondary source of repayment in case of a default is: B. collateral.
  5. The First State Bank of Duncan buys railroad cars and rents them to the Santa Fe Railroad Company. What type of loan has this bank made? E. Lease financing receivables
  6. According to the textbook, the largest category (by dollar volume) of loans extended by U.S. banks is: A. real estate loans.
  7. The Price Bank of Edmond makes a loan to Home Depot. What type of loan has this bank made? B. Commercial and industrial loan
  8. Terry May, a loan officer with First National Bank, calculates liquidity and debt ratios for the Lava Lamp Company and also examines their cash flow statement. What step in the lending process is Terry performing? C. Evaluating a prospective customer's financial condition
  9. Jerry LeGere, a loan officer with First National Bank, checks to see if the house pledged to back up a home mortgage has a clear title and proper insurance. What step in the lending process is Jerry performing? E. Assessing possible collateral and signing the loan agreement
  10. A good collateral for the purpose of protecting a lender should be:

A. durable. B. easy to identify. C. marketable. D. stable in value. E. All the above are qualities of a good collateral. ANSWER: E

  1. Standard Side Bank, a U.S. national bank, has $50 million in unimpaired capital and surpluses and $86 million in total time and savings deposits. Average revenue for the bank in the last three years is $12.5 million and a net interest income of $3.2 million. Pluto Inc. has applied for a loan of $9 million to the bank against which it is willing to provide $1 million worth of ten-year treasury securities. What is the maximum amount of loan the bank can make to Pluto? A. $9 million B. $4.5 million C. $7.5 million D. $8.5 million E. $1 million (D)
  2. A loan to a local business to purchase a new machine would be categorized as: C. a commercial and industrial loan.
  3. Short-term lending to support the construction of homes, apartments, office buildings, shopping centers, and other permanent structures is known as a (or an): A. self-liquidating. B. working capital loan. C. interim construction loan. D. asset-based loan. E. None of the options is correct. (C)
  4. Business loans designed to fund long-term business investments, such as the purchase of equipment or the construction of physical facilities, covering a period longer than one year are known as: A. working capital loans. B. term loans. C. interim construction financing. D. durable goods loan. E. None of the options is correct. (B)
  5. A loan whose principal is not due to be paid back until the loan's term ends and in which only interest is paid periodically during the life of the loan is called a (or an): A. working capital loan. B. project loan. C. bullet loan. D. interim construction loan. E. None of the options is correct. (C)

C. lender liability security program. D. environmental pollution control program. E. None of the options is correct. (B)

  1. Term loans normally are secured by: A. fixed assets. B. accounts receivable. C. inventories. D. personal property. E. None of the options is correct. (A)
  2. Under court interpretation of the Comprehensive Environmental Response, Compensation, and Liability Act, lenders may be liable for clean-up costs of hazardous substances if: A. the lender is involved in managing property with hazardous wastes. B. the lender has a strong association with the property owner. C. the lender has treated the interest in the borrower's property as a long-term investment. D. All of the options are correct. E. the lender does not take action primarily to protect the credit they have extended. (D)
  3. A bank that wants to examine the operating efficiency of a borrower would most likely examine which of the following ratios? A. Cost of goods sold ÷ Average inventory B. Income before interest and taxes ÷ Interest payments C. Cost of goods sold ÷ Net sales D. Current assets ÷ Current liabilities E. All of the options are correct. (A)