Ch 05 Asset-Liability Mgmt

Question 1

aggressive/defensive asset

Answer 1

The goal of defensive asset/liability management is to insulate the net interest income from changes in interest rates; that is, to prevent interest rate changes from decreasing or increasing the net interest income. In contrast, aggressive asset/liability management focuses on increasing the net interest income through altering the portfolio of the institution.

Question 2

liability management

Answer 2

This type of liquidity management refers to meeting liquidity needs by using outside sources of discretionary funds (e.g., fed funds, discount window borrowings, repurchase agreements, certificates of deposit, and other borrowings).

Question 3

asset/liability management (ALM)

Answer 3

The process of making decisions about the composition of assets and liabilities and their risk assessment is known as asset/ liability management.

Question 4

core deposits

Answer 4

These deposits are typically made by regular bank customers, including business firms, government units, and households. Core deposits provide a stable, long-term source of funds. They are not sensitive to changes in interest rates.

Question 5

cumulative gap

Answer 5

The cumulative gap measures the difference between rate-sensitive assets and liabilities over an extended periods or maturity buckets. The cumulative gap is the sum of the incremental gaps.

Question 6

dollar gap

Answer 6

The dollar gap (also referred to as the funding gap or the maturity gap), is the difference between the dollar amount of interest rate-sensitive assets and the dollar amount of interest rate-sensitive liabilities.

Question 7

duration drift

Answer 7

The change in the duration of a financial instrument over time.

Question 8

duration gap

Answer 8

The duration gap is the difference between the duration of a bank?s assets and liabilities. It is a measure of interest rate sensitivity that helps to explain how changes in interest rates affect the market value of a bank?s assets and liabilities, and, in turn, its net worth.

Question 9

Federal Home Loan Bank

Answer 9

The Federal Home Loan Bank system is a government-sponsored enterprise (GSE) whose function is to enhance the availability of residential mortgage credit by making low-cost funds available to member institutions. Banks that are members of the system can borrow funds from regional Federal Home Loan Banks.

Question 10

gap analysis

Answer 10

The effects of interest rate movements on a bank?s net interest margin as well as equity value can be evaluated using dollar gap and duration gap analyses, respectively.

Question 11

immunization

Answer 11

Immunization or isolation of the market value of equity to interest rate changes will be effective only if interest rates for all maturity securities shift up or down by exactly the same amount (i.e., only if the yield curve moves upward or downward by a constant percentage amount).

Question 12

interest rate futures contract

Answer 12

An interest rate futures contract is an agreement between two parties to buy (or sell) a commodity for a fixed price at a specified time in
the future.Various financial instruments, such as Treasury bonds and Eurodollars, are packaged as interest rate commodities and are actively traded.

Question 13

interest rate swap contract

Answer 13

An interest rate swap contract is an agreement in which a bank and another party (referred to as a counterparty) trade payment streams
but not principal amounts. For example, a bank with a long-term fixed-rate mortgage portfolio could agree to receive a floating-rate payment stream and to pay the counterparty an equivalent fixed-rate payment stream.

Question 14

maturity buckets

Answer 14

The time periods (e.g., 90 days, 180 days) used in asset/liability management are referred to as maturity buckets or planning horizons.

Question 15

non-rate-sensitive asset/liabilities

Answer 15

Those assets and liabilities whose interest return or cost do not vary with interest rate movements over the same time horizon are
referred to as non-rate-sensitive (NRS).

Question 16

rate-sensitive asset/liabilities

Answer 16

Those assets and liabilities whose interest return or costs vary with interest rate changes over some given time horizon are
referred to as rate-sensitive assets (RSAs) or rate-sensitive liabilities (RSLs).

Question 17

relative gap ratio

Answer 17

The relative gap ratio expresses the dollar amount of the gap (dollar RSAs ? dollar RSLs) as a percentage of total assets.

Question 18

simulated asset liability models

Answer 18

Simulations are used to evaluate the dollar gap, duration gap, and other asset/liability measures to changes in interest rates and
various balance sheet strategies.

Question 19

stress testing

Answer 19

This refers to testing the ?worst case? scenarios in simulated asset/liability models.