Chapter 7

Question 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.

Answer 1

asset management

Question 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.

Answer 2

liability management

Question 3

The __________________________ is the interest rate that equalizes the current market price of a bond with the present value of the future cash flows.

Answer 3

yield to maturity (YTM)

Question 4

The __________________ 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.

Answer 4

inflation-risk

Question 5

The __________________ shows the relationship between the time to maturity and the yield to maturity of bonds.

Answer 5

yield curve

Question 6

The __________________ premium on a bond reflects the differences in the ease and ability to sell the bond in the secondary market at a favorable price.

Answer 6

liquidity-risk

Question 7

__________________________ are those assets which mature or must be repriced within the planning period.

Answer 7

Interest-sensitive assets

Question 8

__________________________ is the difference between interest-sensitive assets and interest- sensitive liabilities.

Answer 8

Dollar interest-sensitive gap

Question 9

A(n) __________________________ means that the bank has more interest-sensitive liabilities than interest-sensitive assets.

Answer 9

negative interest-sensitive gap (liability sensitive)

Question 10

The bank’s __________________________ takes into account the idea that the speed (sensitivity) of interest rate changes will differ for different types of assets and liabilities.

Answer 10

weighted interest-sensitive gap

Question 11

__________________________ is the coordinated management of both the bank’s assets and its liabilities.

Answer 11

Funds management

Question 12

__________________________ is the risk due to changes in market interest rates which can adversely affect the bank’s net interest margin, assets, liabilities, and equity.

Answer 12

Interest-rate risk

Question 13

The __________________________ is the rate of return on a financial instrument using a 360- day year relative to the instrument’s face value.

Answer 13

bank discount rate

Question 14

The __________________________ component of interest rates is the risk premium due to the probability that the borrower will miss some payments or will not repay the loan.

Answer 14

default-risk premium

Question 15

__________________ is the weighted average maturity for a stream of future cash flows.

Answer 15

Duration

Question 16

__________________________ is the difference between the dollar-weighted duration of the asset portfolio and the dollar-weighted duration of the liability portfolio.

Answer 16

Duration gap

Question 17

A(n) __________________________ gap means that for a parallel increase in all interest rates, the market value of net worth will tend to decline.

Answer 17

positive-duration

Question 18

A(n) __________________________ gap means that for a parallel increase in all interest rates, the market value of net worth will tend to increase.

Answer 18

negative-duration

Question 19

The __________________________ is equal to the duration of each individual type of asset weighted by the market value of each type of asset out of the total market value of all assets.

Answer 19

duration of the asset portfolio.

Question 20

The __________________________ is equal to the duration of each individual type of liability in the portfolio weighted by the market value of each type of liability in the portfolio out of the total market value of all liabilities.

Answer 20

duration of the liability portfolio

Question 21

A bank is __________________ against changes in its net worth if its duration gap is equal to zero.

Answer 21

immunized (insulated or protected)

Question 22

The relationship between a change in an asset’s price and an asset’s change in the yield or interest rate is captured by _________________________.

Answer 22

convexity

Question 23

The change in a financial institution’s __________________ is equal to difference between the average duration of assets times the change in the interest rate divided by (1+ original discount rate) times the dollar amount of total assets and the average duration of liabilities times the change in the interest rate divided by 1+ original discount rate times the dollar amount of total liabilities.

Answer 23

net worth

Question 24

When a bank has a positive duration gap a parallel increase in the interest rates on the assets and liabilities of the bank will lead to a(n) __________________ in the bank’s net worth.

Answer 24

decrease

Question 25

When a bank has a negative duration gap, a parallel decrease in the interest rates on the assets and liabilities of the bank will lead to a(n) _________________________ in the bank’s net worth.

Answer 25

decrease

Question 26

Most lending institutions tend to do better when the yield curve is upward-sloping because they tend to have ____________ maturity gap positions.

Answer 26

positive

Question 27

One of the government-created giant mortgage banking firm which has subsequently been privatized is the ____________________________________.

Answer 27

FNMA or Fannie Mae (or FHLMC or Freddie Mac)

Question 28

One part of interest-rate risk is _____________________. This part of interest-rate risk reflects that as interest rates rise, prices of securities tend to fall.

Answer 28

price risk

Question 29

One part of interest-rate risk is ____________________. This part of interest-rate risk reflects that as interest rates fall, any cash flows that are received are invested at a lower interest rate.

Answer 29

reinvestment risk

Question 30

The interest-rate risk which arises when a borrower has the right to pay off a loan early reducing the lender’s expected rate of return is called ______________.

Answer 30

call risk

Question 31

In recent decades, banks have aggressively sought to insulate their assets and liability portfolios and profits from the ravages of changing interest rates. Many banks now conduct their asset-liability management strategy with the help of a(n) _____________________.

Answer 31

asset-liability committee

Question 32

__________________________ is interest income from loans and investments less interest expenses on deposits and borrowed funds divided by total earning assets.

Answer 32

Net interest margin (NIM)

Question 33

_____________________________ are those liabilities that mature or must be repriced within the planning period.

Answer 33

Interest-sensitive liabilities

Question 34

Variable rate loans and securities are included as part of _______________________ for banks.

Answer 34

repriceable assets

Question 35

Money market deposits are included as part of ______________________ for banks.

Answer 35

repriceable liabilities

Question 36

Interest sensitive assets less interest sensitive liabilities divided by total assets of the bank is known as _______________________.

Answer 36

relative interest sensitive gap

Question 37

Interest sensitive assets divided by interest sensitive liabilities is known as: ____________________________.

Answer 37

interest sensitivity ratio

Question 38

_______________________ is a measure of interest-rate risk exposure which is the total difference in dollars between those assets and liabilities that can be repriced over a designated time period.

Answer 38

Cumulative gap

Question 39

___________________________ is the phenomenon by which interest rates attached to various assets often change by different amounts and at different speeds than interest rates attached to various liabilities.

Answer 39

Basis risk

Question 40

One of the principal goals of asset-liability management is to maximize or at least stabilize a bank’s margin or spread.

Answer 40

TRUE

Question 41

Asset management strategy in banking assumes that the amount and kinds of deposits and other borrowed funds a bank attracts are determined largely by its management.

Answer 41

FALSE

Question 42

The ultimate goal of liability management is to gain control over a financial institution’s sources of funds.

Answer 42

TRUE

Question 43

If interest rates fall when a bank is in an asset-sensitive position, its net interest margin will rise.

Answer 43

FALSE

Question 44

A liability-sensitive bank will experience an increase in its net interest margin if interest rates rise.

Answer 44

FALSE

Question 45

Under the so-called liability management view in banking, the key control lever banks possess over the volume and mix of their liabilities is price.

Answer 45

TRUE

Question 46

Under the so-called funds management view, bank management’s control over assets must be coordinated with its control over liabilities, so that asset and liability management are internally consistent.

Answer 46

TRUE

Question 47

Bankers cannot determine the level or trend of market interest rates; instead, they can only react to the level and trend of rates.

Answer 47

TRUE

Question 48

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.

Answer 48

FALSE

Question 49

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

Answer 49

FALSE

Question 50

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.

Answer 50

TRUE

Question 51

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

Answer 51

TRUE

Question 52

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

Answer 52

FALSE

Question 53

Repriceable liabilities include long-term savings and retirement accounts.

Answer 53

FALSE

Question 54

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

Answer 54

TRUE

Question 55

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.

Answer 55

FALSE

Question 56

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.

Answer 56

FALSE

Question 57

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.

Answer 57

TRUE

Question 58

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

Answer 58

TRUE

Question 59

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.

Answer 59

FALSE

Question 60

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

Answer 60

FALSE

Question 61

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

Answer 61

FALSE

Question 62

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

Answer 62

TRUE

Question 63

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

Answer 63

FALSE

Question 64

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

Answer 64

TRUE

Question 65

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

Answer 65

FALSE

Question 66

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

Answer 66

TRUE

Question 67

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

Answer 67

TRUE

Question 68

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

Answer 68

FALSE

Question 69

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

Answer 69

TRUE

Question 70

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.

Answer 70

TRUE

Question 71

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.

Answer 71

TRUE

Question 72

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.

Answer 72

TRUE

Question 73

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

Answer 73

TRUE

Question 74

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

Answer 74

TRUE

Question 75

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

Answer 75

FALSE

Question 76

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

Answer 76

FALSE

Question 77

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.

Answer 77

C

Question 78

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.

Answer 78

D

Question 79

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.

Answer 79

A

Question 80

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.

Answer 80

B

Question 81

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

Answer 81

D

Question 82

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.

Answer 82

A

Question 83

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.

Answer 83

E

Question 84

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.

Answer 84

B

Question 85

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.

Answer 85

A

Question 86

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.

Answer 86

C

Question 87

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

Answer 87

B

Question 88

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 weighted interest- sensitive gap for this bank?
A. $50.25 million B. -$15.00 million C. -$50.25 million D. $34.25 million E. $196.5 million

Answer 88

A

Question 89

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

Answer 89

C

Question 90

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.

Answer 90

B

Question 91

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

Answer 91

D

Question 92

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

Answer 92

B

Question 93

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

Answer 93

A

Question 94

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.

Answer 94

B

Question 95

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.

Answer 95

A

Question 96

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.

Answer 96

E

Question 97

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.

Answer 97

A

Question 98

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. What will be the bank's earning assets total?
A. $4,717 million
B. $3,602 million
C. $1,115 million
D. $3,790 million
E. None of the options is correct.

Answer 98

C

Question 99

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

Answer 99

D

Question 100

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

Answer 100

B

Question 101

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.

Answer 101

A

Question 102

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.

Answer 102

B

Question 103

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.

Answer 103

D

Question 104

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's leverage-adjusted duration gap is a:
A. negative gap of 1.55 years.
B. positive gap of 1.28 years.
C. negative gap of 3.85 years. 
D. negative gap of 1.28 years.
E. None of the options is correct.

Answer 104

D

Question 105

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.

Answer 105

A

Question 106

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.

Answer 106

C

Question 107

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.

Answer 107

B

Question 108

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. What will be this bank's leverage-adjusted duration gap?
A. 2 years
B. -2 years
C. 3.5 years
D. -3.5 years
E. None of the options is correct.

Answer 108

C

Question 109

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. 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.

Answer 109

B

Question 110

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

Answer 110

D

Question 111

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.

Answer 111

C

Question 112

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.

Answer 112

A

Question 113

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.

Answer 113

A

Question 114

A bond has a face value of $1,000 and coupon payments of $80 annually. This bond matures in three years and is selling for $1,000 in the market. Market interest rate is 8 percent. What is this bond's duration?
A. 3 years
B. 2.78 years
C. 1.95 years
D. 4.31 years
E. None of the options is correct.

Answer 114

B

Question 115

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.

Answer 115

D

Question 116

A bond is selling in the market for $950 and has a duration of 6 years. Market interest rates are 9 percent and are expected to decrease to 7 percent in the near future. What will this bond’s price be after the change in market interest rates?
A. $969 B. $931 C. $1,055 D. $854 E. $950

Answer 116

C

Question 117

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

Answer 117

A

Question 118

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.

Answer 118

C

Question 119

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.

Answer 119

B

Question 120

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.

Answer 120

D

Question 121

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

Answer 121

E

Question 122

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

Answer 122

A

Question 123

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

Answer 123

C

Question 124

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

Answer 124

D

Question 125

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.

Answer 125

C

Question 126

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.

Answer 126

D

Question 127

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.

Answer 127

A

Question 128

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.

Answer 128

B

Question 129

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.

Answer 129

C

Question 130

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 the yield to maturity on these bonds?
A. 3 percent
B. 6 percent
C. 9 percent
D. 12 percent
E. None of the options is correct.

Answer 130

B

Question 131

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.

Answer 131

B

Question 132

Maryellen Epplin notices that a particular T-Bill has a banker’s discount rate of 9 percent in the Wall Street Journal. She knows that this T-Bill has 20 days to maturity and has a face value of $10,000.
What price is this T-Bill selling for in the market?
A. $9,100
B. $10,000
C. $9,950
D. $1,900
E. None of the options is correct.

Answer 132

C

Question 133

Maryellen Epplin notices that a particular T-Bill has a banker’s discount rate of 9 percent in the Wall Street Journal. She knows that this T-Bill has 20 days to maturity and has a face value of $10,000.
What is the yield to maturity on this T-Bill?
A. 9 percent
B. 0.5 percent
C. 4.5 percent
D. 9.17 percent
E. None of the options is correct.

Answer 133

D

Question 134

The Raymond Burr National Bank has $1,000 in assets with an average duration of 5 years. This bank has $800 in liabilities with an average duration of 6.25 years. What is the duration gap of this bank?
A. -1.25 years
B. 0 years
C. 1.25 years
D. -2.25 years
E. None of the options is correct.

Answer 134

B

Question 135

The Raymond Burr National Bank has $1,000 in assets with an average duration of 5 years. This bank has $800 in liabilities with an average duration of 6.25 years. Market interest rates start at 6 percent and fall by 1 percent. What is the change in net worth of this bank?
A. $11.29 
B. -$11.29 
C. $0
D. -$22.22 
E. $22.22

Answer 135

C

Question 136

The interest rate on one year Treasury Bonds is 5 percent. The interest rate on five year Treasury Bonds is 7.5 percent. The interest rate on ten year Treasury Bonds is 10 percent. What is true about the yield curve?
A. It is upward sloping.
B. It is downward sloping. 
C. It is a horizontal curve. 
D. It is a vertical curve.
E. It is parallel to the x-axis.

Answer 136

A

Question 137

The assets and liabilities of Finacle Bank as on December 31, 2015, are as follows:
$20,000 of short-term securities issued by governments and private borrowers (about to mature), $12,000 of borrowings from the money market, $15,000 of short-term savings accounts, $12,000 of variable-rate loans and securities, $18,000 of long-term loans made at a fixed interest rate, $25,000 of long-term savings and retirement accounts, $22,000 of deposits in the Central Bank (held as legal reserves), $550,000 of equity capital provided by the bank’s owners, and $500,000 of building and equipment.
What is the total of repriceable assets held by the bank as on December 31, 2015?
A. $32,000
B. $50,000
C. $45,000
D. $55,000
E. $52,000

Answer 137

A

Question 138

The assets and liabilities of Finacle Bank as on December 31, 2015, are as follows:
$20,000 of short-term securities issued by governments and private borrowers (about to mature), $12,000 of borrowings from the money market, $15,000 of short-term savings accounts, $12,000 of variable-rate loans and securities, $18,000 of long-term loans made at a fixed interest rate, $25,000 of long-term savings and retirement accounts, $22,000 of deposits in the Central Bank (held as legal reserves), $550,000 of equity capital provided by the bank’s owners, and $500,000 of building and equipment.
Which of the following is a repriceable liability for Finacle Bank?
A. Long-term savings and retirement accounts
B. Variable-rate loans and securities
C. Borrowings from the money market
D. Equity capital provided by the owners
E. Long-term loans made at a fixed interest rate

Answer 138

C

Question 139

Brendon Brothers Bank reports interest-sensitive assets at $35 million, interest-sensitive liabilities at $60 million and total assets at $80 million. What is the relative IS GAP of the bank?
A. -0.29 B. 0.29 C. -0.31 D. 0.31 E. -0.33

Answer 139

C