chapter 8: interest rate risk 1

Question 1

net worth

Answer 1

The value of an FI

to its owners; this is equal to the difference between the market value of assets and that of liabilities

Question 2

repricing gap

Answer 2

The difference between assets whose interest rates will be repriced or changed over some future period (rate-sensitive assets) and liabilities whose interest rates will be repriced or changed over some future period (rate- sensitive liabilities).

Question 3

rate-sensitive asset or liability

Answer 3

that is repriced at or near current market interest rates within a maturity bucket.

Question 4

refinancing risk

Answer 4

The risk that the cost of rolling over or reb- orrowing funds will rise above the returns being earned on asset investments.

Question 5

reinvestment risk

Answer 5

The risk that the returns on funds to be reinvested will fall below the cost of the funds.

Question 6

net interest income (nii) formula

Answer 6

ΔNIIi = Change in net interest income in maturity bucket i
GAPi = Dollar size of the gap between the book value of rate-sensitive assets
and rate-sensitive liabilities in maturity bucket i
ΔRi = Change in the level of interest rates impacting assets and liabilities in the ith bucket
ΔNIIi = (GAPi) ΔRi = (RSAi − RSLi )ΔRi
In this first bucket, if the gap is negative $10 million and short-term interest rates (such as fed fund and/or repo rates) rise 1 percent, the annualized change in the FI’s future net interest income is:
ΔNIIi = (−$10 million) × 0.01 = −$100,000

Question 7

Core deposits

Answer 7

Those deposits that act as fi’s long term sources of funds.

Question 8

cgap formula

Answer 8

CGAP = One-year rate-sensitive assets − One-year rate-sensitive liabilities = RSA − RSL
= $155 million − $140 million = $15 million

Question 9

gap ratio

Answer 9

Gap ratio = cgap/a
= ____________________________ = 0.056 = 5.6%
CGAP $15 million A $270 million

Question 10

CGAP effects

Answer 10

The relations between changes in interest rates and changes in net interest income.

Question 11

spread effect

Answer 11

The effect that a change in the spread between rates on RSAs and RSLs has on net interest income as interest rates change.