Topic 5 - Asset-Liability Management

Question 1

RSA > RSL

Answer 1

ARBL

Question 2

RSL > RSA

Answer 2

LRBA

Question 3

ROE =

Answer 3

ROE = Net Income/Equity

Question 4

ROA =

Answer 4

ROA = Net Income/Assets

Question 5

EM =

Answer 5

EM = A/E = ROE/ROA

Question 6

Net Interest Income =

Answer 6

NII = Interest Income - Interest Revenue

Question 7

Net Income =

Answer 7

NI = NII - Taxes (in this tutorial)

Question 8

Net Income Margin =

Answer 8

NIM = Net Income/Total Assets

Question 9

Repricing Gap =

Answer 9

RSA - RSL

Question 10

Prepayment Risk

Answer 10

(Under falling interest rate) If loans are paid early or refinanced, bank loses potential interest income

Question 11

Quantity Effect

Answer 11

(Under falling interest rate) If banks cannot replace lost loans, it’s balance sheet will shrink

Question 12

Price Effect

Answer 12

(Under falling interest rate) If bank can replace lost loans, it will be at a lower yield

Question 13

Adverse Price Effect

Answer 13

(Under rising interest rates) Old loans worth less

Question 14

Favourable Price Effect

Answer 14

(Under falling interest rates) Old loans worth mor

Question 15

Adverse Reinvestment Effect

Answer 15

(Under falling interest rates) New loans worth less

Question 16

Favourable Reinvestment Effect

Answer 16

(Under rising interest rates) New loans return more

Question 17

LRBA Bank

Answer 17

• Vulnerable to rate increase
• Negative maturity gap (RSA-RSL)
• Positive duration gap (Da-k*Dl)

Question 18

ARBL Bank

Answer 18

• Vulnerable to rate decrease
• Positive maturity gap (RSA-RSL)
• Negative duration gap (Da-k*Dl)

Question 19

ΔNII =

Answer 19

ΔNII = Δr (GAP) = Δr (RSA - RSL)

Question 20

CGAP

Answer 20

Cumulative Gap: one year repricing gap = RSA - RSL

Question 21

Gap Ratio =

Answer 21

Gap Ratio = CGAP/Total Assets

Measures direction and scale of interest rate risk exposure

Question 22

Duration =

Answer 22

D = [ Σt t (CFt / (1+i )t) ] / [ Σt (CFt / (1+i )t )]
1

OR

D= Σ(t*PV of CF)/Σ(PV of CF)

Question 23

ΔP =

Answer 23

ΔP = -D[ΔR/(1+R)]P = -(MD) × (ΔR) × (P)

Question 24

Immunization

Answer 24

Matching asset and liability duration

Question 25

Leverage =

Answer 25

Leverage = k = L/A

Question 26

ΔE

Answer 26

ΔE= - [DA-DL k] × A × [ΔR/(1+R)]

A = Size of FI