Deck 5: An Overview of Assetliability Management Alm

Question 1

The principal purpose of asset/liability management has been to increase the size of the firm as measured by total assets.

Answer 1

False

Question 2

The principal purpose of asset/liability management has been to control the size of net interest income.

Answer 2

True

Question 3

Transactions in federal funds, short-term Treasury securities, certificates of deposit, and Treasury bonds are all legitimate to make short-term adjustments in assets and liabilities.

Answer 3

False

Question 4

One reason encouraging banks to take interest rate risk is their inability to make an acceptable return without taking such risk.

Question 5

Dollar (or funding on maturity) gap management focuses on the repricing characteristics of assets and liabilities.

Question 6

Expectations of rising interest rates would be consistent with a negative gap position.

Question 7

A defensive strategy attempts to keep the volume of rate-sensitive assets in balance with the volume of rate-sensitive liabilities over a period.

Question 8

A defensive strategy is necessarily a passive one.

Question 9

Assuming a one-year horizon, a bank with an equal amount of federal funds sold and 360 day certificates of deposit issued (and no other assets or liabilities) would have a gap of zero.

Question 10

Using maturity buckets create multiple gaps.

Question 11

One method of dealing with the problem of imperfect correlation of market interest rates with portfolio interest rates is the use of the standardized gap.

Question 12

The fundamental problem with traditional gap analysis is its focus on net interest income rather than on the return on assets.

Question 13

Duration gap focuses directly on the market value of equity.

Question 14

A bank with a positive duration gap would experience an increase in the market value of equity with rising interest rates.

Question 15

If a bank expected interest rates to fall, and if it wanted to profit from the decline, it should increase the duration of its assets and shorten the duration of its liabilities.

Question 16

Forecasts of changes in the market value of equity due to interest rate changes assume parallel shifts in the yield curve.

Question 17

Duration drift refers to the drift in the market value of equity due to changes in interest rates.

Question 18

Interest rates are generally increasing in the expansion phase of the business cycle, and the yield curve usually becomes more steeply sloped.

Question 19

Interest rate risk and liquidity risk are usually inversely related.

Question 20

Simulation models allow the bank to examine its total balance sheet and income statement under a wide variety of assumptions.

Question 21

Which of the following types of asset/liability management focuses on increasing the net interest margin through altering the portfolio of the institution.

A) Defensive
B) Aggressive
C) strategic
D) tactical
E) none of the above

Question 22

Which type of asset/liability management does NOT require the ability to forecast future interest rate levels?

A) defensive
B) aggressive
C) strategic
D) none of the above

Question 23

A bank can increase the interest sensitivity of its assets by doing all BUT which of the following:

A) selling federal funds
B) purchasing short-term Treasury bills
C) purchasing federal funds
D) purchasing short-term federal agency securities
E) making deposits at other banks

Question 24

If a bank has more interest rate-sensitive liabilities than interest rate-sensitive assets, then it has a:

A) positive dollar gap
B) negative dollar gap
C) positive duration gap
D) negative duration gap

Question 25

If a bank has a positive dollar gap and interest rates are expected to increase in the near future, the net interest margin of the bank will:

A) increase
B) decrease
C) not change
D) it depends on the duration gap

Question 26

If a bank has a negative dollar gap and interest rates are expected to increase in the near future, the net interest margin of the bank will:

A) increase
B) decrease
C) not change
D) it depends on the duration gap

Question 27

If a bank has a zero gap, it is using which of the following interest rate risk management strategies?

A) aggressive
B) passive
C) defensive
D) immunized

Question 28

Which of the following is (are) a potential problem(s) in the use of dollar gap analysis?

A) assets and liabilities may well have different maturities
B) assets and liabilities may have different correlations with the movement of interest rates
C) focuses on net interest income
D) a, b, and c

Question 29

The problem of imperfect correlation of interest rates in the use of gap analysis can be dealt with by using:

A) the standardized gap
B) the adjusted gap
C) a measure that focuses on shareholder wealth
D) a measure that adjusts for differences in the maturities of assets and liabilities

Question 30

Aggressive gap management that successfully increases the net interest income of the bank may well decrease shareholder wealth, all else the same, because:

A) bank risk may decrease
B) bank risk may increase
C) bank return on assets may increase
D) bank return on assets may decrease

Question 31

Duration gap analysis directly focuses on the:

A) rate of return on assets
B) market value of equity
C) net interest margin
D) risk of the bank

Question 32

Given the following definitions:
D_A = the average duration of assets
D_L = the average duration of liabilities
W = the ratio of total liabilities to total assets
The formula for the duration gap is:

A) D_A - WD_L
B) D_A + WD_L
C) D_L - WD_A
D) D_L + WD_L

Question 33

If the duration gap is positive, then increases in interest rates will have a(an) _________ effect on the value of bank equity.

A) favorable
B) unfavorable
C) irrelevant
D) immunized

Question 34

The change in the market value of the equity as a percentage of total assets for a bank with a duration gap of 2.24 assuming interest rates increase 2% from 10% equals:

A) -2.51 percent
B) -2.00 percent
C) +2.51 percent
D) +2.00 percent

Question 35

If the duration gap is zero, then the market value of equity is ____________ interest rates.

A) increased due to an increase
B) increased due to a decrease
C) decreased due to an increase
D) immunized from changes

Question 36

Which of the following is NOT a problem in the use of duration gap management?

A) interest rates on assets and liabilities may be perfectly correlated with changes in the level of interest rates
B) interest rates on all maturities of assets normally shift up and down at different times
C) the relationship between interest rate changes and bond price changes is not linear
D) duration drift can occur

Question 37

First Pennsylvania Corporation "bet the bank" on an interest rate forecast by increasing its holdings of:

A) short-term securities
B) short-term loans
C) long-term securities
D) long-term loans

Question 38

First Pennsylvania's collapse was due to a _______________ and _________interest rates.

A) large positive gap/increasing
B) large positive gap/decreasing
C) large negative gap/increasing
D) large negative gap/decreasing

Question 39

Which of the following is NOT one of the four phases of a normal business cycle as discussed in the text?

A) expansion
B) trough
C) peak
D) depression

Question 40

The term structure of interest rates can change dramatically at which point in the business cycle?

A) expansion
B) trough
C) peak
D) depression

Question 41

In which part of the business cycle are interest rates falling?

A) expansion
B) peak
C) contraction
D) trough

Question 42

If the yield curve were upward sloping, the bank could accept some interest rate risk and earn a positive interest rate spread by using:

A) a negative duration gap
B) a positive duration gap
C) a zero duration gap
D) a zero dollar gap

Question 43

Which of the following is used by banks to examine its total balance sheet and income statement under a wide variety of alternative scenarios?

A) sensitivity analysis
B) simulation model
C) logistic model
D) regression models

Question 44

Interest rate risk and liquidity risk are:

A) unrelated to one another
B) closely related to one another
C) only related to one another when interest rate levels are high
D) only related to one another when interest rate levels are low

Question 45

All else the same, a positive duration gap causes the liquidity of the bank to:

A) increase
B) decrease
C) change only when the level of interest rates is high
D) change only when the level of interest rates is low
E) not change

Question 46

Which of the following is the most interest sensitive and least stable source of funds?

A) demand deposits
B) repurchase agreements
C) federal funds
D) CDs

Question 47

Which of the following is (are) a good reason(s) for accepting some amount of interest rate risk?

A) bank risk can be hedged
B) bank profit can be increased
C) demands by bank customers must be met as much as possible
D) b and c
E) a, b, and c

Question 48

The problem of the selection of the time horizon in gap analysis can be solved to some extent by using:

A) maturity balancing
B) maturity matching
C) maturity buckets
D) maturity differences

Question 49

The standardized gap adjusts for:

A) different interest rate levels of different asset and liabilities items
B) different maturity ranges of different asset and liability items
C) different liquidity of different asset and liability items
D) different interest rate volatilities of different asset and liability items

Question 50

Given the following information:
Interest sensitive assets = $300 30-day commercial paper
Interest sensitive liabilities = $400 90-day CDs
30-day commercial paper is 50 percent as volatile as 90-day T-bills
90-day CDs are 120 percent as volatile as 90-day T-bills
Calculate the standardized gap for the bank.

A) $160
B) $563
C) -$100
D) -$330