Deck 8: Interest Rate Risk I

Question 1

The repricing model is a simplistic approach to focusing on the exposure of net interest income to changes in market levels of interest rates for given maturity periods.

Answer 1

True

Question 2

One reason to exclude NOW accounts when estimating a bank's repricing gap is because the interest rates paid on these accounts typically do not change with the level of market rates.

Answer 2

True

Question 3

Large banks have adopted interest rate risk measurement models based on market value accounting and duration.

Answer 3

True

Question 4

When a bank's repricing gap is positive,net interest income is positively related to changes in interest rates.

Question 5

One reason to include demand deposits when estimating a bank's repricing gap is because rising interest rates could lead to high withdrawals from these accounts.

Question 6

All FIs tend to mismatch the maturities of their assets and liabilities to some extent.

Question 7

The Bank for International Settlements (BISs)requires depository institutions to have interest rate risk management systems.

Question 8

Changes in short term interest rates rarely affect the entire term structure of interest rates.

Question 9

The repricing model estimates the difference between interest earned and interest paid during a given period of time.

Question 10

The repricing gap model is a book value accounting based model.

Question 11

When the Fed finds it necessary to slow economic activity,it allows interest rates to fall.

Question 12

A bank with a negative repricing (or funding)gap faces refinancing risk.

Question 13

In the repricing gap model,assets or liabilities are rate-sensitive within a given time period if the dollar values of each are subject to receiving a different interest rate should market rates change.

Question 14

The cumulative repricing gap position of an FI for a given extended time period is the sum of the repricing gap values for the individual time periods that make up the extended time period.

Question 15

Because of its complexity,small depository institutions rarely use the repricing,or funding gap,model.

Question 16

The maturity model of measuring interest rate risk was a first attempt to include the impact on profitability of interest rate changes.

Question 17

A positive repricing gap implies that a decrease in interest rates will cause interest expense to decrease more than the decrease in interest income.

Question 18

The economic insolvency of many thrift institutions during the 1980s was due,at least in part,to unexpected increases in interest rates.

Question 19

A bank with a negative repricing (or funding)gap faces reinvestment risk.

Question 20

Because the increased level of financial market integration has increased the speed with which interest rate changes are transmitted among countries,control of U.S.interest rates by the Federal Reserve is more difficult and less certain.

Question 21

For a given change in interest rates,the change in price for each additional year of maturity of a fixed-rate asset is smaller as the maturity increases.

Question 22

The market value of a fixed-rate liability will increase as interest rates rise,although the market value of a fixed-rate asset will decrease as interest rates rise.

Question 23

Runoff in demand deposits in a repricing model is typically lower during periods of falling interest rates.

Question 24

To be more precise in measuring interest rate risk,the runoff component of long-term mortgages should be considered in the time buckets in which the maturities actually occur.

Question 25

Defining buckets of time over wider intervals creates greater accuracy in the use of the repricing model because fewer calculations are required.

Question 26

If the interest rate spread between rate sensitive-assets and rate sensitive liabilities increases for a bank,future increases in interest rates will lead to an increase in net interest income.

Question 27

Few DIs consider demand deposits to be "core" or long-term sources of funds.

Question 28

For a given change in interest rates,fixed-rate liabilities with longer-term maturities will have smaller changes in price than liabilities with shorter maturities.

Question 29

For a given change in interest rates,fixed-rate assets with long-term maturities will have smaller changes in price than assets with shorter maturities.

Question 30

An assumption of the repricing model is that interest rate changes will equally affect rate-sensitive assets and rate-sensitive liabilities.

Question 31

When interest rates increase,banks are more likely to be forced to increase rate-sensitive liabilities to replace decreased balances in demand deposits and savings accounts.

Question 32

Because the repricing model ignores the market value effect of changing interest rates,the repricing gap is an incomplete measure of the true interest rate risk exposure of an FI.

Question 33

Defining buckets of time over a range of maturities assures the capture of all relevant information necessary to accurately assess the interest rate risk exposure of an FI.

Question 34

The market value of a fixed-rate liability will decrease as interest rates rise,just as the market value of a fixed-rate asset will decrease as interest rates rise.

Question 35

If the average maturity of assets is 4 years and the average maturity of liabilities is 4 years,then the FI has no interest rate risk exposure.

Question 36

The maturity of a portfolio of assets or liabilities is a weighted average of the maturities of the assets or liabilities that comprise that portfolio.

Question 37

The change in economic value of a fixed-rate liability for a decrease in interest rates is considered to be good news.

Question 38

In general,the interest rate spread (spread effect)between rate-sensitive assets and rate sensitive liabilities is positively related to the change in net interest income.

Question 39

The gap ratio is useful because it indicates the scale of the interest rate exposure by dividing the gap by the asset size of the institution.

Question 40

Retail passbook savings accounts are included as part of rate-sensitive liabilities because the rates on these accounts rarely change.

Question 41

Because of its simplicity,smaller depository institutions still use this model as their primary measure of interest rate risk.

A)The repricing model.
B)The maturity model.
C)The duration model.
D)The convexity model.

Question 42

The maturity gap for a bank is the weighted average maturity of the assets minus the weighted average maturity of the liabilities.

Question 43

The spread effect demonstrates that,regardless of the direction of a change in market interest rates,a positive relation exists between the changes in spread and changes in net interest income.

Question 44

The repricing model incorporates cash flow effects of off-balance sheet activities of DIs.

Question 45

If interest rates decrease 50 basis points for an FI that has a gap of +$5 million,the expected change in net interest income is

A)+$2,500.
B)+$25,000.
C)+$250,000.
D)-$250,000.
E)-$25,000.

Question 46

A positive gap implies that an increase in interest rates will cause _______ in net interest income.

A)no change
B)a decrease
C)an increase
D)an unpredictable change

Question 47

If interest rates increase 75 basis points for an FI that has a gap of -$15 million,the expected change in net interest income is

A)-$112,500.
B)+$112,500.
C)+$1,125,0000.
D)-$1,125,0000.

Question 48

The repricing model ignores market value effects of interest rate changes.

Question 49

Overaggregation within maturity buckets using the repricing model causes inaccurate accounting of asset and liability cash flows and,ultimately,net interest income.

Question 50

The gap ratio expresses the reprice gap for a given time period as a percentage of

A)equity.
B)total liabilities.
C)current liabilities.
D)total assets.

Question 51

An FI finances a $250,000 2-year fixed-rate loan with a $200,000 1-year fixed-rate CD.Use the repricing model to determine (a)the FI's repricing (or funding)gap using a 1-year maturity bucket,and (b)the impact of a 100 basis point (0.01)decrease in interest rates on the FI's annual net interest income?

A)$0;$0.
B)-$200,000;+$2,000.
C)-$200,000;-$2,000.
D)+$50,000;-$500.

Question 52

If interest rates decrease 40 basis points (0.40 percent)for an FI that has a cumulative gap of -$25 million,the expected change in net interest income is

A)+$100,000.
B)-$100,000.
C)-$625,000.
D)-$250,000.

Question 53

When repricing all interest-sensitive assets and all interest-sensitive liabilities in a balance sheet,the cumulative gap will be

A)zero.
B)one.
C)greater than one.
D)a negative value.

Question 54

Which of the following observations about the repricing model is correct?

A)Its information value is limited.
B)It accounts for the problem of rate-insensitive asset and liability runoffs and prepayments.
C)It accommodates cash flows from off-balance-sheet activities.
D)It helps to determine an FI's profit exposure to interest rate changes.

Question 55

An FI's net interest income reflects

A)its asset-liability structure.
B)rates of interest when the assets and liabilities were put on the books.
C)the riskiness of its loans and investments.
D)the cost of its deposit and non-deposit sources of funds.
E)All of the options.

Question 56

The repricing gap approach calculates the gaps in each maturity bucket by subtracting the

A)current assets from the current liabilities.
B)long term liabilities from the fixed assets.
C)rate-sensitive assets from the total assets.
D)rate-sensitive liabilities from the rate-sensitive assets.

Question 57

The net worth of a bank is the difference between the

A)value of retained earnings and the provision for loan losses.
B)market value of assets and the market value of liabilities.
C)book value of assets and book value of liabilities.
D)rate-sensitive assets and rate-sensitive liabilities.

Question 58

What is spread effect?

A)Periodic cash flow of interest and principal amortization payments on long-term assets that can be reinvested at market rates.
B)The effect that a change in the spread between rates on RSAs and RSLs has on net interest income as interest rates change.
C)The effect of mismatch of asset and liabilities within a maturity bucket.
D)The premium paid to compensate for the future uncertainty in a security's value.

Question 59

If the average maturity of assets is 5 years and the average maturity of liabilities is 7 years,then the FI has no interest rate risk exposure.

Question 60

The repricing gap does not accurately measure FI interest rate risk exposure because

A)FIs cannot accurately predict the magnitude change in future interest rates.
B)FIs cannot accurately predict the direction of change in future interest rates.
C)accounting systems are not accurate enough to allow the calculation of precise gap measures.
D)it does not recognize timing differences in cash flows within the same maturity grouping.

Question 61

Which of the following statements is true?

A)An increase in interest rates leads to an increase in the market value of financial securities.
B)Value of longer term securities decreases at a diminishing rate for increases in interest rates.
C)Value of longer term securities increases at an increasing rate for any decline in interest rates.
D)The shorter the maturity of a fixed income asset or liability,the greater the fall in market value for any given interest rate increase.

Question 62

Which of the following relationships does NOT hold in the pricing of fixed-rate assets given changes in market rate?

A)A decrease in interest rates generally leads to an increase in the value of assets.
B)Longer maturity assets have greater changes in price than shorter maturity assets for given changes in interest rates.
C)The absolute change in price per unit of maturity time for given changes in interest rates decreases over time,although the relative changes actually increase.
D)For a given percentage decrease in interest rates,assets will increase in price more than they will decrease in price for the same,but opposite increase in rates.

Question 63

The average maturity of the liabilities of an FI's balance sheet is equal to

A)the weighted-average of the liabilities where the weights are determined relative to the total liabilities and equity of the FI.
B)the weighted-average of the liabilities where the weights are determined relative to the total liabilities of the FI.
C)the weighted-average of the liabilities where the weights are determined relative to the total assets of the FI.
D)the weighted-average of the liabilities where the weights are determined using market values of liabilities.

Question 64

Can an FI immunize itself against interest rate risk exposure even though its maturity gap is not zero?

A)Yes,because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities.
B)No,because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities.
C)Yes,because the maturity model does not consider the timing of cash flows.
D)No,because the timing of cash flows is relevant to immunization against interest rate risk exposure.

Question 65

A method of measuring the interest rate or gap exposure of an FI is

A)the duration model.
B)the maturity model.
C)the repricing model.
D)the funding gap model.
E)All of the options.

Question 66

If the chosen maturity buckets have a time period that is too long,the repricing model may produce inaccurate results because

A)as the time to maturity increases,the price volatility increases.
B)price changes will be overestimated.
C)there may be large differentials in the time to repricing for different securities within each maturity bucket.
D)the FI will be unable to accurately measure the quantity of rate-sensitive assets.

Question 67

The repricing model is based on an accounting world that reports asset and liability values at

A)their market value.
B)their book value.
C)their historic values or costs.
D)their current value or cost.
E)their book value and their historic values or costs.

Question 68

The balance sheet of XYZ Bank appears below. All figures in millions of U.S. dollars.


-Total one-year rate-sensitive assets is

A)$540 million.
B)$580 million.
C)$555 million.
D)$415 million.

Question 69

A bank that finances long-term fixed-rate mortgages with short-term deposits is exposed to

A)increases in net interest income and decreases in the market value of equity when interest rates fall.
B)decreases in net interest income and decreases in the market value of equity when interest rates fall.
C)decreases in net interest income and increases in the market value of equity when interest rates increase.
D)increases in net interest income and increases in the market value of equity when interest rates increase.
E)decreases in net interest income and decreases in the market value of equity when interest rates increase.

Question 70

If an FI's repricing gap is less than zero,then

A)it is deficient in its required reserves.
B)it is deficient in its capital ratio requirement.
C)its liability costs are more sensitive to changing market interest rates than are its asset yields.
D)its liability costs are less sensitive to changing market interest rates than are its asset yields.

Question 71

Which of the following is a weakness of the repricing model to measure interest rate risk?

A)Potential for overaggregation of assets and liabilities within each maturity bucket.
B)It ignores how changes in interest rates affect the market value of assets and liabilities.
C)It ignores the reinvestment of loan interest and principal payments that are reinvested at current market rates.
D)It fails to recognize off-balance-sheet activities that may be rate-sensitive.
E)All of the options.

Question 72

Of the following institutions,which will be subject to refinancing risk within a particular reprice bucket?

A)the market value of rate-sensitive liabilities is less than the market value of equity.
B)the book value of rate-sensitive assets is greater than the book value of rate-sensitive liabilities.
C)the market value of rate-sensitive assets is less than the market value of rate-sensitive liabilities.
D)the book value of rate-sensitive liabilities is greater than the book value of rate-sensitive assets.

Question 73

The balance sheet of XYZ Bank appears below. All figures in millions of U.S. dollars.


-Total one-year rate-sensitive liabilities is

A)$540 million.
B)$580 million.
C)$555 million.
D)$415 million.

Question 74

Of the following institutions,which will be subject to reinvestment risk within a particular reprice bucket?

A)the market value of rate-sensitive liabilities is less than the market value of equity.
B)the book value of rate sensitive assets is greater than the book value of rate-sensitive liabilities.
C)the market value of rate-sensitive assets is less than the market value of rate-sensitive liabilities.
D)the book value of rate-sensitive liabilities is greater than the book value of rate-sensitive assets.

Question 75

The repricing model measures the impact of unanticipated changes in interest rates on

A)the market value of equity.
B)net interest income.
C)both market value of equity and net interest income.
D)the FI's capital position.

Question 76

Which of the following indicates a positive gap according to the repricing model?

A)the book value of rate-sensitive liabilities is less than the book value of rate-sensitive assets.
B)the book value of rate-sensitive assets is less than the book value of rate-sensitive liabilities.
C)the market value of rate-sensitive assets is less than the market value of rate-sensitive liabilities.
D)the book value of rate-sensitive liabilities is greater than the book value of rate-sensitive assets.

Question 77

Which of the following describes the condition known as runoff in the repricing model approach to measuring interest rate risk of an FI?

A)Periodic cash flow of interest and principal amortization payments on long-term assets that can be reinvested at market rates.
B)The effect that a change in the spread between rates on RSAs and RSLs has on net interest income as interest rates change.
C)Mismatch of asset and liabilities within a maturity bucket.
D)The relations between changes in interest rates and changes in net interest income.

Question 78

An interest rate increase

A)benefits the FI by increasing the market value of the FI's liabilities.
B)harms the FI by increasing the market value of the FI's liabilities.
C)harms the FI by decreasing the market value of the FI's liabilities.
D)benefits the FI by decreasing the market value of the FI's liabilities.

Question 79

The repricing model ignores information regarding the distribution of assets and liabilities within maturity buckets.This limitation of the model refers to

A)market value effect.
B)overaggregation.
C)runoffs and pre-payments.
D)OBS activities.

Question 80

An increase in interest rates

A)increases the market value of the FI's financial assets and liabilities.
B)decreases the market value of the FI's financial assets and liabilities.
C)decreases the book value of the FI's financial assets and liabilities.
D)increases the book value of the FI's financial assets and liabilities.