Deck 8: Interest Rate Risk I

Question 1

8-13 One reason to include demand deposits when estimating a bank's repricing gap is because rising interest rates could lead to high withdrawals.

Answer 1

True

Question 2

8-12 A bank with a negative repricing (or funding)gap faces refinancing risk.

Answer 2

True

Question 3

8-1 The economic insolvency of many thrift institutions during the 1980s was due,at least in part,to unexpected increases in interest rates.

Answer 3

True

Question 4

8-4 The maturity gap model estimates the difference between interest earned and interest during a given period of time.

Question 5

8-10 When a bank's repricing gap is positive,net interest income is positively related to changes in interest rates.

Question 6

8-5 The Bank for International Settlements (BIS)strongly urges regulators to use the repricing model to evaluate a bank's interest rate risk.

Question 7

8-2 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.

Question 8

8-9 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 9

8-19 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 10

8-7 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.

Question 11

8-16 Runoff in demand deposits in a repricing model is typically lower during periods of falling interest rates.

Question 12

8-18 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 13

8-8 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 14

8-15 Retail passbook savings accounts should not be considered as part of rate sensitive liabilities because the rates on these accounts rarely change.

Question 15

8-6 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 16

8-17 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 17

8-3 The repricing gap model is a book value accounting based model.

Question 18

8-14 One reason to exclude demand deposits when estimating a bank's repricing gap is because,by regulation,explicit interest cannot be paid on these deposits.

Question 19

8-11 A bank with a negative repricing (or funding)gap faces reinvestment risk.

Question 20

8-20 Defining buckets of time over wider intervals creates greater accuracy in the use of the repricing model because fewer calculations are required.

Question 21

8-36 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.
E)current liabilities from tangible assets.

Question 22

8-24 For a given change in interest rates,fixed-rate assets with long-term maturities will have greater changes in price than assets with shorter maturities.

Question 23

8-30 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 24

8-29 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 25

8-39 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.
E)equity is omitted.

Question 26

8-22 The runoff component of long-term mortgages should be considered in the time buckets in which the maturities actually occur.

Question 27

8-25 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 28

8-23 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 29

8-37 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 offbalance-sheet activities.
D)It points out an FI's profit exposure to interest rate changes.
E)It considers market value effects of interest rate changes.

Question 30

8-40 An FI's net interest income reflects

A)its asset?liability structure.
B)market rates of interest.
C)the riskiness of its loans and investments.
D)the cost of its deposit and non?deposit sources of funds.
E)All of the above.

Question 31

8-21 If the spread between rate sensitive assets and rate sensitive liabilities increases for a bank,future changes in interest rates will lead to an increase in net interest income.

Question 32

8-34 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.
E)None of the above.

Question 33

8-28 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 34

8-26 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 35

8-32 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 36

8-33 The maturity gap for a bank is the average maturity of the assets minus the average maturity of the liabilities.

Question 37

8-35 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.
E)The option pricing model.

Question 38

8-31 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 39

8-38 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.
E)infinity.

Question 40

8-27 The change in economic value of a fixed-rate liability for a decrease in interest rates is considered to be good news.

Question 41

8-51 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.
E)the FI will be unable to accurately measure the quantity of rate sensitive liabilities.

Question 42

8-43 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.
E)-$150,000.

Question 43

8-45 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.
E)?$200,000; ?$1,000.

Question 44

8-54 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 above.

Question 45

8-56 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 above.

Question 46

8-62 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.
E)None of the above.

Question 47

8-52 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.
E)has no impact on the market value of the FI's financial assets and liabilities.

Question 48

8-53 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.
E)Those deposits that act as an FI's long-term sources of funds.

Question 49

8-44 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)-$625,000.
E)+$250,000.

Question 50

8-48 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.
E)the duration of the FI's liabilities exceeds the duration of FI's assets.

Question 51

8-55 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)All of the above.
E)Answers B and C only.

Question 52

8-42 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 53

8-47 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.
E)The value of an FI to its owners.

Question 54

8-58 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.
E)benefits the FI by decreasing the market value of the FI's assets.

Question 55

8-50 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.
E)the prices of assets and liabilities.

Question 56

8-49 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 57

8-59 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.
E)The longer the maturity of a fixed income asset or liability,the greater the fall in market value for any given interest rate decrease.

Question 58

8-41 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
E)Either A or B.

Question 59

8-46 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.
E)current assets.

Question 60

8-57 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.
E)the spread effect.

Question 61

8-80 What is the repricing gap if a 0 to 3 month maturity gap is used? Ignore runoffs.

A)$60 million.
B)$40 million.
C)-$80 million.
D)-$120 million.
E)-$180 million.

Question 62

8-64 Total one-year rate-sensitive liabilities is

A)$540 million.
B)$580 million.
C)$555 million.
D)$415 million.
E)$720 million.

Question 63

8-68 Use the repricing model to determine the funding gap for a maturity bucket of 30 days.

A)?$425 million.
B)?$95 million.
C)?$10 million.
D)?$475 million.
E)+$150 million.

Question 64

8-63 Total one-year rate-sensitive assets is

A)$540 million.
B)$580 million.
C)$555 million.
D)$415 million.
E)$720 million.

Question 65

8-78 What is the repricing gap over the 1-year maturity bucket?

A)+$100 million.
B)-$500 million.
C)?$100 million.
D)+$500 million.
E)?$900 million.

Question 66

8-69 Use the repricing model to determine the funding gap for a maturity bucket of 91 days.

A)?$60 million.
B)?$150 million.
C)$0.
D)?$250 million.
E)?$300 million.

Question 67

8-76 What will be the FI's net interest income at year-end if interest rates do not change?

A)$3.20 million.
B)$5.39 million.
C)$4.04 million.
D)$1.89 million.
E)$1.35 million.

Question 68

8-74 What does Gotbucks Bank's 91-day gap positions reveal about the bank management's interest rate forecasts and the bank's interest rate risk exposure?

A)The bank is exposed to interest rate decreases and positioned to gain when interest rates decline.
B)The bank is exposed to interest rate increases and positioned to gain when interest rates decline.
C)The bank is exposed to interest rate increases and positioned to gain when interest rates increase.
D)The bank is exposed to interest rate decreases and positioned to gain when interest rates increase.
E)Insufficient information.

Question 69

8-67 Suppose that interest rates rise by 2 percent on both RSAs and RSLs.The expected annual change in net interest income of the bank is

A)-$300,000.
B)$500,000.
C)-$2,800,000.
D)-$3,000,000.
E)$300,000.

Question 70

8-73 How will a decrease of 25 basis points in all interest rates affect Gotbuck's net interest income over a planning period of 91 days?

A)+$0.1875 million.
B)+$0.1250 million.
C)-$0.1375 million.
D)+$0.0625 million.
E)0

Question 71

8-72 Calculate the funding gap for Gotbucks Bank using (a)a 30 day maturity period and (b)a 91 day maturity period? (Note: Each maturity period is cumulative.)

A)?$25 and +$80.
B)?$50 and ?$75.
C)?$75 and +$5.
D)+$55 and ?$40.
E)0 and 0.

Question 72

8-65 The cumulative one-year repricing gap (CGAP)for the bank is

A)$25 million.
B)$-140 million.
C)$15 million.
D)$-150 million.
E)$-15 million.

Question 73

8-66 The gap ratio is

A).015.
B)-.015.
C).025.
D)-.144.
E).154.

Question 74

8-81 What is the repricing gap if a 3-year maturity gap is used? Ignore runoffs.

A)$21 million.
B)$44 million.
C)-$80 million.
D)-$60 million.
E)-$120 million.

Question 75

8-70 Use the repricing model to determine the funding gap for a maturity bucket of 365 days.

A)+$15 million.
B)?$20 million.
C)?$350 million.
D)?$450 million.
E)?$290 million.

Question 76

8-77 Suppose short-term interest rates increase by 1 percent.Calculate the change in net interest income after the interest rate increase.

A)$50,000.
B)$18,900.
C)$40,400.
D)$53,900.
E)$32,000.

Question 77

8-71 What is the impact over the next 30 days on the dealer's net interest income if all interest rates rise by 50 basis points?

A)Net interest income will decrease by $50,000.
B)Net interest income will decrease by $2.125 million.
C)Net interest income will decrease by $475,000.
D)Net interest income will decrease by $2.375 million.
E)Net interest income will increase by $750,000.

Question 78

8-75 What is the repricing gap for the FI?

A)$0.
B)$5,000,000.
C)$9,800,000.
D)-$5,000,000.
E)?$8,000,000.

Question 79

8-82 What is the repricing gap if a 1-year maturity gap is used if runoffs are also considered?

A)-22 million.
B)+$22 million.
C)+$53 million.
D)-$40 million.
E)-$70 million.

Question 80

8-79 If all interest rates decrease by 15 basis points,what is the expected impact on the FI's net interest income? (Hint: Use the repricing model to answer this question.)

A)+$150,000.
B)?$150,000.
C)-$750,000.
D)+$750,000.
E)No change.