Question 1

In an interest rate swap, a bank whose liabilities are ____ rate sensitive than its assets can swap payments with a ____ interest rate in exchange for payments with a ____ interest rate.

Accepted Answer

In an interest rate swap, a bank whose liabilities are more rate sensitive than its assets would want to swap payments with a fixed interest rate in exchange for payments with a variable interest rate. This helps the bank manage the interest rate risk by aligning the sensitivity of its assets and liabilities more closely.

Question 2

In a sensitivity  analysis using a bank's stock return, an interest rate proxy, and market returns, a ____ coefficient for the interest rate variable suggests that the bank's performance is ____ affected by ____ interest rates.

Accepted Answer

A negative coefficient for the interest rate variable suggests that the bank's performance is adversely affected by rising interest rates, as higher rates typically increase the cost of borrowing and can reduce profitability.

Question 3

Crazer Bank has a profit after taxes of $2 million, total assets of $100 million, and shareholders' equity of $10 million. Crazer's return on equity (ROE)is ____ percent.

Accepted Answer

Return on Equity (ROE) is calculated as (Profit after Taxes / Shareholders' Equity) * 100. For Crazer Bank, ROE = ($2 million / $10 million) * 100 = 20%.

Question 4

During a period of ____ interest rates, a bank's net interest margin will likely ____ if its liabilities are more rate sensitive than its assets.

Accepted Answer

The answer of During a period of ____ interest rates,...

Question 5

Which of the following is a method that a bank can use to reduce its credit risk?

Accepted Answer

Diversifying its loans across different industries helps a bank spread its risk. If one industry suffers, the losses can be offset by gains in others, reducing overall credit risk.

Question 6

If a bank expects interest rates to consistently ____ over time, it will consider allocating most of its funds to rate-____ assets.

Accepted Answer

If a bank expects interest rates to increase, it will allocate funds to rate-sensitive assets, which will yield higher returns as rates rise.

Question 7

A(n)____________ is an agreement for a fee to receive payments when the interest rate of a particular security rises above a specified level by a specified date.

Accepted Answer

An interest rate cap is a type of derivative contract that provides the purchaser with payments when the interest rate exceeds a certain level, known as the cap rate, by a specified date. This financial instrument is used to hedge against rising interest rates.

Question 8

The Financial Reform Act of 2010 provides that if a bank suffers large losses because it took excessive risk, the Federal Reserve will appoint a new board of directors for the bank.

Accepted Answer

The Financial Reform Act of 2010, also known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, does not specifically provide for the Federal Reserve to appoint a new board of directors for a bank if it suffers large losses due to excessive risk. The Act focuses on increasing regulation and oversight of financial institutions to prevent excessive risk-taking and to protect consumers, but the appointment of a new board of directors is not a direct provision of the Act.

Question 9

If interest rates ____, banks with ____ duration gaps will be ____ affected.

Accepted Answer

Banks with positive duration gaps have assets that mature more slowly than their liabilities. If interest rates rise, the value of their longer-term assets decreases more than their liabilities, leading to adverse effects.

Question 10

When determining the appropriate interest rate to charge on a loan, a bank uses the Federal Reserve's primary credit rate as a benchmark and adds a premium to this rate for less creditworthy customers.

Accepted Answer

The answer of When determining the appropriate interest rate to...

Question 11

If a bank has a ____ duration gap, its average asset duration is probably ____ than its liability duration.

Accepted Answer

A positive duration gap occurs when a bank's average asset duration is longer than its liability duration, meaning the bank's assets are more sensitive to interest rate changes than its liabilities.

Question 12

An effective way to align bank managers' interests with shareholders' goal of higher returns is to compensate the managers with fixed salaries without a bonus.

Accepted Answer

Compensating bank managers with fixed salaries without a bonus may not effectively align their interests with shareholders' goals of higher returns. Variable compensation, such as bonuses tied to performance metrics, is more likely to motivate managers to work towards increasing shareholder value.

Question 13

Which of the following is NOT a function of a bank's board of directors?

Accepted Answer

The primary functions of a bank's board of directors include overseeing acquisitions, determining compensation systems for executives, and overseeing policies for changing the bank's capital structure. Pursuing a proxy contest to change the bank's dividend policy is not typically a function of the board of directors; such activities are usually initiated by shareholders seeking to influence management decisions.

Question 14

Because riskier assets offer ____ returns, a bank's strategy to increase its return will typically entail a(n)____ in the overall credit risk of its asset portfolio.

Accepted Answer

Riskier assets offer higher returns, so a bank aiming to increase its return would likely increase the overall credit risk of its asset portfolio.

Question 15

____ is NOT a method used to assess interest rate risk.

Accepted Answer

Ratio analysis is not specifically a method used to assess interest rate risk. It is more broadly used in financial analysis to evaluate the financial health of a company or entity, focusing on metrics such as liquidity, profitability, and solvency ratios, rather than directly assessing the impact of interest rate changes on an entity's financial position.

Quiz 19: Bank Management

In an interest rate swap, a bank whose liabilities are rate sensitive than its assets can swap payments with a interest rate in exchange for payments with a interest rate.

In a sensitivity analysis using a bank's stock return, an interest rate proxy, and market returns, a coefficient for the interest rate variable suggests that the bank's performance is affected by interest rates.

Crazer Bank has a profit after taxes of $2 million, total assets of $100 million, and shareholders' equity of $10 million. Crazer's return on equity (ROE) is ____ percent.

During a period of interest rates, a bank's net interest margin will likely if its liabilities are more rate sensitive than its assets.

Which of the following is a method that a bank can use to reduce its credit risk?

If a bank expects interest rates to consistently over time, it will consider allocating most of its funds to rate- assets.

A(n) ____________ is an agreement for a fee to receive payments when the interest rate of a particular security rises above a specified level by a specified date.

The Financial Reform Act of 2010 provides that if a bank suffers large losses because it took excessive risk, the Federal Reserve will appoint a new board of directors for the bank.

If interest rates , banks with duration gaps will be affected.

When determining the appropriate interest rate to charge on a loan, a bank uses the Federal Reserve's primary credit rate as a benchmark and adds a premium to this rate for less creditworthy customers.

If a bank has a duration gap, its average asset duration is probably than its liability duration.

An effective way to align bank managers' interests with shareholders' goal of higher returns is to compensate the managers with fixed salaries without a bonus.

Which of the following is NOT a function of a bank's board of directors?

Because riskier assets offer returns, a bank's strategy to increase its return will typically entail a(n) in the overall credit risk of its asset portfolio.

____ is NOT a method used to assess interest rate risk.

Quiz 19: Bank Management

In an interest rate swap, a bank whose liabilities are ____ rate sensitive than its assets can swap payments with a ____ interest rate in exchange for payments with a ____ interest rate.

In a sensitivity analysis using a bank's stock return, an interest rate proxy, and market returns, a ____ coefficient for the interest rate variable suggests that the bank's performance is ____ affected by ____ interest rates.

Crazer Bank has a profit after taxes of $2 million, total assets of $100 million, and shareholders' equity of $10 million. Crazer's return on equity (ROE) is ____ percent.

During a period of ____ interest rates, a bank's net interest margin will likely ____ if its liabilities are more rate sensitive than its assets.

Which of the following is a method that a bank can use to reduce its credit risk?

If a bank expects interest rates to consistently ____ over time, it will consider allocating most of its funds to rate-____ assets.

A(n) ____________ is an agreement for a fee to receive payments when the interest rate of a particular security rises above a specified level by a specified date.

The Financial Reform Act of 2010 provides that if a bank suffers large losses because it took excessive risk, the Federal Reserve will appoint a new board of directors for the bank.

If interest rates ____, banks with ____ duration gaps will be ____ affected.

When determining the appropriate interest rate to charge on a loan, a bank uses the Federal Reserve's primary credit rate as a benchmark and adds a premium to this rate for less creditworthy customers.

If a bank has a ____ duration gap, its average asset duration is probably ____ than its liability duration.

An effective way to align bank managers' interests with shareholders' goal of higher returns is to compensate the managers with fixed salaries without a bonus.

Which of the following is NOT a function of a bank's board of directors?

Because riskier assets offer ____ returns, a bank's strategy to increase its return will typically entail a(n) ____ in the overall credit risk of its asset portfolio.

____ is NOT a method used to assess interest rate risk.

In an interest rate swap, a bank whose liabilities are rate sensitive than its assets can swap payments with a interest rate in exchange for payments with a interest rate.

In a sensitivity analysis using a bank's stock return, an interest rate proxy, and market returns, a coefficient for the interest rate variable suggests that the bank's performance is affected by interest rates.

During a period of interest rates, a bank's net interest margin will likely if its liabilities are more rate sensitive than its assets.

If a bank expects interest rates to consistently over time, it will consider allocating most of its funds to rate- assets.

If interest rates , banks with duration gaps will be affected.

If a bank has a duration gap, its average asset duration is probably than its liability duration.

Because riskier assets offer returns, a bank's strategy to increase its return will typically entail a(n) in the overall credit risk of its asset portfolio.