Question 1

Interest-sensitive gap and weighted interest-sensitive gap will always reach the same conclusion as to whether a bank is asset sensitive or liability sensitive.

Accepted Answer

Interest-sensitive gap and weighted interest-sensitive gap may produce different results in determining whether a bank is asset sensitive or liability sensitive. Weighted interest-sensitive gap takes into account the size of the interest rate-sensitive assets and liabilities, while interest-sensitive gap only considers the absolute amounts. Therefore, a bank may have a positive interest-sensitive gap but a negative weighted interest-sensitive gap, or vice versa.

Question 2

Interest-sensitive gap techniques do not consider the impact of changing interest rates on stockholders' equity.

Accepted Answer

Interest-sensitive gap techniques only focus on the impact of changing interest rates on assets and liabilities, such as net interest income and market value of equity. They do not take into account the impact on the stockholders' equity directly.

Question 3

Banks with a positive cumulative interest-sensitive gap will benefit if interest rates rise,but lose income if interest rates decline.

Accepted Answer

A positive cumulative interest-sensitive gap means that banks have more interest-earning assets than interest-bearing liabilities. If interest rates rise, the interest earned on these assets will increase, leading to higher profits for the bank. However, if interest rates decline, the interest earned on these assets will decrease, leading to lower profits for the bank.

Question 4

Under the so-called liability management view in banking,the key control lever banks possess over the volume and mix of their liabilities is price.

Accepted Answer

The liability management view in banking suggests that banks can control the volume and mix of their liabilities by adjusting their prices. This reflects the idea that customers may be more or less willing to deposit money or borrow funds depending on the interest rates and fees offered by banks. By adjusting the prices of their products and services, banks can attract or repel different types of customers and manage their overall level of risk and profitability. Thus, price is a key control lever in the context of liability management in banking.

Question 5

Banks with a negative cumulative interest-sensitive gap will benefit if interest rates rise,but lose income if interest rates decline.

Accepted Answer

A negative cumulative interest-sensitive gap means that a bank's interest-sensitive liabilities exceed its interest-sensitive assets. Therefore, if interest rates rise, the bank will pay more on its liabilities than it earns on its assets, leading to a loss. Conversely, if interest rates decline, the bank's interest expenses decrease more than its interest income, potentially leading to a gain.

Question 6

A financial institution is liability sensitive,if its interest-sensitive liabilities are less than its interest-sensitive assets.

Accepted Answer

A financial institution is considered liability sensitive if its interest-sensitive liabilities exceed its interest-sensitive assets, meaning it is more affected by changes in interest rates on the liabilities side.

Question 7

A liability-sensitive bank will experience an increase in its net interest margin if interest rates rise.

Accepted Answer

A liability-sensitive bank has more liabilities (e.g., deposits) that reprice or mature in the short term compared to assets (e.g., loans). Therefore, if interest rates rise, the cost of its liabilities will increase faster than the income from its assets, potentially decreasing its net interest margin.

Question 8

The ultimate goal of liability management is to gain control over a financial institution's sources of funds.

Accepted Answer

The ultimate goal of liability management is to gain control over a financial institution's sources of funds, with the aim of improving profitability, managing risk, and ensuring liquidity. By managing liabilities, financial institutions can optimize their funding mix, reduce funding costs, and mitigate interest rate sensitivity or liquidity risks. Therefore, liability management is a crucial function in the management of banks and other financial institutions.

Question 9

If interest rates fall when a bank is in an asset-sensitive position,its net interest margin will rise.

Accepted Answer

When a bank is in an asset-sensitive position, it means that its assets (like loans) will reprice or adjust to changes in interest rates faster than its liabilities (like deposits). If interest rates fall, the interest income on its assets will decrease more quickly than the interest expense on its liabilities, leading to a decrease in the net interest margin, not an increase.

Question 10

Weighted interest-sensitive gap is less accurate than interest-sensitive gap in determining the effect of changes in interest rates on net interest margin.

Accepted Answer

Weighted interest-sensitive gap takes into account not only the timing but also the magnitude of cash flows, making it a more accurate measure for determining the effect of changes in interest rates on net interest margin than the simple interest-sensitive gap.

Question 11

Repriceable liabilities include long-term savings and retirement accounts.

Accepted Answer

Repriceable liabilities typically refer to short-term financial obligations that can be adjusted or repriced in response to changes in interest rates, unlike long-term savings and retirement accounts which are generally fixed.

Question 12

If a bank's interest-sensitive assets and liabilities are equal,then its interest revenues from assets and funding costs from liabilities will change in the same proportion relative to changes in market interest rates.

Accepted Answer

When a bank's interest-sensitive assets and liabilities are equal, this is referred to as balance or “neutral” interest rate risk. In this scenario, if market interest rates increase, the bank's interest revenues from its assets will also increase, but its funding costs from liabilities will increase by a similar proportion, resulting in no net change in the bank's net income. Similarly, if market interest rates decrease, the interest revenues from assets and funding costs from liabilities will both decrease by a similar proportion. Therefore, the bank's net income will remain unchanged.

Question 13

Financial securities that are the same in all other ways may have differences in interest rates that reflect the differences in the ease of selling the security in the secondary market at a favorable price.

Accepted Answer

This statement is true. The ease of selling a security in the secondary market at a favorable price is a factor that can affect its interest rate. A security that is more easily tradable and liquid will generally have a lower interest rate than a less liquid security with the same financial characteristics.

Question 14

Interest-sensitive gap,relative interest-sensitive gap,and the interest-sensitivity ratio will often reach different conclusions as to whether the bank is asset or liability sensitive.

Accepted Answer

The answer of Interest-sensitive gap,relative interest-sensitive gap,and the interest-sensitivity ratio...

Question 15

Asset management strategy in banking assumes that the amount and kinds of deposits and other borrowed funds a bank attracts are determined largely by its management.

Accepted Answer

Asset management strategy in banking relates to the management of a bank's assets, such as loans and investments, to generate profits and manage risks. The amount and kinds of deposits and borrowed funds a bank attracts are influenced by various factors including market conditions, interest rates, and customer preferences. While the bank's management can play a role in attracting deposits and borrowing funds through its marketing and pricing strategies, it cannot fully control the external factors that impact the amount and types of funding it receives.

Question 16

Financial institutions face two major kinds of interest-rate risk.These risks include price risk and reinvestment risk.

Accepted Answer

Financial institutions face both price risk and reinvestment risk as two major types of interest-rate risk. Price risk refers to the risk of a decline in the value of a financial instrument due to changes in interest rates, while reinvestment risk refers to the risk that cash flows from an existing investment will have to be reinvested at a lower rate of interest in the future.

Question 17

Bankers cannot determine the level or trend of market interest rates;instead,they can only react to the level and trend of rates.

Accepted Answer

Bankers do not have control over market interest rates, as they are determined by various economic factors such as inflation, supply and demand, and government policies. Therefore, bankers can only respond to the existing level and trend of rates by setting their own borrowing and lending rates.

Question 18

The yield curve is constructed using corporate bonds with different default risks,so that the bank can determine the risk/return tradeoff for default risk.

Accepted Answer

The yield curve is constructed using government bonds with different maturities, not corporate bonds with different default risks. The yield curve helps determine the risk/return tradeoff for interest rate risk.

Question 19

Under the so-called funds management view,bank management's control over assets must be coordinated with its control over liabilities,so that asset and liability management are internally consistent.

Accepted Answer

The statement is true as per the funds management view, which emphasizes the importance of aligning asset and liability management within a bank to ensure internal consistency in their control and management.

Question 20

Short-term interest rates tend to rise more slowly than long-term interest rates and to fall more slowly when the long-term interest rates in the market are headed down.

Accepted Answer

Short-term interest rates are generally more volatile and can change more quickly than long-term rates, responding more directly to immediate economic conditions and central bank policies.

Quiz 7: Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques