Question 1

The threat that an increase in interest rates will reduce the market value of security holdings.
A) price risk
B) gap
C) interest rate risk
D) reinvestment rate risk.

Accepted Answer

The answer of The threat that an increase in interest...

Question 2

An expected increase in interest rate would indicate a move towards _______________income gap to increase future bank income.
A) neutral
B) negative
C) positive
D) zero

Accepted Answer

An expected increase in interest rate would indicate a move towards a positive income gap to increase future bank income. This is because a positive income gap implies that a bank's interest-sensitive assets exceed its interest-sensitive liabilities, so when interest rates rise, the bank's income from assets increases more than its expenses on liabilities, leading to higher overall income.

Question 3

Liquidity risk can be managed on the liability side by
A) attracting different types of deposits and tapping other sources of borrowing.
B) selling loans or securities.
C) attracting deposits and selling loans.
D) reducing the amount of deposits and borrowings relative to assets.

Accepted Answer

Liquidity risk management on the liability side involves diversifying funding sources, which includes attracting different types of deposits and tapping other sources of borrowing to ensure that there are multiple ways to meet cash flow needs.

Question 4

If a borrower purchased a home for$100,000, put $8,000 down and borrowed the rest from a bank, what is the amount of equity the homeowner has in the house if the house falls in value to $90,000?
A) the borrower has an equity in the property worth $8,000.
B) the borrower has zero equity in the home.
C) the borrower has negative equity in the home equivalent to $2,000.
D) None of the above.

Accepted Answer

The borrower initially had $8,000 in equity from the down payment. However, when the home's value decreased to $90,000, the loan amount ($92,000) exceeded the home's value, creating negative equity of $2,000.

Question 5

Assuming an income gap of $100 million, what will be the change in bank income if there is a 3 percent decrease in interest rates?
A) $3 million
B) -$3 million
C) $30 million
D) Unable to tell with the information provided.

Accepted Answer

The answer of Assuming an income gap of $100 million,...

Question 6

Assuming a gap of $100 million, what will be the change in bank income if there is a 3 percent increase in interest rates?
A) $3 million
B) -$3 million
C) $30 million
D) Unable to tell with the information provided.

Accepted Answer

The change in bank income due to a 3 percent increase in interest rates on a gap of $100 million would be $3 million (3% of $100 million).

Question 7

If interest rate sensitive assets are $50 million and interest rate sensitive liabilities are $40 million, what is the income gap?
A) $90 million
B) $40 million
C) $50 million
D) $10 million

Accepted Answer

The income gap is calculated as the difference between interest rate sensitive assets and interest rate sensitive liabilities, which is $50 million - $40 million = $10 million.

Question 8

If interest rate sensitive assets are $40 million and interest rate sensitive liabilities are $50 million, what is the income gap?
A) -$90 million
B) $40 million
C) -$50 million
D) -$10 million

Accepted Answer

The income gap is calculated by subtracting interest rate sensitive liabilities from interest rate sensitive assets. Therefore, $40 million - $50 million = -$10 million.

Question 9

Interest rates go up. What happens to bank income if the income gap is negative?
A) Bank income increases.
B) Bank income stays the same.
C) Bank Income decreases.
D) It's impossible to tell from the information provided

Accepted Answer

When the income gap is negative, it means that a bank's interest-sensitive liabilities exceed its interest-sensitive assets. Therefore, if interest rates go up, the bank pays more on its liabilities than it earns on its assets, leading to a decrease in bank income.

Question 10

Interest rates go up. What happens to bank income if the income gap is positive?
A) Bank income increases.
B) Bank income stays the same.
C) Bank Income decreases.
D) It's impossible to tell from the information provided.

Accepted Answer

When the income gap is positive, it means that a bank's interest-sensitive assets exceed its interest-sensitive liabilities. Therefore, if interest rates go up, the bank earns more on its assets relative to what it pays on its liabilities, leading to an increase in bank income.

Question 11

Interest rates go down. What happens to bank income if the income gap is positive?
A) Bank income increases.
B) Bank income stays the same.
C) Bank Income decreases.
D) It's impossible to tell from the information provided.

Accepted Answer

When interest rates go down and a bank has a positive income gap, it means that the bank's interest-sensitive assets exceed its interest-sensitive liabilities. Therefore, the bank earns less on its assets relative to what it pays on its liabilities, leading to a decrease in income.

Question 12

Interest rates go down. What happens to bank income if the income gap is negative?
A) Bank income increases.
B) Bank income stays the same.
C) Bank Income decreases.
D) It's impossible to tell from the information provided.

Accepted Answer

When the income gap is negative, it means that the bank has more rate-sensitive liabilities than rate-sensitive assets. Therefore, when interest rates go down, the bank's interest expenses decrease more than its interest income, leading to an increase in bank income.

Question 13

Checkable deposits and savings deposits will be found in the of a typical depository institution.
A) income statement
B) capital category of the balance sheet .
C) asset category in the balance sheet
D) liability category of the balance sheet.

Accepted Answer

Checkable deposits and savings deposits are liabilities for a depository institution because they represent money the institution owes to its depositors.

Question 14

To reduce interest rate, a bank can
A) make adjustable rate loans
B) share the risk through loan participations
C) though selling loans to another bank or firm
D) All of the above

Accepted Answer

The answer of To reduce interest rate, a bank can
A)...

Question 15

Asymmetric information means
A) after the loan is made, the borrower has an incentive to use the proceeds for a more risky venture.
B) the borrower knows more about the risks of a project than the lender.
C) the worst borrowers will pursue the loan most diligently.
D) the benefits of the loan must be greater than the costs.

Accepted Answer

Asymmetric information refers to a situation where one party (in this case, the borrower) has more or better information than the other party (the lender) about an important aspect of a transaction or situation, such as the risks involved in a project.

Question 16

Moral hazard means
A) after the loan is made, the borrower has an incentive to use the proceeds for a more risky venture.
B) the borrower knows more about the risks of a project than the lender.
C) the worst borrowers will pursue the loan most diligently.
D) the benefits of the loan must be greater than the costs.

Accepted Answer

Moral hazard refers to the situation where the behavior of one party to a contract changes to the detriment of another after the contract has been concluded. In the context of a loan, it specifically means that the borrower might engage in riskier behavior (such as investing in a risky venture) because the borrower does not bear the full consequences of that risk, potentially leaving the lender with the downside if things go wrong.

Question 17

Adverse selection means
A) after the loan is made, the borrower has an incentive to use the proceeds for a more risky venture.
B) the borrower knows more about the risks of a project than the lender.
C) the worst borrowers will pursue the loan most diligently.
D) the benefits of the loan must be greater than the costs.

Accepted Answer

The answer of Adverse selection means
A) after the loan is...

Question 18

The gap is the difference between
A) interest sensitive liabilities and interest sensitive assets.
B) interest sensitive assets and interest sensitive liabilities.
C) fixed and variable assets.
D) fixed and variable liabilities.

Accepted Answer

The gap is the difference between interest-sensitive liabilities and interest-sensitive assets.

Question 19

If a borrower purchased a home for $200,000, put $20,000 down, and borrowed the rest from a bank, what happens to the homeowner's equity if the value of house falls to $160,000?
A) the borrower has an equity in the property worth $40,000.
B) the borrower has zero equity in the home.
C) the borrower has negative equity in the home equivalent to $20,000.
D) None of the above.

Accepted Answer

The homeowner's equity decreases as the value of the house falls below the amount borrowed. Initially, the homeowner had $20,000 in equity from the down payment. However, with the house value dropping to $160,000 and the initial loan amount being $180,000 ($200,000 - $20,000 down payment), the homeowner now owes more on the mortgage than the house is worth, creating negative equity of $20,000.

Question 20

A bank has interest sensitive liabilities equal to $100 million and interest sensitive assets equal to $80 million, then the gap is
A) $20 million
B) -$20 million
C) $180 million
D) -$180 million

Accepted Answer

The gap is calculated as interest sensitive assets minus interest sensitive liabilities. In this case, $80 million - $100 million = -$20 million.

Quiz 11: Risk Assessment and Management

The threat that an increase in interest rates will reduce the market value of security holdings.

An expected increase in interest rate would indicate a move towards _______________income gap to increase future bank income.

Liquidity risk can be managed on the liability side by

If a borrower purchased a home for$100,000, put $8,000 down and borrowed the rest from a bank, what is the amount of equity the homeowner has in the house if the house falls in value to $90,000?

Assuming an income gap of $100 million, what will be the change in bank income if there is a 3 percent decrease in interest rates?

Assuming a gap of $100 million, what will be the change in bank income if there is a 3 percent increase in interest rates?

If interest rate sensitive assets are $50 million and interest rate sensitive liabilities are $40 million, what is the income gap?

If interest rate sensitive assets are $40 million and interest rate sensitive liabilities are $50 million, what is the income gap?

Interest rates go up. What happens to bank income if the income gap is negative?

Interest rates go up. What happens to bank income if the income gap is positive?

Interest rates go down. What happens to bank income if the income gap is positive?

Interest rates go down. What happens to bank income if the income gap is negative?

Checkable deposits and savings deposits will be found in the of a typical depository institution.

To reduce interest rate, a bank can

Asymmetric information means

Moral hazard means

Adverse selection means

The gap is the difference between

If a borrower purchased a home for $200,000, put $20,000 down, and borrowed the rest from a bank, what happens to the homeowner's equity if the value of house falls to $160,000?

A bank has interest sensitive liabilities equal to $100 million and interest sensitive assets equal to $80 million, then the gap is