Question 1

The fact that a consumer who purchases a particular basket of goods for $100 today has to pay $105 next year for the same basket of goods is an example of which of the following risks?

Accepted Answer

The increase in the price of goods is caused by inflation, which is a risk for consumers as it reduces the purchasing power of their money over time. Default risk relates to the risk of a borrower being unable to meet their debt obligations, liquidity risk relates to the ease of selling an asset, price risk refers to the risk of an asset's value changing, and maturity risk relates to changes in the value of a bond as it approaches maturity.

Question 2

The net interest margin of a bank is influenced by:

Accepted Answer

All of the options listed can influence the net interest margin of a bank, as they all relate to changes in interest rates, interest income, and interest expenses on assets and liabilities. The net interest margin is the difference between a bank’s interest income and interest expenses, so any changes in these factors will have an impact on this measure. Therefore, all options are correct.

Question 3

The discount rate that equalizes the current market value of a loan or security with the expected stream of future income payments from that loan or security is known as:

Accepted Answer

The discount rate that equalizes the current market value of a loan or security with the expected stream of future income payments is known as yield to maturity. This reflects the total return an investor can expect to earn from holding the security until maturity, taking into account its current market price, coupon rate, and the time remaining until maturity. Options A, C, and D are not accurate definitions of the concept.

Question 4

If a bank has a negative interest-sensitive gap,one of the possible management responses would be to:

Accepted Answer

The answer of If a bank has a negative interest-sensitive...

Question 5

A bank has Federal funds totaling $25 million with an interest-rate sensitivity weight of 1.0.This bank also has loans of $105 million and investments of $65 million with interest rate sensitivity weights of 1.40 and 1.15 respectively.It also has $135 million in interest-bearing deposits with an interest rate sensitivity weight of 0.90 and other money market borrowings of $75 million with an interest rate sensitivity weight of 1.0.What is the weighted interest-sensitive gap for this bank?

Accepted Answer

The weighted interest-sensitive gap is calculated as follows:(Federal funds * Interest-rate sensitivity weight) + (Loans * Interest-rate sensitivity weight) + (Investments * Interest-rate sensitivity weight) - (Interest-bearing deposits * Interest-rate sensitivity weight) - (Other money market borrowings * Interest-rate sensitivity weight)= ($25 million * 1.0) + ($105 million * 1.40) + ($65 million * 1.15) - ($135 million * 0.90) - ($75 million * 1.0)= $25 million + $147 million + $74.75 million - $121.5 million - $75 million= $50.25 million

Question 6

A bank has Federal Funds totaling $25 million with an interest-rate sensitivity weight of 1.0.This bank also has loans of $105 million and investments of $65 million with interest rate sensitivity weights of 1.40 and 1.15 respectively.It also has $135 million in interest-bearing deposits with an interest rate sensitivity weight of 0.90 and other money market borrowings of $75 million with an interest rate sensitivity weight of 1.0.What is the dollar interest-sensitive gap for this bank?

Accepted Answer

The answer of A bank has Federal Funds totaling $25...

Question 7

As per the __________________ strategy,financial-service managers set interest-sensitive gap as close to zero as possible to reduce the expected volatility of net interest income.

Accepted Answer

Defensive GAP management involves setting the interest-sensitive gap as close to zero as possible to reduce the volatility of net interest income. This strategy is recommended for financial institutions that are risk-averse and prefer stability over high returns. Aggressive GAP management, on the other hand, involves taking a larger interest rate risk position to increase the potential for higher returns. Cumulative GAP management involves monitoring the cumulative effect of interest rate changes on net interest income over time, while weighted GAP management involves assigning different weights to different interest-sensitive assets and liabilities to manage interest rate risk. Asset-sensitive GAP management involves having an interest-sensitive gap that is positive, which means that an increase in interest rates would result in an increase in net interest income.

Question 8

The Third National Bank of Edmond reports a net interest margin of 5.83 percent.It has total interest revenues of $275 million and total interest expenses of $210 million.What will be the bank's earning assets total?

Accepted Answer

The answer of The Third National Bank of Edmond reports...

Question 9

A treasury bill currently sells for $9,845,has a face value of $10,000 and has 46 days to maturity.What is the bank discount rate on this security?

Accepted Answer

The answer of A treasury bill currently sells for $9,845,has...

Question 10

A treasury bill currently selling for $9,845,has a face value of $10,000 and has 46 days to maturity.What is the yield to maturity equivalent on this security?

Accepted Answer

The yield to maturity on a treasury bill is the annualized rate of return an investor can expect to receive if they hold the bill until maturity. The formula for calculating the yield to maturity is:YTM = (FV - PV) / PV * (360 / D)where:YTM = yield to maturityFV = face value of the billPV = purchase price of the billD = number of days to maturityIn this case, the face value of the bill is $10,000, the purchase price is $9,845, and the number of days to maturity is 46. Plugging these values into the formula, we get:YTM = (10,000 - 9,845) / 9,845 * (360 / 46)YTM = 0.1249 or 12.49%Therefore, the yield to maturity equivalent on this security is 12.49%.

Question 11

A bank whose interest-sensitive assets total $350 million and its interest-sensitive liabilities amount to $175 million has:

Accepted Answer

Gap = interest-sensitive assets - interest-sensitive liabilities
Gap = $350 million - $175 million
Gap = $175 million

Since the interest-sensitive assets are greater than the interest-sensitive liabilities, the bank has an asset-sensitive gap.

Question 12

The interest-rate measure often quoted on short-term loans and money market securities such as U.S.Treasury bills is the

Accepted Answer

The bank discount rate is commonly cited on short-term loans and money market securities like U.S. Treasury bills. It measures the interest rate that the Federal Reserve or other central bank charges to loan money to financial institutions. This interest rate reflects the cost of borrowing money in the short term, and is used as a benchmark for determining other short-term interest rates.

Question 13

A bank has a 1-year $1,000,000 loan outstanding,payable in four equal quarterly installments.What dollar amount of the loan would be considered rate sensitive in the 0-90 day bucket?

Accepted Answer

The $250,000 represents the portion of the loan that is due within the next 90 days, as the loan is repaid in four equal quarterly installments of $250,000 each.

Question 14

A bond has a face value of $1,000 and five years to maturity.This bond has a coupon rate of 13 percent and is selling in the market today for $902.Coupon payments are made annually on this bond.What is the yield to maturity (YTM)for this bond?

Accepted Answer

The yield to maturity (YTM) is the interest rate that makes the present value of the bond's cash flows equal to its current market price. Given the bond's face value, coupon rate, market price, and time to maturity, the YTM is calculated to be approximately 16 percent.

Question 15

The change in a bank's net income that occurs due to changes in interest rates equals the overall change in market interest rates (in percentage points)times ____________.

Accepted Answer

The change in a bank's net income due to changes in interest rates is calculated by multiplying the overall change in market interest rates (in percentage points) by the size of the bank's cumulative gap. The cumulative gap measures the difference between the volumes of interest-sensitive assets and interest-sensitive liabilities over a certain period.

Question 16

The Third National Bank of Edmond reports a net interest margin of 5.83 percent.It has total interest revenues of $275 million and total interest expenses of $210 million.This bank has earnings assets of $1,115.Suppose this bank's interest revenues rise by 8 percent and its interest expenses and earnings assets rise by 10 percent next year,what is this bank's new net interest margin?

Accepted Answer

To calculate the new net interest margin, we need to first calculate the new interest revenues and interest expenses.

New interest revenues = $275 million x 1.08 = $297 million 
New interest expenses = $210 million x 1.10 = $231 million

Next, we need to calculate the new earnings assets.

New earnings assets = $1,115 million x 1.10 = $1,226.5 million

Finally, we can calculate the new net interest margin with the following formula:

New net interest margin = (New interest revenues - New interest expenses) / New earnings assets

New net interest margin = ($297 million - $231 million) / $1,226.5 million 
New net interest margin = $66 million / $1,226.5 million 
New net interest margin = 5.38%

Therefore, the correct answer is D) 5.38%.

Question 17

If a bank has a positive interest-sensitive gap,one of the possible management responses would be to:

Accepted Answer

A positive interest-sensitive gap means that the bank's assets are more sensitive to interest rate changes than its liabilities. This means that if interest rates rise, the bank's assets will increase in value more than its liabilities, resulting in a net gain. Therefore, the bank can wait for interest rates to rise or be stable to benefit from this positive gap.

Question 18

Financial firms devote greater attention to opening up new sources of funding and monitoring the mix and cost of their deposit and non-deposit liabilities under the _______________________ strategy.

Accepted Answer

Liabilities management strategy involves managing the mix and cost of deposit and non-deposit liabilities. This strategy helps financial firms to open up new sources of funding and also monitor the cost and mix of their liabilities.

Question 19

The _______________ is determined by the demand and supply for loanable funds in the market.

Accepted Answer

The risk-free real rate of interest is determined by the demand and supply for loanable funds in the market, as it reflects the underlying opportunity cost of investing funds in alternative uses. The coupon rate is the interest rate paid to bondholders; the reserve requirement is the percentage of deposits that banks must hold in reserve; the interest-sensitive gap is the difference between interest-sensitive assets and liabilities; and the duration gap is the difference between the maturities of a bank's assets and liabilities.

Question 20

A bank with a negative interest-sensitive GAP:

Accepted Answer

A bank with a negative interest-sensitive GAP has a greater dollar volume of interest-sensitive liabilities than interest-sensitive assets. This means that the bank is more exposed to a decrease in interest rates than an increase, and therefore, will generate a lower interest margin if interest rates fall.

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