Question 1

Which of the following statements is true?
A)APRA requires smaller Australian FIs to use the repricing gap method to estimate interest rate exposures in their banking book for capital adequacy.
B)Australian FIs are only required to use the repricing gap method if they are listed on an US stock exchange.
C)APRA does not require Australian FIs to use the repricing gap method to estimate interest rate exposures in their banking book for capital adequacy.
D)Australian FIs are only required to use the repricing gap if they are internationally active.

Accepted Answer

A

Question 2

Consider the following repricing buckets and gaps:  What is the annualised change in the bank's future net interest income if the overnight interest rate increased by 100 basis points?
A)-$700
B)$700
C)-$7000
D)$700

Accepted Answer

A

Question 3

What is spread effect?
A)Periodic cash flow of interest and principal amortisation payments on long-term assets that can be reinvested at market rates.
B)The effect that a change in the spread between rates on rate sensitive assets and rate sensitive liabilities 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.

Accepted Answer

Spread effect refers to the impact of changes in the spread (difference) between rates on rate-sensitive assets (such as loans) and rate-sensitive liabilities (such as deposits) on net interest income. As interest rates change, the spread changes, and this affects the profitability of financial institutions.

Question 4

Consider the following repricing buckets and gaps:  What is the annualised change in the bank's future net interest income if the average rate change for assets and liabilities that can be repriced over five years is an increase of 50 basis points?
A)$7500
B)$7500.
C)$0
D)Not enough information to answer the question.

Accepted Answer

The answer of Consider the following repricing buckets and gaps:...

Question 5

The term core deposits refers to those deposits that:
A)act as long-term sources of funds for the FI.
B)reflect the true or core nature of the FI's operations.
C)support the core of the FI's operations.
D)None of the listed options are correct.

Accepted Answer

The answer of The term core deposits refers to those...

Question 6

Repricing gap refers to the:
A)difference between rate-sensitive assets and rate-sensitive liabilities.
B)sum of rate-sensitive assets and rate-sensitive liabilities.
C)difference between rate-sensitive liabilities and rate-sensitive assets.
D)difference between rate-insensitive assets and rate-insensitive liabilities.

Accepted Answer

Repricing gap refers to the difference between rate-sensitive assets and rate-sensitive liabilities. This calculation helps to determine how changes in interest rates will affect a financial institution's net interest income.

Question 7

The cumulative gap over the whole balance sheet by definition:
A)must be greater than zero.
B)must be lower than zero.
C)must equal zero.
D)can take any value.

Accepted Answer

The cumulative gap over the whole balance sheet must equal zero by definition of the balance sheet. This means that the total assets must equal the total liabilities and equity. If there is a positive or negative gap, it indicates an imbalance in the balance sheet, which is not consistent with the accounting equation. Therefore, the cumulative gap must always equal zero.

Question 8

The term 'runoffs' refers to:
A)one-off cash flow of interest and principal amortisation payments on long-term assets.
B)periodic cash flow of interest and principal amortisation payments on long-term assets.
C)one-off cash flow of interest and principal amortisation payments on short-term assets.
D)periodic cash flow of interest and principal amortisation payments on short-term assets.

Accepted Answer

Runoffs typically refer to the periodic cash flow of interest and principal amortization payments on long-term assets, such as bonds or loans, as these assets gradually mature over time.

Question 9

The term 'rate-sensitive assets' refers to assets:
A)whose interest rate will be repriced over some future period.
B)with a particularly high interest rate.
C)with a particularly low interest rate.
D)for which demand is highly dependent on the level of interest rates.

Accepted Answer

Rate-sensitive assets are those whose interest rates will be repriced over some future period. These assets include bonds, loans, and other fixed-income securities that have maturities or re-pricing dates that are going to come up in the near future. These assets are particularly sensitive to changes in interest rates, and as such, their value can fluctuate significantly as interest rates rise or fall.

Question 10

Which of the following statements is false?
A)A major reason for cheque accounts to be included in an FI's interest-sensitive liabilities is that the majority of these accounts are core deposits.
B)Cheque accounts should be treated as interest-sensitive liabilities because if interest rates rise, deposits might be withdrawn and thus will need to be replaced by higher-yielding deposits.
C)The final decision whether or not to include cheque accounts as rate sensitive liabilities must be made after an analysis of the actual deposit history.
D)None of the listed options are correct.

Accepted Answer

Cheque accounts are considered interest-sensitive liabilities not primarily because they are core deposits, but because their balances can be sensitive to changes in interest rates, affecting the flow of funds into or out of these accounts. Core deposits refer to the stable and less expensive source of funding for banks, but the sensitivity to interest rate changes is a separate consideration.

Question 11

Which of the following statements is true?
A)A negative gap indicates that a rise in interest rates would increase the bank's net interest income.
B)A positive gap indicates that a rise in interest rates would increase the bank's net interest income.
C)A positive gap indicates that a fall in interest rates would increase the bank's net interest income.
D)None of the listed options are correct.

Accepted Answer

A positive gap means that the bank has more fixed-rate assets than fixed-rate liabilities, which would result in increased net interest income if interest rates rise. Conversely, a negative gap would result in decreased net interest income if interest rates rise. Therefore, option A is incorrect, and option C is also incorrect as it describes a scenario for a negative gap. Option D is incorrect because there is a correct choice among the listed options.

Question 12

Which of the following statements is true?
A)The repricing gap model is a market value accounting cash flow analysis of the repricing gap between the interest revenue earned on assets and the interest paid on liabilities over some period.
B)The repricing gap model is a book value accounting cash flow analysis of the repricing gap between the interest revenue earned on assets and the interest paid on liabilities over some period.
C)The repricing gap model is a market value accounting cash flow analysis of the repricing gap between the interest revenue earned on liabilities and the interest paid on assets over some period.
D)The repricing gap model is a book value accounting cash flow analysis of the repricing gap between the interest revenue earned on liabilities and the interest paid on assets over some period.

Accepted Answer

The repricing gap model uses book value accounting to analyze the cash flow impact of the gap between interest earned on assets and interest paid on liabilities over a certain period. It does not reverse the roles of assets and liabilities nor does it use market value accounting for this analysis.

Question 13

Which of the following are rate-sensitive assets?
A)Short-term consumer loans, cheque accounts and three-month Treasury notes.
B)Ten-year fixed rate mortgages, short-term consumer loans and long-term consumer loans.
C)Short-term consumer loans, ten-year fixed rate mortgages and one-year term deposits.
D)Short-term consumer loans, six-month Treasury notes and three-year

Accepted Answer

The answer of Which of the following are rate-sensitive assets?
A)Short-term...

Question 14

Consider the following repricing buckets and gaps:  What is the annualised change in the bank's future net interest income if the average rate change for assets and liabilities that can be repriced within one year is a decrease of 100 basis points?
A)$17 000
B)-$17 000
C)$13 000
D)-$13 000

Accepted Answer

The answer of Consider the following repricing buckets and gaps:...

Question 15

Which of the following statements is true?
A)Cheque accounts are a type of interest-sensitive asset.
B)Cheque accounts are a type of interest-sensitive liability.
C)There are strong arguments for and against the inclusion of cheque accounts as a type of interest-sensitive asset.
D)There are strong arguments for and against the inclusion of cheque accounts as a type of interest-sensitive liability.

Accepted Answer

The answer of Which of the following statements is true?
A)Cheque...

Question 16

Consider the following repricing buckets and gaps:  What is the annualised change in the bank's future net interest income if the average rate change for assets and liabilities that can be repriced within one year is an increase of 100 basis points?
A)$17 000
B)-$17 000
C)$13 000
D)-$13 000

Accepted Answer

The answer of Consider the following repricing buckets and gaps:...

Question 17

Consider the following repricing buckets and gaps:  What is the annualised change in the bank's future net interest income if the overnight interest rate decreased by 100 basis points?
A)-$700
B)$700
C)-$7000
D)$700

Accepted Answer

The answer of Consider the following repricing buckets and gaps:...

Question 18

Which of the following statements is true?
A)A negative gap indicates that a rise in interest rates would lower the bank's net interest income.
B)A positive gap indicates that a rise in interest rates would lower the bank's net interest income.
C)A negative gap indicates that a rise in interest rates would increase the bank's net interest income.
D)None of the listed options are correct.

Accepted Answer

A negative gap indicates that the bank has more interest-sensitive liabilities than assets. Therefore, if interest rates rise, the cost of the liabilities will increase more than the income generated from the assets, resulting in a decrease in net interest income.

Question 19

Which of the following statements is true?
A)As opposed to the duration model, the repricing gap model is a market-value based approach.
B)As opposed to the maturity model, the repricing gap model is a market-value based approach.
C)The capital loss effect is captured by the repricing model.
D)None of the listed options are correct.

Accepted Answer

The repricing gap model, unlike what is suggested in options A and B, is not a market-value based approach but rather an income-based approach focusing on the timing differences in interest rate adjustments for assets and liabilities. The capital loss effect is not captured by the repricing model; it is more accurately addressed by market-value based models such as the duration model.

Question 20

Which of the following are rate-sensitive liabilities?
A)Short-term consumer loans, cheque accounts and three-month Treasury notes.
B)Three-month term deposits, three month bankers' acceptances, six-month negotiable certificates of deposit and one-year term deposits.
C)Short-term consumer loans, six-month negotiable certificates of deposit and one-year term deposits.
D)Short-term consumer loans, six-month Treasury notes and three-year Treasury bonds.

Accepted Answer

Rate-sensitive liabilities are those that have interest rates that change frequently and are directly tied to market rates. The options in choice B are all short-term deposits and instruments that have interest rates that are market-sensitive and can be adjusted easily to reflect changes in interest rates. The other options in A, C, and D have some rate-sensitive liabilities but also include other instruments that are not as sensitive to changes in interest rates.

Quiz 5: Interest Rate Risk Measurement: The Repricing Model

Which of the following statements is true?

Consider the following repricing buckets and gaps: What is the annualised change in the bank's future net interest income if the overnight interest rate increased by 100 basis points? A)-$700 B)$700 C)-$7000 D)$700

What is spread effect?

Consider the following repricing buckets and gaps: What is the annualised change in the bank's future net interest income if the average rate change for assets and liabilities that can be repriced over five years is an increase of 50 basis points?

The term core deposits refers to those deposits that:

Repricing gap refers to the:

The cumulative gap over the whole balance sheet by definition:

The term 'runoffs' refers to:

The term 'rate-sensitive assets' refers to assets:

Which of the following statements is false?

Which of the following statements is true?

Which of the following statements is true?

Which of the following are rate-sensitive assets?

Consider the following repricing buckets and gaps: What is the annualised change in the bank's future net interest income if the average rate change for assets and liabilities that can be repriced within one year is a decrease of 100 basis points?

Which of the following statements is true?

Consider the following repricing buckets and gaps: What is the annualised change in the bank's future net interest income if the average rate change for assets and liabilities that can be repriced within one year is an increase of 100 basis points?

Consider the following repricing buckets and gaps: What is the annualised change in the bank's future net interest income if the overnight interest rate decreased by 100 basis points? A)-$700 B)$700 C)-$7000 D)$700

Which of the following statements is true?

Which of the following statements is true?

Which of the following are rate-sensitive liabilities?