Question 1

8-13 One reason to include demand deposits when estimating a bank's repricing gap is because rising interest rates could lead to high withdrawals.

Accepted Answer

Demand deposits are easily withdrawable by customers, and if interest rates rise, customers may choose to withdraw their funds from the bank and seek higher yields elsewhere. Therefore, including demand deposits in the repricing gap calculation helps estimate the potential impact of rising interest rates on a bank's liquidity.

Question 2

8-12 A bank with a negative repricing (or funding)gap faces refinancing risk.

Accepted Answer

A negative repricing gap means that a bank's interest-bearing liabilities (deposits, borrowings) with shorter maturities exceed its interest-earning assets (loans, investments) with shorter maturities. As interest rates rise, the bank's funding costs will increase faster than its interest income, leading to compressed net interest margins and decreased profitability. To maintain its funding sources, the bank may have to offer higher deposit rates, issue longer-term debt, or seek alternative funding channels. If the bank cannot secure sufficient funds at reasonable rates, it may face liquidity stress or default risk. Therefore, negative repricing gap exposes a bank to refinancing risk, which is the risk of not being able to roll over or replace maturing debts on favorable terms.

Question 3

8-1 The economic insolvency of many thrift institutions during the 1980s was due,at least in part,to unexpected increases in interest rates.

Accepted Answer

The sudden increase in interest rates during the 1980s contributed to the economic insolvency of many thrift institutions.

Question 4

8-4 The maturity gap model estimates the difference between interest earned and interest during a given period of time.

Accepted Answer

The maturity gap model measures the difference between the amounts of assets and liabilities that reprice or mature within a certain time period, not the difference between interest earned and interest paid.

Question 5

8-10 When a bank's repricing gap is positive,net interest income is positively related to changes in interest rates.

Accepted Answer

A positive repricing gap means that a bank's assets (loans, investments) have a longer maturity or fixed rate than its liabilities (deposits, borrowings), so when interest rates increase, the bank's interest income on assets will increase more than its interest expense on liabilities. Therefore, net interest income will increase, making it positively related to changes in interest rates.

Question 6

8-5 The Bank for International Settlements (BIS)strongly urges regulators to use the repricing model to evaluate a bank's interest rate risk.

Accepted Answer

The Bank for International Settlements (BIS) does not specifically endorse the repricing model; it suggests various methods for evaluating interest rate risk, including the repricing model, but also encourages comprehensive approaches like duration analysis and stress testing.

Question 7

8-2 Because the increased level of financial market integration has increased the speed with which interest rate changes are transmitted among countries,control of U.S.interest rates by the Federal Reserve is more difficult.

Accepted Answer

The answer of 8-2 Because the increased level of financial...

Question 8

8-9 The cumulative repricing gap position of an FI for a given extended time period is the sum of the repricing gap values for the individual time periods that make up the extended time period.

Accepted Answer

The definition of cumulative repricing gap position implies that it is the sum of the repricing gap values for individual time periods within an extended time period. Therefore, the statement is true.

Question 9

8-19 Defining buckets of time over a range of maturities assures the capture of all relevant information necessary to accurately assess the interest rate risk exposure of an FI.

Accepted Answer

The answer of 8-19 Defining buckets of time over a...

Question 10

8-7 The repricing model is a simplistic approach to focusing on the exposure of net interest income to changes in market levels of interest rates for given maturity periods.

Accepted Answer

The repricing model does focus on the exposure of net interest income to changes in market levels of interest rates for given maturity periods, and it is a simplistic approach.

Question 11

8-16 Runoff in demand deposits in a repricing model is typically lower during periods of falling interest rates.

Accepted Answer

In a repricing model, demand deposits are more likely to stay in the bank during periods of falling interest rates because customers are not actively seeking higher returns on their cash. Therefore, the runoff (or withdrawal) of demand deposits is lower during this time compared to periods of rising interest rates when customers may move their money to higher-yielding accounts.

Question 12

8-18 Because the repricing model ignores the market value effect of changing interest rates,the repricing gap is an incomplete measure of the true interest rate risk exposure of an FI.

Accepted Answer

The statement is true. The repricing gap only considers the volume of assets and liabilities that will be repriced within a certain time frame, but it does not account for the potential impact of changing interest rates on the market value of these instruments. Therefore, it is an incomplete measure of interest rate risk exposure.

Question 13

8-8 A positive repricing gap implies that a decrease in interest rates will cause interest expense to decrease more than the decrease in interest income.

Accepted Answer

A positive repricing gap indicates that more assets than liabilities are subject to interest rate changes, so a decrease in interest rates would cause interest income to decrease more than interest expense.

Question 14

8-15 Retail passbook savings accounts should not be considered as part of rate sensitive liabilities because the rates on these accounts rarely change.

Accepted Answer

The answer of 8-15 Retail passbook savings accounts should not...

Question 15

8-6 In the repricing gap model,assets or liabilities are rate sensitive within a given time period if the dollar values of each are subject to receiving a different interest rate should market rates change.

Accepted Answer

The statement accurately describes the concept of rate sensitivity in the repricing gap model.

Question 16

8-17 The gap ratio is useful because it indicates the scale of the interest rate exposure by dividing the gap by the asset size of the institution.

Accepted Answer

The statement is true. The gap ratio is calculated by dividing the gap (difference between rate-sensitive assets and liabilities) by the asset size of the institution. This ratio helps to indicate the scale of an institution's interest rate exposure.

Question 17

8-3 The repricing gap model is a book value accounting based model.

Accepted Answer

The repricing gap model is a book value accounting based model that measures the difference between the rate-sensitive assets and rate-sensitive liabilities. It helps to identify the interest rate risk associated with a bank's balance sheet.

Question 18

8-14 One reason to exclude demand deposits when estimating a bank's repricing gap is because,by regulation,explicit interest cannot be paid on these deposits.

Accepted Answer

Demand deposits are non-interest-bearing accounts, so they are not included in the calculation of a bank's repricing gap.

Question 19

8-11 A bank with a negative repricing (or funding)gap faces reinvestment risk.

Accepted Answer

A bank with a negative repricing gap faces refinancing risk, not reinvestment risk, because its liabilities reprice faster than its assets.

Question 20

8-20 Defining buckets of time over wider intervals creates greater accuracy in the use of the repricing model because fewer calculations are required.

Accepted Answer

Defining buckets of time over wider intervals may reduce the frequency of calculations, but it does not inherently increase accuracy. Accuracy depends on the precision and relevance of the data and model, not the interval size.

Quiz 8: Interest Rate Risk I