Question 1

Consider the following repricing buckets and gaps: \(\begin{array}{c}
\begin{array}{|l|}
\hline \text { Repricing bucket }\
\hline 1 \text { day } \
\hline 1 \text { day to } 3 \text { months } \
\hline 3 \text { to } 6 \text { months } \
\hline 6 \text { to } 12 \text { months } \
\hline 1 \text { to } 5 \text { years } \
\hline \text { Over } 5 \text { years } \
\hline
\end{array}
\begin{array}{r|}
\hline\text { Assets } \
\hline \$ 50000 \
\hline \$ 100000 \
\hline \$ 100000 \
\hline \$ 250000 \
\hline 575000 \
\hline 325000 \
\hline 
\end{array}
\begin{array}{|r|}
\hline\text { Liabilities }\
\hline \$ 120000 \
\hline \$ 70000 \
\hline \$ 100000 \
\hline \$ 80000 \
\hline \$ 130000 \
\hline \$ 100000 \
\hline 
\end{array}
\begin{array}{r|}
\hline\text { Gaps }\
\hline-\$ 70000 \
\hline \$ 30000 \
\hline \$ 0 \
\hline \$ 170000 \
\hline-\$ 55000 \
\hline-\$ 75000 \
\hline
\end{array} 
\begin{array}{r|}
\hline\text { Cumulative gap }\
\hline-\$ 70000 \
\hline-\$ 40000 \
\hline-\$ 40000 \
\hline \$ 130000 \
\hline \$ 75000 \
\hline \$ 0 \
\hline
\end{array}
\end{array}\)

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)$75 000
C)$0
D)Not enough information to answer the question.

Accepted Answer

C

Question 2

Consider the following repricing buckets and gaps: $$\begin{array} { | l | r | r | r | } 
\hline \text { Repricing bucket } & { \text { Assets } } &  { \text { Liabilities } } &{ \text { Gaps } } \
\hline \text { 1 day } & \$ 50000 & \$ 120000 & - \$ 70000 \
\hline \text { 1 day to 3 months } & \$ 100000 & \$ 70000 & \$ 30000 \
\hline \text { 3 to 6 months } & \$ 100000 & \$ 100000 & \$ 0 \
\hline \text { 6 to 12 months } & \$ 250000 & \$ 80000 & \$ 170000 \
\hline 1 \text { to 5 years } & \$ 75000 & \$ 130000 & - \$ 55000 \
\hline \text { Over 5 years } & \$ 25000 & \$ 100000 & - \$ 75000 \
\hline
\end{array}$$ 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)$7000

Accepted Answer

A

Question 3

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 4

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 5

Consider the following repricing buckets and gaps: $$\begin{array} { | l | r | r | r | } 
\hline \text { Repricing bucket } &  { \text { Assets } } &  { \text { Liabilities } } & { \text { Gaps } } \
\hline \text { 1 day } & \$ 50000 & \$ 120000 & - \$ 70000 \
\hline \text { 1 day to 3 months } & \$ 100000 & \$ 70000 & \$ 30000 \
\hline \text { 3 to 6 months } & \$ 100000 & \$ 100000 & \$ 0 \
\hline \text { 6 to 12 months } & \$ 250000 & \$ 80000 & \$ 170000 \
\hline 1 \text { to 5 years } & \$ 75000 & \$ 130000 & - \$ 55000 \
\hline \text { Over 5 years } & \$ 25000 & \$ 100000 & - \$ 75000 \
\hline
\end{array}$$ 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)$7000

Accepted Answer

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

Question 6

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 7

Consider the following repricing buckets and gaps: $$\begin{array} { | l | r | r | r | } 
\hline \text { Repricing bucket } &{ \text { Assets } } & { \text { Liabilities } } &  { \text { Gaps } } \
\hline \text { 1 day } & \$ 50000 & \$ 120000 & - \$ 70000 \
\hline \text { 1 day to 3 months } & \$ 100000 & \$ 70000 & \$ 30000 \
\hline \text { 3 to 6 months } & \$ 100000 & \$ 100000 & \$ 0 \
\hline \text { 6 to 12 months } & \$ 250000 & \$ 80000 & \$ 170000 \
\hline 1 \text { to 5 years } & \$ 75000 & \$ 130000 & - \$ 55000 \
\hline \text { Over 5 years } & \$ 25000 & \$ 100000 & - \$ 75000 \
\hline
\end{array}$$ 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 annualised change in the bank's future net interest income can be calculated by applying the average rate change to the cumulative gap for assets and liabilities that can be repriced within one year. The cumulative gap within one year is the sum of the gaps in the "1 day", "1 day to 3 months", and "3 to 6 months" buckets, which is -\$70,000 + \$30,000 + \$0 = -\$40,000. Since the gap is negative, an increase in interest rates will decrease net interest income. The change in net interest income is -\$40,000 * 1% (or 100 basis points) = -\$400. However, there seems to be a misunderstanding in the calculation or the options provided, as none of the options directly match the calculated outcome based on the provided explanation. The correct approach involves calculating the impact of the interest rate change on the net interest income considering the gaps, but the options given do not align with the standard calculation.

Question 8

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 9

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 10

Consider the following repricing buckets and gaps: $$\begin{array} { | l | r | r | r | } 
\hline \text { Repricing bucket } &  { \text { Assets } } & { \text { Liabilities } } &  { \text { Gaps } } \
\hline \text { 1 day } & \$ 50000 & \$ 120000 & - \$ 70000 \
\hline \text { 1 day to 3 months } & \$ 100000 & \$ 70000 & \$ 30000 \
\hline \text { 3 to 6 months } & \$ 100000 & \$ 100000 & \$ 0 \
\hline \text { 6 to 12 months } & \$ 250000 & \$ 80000 & \$ 170000 \
\hline 1 \text { to 5 years } & \$ 75000 & \$ 130000 & - \$ 55000 \
\hline \text { Over 5 years } & \$ 25000 & \$ 100000 & - \$ 75000 \
\hline
\end{array}$$ 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 11

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 should equal zero, as it represents the difference between assets and liabilities. Since every asset is matched with a corresponding liability, the cumulative gap should be zero.

Question 12

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 on net interest income caused by a change in the spread between rates on rate-sensitive assets and rate-sensitive liabilities as interest rates change.

Question 13

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

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

Question 14

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 gap measures the sensitivity of a bank's net interest income to changes in interest rates. If a bank has more rate-sensitive assets than liabilities, a rise in interest rates will increase its net interest income, while a fall in rates will decrease it. On the other hand, if a bank has more rate-sensitive liabilities than assets, rising interest rates will decrease its net interest income, while falling rates will increase it.

Question 15

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, 10-year fixed-rate mortgages and one-year term deposits
D)Short-term consumer loans, six-month Treasury Notes and three-year Treasury Bonds

Accepted Answer

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

Question 16

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's interest-sensitive liabilities exceed its interest-sensitive assets. This means that a rise in interest rates would increase the bank's net interest income, as the bank would be earning more interest on its liabilities than it would be paying on its assets. Conversely, a negative gap would mean that a rise in interest rates would decrease the bank's net interest income, as the bank would be paying more interest on its liabilities than it would be earning on its assets. Option C is incorrect, as a positive gap would mean that a fall in interest rates would decrease the bank's net interest income, since the bank would be earning less interest on its liabilities than it would be paying on its assets. Option A is incorrect, as a negative gap would mean that a rise in interest rates would decrease the bank's net interest income.

Question 17

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

Core deposits are considered stable and long-term sources of funds for financial institutions (FIs), as they are less likely to be withdrawn suddenly compared to other types of deposits.

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 means that the bank has more liabilities than assets that are impacted by changes in interest rates. This means that if interest rates rise, the bank's cost of funds will increase more than its interest income, resulting in a decrease in net interest income.

Question 19

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 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 refer to those liabilities that reprice or mature within a short period of time and hence are sensitive to changes in interest rates. Three-month term deposits, three-month bankers' acceptances, six-month negotiable certificates of deposit, and one-year term deposits are all examples of rate-sensitive liabilities as they mature or reprice within a short period of time. Short-term consumer loans typically have fixed interest rates and are not rate-sensitive liabilities. Treasury notes and bonds have longer maturities and hence are not considered rate-sensitive liabilities.

Quiz 5: Interest Rate Risk Measurement: The Repricing Model

Which of the following statements is true?

Which of the following statements is false?

The term 'runoffs' refers to:

Which of the following statements is true?

Which of the following statements is true?

The cumulative gap over the whole balance sheet by definition:

What is spread effect?

Which of the following statements is true?

Repricing gap refers to the:

Which of the following are rate-sensitive assets?

Which of the following statements is true?

The term core deposits refers to those deposits that:

Which of the following statements is true?

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

Which of the following are rate-sensitive liabilities?