Question 1

A bank has three assets. It has $75 million invested in consumer loans with a 3-year duration, $39 million invested in T-Bonds with a 16-year duration, and $39 million in 6-month maturity T-Bills. What is the duration of the bank's asset portfolio in years?

Accepted Answer

To find the duration of the bank's asset portfolio, we need to weight the duration of each asset by the proportion of the total value it represents. We can calculate the proportion of total value for each asset by dividing its value by the total value of all assets:

Consumer loans: $75 million / ($75 million + $39 million + $39 million) = 975/1320 
T-Bonds: $39 million / ($75 million + $39 million + $39 million) = 39/132 
T-Bills: $39 million / ($75 million + $39 million + $39 million) = 39/132

Then, we can calculate the weighted average duration by multiplying each asset's proportion by its duration in years:

(975/132) x 3 + (39/132) x 16 + (39/132) x 0.5 = 6.50

Therefore, the answer is C.

Question 2

For large interest rate declines, duration ___________ the increases in the bond's price, and for large interest rate decreases, it ____________ the decline in the bond's price.

Accepted Answer

Duration overpredicts the increases in the bond's price for large interest rate declines and underpredicts the decline in the bond's price for large interest rate decreases.

Question 3

A bank's balance sheet is characterized by long-term fixed-rate assets funded by short-term, variable-rate liabilities. Most likely the bank has a

Accepted Answer

The answer of A bank's balance sheet is characterized by...

Question 4

If the spread effect is zero and all interest rates decline 50 basis points, the bank's NII will change by ________________ over the year.

Accepted Answer

Based on the given information, if the spread effect is zero, then the change in NII will be solely due to the change in interest rates. A 50 basis point decline in all interest rates would lead to a decrease in NII. Using the information provided, the calculation would be: $140,000,000 x -0.0050 = -$700,000. Therefore, the correct answer is E, -$700,000.

Question 5

For a bank with a positive duration gap, an increase in interest rates will

Accepted Answer

The answer of For a bank with a positive duration...

Question 6

A bank has a negative duration gap. Interest rates decline. Which one of the following best describes the effects of the interest rate change?

Accepted Answer

A negative duration gap means that the bank's liabilities are more sensitive to interest rate changes than its assets. When interest rates decline, the market value of liabilities increases more than the market value of assets, leading to a decrease in the bank's market value of equity.

Question 7

A bank has a negative repricing gap. This implies that

Accepted Answer

A negative repricing gap occurs when a bank has more fixed-rate liabilities (RSLs) financing fixed-rate assets (RAs) than variable-rate liabilities financing variable-rate assets. This implies that some RSLs are financing fixed-rate assets, which is option B.

Question 8

For a 9-month maturity bucket the bank has _________________ in fixed-rate assets and _________________ in fixed-rate liabilities.

Accepted Answer

The fixed-rate assets (FRA) are calculated as cash plus long-term loans, which equals $285. The fixed-rate liabilities (FRL) are calculated as fixed-rate deposits plus long-term borrowings, which equals $359.

Question 9

A bank has a positive repricing gap. This implies that

Accepted Answer

The answer of A bank has a positive repricing gap....

Question 10

A bank has a positive repricing gap and estimates that the spread between RSAs and RSLs will move directly with interest rates. If interest rates fall, the bank's overall NII will

Accepted Answer

A positive repricing gap means that the bank's interest-sensitive assets (RSAs) reprice more quickly than its interest-sensitive liabilities (RSLs). If interest rates fall, the interest earned on RSAs will decrease faster than the interest paid on RSLs, leading to a decrease in NII. Therefore, the bank's overall NII will fall.

Question 11

With a 6-month maturity bucket, a 9-month fixed rate loan would be considered a ________________ asset and a 30-year mortgage with a rate adjustment in 3 months would be classified as a _______________ asset.

Accepted Answer

A 6-month maturity bucket implies that the institution is interested in assets that can be converted into cash or reinvested in a new asset within 6 months. A 9-month fixed rate loan is not as liquid as a rate-sensitive asset, as it cannot be easily adjusted to changing interest rates. Therefore, it would be considered a fixed-rate asset. On the other hand, a 30-year mortgage with a rate adjustment in 3 months would be classified as rate-sensitive, as its interest rate can be adjusted based on changes in market rates.

Question 12

To get D_E to equal zero to protect the equity value in the event of an interest rate change, the bank could

Accepted Answer

The answer of To get D_E to equal zero to...

Question 13

Weaknesses of the repricing model include the fact that
I. it ignores changes in present values caused by changes in interest rates.
II. it ignores different cash flow sensitivities within a maturity bucket.
III. it fails to account for runoffs and prepayments.

Accepted Answer

The repricing model has several weaknesses, including ignoring changes in present values caused by changes in interest rates (I), not accounting for different cash flow sensitivities within a maturity bucket (II), and failing to account for runoffs and prepayments (III).

Question 14

If interest rates increase 100 basis points the predicted dollar change in equity value will equal

Accepted Answer

Using the formula provided, we get -$12,724,528. Therefore, the best choice is D.

Question 15

A bank has a positive duration gap. Which one of the following statements is most correct?

Accepted Answer

A positive duration gap means that the bank's assets have longer maturities than its liabilities. If interest rates increase, the value of the assets will decrease more than the value of liabilities. To limit the net value decline before rates rise, the bank should increase short-term loans and decrease long-term loans. Short-term loans will have shorter maturities and will be less sensitive to interest rate changes, while long-term loans will have longer maturities and will be more sensitive to interest rate changes. Therefore, increasing short-term loans will reduce the duration gap and limit the net value decline. Similarly, if interest rates are projected to decrease, the bank should do the opposite, i.e., increase long-term loans and decrease short-term loans.

Question 16

After interest rate and yield curve changes, a bank's market value of assets increased $4 million and the market value of its liabilities fell $6 million. The book value of equity _____________ and the market value of equity ____________.

Accepted Answer

The book value of equity remains unchanged because it reflects the historical cost of assets and liabilities, not their market value. The market value of equity increased by $10 million because the assets increased by $4 million and liabilities decreased by $6 million, leading to a net increase in equity value in the market.

Question 17

What is the bank's duration gap in years?

Accepted Answer

Based on the given information, the bank's duration gap is 1.5868 years. No other information is provided to make any other choices.

Question 18

An FI's balance sheet is characterized by long-term fixed-rate assets funded by short-term variable-rate securities. Most likely the bank has a

Accepted Answer

The answer of An FI's balance sheet is characterized by...

Question 19

A bank has a negative repricing gap and estimates that the spread between RSAs and RSLs will move inversely with interest rates. If interest rates increase, NII will

Accepted Answer

A negative repricing gap means that the bank's RSAs are higher than RSLs, so an increase in interest rates will lead to a decrease in net interest income (NII) since the income earned on RSAs will decline more than the interest paid on RSLs. The fact that the spread between RSAs and RSLs is expected to move inversely with interest rates implies that the decrease in income will be larger than the decrease in interest expense, leading to a decrease in NII.

Question 20

The bank's one-year repricing gap is (Million $)

Accepted Answer

The computation for the one-year repricing gap is as follows:
RSAs - RSLs = [200 + 225] - [260 + 25] = $140 million. Therefore, the correct answer is D, $140 million.

Quiz 22: Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

A bank has three assets. It has $75 million invested in consumer loans with a 3-year duration, $39 million invested in T-Bonds with a 16-year duration, and $39 million in 6-month maturity T-Bills. What is the duration of the bank's asset portfolio in years?

For large interest rate declines, duration _ the increases in the bond's price, and for large interest rate decreases, it __ the decline in the bond's price.

A bank's balance sheet is characterized by long-term fixed-rate assets funded by short-term, variable-rate liabilities. Most likely the bank has a

If the spread effect is zero and all interest rates decline 50 basis points, the bank's NII will change by ________________ over the year.

For a bank with a positive duration gap, an increase in interest rates will

A bank has a negative duration gap. Interest rates decline. Which one of the following best describes the effects of the interest rate change?

A bank has a negative repricing gap. This implies that

For a 9-month maturity bucket the bank has _ in fixed-rate assets and _ in fixed-rate liabilities.

A bank has a positive repricing gap. This implies that

A bank has a positive repricing gap and estimates that the spread between RSAs and RSLs will move directly with interest rates. If interest rates fall, the bank's overall NII will

With a 6-month maturity bucket, a 9-month fixed rate loan would be considered a __ asset and a 30-year mortgage with a rate adjustment in 3 months would be classified as a _ asset.

To get D_E to equal zero to protect the equity value in the event of an interest rate change, the bank could

Weaknesses of the repricing model include the fact that I. it ignores changes in present values caused by changes in interest rates. II. it ignores different cash flow sensitivities within a maturity bucket. III. it fails to account for runoffs and prepayments.

If interest rates increase 100 basis points the predicted dollar change in equity value will equal

A bank has a positive duration gap. Which one of the following statements is most correct?

After interest rate and yield curve changes, a bank's market value of assets increased $4 million and the market value of its liabilities fell $6 million. The book value of equity _ and the market value of equity .

What is the bank's duration gap in years?

An FI's balance sheet is characterized by long-term fixed-rate assets funded by short-term variable-rate securities. Most likely the bank has a

A bank has a negative repricing gap and estimates that the spread between RSAs and RSLs will move inversely with interest rates. If interest rates increase, NII will

The bank's one-year repricing gap is (Million $)

Quiz 22: Managing Interest Rate Risk and Insolvency Risk on the Balance Sheet

A bank has three assets. It has $75 million invested in consumer loans with a 3-year duration, $39 million invested in T-Bonds with a 16-year duration, and $39 million in 6-month maturity T-Bills. What is the duration of the bank's asset portfolio in years?

For large interest rate declines, duration ___________ the increases in the bond's price, and for large interest rate decreases, it ____________ the decline in the bond's price.

A bank's balance sheet is characterized by long-term fixed-rate assets funded by short-term, variable-rate liabilities. Most likely the bank has a

If the spread effect is zero and all interest rates decline 50 basis points, the bank's NII will change by ________________ over the year.

For a bank with a positive duration gap, an increase in interest rates will

A bank has a negative duration gap. Interest rates decline. Which one of the following best describes the effects of the interest rate change?

A bank has a negative repricing gap. This implies that

For a 9-month maturity bucket the bank has _________________ in fixed-rate assets and _________________ in fixed-rate liabilities.

A bank has a positive repricing gap. This implies that

A bank has a positive repricing gap and estimates that the spread between RSAs and RSLs will move directly with interest rates. If interest rates fall, the bank's overall NII will

With a 6-month maturity bucket, a 9-month fixed rate loan would be considered a ________________ asset and a 30-year mortgage with a rate adjustment in 3 months would be classified as a _______________ asset.

To get DE to equal zero to protect the equity value in the event of an interest rate change, the bank could

Weaknesses of the repricing model include the fact that I. it ignores changes in present values caused by changes in interest rates. II. it ignores different cash flow sensitivities within a maturity bucket. III. it fails to account for runoffs and prepayments.

If interest rates increase 100 basis points the predicted dollar change in equity value will equal

A bank has a positive duration gap. Which one of the following statements is most correct?

After interest rate and yield curve changes, a bank's market value of assets increased $4 million and the market value of its liabilities fell $6 million. The book value of equity _____________ and the market value of equity ____________.

What is the bank's duration gap in years?

An FI's balance sheet is characterized by long-term fixed-rate assets funded by short-term variable-rate securities. Most likely the bank has a

A bank has a negative repricing gap and estimates that the spread between RSAs and RSLs will move inversely with interest rates. If interest rates increase, NII will

The bank's one-year repricing gap is (Million $)

For large interest rate declines, duration _ the increases in the bond's price, and for large interest rate decreases, it __ the decline in the bond's price.

For a 9-month maturity bucket the bank has _ in fixed-rate assets and _ in fixed-rate liabilities.

With a 6-month maturity bucket, a 9-month fixed rate loan would be considered a __ asset and a 30-year mortgage with a rate adjustment in 3 months would be classified as a _ asset.

To get D_E to equal zero to protect the equity value in the event of an interest rate change, the bank could

After interest rate and yield curve changes, a bank's market value of assets increased $4 million and the market value of its liabilities fell $6 million. The book value of equity _ and the market value of equity .