Chap008 interest risk wk8

1、Chapter 08 - Interest Rate Risk IChapter EightInterest Rate Risk ITrue/False8-1The economic insolvency of many thrift institutions during the 1980s was due, at least in part, to unexpected increases in interest rates.Answer: T8-2Because the increased level of financial market integration has increas

2、ed the speed with which interest rate changes are transmitted among countries, control of U.S. interest rates by the Federal Reserve is more difficult.Answer: F8-3The repricing gap model is a book value accounting based model.Answer: T8-4The maturity gap model estimates the difference between intere

3、st earned and interest during a given period of time.Answer: F8-5The Bank for International Settlements (BIS) strongly urges regulators to use the repricing model to evaluate a banks interest rate risk.Answer: F78-6In the repricing gap model, assets or liabilities are rate sensitive within a given t

4、ime period if the dollar values of each are subject to receiving a different interest rate should market rates change.Answer: T8-7The 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.A

5、nswer: T8-8A positive repricing gap implies that a decrease in interest rates will cause interest expense to decrease more than the decrease in interest income.Answer: F8-9The cumulative repricing gap position of an FI for a given extended time period is the sum of the repricing gap values for the i

6、ndividual time periods that make up the extended time period.Answer: T8-10When a banks repricing gap is positive, net interest income is positively related to changes in interest rates.Answer: T8-11A bank with a negative repricing (or funding) gap faces reinvestment risk.Answer: F8-12A bank with a n

7、egative repricing (or funding) gap faces refinancing risk.Answer: T8-13One reason to include demand deposits when estimating a banks repricing gap is because rising interest rates could lead to high withdrawals.Answer: T8-14One reason to exclude demand deposits when estimating a banks repricing gap

8、is because, by regulation, explicit interest cannot be paid on these deposits.Answer: T8-15Retail passbook savings accounts should not be considered as part of rate sensitive liabilities because the rates on these accounts rarely change.Answer: F8-16Runoff in demand deposits in a repricing model is

9、typically lower during periods of falling interest rates.Answer: T8-17The 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.Answer: T8-18Because the repricing model ignores the market value effect of changing int

10、erest rates, the repricing gap is an incomplete measure of the true interest rate risk exposure of an FI.Answer: T8-19Defining 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.Answer: F8

11、-20Defining buckets of time over wider intervals creates greater accuracy in the use of the repricing model because fewer calculations are required.Answer: F8-21If the spread between rate sensitive assets and rate sensitive liabilities increases for a bank, future changes in interest rates will lead

12、 to an increase in net interest income.Answer: T8-22The runoff component of long-term mortgages should be considered in the time buckets in which the maturities actually occur.Answer: T8-23When interest rates increase, banks are more likely to be forced to increase rate-sensitive liabilities to repl

13、ace decreased balances in demand deposits and savings accounts.Answer: T8-24For a given change in interest rates, fixed-rate assets with long-term maturities will have greater changes in price than assets with shorter maturities.Answer: T8-25The market value of a fixed-rate liability will decrease a

14、s interest rates rise, just as the market value of a fixed-rate asset will decrease as interest rates rise.Answer: T8-26The market value of a fixed-rate liability will increase as interest rates rise, although the market value of a fixed-rate asset will decrease as interest rates rise.Answer: F8-27T

15、he change in economic value of a fixed-rate liability for a decrease in interest rates is considered to be good news.Answer: F8-28For a given change in interest rates, fixed-rate liabilities with longer-term maturities will have smaller changes in price than liabilities with shorter maturities.Answe

16、r: F8-29For a given change in interest rates, the change in price for each additional year of maturity of a fixed-rate asset is smaller as the maturity increases.Answer: T8-30The maturity of a portfolio of assets or liabilities is a weighted average of the maturities of the assets or liabilities tha

17、t comprise that portfolio.Answer: T8-31If the average maturity of assets is 4 years and the average maturity of liabilities is 4 years, then the FI has no interest rate risk exposure.Answer: F8-32If the average maturity of assets is 5 years and the average maturity of liabilities is 7 years, then th

18、e FI has no interest rate risk exposure.Answer: F8-33The maturity gap for a bank is the average maturity of the assets minus the average maturity of the liabilities.Answer: TMultiple-Choice8-34The net worth of a bank is the difference between thea.value of retained earnings and the provision for loa

19、n losses.b.market value of assets and the market value of liabilities.c.book value of assets and book value of liabilities.d.rate-sensitive assets and rate-sensitive liabilities.e.None of the above.Answer:B8-35Because of its simplicity, smaller depository institutions still use this model as their p

20、rimary measure of interest rate risk.a.The repricing model.b.The maturity model.c.The duration model.d.The convexity model.e.The option pricing model.Answer:A8-36The repricing gap approach calculates the gaps in each maturity bucket by subtracting the a.current assets from the current liabilities.b.

21、long term liabilities from the fixed assets.c.rate sensitive assets from the total assets.d.rate sensitive liabilities from the rate sensitive assets.e.current liabilities from tangible assets.Answer:D8-37Which of the following observations about the repricing model is correct?a.Its information valu

22、e is limited.b.It accounts for the problem of rate-insensitive asset and liability runoffs and prepayments.c.It accommodates cash flows from offbalance-sheet activities.d.It points out an FIs profit exposure to interest rate changes.e.It considers market value effects of interest rate changes.Answer

23、:D8-38When repricing all interest sensitive assets and all interest sensitive liabilities in a balance sheet, the cumulative gap will bea.zero.b.one.c.greater than one.d.a negative value.e.infinity.Answer:A8-39The repricing gap does not accurately measure FI interest rate risk exposure becausea.FIs

24、cannot accurately predict the magnitude change in future interest rates.b.FIs cannot accurately predict the direction of change in future interest rates.c.accounting systems are not accurate enough to allow the calculation of precise gapmeasures.d.it does not recognize timing differences in cash flo

25、ws within the same maturity grouping.e.equity is omitted.Answer:D8-40An FIs net interest income reflectsa.its assetliability structure.b.market rates of interest.c.the riskiness of its loans and investments.d.the cost of its deposit and nondeposit sources of funds.e.All of the above.Answer:E8-41A po

26、sitive gap implies that an increase in interest rates will cause _ in net interest income.a.no changeb.a decreasec.an increased.an unpredictable changee.Either A or B.Answer:C8-42If interest rates decrease 50 basis points for an FI that has a gap of +$5 million, the expected change in net interest i

27、ncome isa.+ $2,500.b.+ $25,000.c.+ $250,000.d.- $250,000.e.- $25,000.Answer:E8-43If interest rates increase 75 basis points for an FI that has a gap of -$15 million, the expected change in net interest income isa.-$112,500.b.+$112,500.c.+$1,125,0000.d.-$1,125,0000.e.-$150,000.Answer:A8-44If interest

28、 rates decrease 40 basis points (0.40 percent) for an FI that has a cumulative gap of -$25 million, the expected change in net interest income isa.+$100,000.b.-$100,000.c.-$625,000.d.-$625,000.e.+$250,000.Answer:A8-45An FI finances a $250,000 2-year fixed-rate loan with a $200,000 1-year fixed-rate

29、CD. Use the repricing model to determine (a) the FIs repricing (or funding) gap using a 1-year maturity bucket, and (b) the impact of a 100 basis point (0.01) decrease in interest rates on the FIs annual net interest income?a.$0; $0.b.-$200,000; +$2,000.c.-$200,000; -$2,000.d.+$50,000; $500.e.$200,0

30、00; $1,000.Answer:B8-46The gap ratio expresses the reprice gap for a given time period as a percentage ofa.equity.b.total liabilities.c.current liabilities.d.total assets.e.current assets.Answer:D8-47What is spread effect?a.Periodic cash flow of interest and principal amortization payments on long-t

31、erm assets that can be reinvested at market rates.b.The effect that a change in the spread between rates on RSAs and RSLs 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 unc

32、ertainty in a securitys value.e.The value of an FI to its owners.Answer:B8-48If an FIs repricing gap is less than zero, thena.it is deficient in its required reserves.b.it is deficient in its capital ratio requirement.c.its liability costs are more sensitive to changing market interest rates than ar

33、e its asset yields.d.its liability costs are less sensitive to changing market interest rates than are its asset yields.e.the duration of the FIs liabilities exceeds the duration of FIs assets.Answer:C8-49A bank that finances long-term fixed-rate mortgages with short-term deposits is exposed toa.inc

34、reases in net interest income and decreases in the market value of equity when interest rates fall.b.decreases in net interest income and decreases in the market value of equity when interest rates fall.c.decreases in net interest income and increases in the market value of equity when interest rate

35、s increase.d.increases in net interest income and increases in the market value of equity when interest rates increase.e.decreases in net interest income and decreases in the market value of equity when interest rates increase.Answer:E8-50The repricing model measures the impact of unanticipated chan

36、ges in interest rates ona.the market value of interest income.c.both market value of equity and net interest income.d.the FIs capital position.e.the prices of assets and liabilities.Answer:B8-51If the chosen maturity buckets have a time period that is too long, the repricing model may p

37、roduce inaccurate results becausea.as the time to maturity increases, the price volatility increases.b.price changes will be overestimated.c.there may be large differentials in the time to repricing for different securities within each maturity bucket.d.the FI will be unable to accurately measure th

38、e quantity of rate sensitive assets.e.the FI will be unable to accurately measure the quantity of rate sensitive liabilities.Answer:C8-52An increase in interest ratesa.increases the market value of the FIs financial assets and liabilities.b.decreases the market value of the FIs financial assets and

39、liabilities.c.decreases the book value of the FIs financial assets and liabilities.d.increases the book value of the FIs financial assets and liabilities.e.has no impact on the market value of the FIs financial assets and liabilities.Answer:B8-53Which of the following describes the condition known a

40、s runoff in the repricing model approach to measuring interest rate risk of an FI?a.Periodic cash flow of interest and principal amortization payments on long-term assets that can be reinvested at market rates.b.The effect that a change in the spread between rates on RSAs and RSLs has on net interes

41、t income as interest rates change.c.Mismatch of asset and liabilities within a maturity bucket.d.The relations between changes in interest rates and changes in net interest income.e.Those deposits that act as an FIs long-term sources of funds.Answer:A8-54A method of measuring the interest rate or ga

42、p exposure of an FI isa.the duration model.b.the maturity model.c.the repricing model.d.the funding gap model.e.All of the above.Answer:E8-55The repricing model is based on an accounting world that reports asset and liability values ata.their market value.b.their book value.c.their historic values o

43、r costs.d.All of the above.e.Answers B and C only.Answer:E8-56Which of the following is a weakness of the repricing model to measure interest rate risk?a.Potential for overaggregation of assets and liabilities within each maturity bucket.b.It ignores how changes in interest rates affect the market v

44、alue of assets and liabilities.c.It ignores the reinvestment of loan interest and principal payments that are reinvested at current market rates.d.It fails to recognize off-balance-sheet activities that may be rate sensitive.e.All of the above.Answer:E8-57The repricing model ignores information rega

45、rding the distribution of assets and liabilities within maturity buckets. This limitation of the model refers toa.market value effect.b.overaggregation.c.runoffs and pre-payments.d.OBS activities.e.the spread effect.Answer:B8-58An interest rate increasea.benefits the FI by increasing the market valu

46、e of the FIs liabilities.b.harms the FI by increasing the market value of the FIs liabilities.c.harms the FI by decreasing the market value of the FIs liabilities.d.benefits the FI by decreasing the market value of the FIs liabilities.e.benefits the FI by decreasing the market value of the FIs asset

47、s.Answer:D8-59Which of the following statements is true?a.An increase in interest rates leads to an increase in the market value of financial securities.b.Value of longer term securities decreases at a diminishing rate for increases in interest rates.c.Value of longer term securities increases at an

48、 increasing rate for any decline in interest rates.d.The shorter the maturity of a fixed income asset or liability, the greater the fall in market value for any given interest rate increase.e.The longer the maturity of a fixed income asset or liability, the greater the fall in market value for any g

49、iven interest rate decrease.Answer:B8-60Can an FI immunize itself against interest rate risk exposure even though its maturity gap is not zero?a.Yes, because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities.b.No, becau

50、se with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities.c.Yes, because the maturity model does not consider the timing of cash flows.d.No, because the timing of cash flows is relevant to immunization against interest rate

51、risk exposure.e.No, because a representative bank will always have a positive maturity gap.Answer:C8-61Which of the following relationships does NOT hold in the pricing of fixed-rate assets given changes in market rate?a.A decrease in interest rates generally leads to an increase in the value of ass

52、ets.b.Longer maturity assets have greater changes in price than shorter maturity assets for given changes in interest rates.c.The absolute change in price per unit of maturity time for given changes in interest rates decreases over time, although the relative changes actually increase.d.For a given

53、percentage decrease in interest rates, assets will increase in price more than they will decrease in price for the same, but opposite increase in rates.e.None of the above.Answer:C8-62The average maturity of the liabilities of an FIs balance sheet is equal toa.the weighted-average of the liabilities

54、 where the weights are determined relative to the total liabilities and equity of the FI.b.the weighted-average of the liabilities where the weights are determined relative to the total liabilities of the FI.c.the weighted-average of the liabilities where the weights are determined relative to the t

55、otal assets of the FI.d.the weighted-average of the liabilities where the weights are determined using market values of liabilities.e.None of the above.Answer:BMultiple Part QuestionsUse the following information to answer the next five (5) questions:The balance sheet of XYZ Bank. All figures in millions of US Dollars.AssetsLiabilities1Short-term consumer loans (one-year maturity)$ 1501Equity c