ch7

Student: ___________________________________________________________________________

1. The ___________________ view of assets and liabilities held that the amount and types of
deposits was primarily determined by customers and hence the key decision a bank needed to
make was with the assets.

________________________________________

2. Recent decades have ushered in dramatic changes in banking. The goal of

__________________ was simply to gain control of the bank's sources of funds.

________________________________________

3. The __________________________ is the interest rate that equalizes the current market price of
a bond with the present value of the future cash flows.

________________________________________

4. The __________________ premium on a bond allows the investor to be compensated for their
projected loss in purchasing power from the increase in the prices of goods and services in the
future.

________________________________________

5. The __________________ shows the relationship between the time to maturity and the yield to
maturity of bonds.

________________________________________

6. The __________________ premium on a bond reflects the differences in the ease and ability to
sell the bond in the secondary market at a favorable price.

________________________________________

7. __________________________ are those assets which mature or must be repriced within the
planning period.

________________________________________

8. __________________________ is the difference between interest-sensitive assets and interest-

sensitive liabilities.

________________________________________
9. A(n) __________________________ means that the bank has more interest-sensitive liabilities
than interest-sensitive assets.

________________________________________

10. The bank's __________________________ takes into account the idea that the speed
(sensitivity) of interest rate changes will differ for different types of assets and liabilities.

________________________________________

11. __________________________ is the coordinated management of both the bank's assets and
its liabilities.

________________________________________

12. __________________________ is the risk due to changes in market interest rates which can
adversely affect the bank's net interest margin, assets, liabilities, and equity.

________________________________________

13. The __________________________ is the rate of return on a financial instrument using a 360-
day year relative to the instrument's face value.

________________________________________

14. The __________________________ component of interest rates is the risk premium due to the
probability that the borrower will miss some payments or will not repay the loan.

________________________________________

15. __________________ is the weighted average maturity for a stream of future cash flows.

________________________________________

16. __________________________ is the difference between the dollar-weighted duration of the

asset portfolio and the dollar-weighted duration of the liability portfolio.

________________________________________

17. A(n) __________________________ gap means that for a parallel increase in all interest rates,
the market value of net worth will tend to decline.

________________________________________

18. A(n) __________________________ gap means that for a parallel increase in all interest rates,
the market value of net worth will tend to increase.

________________________________________
19. The __________________________ is equal to the duration of each individual type of asset
weighted by the market value of each type of asset out of the total market value of all assets.

________________________________________

20. The __________________________ is equal to the duration of each individual type of liability in
the portfolio weighted by the market value of each type of liability in the portfolio out of the total
market value of all liabilities.

________________________________________

21. A bank is __________________ against changes in its net worth if its duration gap is equal to
zero.

________________________________________

22. The relationship between a change in an asset's price and an asset's change in the yield or
interest rate is captured by _________________________.

________________________________________

23. The change in a financial institution's __________________ is equal to difference between the
average duration of assets times the change in the interest rate divided by (1+ original discount
rate) times the dollar amount of total assets and the average duration of liabilities times the
change in the interest rate divided by 1+ original discount rate times the dollar amount of total
liabilities.

________________________________________

24. When a bank has a positive duration gap a parallel increase in the interest rates on the assets
and liabilities of the bank will lead to a(n) __________________ in the bank's net worth.

________________________________________

25. When a bank has a negative duration gap, a parallel decrease in the interest rates on the assets
and liabilities of the bank will lead to a(n) _________________________ in the bank's net worth.

________________________________________

26. Most lending institutions tend to do better when the yield curve is upward-sloping because they
tend to have ____________ maturity gap positions.

________________________________________

27. One of the government-created giant mortgage banking firm which has subsequently been
privatized is the ____________________________________.

________________________________________
28. One part of interest-rate risk is _____________________. This part of interest-rate risk reflects
that as interest rates rise, prices of securities tend to fall.

________________________________________

29. One part of interest-rate risk is ____________________. This part of interest-rate risk reflects
that as interest rates fall, any cash flows that are received are invested at a lower interest rate.

________________________________________

30. The interest-rate risk which arises when a borrower has the right to pay off a loan early reducing
the lender's expected rate of return is called ______________.

________________________________________

31. In recent decades, banks have aggressively sought to insulate their assets and liability portfolios
and profits from the ravages of changing interest rates. Many banks now conduct their asset-
liability management strategy with the help of a(n) _____________________.

________________________________________

32. __________________________ is interest income from loans and investments less interest
expenses on deposits and borrowed funds divided by total earning assets.

________________________________________

33. _____________________________ are those liabilities that mature or must be repriced within
the planning period.

________________________________________

34. Variable rate loans and securities are included as part of _______________________ for banks.

________________________________________

35. Money market deposits are included as part of ______________________ for banks.

________________________________________

36. Interest sensitive assets less interest sensitive liabilities divided by total assets of the bank is
known as _______________________.

________________________________________

37. Interest sensitive assets divided by interest sensitive liabilities is known as:
____________________________.

________________________________________
38. _______________________ is a measure of interest-rate risk exposure which is the total
difference in dollars between those assets and liabilities that can be repriced over a designated
time period.

________________________________________

39. ___________________________ is the phenomenon by which interest rates attached to various

assets often change by different amounts and at different speeds than interest rates attached to
various liabilities.

________________________________________

40. One of the principal goals of asset-liability management is to maximize or at least stabilize a
bank's margin or spread.

True False

41. Asset management strategy in banking assumes that the amount and kinds of deposits and other
borrowed funds a bank attracts are determined largely by its management.

True False

42. The ultimate goal of liability management is to gain control over a financial institution's sources of
funds.

True False

43. If interest rates fall when a bank is in an asset-sensitive position, its net interest margin will rise.

True False

44. A liability-sensitive bank will experience an increase in its net interest margin if interest rates rise.

True False

45. Under the so-called liability management view in banking, the key control lever banks possess
over the volume and mix of their liabilities is price.

True False

46. Under the so-called funds management view, bank management's control over assets must be
coordinated with its control over liabilities, so that asset and liability management are internally
consistent.

True False
47. Bankers cannot determine the level or trend of market interest rates; instead, they can only react
to the level and trend of rates.

True False

48. Short-term interest rates tend to rise more slowly than long-term interest rates and to fall more
slowly when the long-term interest rates in the market are headed down.

True False

49. A financial institution is liability sensitive, if its interest-sensitive liabilities are less than its interest-
sensitive assets.

True False

50. If a bank's interest-sensitive assets and liabilities are equal, then its interest revenues from assets
and funding costs from liabilities will change in the same proportion relative to changes in market
interest rates.

True False

51. Banks with a positive cumulative interest-sensitive gap will benefit if interest rates rise, but lose
income if interest rates decline.

True False

52. Banks with a negative cumulative interest-sensitive gap will benefit if interest rates rise, but lose
income if interest rates decline.

True False

53. Repriceable liabilities include long-term savings and retirement accounts.

True False

54. Interest-sensitive gap techniques do not consider the impact of changing interest rates on
stockholders' equity.

True False

55. Interest-sensitive gap, relative interest-sensitive gap, and the interest-sensitivity ratio will often
reach different conclusions as to whether the bank is asset or liability sensitive.

True False

56. The yield curve is constructed using corporate bonds with different default risks, so that the bank
can determine the risk/return tradeoff for default risk.

True False
57. Financial securities that are the same in all other ways may have differences in interest rates that
reflect the differences in the ease of selling the security in the secondary market at a favorable
price.

True False

58. Financial institutions face two major kinds of interest-rate risk. These risks include price risk and
reinvestment risk.

True False

59. Interest-sensitive gap and weighted interest-sensitive gap will always reach the same conclusion
as to whether a bank is asset sensitive or liability sensitive.

True False

60. Weighted interest-sensitive gap is less accurate than interest-sensitive gap in determining the
effect of changes in interest rates on net interest margin.

True False

61. A bank with a positive duration gap experiencing a rise in interest rates will experience an
increase in its net worth.

True False

62. A bank with a negative duration gap experiencing a rise in interest rates will experience an
increase in its net worth.

True False

63. Duration is a direct measure of the price risk but not the reinvestment risk of a bond.

True False

64. A bank with a positive duration gap experiencing a decrease in interest rates will experience an
increase in its net worth.

True False

65. A bank with a negative duration gap experiencing a decrease in interest rates will experience an
increase in its net worth.

True False

66. Duration is the weighted average maturity of a promised stream of future cash flows.

True False
67. Convexity is a direct measure of the price risk of a bond.

True False

68. A bond with a greater duration will have a smaller price change in percentage terms when interest
rates change.

True False

69. Long-term interest rates tend to change very little with the cycle of economic activity.

True False

70. A bank with a duration gap of zero is immunized against changes in the value of net worth due to
changes in interest rates in the market.

True False

71. Convexity is the idea that the rate of change of an asset's price varies with the change in interest
rates depending on the prevailing interest rates.

True False

72. The change in the market price of an asset due to a change in market interest rates is roughly
equal to the asset's duration times the relative change in interest rates attached to that particular
asset.

True False

73. U.S. banks having positive maturity gap positions tend to do better when the yield curve is
upward-sloping.

True False

74. Net interest margin tends to rise for U.S. banks having positive maturity gap positions when the
yield curve is upward-sloping.

True False

75. Financial institutions laden with home mortgages tend be immune to interest-rate risk.

True False

76. If a financial institution's net interest margin is immune to interest-rate risk, then so is its net
worth.

True False
77. A bank's IS GAP is defined as:

A. the dollar amount of interest-sensitive assets divided by the dollar amount of interest-sensitive
liabilities.
B. the dollar amount of earning assets divided by the dollar amount of total liabilities.
C. the dollar amount of interest-sensitive assets minus the dollar amount of interest-sensitive
liabilities.
D. the dollar amount of interest-sensitive liabilities minus the dollar amount of interest-sensitive
assets.
E. the dollar amount of earning assets times the average liability interest rate.

78. The maturing of the liability management techniques, coupled with more volatile interest rates,
gave birth to the __________________ approach, which dominates banking today.

A. liability management
B. asset management
C. risk management
D. funds management
E. None of the options is correct.

79. The principal goal of interest rate hedging strategy is to hold fixed a bank's:

A. net interest margin.

B. net income before taxes.
C. value of loans and securities.
D. interest sensitive assets.
E. None of the options is correct.

80. A bank is asset-sensitive if its:

A. loans and securities are affected by changes in interest rates.

B. interest-sensitive assets exceed its interest-sensitive liabilities.
C. interest-sensitive liabilities exceed its interest-sensitive assets.
D. deposits and borrowings are affected by changes in interest rates.
E. None of the options is correct.
81. The change in a bank's net income that occurs due to changes in interest rates equals the overall
change in market interest rates (in percentage points) times ____________.

A. volume of interest-sensitive assets

B. price risk of the bank's assets
C. price risk of the bank's liabilities
D. size of the bank's cumulative gap
E. None of the options is correct

82. A bank with a negative interest-sensitive GAP:

A. has a greater dollar volume of interest-sensitive liabilities than interest-sensitive assets.

B. will generate a higher interest margin if interest rates rise.
C. will generate a lower interest margin if interest rates fall.
D. has assets and liabilities with the same duration.
E. has liabilities with a greater duration than its assets.

83. The net interest margin of a bank is influenced by:

A. changes in the level of interest rates.

B. changes in the volume of interest-bearing assets and interest-bearing liabilities.
C. changes in interest income from loans and investments.
D. changes in interest expense on deposits and other borrowed funds.
E. All of the options are correct.

84. The discount rate that equalizes the current market value of a loan or security with the expected
stream of future income payments from that loan or security is known as:

A. bank discount rate.

B. yield to maturity.
C. annual percentage rate.
D. net interest margin.
E. None of the options is correct.

85. The interest-rate measure often quoted on short-term loans and money market securities such as
U.S. Treasury bills is the

A. bank discount rate.

B. yield to maturity.
C. annual percentage rate.
D. net interest margin.
E. None of the options is correct.
86. A bank whose interest-sensitive assets total $350 million and its interest-sensitive liabilities
amount to $175 million has:

A. an asset-sensitive gap of $525 million.

B. a liability-sensitive gap of $175 million.
C. an asset-sensitive gap of $175 million.
D. a liability-sensitive gap of $350 million.
E. None of the options is correct.

87. A bank has a 1-year $1,000,000 loan outstanding, payable in four equal quarterly installments.
What dollar amount of the loan would be considered rate sensitive in the 0-90 day bucket?

A. $0
B. $250,000
C. $500,000
D. $750,000
E. $1,000,000

88. A bank has Federal funds totaling $25 million with an interest-rate sensitivity weight of 1.0. This
bank also has loans of $105 million and investments of $65 million with interest rate sensitivity
weights of 1.40 and 1.15 respectively. It also has $135 million in interest-bearing deposits with an
interest rate sensitivity weight of 0.90 and other money market borrowings of $75 million with an
interest rate sensitivity weight of 1.0. What is the weighted interest-sensitive gap for this bank?

A. $50.25 million
B. -$15.00 million
C. -$50.25 million
D. $34.25 million
E. $196.5 million

89. A bond has a face value of $1,000 and five years to maturity. This bond has a coupon rate of 13
percent and is selling in the market today for $902. Coupon payments are made annually on this
bond. What is the yield to maturity (YTM) for this bond?

A. 13 percent
B. 12.75 percent
C. 16 percent
D. 11.45 percent
E. 12 percent
90. A treasury bill currently sells for $9,845, has a face value of $10,000 and has 46 days to maturity.
What is the bank discount rate on this security?

A. 12.49 percent
B. 12.13 percent
C. 12.30 percent
D. 2 percent
E. None of the options is correct.

91. The _______________ is determined by the demand and supply for loanable funds in the
market.

A. coupon rate
B. reserve requirement
C. interest-sensitive gap
D. risk-free real rate of interest
E. duration gap

92. As per the __________________ strategy, financial-service managers set interest-sensitive gap
as close to zero as possible to reduce the expected volatility of net interest income.

A. aggressive GAP management

B. defensive GAP management
C. cumulative GAP management
D. weighted GAP management
E. asset-sensitive GAP management

93. The fact that a consumer who purchases a particular basket of goods for $100 today has to pay
$105 next year for the same basket of goods is an example of which of the following risks?

A. Inflation risk
B. Default risk
C. Liquidity risk
D. Price risk
E. Maturity risk
94. A bank has Federal Funds totaling $25 million with an interest-rate sensitivity weight of 1.0. This
bank also has loans of $105 million and investments of $65 million with interest rate sensitivity
weights of 1.40 and 1.15 respectively. It also has $135 million in interest-bearing deposits with an
interest rate sensitivity weight of 0.90 and other money market borrowings of $75 million with an
interest rate sensitivity weight of 1.0. What is the dollar interest-sensitive gap for this bank?

A. $50.25 million
B. -$15 million
C. -$50.25 million
D. $34.25 million
E. None of the options is correct.

95. If a bank has a positive interest-sensitive gap, one of the possible management responses would
be to:

A. wait for the interest rates to rise or be stable.

B. shorten asset maturities.
C. decrease interest-sensitive liabilities.
D. increase interest-sensitive assets.
E. extend liability maturities.

96. If a bank has a negative interest-sensitive gap, one of the possible management responses would
be to:

A. lengthen asset maturities.

B. shorten liability maturities.
C. increase interest-sensitive liabilities.
D. decrease interest-sensitive assets.
E. wait for the interest rates to fall or be stable.

97. A treasury bill currently selling for $9,845, has a face value of $10,000 and has 46 days to
maturity. What is the yield to maturity equivalent on this security?

A. 12.49 percent
B. 12.13 percent
C. 12.30 percent
D. 2 percent
E. None of the options is correct.
98. The Third National Bank of Edmond reports a net interest margin of 5.83 percent. It has total
interest revenues of $275 million and total interest expenses of $210 million. What will be the
bank's earning assets total?

A. $4,717 million
B. $3,602 million
C. $1,115 million
D. $3,790 million
E. None of the options is correct.

99. The Third National Bank of Edmond reports a net interest margin of 5.83 percent. It has total
interest revenues of $275 million and total interest expenses of $210 million. This bank has
earnings assets of $1,115. Suppose this bank's interest revenues rise by 8 percent and its
interest expenses and earnings assets rise by 10 percent next year, what is this bank's new net
interest margin?

A. 5.83 percent
B. 7.09 percent
C. 3.59 percent
D. 5.38 percent
E. 7.80 percent

100.Financial firms devote greater attention to opening up new sources of funding and monitoring the
mix and cost of their deposit and non-deposit liabilities under the _______________________
strategy.

A. asset management
B. liabilities management
C. interest-sensitive gap management
D. weighted gap management
E. duration gap management

101.If Fifth National Bank's asset duration exceeds its liability duration and if interest rates rise, the
bank's net worth will _________________.

A. decrease
B. increase
C. stabilize
D. be unaffected
E. None of the options is correct.
102.Main Street Bank has $100 million in commercial loans with an average duration of 0.40 years;
$40 million in consumer loans with an average duration of 1.75 years; and $30 million in U.S.
Treasury bonds with an average duration of 6 years. What will be the bank's dollar-weighted
asset portfolio duration?

A. 0.4 years
B. 1.7 years
C. 2.7 years
D. 4.1 years
E. None of the options is correct.

103.A an average asset duration of 4.7 years and an average liability duration of 3.3 years. This bank
has $750 million in total assets and $500 million in total liabilities. This bank's leverage-adjusted
duration gap is a:

A. positive gap of 8.0 years.

B. negative gap of 2.5 years.
C. positive gap of 1.4 years.
D. positive gap of 2.5 years.
E. None of the options is correct.

104.A bank has an average asset duration of 1.15 years and an average liability duration of 2.70
years. This bank has $250 million in total assets and $225 million in total liabilities. This bank's
leverage-adjusted duration gap is a:

A. negative gap of 1.55 years.

B. positive gap of 1.28 years.
C. negative gap of 3.85 years.
D. negative gap of 1.28 years.
E. None of the options is correct.

105.The duration of a bond is the weighted average maturity of the future cash flows expected to be
received on a bond. Which of the following statements concerning duration is true?

A. The longer the time to maturity, the greater the duration.

B. The higher the coupon rate, the lower the duration.
C. The shorter the duration, the greater the price volatility.
D. All of the options are true.
E. None of the options is true.
106.A bond has a duration of 7.5 years. Its current market price is $1,125. Interest rates in the market
are 7 percent today. It has been forecasted that interest rates will rise to 9 percent over the next
couple of weeks. How will the bond's price change in percentage terms?

A. The bond's price will rise by 2 percent.

B. The bond's price will fall by 2 percent.
C. The bond's price will fall by 14.02 percent.
D. The bond's price will rise by 14.02 percent.
E. The bond's price will not change.

107.A bank has an average asset duration of 5 years and an average liability duration of 3 years. This
bank has total assets of $500 million and total liabilities of $250 million. Currently, market interest
rates are 10 percent. If interest rates fall by 2 percent (to 8 percent), what is this bank's change in
net worth?

A. Net worth will decrease by $31.81 million.

B. Net worth will increase by $31.81 million.
C. Net worth will increase by $27.27 million.
D. Net worth will decrease by $27.27 million.
E. Net worth will not change at all.

108.A bank has an average asset duration of 5 years and an average liability duration of 3 years. This
bank has total assets of $500 million and total liabilities of $250 million. Currently, market interest
rates are 10 percent. What will be this bank's leverage-adjusted duration gap?

A. 2 years
B. -2 years
C. 3.5 years
D. -3.5 years
E. None of the options is correct.

109.A bank has an average asset duration of 5 years and an average liability duration of 9 years. This
bank has total assets of $1,000 million and total liabilities of $850 million. Currently, market
interest rates are 5 percent. If interest rates rise by 2 percent (to 7 percent), what is this bank's
change in net worth?

A. Net worth will decrease by $50.47 million.

B. Net worth will increase by $50.47 million.
C. Net worth will decrease by $240.95 million.
D. Net worth will increase by $240.95 million.
E. Net worth will not change at all.
110.A bank has an average asset duration of 5 years and an average liability duration of 9 years. This
bank has total assets of $1,000 million and total liabilities of $850 million. Currently, market
interest rates are 5 percent. What will be this bank's leverage-adjusted duration gap?

A. -4 years
B. 4 years
C. 2.65 years
D. -2.65 years
E. 3.65 years

111.A bank has $100 million of investment grade bonds with a duration of 9.0 years. This bank also
has $500 million of commercial loans with a duration of 5.0 years. This bank has $300 million of
consumer loans with a duration of 2.0 years. This bank has deposits of $600 million with a
duration of 1.0 year and non-deposit borrowings of $100 million with an average duration of .25
years. What is this bank's duration gap? These are all of the assets and liabilities this bank has.

A. This bank has a duration gap of 14.75 years.

B. This bank has a duration gap of 15.03 years.
C. This bank has a duration gap of 3.55 years.
D. This bank has a duration gap of 3.75 years.
E. This bank has a duration gap of 5.15 years.

112.Which of the following statements concerning a bank's leverage-adjusted duration gap is true?

A. If it has a positive duration gap and interest rates rise, its net worth will decline.
B. If it has a positive duration gap and interest rates fall, its net worth will decline.
C. If it has a negative duration gap and interest rates rise, its net worth will decline.
D. If it has a negative duration gap and interest rates fall, its net worth will increase.
E. All of the options are correct.

113.A bank has an average duration for its asset portfolio of 5.5 years. The bank has total assets of
$1,000 million and total liabilities of $750 million. If this bank's leverage-adjusted duration gap is
zero, what must be the duration of its liabilities portfolio?

A. 7.33 years
B. 4.125 years
C. 7.5 years
D. 5.5 years
E. None of the options is correct.
114.A bond has a face value of $1,000 and coupon payments of $80 annually. This bond matures in
three years and is selling for $1,000 in the market. Market interest rate is 8 percent. What is this
bond's duration?

A. 3 years
B. 2.78 years
C. 1.95 years
D. 4.31 years
E. None of the options is correct.

115.A bond has a face value of $1,000 and coupon payments of $120 annually. This bond matures in
three years and is selling in the market for $1,160. Market interest rate is 6 percent. What is this
bond's duration?

A. 3 years
B. 5.71 years
C. 1.96 years
D. 2.71 years
E. None of the options is correct.

116.A bond is selling in the market for $950 and has a duration of 6 years. Market interest rates are 9
percent and are expected to decrease to 7 percent in the near future. What will this bond's price
be after the change in market interest rates?

A. $969
B. $931
C. $1,055
D. $854
E. $950

117.A bond is selling in the market for $1,100 and has a duration of 4.5 years. Market interest rates
are 5 percent and are expected to increase to 7 percent in the near future. What will this bond's
price be after the change in market interest rates?

A. $1,006
B. $1,194
C. $1,122
D. $1,078
E. $1,100
118.Which of the following is a true statement?

A. The longer the time to maturity of a security, the smaller will be the duration
B. The lower the coupon rate of a security, the higher the duration
C. For a given duration and change in interest rates, the change in the price of the security will be
larger for a lower starting level of interest rates
D. The duration of a security remains constant no matter the level of market interest rates
E. All of the options are true statements.

119.The fact that the rate of change in an asset's price varies with the level of interest rates is known
as:

A. portfolio.
B. convexity.
C. maturity.
D. yield.
E. None of the options is correct.

120.U.S. banks tend to fare best when the yield curve is:

A. horizontal.
B. downward-sloping.
C. vertical.
D. upward-sloping.
E. None of the options is correct.

121.Carolina National Bank knows that the interest rate on its loans change faster and by a larger
amount than the interest rate on its deposits. What type of risk is this an example of?

A. Default risk
B. Inflation risk
C. Liquidity risk
D. Call risk
E. Basis risk
122.Havoc State Bank has a loan that it fears will not be repaid because the company is going into
bankruptcy. What type of risk would this be an example of?

A. Default risk
B. Inflation risk
C. Liquidity risk
D. Call risk
E. Basis risk

123.Carter National Bank is worried because it knows that the municipal bonds it has in its bond
portfolio can be difficult to sell quickly. What type of risk would this be an example of?

A. Default risk
B. Inflation risk
C. Liquidity risk
D. Call risk
E. Basis risk

124.Jackson State Bank is worried because many of the loans it has made are home mortgages
which can be paid off early by the homeowner. What type of risk would this be an example of?

A. Default risk
B. Inflation risk
C. Liquidity risk
D. Call risk
E. Basis risk

125.A bank is liability sensitive, if its:

A. deposits and non-deposit borrowings are not affected by changes in interest rates.
B. interest-sensitive assets exceed its interest-sensitive liabilities.
C. interest-sensitive liabilities exceed its interest-sensitive assets.
D. loans and securities are affected by changes in interest rates.
E. None of the options is correct.

126.Which of the following would be an example of a repriceable asset?

A. Money the bank has borrowed from the money market

B. Cash in the vault
C. Demand deposits that do not pay interest
D. Short-term securities issued by the government about to mature
E. All of the options are correct.
127.Which of the following would be an example of a repriceable liability?

A. Money the bank has borrowed from the money market

B. Cash in the vault
C. Demand deposits that do not pay an interest rate
D. Short term securities issued by the government about to mature
E. All of the options are correct.

128.Which of the following would be an example of a nonrepriceable asset?

A. Money the bank has borrowed from the money market

B. Cash in the vault
C. Demand deposits that do not pay an interest rate
D. Short term securities issued by the government about to mature
E. All of the options are correct.

129.Which of the following would be an example of a nonrepriceable liability?

A. Money the bank has borrowed from the money market

B. Cash in the vault
C. Demand deposits that do not pay an interest rate
D. Short term securities issued by the government about to mature
E. All of the options are correct.

The Tidewater State Bank has $1,000 in total assets (all of which are earning assets), $700 of
which will be repriced within the next 90 days. This bank also has $800 in total liabilities, $400 of
which will be repriced within the next 90 days. Currently, the bank is earning 8 percent on its
assets and is paying 5 percent on its liabilities.

130.If interest rates do not change in the next 90 days, what is this bank's net interest margin?

A. 8 percent
B. 5 percent
C. 4 percent
D. 1.4 percent
E. 3 percent
131.What is the dollar interest-sensitive gap of this bank?

A. -$200
B. -$100
C. $200
D. $300
E. $600

132.If interest rates on both assets and liabilities rise by 2 percent in the next 90 days, what would be
the bank's net interest margin?

A. 4 percent
B. 4.4 percent
C. 4.6 percent
D. 2.4 percent
E. 6 percent

133.If interest rates on both assets and liabilities rise by 2 percent in the next 90 days, what should
happen to this bank's net interest margin?

A. It should rise by 0.60 percent.

B. It should rise by 2 percent.
C. It should rise by 4 percent.
D. It should rise by 1 percent.
E. It should not show any rise.

134.If interest rates on both assets and liabilities decrease by 2 percent in the next 90 days, what
would be this bank's net interest margin?

A. 3.4 percent
B. 4 percent
C. 0.4 percent
D. 5.6 percent
E. 2 percent
135.If interest rates on both assets and liabilities decrease by 2 percent in the next 90 days, what
should happen to this bank's net interest margin?

A. It should fall by 2 percent.

B. It should fall by 0.6 percent.
C. It should fall by 4 percent.
D. It should fall by 1 percent.
E. It should not show any fall.

136.The Arnold National Bank has a bond portfolio that consists of bonds with 5 years to maturity and
a 9 percent coupon rate having a face value of $1,000. These bonds are selling in the market for
$1,126. Coupon payments are made annually on this bond.

What is the yield to maturity on these bonds?

A. 3 percent
B. 6 percent
C. 9 percent
D. 12 percent
E. None of the options is correct.

137.The Arnold National Bank has a bond portfolio that consists of bonds with 5 years to maturity and
a 9 percent coupon rate having a face value of $1,000. These bonds are selling in the market for
$1,126. Coupon payments are made annually on this bond.

What is duration of these bonds?

A. 3.77 years
B. 4.23 years
C. 5 years
D. 9 years
E. None of the options is correct.

The Harris State Bank has $2,000 in total assets (all of which are earning assets), $500 of which
will be repriced in the next 90 days. This bank also has $1,600 in total liabilities, $1,000 of which
will be repriced in 90 days. The bank currently earns 9 percent on its assets and pays 4 percent
on its liabilities.
138.If interest rates do not change in the next 90 days, what is this bank's net interest margin?

A. 0.5 percent
B. 0.8 percent
C. 1.8 percent
D. 5.8 percent
E. None of the options is correct.

139.What is the dollar interest-sensitive gap of this bank?

A. $400
B. -$1,100
C. -$500
D. $1,000
E. None of the options is correct.

140.If interest rates on both assets and liabilities rise by 2 percent in the next 90 days, what would be
this bank's net interest margin?

A. 4.2 percent
B. 5.3 percent
C. 5.8 percent
D. 6.2 percent
E. 7.8 percent

141.If interest rates on both assets and liabilities rise by 2 percent in the next 90 days, what should
happen to this bank's net interest margin?

A. It should fall by 2 percent.

B. It should fall by 0.5 percent.
C. It should fall by 4 percent.
D. It should fall by 1 percent.
E. It should not record any fall.

142.If interest rates on both assets and liabilities fall by 2 percent in the next 90 days, what would be
this bank's net interest margin?

A. 3.8 percent
B. 5.4 percent
C. 5.8 percent
D. 6.3 percent
E. 7.8 percent
143.If interest rates on both assets and liabilities fall by 2 percent in the next 90 days, what should
happen to this bank's net interest margin?

A. It should rise by 0.5 percent.

B. It should fall by 0.5 percent.
C. It should stay the same.
D. It should rise by 2 percent.
E. It should fall by 2 percent.

144.Maryellen Epplin notices that a particular T-Bill has a banker's discount rate of 9 percent in the
Wall Street Journal. She knows that this T-Bill has 20 days to maturity and has a face value of
$10,000.

What price is this T-Bill selling for in the market?

A. $9,100
B. $10,000
C. $9,950
D. $1,900
E. None of the options is correct.

145.Maryellen Epplin notices that a particular T-Bill has a banker's discount rate of 9 percent in the
Wall Street Journal. She knows that this T-Bill has 20 days to maturity and has a face value of
$10,000.

What is the yield to maturity on this T-Bill?

A. 9 percent
B. 0.5 percent
C. 4.5 percent
D. 9.17 percent
E. None of the options is correct.

146.The Raymond Burr National Bank has $1,000 in assets with an average duration of 5 years. This
bank has $800 in liabilities with an average duration of 6.25 years. What is the duration gap of
this bank?

A. -1.25 years
B. 0 years
C. 1.25 years
D. -2.25 years
E. None of the options is correct.
147.The Raymond Burr National Bank has $1,000 in assets with an average duration of 5 years. This
bank has $800 in liabilities with an average duration of 6.25 years. Market interest rates start at 6
percent and fall by 1 percent. What is the change in net worth of this bank?

A. $11.29
B. -$11.29
C. $0
D. -$22.22
E. $22.22

148.The interest rate on one year Treasury Bonds is 5 percent. The interest rate on five year
Treasury Bonds is 7.5 percent. The interest rate on ten year Treasury Bonds is 10 percent. What
is true about the yield curve?

A. It is upward sloping.
B. It is downward sloping.
C. It is a horizontal curve.
D. It is a vertical curve.
E. It is parallel to the x-axis.

149.The assets and liabilities of Finacle Bank as on December 31, 2015, are as follows:

$20,000 of short-term securities issued by governments and private borrowers (about to mature),
$12,000 of borrowings from the money market, $15,000 of short-term savings accounts, $12,000
of variable-rate loans and securities, $18,000 of long-term loans made at a fixed interest rate,
$25,000 of long-term savings and retirement accounts, $22,000 of deposits in the Central Bank
(held as legal reserves), $550,000 of equity capital provided by the bank's owners, and $500,000
of building and equipment.

What is the total of repriceable assets held by the bank as on December 31, 2015?

A. $32,000
B. $50,000
C. $45,000
D. $55,000
E. $52,000
150.The assets and liabilities of Finacle Bank as on December 31, 2015, are as follows:

$20,000 of short-term securities issued by governments and private borrowers (about to mature),
$12,000 of borrowings from the money market, $15,000 of short-term savings accounts, $12,000
of variable-rate loans and securities, $18,000 of long-term loans made at a fixed interest rate,
$25,000 of long-term savings and retirement accounts, $22,000 of deposits in the Central Bank
(held as legal reserves), $550,000 of equity capital provided by the bank's owners, and $500,000
of building and equipment.

Which of the following is a repriceable liability for Finacle Bank?

A. Long-term savings and retirement accounts

B. Variable-rate loans and securities
C. Borrowings from the money market
D. Equity capital provided by the owners
E. Long-term loans made at a fixed interest rate

151.Brendon Brothers Bank reports interest-sensitive assets at $35 million, interest-sensitive liabilities
at $60 million and total assets at $80 million. What is the relative IS GAP of the bank?

A. -0.29
B. 0.29
C. -0.31
D. 0.31
E. -0.33
152.Loyola Bank classifies its assets and liabilities and the period (maturity buckets) within which they
are subject to repricing as on March 31, 2015 as follows:

What is the interest-sensitive gap of the bank as on March 31, 2015?

A. -$30 million
B. $40 million
C. -$45 million
D. $32 million
E. -$38 million

153.Loyola Bank classifies its assets and liabilities and the period (maturity buckets) within which they
are subject to repricing as on March 31, 2015 as follows:

What is the cumulative gap of the bank for interest-sensitive assets and interest-sensitive
liabilities of maturity buckets up to 180 days as on March 31, 2015?

A. -$65 million
B. -$60 million
C. $65 million
D. $60 million
E. $45 million
154.Loyola Bank classifies its assets and liabilities and the period (maturity buckets) within which they
are subject to repricing as on March 31, 2015 as follows:

What is the interest-sensitivity ratio of the bank for the 90 to 180 days maturity bucket?

A. 0.82
B. 0.88
C. 0.91
D. 0.92
E. 0.85

155.Loyola Bank classifies its assets and liabilities and the period (maturity buckets) within which they
are subject to repricing as on March 31, 2015 as follows:

Silvershine bank has $200 million in earning assets and $280 million in liabilities that are subject
to an interest rate change each month over the next six months. If market interest rates suddenly
rise by 2 full percentage points, what will be approximate change in the net interest income for
the bank?

A. $8.2 million
B. -$8.5 million
C. $8.5 million
D. $9.6 million
E. -$9.6 million
 ch7 Key

1. The ___________________ view of assets and liabilities held that the amount and types of
deposits was primarily determined by customers and hence the key decision a bank needed to
make was with the assets.

asset management
Rose - Chapter 07 #1

2. Recent decades have ushered in dramatic changes in banking. The goal of

__________________ was simply to gain control of the bank's sources of funds.

liability management
Rose - Chapter 07 #2

3. The __________________________ is the interest rate that equalizes the current market
price of a bond with the present value of the future cash flows.

yield to maturity (YTM)

Rose - Chapter 07 #3

4. The __________________ premium on a bond allows the investor to be compensated for

their projected loss in purchasing power from the increase in the prices of goods and services
in the future.

inflation-risk
Rose - Chapter 07 #4

5. The __________________ shows the relationship between the time to maturity and the yield
to maturity of bonds.

yield curve
Rose - Chapter 07 #5

6. The __________________ premium on a bond reflects the differences in the ease and ability
to sell the bond in the secondary market at a favorable price.

liquidity-risk
Rose - Chapter 07 #6
7. __________________________ are those assets which mature or must be repriced within the
planning period.

Interest-sensitive assets
Rose - Chapter 07 #7

8. __________________________ is the difference between interest-sensitive assets and

interest-sensitive liabilities.

Dollar interest-sensitive gap

Rose - Chapter 07 #8

9. A(n) __________________________ means that the bank has more interest-sensitive

liabilities than interest-sensitive assets.

negative interest-sensitive gap (liability sensitive)

Rose - Chapter 07 #9

10. The bank's __________________________ takes into account the idea that the speed
(sensitivity) of interest rate changes will differ for different types of assets and liabilities.

weighted interest-sensitive gap

Rose - Chapter 07 #10

11. __________________________ is the coordinated management of both the bank's assets

and its liabilities.

Funds management
Rose - Chapter 07 #11

12. __________________________ is the risk due to changes in market interest rates which can
adversely affect the bank's net interest margin, assets, liabilities, and equity.

Interest-rate risk
Rose - Chapter 07 #12

13. The __________________________ is the rate of return on a financial instrument using a

360-day year relative to the instrument's face value.

bank discount rate

Rose - Chapter 07 #13
14. The __________________________ component of interest rates is the risk premium due to
the probability that the borrower will miss some payments or will not repay the loan.

default-risk premium
Rose - Chapter 07 #14

15. __________________ is the weighted average maturity for a stream of future cash flows.

Duration
Rose - Chapter 07 #15

16. __________________________ is the difference between the dollar-weighted duration of the

asset portfolio and the dollar-weighted duration of the liability portfolio.

Duration gap
Rose - Chapter 07 #16

17. A(n) __________________________ gap means that for a parallel increase in all interest
rates, the market value of net worth will tend to decline.

positive-duration
Rose - Chapter 07 #17

18. A(n) __________________________ gap means that for a parallel increase in all interest
rates, the market value of net worth will tend to increase.

negative-duration
Rose - Chapter 07 #18

19. The __________________________ is equal to the duration of each individual type of asset
weighted by the market value of each type of asset out of the total market value of all assets.

duration of the asset portfolio.

Rose - Chapter 07 #19

20. The __________________________ is equal to the duration of each individual type of liability
in the portfolio weighted by the market value of each type of liability in the portfolio out of the
total market value of all liabilities.

duration of the liability portfolio

Rose - Chapter 07 #20
21. A bank is __________________ against changes in its net worth if its duration gap is equal to
zero.

immunized (insulated or protected)

Rose - Chapter 07 #21

22. The relationship between a change in an asset's price and an asset's change in the yield or
interest rate is captured by _________________________.

convexity
Rose - Chapter 07 #22

23. The change in a financial institution's __________________ is equal to difference between the
average duration of assets times the change in the interest rate divided by (1+ original
discount rate) times the dollar amount of total assets and the average duration of liabilities
times the change in the interest rate divided by 1+ original discount rate times the dollar
amount of total liabilities.

net worth
Rose - Chapter 07 #23

24. When a bank has a positive duration gap a parallel increase in the interest rates on the assets
and liabilities of the bank will lead to a(n) __________________ in the bank's net worth.

decrease
Rose - Chapter 07 #24

25. When a bank has a negative duration gap, a parallel decrease in the interest rates on the
assets and liabilities of the bank will lead to a(n) _________________________ in the bank's
net worth.

decrease
Rose - Chapter 07 #25

26. Most lending institutions tend to do better when the yield curve is upward-sloping because
they tend to have ____________ maturity gap positions.

positive
Rose - Chapter 07 #26

27. One of the government-created giant mortgage banking firm which has subsequently been
privatized is the ____________________________________.

FNMA or Fannie Mae (or FHLMC or Freddie Mac)

Rose - Chapter 07 #27
28. One part of interest-rate risk is _____________________. This part of interest-rate risk
reflects that as interest rates rise, prices of securities tend to fall.

price risk
Rose - Chapter 07 #28

29. One part of interest-rate risk is ____________________. This part of interest-rate risk reflects
that as interest rates fall, any cash flows that are received are invested at a lower interest
rate.

reinvestment risk
Rose - Chapter 07 #29

30. The interest-rate risk which arises when a borrower has the right to pay off a loan early
reducing the lender's expected rate of return is called ______________.

call risk
Rose - Chapter 07 #30

31. In recent decades, banks have aggressively sought to insulate their assets and liability
portfolios and profits from the ravages of changing interest rates. Many banks now conduct
their asset-liability management strategy with the help of a(n) _____________________.

asset-liability committee
Rose - Chapter 07 #31

32. __________________________ is interest income from loans and investments less interest
expenses on deposits and borrowed funds divided by total earning assets.

Net interest margin (NIM)

Rose - Chapter 07 #32

33. _____________________________ are those liabilities that mature or must be repriced within
the planning period.

Interest-sensitive liabilities
Rose - Chapter 07 #33

34. Variable rate loans and securities are included as part of _______________________ for
banks.

repriceable assets
Rose - Chapter 07 #34
35. Money market deposits are included as part of ______________________ for banks.

repriceable liabilities
Rose - Chapter 07 #35

36. Interest sensitive assets less interest sensitive liabilities divided by total assets of the bank is
known as _______________________.

relative interest sensitive gap

Rose - Chapter 07 #36

37. Interest sensitive assets divided by interest sensitive liabilities is known as:
____________________________.

interest sensitivity ratio

Rose - Chapter 07 #37

38. _______________________ is a measure of interest-rate risk exposure which is the total

difference in dollars between those assets and liabilities that can be repriced over a
designated time period.

Cumulative gap
Rose - Chapter 07 #38

39. ___________________________ is the phenomenon by which interest rates attached to

various assets often change by different amounts and at different speeds than interest rates
attached to various liabilities.

Basis risk
Rose - Chapter 07 #39

40. One of the principal goals of asset-liability management is to maximize or at least stabilize a
bank's margin or spread.

TRUE
Rose - Chapter 07 #40

41. Asset management strategy in banking assumes that the amount and kinds of deposits and
other borrowed funds a bank attracts are determined largely by its management.

FALSE
Rose - Chapter 07 #41
42. The ultimate goal of liability management is to gain control over a financial institution's sources
of funds.

TRUE
Rose - Chapter 07 #42

43. If interest rates fall when a bank is in an asset-sensitive position, its net interest margin will
rise.

FALSE
Rose - Chapter 07 #43

44. A liability-sensitive bank will experience an increase in its net interest margin if interest rates
rise.

FALSE
Rose - Chapter 07 #44

45. Under the so-called liability management view in banking, the key control lever banks possess
over the volume and mix of their liabilities is price.

TRUE
Rose - Chapter 07 #45

46. Under the so-called funds management view, bank management's control over assets must be
coordinated with its control over liabilities, so that asset and liability management are internally
consistent.

TRUE
Rose - Chapter 07 #46

47. Bankers cannot determine the level or trend of market interest rates; instead, they can only
react to the level and trend of rates.

TRUE
Rose - Chapter 07 #47

48. Short-term interest rates tend to rise more slowly than long-term interest rates and to fall more
slowly when the long-term interest rates in the market are headed down.

FALSE
Rose - Chapter 07 #48
49. A financial institution is liability sensitive, if its interest-sensitive liabilities are less than its
interest-sensitive assets.

FALSE
Rose - Chapter 07 #49

50. If a bank's interest-sensitive assets and liabilities are equal, then its interest revenues from
assets and funding costs from liabilities will change in the same proportion relative to changes
in market interest rates.

TRUE
Rose - Chapter 07 #50

51. Banks with a positive cumulative interest-sensitive gap will benefit if interest rates rise, but
lose income if interest rates decline.

TRUE
Rose - Chapter 07 #51

52. Banks with a negative cumulative interest-sensitive gap will benefit if interest rates rise, but
lose income if interest rates decline.

FALSE
Rose - Chapter 07 #52

53. Repriceable liabilities include long-term savings and retirement accounts.

FALSE
Rose - Chapter 07 #53

54. Interest-sensitive gap techniques do not consider the impact of changing interest rates on
stockholders' equity.

TRUE
Rose - Chapter 07 #54

55. Interest-sensitive gap, relative interest-sensitive gap, and the interest-sensitivity ratio will often
reach different conclusions as to whether the bank is asset or liability sensitive.

FALSE
Rose - Chapter 07 #55
56. The yield curve is constructed using corporate bonds with different default risks, so that the
bank can determine the risk/return tradeoff for default risk.

FALSE
Rose - Chapter 07 #56

57. Financial securities that are the same in all other ways may have differences in interest rates
that reflect the differences in the ease of selling the security in the secondary market at a
favorable price.

TRUE
Rose - Chapter 07 #57

58. Financial institutions face two major kinds of interest-rate risk. These risks include price risk
and reinvestment risk.

TRUE
Rose - Chapter 07 #58

59. Interest-sensitive gap and weighted interest-sensitive gap will always reach the same
conclusion as to whether a bank is asset sensitive or liability sensitive.

FALSE
Rose - Chapter 07 #59

60. Weighted interest-sensitive gap is less accurate than interest-sensitive gap in determining the
effect of changes in interest rates on net interest margin.

FALSE
Rose - Chapter 07 #60

61. A bank with a positive duration gap experiencing a rise in interest rates will experience an
increase in its net worth.

FALSE
Rose - Chapter 07 #61

62. A bank with a negative duration gap experiencing a rise in interest rates will experience an
increase in its net worth.

TRUE
Rose - Chapter 07 #62
63. Duration is a direct measure of the price risk but not the reinvestment risk of a bond.

FALSE
Rose - Chapter 07 #63

64. A bank with a positive duration gap experiencing a decrease in interest rates will experience
an increase in its net worth.

TRUE
Rose - Chapter 07 #64

65. A bank with a negative duration gap experiencing a decrease in interest rates will experience
an increase in its net worth.

FALSE
Rose - Chapter 07 #65

66. Duration is the weighted average maturity of a promised stream of future cash flows.

TRUE
Rose - Chapter 07 #66

67. Convexity is a direct measure of the price risk of a bond.

TRUE
Rose - Chapter 07 #67

68. A bond with a greater duration will have a smaller price change in percentage terms when
interest rates change.

FALSE
Rose - Chapter 07 #68

69. Long-term interest rates tend to change very little with the cycle of economic activity.

TRUE
Rose - Chapter 07 #69

70. A bank with a duration gap of zero is immunized against changes in the value of net worth due
to changes in interest rates in the market.

TRUE
Rose - Chapter 07 #70
71. Convexity is the idea that the rate of change of an asset's price varies with the change in
interest rates depending on the prevailing interest rates.

TRUE
Rose - Chapter 07 #71

72. The change in the market price of an asset due to a change in market interest rates is roughly
equal to the asset's duration times the relative change in interest rates attached to that
particular asset.

TRUE
Rose - Chapter 07 #72

73. U.S. banks having positive maturity gap positions tend to do better when the yield curve is
upward-sloping.

TRUE
Rose - Chapter 07 #73

74. Net interest margin tends to rise for U.S. banks having positive maturity gap positions when
the yield curve is upward-sloping.

TRUE
Rose - Chapter 07 #74

75. Financial institutions laden with home mortgages tend be immune to interest-rate risk.

FALSE
Rose - Chapter 07 #75

76. If a financial institution's net interest margin is immune to interest-rate risk, then so is its net
worth.

FALSE
Rose - Chapter 07 #76
77. A bank's IS GAP is defined as:

A. the dollar amount of interest-sensitive assets divided by the dollar amount of interest-
sensitive liabilities.
B. the dollar amount of earning assets divided by the dollar amount of total liabilities.
C. the dollar amount of interest-sensitive assets minus the dollar amount of interest-sensitive
liabilities.
D. the dollar amount of interest-sensitive liabilities minus the dollar amount of interest-sensitive
assets.
E. the dollar amount of earning assets times the average liability interest rate.
Rose - Chapter 07 #77

78. The maturing of the liability management techniques, coupled with more volatile interest rates,
gave birth to the __________________ approach, which dominates banking today.

A. liability management
B. asset management
C. risk management
D. funds management
E. None of the options is correct.
Rose - Chapter 07 #78

79. The principal goal of interest rate hedging strategy is to hold fixed a bank's:

A. net interest margin.

B. net income before taxes.
C. value of loans and securities.
D. interest sensitive assets.
E. None of the options is correct.
Rose - Chapter 07 #79

80. A bank is asset-sensitive if its:

A. loans and securities are affected by changes in interest rates.

B. interest-sensitive assets exceed its interest-sensitive liabilities.
C. interest-sensitive liabilities exceed its interest-sensitive assets.
D. deposits and borrowings are affected by changes in interest rates.
E. None of the options is correct.
Rose - Chapter 07 #80
81. The change in a bank's net income that occurs due to changes in interest rates equals the
overall change in market interest rates (in percentage points) times ____________.

A. volume of interest-sensitive assets

B. price risk of the bank's assets
C. price risk of the bank's liabilities
D. size of the bank's cumulative gap
E. None of the options is correct
Rose - Chapter 07 #81

82. A bank with a negative interest-sensitive GAP:

A. has a greater dollar volume of interest-sensitive liabilities than interest-sensitive assets.

B. will generate a higher interest margin if interest rates rise.
C. will generate a lower interest margin if interest rates fall.
D. has assets and liabilities with the same duration.
E. has liabilities with a greater duration than its assets.
Rose - Chapter 07 #82

83. The net interest margin of a bank is influenced by:

A. changes in the level of interest rates.

B. changes in the volume of interest-bearing assets and interest-bearing liabilities.
C. changes in interest income from loans and investments.
D. changes in interest expense on deposits and other borrowed funds.
E. All of the options are correct.
Rose - Chapter 07 #83

84. The discount rate that equalizes the current market value of a loan or security with the
expected stream of future income payments from that loan or security is known as:

A. bank discount rate.

B. yield to maturity.
C. annual percentage rate.
D. net interest margin.
E. None of the options is correct.
Rose - Chapter 07 #84
85. The interest-rate measure often quoted on short-term loans and money market securities such
as U.S. Treasury bills is the

A. bank discount rate.

B. yield to maturity.
C. annual percentage rate.
D. net interest margin.
E. None of the options is correct.
Rose - Chapter 07 #85

86. A bank whose interest-sensitive assets total $350 million and its interest-sensitive liabilities
amount to $175 million has:

A. an asset-sensitive gap of $525 million.

B. a liability-sensitive gap of $175 million.
C. an asset-sensitive gap of $175 million.
D. a liability-sensitive gap of $350 million.
E. None of the options is correct.
Rose - Chapter 07 #86

87. A bank has a 1-year $1,000,000 loan outstanding, payable in four equal quarterly installments.
What dollar amount of the loan would be considered rate sensitive in the 0-90 day bucket?

A. $0
B. $250,000
C. $500,000
D. $750,000
E. $1,000,000
Rose - Chapter 07 #87
88. A bank has Federal funds totaling $25 million with an interest-rate sensitivity weight of 1.0.
This bank also has loans of $105 million and investments of $65 million with interest rate
sensitivity weights of 1.40 and 1.15 respectively. It also has $135 million in interest-bearing
deposits with an interest rate sensitivity weight of 0.90 and other money market borrowings of
$75 million with an interest rate sensitivity weight of 1.0. What is the weighted interest-
sensitive gap for this bank?

A. $50.25 million
B. -$15.00 million
C. -$50.25 million
D. $34.25 million
E. $196.5 million
Rose - Chapter 07 #88

89. A bond has a face value of $1,000 and five years to maturity. This bond has a coupon rate of
13 percent and is selling in the market today for $902. Coupon payments are made annually
on this bond. What is the yield to maturity (YTM) for this bond?

A. 13 percent
B. 12.75 percent
C. 16 percent
D. 11.45 percent
E. 12 percent
Rose - Chapter 07 #89

90. A treasury bill currently sells for $9,845, has a face value of $10,000 and has 46 days to
maturity. What is the bank discount rate on this security?

A. 12.49 percent
B. 12.13 percent
C. 12.30 percent
D. 2 percent
E. None of the options is correct.
Rose - Chapter 07 #90
91. The _______________ is determined by the demand and supply for loanable funds in the
market.

A. coupon rate
B. reserve requirement
C. interest-sensitive gap
D. risk-free real rate of interest
E. duration gap
Rose - Chapter 07 #91

92. As per the __________________ strategy, financial-service managers set interest-sensitive

gap as close to zero as possible to reduce the expected volatility of net interest income.

A. aggressive GAP management

B. defensive GAP management
C. cumulative GAP management
D. weighted GAP management
E. asset-sensitive GAP management
Rose - Chapter 07 #92

93. The fact that a consumer who purchases a particular basket of goods for $100 today has to
pay $105 next year for the same basket of goods is an example of which of the following
risks?

A. Inflation risk
B. Default risk
C. Liquidity risk
D. Price risk
E. Maturity risk
Rose - Chapter 07 #93
94. A bank has Federal Funds totaling $25 million with an interest-rate sensitivity weight of 1.0.
This bank also has loans of $105 million and investments of $65 million with interest rate
sensitivity weights of 1.40 and 1.15 respectively. It also has $135 million in interest-bearing
deposits with an interest rate sensitivity weight of 0.90 and other money market borrowings of
$75 million with an interest rate sensitivity weight of 1.0. What is the dollar interest-sensitive
gap for this bank?

A. $50.25 million
B. -$15 million
C. -$50.25 million
D. $34.25 million
E. None of the options is correct.
Rose - Chapter 07 #94

95. If a bank has a positive interest-sensitive gap, one of the possible management responses
would be to:

A. wait for the interest rates to rise or be stable.

B. shorten asset maturities.
C. decrease interest-sensitive liabilities.
D. increase interest-sensitive assets.
E. extend liability maturities.
Rose - Chapter 07 #95

96. If a bank has a negative interest-sensitive gap, one of the possible management responses
would be to:

A. lengthen asset maturities.

B. shorten liability maturities.
C. increase interest-sensitive liabilities.
D. decrease interest-sensitive assets.
E. wait for the interest rates to fall or be stable.
Rose - Chapter 07 #96
97. A treasury bill currently selling for $9,845, has a face value of $10,000 and has 46 days to
maturity. What is the yield to maturity equivalent on this security?

A. 12.49 percent
B. 12.13 percent
C. 12.30 percent
D. 2 percent
E. None of the options is correct.
Rose - Chapter 07 #97

98. The Third National Bank of Edmond reports a net interest margin of 5.83 percent. It has total
interest revenues of $275 million and total interest expenses of $210 million. What will be the
bank's earning assets total?

A. $4,717 million
B. $3,602 million
C. $1,115 million
D. $3,790 million
E. None of the options is correct.
Rose - Chapter 07 #98

99. The Third National Bank of Edmond reports a net interest margin of 5.83 percent. It has total
interest revenues of $275 million and total interest expenses of $210 million. This bank has
earnings assets of $1,115. Suppose this bank's interest revenues rise by 8 percent and its
interest expenses and earnings assets rise by 10 percent next year, what is this bank's new
net interest margin?

A. 5.83 percent
B. 7.09 percent
C. 3.59 percent
D. 5.38 percent
E. 7.80 percent
Rose - Chapter 07 #99
100. Financial firms devote greater attention to opening up new sources of funding and monitoring
the mix and cost of their deposit and non-deposit liabilities under the
_______________________ strategy.

A. asset management
B. liabilities management
C. interest-sensitive gap management
D. weighted gap management
E. duration gap management
Rose - Chapter 07 #100

101. If Fifth National Bank's asset duration exceeds its liability duration and if interest rates rise, the
bank's net worth will _________________.

A. decrease
B. increase
C. stabilize
D. be unaffected
E. None of the options is correct.
Rose - Chapter 07 #101

102. Main Street Bank has $100 million in commercial loans with an average duration of 0.40
years; $40 million in consumer loans with an average duration of 1.75 years; and $30 million in
U.S. Treasury bonds with an average duration of 6 years. What will be the bank's dollar-
weighted asset portfolio duration?

A. 0.4 years
B. 1.7 years
C. 2.7 years
D. 4.1 years
E. None of the options is correct.
Rose - Chapter 07 #102
103. A an average asset duration of 4.7 years and an average liability duration of 3.3 years. This
bank has $750 million in total assets and $500 million in total liabilities. This bank's leverage-
adjusted duration gap is a:

A. positive gap of 8.0 years.

B. negative gap of 2.5 years.
C. positive gap of 1.4 years.
D. positive gap of 2.5 years.
E. None of the options is correct.
Rose - Chapter 07 #103

104. A bank has an average asset duration of 1.15 years and an average liability duration of 2.70
years. This bank has $250 million in total assets and $225 million in total liabilities. This bank's
leverage-adjusted duration gap is a:

A. negative gap of 1.55 years.

B. positive gap of 1.28 years.
C. negative gap of 3.85 years.
D. negative gap of 1.28 years.
E. None of the options is correct.
Rose - Chapter 07 #104

105. The duration of a bond is the weighted average maturity of the future cash flows expected to
be received on a bond. Which of the following statements concerning duration is true?

A. The longer the time to maturity, the greater the duration.

B. The higher the coupon rate, the lower the duration.
C. The shorter the duration, the greater the price volatility.
D. All of the options are true.
E. None of the options is true.
Rose - Chapter 07 #105

106. A bond has a duration of 7.5 years. Its current market price is $1,125. Interest rates in the
market are 7 percent today. It has been forecasted that interest rates will rise to 9 percent over
the next couple of weeks. How will the bond's price change in percentage terms?

A. The bond's price will rise by 2 percent.

B. The bond's price will fall by 2 percent.
C. The bond's price will fall by 14.02 percent.
D. The bond's price will rise by 14.02 percent.
E. The bond's price will not change.
Rose - Chapter 07 #106
107. A bank has an average asset duration of 5 years and an average liability duration of 3 years.
This bank has total assets of $500 million and total liabilities of $250 million. Currently, market
interest rates are 10 percent. If interest rates fall by 2 percent (to 8 percent), what is this
bank's change in net worth?

A. Net worth will decrease by $31.81 million.

B. Net worth will increase by $31.81 million.
C. Net worth will increase by $27.27 million.
D. Net worth will decrease by $27.27 million.
E. Net worth will not change at all.
Rose - Chapter 07 #107

108. A bank has an average asset duration of 5 years and an average liability duration of 3 years.
This bank has total assets of $500 million and total liabilities of $250 million. Currently, market
interest rates are 10 percent. What will be this bank's leverage-adjusted duration gap?

A. 2 years
B. -2 years
C. 3.5 years
D. -3.5 years
E. None of the options is correct.
Rose - Chapter 07 #108

109. A bank has an average asset duration of 5 years and an average liability duration of 9 years.
This bank has total assets of $1,000 million and total liabilities of $850 million. Currently,
market interest rates are 5 percent. If interest rates rise by 2 percent (to 7 percent), what is
this bank's change in net worth?

A. Net worth will decrease by $50.47 million.

B. Net worth will increase by $50.47 million.
C. Net worth will decrease by $240.95 million.
D. Net worth will increase by $240.95 million.
E. Net worth will not change at all.
Rose - Chapter 07 #109
110. A bank has an average asset duration of 5 years and an average liability duration of 9 years.
This bank has total assets of $1,000 million and total liabilities of $850 million. Currently,
market interest rates are 5 percent. What will be this bank's leverage-adjusted duration gap?

A. -4 years
B. 4 years
C. 2.65 years
D. -2.65 years
E. 3.65 years
Rose - Chapter 07 #110

111. A bank has $100 million of investment grade bonds with a duration of 9.0 years. This bank
also has $500 million of commercial loans with a duration of 5.0 years. This bank has $300
million of consumer loans with a duration of 2.0 years. This bank has deposits of $600 million
with a duration of 1.0 year and non-deposit borrowings of $100 million with an average
duration of .25 years. What is this bank's duration gap? These are all of the assets and
liabilities this bank has.

A. This bank has a duration gap of 14.75 years.

B. This bank has a duration gap of 15.03 years.
C. This bank has a duration gap of 3.55 years.
D. This bank has a duration gap of 3.75 years.
E. This bank has a duration gap of 5.15 years.
Rose - Chapter 07 #111

112. Which of the following statements concerning a bank's leverage-adjusted duration gap is
true?

A. If it has a positive duration gap and interest rates rise, its net worth will decline.
B. If it has a positive duration gap and interest rates fall, its net worth will decline.
C. If it has a negative duration gap and interest rates rise, its net worth will decline.
D. If it has a negative duration gap and interest rates fall, its net worth will increase.
E. All of the options are correct.
Rose - Chapter 07 #112
113. A bank has an average duration for its asset portfolio of 5.5 years. The bank has total assets
of $1,000 million and total liabilities of $750 million. If this bank's leverage-adjusted duration
gap is zero, what must be the duration of its liabilities portfolio?

A. 7.33 years
B. 4.125 years
C. 7.5 years
D. 5.5 years
E. None of the options is correct.
Rose - Chapter 07 #113

114. A bond has a face value of $1,000 and coupon payments of $80 annually. This bond matures
in three years and is selling for $1,000 in the market. Market interest rate is 8 percent. What is
this bond's duration?

A. 3 years
B. 2.78 years
C. 1.95 years
D. 4.31 years
E. None of the options is correct.
Rose - Chapter 07 #114

115. A bond has a face value of $1,000 and coupon payments of $120 annually. This bond matures
in three years and is selling in the market for $1,160. Market interest rate is 6 percent. What is
this bond's duration?

A. 3 years
B. 5.71 years
C. 1.96 years
D. 2.71 years
E. None of the options is correct.
Rose - Chapter 07 #115
116. A bond is selling in the market for $950 and has a duration of 6 years. Market interest rates
are 9 percent and are expected to decrease to 7 percent in the near future. What will this
bond's price be after the change in market interest rates?

A. $969
B. $931
C. $1,055
D. $854
E. $950
Rose - Chapter 07 #116

117. A bond is selling in the market for $1,100 and has a duration of 4.5 years. Market interest
rates are 5 percent and are expected to increase to 7 percent in the near future. What will this
bond's price be after the change in market interest rates?

A. $1,006
B. $1,194
C. $1,122
D. $1,078
E. $1,100
Rose - Chapter 07 #117

118. Which of the following is a true statement?

A. The longer the time to maturity of a security, the smaller will be the duration
B. The lower the coupon rate of a security, the higher the duration
C. For a given duration and change in interest rates, the change in the price of the security will
be larger for a lower starting level of interest rates
D. The duration of a security remains constant no matter the level of market interest rates
E. All of the options are true statements.
Rose - Chapter 07 #118

119. The fact that the rate of change in an asset's price varies with the level of interest rates is
known as:

A. portfolio.
B. convexity.
C. maturity.
D. yield.
E. None of the options is correct.
Rose - Chapter 07 #119
120. U.S. banks tend to fare best when the yield curve is:

A. horizontal.
B. downward-sloping.
C. vertical.
D. upward-sloping.
E. None of the options is correct.
Rose - Chapter 07 #120

121. Carolina National Bank knows that the interest rate on its loans change faster and by a larger
amount than the interest rate on its deposits. What type of risk is this an example of?

A. Default risk
B. Inflation risk
C. Liquidity risk
D. Call risk
E. Basis risk
Rose - Chapter 07 #121

122. Havoc State Bank has a loan that it fears will not be repaid because the company is going into
bankruptcy. What type of risk would this be an example of?

A. Default risk
B. Inflation risk
C. Liquidity risk
D. Call risk
E. Basis risk
Rose - Chapter 07 #122

123. Carter National Bank is worried because it knows that the municipal bonds it has in its bond
portfolio can be difficult to sell quickly. What type of risk would this be an example of?

A. Default risk
B. Inflation risk
C. Liquidity risk
D. Call risk
E. Basis risk
Rose - Chapter 07 #123
124. Jackson State Bank is worried because many of the loans it has made are home mortgages
which can be paid off early by the homeowner. What type of risk would this be an example
of?

A. Default risk
B. Inflation risk
C. Liquidity risk
D. Call risk
E. Basis risk
Rose - Chapter 07 #124

125. A bank is liability sensitive, if its:

A. deposits and non-deposit borrowings are not affected by changes in interest rates.
B. interest-sensitive assets exceed its interest-sensitive liabilities.
C. interest-sensitive liabilities exceed its interest-sensitive assets.
D. loans and securities are affected by changes in interest rates.
E. None of the options is correct.
Rose - Chapter 07 #125

126. Which of the following would be an example of a repriceable asset?

A. Money the bank has borrowed from the money market

B. Cash in the vault
C. Demand deposits that do not pay interest
D. Short-term securities issued by the government about to mature
E. All of the options are correct.
Rose - Chapter 07 #126

127. Which of the following would be an example of a repriceable liability?

A. Money the bank has borrowed from the money market

B. Cash in the vault
C. Demand deposits that do not pay an interest rate
D. Short term securities issued by the government about to mature
E. All of the options are correct.
Rose - Chapter 07 #127
128. Which of the following would be an example of a nonrepriceable asset?

A. Money the bank has borrowed from the money market

B. Cash in the vault
C. Demand deposits that do not pay an interest rate
D. Short term securities issued by the government about to mature
E. All of the options are correct.
Rose - Chapter 07 #128

129. Which of the following would be an example of a nonrepriceable liability?

A. Money the bank has borrowed from the money market

B. Cash in the vault
C. Demand deposits that do not pay an interest rate
D. Short term securities issued by the government about to mature
E. All of the options are correct.
Rose - Chapter 07 #129

The Tidewater State Bank has $1,000 in total assets (all of which are earning assets), $700 of
which will be repriced within the next 90 days. This bank also has $800 in total liabilities, $400
of which will be repriced within the next 90 days. Currently, the bank is earning 8 percent on its
assets and is paying 5 percent on its liabilities.
Rose - Chapter 07

130. If interest rates do not change in the next 90 days, what is this bank's net interest margin?

A. 8 percent
B. 5 percent
C. 4 percent
D. 1.4 percent
E. 3 percent
Rose - Chapter 07 #130

131. What is the dollar interest-sensitive gap of this bank?

A. -$200
B. -$100
C. $200
D. $300
E. $600
Rose - Chapter 07 #131
132. If interest rates on both assets and liabilities rise by 2 percent in the next 90 days, what would
be the bank's net interest margin?

A. 4 percent
B. 4.4 percent
C. 4.6 percent
D. 2.4 percent
E. 6 percent
Rose - Chapter 07 #132

133. If interest rates on both assets and liabilities rise by 2 percent in the next 90 days, what should
happen to this bank's net interest margin?

A. It should rise by 0.60 percent.

B. It should rise by 2 percent.
C. It should rise by 4 percent.
D. It should rise by 1 percent.
E. It should not show any rise.
Rose - Chapter 07 #133

134. If interest rates on both assets and liabilities decrease by 2 percent in the next 90 days, what
would be this bank's net interest margin?

A. 3.4 percent
B. 4 percent
C. 0.4 percent
D. 5.6 percent
E. 2 percent
Rose - Chapter 07 #134

135. If interest rates on both assets and liabilities decrease by 2 percent in the next 90 days, what
should happen to this bank's net interest margin?

A. It should fall by 2 percent.

B. It should fall by 0.6 percent.
C. It should fall by 4 percent.
D. It should fall by 1 percent.
E. It should not show any fall.
Rose - Chapter 07 #135
136. The Arnold National Bank has a bond portfolio that consists of bonds with 5 years to maturity
and a 9 percent coupon rate having a face value of $1,000. These bonds are selling in the
market for $1,126. Coupon payments are made annually on this bond.

What is the yield to maturity on these bonds?

A. 3 percent
B. 6 percent
C. 9 percent
D. 12 percent
E. None of the options is correct.
Rose - Chapter 07 #136

137. The Arnold National Bank has a bond portfolio that consists of bonds with 5 years to maturity
and a 9 percent coupon rate having a face value of $1,000. These bonds are selling in the
market for $1,126. Coupon payments are made annually on this bond.

What is duration of these bonds?

A. 3.77 years
B. 4.23 years
C. 5 years
D. 9 years
E. None of the options is correct.
Rose - Chapter 07 #137

The Harris State Bank has $2,000 in total assets (all of which are earning assets), $500 of
which will be repriced in the next 90 days. This bank also has $1,600 in total liabilities, $1,000
of which will be repriced in 90 days. The bank currently earns 9 percent on its assets and pays
4 percent on its liabilities.
Rose - Chapter 07

138. If interest rates do not change in the next 90 days, what is this bank's net interest margin?

A. 0.5 percent
B. 0.8 percent
C. 1.8 percent
D. 5.8 percent
E. None of the options is correct.
Rose - Chapter 07 #138
139. What is the dollar interest-sensitive gap of this bank?

A. $400
B. -$1,100
C. -$500
D. $1,000
E. None of the options is correct.
Rose - Chapter 07 #139

140. If interest rates on both assets and liabilities rise by 2 percent in the next 90 days, what would
be this bank's net interest margin?

A. 4.2 percent
B. 5.3 percent
C. 5.8 percent
D. 6.2 percent
E. 7.8 percent
Rose - Chapter 07 #140

141. If interest rates on both assets and liabilities rise by 2 percent in the next 90 days, what should
happen to this bank's net interest margin?

A. It should fall by 2 percent.

B. It should fall by 0.5 percent.
C. It should fall by 4 percent.
D. It should fall by 1 percent.
E. It should not record any fall.
Rose - Chapter 07 #141

142. If interest rates on both assets and liabilities fall by 2 percent in the next 90 days, what would
be this bank's net interest margin?

A. 3.8 percent
B. 5.4 percent
C. 5.8 percent
D. 6.3 percent
E. 7.8 percent
Rose - Chapter 07 #142
143. If interest rates on both assets and liabilities fall by 2 percent in the next 90 days, what should
happen to this bank's net interest margin?

A. It should rise by 0.5 percent.

B. It should fall by 0.5 percent.
C. It should stay the same.
D. It should rise by 2 percent.
E. It should fall by 2 percent.
Rose - Chapter 07 #143

144. Maryellen Epplin notices that a particular T-Bill has a banker's discount rate of 9 percent in the
Wall Street Journal. She knows that this T-Bill has 20 days to maturity and has a face value of
$10,000.

What price is this T-Bill selling for in the market?

A. $9,100
B. $10,000
C. $9,950
D. $1,900
E. None of the options is correct.
Rose - Chapter 07 #144

145. Maryellen Epplin notices that a particular T-Bill has a banker's discount rate of 9 percent in the
Wall Street Journal. She knows that this T-Bill has 20 days to maturity and has a face value of
$10,000.

What is the yield to maturity on this T-Bill?

A. 9 percent
B. 0.5 percent
C. 4.5 percent
D. 9.17 percent
E. None of the options is correct.
Rose - Chapter 07 #145
146. The Raymond Burr National Bank has $1,000 in assets with an average duration of 5 years.
This bank has $800 in liabilities with an average duration of 6.25 years. What is the duration
gap of this bank?

A. -1.25 years
B. 0 years
C. 1.25 years
D. -2.25 years
E. None of the options is correct.
Rose - Chapter 07 #146

147. The Raymond Burr National Bank has $1,000 in assets with an average duration of 5 years.
This bank has $800 in liabilities with an average duration of 6.25 years. Market interest rates
start at 6 percent and fall by 1 percent. What is the change in net worth of this bank?

A. $11.29
B. -$11.29
C. $0
D. -$22.22
E. $22.22
Rose - Chapter 07 #147

148. The interest rate on one year Treasury Bonds is 5 percent. The interest rate on five year
Treasury Bonds is 7.5 percent. The interest rate on ten year Treasury Bonds is 10 percent.
What is true about the yield curve?

A. It is upward sloping.
B. It is downward sloping.
C. It is a horizontal curve.
D. It is a vertical curve.
E. It is parallel to the x-axis.
Rose - Chapter 07 #148
149. The assets and liabilities of Finacle Bank as on December 31, 2015, are as follows:

$20,000 of short-term securities issued by governments and private borrowers (about to

mature), $12,000 of borrowings from the money market, $15,000 of short-term savings
accounts, $12,000 of variable-rate loans and securities, $18,000 of long-term loans made at a
fixed interest rate, $25,000 of long-term savings and retirement accounts, $22,000 of deposits
in the Central Bank (held as legal reserves), $550,000 of equity capital provided by the bank's
owners, and $500,000 of building and equipment.

What is the total of repriceable assets held by the bank as on December 31, 2015?

A. $32,000
B. $50,000
C. $45,000
D. $55,000
E. $52,000
Rose - Chapter 07 #149

150. The assets and liabilities of Finacle Bank as on December 31, 2015, are as follows:

$20,000 of short-term securities issued by governments and private borrowers (about to

mature), $12,000 of borrowings from the money market, $15,000 of short-term savings
accounts, $12,000 of variable-rate loans and securities, $18,000 of long-term loans made at a
fixed interest rate, $25,000 of long-term savings and retirement accounts, $22,000 of deposits
in the Central Bank (held as legal reserves), $550,000 of equity capital provided by the bank's
owners, and $500,000 of building and equipment.

Which of the following is a repriceable liability for Finacle Bank?

A. Long-term savings and retirement accounts

B. Variable-rate loans and securities
C. Borrowings from the money market
D. Equity capital provided by the owners
E. Long-term loans made at a fixed interest rate
Rose - Chapter 07 #150
151. Brendon Brothers Bank reports interest-sensitive assets at $35 million, interest-sensitive
liabilities at $60 million and total assets at $80 million. What is the relative IS GAP of the
bank?

A. -0.29
B. 0.29
C. -0.31
D. 0.31
E. -0.33
Rose - Chapter 07 #151

152. Loyola Bank classifies its assets and liabilities and the period (maturity buckets) within which
they are subject to repricing as on March 31, 2015 as follows:

What is the interest-sensitive gap of the bank as on March 31, 2015?

A. -$30 million
B. $40 million
C. -$45 million
D. $32 million
E. -$38 million
Rose - Chapter 07 #152
153. Loyola Bank classifies its assets and liabilities and the period (maturity buckets) within which
they are subject to repricing as on March 31, 2015 as follows:

What is the cumulative gap of the bank for interest-sensitive assets and interest-sensitive
liabilities of maturity buckets up to 180 days as on March 31, 2015?

A. -$65 million
B. -$60 million
C. $65 million
D. $60 million
E. $45 million
Rose - Chapter 07 #153

154. Loyola Bank classifies its assets and liabilities and the period (maturity buckets) within which
they are subject to repricing as on March 31, 2015 as follows:

What is the interest-sensitivity ratio of the bank for the 90 to 180 days maturity bucket?

A. 0.82
B. 0.88
C. 0.91
D. 0.92
E. 0.85
Rose - Chapter 07 #154
155. Loyola Bank classifies its assets and liabilities and the period (maturity buckets) within which
they are subject to repricing as on March 31, 2015 as follows:

Silvershine bank has $200 million in earning assets and $280 million in liabilities that are
subject to an interest rate change each month over the next six months. If market interest
rates suddenly rise by 2 full percentage points, what will be approximate change in the net
interest income for the bank?

A. $8.2 million
B. -$8.5 million
C. $8.5 million
D. $9.6 million
E. -$9.6 million
Rose - Chapter 07 #155
 ch7 Summary

Category # of Questions
Rose - Chapter 07 157