Question 1

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.

Accepted Answer

The net interest margin is the difference between the interest rate on assets and the interest rate on liabilities. If interest rates on both assets and liabilities rise by 2 percent, then the net interest margin will also rise by 2 percent.

Question 2

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

Accepted Answer

Default risk refers to the risk of the borrower not being able to repay a loan or going into bankruptcy.

Question 3

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.

Accepted Answer

The duration of a bond is calculated using the formula that considers the present value of cash flows, which includes annual coupon payments and the face value at maturity. Given the bond's coupon rate, market price, and time to maturity, the duration is approximately 4.23 years.

Question 4

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

Accepted Answer

The net interest margin would remain unchanged at 4.6 percent because both assets and liabilities interest rates increase by the same percentage, thus maintaining the same margin between them.

Question 5

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.

Accepted Answer

A bank is liability sensitive if its interest-sensitive liabilities exceed its interest-sensitive assets, meaning that if interest rates increase, the cost of its liabilities will increase more than the income generated by its assets, resulting in lower net income.

Question 6

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.

Accepted Answer

Nonrepriceable liabilities are those that do not have an interest rate that will adjust in response to changes in market interest rates. Demand deposits that do not pay an interest rate are an example of a nonrepriceable liability because the bank cannot adjust the interest rate it pays on these deposits in response to changes in market interest rates. Money borrowed from the money market (A), cash in the vault (B), and short term securities issued by the government about to mature (D) are all examples of assets or liabilities that can be repriced in response to changes in market interest rates, so they are not nonrepriceable liabilities.

Question 7

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.

Accepted Answer

Short-term securities issued by the government about to mature are an example of a repriceable asset because their value will change (reprice) when they mature and the investor receives their principal and any accrued interest. The other options do not have a changing value or return, and therefore would not be considered repriceable assets.

Question 8

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.

Accepted Answer

Repriceable liabilities are those liabilities whose interest rates may change in response to market conditions. Money borrowed from the money market typically has variable interest rates that may be adjusted periodically.

Question 9

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

Accepted Answer

Liquidity risk refers to the risk of not being able to sell a security quickly enough at a fair price, which can be a concern for securities that are not actively traded or have a limited market. In this scenario, Carter National Bank is worried about the liquidity risk associated with its municipal bonds.

Question 10

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.

Accepted Answer

The dollar interest-sensitive gap is calculated as the difference between the bank's interest-sensitive assets and its interest-sensitive liabilities. If the bank's interest-sensitive assets are $500 less than its interest-sensitive liabilities, the gap would be -$500.

Question 11

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.

Accepted Answer

To calculate the yield to maturity, we need to find the interest rate that will make the present value of the bond's cash flows equal to its current market price. Using a financial calculator or spreadsheet function, we can solve for the interest rate (yield) that makes the following formula true:
$1,126 = $90/(1+yield)^1 + $90/(1+yield)^2 + ... + $1,090/(1+yield)^5
The yield to maturity on these bonds is approximately 6 percent.

Question 12

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.

Accepted Answer

The answer of If interest rates on both assets and...

Question 13

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

Accepted Answer

The net interest margin would remain unchanged at 5.3 percent because both assets and liabilities are affected equally by the 2 percent rise in interest rates, thus maintaining the same margin between interest income generated by assets and interest paid on liabilities.

Question 14

What is the dollar interest-sensitive gap of this bank?
A)-$200
B)-$100
C)$200
D)$300
E)$600

Accepted Answer

The answer of What is the dollar interest-sensitive gap of...

Question 15

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.

Accepted Answer

Cash in the vault is a nonrepriceable asset because its value cannot be adjusted based on changes in interest rates or market conditions. The other options are all examples of assets that can be repriced or have their value adjusted based on various factors.

Question 16

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

Accepted Answer

This scenario represents Call risk, which is the risk that borrowers will pay off their loans early, causing the bank to miss out on some interest income.

Question 17

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

Accepted Answer

The net interest margin would remain unchanged at 3.4 percent because both assets and liabilities are affected equally by the 2 percent decrease in interest rates, leaving the margin between them the same.

Question 18

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.

Accepted Answer

The answer of If interest rates do not change in...

Question 19

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

Accepted Answer

This is an example of basis risk, which occurs when the interest rates on different financial instruments or assets move differently. In this case, the difference in how quickly and by how much the interest rates on loans and deposits change represents basis risk for Carolina National Bank.

Question 20

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

Accepted Answer

The question implies that the bank's net interest margin is fixed and not affected by any changes in interest rates. Therefore, we simply need to find the net interest margin for the bank, which is calculated by subtracting the bank's interest expense from its interest income and then dividing by its total assets. Without any further information or calculations given, we can only choose the option with the closest or most reasonable net interest margin, which in this case is C) 4 percent.

Quiz 7: Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques

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?

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?

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?

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 bank is liability sensitive,if its:

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

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

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

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?

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

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?

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?

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?

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

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

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?

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?

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

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?

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