chap008interestrisk

ChapterEightInterestRateRiskITrue/False8-1Theeconomicinsolvencyofmanythriftinstitutionsduringthe1980swasdue,atleastinpart,tounexpectedincreasesininterestrates.Answer:T8-2Becausetheincreasedleveloffinancialmarketintegrationhasincreasedthespeedwithwhichinterestratechangesaretransmittedamongcountries,controlofU.S.interestratesbytheFederalReserveismoredifficult.Answer:F8-3Therepricinggapmodelisabookvalueaccountingbasedmodel.Answer:T8-4Thematuritygapmodelestimatesthedifferencebetweeninterestearnedandinterestduringagivenperiodoftime.Answer:F8-5TheBankforInternationalSettlements(BIS)stronglyurgesregulatorstousetherepricingmodeltoevaluateabank’sinterestraterisk.Answer:F78-6Intherepricinggapmodel,assetsorliabilitiesareratesensitivewithinagiventimeperiodifthedollarvaluesofeacharesubjecttoreceivingadifferentinterestrateshouldmarketrateschange.Answer:T8-7Therepricingmodelisasimplisticapproachtofocusingontheexposureofnetinterestincometochangesinmarketlevelsofinterestratesforgivenmaturityperiods.Answer:T8-8Apositiverepricinggapimpliesthatadecreaseininterestrateswillcauseinterestexpensetodecreasemorethanthedecreaseininterestincome.Answer:F8-9ThecumulativerepricinggappositionofanFIforagivenextendedtimeperiodisthesumoftherepricinggapvaluesfortheindividualtimeperiodsthatmakeuptheextendedtimeperiod.Answer:T8-10Whenabank’srepricinggapispositive,netinterestincomeispositivelyrelatedtochangesininterestrates.Answer:T8-11Abankwithanegativerepricing(orfunding)gapfacesreinvestmentrisk.Answer:F8-12Abankwithanegativerepricing(orfunding)gapfacesrefinancingrisk.Answer:T8-13Onereasontoincludedemanddepositswhenestimatingabank’srepricinggapisbecauserisinginterestratescouldleadtohighwithdrawals.Answer:T8-14Onereasontoexcludedemanddepositswhenestimatingabank’srepricinggapisbecause,byregulation,explicitinterestcannotbepaidonthesedeposits.Answer:T8-15Retailpassbooksavingsaccountsshouldnotbeconsideredaspartofratesensitiveliabilitiesbecausetheratesontheseaccountsrarelychange.Answer:F8-16Runoffindemanddepositsinarepricingmodelistypicallylowerduringperiodsoffallinginterestrates.Answer:T8-17Thegapratioisusefulbecauseitindicatesthescaleoftheinterestrateexposurebydividingthegapbytheassetsizeoftheinstitution.Answer:T8-18Becausetherepricingmodelignoresthemarketvalueeffectofchanginginterestrates,therepricinggapisanincompletemeasureofthetrueinterestrateriskexposureofanFI.Answer:T8-19DefiningbucketsoftimeoverarangeofmaturitiesassuresthecaptureofallrelevantinformationnecessarytoaccuratelyassesstheinterestrateriskexposureofanFI.Answer:F8-20Definingbucketsoftimeoverwiderintervalscreatesgreateraccuracyintheuseoftherepricingmodelbecausefewercalculationsarerequired.Answer:F8-21Ifthespreadbetweenratesensitiveassetsandratesensitiveliabilitiesincreasesforabank,futurechangesininterestrateswillleadtoanincreaseinnetinterestincome.Answer:T8-22Therunoffcomponentoflong-termmortgagesshouldbeconsideredinthetimebucketsinwhichthematuritiesactuallyoccur.Answer:T8-23Wheninterestratesincrease,banksaremorelikelytobeforcedtoincreaserate-sensitiveliabilitiestoreplacedecreasedbalancesindemanddepositsandsavingsaccounts.Answer:T8-24Foragivenchangeininterestrates,fixed-rateassetswithlong-termmaturitieswillhavegreaterchangesinpricethanassetswithshortermaturities.Answer:T8-25Themarketvalueofafixed-rateliabilitywilldecreaseasinterestratesrise,justasthemarketvalueofafixed-rateassetwilldecreaseasinterestratesrise.Answer:T8-26Themarketvalueofafixed-rateliabilitywillincreaseasinterestratesrise,althoughthemarketvalueofafixed-rateassetwilldecreaseasinterestratesrise.Answer:F8-27Thechangeineconomicvalueofafixed-rateliabilityforadecreaseininterestratesisconsideredtobegoodnews.Answer:F8-28Foragivenchangeininterestrates,fixed-rateliabilitieswithlonger-termmaturitieswillhavesmallerchangesinpricethanliabilitieswithshortermaturities.Answer:F8-29Foragivenchangeininterestrates,thechangeinpriceforeachadditionalyearofmaturityofafixed-rateassetissmallerasthematurityincreases.Answer:T8-30Thematurityofaportfolioofassetsorliabilitiesisaweightedaverageofthematuritiesoftheassetsorliabilitiesthatcomprisethatportfolio.Answer:T8-31Iftheaveragematurityofassetsis4yearsandtheaveragematurityofliabilitiesis4years,thentheFIhasnointerestrateriskexposure.Answer:F8-32Iftheaveragematurityofassetsis5yearsandtheaveragematurityofliabilitiesis7years,thentheFIhasnointerestrateriskexposure.Answer:F8-33Thematuritygapforabankistheaveragematurityoftheassetsminustheaveragematurityoftheliabilities.Answer:TMultiple-Choice8-34Thenetworthofabankisthedifferencebetweenthea.valueofretainedearningsandtheprovisionforloanlosses.b.marketvalueofassetsandthemarketvalueofliabilities.c.bookvalueofassetsandbookvalueofliabilities.d.rate-sensitiveassetsandrate-sensitiveliabilities.e.Noneoftheabove.Answer:B8-35Becauseofitssimplicity,smallerdepositoryinstitutionsstillusethismodelastheirprimarymeasureofinterestraterisk.a.Therepricingmodel.b.Thematuritymodel.c.Thedurationmodel.d.Theconvexitymodel.e.Theoptionpricingmodel.Answer:A8-36Therepricinggapapproachcalculatesthegapsineachmaturitybucketbysubtractingthea.currentassetsfromthecurrentliabilities.b.longtermliabilitiesfromthefixedassets.c.ratesensitiveassetsfromthetotalassets.d.ratesensitiveliabilitiesfromtheratesensitiveassets.e.currentliabilitiesfromtangibleassets.Answer:D8-37Whichofthefollowingobservationsabouttherepricingmodeliscorrecta.Itsinformationvalueislimited.b.Itaccountsfortheproblemofrate-insensitiveassetandliabilityrunoffsandprepayments.c.Itaccommodatescashflowsfromoffbalance-sheetactivities.d.ItpointsoutanFI’sprofitexposuretointerestratechanges.e.Itconsidersmarketvalueeffectsofinterestratechanges.Answer:D8-38Whenrepricingallinterestsensitiveassetsandallinterestsensitiveliabilitiesinabalancesheet,thecumulativegapwillbea.zero.b.one.c.greaterthanone.d.anegativevalue.e.infinity.Answer:A8-39TherepricinggapdoesnotaccuratelymeasureFIinterestrateriskexposurebecausea.FIscannotaccuratelypredictthemagnitudechangeinfutureinterestrates.b.FIscannotaccuratelypredictthedirectionofchangeinfutureinterestrates.c.accountingsystemsarenotaccurateenoughtoallowthecalculationofprecisegapmeasures.d.itdoesnotrecognizetimingdifferencesincashflowswithinthesamematuritygrouping.e.equityisomitted.Answer:D8-40AnFI'snetinterestincomereflectsa.itsasset‑liabilitystructure.b.marketratesofinterest.c.theriskinessofitsloansandinvestments.d.thecostofitsdepositandnon‑depositsourcesoffunds.e.Alloftheabove.Answer:E8-41Apositivegapimpliesthatanincreaseininterestrateswillcause_______innetinterestincome.a.nochangeb.adecreasec.anincreased.anunpredictablechangee.EitherAorB.Answer:C8-42Ifinterestratesdecrease50basispointsforanFIthathasagapof+$5million,theexpectedchangeinnetinterestincomeisa.+$2,500.b.+$25,000.c.+$250,000.d.-$250,000.e.-$25,000.Answer:E8-43Ifinterestratesincrease75basispointsforanFIthathasagapof-$15million,theexpectedchangeinnetinterestincomeisa.-$112,500.b.+$112,500.c.+$1,125,0000.d.-$1,125,0000.e.-$150,000.Answer:A8-44Ifinterestratesdecrease40basispointspercent)foranFIthathasacumulativegapof-$25million,theexpectedchangeinnetinterestincomeisa.+$100,000.b.-$100,000.c.-$625,000.d.-$625,000.e.+$250,000.Answer:A8-45AnFIfinancesa$250,0002-yearfixed-rateloanwitha$200,0001-yearfixed-rateCD.Usetherepricingmodeltodetermine(a)theFI'srepricing(orfunding)gapusinga1-yearmaturitybucket,and(b)theimpactofa100basispointdecreaseininterestratesontheFI'sannualnetinterestincomea.$0;$0.b.-$200,000;+$2,000.c.-$200,000;-$2,000.d.+$50,000;‑$500.e.‑$200,000;‑$1,000.Answer:B8-46Thegapratioexpressestherepricegapforagiventimeperiodasapercentageofa.equity.b.totalliabilities.c.currentliabilities.d.totalassets.e.currentassets.Answer:D8-47Whatisspreadeffecta.Periodiccashflowofinterestandprincipalamortizationpaymentsonlong-termassetsthatcanbereinvestedatmarketrates.b.TheeffectthatachangeinthespreadbetweenratesonRSAsandRSLshasonnetinterestincomeasinterestrateschange.c.Theeffectofmismatchofassetandliabilitieswithinamaturitybucket.d.Thepremiumpaidtocompensateforthefutureuncertaintyinasecurity’svalue.e.ThevalueofanFItoitsowners.Answer:B8-48IfanFI'srepricinggapislessthanzero,thena.itisdeficientinitsrequiredreserves.b.itisdeficientinitscapitalratiorequirement.c.itsliabilitycostsaremoresensitivetochangingmarketinterestratesthanareitsassetyields.d.itsliabilitycostsarelesssensitivetochangingmarketinterestratesthanareitsassetyields.e.thedurationoftheFI'sliabilitiesexceedsthedurationofFI'sassets.Answer:C8-49Abankthatfinanceslong-termfixed-ratemortgageswithshort-termdepositsisexposedtoa.increasesinnetinterestincomeanddecreasesinthemarketvalueofequitywheninterestratesfall.b.decreasesinnetinterestincomeanddecreasesinthemarketvalueofequitywheninterestratesfall.c.decreasesinnetinterestincomeandincreasesinthemarketvalueofequitywheninterestratesincrease.d.increasesinnetinterestincomeandincreasesinthemarketvalueofequitywheninterestratesincrease.e.decreasesinnetinterestincomeanddecreasesinthemarketvalueofequitywheninterestratesincrease.Answer:E8-50Therepricingmodelmeasurestheimpactofunanticipatedchangesininterestratesona.themarketvalueofequity.b.netinterestincome.c.bothmarketvalueofequityandnetinterestincome.d.theFI'scapitalposition.e.thepricesofassetsandliabilities.Answer:B8-51Ifthechosenmaturitybucketshaveatimeperiodthatistoolong,therepricingmodelmayproduceinaccurateresultsbecausea.asthetimetomaturityincreases,thepricevolatilityincreases.b.pricechangeswillbeoverestimated.c.theremaybelargedifferentialsinthetimetorepricingfordifferentsecuritieswithineachmaturitybucket.d.theFIwillbeunabletoaccuratelymeasurethequantityofratesensitiveassets.e.theFIwillbeunabletoaccuratelymeasurethequantityofratesensitiveliabilities.Answer:C8-52Anincreaseininterestratesa.increasesthemarketvalueoftheFI'sfinancialassetsandliabilities.b.decreasesthemarketvalueoftheFI'sfinancialassetsandliabilities.c.decreasesthebookvalueoftheFI'sfinancialassetsandliabilities.d.increasesthebookvalueoftheFI'sfinancialassetsandliabilities.e.hasnoimpactonthemarketvalueoftheFI'sfinancialassetsandliabilities.Answer:B8-53WhichofthefollowingdescribestheconditionknownasrunoffintherepricingmodelapproachtomeasuringinterestrateriskofanFIa.Periodiccashflowofinterestandprincipalamortizationpaymentsonlong-termassetsthatcanbereinvestedatmarketrates.b.TheeffectthatachangeinthespreadbetweenratesonRSAsandRSLshasonnetinterestincomeasinterestrateschange.c.Mismatchofassetandliabilitieswithinamaturitybucket.d.Therelationsbetweenchangesininterestratesandchangesinnetinterestincome.e.ThosedepositsthatactasanFI’slong-termsourcesoffunds.Answer:A8-54AmethodofmeasuringtheinterestrateorgapexposureofanFIisa.thedurationmodel.b.thematuritymodel.c.therepricingmodel.d.thefundinggapmodel.e.Alloftheabove.Answer:E8-55Therepricingmodelisbasedonanaccountingworldthatreportsassetandliabilityvaluesata.theirmarketvalue.b.theirbookvalue.c.theirhistoricvaluesorcosts.d.Alloftheabove.e.AnswersBandConly.Answer:E8-56Whichofthefollowingisaweaknessoftherepricingmodeltomeasureinterestrateriska.Potentialforoveraggregationofassetsandliabilitieswithineachmaturitybucket.b.Itignoreshowchangesininterestratesaffectthemarketvalueofassetsandliabilities.c.Itignoresthereinvestmentofloaninterestandprincipalpaymentsthatarereinvestedatcurrentmarketrates.d.Itfailstorecognizeoff-balance-sheetactivitiesthatmayberatesensitive.e.Alloftheabove.Answer:E8-57Therepricingmodelignoresinformationregardingthedistributionofassetsandliabilitieswithinmaturitybuckets.Thislimitationofthemodelreferstoa.marketvalueeffect.b.overaggregation.c.runoffsandpre-payments.d.OBSactivities.e.thespreadeffect.Answer:B8-58Aninterestrateincreasea.benefitstheFIbyincreasingthemarketvalueoftheFI'sliabilities.b.harmstheFIbyincreasingthemarketvalueoftheFI'sliabilities.c.harmstheFIbydecreasingthemarketvalueoftheFI'sliabilities.d.benefitstheFIbydecreasingthemarketvalueoftheFI'sliabilities.e.benefitstheFIbydecreasingthemarketvalueoftheFI'sassets.Answer:D8-59Whichofthefollowingstatementsistruea.Anincreaseininterestratesleadstoanincreaseinthemarketvalueoffinancialsecurities.b.Valueoflongertermsecuritiesdecreasesatadiminishingrateforincreasesininterestrates.c.Valueoflongertermsecuritiesincreasesatanincreasingrateforanydeclineininterestrates.d.Theshorterthematurityofafixedincomeassetorliability,thegreaterthefallinmarketvalueforanygiveninterestrateincrease.e.Thelongerthematurityofafixedincomeassetorliability,thegreaterthefallinmarketvalueforanygiveninterestratedecrease.Answer:B8-60CananFIimmunizeitselfagainstinterestrateriskexposureeventhoughitsmaturitygapisnotzeroa.Yes,becausewithamaturitygapofzerothechangeinthemarketvalueofassetsexactlyoffsetsthechangeinthemarketvalueofliabilities.b.No,becausewithamaturitygapofzerothechangeinthemarketvalueofassetsexactlyoffsetsthechangeinthemarketvalueofliabilities.c.Yes,becausethematuritymodeldoesnotconsiderthetimingofcashflows.d.No,becausethetimingofcashflowsisrelevanttoimmunizationagainstinterestrateriskexposure.e.No,becausearepresentativebankwillalwayshaveapositivematuritygap.Answer:C8-61WhichofthefollowingrelationshipsdoesNOTholdinthepricingoffixed-rateassetsgivenchangesinmarketratea.Adecreaseininterestratesgenerallyleadstoanincreaseinthevalueofassets.b.Longermaturityassetshavegreaterchangesinpricethanshortermaturityassetsforgivenchangesininterestrates.c.Theabsolutechangeinpriceperunitofmaturitytimeforgivenchangesininterestratesdecreasesovertime,althoughtherelativechangesactuallyincrease.d.Foragivenpercentagedecreaseininterestrates,assetswillincreaseinpricemorethantheywilldecreaseinpriceforthesame,butoppositeincreaseinrates.e.Noneoftheabove.Answer:C8-62TheaveragematurityoftheliabilitiesofanFI’sbalancesheetisequaltoa.theweighted-averageoftheliabilitieswheretheweightsaredeterminedrelativetothetotalliabilitiesandequityoftheFI.b.theweighted-averageoftheliabilitieswheretheweightsaredeterminedrelativetothetotalliabilitiesoftheFI.c.theweighted-averageoftheliabilitieswheretheweightsaredeterminedrelativetothetotalassetsoftheFI.d.theweighted-averageoftheliabilitieswheretheweightsaredeterminedusingmarketvaluesofliabilities.e.Noneoftheabove.Answer:BMultiplePartQuestionsUsethefollowinginformationtoanswerthenextfive(5)questions:ThebalancesheetofXYZBank.AllfiguresinmillionsofUSDollars. Assets Liabilities 1 Short-termconsumerloans(one-yearmaturity) $150 1 Equitycapital(fixed) $120 2 Long-termconsumerloans 125 2 Demanddeposits(two-yearmaturity) 40 3 Three-monthTreasurybills 130 3 Passbooksavings 130 4 Six-monthTreasurynotes 135 4 Three-monthCDs 140 5 Three-yearTreasurybond 170 5 Three-monthbankersacceptances 120 6 10-year,fixed-ratemortgages 120 6 Six-monthcommercialpaper 160 7 30-year,floating-ratemortgages(rateadjustedeveryninemonths) 140 7 One-yeartimedeposits 120 8 Two-yeartimedeposits 40 $970 $9708-63Totalone-yearrate-sensitiveassetsisa.$540million.b.$580million.c.$555million.d.$415million.e.$720million.Answer:C8-64Totalone-yearrate-sensitiveliabilitiesisa.$540million.b.$580million.c.$555million.d.$415million.e.$720million.Answer:A8-65Thecumulativeone-yearrepricinggap(CGAP)forthebankisa.$25million.b.$-140million.c.$15million.d.$-150million.e.$-15million.Answer:C8-66Thegapratioisa..015.b..c..025.d..e..154.Answer:A8-67Supposethatinterestratesriseby2percentonbothRSAsandRSLs.Theexpectedannualchangeinnetinterestincomeofthebankisa.-$300,000.b.$500,000.c.-$2,800,000.d.-$3,000,000.e.$300,000.Answer:EUsethefollowinginformationtoanswerthenextfour(4)questions:Thefollowingaretheassetsandliabilitiesofagovernmentsecuritydealer. Assets: $150million30dayTreasurybills $275million91dayTreasurybills $90million180daymunicipalnotes $350million2yearTreasurynotes Liabilities: $575million14dayrepurchaseagreements $290million1yearcommercialpaper8-68Usetherepricingmodeltodeterminethefundinggapforamaturitybucketof30days.a.‑$425million.b.‑$95million.c.‑$10million.d.‑$475million.e.+$150million.Answer:A8-69Usetherepricingmodeltodeterminethefundinggapforamaturitybucketof91days.a.‑$60million.b.‑$150million.c.$0.d.‑$250million.e.‑$300million.Answer:B8-70Usetherepricingmodeltodeterminethefundinggapforamaturitybucketof365days.a.+$15million.b.‑$20million.c.‑$350million.d.‑$450million.e.‑$290million.Answer:C8-71Whatistheimpactoverthenext30daysonthedealer'snetinterestincomeifallinterestratesriseby50basispointsa.Netinterestincomewilldecreaseby$50,000.b.Netinterestincomewilldecreaseby$million.c.Netinterestincomewilldecreaseby$475,000.d.Netinterestincomewilldecreaseby$million.e.Netinterestincomewillincreaseby$750,000.Answer:BUsethefollowinginformationtoanswerthenextthree(3)questions:ThefollowinginformationdetailstheratesensitivityreportforGotbucksBank,Inc.($million). Maturity Overnight 1-30days 31-91days 92-181days Assets FedFunds $20 Loans $0 $10 $15 $80 Liabilities FedFunds $50 EuroCDs $5 $25 $40 $08-72CalculatethefundinggapforGotbucksBankusing(a)a30daymaturityperiodand(b)a91daymaturityperiod(Note:Eachmaturityperiodiscumulative.)a.‑$25and+$80.b.‑$50and‑$75.c.‑$75and+$5.d.+$55and‑$40.e.0and0.Answer:B8-73Howwilladecreaseof25basispointsinallinterestratesaffectGotbuck'snetinterestincomeoveraplanningperiodof91daysa.+$million.b.+$million.c.-$million.d.+$million.e.0Answer:A8-74WhatdoesGotbucksBank's91-daygappositionsrevealaboutthebankmanagement'sinterestrateforecastsandthebank'sinterestrateriskexposurea.Thebankisexposedtointerestratedecreasesandpositionedtogainwheninterestratesdecline.b.Thebankisexposedtointerestrateincreasesandpositionedtogainwheninterestratesdecline.c.Thebankisexposedtointerestrateincreasesandpositionedtogainwheninterestratesincrease.d.Thebankisexposedtointerestratedecreasesandpositionedtogainwheninterestratesincrease.e.Insufficientinformation.Answer:BUsethefollowinginformationtoanswerthenextthree(3)questions: Assets Amount Rate Liabilities Amount Rate RateSensitive $35,000,000 10% RateSensitive $40,000,000 8% FixedRate $21,000,000 9% FixedRate $12,000,000 7% Non-earning $4,000,000 Equity $8,000,000 8-75WhatistherepricinggapfortheFIa.$0.b.$5,000,000.c.$9,800,000.d.-$5,000,000.e.‑$8,000,000.Answer:D8-76WhatwillbetheFI'snetinterestincomeatyear-endifinterestratesdonotchangea.$million.b.$million.c.$million.d.$million.e.$million.Answer:E8-77Supposeshort-terminterestratesincreaseby1percent.Calculatethechangeinnetinterestincomeaftertheinterestrateincrease.a.$50,000.b.$18,900.c.$40,400.d.$53,900.e.$32,000.Answer:AUsethefollowinginformationtoanswerthenexttwo(2)questions: Assets ParAmount Rate Liabilities ParAmount Rate 2-yearcommercialloans $600million 10% 1-yearCDs $900million 7% 1-yearTreasurybills $400million NetWorth $100million 8-78Whatistherepricinggapoverthe1-yearmaturitybucketa.+$100million.b.-$500million.c.‑$100million.d.+$500million.e.‑$900million.Answer:B8-79Ifallinterestratesdecreaseby15basispoints,whatistheexpectedimpactontheFI'snetinterestincome(Hint:Usetherepricingmodeltoanswerthisquestion.)a.+$150,000.b.‑$150,000.c.-$750,000.d.+$750,000.e.Nochange.Answer:DUsethefollowinginformationtoanswerthenextfour(4)questions:ThefollowingisthebalancesheetofBostonBank.Theaveragematurityofdemanddepositsisestimatedat2years. FaceValue Runoff<1year FaceValue Runoff<1year 3-mo.T-Bills $60m DemandDep. $180m 10percent 2-yrBonds $60m 5percent Equity $20m 5-yrBonds $80m 10percent 8-80Whatistherepricinggapifa0to3monthmaturitygapisusedIgnorerunoffs.a.$60million.b.$40million.c.-$80million.d.-$120million.e.-$180million.Answer:A8-81Whatistherepricinggapifa3-yearmaturitygapisusedIgnorerunoffs.a.$21million.b.$44million.c.-$80million.d.-$60million.e.-$120million.Answer:D8-82Whatistherepricinggapifa1-yearmaturitygapisusedifrunoffsarealsoconsidereda.-22million.b.+$22million.c.+$53million.d.-$40million.e.-$70million.Answer:C8-83Whatistheimpactonnetinterestincomeinyeartwoifinterestratesincreaseby50basispointsattheendofyearoneIgnorerunoffs.a.+$million.b.+$million.c.-$million.d.-$million.e.+$million.Answer:CUsethefollowinginformationtoanswerthenextten(10)questions:Allassetsandlia