1 53 A bank''''s GAP is defined as a the dollar amount of rate sensitive assets divided by the dollar amount of rate sensitive liabilities b the dollar amount of earning assets divided by the dollar amou[.]
410 Exam Study online at quizlet.com/_2o0hg6 53 A bank's GAP is defined as: a the dollar amount of rate-sensitive assets divided by the dollar amount of rate-sensitive liabilities b the dollar amount of earning assets divided by the dollar amount of total liabilities c the dollar amount of rate-sensitive assets minus the dollar amount of ratesensitive liabilities d the dollar amount of rate-sensitive liabilities minus the dollar amount of rate-sensitive assets e the dollar amount of earning assets times the average liability interest rate Answer: c According to the Federal Reserve's Functional Cost and Profit Analysis, the least expensive source of funds for a typical bank is: a certificates of deposit b negotiable order of withdrawal accounts c savings accounts d demand deposit accounts e federal funds purchased Answer: d All of the following are considered transaction accounts except: a negotiable orders of withdrawal b automatic transfer from savings c demand deposit accounts d small time deposits e all of the above are considered transaction accounts Answer: d An asset would normally be classified as ratesensitive if: a it matures during the examined time period b it represents a partial principal payment c the outstanding principal on a loan can be repriced when the base rate changes d All of the above e a and c only Answer: d A bank estimates that their average balance on demand deposit accounts is $2,500, net of float Each account costs the bank $175 per year in processing costs The bank collects an average of $5 per month on each account in service charges Assume reserve requirements are 10% If the bank can invest the deposit balance (after adjusting for reserve requirements) at 7%, what is the break-even deposit balance? a $3,777 b $3,500 c $2,500 d $1,825 e $1,479 Answer: d Net Cost = (Non-Interest Expense Non-Interest Income)/[Avg Balance * (1RR)] 7% = ($175 $60)/[Avg Balance * (1-.10)] 7% = $115/(Avg Balance * 9) 9Average Balance = $115/.07 Average Balance = ($115/.07)/.9 = $1,825.40 A bank estimates that their average balance on demand deposit accounts is $2,500, net of float Each account costs the bank $175 per year in processing costs The bank collects an average of $5 per month on each account in service charges Assume reserve requirements are 10% What is the net cost of an average demand deposit? a 4.5% b 4.8% c 5.1% d 6.8% e 7.0% Answer: c Net Cost = (Non-Interest Expense Non-Interest Income)/[Avg Balance * (1RR)] Annual NonInterest Income = 12 * $5 = $60 Net Cost = ($175 $60)/[$2,500 * (1-.10)] = 5.1% A bank has $100 million in earning assets, a net interest margin of 5%, and a 1-year cumulative GAP of $10 million Interest rates are expected to increase by 2% If the bank does not want net interest income to fall by more than 25% during the next year, how large can the cumulative GAP be to achieve the allowable change in net interest income a $2 million b $12 million c $15 million d $50 million e $62.5 million Answer: e Target Gap/Earning Assets = (Allowable % change in NIM) (Expected NIM)/(Expected % change in interest rates) Target Gap/$100 = (25%*5%/2%) Target Gap/$100 = 0.625 Target Gap = $62.5 A bank is going to issue $10,000,000 in 5year par value bonds that pay a 5% annual coupon The bank must pay 7% of the face value in floatation costs What is the bank's effective cost of borrowing? a 5.0% b 5.2% c 5.7% d 6.2% e 7.5% Answer: b Financial calculator solution FV= 10,000,000 PMT = 10,000,000 * 5% = 500,000 N=5 PV = -10,000,000 * (1-.007) = -9,930,000 I = ? = 5.2% A bank's cumulative GAP will always be: a greater than the periodic GAP b less than the periodic GAP c positive d negative e the sum of the interim periodic GAPs Answer: e 10 A bank's GAP is defined as: a the dollar amount of rate-sensitive assets divided by the dollar amount of rate-sensitive liabilities b the dollar amount of earning assets divided by the dollar amount of total liabilities c the dollar amount of rate-sensitive assets minus the dollar amount of rate-sensitive liabilities d the dollar amount of rate-sensitive liabilities minus the dollar amount of rate-sensitive assets e the dollar amount of earning assets times the average liability interest rate Answer: c 11 A bank's periodic GAP: a is defined as the dollar amount of ratesensitive assets divided by the dollar amount of rate-sensitive liabilities b is defined as the dollar amount of earning assets divided by the dollar amount of total liabilities c compares rate-sensitive assets with ratesensitive liabilities across all time buckets d compares rate-sensitive assets with ratesensitive liabilities across a single time bucket compares the dollar amount of earning assets times the average liability interest rate Answer: d 12 Banks prefer money market deposit accounts to demand deposits for all of the following reasons except: a required reserves on money market deposit accounts are lower b money market deposit accounts are less interest rate sensitive than demand deposit accounts c demand deposit accounts have fewer checks written each month d average demand deposit balances are higher than money market deposit account balances e money market deposits accounts are not limited to the $100,000 deposit insurance limit like demand deposit accounts Answer: b 13 A bank's stock is currently trading at $50 and currently pays a divided of $6 per year The average forecast is that next year's dividend will be $6.42 Assuming a 34% percent corporate tax bracket, what is the pre-tax expected return on equity? a 12.8% b 19.8% c 30.1% d 28.8% e 58.2% Answer: b ke = D1/P + g g = D1/D0 - = 6.42/6.00 = 07 ke = $6.42/$50.00 + 07 = 1984 = 19.8% 14 A bank with a negative GAP is said to be liability sensitive Answer: True A bond has a Macaulay's duration of 10.7 years If rates fall from 7% to 6%, the bonds price will: a increase by approximately 1% b decrease by approximately 1% c increase by approximately 10% d decrease by approximately 10% e Not enough information is given to answer the question Answer: c Modified Duration = Macaulay's duration/(1+i) = 10.7/1.07 = 10 % Change in Price = Modified duration Change in interest rates = 10 1% = 10% A brokered deposit would most likely take which of the following forms? a Demand deposit b NOW account c Jumbo CDs d Savings account e Small time deposit Answer: c 17 Core deposits are affected by all of the following except: a location b availability c volatile liabilities d service charges e Core deposits are affected by all of the above Answer: c 18 Discuss the difference between a bank's periodic and cumulative GAP 19 Discuss the similarities and differences between earnings sensitivity analysis and income statement GAP analysis 20 Discuss three factors that affect net interest income 15 16 21 Duration gap analysis: a applies he the concept of duration to the bank's entire balance sheet b applies he the concept of duration to the bank's entire income statement c applies he the concept of duration to the bank's retained earnings d indicates the difference in the GAP in the time it takes to collect on loan payments versus the time to attract deposits e estimates when embedded options will be exercised Answer: a 22 Earnings-at-risk: a considers only interest rate "shocks." b is only an effective measure for 90 day intervals or less c examines the change in asset composition, given a change in bank liabilities d examines the variation in net interest income associated with various changes in interest rates e None of the above Answer: d 23 The earnings change ratio: a is defined as yield on rate-sensitive liabilities divided by the yield on rate-sensitive assets b measures how the yield on an asset is assumed to change given a 1% change in some base rate c measures the change in net interest income for a given change in some base rate d All of the above e a and c Answer: b 24 Earnings sensitivity analysis differs from static GAP analysis by: a looking at a wide range of interest rate environments b using perfect interest rate forecasts c calculating a change in net interest income given a change in interest rates d Earnings sensitivity analysis differs from static GAP analysis in all of the above ways e Earnings sensitivity analysis and static GAP analysis not differ They are different names for the exact same analysis Answer: a 25 Earnings sensitivity analysis does not consider: a changes in interest rates b changes in the volume of rate-sensitive assets due to a change in interest rates c changes in the volume of fixed-rate liabilities due to a change in interest rates d mortgage prepayments e Earnings sensitivity analysis considers all of the above Answer: e 26 Effective duration: a estimates when embedded options will be used b directly indicates how much the price of a security will change given a change in interest rates c is always greater than maturity d is a weighted average of the time until cash flows are received e All of the above Answer: a 27 Federal funds are: a secured bank loans from the discount window b unsecured short-term loans that are settled in immediately available funds c secured inter-bank loans of reserves d secured core deposits e secured overnight loans Answer: b 28 The GAP ratio: a is always greater than one for bank's with a negative periodic GAP b is equal to the volume of rate-sensitive liabilities times the volume of rate-sensitive assets c is equal to the volume of rate-sensitive liabilities divided by the volume of rate-sensitive assets d is equal to the volume of rate-sensitive assets divided by the volume of rate-sensitive liabilities e is always less than one for bank's with a positive cumulative GAP Answer: d 29 A GAP ratio of less than one is consistent with a negative gap True 30 High interest rates in the late 1990's on large CDs lead to the introduction of: a zero coupon CDs b variable rate CDs c callable CDs d stock market indexed CDs e immediately available funds CDs Answer: c 31 If a bank expects interest rates to decrease in the coming year, it should: a increase its GAP b issue long-term subordinated debt today c increase the rates paid on long-term deposits d issue more variable rate loans e become more liability sensitive Answer: e 32 If a bank has a positive GAP, a decrease in interest rates will cause interest income to , interest expense to , and net interest income to a increase, increase, increase b increase, decrease, increase c increase, increase, decrease d decrease, decrease, decrease e decrease, increase, increase Answer: d 33 If rate-sensitive assets equal $500 million and rate-sensitive liabilities equals $400 million, what is the expected change in net interest income if rates increase by 1%? a Net interest income will increase by $1 million b Net interest income will fall by $1 million c Net interest income will increase by $10 million d Net interest income will fall by $10 million e Net interest income will be unchanged Answer: a ($500 million $400 million) * 1% = $1,000,000 34 If rate-sensitive assets equal $500 million and rate-sensitive liabilities equals $400 million, what is the expected change in net interest income if rates increase by 1%? a Net interest income will increase by $1 million b Net interest income will fall by $1 million c Net interest income will increase by $10 million d Net interest income will fall by $10 million e None of the above Answer: a ($500 million $400 million) * 1% = $1,000,000 35 If the yield curve is inverted, a portfolio manager can take advantage of this by: a pricing more deposits on a fixed-rate basis b buying more long-term securities c making variable-rate, callable loans d increasing the number of rate-sensitive assets e All of the above Answer: b 36 If you deposit $1,000 into a certificate of deposit that quotes you a 5.5% APY, how much will you have at the end of year? a $1,050.00 b $1,055.00 c $1,550.00 d $1,005.50 e None of the above Answer: b FV = PV * (1+i)n $1,000 * 1.0551 = $1,055.00 37 In 1961, Citicorp introduced the first: a NOW account b marketable certificate of deposit c MMDA d subordinated debenture e zero coupon bond Answer: b Income statement GAP considers: a changes in interest rates b changes in the volume of rate-sensitive assets due to a change in interest rates c changes in the volume of fix-rate liabilities due to a change in interest rates d mortgage prepayments e Income statement GAP considers all of the above Answer: a In regards to repurchase agreements, the margin is: a a good faith deposit b a loan against the repurchase agreement c a risk-free guarantee d the difference between the market value of the collateral and the amount of the loan e all of the above Answer: d Interest costs not equal the effective cost of bank liabilities because: a reserve requirements increase the effective cost b there may be substantial processing costs c service charges may offset a portion of noninterest expense d all of the above e a and c Answer: d Interest rate risk: a varies inversely with a bank's GAP b can be measured by the volatility of a bank's net interest income given changes in the level of interest rates c can be eliminated by matching fixed rate assets with variable rate liabilities d rarely has an impact on bank earnings e All of the above Answer: b 38 39 40 41 42 Keeping all other factors constant, banks can reduce the volatility of net interest income by: a adjusting the dollar amount of rate-sensitive assets b adjusting the dollar amount of fixed-rate liabilities c using interest rate swaps d Bank can reduce volatility of net interest income by doing all of the above e a and c only Answer: e 43 Liability management decisions determines all of the following except: a interest expense on borrowed funds b check handling costs c personnel costs d fee income e loan rates Answer: e 44 Macaulay's duration: a is a weighted average of the time until cash flows are received b is always greater than maturity c is never equal to maturity d directly indicates how much the price of a security will change given a change in interest rates e estimates when embedded options will be used Answer: a 45 Modified duration: a estimates when embedded options will be used b directly indicates how much the price of a security will change given a change in interest rates c is always greater than maturity d All of the above e a and b Answer: b 46 Non-earning assets are classified as ratesensitive assets for GAP analysis purposes False 47 On-us debits are: a checks drawn on any bank other than the bank into which it was deposited b the accounting transaction for selling fed funds c discount window loans d illegal e checks drawn on a bank's own customer's account Answer: e 48 49 A primary difference between "intelligent" smart cards and "memory" smart cards is that: a intelligent smart cards can store information, while memory smart cards cannot b intelligent smart cards are larger than memory smart cards c intelligent smart cards contain a microchip, while memory smart cards not d intelligent smart cards are "digital", while memory smart cards are not e intelligent smart cards are used in ACH transactions, while memory smart cards are not Answer: c Put the following steps for conducting a Static GAP analysis in the proper chronological order I Forecast changes in net interest income for a variety of interest rate scenarios II Select the sequential time intervals for determining when assets and liabilities are ratesensitive III Group assets and liabilities into time "buckets." IV Develop interest rate forecasts Answer: e a I, II, III, IV b IV, I, III, II c IV, I, II, III d II, III, IV, I e IV, II, III, I 50 51 Repurchase agreements are: a riskier than fed funds loans b unsecured short-term loans c secured overnight loans d secured loans of reserves e secured Fed funds loans Answer: c A shift from core deposits to non-core deposits will: a always increase the amount of fixed rate assets b always increase the amount of rate-sensitive assets c generally increase the amount of non-earning assets d generally reduce net interest income e b and d Answer: d 52 Small time deposits are characterized by all of the following except: a they have denominations are less than $100,000 b they have substantial interest penalties for early withdrawal c banks can pay market interest rates on them d there is a substantial interest penalty for early withdrawal e they have a minimum maturity of days Answer: e 53 Static GAP analysis focuses on managing net interest income in the short-run Answer: True 54 There is a constant relationship between changes in a bank's portfolio mix and net interest income False 55 To decrease liability sensitivity, a bank can: a buy longer-term securities b attract more non-core deposits c increase the number of floating rate loans d pay premiums on longer-term deposits e All of the above Answer: d 56 To increase asset sensitivity, a bank can: a buy longer-term securities b pay premiums on subordinated debt c shorten loan maturities d make more fixed rate loans e All of the above Answer: c 57 What are the advantages and disadvantages of static GAP analysis? 58 What are the weaknesses of using static GAP analysis versus duration gap analysis? a Static GAP ignores the time value of money b Static GAP ignores the cumulative impact of interest rate changes on a bank's risk profile c Static GAP does not proscribe the treatment of demand deposits d All of the above are weaknesses of using static GAP analysis versus duration gap analysis e a.and b Answer: d 59 60 61 62 63 64 What does a bank's duration gap measure? a The duration of short-term buckets minus the duration of long-term buckets b The duration of the bank's assets minus the duration of its liabilities c The duration of all rate-sensitive assets minus the duration of rate-sensitive liabilities d The duration of the bank's liabilities minus the duration of its assets e The duration of all rate-sensitive liabilities minus the duration of ratesensitive assets Answer: b What type of GAP analysis directly measures a bank's net interest sensitivity through the last day of the analysis period? a Earnings b Net Income c Maturity d Periodic e Cumulative Answer: e When is interest rate risk for a bank greatest? a When interest rates are volatile b When interest rates are stable c When inflation is high d When inflation is low e When loan defaults are high Answer: a When is interest rate risk for a bank greatest? a When interest rates are volatile b When interest rates are stable c When inflation is high d When inflation is low e When loan defaults are high Answer: a When the FDIC provides assistance in acquiring a failed bank, which option is the FDIC using in handling the failing institution? a Purchase and assumption b Open bank assistance c Insured deposit assumption or transfer d Bridge bank e Payout option Answer: b Which beta for a bank stock would indicate the greatest amount of market risk? a -2.5 b -1.0 c 0.0 d 1.5 e 2.0 Answer: a 65 Which of the following allows a security's cash flows to change when interest rates change? a Modified duration b Macaulay's duration c Effective duration d Balance sheet duration e Income statement duration Answer: c 66 Which of the following are likely to occur when interest rates rise sharply? a Fixed-rate loans are pre-paid b Bonds are called c Deposits are withdrawn early d All of the above occur when interest rates rise sharply e a and b Answer: c 67 Which of the following can a bank use as collateral for borrowing from the Federal Home Loan Bank Board? a Real estate loans b Treasury securities c Negotiable CDs d Credit card receivables e Repurchase agreement Answer: a 68 Which of the following does not affect net interest income? a Changes in the level of interest rates b Changes in the volume of earning assets c Changes in the portfolio mix of earning assets d The yield curve changing from upward sloping to inverted e All of the above affect net interest income Answer: e 69 Which of the following does not have an embedded option? a A callable Federal Home Loan Bank bond b Demand deposit accounts c A home mortgage loan d An auto loan e All of the above have embedded options Answer: e 70 Which of the following does not have an embedded option? a A callable Wizard Home Loans bond b Demand deposit accounts c A home mortgage loan d An auto loan e All of the above have embedded options Answer: e 71 Which of the following Federal Reserve loans is to help with systematic new loan demand? a Extended credit loans b Seasonal borrowing loans c Fed funds loans d Deposit insurance loans e Short-term adjustment loans Answer: e 72 Which of the following is an advantage of static GAP analysis? a Static GAP analysis considers the time value of money b Static GAP analysis indicates the specific balance sheet items that are responsible for the interest rate risk c Static GAP analysis considers the cumulative impact of interest rate changes on the bank's position d Static GAP analysis considers the embedded options in loans, such as mortgage prepayments e All of the above are advantages of static GAP analysis Answer: b Which of the following is an example of immediately available funds? a Deposits at the Federal Reserve b Stock market indexed CDs c Demand deposits d Money market deposit accounts e All of the above Answer: a Which of the following is likely to have a negative effective duration? a A high coupon, interest only mortgage-backed security that is pre-paying at a high rate b A low coupon Commonwealth Treasury bond c Commonwealth Government Securities purchased d Demand deposits e None of the above can have a negative effective duration Answer: a Which of the following is not a characteristic of jumbo CDs? a They have a minimum maturity of days b Interest rates are quoted on a 365-day year c They are generally issued at face value d They are only insured up to $100,000 per individual per institution e All of the above are characteristics of jumbo CDs Answer: b 73 74 75 76 Which of the following is not a disadvantage of static GAP analysis? a Static GAP analysis depends on the forecasted interest rates b Static GAP analysis often considers demand deposits as non-rate sensitive c Static GAP analysis does not consider the cumulative impact of interest rate changes on the bank's position d Static GAP analysis does not consider a depositor's early withdrawal option e All of the above are disadvantages of static GAP analysis Answer: c 77 Which of the following is true regarding money market deposit accounts (MMDAs)? a A maximum of three checks per month may be written on a MMDA account b The average check size on an MMDA account is smaller than the average demand deposit check size c MMDAs are formally transaction accounts d Required reserves on MMDAs are higher than on demand deposit accounts e Rates paid on MMDAs are generally higher than rates on money market mutual funds Answer: a 78 Which of the following will cause a bank's 1-year cumulative GAP to increase, everything else the same a An increase in 3-month loans and an offsetting decrease in 6-month loans b An increase in 3-month loans and an offsetting increase in 3-month CDs c A decrease in 3-month CD's and an offsetting increase in 3-year CDs d a and c e b and c Answer: c 79 Which of the following would be an example of a Eurodollar account? a A U.S dollar denominated deposit held at a Japanese bank b A British pound denominated deposit held at a New York bank c A French franc denominated deposit held at a Toronto bank d A U.S dollar denominated deposit held at a Chicago bank e A EMU euro denominated deposit held at a London bank Answer: a 80 Which of the following would not be considered "hot money"? a Jumbo CDs b Fed funds purchased c Eurodollar time deposits d Retail demand deposits e Repurchase agreements Answer: d 81 With "relationship pricing": a banks unbundle services and charge separate prices for each b service charges decline with larger customer deposit balances c interest rates paid on deposit accounts decreases with customer deposit balances d large depositors pay the highest fees.small depositors receive the highest interest rates Answer: b