Interest and Ratio

Multiple choice. Answer all questions on bottom of page 1 (2 points each)
1.If a bank has a negative gap and interest rates decline, possible management response(s) may be to:
* Do nothing
* Decrease interest-sensitive liabilities
* Increase interest-sensitive assets
* Either (b) or (c)
2.If the bank has a positive relative IS gap ratio:
* Interest sensitive ratio must be less than one
* Interest rates must be falling
* Interest sensitive ratio must be more than one
* Interest rates must be rising
3.Banks are exposed to interest rates:
* When rates are declining
* When rates are steady
* When rates are rising
* Whether rates are declining or rising
Multiple choice answers:
1 D9 D
2 C10 C
3 A11 B
4 D12 B
5 D13 B
6 C14 D
7 A15 C
8 C
4. A bank is liability-sensitive if:
* It experiences fall in net interest income when interest rates rise
* Relative IS Gap is positive
* It experiences rise in net interest income when interest rates fall
* Both (a) and (c)
5.The purpose of asset-liability management is to:
* Minimize net interest margin
* Control bank’s operating expenses
* Control a bank’s sensitivity to changes in market interest rates
* Maximize non net-interest margin
6. An asset-sensitive financial institution will typically hedge its position to avoid lower net interest income by:
* By pursuing a short futures contract
* Executing a call option
* Using an interest rate collar
* Executing a put option
7.In a call option:
* The option writer must stand ready to deliver securities to the option buyer upon request.
* The option writer must stand ready to accept delivery of securities from the option buyer if the latter requests.
* The buyer has the right, but not the obligation, to take a short position.
* Both (a) and (c).
8.If interest rates rise:
* Short futures contracts are more likely to be exercised
* Call options are more likely to be exercised
* Put options are more likely to be exercised
* Long futures contracts are more likely to be exercised
9. Lenders often make heavy use of interest-rate floors to protect their earnings when:
a. When interest rates appear to be most volatile
* Interest rates are falling
* There is considerable uncertainty about the direction in which market rates may move
* Both (a) and (c)
10. In an interest-rate swap:
* Both the net amount of interest due and the amount borrowed (notional amount) usually flows to one or the other party to the swap.
* The transaction usually combines an interest rate cap and an interest rate floor.
* Only the net amount of interest due usually flows to one or the other party to the swap.
* A borrowing institution’s objective is not to manage interest rate risk.
11.When interest rates fall:
* Longest-term bonds experience the most gains
* Longest-term bonds suffer the greatest losses
* Shortest-term bonds experience the least gains
d.Both (a) and (c)
12.Capital market instruments:
* Earn lower returns.
* Are less marketable.
* Have higher capital gains potential.
* Both (b) and (c).
13. When a bank expects revenues and profits to fall in a particular year, it will more likely pursue investment portfolio shifting by:
* Selling bonds whose market value has declined
* Selling bonds whose market value has risen
* Purchasing bonds whose market value has risen
* Purchasing binds whose market value has declined
14.Advantage of a barbell portfolio policy is to:
* Meet liquidity needs with long term securities
* Reduce investment income fluctuations
* Suffer minimum loses if interest rates rise
d.Both (a) and (c)
15.Investment security portfolios helps to dress up a bank’s balance sheet means:
* To make a financial institution look financially stronger by investing only in money market securities
* ...