978-0133427073 Test Bank Chapter 23 Part 2

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33) If First National Bank has a gap equal to a negative $30 million, then a 5 percentage point

increase in interest rates will cause profits to

A) increase by $15 million.

B) increase by $1.5 million.

C) decline by $15 million.

D) decline by $1.5 million.

34) Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap

times the change in the interest rate is called ________.

A) basic duration analysis

B) basic gap analysis

C) interest-exposure analysis

D) gap-exposure analysis

35) Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap

for several maturity subintervals by the change in the interest rate is called

A) basic gap analysis.

B) the segmented maturity approach to gap analysis.

C) the maturity bucket approach to gap analysis.

D) the segmented maturity approach to interest-exposure analysis.

E) none of the above.

36) Duration gap analysis

A) is a refinement of basic gap analysis that accounts for interest-rate changes over a multiyear

period.

B) is a refinement of basic gap analysis that accounts for how long a gap will last.

C) is a complement to basic gap analysis that accounts for the effect of interest rate changes on

market value.

D) is a complement to basic gap analysis that accounts for the influence of partially rate-sensitive

assets.

37) Duration analysis involves comparing the average duration of the bank’s ________ to the

average duration of its ________.

A) securities portfolio; nondeposit liabilities

B) loan portfolio; nondeposit liabilities

C) loan portfolio; rate-sensitive liabilities

D) rate-sensitive assets; rate-sensitive liabilities

E) assets; liabilities

38) To use the concept of duration to analyze the effect of changes in interest rates on the market

value of an asset, a bank manager would multiply

A) the negative of the duration of the asset by the change in the interest rate, Δi.

B) the negative of the duration of the asset by Δi /(1 + i).

C) the duration of the asset by the change in the interest rate, Δi.

D) the duration of the asset by Δi /(1 + i).

39) If a bank has a duration gap of 2 years, then a rise in interest rates from 6 percent to 9 percent

will lead to

A) a rise in the market value of its net worth of 5.66 percent.

B) a rise in net interest income of 5.66 percent.

C) a fall in the market value of its net worth of 5.66 percent.

D) a fall in net interest income of 5.66 percent.

E) an unknown change.

40) If a bank has a duration gap of 2 years, then a fall in interest rates from 6 percent to 3 percent

will lead to

A) a rise in the market value of its net worth of 5.66 percent.

B) a fall in the market value of its net worth of 5.66 percent.

C) a rise in net interest income of 5.66 percent.

D) a fall in net interest income of 5.66 percent.

E) an unknown change.

41) If a decline in interest rates causes the market value of a bank’s net worth to rise, then the

bank must have a ________.

A) negative duration gap

B) positive duration gap

C) negative gap

D) positive gap

42) If a rise in interest rates causes the market value of a bank’s net worth to rise, then the bank

must have a ________.

A) negative duration gap

B) positive duration gap

C) negative gap

D) positive gap

43) One problem with duration gap analysis is that it

A) is calculated assuming that the yield curve is flat.

B) is calculated assuming that the yield curve does not change.

C) does not measure the sensitivity of net worth to interest rate changes.

D) does not measure the sensitivity of income to interest rate changes.

E) applies only to financial institutions.

44) One problem with basic gap analysis is that it

A) is calculated assuming interest rates on all maturities are equal.

B) is calculated assuming interest rates on all maturities change by equal amounts.

C) measures the sensitivity of net worth to interest rate changes.

D) does not measure the sensitivity of income to interest rate changes.

E) applies only to financial institutions.

45) A bank manager concerned about interest income who expects interest rates to rise and who

knows the bank currently has a positive gap should ________ rate-sensitive assets and ________

rate-sensitive liabilities.

A) increase; increase

B) decrease; increase

C) decrease; decrease

D) increase; decrease

46) A bank manager concerned about interest income who expects interest rates to fall and who

knows the bank currently has a positive gap should ________ rate-sensitive assets and ________

rate-sensitive liabilities.

A) increase; increase

B) decrease; increase

C) decrease; decrease

D) increase; decrease

1) If a bank has more rate-sensitive liabilities than assets, then an increase in interest rates will

reduce bank profits.

2) The difference between rate-sensitive liabilities and rate-sensitive assets is known as the

duration gap.

3) If a bank has a negative gap, then a decrease in interest rates will increase income.

4) Banks face the problem of adverse selection in loan markets because bad credit risks are the

ones most likely to seek bank loans.

5) Effective screening and information collection together form an important principle of credit

risk management.

6) Deciding on how good a risk you is entirely scientific, based on your credit score.

7) Credit rationing reduces adverse selection problems.

8) Credit rationing occurs when lenders charge higher interest rates on the loans they make to

riskier borrowers.

9) Developing and maintaining long-term customer relationships help to reduce banks’ costs of

screening and monitoring borrowers.

10) Measuring the sensitivity of bank profits to changes in interest rates by multiplying the gap

for several maturity subintervals by the change in the interest rate is called duration analysis.

11) If interest rates rise by 5 percentage points, then bank profits (measured using gap analysis)

will increase regardless of the income gap.

12) Income gap analysis and duration gap analysis are basically the same thing, so hedging

against one gap automatically hedges against the other.