1. The ___________________ view of assets and liabilities held that the amount and types of
deposits was primarily determined by customers and hence the key decision a bank needed to
make was with the assets.
2. Recent decades have ushered in dramatic changes in banking. The goal of
__________________ was simply to gain control of the bank’s sources of funds.
3. The__________________________ is the interest rate that equalizes the current market price of a
bond with the present value of the future cash flows.
4. The __________________ risk premium on a bond allows the investor to be compensated for
their projected loss in purchasing power from the increase in the prices of goods and services in
the future.
5. The __________________ shows the relationship between the time to maturity and the yield to
maturity of a bond. It is usually constructed using treasury securities since they are assumed to
have no default risk.
6. The __________________ risk premium on a bond reflects the differences in the ease and ability
to sell the bond in the secondary market at a favorable price.
7. __________________________ are those assets which mature or must be repriced within the
planning period.
8. __________________________ is the difference between interest-sensitive assets and interest-
sensitive liabilities.
9. A(n)__________________________ means that the bank has more interest-sensitive liabilities
than interest-sensitive assets.
10. The bank’s__________________________ takes into account the idea that the speed (sensitivity)
of interest rate changes will differ for different types of assets and liabilities.
11. __________________________ is the coordinated management of both the bank’s assets and its
liabilities.
12. __________________________ is the risk due to changes in market interest rates which can
adversely affect the bank’s net interest margin, assets and equity.
13. The__________________________ is the rate of return on a financial instrument using a 360 day
year relative to the instrument’s face value.
14. The __________________________ component of interest rates is the risk premium due to the
probability that the borrower will miss some payments or will not repay the loan.
15. __________________ is the weighted average maturity for a stream of future cash flows. It is a
direct measure of price risk.
16. __________________________ is the difference between the dollar-weighted duration of the
asset portfolio and the dollar-weighted duration of the liability portfolio.
17. A(n)__________________________ duration gap means that for a parallel increase in all interest
rates the market value of net worth will tend to decline.
18. A(n)__________________________ duration gap means that for a parallel increase in all
interest rates the market value of net worth will tend to increase.
19. The __________________ refers to the periodic fluctuations in the scale of economic activity.
20. The__________________________ is equal to the duration of each individual type of asset
weighted by the dollar amount of each type of asset out of the total dollar amount of assets.
21. The__________________________ is equal to the duration of each individual type of liability
weighted by the dollar amount of each type of asset out of the total dollar amount of assets.
22. A bank is __________________ against changes in its net worth if its duration gap is equal to
zero.
23. The relationship between a change in an asset’s price and an asset’s change in the yield or interest
rate is captured by __________________________.
24. The change in a financial institution’s __________________ is equal to difference in the duration
of the assets and liabilities times the change in the interest rate divided by the starting interest rate
times the dollar amount of the assets and liabilities.
25. When a bank has a positive duration gap a parallel increase in the interest rates on the assets and
liabilities of the bank will lead to a(n) __________________ in the bank’s net worth.
26. When a bank has a negative duration gap a parallel decrease in the interest rates on the assets and
liabilities of the bank will lead to a(n)_________________________ in the bank’s net worth.
27. U.S. banks tend to do better when the yield curve is upward-sloping because they tend to have
____________ maturity gap positions.
28. One government-created giant mortgage banking firms which have subsequently been privatized
is the .
29. One part of interest rate risk is . This part of interest rate risk
reflects that as interest rates rise, prices of securities tend to fall.
30. One part of interest rate risk is . This part of interest rate risk
reflects that as interest rates fall, any cash flows that are received before maturity are invested at a
lower interest rate.
31. When a borrower has the right to pay off a loan early which reduced the lender’s expected rate of
return it is called .
32. In recent decades, banks have aggressively sought to insulate their assets and liability portfolios
and profits from the ravages if interest rate changes. Many banks now conduct their asset-
liability management strategy with the help of an which
often meets daily.
33. is interest income from loans and investments less interest expenses on
deposits and borrowed funds divided by total earning assets.
34. are those liabilities that which mature or must be repriced within
the planning period.
35. Variable rate loans and securities are included as part of for
banks.
36. Money market deposits are included as part of for banks.
37. Interest sensitive assets less interest sensitive liabilities divided by total assets of the bank is
known as .
38. Interest sensitive assets divided by interest sensitive liabilities is known as .
39. is a measure of interest rate exposure which is the total difference in
dollars between those assets and liabilities that can be repriced over a designated time period.
40. is the phenomenon that interest rates attached to various assets often
change by different amounts and at different speeds than interest rates attached to various
liabilities,
41. Usually the principal goal of asset-liability management is to maximize or at least stabilize a
bank’s margin or spread.
42. Asset management strategy in banking assumes that the amount and kinds of deposits and other
borrowed funds a bank attracts are determined largely by its management.
43. The ultimate goal of liability management is to gain control over a financial institution’s sources
of funds.
44. If interest rates fall when a bank is in an asset-sensitive position its net interest margin will rise.
45. A liability-sensitive bank will experience an increase in its net interest margin if interest rates
rise.
46. Under the so-called liability management view in banking the key control lever banks possess
over the volume and mix of their liabilities is price.
47. Under the so-called funds management view bank management’s control over assets must be
coordinated with its control over liabilities so that asset and liability management are internally
consistent.
48. Bankers cannot determine the level or trend of market interest rates; instead, they can only react
to the level and trend of rates.
49. Short-term interest rates tend to rise more slowly than long-term interest rates and to fall more
slowly when all interest rates in the market are headed down.
50. A financial institution is liability sensitive if its interest-sensitive liabilities are less than its
interest-sensitive assets.
51. If a bank’s interest-sensitive assets and liabilities are equal than its interest revenues from assets
and funding costs from liabilities will change at the same rate.
52. Banks with a positive cumulative interest-sensitive gap will benefit if interest rates rise, but lose
income if interest rates decline.
53. Banks with a negative cumulative interest-sensitive gap will benefit if interest rates rise, but lose
income if interest rates decline.
54. For most banks interest rates paid on liabilities tend to move more slowly than interest rates
earned on assets.
55. Interest-sensitive gap techniques do not consider the impact of changing interest rates on
stockholders equity.
56. Interest-sensitive gap, relative interest-sensitive gap and the interest-sensitivity ratio will often
reach different conclusions as to whether the bank is asset or liability sensitive.
57. The yield curve is constructed using corporate bonds with different default risks so the bank can
determine the risk/return tradeoff for default risk.
58. Financial securities that are the same in all other ways may have differences in interest rates that
reflect the differences in the ease of selling the security in the secondary market at a favorable
price.
59. Financial institutions face two major kinds of interest rate risk. These risks include price risk and
reinvestment risk.
60. Interest-sensitive gap and weighted interest-sensitive gap will always reach the same conclusion
as to whether a bank is asset sensitive or liability sensitive.
61. Weighted interest-sensitive gap is less accurate than interest-sensitive gap in determining the
affect of changes in interest rates on net interest margin.
62. A bank with a positive duration gap experiencing a rise in interest rates will experience an
increase in its net worth.
63. A bank with a negative duration gap experiencing a rise in interest rates will experience an
increase in its net worth.
64. Duration is a direct measure of the reinvestment risk of a bond.
65. A bank with a positive duration gap experiencing a decrease in interest rates will experience an
increase in its net worth.
66. A bank with a negative duration gap experiencing a decrease in interest rates will experience an
increase in its net worth.
67. Duration is the weighted average maturity of a promised stream of future cash flows.
68. Duration is a direct measure of the price risk of a bond.
69. A bond with a greater duration will have a smaller price change in percentage terms when interest
rates change.
70. Long-term interest rates tend to change very little with the cycle of economic activity.
71. A bank with a duration gap of zero is immunized against changes in the value of net worth due to
changes in interest rates in the market.
72. Convexity is the idea that the rate of change of an asset’s price varies with the level of interest
rates.
73. The change in the market price of an asset’s price from a change in market interest rates is
roughly equal to the asset’s duration times the change the interest rate divided by the original
interest rate.
74. U.S. banks tend to do better when the yield curve is upward-sloping.
75. Net interest margin tends to rise for U.S. banks when the yield curve is upward-sloping.
76. Financial institutions laden with home mortgages tend be immune to interest-rate risk.
77. If a Financial Institution’s net interest margin is immune to interest-rate risk then so is its net
worth.
78. 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.
79. A bank’s IS 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.
80. According to the textbook, the maturing of the liability management techniques, coupled with
more volatile interest rates, gave birth to the __________________ approach which dominates
banking today. The term that correctly fills in the blank in the preceding sentence is:
A) Liability management
B) Asset management
C) Risk management
D) Funds management
E) None of the above.
81. The principal goal of interest-rate hedging strategy is to hold fixed a bank’s:
A) Net interest margin
B) Net income before taxes
C) Value of loans and securities
D) Noninterest spread
E) None of the above.
82. A bank is asset sensitive if its:
A) Loans and securities are 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) Deposits and borrowings are affected by changes in interest rates.
E) None of the above.
83. The change in a bank’s net income that occurs due to changes in interest rates equals the overall
change in market interest rates (in percentage points) times _____________. The choice below
that correctly fills in the blank in the preceding sentence is:
A) Volume of interest-sensitive assets
B) Price risk of the bank’s assets
C) Price risk of the bank’s liabilities
D) Size of the bank’s cumulative gap
E) None of the above.
84. A bank with a negative interest-sensitive GAP:
A) Has a greater dollar volume of interest-sensitive liabilities than interest-sensitive assets.
B) Will generate a higher interest margin if interest rates rise.
C) Will generate a higher interest margin if interest rates fall.
D) A and B.
E) A and C.
85. The net interest margin of a bank is influenced by:
A) Changes in the level of interest rates.
B) Changes in the volume of interest-bearing assets and interest-bearing liabilities.
C) Changes in the mix of assets and liabilities in the bank’s portfolio.
D) All of the above.
E) A and B only.
86. The discount rate that equalizes the current market value of a loan or security with the expected
stream of future income payments from that loan or security is known as the:
A) Bank discount rate
B) Yield to maturity
C) Annual percentage rate (APR)
D) Add-on interest rate
E) None of the above.
87. The interest-rate measure often quoted on short-term loans and money market securities such as
U.S. Treasury bills is the:
A) Bank discount rate
B) Yield to maturity
C) Annual percentage rate (APR)
D) Add-on interest rate
E) None of the above
88. A bank whose interest-sensitive assets total $350 million and its interest-sensitive liabilities
amount to $175 million has:
A) An asset-sensitive gap of 525 million
B) A liability-sensitive gap of $175 million
C) An asset-sensitive gap of $175 million
D) A liability-sensitive gap of $350 million
E) None of the above.
89. A bank has a 1-year $1,000,000 loan outstanding, payable in four equal quarterly installments.
What dollar amount of the loan would be considered rate sensitive in the 0 – 90 day bucket?
A) $0
B) $250,000
C) $500,000
D) $750,000
E) $1,000,000
90. A bank has Federal funds totaling $25 million with an interest rate sensitivity weight of 1.0. This
bank also has loans of $105 million and investments of $65 million with interest rate sensitivity
weights of 1.40 and 1.15 respectively. This bank also has $135 million in interest-bearing
deposits with an interest rate sensitivity weight of .90 and other money market borrowings of $75
million with an interest rate sensitivity weight of 1.0. What is the weighted interest-sensitive gap
for this bank?
A) $50.25
B) $-15
C) -$50.25
D) $34.25
E) None of the above
91. A bond has a face value of $1000 and five years to maturity. This bond has a coupon rate of 13
percent and is selling in the market today for $902. Coupon payments are made annually on this
bond. What is the yield to maturity (YTM) for this bond?
A) 13%
B) 12.75%
C) 16%
D) 11.45%
E) Cannot be calculated from the information given
92. A treasury bill currently sells for $9,845, has a face value of $10,000 and has 46 days to maturity.
What is the bank discount rate on this security?
A) 12.49%
B) 12.13%
C) 12.30%
D) 2%
E) None of the above
93. The _______________ is determined by the demand and supply for loanable funds in the
market. The term that correctly fills in the blank in the preceding sentence is:
A) The yield to maturity
B) The banker’s discount rate
C) The holding period return
D) The risk-free real rate of interest
E) The market rate of interest on a risky loan
94. A bank with a positive interest-sensitive gap will have a decrease in net interest income when
interest rates in the market:
A) Rise
B) Fall
C) Stay the same
D) A bank with a positive interest-sensitive gap will never have a decrease in net interest income
95. The fact that a consumer who purchases a particular basket of goods for $100 today has to pay
$105 next year for the same basket of goods is an example of which of the following risks:
A) Inflation risk
B) Default risk
C) Liquidity risk
D) Price risk
E) Maturity risk
96. A bank has Federal Funds totaling $25 million with an interest rate sensitivity weight of 1.0. This
bank also has loans of $105 million and investments of $65 million with interest rate sensitivity
weights of 1.40 and 1.15 respectively. This bank also has $135 million in interest-bearing
deposits with an interest rate sensitivity weight of .90 and other money market borrowings of $75
million with an interest rate sensitivity weight of 1.0. What is the dollar interest-sensitive gap for
this bank?
A) $50.25
B) $-15
C) -$50.25
D) $34.25
E) None of the above
97. If a bank has a positive GAP, an increase in interest rates will cause interest income to
__________, interest expense to__________, and net interest income to __________.
A) Increase, increase, increase
B) Increase, decrease, increase