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    Section 5 - ch7 Answers

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    Dina Alfawal
    1) The document discusses risk management techniques for changing interest rates, including asset-liability management and duration. 2) It provides examples of fill-in-the-blank, true/false, and multiple choice questions related to interest rates, yield curves, duration, and asset-liability matching. 3) The questions cover topics like interest rate sensitivity, duration gaps, net interest margins, and how changes in interest rates impact the value of assets and liabilities.

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    Section 5 - ch7 Answers

    Uploaded by

    Dina Alfawal
    118 views4 pages
    1) The document discusses risk management techniques for changing interest rates, including asset-liability management and duration. 2) It provides examples of fill-in-the-blank, true/false, and multiple choice questions related to interest rates, yield curves, duration, and asset-liability matching. 3) The questions cover topics like interest rate sensitivity, duration gaps, net interest margins, and how changes in interest rates impact the value of assets and liabilities.

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    1) The document discusses risk management techniques for changing interest rates, including asset-liability management and duration. 2) It provides examples of fill-in-the-blank, true/false, and multiple choice questions related to interest rates, yield curves, duration, and asset-liability matching. 3) The questions cover topics like interest rate sensitivity, duration gaps, net interest margins, and how changes in interest rates impact the value of assets and liabilities.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    118 views4 pages

    Section 5 - ch7 Answers

    Uploaded by

    Dina Alfawal
    1) The document discusses risk management techniques for changing interest rates, including asset-liability management and duration. 2) It provides examples of fill-in-the-blank, true/false, and multiple choice questions related to interest rates, yield curves, duration, and asset-liability matching. 3) The questions cover topics like interest rate sensitivity, duration gaps, net interest margins, and how changes in interest rates impact the value of assets and liabilities.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    Fall 2020/2021

    Section (6)
    CH 7: Risk Management for Changing Interest Rates: Asset-Liability Management and Duration Techniques

    Fill in the Blank Questions:

    1) The yield curve shows the relationship between the time to maturity and the yield to maturity of bonds. 
    2) Interest-sensitive assets are those assets which mature or must be repriced within the planning period.
    3) A(n) negative interest-sensitive gap (liability sensitive) means that the bank has more
    interest-sensitive liabilities than interest-sensitive assets. 
    4) A(n) negative-duration gap means that for a parallel increase in all interest rates, the market value of net worth
    will tend to increase.  If interest rates rise, liabilities will lose more value than assets thus, increasing the firm’s equity.

    State whether the following statements are true or false and correct the false statements:

    1) A financial institution is liability sensitive, if its interest-sensitive liabilities are less than its interest-sensitive
    assets. FALSE (more)
    2) Interest-sensitive gap techniques do not consider the impact of changing interest rates on stockholders' equity. TRUE
    3) A bank with a positive duration gap experiencing a decrease in interest rates will experience an increase in its net
    TRUE value of assets will increase more than the dec in the value of
    worth. 

    liabilities

    Multiple Choice Questions:


    1. 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.  interest sensitive assets.
    E.  None of the options is correct.

    2. 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 options is correct.
    Fall 2020/2021
    3. 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.
    D.  net interest margin.
    E.  None of the options is correct.
    4. The Third National Bank of Edmond reports a net interest margin of 5.83 percent. It has total interest revenues
    of $275 million and total interest expenses of $210 million. What will be the bank's earning assets
    total? NIM=IR-IE/earning assets 5.83%= 65/x x=65/8.83%
    A.  $4,717 million
    B.  $3,602 million
    C.  $1,115 million
    D.  $3,790 million
    E.  None of the options is correct.

    5. The Third National Bank of Edmond reports a net interest margin of 5.83 percent. It has total interest revenues
    of $275 million and total interest expenses of $210 million. This bank has earnings assets of $1,115. Suppose
    this bank's interest revenues rise by 8 percent and its interest expenses and earnings assets rise by 10 percent
    next year, what is this bank's new net interest margin?   IR= 275+(1x8%)= 297 IE= 210+(1x10%)=231 EA=1115+
    (1x10%)= 1226.5 297-231/1226.5
    A.  5.83 percent
    B.  7.09 percent
    C.  3.59 percent
    D.  5.38 percent
    E.  7.80 percent

    6. If Fifth National Bank's asset duration exceeds its liability duration and if interest rates rise, the bank's net
    worth will _________________. 
    A.  decrease
    B.  increase
    C.  stabilize
    D.  be unaffected
    E.  None of the options is correct.
    Fall 2020/2021
    7. The assets and liabilities of Finacle Bank as on December 31, 2015, are as follows:

    $20,000 of short-term securities issued by governments and private borrowers (about to mature), $12,000 of
    borrowings from the money market, $15,000 of short-term savings accounts, $12,000 of variable-rate loans
    and securities, $18,000 of long-term loans made at a fixed interest rate, $25,000 of long-term savings and
    retirement accounts, $22,000 of deposits in the Central Bank (held as legal reserves), $550,000 of equity capital
    provided by the bank's owners, and $500,000 of building and equipment. 20+12

    What is the total of repriceable assets held by the bank as on December 31, 2015
    A.  $32,000
    B.  $50,000
    C.  $45,000
    D.  $55,000
    E.  $52,000

    8. Brendon Brothers Bank reports interest-sensitive assets at $35 million, interest-sensitive liabilities at $60
    million and total assets at $80 million. What is the relative IS GAP of the bank?  TSA-TSL/TA
    A.  -0.29
    B.  0.29
    C.  -0.31
    D.  0.31
    E.  -0.33
    Fall 2020/2021

    Problems:

    1)

     Earning assets = (95-82)/2.75% =$472.73M


     New int rev = 95(1+5%) = 99.75
     New int expense = 82(1+9%) = 89.38
     New earning assets = 472.73(1+9%) =515.28
     Net interest margin = (99.75-89.38)/515.28 = 2.01%

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