1、Chapter 7Risk Management for Changing Interest Rates: Asset-Liability Management and Duration TechniquesFill in the Blank Questions1.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

2、was with the assets. Answer: asset management 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. Answer: liability management 3.The_ is the interest rate that equalizes the current market price of a bond with the

3、 present value of the future cash flows. Answer: yield to maturity (YTM) 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. Answer: inflation 5.The _ shows the relation

4、ship 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. Answer: yield curve 6.The _ risk premium on a bond reflects the differences in the ease and ability to sell the bond in the secon

5、dary market at a favorable price. Answer: liquidity 7._ are those assets which mature or must be repriced within the planning period. Answer: Interest-sensitive assets 8._ is the difference between interest-sensitive assets and interest-sensitive liabilities. Answer: Dollar interest-sensitive gap 9.

6、A(n)_ means that the bank has more interest-sensitive liabilities than interest-sensitive assets. Answer: negative interest-sensitive gap (liability sensitive) 10.The bank's_ takes into account the idea that the speed (sensitivity) of interest rate changes will differ for different types of asse

7、ts and liabilities. Answer: weighted interest-sensitive gap 11._ is the coordinated management of both the bank's assets and its liabilities. Answer: Funds management 12._ is the risk due to changes in market interest rates which can adversely affect the bank's net interest margin, assets an

8、d equity. Answer: Interest rate risk 13.The_ is the rate of return on a financial instrument using a 360 day year relative to the instrument's face value. Answer: bank discount rate 14.The _ component of interest rates is the risk premium due to the probability that the borrower will miss some p

9、ayments or will not repay the loan. Answer: default risk premium 15._ is the weighted average maturity for a stream of future cash flows. It is a direct measure of price risk. Answer: Duration 16._ is the difference between the dollar-weighted duration of the asset portfolio and the dollar-weighted

10、duration of the liability portfolio. Answer: Duration gap 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. Answer: positive 18.A(n)_ duration gap means that for a parallel increase in all interest rates the market valu

11、e of net worth will tend to increase. Answer: negative 19.The _ refers to the periodic fluctuations in the scale of economic activity. Answer: business cycle 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

12、amount of assets. Answer: duration of the asset portfolio 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. Answer: duration of the liability portfolio 22.A bank is _ against changes in

13、its net worth if its duration gap is equal to zero. Answer: immunized (insulated or protected) 23.The relationship between a change in an asset's price and an assets change in the yield or interest rate is captured by _. Answer: convexity 24.The change in a financial institution's _ is equal

14、 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. Answer: net worth 25.When a bank has a positive duration gap a parallel increase in the interest rates on th

15、e assets and liabilities of the bank will lead to a(n) _ in the bank's net worth. Answer: decrease 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. Answer: decrease 27.U.

16、S. banks tend to do better when the yield curve is upward-sloping because they tend to have _ maturity gap positions. Answer: positive 28. One government-created giant mortgage banking firms which have subsequently been privatized is the . Answer: FNMA or Fannie Mae (or FHLMC or Freddie Mac) 29. One

17、 part of interest rate risk is . This part of interest rate risk reflects that as interest rates rise, prices of securities tend to fall.Answer: price risk30. 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 be

18、fore maturity are invested at a lower interest rate.Answer: reinvestment risk31. When a borrower has the right to pay off a loan early which reduced the lenders expected rate of return it is called .Answer: call risk32. In recent decades, banks have aggressively sought to insulate their assets and l

19、iability 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.Answer: asset-liability committee33. is interest income from loans and investments less interest expenses on deposit

20、s and borrowed funds divided by total earning assets.Answer: Net interest margin (NIM)34. are those liabilities that which mature or must be repriced within the planning period.Answer: Interest-sensitive liabilities35. Variable rate loans and securities are included as part of for banks.Answer: repr

21、iceable assets36. Money market deposits are included as part of for banks.Answer: repriceable liabilities37. Interest sensitive assets less interest sensitive liabilities divided by total assets of the bank is known as .Answer: relative interest sensitive gap38. Interest sensitive assets divided by

22、interest sensitive liabilities is known as .Answer: Interest sensitivity ratio39. 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.Answer: Cumulative gap40. is the phenomenon that i

23、nterest rates attached to various assets often change by different amounts and at different speeds than interest rates attached to various liabilities,Answer: basis riskTrue/False QuestionsTF41.Usually the principal goal of asset-liability management is to maximize or at least stabilize a bank's

24、 margin or spread. Answer: True TF42.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. Answer: False TF43.The ultimate goal of liability management is to gain control over a financial

25、institution's sources of funds. Answer: True TF44.If interest rates fall when a bank is in an asset-sensitive position its net interest margin will rise. Answer: False TF45.A liability-sensitive bank will experience an increase in its net interest margin if interest rates rise. Answer: False TF4

26、6.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.Answer: True TF47.Under the so-called funds management view bank management's control over assets must be coordinated with its control over liabili

27、ties so that asset and liability management are internally consistent. Answer: True TF48.Bankers cannot determine the level or trend of market interest rates; instead, they can only react to the level and trend of rates. Answer: True TF49.Short-term interest rates tend to rise more slowly than long-

28、term interest rates and to fall more slowly when all interest rates in the market are headed down. Answer: False TF50.A financial institution is liability sensitive if its interest-sensitive liabilities are less than its interest-sensitive assets. Answer: False TF51.If a bank's interest-sensitiv

29、e assets and liabilities are equal than its interest revenues from assets and funding costs from liabilities will change at the same rate. Answer: True TF52.Banks with a positive cumulative interest-sensitive gap will benefit if interest rates rise, but lose income if interest rates decline. Answer:

30、 True TF53.Banks with a negative cumulative interest-sensitive gap will benefit if interest rates rise, but lose income if interest rates decline. Answer: False TF54.For most banks interest rates paid on liabilities tend to move more slowly than interest rates earned on assets. Answer: False TF55.In

31、terest-sensitive gap techniques do not consider the impact of changing interest rates on stockholders equity. Answer: True TF56.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 liabili

32、ty sensitive. Answer: False TF57.The yield curve is constructed using corporate bonds with different default risks so the bank can determine the risk/return tradeoff for default risk. Answer: False TF58.Financial securities that are the same in all other ways may have differences in interest rates t

33、hat reflect the differences in the ease of selling the security in the secondary market at a favorable price. Answer: True TF59.Financial institutions face two major kinds of interest rate risk. These risks include price risk and reinvestment risk. Answer: True TF60.Interest-sensitive gap and weight

34、ed interest-sensitive gap will always reach the same conclusion as to whether a bank is asset sensitive or liability sensitive. Answer: False TF61.Weighted interest-sensitive gap is less accurate than interest-sensitive gap in determining the affect of changes in interest rates on net interest margi

35、n. Answer: False TF62.A bank with a positive duration gap experiencing a rise in interest rates will experience an increase in its net worth. Answer: False TF63.A bank with a negative duration gap experiencing a rise in interest rates will experience an increase in its net worth. Answer: True TF64.D

36、uration is a direct measure of the reinvestment risk of a bond. Answer: False TF65.A bank with a positive duration gap experiencing a decrease in interest rates will experience an increase in its net worth. Answer: True TF66.A bank with a negative duration gap experiencing a decrease in interest rat

37、es will experience an increase in its net worth. Answer: False TF67.Duration is the weighted average maturity of a promised stream of future cash flows. Answer: True TF68.Duration is a direct measure of the price risk of a bond. Answer: True TF69.A bond with a greater duration will have a smaller pr

38、ice change in percentage terms when interest rates change. Answer: False TF70.Long-term interest rates tend to change very little with the cycle of economic activity. Answer: True TF71.A bank with a duration gap of zero is immunized against changes in the value of net worth due to changes in interes

39、t rates in the market. Answer: True TF72.Convexity is the idea that the rate of change of an asset's price varies with the level of interest rates. Answer: True TF73.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

40、duration times the change the interest rate divided by the original interest rate. Answer: True TF74.U.S. banks tend to do better when the yield curve is upward-sloping. Answer: True TF75.Net interest margin tends to rise for U.S. banks when the yield curve is upward-sloping. Answer: True TF76.Finan

41、cial institutions laden with home mortgages tend be immune to interest-rate risk. Answer: False TF77.If a Financial Institution's net interest margin is immune to interest-rate risk then so is its net worth. Answer: False Multiple Choice Questions78. When is interest rate risk for a bank greates

42、t?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: A79. A banks IS GAP is defined as:A) The dollar amount of rate-sensitive assets divided by the dollar amount of rate-sensitive liabilities

43、.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 dol

44、lar amount of earning assets times the average liability interest rate.Answer: C80. 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

45、the blank in the preceding sentence is: A)Liability management B)Asset management C)Risk management D)Funds management E)None of the above. Answer: D 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 loa

46、ns and securities D)Noninterest spread E)None of the above. Answer: A 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-se

47、nsitive assets. D)Deposits and borrowings are affected by changes in interest rates. E)None of the above. Answer: B 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 bel

48、ow 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. Answer: D 84. A bank with a negative interest-sensiti

49、ve 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. Answer: E 85. The net interest margin of a b

50、ank 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. Answer: D 86. The discount rate that eq

51、ualizes 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. Answer: B 87. The interest-rate me

52、asure 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 Answer: A 88. A bank whose interest-sensitive assets total $350 million and its interest-sensitive liabilities amount to $175 million has: A)An asset-sens