FINC

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QUESTION 1 ● When interest rate changes, the impact on a bank’s earnings depends on the repricing of

their assets or liabilities.

2. Loan A (7%, 1 year) = $100 Deposit A (2.5%, 3 months) = $250 Loan B (10%, 2 years) = $200 Deposit B (5%, 1 year) = $ 50 Total Assets = $300 Total Liabilities = $300 The net interest margin or spread

1 points

QUESTION 2 1. The average maturity of its assets is larger than that of its deposits, as is typical of most banks. There is a

reinvestment risk

re-finance risk

re-pricing risk

default risk

1 points

QUESTION 3 1. The average duration of its assets is longer than that of its liabilities. There is a

reinvestment risk

re-finance risk

re-pricing risk

basis point risk

1 points

QUESTION 4 1. If the loan interest rate adjusts every quarter and the deposit interest rate adjust every six months, the risk of interest rate from the different frequencies of rate adjustments is called

Repricing risk

yield -curve risk

basis point risk

default risk

1 points

QUESTION 5 1. If the loan interest rate is 4 % mark-up on the 6 month treasury bill and the deposit interest rate is 1% mark-up on the 3 month treasury bill, the risk of interest rate like this is called

Repricing risk

yield -curve risk

basis point risk

default risk

1 points

QUESTION 6 1. Consider a bank that borrows $100 million in deposits at a floating rate of T-Bill plus 2% and lends at LIBOR plus 4%. Both rates are reset semi-annually. Normally, both rates move together. Assume

the 3-month LIBOR rate was 3.40% and the 3-month T-Bill rate was 3.0% when the loan was disbursed.

The spread is given as follows

1 points

QUESTION 7 1. Assume a bank has the following balance sheet. Determine the 2-year GAP.

Asset Amou n t

Liability Amoun t

Cash $100 90-day CDs

$100

6-month Gbo nds

$400 360-day CDs

$200

2-year

commer cial

loans

$400 Time Deposi ts 2- year

$900

5-year fixed

rate loan s

$500 Stockholde r’

s equity

$200

Total $1,40 0

Total $1,400

GAP = (RSA2 yr – RSL2 yr)

1 points

QUESTION 8 1. Assume a bank has the following balance sheet. When both the deposit rate and loan rate change by 2%, determine the 1-year net impact on net interest income (ΔNII)

Asset Amou n t

Liability Amoun t

Cash $100 90-day CDs

$100

6-month Gbo nds

$400 360-day CDs

$200

2-year

commer cial

loans

$400 Time Deposi ts 2- year

$900

5-year fixed

rate loan s

$500 Stockholde r’

s equity

$200

Total $1,40 0

Total $1,400

ΔNII = (RSA1-year – RSL1-year)* (.02)

1 points

QUESTION 9 1. Assume a bank has the following balance sheet for the 3-year GAP=$? (Hint: only rate sensitive assets and rate sensitive liabilities count)

Asset Potential rate change

Amo u n t

Liability Potential Rate change

Amoun t

Reserv es at the Fed

N/A $200 90-day CDs

0.85% $200

6-mont h T-B ills

2.00% $400 360-day CDs

1.00% $300

3-year Co nsu mer loa ns

3.00% $600 Time Depos its 2- year

1.50% $1200

10-year mor tga ges

2.00% $800 Stockhold er’

s equity

N/A $200

Total $200 0

Total $2000

1 points

QUESTION 10 1. Assume a bank has the following balance sheet What is the net impact on net interest income (NII) for 3 YEARS. if interest rates are expected to change as specified in the Potential rate change, (compute the detailed ERA)

Asset Potential rate change

Amo u n t

Liability Potential Rate change

Amoun t

Reserv es at the Fed

N/A $200 90-day CDs

0.85% $200

6-mont h T-B ills

2.00% $400 360-day CDs

1.00% $300

3-year Co nsu mer loa ns

3.00% $600 Time Depos its 2- year

1.50% $1200

10-year mor tga ges

2.00% $800 Stockhold er’

s equity

N/A $200

Total $200 0

Total $2000

1 points

QUESTION 11 1. The elasticity of the change of the price of debt toward the change in interest rate is the absolute value of (and then divided by(1+r))

Convexity

b. Maturity

c. Duration

d. Immuniz ation

1 points

QUESTION 12 1. ( ) is a measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates.

Convexit y

Maturity

Duration

Immuniza tion

1 points

QUESTION 13 1. Assume a 4-year loan with a principal of $5,000 paying 7% interest. The current market yield on the loan is also 7%. What is the duration of the loan?

1.62 y e ar s

2.62 y e ar s

3.62 y e ar s

4.62 y e ar s

1 points

QUESTION 14 1. 14. Estimate the duration of Loan M

Bank Balance Sheet

Cash = $ 50

Loan M (7%, 6 years) = $200

Deposit N (3 years, 2%) = $ 200

Equity = $ 50

Total Assets = $250 Total Liabilities = $ 250

3.1 y e a r s

4.1 y e a r s

5.1 y e a r s

6.1 y

e a r s

1 points

QUESTION 15 1. 14. Estimate the duration of Deposit N

Bank Balance Sheet

Cash = $ 50

Loan M (7%, 6 years) = $200

Deposit N (3 years, 2%) = $ 200

Equity = $ 50

Total Assets = $250 Total Liabilities = $ 250

1 points

QUESTION 16

1. Δ%(MV) = -MD*Δr When we use this equation to evaluate a loan, this equation does not totally reflect the change in the present value of loans mainly because of the ignorance of which of the following factors

a. Convexity

b. Maturity

c. Duration

d. Immunization

1 points

QUESTION 17 1. 16. In the following balance sheet, estimate the impact on the economic value of equity (EVE). if all interest rates decrease by 3%, EVE=$( )

Loan A (7.5%, 5 year) = $500 Deposit B (5%, 2 year) = $500

Total Assets = $500 Total Liabilities = $500

1 points

QUESTION 18 1. In the following balance sheet, estimate the impact on the economic value of equity (EVE). If interest rates of assets fall by 1% and deposit rates increase by 1%. EVE=$( )

Loan A (8%, 3 year)

= $1 50

Deposit A

(5%, 2 years )

=$250

Loan B (11%, 4 years )

= $2 00

Deposit B

(7%, 3 year)

= $100

Total Ass ets

= $3 50

Total Liabi lities

= $350

1 points

QUESTION 19 1. In the following balance sheet,

Loan A (8%, 3 year)

= $1 50

Deposit A

(5%, 2 years )

=$250

Loan B (11%, 4 years )

= $2 00

Deposit B

(7%, 3 year)

= $100

Total Ass ets

= $3 50

Total Liabil ities

= $350

2. The GAP 3 y GAP three year

1 points

QUESTION 20 1. 19. In the following balance sheet,

Loan A (8%, 3 year)

= $1 50

Deposit A

(5%, 2 years )

=$250

Loan B (11%, 4 years )

= $2 00

Deposit B

(7%, 3 year)

= $100

Total Ass ets

= $3 50

Total Liabil ities

= $350

2. The GAP 3 yr=-200 if all interest rates decrease by 3%, net impact on net interest income (ΔNII) is

1 points

QUESTION 21 1. 20. When both deposit and loan interest rates decrease at the same speed in the market, a bank tends to ( ) to make money.

(a. reinvest

b. refinance

c. keep neutral)

1 points

QUESTION 22 1. When both deposit and loan interest rates increase at the same speed in the market, a bank tends to ( ) to make profit.

a. reinvest

b. refinance

c. keep

neutral

1 points

QUESTION 23

1. When borrowers tend to pay back the loans to bankers earlier, the bank is facing

a. Repricing risk

b. Yield curve risk

c. Basis points risk

d. Embedded options risk

1 points

QUESTION 24 1. 24. The GAP analysis and EAR analysis

a. If GAP is positive and interest rate increases the same on both asset and liability sides, EAR increases.

b. If GAP is negative and interest rate decreases the same on both asset and liability sides, EAR increases.

c. If EARs for year 1, year 2, year 3. ….up to year 30 are all positive, the bank should be profitable.

d. If GAP for year 1, year 2, year 3. ….up to year 30 are all zero, the bank’s interest rate risk should be very low.

all a,b,c,d are correct.

1 points

QUESTION 25

1. 25. The Federal Reserve has tools at its disposal to implement monetary policy, which does NOT include

a. Reserve requirements

b. Regulate investment banks

c. Open market operations

d. Discount rate

1 points

QUESTION 26 1. 26. ( ) is responsible for conducting monetary policy by influencing money supply and interest rates.

a. A Commercial Bank

b. A credit union

c. A Central Bank

d. An investment bank

1 points

QUESTION 27 1. The use of paper money

a. people trust paper money more than metal coins.

b. Improves the Durability of the currency

c. Improve the transportability of the currency

e.remedies the problem of Gresham’s Law

d. Improve the scarcity of the currency

1 points

QUESTION 28 1. When the Federal Reserve buys T-Bonds in the US market.

a. Money supply increases

b. Money supply decreases

c. Irrelevant to Money Supply

1 points

QUESTION 29 1. 29. When the Federal Reserve increase the discount rate of the Fed Fund in the US market.

a. Money supply increases

b. Money supply decreases

c. Irrelevant to Money Supply

1 points

QUESTION 30 1. 30. By raising the reserve requirement, the central bank

a. Money supply increases

b. Money supply decreases

c. Irrelevant to Money Supply

1 points

QUESTION 31 1. Negative Interest rate

a. This action was meant to complement the quantitative easing

b. encourages banks to lend more instead of keeping them as excess reserves.

c. Customers will consume more and deposit less.

all are correct.

1 points

QUESTION 32 1. about SOFR and LIBOR a

SOFR represents the interest rate of the unsecured funds

LIBOR is a good proxy of the risk-free rate

SOFRs include triparty repo data from the Bank of New York Mellon (BNYM) and the Depository Trust & Clearing Corporation (DTCC).

LIBOR now in 2020 is still the most influential interest rate in the international market.

1 points

QUESTION 33 1. Deposit Insurance

a. depositor indifference generates a moral hazard problem that encourages banks to engage in risky activities

b. exists only in the USA, not in the other countries.

c. It is a privately owned insurance company.

d. successfully helped US to overcome the problems in 1980’s S&L crisis and 2008 Financial Crisis.

1 points

QUESTION 34 1. What are CAMELS? They are ratings assessed by bank regulators after on-site examinations. Which one is wrong

a. C = Capital adequacy

b. A = Assurance of Assessment

c. M = Management

d. E = Earnings

e. L = Liquidity

1 points

QUESTION 35 1. About Insurance, which one is wrong?

a. insurance firms purchase re-insurance to reduce/alleviate/diversify the risk.

b. Deposit insurance is used in commercial banking businesses.

c. Underwriting and reinsurance risks are the major risks for insurance companies.

d. Categorized as Life insurance and non-life (property/casualty, including medical) insurance.

e. The US became a dominant insurer from modest roots planted in the 16th century.