Financial Institutions Management 4th Edition by Saunders -Test Bank Instant Download - Complete Test Bank With Answers Sample Questions Are Posted Below Chapter 05 Testbank Student: ___________________________________________________________________________ Repricing gap refers to the: difference between rate-sensitive assets and rate-sensitive liabilities B. sum of rate-sensitive assets and rate-sensitive liabilities C. difference between rate-sensitive …
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Financial Institutions Management 4th Edition by Saunders -Test Bank
Instant Download – Complete Test Bank With Answers
Sample Questions Are Posted Below
Chapter 05 Testbank
Student: ___________________________________________________________________________
| Repricing gap refers to the: |
difference between rate-sensitive assets and rate-sensitive liabilities
B. sum of rate-sensitive assets and rate-sensitive liabilities
C. difference between rate-sensitive liabilities and rate-sensitive assets
D. difference between rate-insensitive assets and rate-insensitive liabilities
| The term ‘rate-sensitive assets’ refers to assets: |
whose interest rate will be repriced over some future period
B. with a particularly high interest rate
C. with a particularly low interest rate
D. for which demand is highly dependent on the level of interest rates
| Which of the following statements is true? |
APRA requires smaller Australian FIs to use the repricing gap method to estimate interest rate exposures in their banking book for capital adequacy.
B. Australian FIs are only required to use the repricing gap method if they are listed on an US stock exchange.
C. APRA does not require Australian FIs to use the repricing gap method to estimate interest rate exposures in their banking book for capital adequacy.
D. Australian FIs are only required to use the repricing gap if they are internationally active.
| What is spread effect? |
Periodic cash flow of interest and principal amortisation payments on long-term assets that can be reinvested at market rates.
B. The effect that a change in the spread between rates on rate-sensitive assets and rate-sensitive liabilities has on net interest income as interest rates change.
C. The effect of mismatch of asset and liabilities within a maturity bucket.
D. The premium paid to compensate for the future uncertainty in a security’s value.
| The cumulative gap over the whole balance sheet by definition: |
must be greater than zero
B. must be lower than zero
C. must equal zero
D. can take any value
| Which of the following statements is true? |
A negative gap indicates that a rise in interest rates would lower the bank’s net interest income.
B. A positive gap indicates that a rise in interest rates would lower the bank’s net interest income.
C. A negative gap indicates that a rise in interest rates would increase the bank’s net interest income.
D. None of the listed options are correct.
| Which of the following statements is true? |
A negative gap indicates that a rise in interest rates would increase the bank’s net interest income.
B. A positive gap indicates that a rise in interest rates would increase the bank’s net interest income.
C. A positive gap indicates that a fall in interest rates would increase the bank’s net interest income.
D. None of the listed options are correct.
| Consider the following repricing buckets and gaps: |
What is the annualised change in the bank’s future net interest income if the overnight interest rate decreased by 100 basis points?
-$700
-$7000
| Consider the following repricing buckets and gaps:
What is the annualised change in the bank’s future net interest income if the overnight interest rate increased by 100 basis points? |
-$700
-$7000
| Consider the following repricing buckets and gaps:
What is the annualised change in the bank’s future net interest income if the average rate change for assets and liabilities that can be repriced within one year is an increase of 100 basis points? |
-$17 000
-$13 000
| Consider the following repricing buckets and gaps:
What is the annualised change in the bank’s future net interest income if the average rate change for assets and liabilities that can be repriced within one year is a decrease of 100 basis points? |
-$17 000
-$13 000
| Consider the following repricing buckets and gaps:
What is the annualised change in the bank’s future net interest income if the average rate change for assets and liabilities that can be repriced over five years is an increase of 50 basis points? |
$75 000
| Which of the following statements is true? |
The repricing gap model is a market value accounting cash flow analysis of the repricing gap between the interest revenue earned on assets and the interest paid on liabilities over some period.
B. The repricing gap model is a book value accounting cash flow analysis of the repricing gap between the interest revenue earned on assets and the interest paid on liabilities over some period.
C. The repricing gap model is a market value accounting cash flow analysis of the repricing gap between the interest revenue earned on liabilities and the interest paid on assets over some period.
D. The repricing gap model is a book value accounting cash flow analysis of the repricing gap between the interest revenue earned on liabilities and the interest paid on assets over some period.
| Which of the following statements is true? |
As opposed to the duration model, the repricing gap model is a market-value based approach.
B. As opposed to the maturity model, the repricing gap model is a market-value based approach.
C. The capital loss effect is captured by the repricing model.
D. None of the listed options are correct.
| The term core deposits refers to those deposits that: |
act as long-term sources of funds for the FI
B. reflect the true or core nature of the FI’s operations
C. support the core of the FI’s operations
D. None of the listed options are correct.
| Which of the following are rate-sensitive assets? |
Short-term consumer loans, cheque accounts and three-month Treasury Notes
B. Ten-year fixed rate mortgages, short-term consumer loans and long-term consumer loans
C. Short-term consumer loans, 10-year fixed-rate mortgages and one-year term deposits
D. Short-term consumer loans, six-month Treasury Notes and three-year Treasury Bonds
| Which of the following are rate-sensitive liabilities? |
Short-term consumer loans, cheque accounts and three-month Treasury Notes
B. Three-month term deposits, three-month bankers’ acceptances, six-month negotiable certificates of deposit and one-year term deposits
C. Short-term consumer loans, six-month negotiable certificates of deposit and one-year term deposits.
D. Short-term consumer loans, six-month Treasury Notes and three-year Treasury Bonds
| The term ‘runoffs’ refers to: |
one-off cash flow of interest and principal amortisation payments on long-term assets
B. periodic cash flow of interest and principal amortisation payments on long-term assets
C. one-off cash flow of interest and principal amortisation payments on short-term assets
D. periodic cash flow of interest and principal amortisation payments on short-term assets
| Which of the following statements is true? |
Cheque accounts are a type of interest-sensitive asset.
B. Cheque accounts are a type of interest-sensitive liability.
C. There are strong arguments for and against the inclusion of cheque accounts as a type of interest-sensitive asset.
D. There are strong arguments for and against the inclusion of cheque accounts as a type of interest-sensitive liability.
| Which of the following statements is false? |
A major reason for cheque accounts to be included in an FI’s interest-sensitive liabilities is that the majority of these accounts are core deposits.
B. Cheque accounts should be treated as interest-sensitive liabilities because if interest rates rise, deposits might be withdrawn and thus will need to be replaced by higher-yielding deposits.
C. The final decision whether or not to include cheque accounts as rate-sensitive liabilities must be made after an analysis of the actual deposit history.
D. None of the listed options are correct.
| Which of the following statements is true? |
A major reason for cheque accounts to be excluded from an FI’s interest-sensitive liabilities is that the majority of these accounts are core deposits.
B. Cheque accounts should be treated as interest-sensitive liabilities because if interest rates fall, deposits might be withdrawn and thus will need to be replaced by higher-yielding deposits.
C. The final decision whether or not to include cheque accounts as rate sensitive liabilities must be made by predicting depositors’ behaviours.
D. None of the listed options are correct.
| Which of the following statements is true? |
The cumulative repricing gap can also be expressed as a percentage of liabilities.
B. The cumulative repricing gap can also be expressed as a percentage of equity.
C. The cumulative repricing gap can also be expressed as a percentage of assets.
D. None of the listed options are correct.
| Which of the following statements is true? |
Expressing the repricing gap as a percentage of assets tells us the direction of the interest rate exposure.
B. Expressing the repricing gap as a percentage of liabilities tells us the scale of the interest rate exposure.
C. Expressing the repricing gap as a percentage of equity tells us the scale of the interest rate exposure.
D. Expressing the repricing gap as a percentage of liabilities tells us the direction of the interest rate exposure.
| Which of the following statements is true? |
An FI with a positive repricing gap expects interest rates to remain stable.
B. An FI with a positive repricing gap expects interest rates to rise.
C. An FI with a positive repricing gap expects interest rates to remain fall.
D. An FI with a positive repricing gap has not particular expectations regarding interest rate movements.
| Which of the following statements is true? |
An FI with a negative repricing gap expects interest rates to remain stable.
B. An FI with a negative repricing gap expects interest rates to rise.
C. An FI with a negative repricing gap expects interest rates to remain fall.
D. An FI with a negative repricing gap has not particular expectations regarding interest rate movements.
| Which of the following statements is true? |
An FI with a repricing gap of zero is unsure about interest rate movements.
B. An FI with a repricing gap of zero expects interest rates to rise.
C. An FI with a repricing gap of zero expects interest rates to remain fall.
D. An FI with a repricing gap of zero does not measure and manage its interest rate exposures.
| Assume you are the manager of an FI. How would you structure your balance sheet using the repricing gap model if you expected interest rates to increase? |
I would create a positive gap.
B. I would create a negative gap.
C. I would create a neutral gap.
D. It would depend on my FI’s current profitability.
| Which of the following statements is true? |
As opposed to the duration gap model, the repricing gap model captures the capital loss and capital gain effect.
B. The repricing gap model is a market-value based approach, while the duration model is a book-value based approach.
C. The repricing gap model does not consider the size and timing of cash flows.
D. The duration gap model focuses on the impact interest rate changes have on an FI’s net interest income.
| Which of the following statements is true? |
An FI that has a positive on-balance-sheet gap and a negative off-balance-sheet gap is not sure about interest movements.
B. An FI that has a positive on-balance-sheet gap and a negative off-balance-sheet gap has made a mistake in hedging its interest rate risk.
C. An FI that has a positive on-balance-sheet gap and a negative off-balance-sheet gap is using its off-balance-sheet position to hedge its on-balance-sheet position.
D. None of the listed options are correct.
| Which of the following statements is true? |
One problem with the repricing gap is over-aggregation, which means that while the dollar value of asset-sensitive liabilities and assets within one bucket might be the same, the repricing timing for assets and liabilities within this bucket might differ.
B. One problem with the repricing gap is over-aggregation, which means that managers cannot make informed decisions about interest rate movements.
C. An advantage of the repricing gap is over-aggregation, which means that the information provided in the buckets is precise.
D. None of the listed options are correct.
| Which of the following statements is true? |
The size of the range over which bucket gaps are calculated does not matter as the repricing gap will always lead to exact results.
B. The shorter the range over which bucket gaps are calculated, the greater the potential error.
C. The shorter the range over which bucket gaps are calculated, the smaller the potential error.
D. None of the listed options are correct.
| Which of the following statements is true? |
The runoff component is rate-sensitive.
B. The runoff component is rate-insensitive.
C. The runoff component refers to interest payments on long-term liabilities that need to be refinanced at market rates.
D. The run-off component refers to interest payments on short-term liabilities that need to be refinanced at market rates.
| Consider the following table:
What is the one-year gap adjusted for runoffs? |
| Consider the following table:
What is the one-year gap adjusted for runoffs? |
| Consider the following table:
How does a decrease in the average one-year interest rate of 50 basis points affect the FI’s future net interest income? |
| Consider the following table:
How does an increase in the average one-year interest rate of 50 basis points affect the FI’s future net interest income? |
| How do you interpret the position of an FI with a negative on-balance-sheet gap and a positive off-balance-sheet gap? |
The FI uses its on-balance-sheet activities to hedge its off-balance-sheet activities.
B. The FI uses its off-balance-sheet activities to hedge its on-balance-sheet activities.
C. The FI believes that interest rates will decrease and made a mistake in setting its gap for off-balance-sheet activities.
D. The FI believes that interest rates will decrease and made a mistake in setting its gap for on-balance-sheet activities.
| Which of the following statements is true? |
The major focus of the repricing gap is the capital loss effect.
B. The major focus of the repricing gap is the capital gains effect.
C. The repricing gap focuses on all three, the capital gains, the capital loss and the interest income effect.
D. The major focus of the repricing gap is the interest income effect.
| How do you interpret the position of an FI with a positive on-balance-sheet gap and a negative off-balance sheet gap? |
The FI uses its on-balance-sheet activities to hedge its off-balance-sheet activities.
B. The FI uses its off-balance-sheet activities to hedge its on-balance-sheet activities.
C. The FI believes that interest rates will increase and made a mistake in setting its gap for off-balance-sheet activities.
D. The FI believes that interest rates will increase and made a mistake in setting its gap for on-balance-sheet activities.
| When repricing all interest sensitive assets and all interest sensitive liabilities in a balance sheet, the cumulative gap will be: |
zero
B. one
C. greater than one
D. a negative value
| The repricing gap approach calculates the gaps in each maturity bucket by subtracting the: |
current assets from the current liabilities
B. long-term liabilities from the fixed assets
C. rate-sensitive assets from the total assets
D. rate-sensitive liabilities from the rate-sensitive assets
| The bank has a positive repricing gap. Is it exposed to interest rate increases or decreases and why? |
Interest rate increases because the interest income on its assets will rise more than the interest expenses on its liabilities and net interest income will rise.
B. Interest rate increases because the interest income on its assets will fall more than the interest expenses on its liabilities and net interest income will fall.
C. Interest rate decreases because the interest income on its assets will rise more than the interest expenses on its liabilities and net interest income will rise.
D. Interest rate decreases because the interest income on its assets will fall more than the interest expenses on its liabilities and net interest income will fall.
| The bank has a negative repricing gap. Is it exposed to interest rate increases or decreases and why? |
Interest rate increases because the interest income on its assets will rise more than the interest expenses on its liabilities and net interest income will rise.
B. Interest rate increases because the interest income on its assets will rise by less than the interest expenses on its liabilities and net interest income will fall.
C. Interest rate decreases because the interest income on its assets will rise more than the interest expenses on its liabilities and net interest income will rise.
D. Interest rate decreases because the interest income on its assets will rise by less than the interest expenses on its liabilities and net interest income will fall.
| The Reserve Bank of Australia’s (RBA) monetary policy can reduce an FI’s interest rate risk: |
by smoothing or targeting the level of interest rates it increases unexpected interest rate shocks and interest volatility.
B. by smoothing or targeting the level of interest rates it decreases unexpected interest rate shocks and interest volatility.
C. by letting interest rates find their own level it increases interest volatility.
D. All of the listed options are correct.
| The Reserve Bank of Australia (RBA) undertook actions in regards to their open market operation in the post global financial crisis environment to move financial markets towards greater stability. This was achieved by: |
increasing the maturity of repos to reduce money pressure in the money market over the longer term.
B. increasing RBA holdings of non-government securities for use with repos due to the shortage of government securities.
C. increasing the supply of deposits held by banks and other authorised deposit-taking institutions in their exchange settlement accounts held with the RBA.
D. All of the listed options are correct.
| The repricing model ignores information regarding the distribution of assets and liabilities within maturity buckets. This limitation of the model refers to: |
market value effect
B. over-aggregation
C. runoffs and pre-payments
D. off-balance-sheet activities
| If an FI’s repricing gap is less than zero, then: |
it is deficient in its required reserves
B. it is deficient in its capital ratio requirement
C. its liability costs are more sensitive to changing market interest rates than are its asset yields
D. its liability costs are less sensitive to changing market interest rates than are its asset yields
| Consider the following information to answer the question:
What will be the FI’s net interest income at year-end if interest rates do not change? |
| Consider the following information to answer the question:
What is the repricing gap for the FI? |
| Which of the following is a weakness of the repricing model to measure interest rate risk? |
Potential for over-aggregation of assets and liabilities within each maturity bucket.
B. It ignores how changes in interest rates affect the market value of assets and liabilities.
C. It ignores the reinvestment of loan interest and principal payments that are reinvested at current market rates and it fails to recognise off-balance-sheet activities that may be rate sensitive.
D. All of the listed options are correct.
| Which of the following is not a weakness of the repricing model to measure interest rate risk? |
Potential for over-aggregation of assets and liabilities within each maturity bucket.
B. It ignores how changes in interest rates affect the market value of assets and liabilities.
C. It ignores the reinvestment of loan interest and principal payments that are reinvested at current market rates and it fails to recognise off-balance-sheet activities that may be rate sensitive.
D. It ignores how changes in currency exchange rates affect the market value of assets and liabilities.
| The unbiased expectations theory of the term structure of interest rates: |
assumes that long-term interest rates are an arithmetic average of short-term rates
B. assumes that the yield curve reflects the market’s current expectations of future short-term interest rates
C. recognises that forward rates are perfect predictors of future interest rates
D. assumes that risk premiums increase uniformly with maturity
| The liquidity premium theory of the term structure of interest rates: |
assumes that investors will hold long-term maturity assets if there is a sufficient premium to compensate for the uncertainty of the long term.
B. assumes that long-term interest rates are an arithmetic average of short-term rates plus a liquidity premium.
C. recognises that forward rates are perfect predictors of future interest rates.
D. assumes that risk premiums increase uniformly with maturity.
| The market segmentation theory of the term structure of interest rates: |
assumes that investors will hold long-term maturity assets if there is a sufficient premium to compensate for the uncertainty of the long term
B. assumes that the yield curve reflects the market’s current expectations of future short-term interest rates
C. assumes that market rates are determined by supply and demand conditions within fairly distinct time or maturity buckets
D. assumes that both investors and borrowers are willing to shift from one maturity sector to another to take advantage of opportunities arising from changing yields
| A positive correlation between the inflation rate and the RBA’s target cash rate decision suggests that when inflation is on the increase, the RBA generally increases its targeted cash rate. |
True False
| The repricing gap considers the timing and size of cash flows. |
True False
| The repricing gap focuses on the interest income effect. |
True False
| An FI with a positive repricing gap expects interest rates to decrease. |
True False
| An FI with a neutral repricing gap in its three to six month bucket is hedged against any interest rate changes at all points in time. |
True False
| The repricing gap is a book-value based approach. |
True False
| Over-aggregation and runoffs are the major problems associated with the repricing gap. |
True False
| Convexity is the major problem associated with the repricing gap. |
True False
| The cumulative repricing gap position of an FI for a given extended time period is the sum of the repricing gap values for the individual time periods that make up the extended time period. |
True False
| An FI with a negative gap of $20 million suffers a $0.2 million decrease in its net interest income if interest rates decrease by 1 per cent. |
True False
| An FI with a positive gap of $30 million suffers a $0.15 million decrease in its net interest income if interest rates increase by 0.5 per cent. |
True False
| Because the repricing model ignores the market value effect of changing interest rates, the repricing gap is an incomplete measure of the true interest rate risk exposure of an FI. |
True False
| If the spread between rate-sensitive assets and rate-sensitive liabilities increases for a bank, future changes in interest rates will lead to an increase in net interest income. |
True False
| Spread effect is periodic cash flow of interest and principal amortisation payments on long-term assets that can be reinvested at market rates. |
True False
| The term ‘rate-sensitive assets’ refers to assets whose interest rate will be repriced over some future period. |
True False
| The term ‘rate-sensitive assets’ refers to assets with a particularly high interest rate. |
True False
| CGAP effect is the relationship between changes in interest rates and changes in net interest income. |
True False
| CGAP effect is the relationship between changes in interest rates and changes in FI’s liabilities. |
True False
| Interest rate spread is the difference between the earning assets interest rate and the interest rate paid on interest-bearing liability. |
True False
| Interest rate spread is the difference between the earning assets interest rate and cash rate set by RBA. |
True False
In the last quarter ABC Bank reported the following repricing buckets:
Calculate the repricing gaps for each maturity bucket and the cumulative gaps.
| Would you consider the repricing model to be a good and well-founded interest rate risk measurement and management tool? Why or why not? |
| Outline what is meant by the CGAP effect and explain the relationship between interest rate changes and changes in net interest income. Specifically, indicate whether a FI would wish to hold a negative or positive CGAP and under which interest rate conditions. |
Chapter 05 Testbank Key
| Repricing gap refers to the: |
difference between rate-sensitive assets and rate-sensitive liabilities
B. sum of rate-sensitive assets and rate-sensitive liabilities
C. difference between rate-sensitive liabilities and rate-sensitive assets
D. difference between rate-insensitive assets and rate-insensitive liabilities
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: 1–3
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| The term ‘rate-sensitive assets’ refers to assets: |
whose interest rate will be repriced over some future period
B. with a particularly high interest rate
C. with a particularly low interest rate
D. for which demand is highly dependent on the level of interest rates
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: 1–3
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| Which of the following statements is true? |
APRA requires smaller Australian FIs to use the repricing gap method to estimate interest rate exposures in their banking book for capital adequacy.
B. Australian FIs are only required to use the repricing gap method if they are listed on an US stock exchange.
C. APRA does not require Australian FIs to use the repricing gap method to estimate interest rate exposures in their banking book for capital adequacy.
D. Australian FIs are only required to use the repricing gap if they are internationally active.
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| What is spread effect? |
Periodic cash flow of interest and principal amortisation payments on long-term assets that can be reinvested at market rates.
B. The effect that a change in the spread between rates on rate-sensitive assets and rate-sensitive liabilities has on net interest income as interest rates change.
C. The effect of mismatch of asset and liabilities within a maturity bucket.
D. The premium paid to compensate for the future uncertainty in a security’s value.
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| The cumulative gap over the whole balance sheet by definition: |
must be greater than zero
B. must be lower than zero
C. must equal zero
D. can take any value
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| Which of the following statements is true? |
A negative gap indicates that a rise in interest rates would lower the bank’s net interest income.
B. A positive gap indicates that a rise in interest rates would lower the bank’s net interest income.
C. A negative gap indicates that a rise in interest rates would increase the bank’s net interest income.
D. None of the listed options are correct.
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| Which of the following statements is true? |
A negative gap indicates that a rise in interest rates would increase the bank’s net interest income.
B. A positive gap indicates that a rise in interest rates would increase the bank’s net interest income.
C. A positive gap indicates that a fall in interest rates would increase the bank’s net interest income.
D. None of the listed options are correct.
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| Consider the following repricing buckets and gaps: |
What is the annualised change in the bank’s future net interest income if the overnight interest rate decreased by 100 basis points?
-$700
-$7000
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| Consider the following repricing buckets and gaps:
What is the annualised change in the bank’s future net interest income if the overnight interest rate increased by 100 basis points? |
-$700
-$7000
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| Consider the following repricing buckets and gaps:
What is the annualised change in the bank’s future net interest income if the average rate change for assets and liabilities that can be repriced within one year is an increase of 100 basis points? |
-$17 000
-$13 000
AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1–3
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| Consider the following repricing buckets and gaps:
What is the annualised change in the bank’s future net interest income if the average rate change for assets and liabilities that can be repriced within one year is a decrease of 100 basis points? |
-$17 000
-$13 000
AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1–3
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| Consider the following repricing buckets and gaps:
What is the annualised change in the bank’s future net interest income if the average rate change for assets and liabilities that can be repriced over five years is an increase of 50 basis points? |
$75 000
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| Which of the following statements is true? |
The repricing gap model is a market value accounting cash flow analysis of the repricing gap between the interest revenue earned on assets and the interest paid on liabilities over some period.
B. The repricing gap model is a book value accounting cash flow analysis of the repricing gap between the interest revenue earned on assets and the interest paid on liabilities over some period.
C. The repricing gap model is a market value accounting cash flow analysis of the repricing gap between the interest revenue earned on liabilities and the interest paid on assets over some period.
D. The repricing gap model is a book value accounting cash flow analysis of the repricing gap between the interest revenue earned on liabilities and the interest paid on assets over some period.
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| Which of the following statements is true? |
As opposed to the duration model, the repricing gap model is a market-value based approach.
B. As opposed to the maturity model, the repricing gap model is a market-value based approach.
C. The capital loss effect is captured by the repricing model.
D. None of the listed options are correct.
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| The term core deposits refers to those deposits that: |
act as long-term sources of funds for the FI
B. reflect the true or core nature of the FI’s operations
C. support the core of the FI’s operations
D. None of the listed options are correct.
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: 1–3
Learning Objective: 5.4 Gain an understanding of rate sensitive assets and rate–sensitive liabilities
| Which of the following are rate-sensitive assets? |
Short-term consumer loans, cheque accounts and three-month Treasury Notes
B. Ten-year fixed rate mortgages, short-term consumer loans and long-term consumer loans
C. Short-term consumer loans, 10-year fixed-rate mortgages and one-year term deposits
D. Short-term consumer loans, six-month Treasury Notes and three-year Treasury Bonds
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.4 Gain an understanding of rate sensitive assets and rate–sensitive liabilities
| Which of the following are rate-sensitive liabilities? |
Short-term consumer loans, cheque accounts and three-month Treasury Notes
B. Three-month term deposits, three-month bankers’ acceptances, six-month negotiable certificates of deposit and one-year term deposits
C. Short-term consumer loans, six-month negotiable certificates of deposit and one-year term deposits.
D. Short-term consumer loans, six-month Treasury Notes and three-year Treasury Bonds
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.4 Gain an understanding of rate sensitive assets and rate–sensitive liabilities
| The term ‘runoffs’ refers to: |
one-off cash flow of interest and principal amortisation payments on long-term assets
B. periodic cash flow of interest and principal amortisation payments on long-term assets
C. one-off cash flow of interest and principal amortisation payments on short-term assets
D. periodic cash flow of interest and principal amortisation payments on short-term assets
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.5 Learn the weaknesses of the repricing model
| Which of the following statements is true? |
Cheque accounts are a type of interest-sensitive asset.
B. Cheque accounts are a type of interest-sensitive liability.
C. There are strong arguments for and against the inclusion of cheque accounts as a type of interest-sensitive asset.
D. There are strong arguments for and against the inclusion of cheque accounts as a type of interest-sensitive liability.
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.4 Gain an understanding of rate sensitive assets and rate–sensitive liabilities
| Which of the following statements is false? |
A major reason for cheque accounts to be included in an FI’s interest-sensitive liabilities is that the majority of these accounts are core deposits.
B. Cheque accounts should be treated as interest-sensitive liabilities because if interest rates rise, deposits might be withdrawn and thus will need to be replaced by higher-yielding deposits.
C. The final decision whether or not to include cheque accounts as rate-sensitive liabilities must be made after an analysis of the actual deposit history.
D. None of the listed options are correct.
AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1–3
Learning Objective: 5.4 Gain an understanding of rate sensitive assets and rate–sensitive liabilities
| Which of the following statements is true? |
A major reason for cheque accounts to be excluded from an FI’s interest-sensitive liabilities is that the majority of these accounts are core deposits.
B. Cheque accounts should be treated as interest-sensitive liabilities because if interest rates fall, deposits might be withdrawn and thus will need to be replaced by higher-yielding deposits.
C. The final decision whether or not to include cheque accounts as rate sensitive liabilities must be made by predicting depositors’ behaviours.
D. None of the listed options are correct.
AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1–3
Learning Objective: 5.4 Gain an understanding of rate sensitive assets and rate–sensitive liabilities
| Which of the following statements is true? |
The cumulative repricing gap can also be expressed as a percentage of liabilities.
B. The cumulative repricing gap can also be expressed as a percentage of equity.
C. The cumulative repricing gap can also be expressed as a percentage of assets.
D. None of the listed options are correct.
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.4 Gain an understanding of rate sensitive assets and rate–sensitive liabilities
| Which of the following statements is true? |
Expressing the repricing gap as a percentage of assets tells us the direction of the interest rate exposure.
B. Expressing the repricing gap as a percentage of liabilities tells us the scale of the interest rate exposure.
C. Expressing the repricing gap as a percentage of equity tells us the scale of the interest rate exposure.
D. Expressing the repricing gap as a percentage of liabilities tells us the direction of the interest rate exposure.
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.4 Gain an understanding of rate sensitive assets and rate–sensitive liabilities
| Which of the following statements is true? |
An FI with a positive repricing gap expects interest rates to remain stable.
B. An FI with a positive repricing gap expects interest rates to rise.
C. An FI with a positive repricing gap expects interest rates to remain fall.
D. An FI with a positive repricing gap has not particular expectations regarding interest rate movements.
AACSB: Analytic
Bloom’s: Application
Difficulty: Easy
Est time: 1–3
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| Which of the following statements is true? |
An FI with a negative repricing gap expects interest rates to remain stable.
B. An FI with a negative repricing gap expects interest rates to rise.
C. An FI with a negative repricing gap expects interest rates to remain fall.
D. An FI with a negative repricing gap has not particular expectations regarding interest rate movements.
AACSB: Analytic
Bloom’s: Application
Difficulty: Easy
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| Which of the following statements is true? |
An FI with a repricing gap of zero is unsure about interest rate movements.
B. An FI with a repricing gap of zero expects interest rates to rise.
C. An FI with a repricing gap of zero expects interest rates to remain fall.
D. An FI with a repricing gap of zero does not measure and manage its interest rate exposures.
AACSB: Analytic
Bloom’s: Application
Difficulty: Easy
Est time: 1–3
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| Assume you are the manager of an FI. How would you structure your balance sheet using the repricing gap model if you expected interest rates to increase? |
I would create a positive gap.
B. I would create a negative gap.
C. I would create a neutral gap.
D. It would depend on my FI’s current profitability.
AACSB: Analytic
Bloom’s: Application
Difficulty: Easy
Est time: 1–3
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| Which of the following statements is true? |
As opposed to the duration gap model, the repricing gap model captures the capital loss and capital gain effect.
B. The repricing gap model is a market-value based approach, while the duration model is a book-value based approach.
C. The repricing gap model does not consider the size and timing of cash flows.
D. The duration gap model focuses on the impact interest rate changes have on an FI’s net interest income.
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.5 Learn the weaknesses of the repricing model
| Which of the following statements is true? |
An FI that has a positive on-balance-sheet gap and a negative off-balance-sheet gap is not sure about interest movements.
B. An FI that has a positive on-balance-sheet gap and a negative off-balance-sheet gap has made a mistake in hedging its interest rate risk.
C. An FI that has a positive on-balance-sheet gap and a negative off-balance-sheet gap is using its off-balance-sheet position to hedge its on-balance-sheet position.
D. None of the listed options are correct.
AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1–3
Learning Objective: 5.5 Learn the weaknesses of the repricing model
| Which of the following statements is true? |
One problem with the repricing gap is over-aggregation, which means that while the dollar value of asset-sensitive liabilities and assets within one bucket might be the same, the repricing timing for assets and liabilities within this bucket might differ.
B. One problem with the repricing gap is over-aggregation, which means that managers cannot make informed decisions about interest rate movements.
C. An advantage of the repricing gap is over-aggregation, which means that the information provided in the buckets is precise.
D. None of the listed options are correct.
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.5 Learn the weaknesses of the repricing model
| Which of the following statements is true? |
The size of the range over which bucket gaps are calculated does not matter as the repricing gap will always lead to exact results.
B. The shorter the range over which bucket gaps are calculated, the greater the potential error.
C. The shorter the range over which bucket gaps are calculated, the smaller the potential error.
D. None of the listed options are correct.
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.5 Learn the weaknesses of the repricing model
| Which of the following statements is true? |
The runoff component is rate-sensitive.
B. The runoff component is rate-insensitive.
C. The runoff component refers to interest payments on long-term liabilities that need to be refinanced at market rates.
D. The run-off component refers to interest payments on short-term liabilities that need to be refinanced at market rates.
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.5 Learn the weaknesses of the repricing model
| Consider the following table:
What is the one-year gap adjusted for runoffs? |
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 3–5
Learning Objective: 5.5 Learn the weaknesses of the repricing model
| Consider the following table:
What is the one-year gap adjusted for runoffs? |
AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 3–5
Learning Objective: 5.5 Learn the weaknesses of the repricing model
| Consider the following table:
How does a decrease in the average one-year interest rate of 50 basis points affect the FI’s future net interest income? |
AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 3–5
Learning Objective: 5.4 Gain an understanding of rate sensitive assets and rate–sensitive liabilities
| Consider the following table:
How does an increase in the average one-year interest rate of 50 basis points affect the FI’s future net interest income? |
AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 3–5
Learning Objective: 5.4 Gain an understanding of rate sensitive assets and rate–sensitive liabilities
| How do you interpret the position of an FI with a negative on-balance-sheet gap and a positive off-balance-sheet gap? |
The FI uses its on-balance-sheet activities to hedge its off-balance-sheet activities.
B. The FI uses its off-balance-sheet activities to hedge its on-balance-sheet activities.
C. The FI believes that interest rates will decrease and made a mistake in setting its gap for off-balance-sheet activities.
D. The FI believes that interest rates will decrease and made a mistake in setting its gap for on-balance-sheet activities.
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.5 Learn the weaknesses of the repricing model
| Which of the following statements is true? |
The major focus of the repricing gap is the capital loss effect.
B. The major focus of the repricing gap is the capital gains effect.
C. The repricing gap focuses on all three, the capital gains, the capital loss and the interest income effect.
D. The major focus of the repricing gap is the interest income effect.
AACSB: Analytic
Bloom’s: Application
Difficulty: Easy
Est time: 1–3
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| How do you interpret the position of an FI with a positive on-balance-sheet gap and a negative off-balance sheet gap? |
The FI uses its on-balance-sheet activities to hedge its off-balance-sheet activities.
B. The FI uses its off-balance-sheet activities to hedge its on-balance-sheet activities.
C. The FI believes that interest rates will increase and made a mistake in setting its gap for off-balance-sheet activities.
D. The FI believes that interest rates will increase and made a mistake in setting its gap for on-balance-sheet activities.
AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1–3
Learning Objective: 5.5 Learn the weaknesses of the repricing model
| When repricing all interest sensitive assets and all interest sensitive liabilities in a balance sheet, the cumulative gap will be: |
zero
B. one
C. greater than one
D. a negative value
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: <1
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| The repricing gap approach calculates the gaps in each maturity bucket by subtracting the: |
current assets from the current liabilities
B. long-term liabilities from the fixed assets
C. rate-sensitive assets from the total assets
D. rate-sensitive liabilities from the rate-sensitive assets
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: 1–3
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| The bank has a positive repricing gap. Is it exposed to interest rate increases or decreases and why? |
Interest rate increases because the interest income on its assets will rise more than the interest expenses on its liabilities and net interest income will rise.
B. Interest rate increases because the interest income on its assets will fall more than the interest expenses on its liabilities and net interest income will fall.
C. Interest rate decreases because the interest income on its assets will rise more than the interest expenses on its liabilities and net interest income will rise.
D. Interest rate decreases because the interest income on its assets will fall more than the interest expenses on its liabilities and net interest income will fall.
AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1–3
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| The bank has a negative repricing gap. Is it exposed to interest rate increases or decreases and why? |
Interest rate increases because the interest income on its assets will rise more than the interest expenses on its liabilities and net interest income will rise.
B. Interest rate increases because the interest income on its assets will rise by less than the interest expenses on its liabilities and net interest income will fall.
C. Interest rate decreases because the interest income on its assets will rise more than the interest expenses on its liabilities and net interest income will rise.
D. Interest rate decreases because the interest income on its assets will rise by less than the interest expenses on its liabilities and net interest income will fall.
AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 1–3
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| The Reserve Bank of Australia’s (RBA) monetary policy can reduce an FI’s interest rate risk: |
by smoothing or targeting the level of interest rates it increases unexpected interest rate shocks and interest volatility.
B. by smoothing or targeting the level of interest rates it decreases unexpected interest rate shocks and interest volatility.
C. by letting interest rates find their own level it increases interest volatility.
D. All of the listed options are correct.
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.1 Appreciate the influence that the Reserve Bank of Australia (RBA) has on interest rates and why this is the case
| The Reserve Bank of Australia (RBA) undertook actions in regards to their open market operation in the post global financial crisis environment to move financial markets towards greater stability. This was achieved by: |
increasing the maturity of repos to reduce money pressure in the money market over the longer term.
B. increasing RBA holdings of non-government securities for use with repos due to the shortage of government securities.
C. increasing the supply of deposits held by banks and other authorised deposit-taking institutions in their exchange settlement accounts held with the RBA.
D. All of the listed options are correct.
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.1 Appreciate the influence that the Reserve Bank of Australia (RBA) has on interest rates and why this is the case
| The repricing model ignores information regarding the distribution of assets and liabilities within maturity buckets. This limitation of the model refers to: |
market value effect
B. over-aggregation
C. runoffs and pre-payments
D. off-balance-sheet activities
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: <1
Learning Objective: 5.5 Learn the weaknesses of the repricing model
| If an FI’s repricing gap is less than zero, then: |
it is deficient in its required reserves
B. it is deficient in its capital ratio requirement
C. its liability costs are more sensitive to changing market interest rates than are its asset yields
D. its liability costs are less sensitive to changing market interest rates than are its asset yields
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
Learning Objective: 5.4 Gain an understanding of rate sensitive assets and rate–sensitive liabilities
| Consider the following information to answer the question:
What will be the FI’s net interest income at year-end if interest rates do not change? |
AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 3–5
Learning Objective: 5.4 Gain an understanding of rate sensitive assets and rate–sensitive liabilities
| Consider the following information to answer the question:
What is the repricing gap for the FI? |
AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: 3–5
Learning Objective: 5.4 Gain an understanding of rate sensitive assets and rate–sensitive liabilities
| Which of the following is a weakness of the repricing model to measure interest rate risk? |
Potential for over-aggregation of assets and liabilities within each maturity bucket.
B. It ignores how changes in interest rates affect the market value of assets and liabilities.
C. It ignores the reinvestment of loan interest and principal payments that are reinvested at current market rates and it fails to recognise off-balance-sheet activities that may be rate sensitive.
D. All of the listed options are correct.
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.5 Learn the weaknesses of the repricing model
| Which of the following is not a weakness of the repricing model to measure interest rate risk? |
Potential for over-aggregation of assets and liabilities within each maturity bucket.
B. It ignores how changes in interest rates affect the market value of assets and liabilities.
C. It ignores the reinvestment of loan interest and principal payments that are reinvested at current market rates and it fails to recognise off-balance-sheet activities that may be rate sensitive.
D. It ignores how changes in currency exchange rates affect the market value of assets and liabilities.
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.5 Learn the weaknesses of the repricing model
| The unbiased expectations theory of the term structure of interest rates: |
assumes that long-term interest rates are an arithmetic average of short-term rates
B. assumes that the yield curve reflects the market’s current expectations of future short-term interest rates
C. recognises that forward rates are perfect predictors of future interest rates
D. assumes that risk premiums increase uniformly with maturity
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.7 Gain an understanding of the theory behind term structure of interest rates
| The liquidity premium theory of the term structure of interest rates: |
assumes that investors will hold long-term maturity assets if there is a sufficient premium to compensate for the uncertainty of the long term.
B. assumes that long-term interest rates are an arithmetic average of short-term rates plus a liquidity premium.
C. recognises that forward rates are perfect predictors of future interest rates.
D. assumes that risk premiums increase uniformly with maturity.
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.7 Gain an understanding of the theory behind term structure of interest rates
| The market segmentation theory of the term structure of interest rates: |
assumes that investors will hold long-term maturity assets if there is a sufficient premium to compensate for the uncertainty of the long term
B. assumes that the yield curve reflects the market’s current expectations of future short-term interest rates
C. assumes that market rates are determined by supply and demand conditions within fairly distinct time or maturity buckets
D. assumes that both investors and borrowers are willing to shift from one maturity sector to another to take advantage of opportunities arising from changing yields
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: 1–3
Learning Objective: 5.7 Gain an understanding of the theory behind term structure of interest rates
| A positive correlation between the inflation rate and the RBA’s target cash rate decision suggests that when inflation is on the increase, the RBA generally increases its targeted cash rate. |
TRUE
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 5.1 Appreciate the influence that the Reserve Bank of Australia (RBA) has on interest rates and why this is the case
| The repricing gap considers the timing and size of cash flows. |
FALSE
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| The repricing gap focuses on the interest income effect. |
TRUE
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| An FI with a positive repricing gap expects interest rates to decrease. |
FALSE
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: <1
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| An FI with a neutral repricing gap in its three to six month bucket is hedged against any interest rate changes at all points in time. |
FALSE
AACSB: Analytic
Bloom’s: Application
Difficulty: Hard
Est time: <1
Learning Objective: 5.5 Learn the weaknesses of the repricing model
| The repricing gap is a book-value based approach. |
TRUE
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| Over-aggregation and runoffs are the major problems associated with the repricing gap. |
TRUE
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: <1
Learning Objective: 5.5 Learn the weaknesses of the repricing model
| Convexity is the major problem associated with the repricing gap. |
FALSE
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: <1
Learning Objective: 5.5 Learn the weaknesses of the repricing model
| The cumulative repricing gap position of an FI for a given extended time period is the sum of the repricing gap values for the individual time periods that make up the extended time period. |
TRUE
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: <1
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| An FI with a negative gap of $20 million suffers a $0.2 million decrease in its net interest income if interest rates decrease by 1 per cent. |
FALSE
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: <1
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| An FI with a positive gap of $30 million suffers a $0.15 million decrease in its net interest income if interest rates increase by 0.5 per cent. |
FALSE
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: <1
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| Because the repricing model ignores the market value effect of changing interest rates, the repricing gap is an incomplete measure of the true interest rate risk exposure of an FI. |
TRUE
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: <1
Learning Objective: 5.5 Learn the weaknesses of the repricing model
| If the spread between rate-sensitive assets and rate-sensitive liabilities increases for a bank, future changes in interest rates will lead to an increase in net interest income. |
TRUE
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: <1
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| Spread effect is periodic cash flow of interest and principal amortisation payments on long-term assets that can be reinvested at market rates. |
FALSE
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Medium
Est time: <1
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| The term ‘rate-sensitive assets’ refers to assets whose interest rate will be repriced over some future period. |
TRUE
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| The term ‘rate-sensitive assets’ refers to assets with a particularly high interest rate. |
FALSE
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| CGAP effect is the relationship between changes in interest rates and changes in net interest income. |
TRUE
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| CGAP effect is the relationship between changes in interest rates and changes in FI’s liabilities. |
FALSE
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| Interest rate spread is the difference between the earning assets interest rate and the interest rate paid on interest-bearing liability. |
TRUE
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
| Interest rate spread is the difference between the earning assets interest rate and cash rate set by RBA. |
FALSE
AACSB: Analytic
Bloom’s: Knowledge
Difficulty: Easy
Est time: <1
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
In the last quarter ABC Bank reported the following repricing buckets:
Calculate the repricing gaps for each maturity bucket and the cumulative gaps.
AACSB: Analytic
Bloom’s: Application
Difficulty: Medium
Est time: 5–10 minutes
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
In the simple repricing model, we assume that loans of one type mature at the same time; for example, all one-year consumer loans mature in one year’s time and all 10-year fixed-rate mortgages mature in 10 years’ time.
In reality, the bank continuously originates and retires consumer mortgages and all types of loans as it creates and retires deposits. For example, today some 10-year fixed-rate mortgages may only have one year left before they are repriced; that is, they are in their 9th year. In addition, virtually all housing mortgages pay at least some principal back to the bank each month.
As a result, the bank receives a runoff cash flow from its conventional mortgage portfolio that can be reinvested at current market rates, making this runoff component rate sensitive. The bank manager can easily deal with this in the repricing model by identifying for each asset and liability item the estimated dollar cash flow that will runoff, reprice or mature within the next year and adding these amounts to the rate-sensitive assets and liabilities.
AACSB: Analytic
Bloom’s: Comprehension
Difficulty: Hard
Est time: 10–15
Learning Objective: 5.5 Learn the weaknesses of the repricing model
| Would you consider the repricing model to be a good and well-founded interest rate risk measurement and management tool? Why or why not? |
The repricing gap is a measure of interest rate risk which uses book or historical values of assets and liabilities. It is conceptually easy to understand and can be used to forecast changes in profitability for given changes in interest rates. In this way it can assist FI managers to decide the structure of their balance sheet in light of projected interest rate changes. However, because of the book value approach, the repricing model concentrates on the net interest income effects of rate changes and ignores the market value effects. In addition, the model ignores important cash flow issues associated with over-aggregation, runoffs and off-balance-sheet activities. As such, the model does not provide an accurate picture of an FI’s interest rate risk exposure. More complete measures of interest rate risk are provided by duration and the duration gap model.
AACSB: Analytic
Bloom’s: Analysis
Difficulty: Hard
Est time: 5–10
Learning Objective: 5.5 Learn the weaknesses of the repricing model
| Outline what is meant by the CGAP effect and explain the relationship between interest rate changes and changes in net interest income. Specifically, indicate whether a FI would wish to hold a negative or positive CGAP and under which interest rate conditions. |
The CGAP effect describes the relations between changes in interest rates and changes in net interest income. According to the CGAP effect, when CGAP is positive the change in NII is positively related to the change in interest rates. Thus, an FI would want its CGAP to be positive when interest rates are expected to rise. According to the CGAP effect, when CGAP is negative the change in NII is negatively related to the change in interest rates. Thus, an FI would want its CGAP to be negative when interest rates are expected to fall.
AACSB: Analytic
Bloom’s: Analysis
Difficulty: Hard
Est time: 5–10
Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk
Chapter 05 Testbank Summary
| Category | # of Questions |
| AACSB: Analytic | 78 |
| Bloom’s: Analysis | 2 |
| Bloom’s: Application | 47 |
| Bloom’s: Comprehension | 1 |
| Bloom’s: Knowledge | 28 |
| Difficulty: Easy | 20 |
| Difficulty: Hard | 17 |
| Difficulty: Medium | 41 |
| Est time: 1–3 | 43 |
| Est time: 10–15 | 1 |
| Est time: 3–5 | 6 |
| Est time: 5–10 | 2 |
| Est time: 5–10 minutes | 1 |
| Est time: <1 | 23 |
| Learning Objective: 5.1 Appreciate the influence that the Reserve Bank of Australia (RBA) has on interest rates and why this is the case | 3 |
| Learning Objective: 5.3 Learn the repricing model, repricing gaps and their use in measuring interest rate risk | 41 |
| Learning Objective: 5.4 Gain an understanding of rate sensitive assets and rate–sensitive liabilities | 13 |
| Learning Objective: 5.5 Learn the weaknesses of the repricing model | 19 |
| Learning Objective: 5.7 Gain an understanding of the theory behind term structure of interest rates | 3 |
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
