Frm Objectives

Chapter 21: Your Results: The correct answer for each question is indicated by a 1 INCORRECT

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When a bank encounters a surge of deposit customers, withdrawing their funds unexpectedly, we say the bank is experiencing a/an: A)funding gap B)bank surrender C)bank run D)excess liquidity position E)fire sale

2 INCORRECT

The _______________ of a bank are those that exhibit a higher degree of stability from day to day. A)discount window borrowing B)federal funds purchases C)repurchase agreements D)core deposits E)large, negotiable CDs

3 CORRECT

This week, Bank-A experienced an unexpectedly high amount fund requests from customers holding loan commitments. Bank-A is experiencing the results of: A)asset side liquidity risk B)credit risk C)net deposit drain D)liability side liquidity risk E)c and d

4 INCORRECT

When a bank handles a deposit "drain" by raising funds in the fed funds market, or by means of "repos," we say the bank is using: A)long-term funding sources B)core deposits C)purchased liquidity D)liquidation of assets E)brokered deposits

5 CORRECT

If a bank is forced to raise liquidity by selling off loans on short notice, the price it can receive on a loan sale would be termed: A)a fire-sale price B)the maximum liquidity price C)the deposit drain price

D)the face value E)the book value

6 INCORRECT

The text addresses a "liquidity index." Which of the following is/are true? A)This index will be higher if the bank is holding more liquid assets. B)This index will be lower if the bank is holding less liquid assets. C)This index will be lower if relatively "quick" asset sales require lower prices. D)(a) and (c) E)(b) and (c)

7 INCORRECT

The stated, per-account limit on deposit insurance, provided by the FDIC, is: A)$2,500 B)$5,000 C)$10,000 D)$100,000 E)$250,000

8 INCORRECT

In 1991, passage of FDICIA: A)increased the discretionary power of the Federal Reserve to make "discount window" loans. B)limited the Federal Reserve's ability to make loans to troubled institutions. C)lowered the maximum per-account loss coverage of FDIC insurance. D)forced all U.S. commercial banks to be chartered by the Comptroller of the Currency. E)closed the Federal Reserve's "discount window."

9 INCORRECT

For the life and property-casualty insurance businesses, there: A)is a federally-sponsored insurance program, very much analogous to the FDIC B)is little possibility of a "run" by insurance customers, because of federallysponsored insurance. C)has never been a failure by companies to meet customer claims. D)is no permanent guarantee fund for the industry E)(a) and (b)

10 CORRECT

The difference between a bank's average loans and its average core deposits is called the: A)financing gap B)liquidity index C)core deposit surplus D)stored liquidity E)purchased liquidity

11 INCORRECT

The problems at Continental Illinois Bank, in 1984, were related to the bank's: A)very limited use of borrowed funds. B)extensive investments in low-return, low-risk assets. C)very small base of core deposits. D)relatively large amount of bank capital. E)extensive branching network in the state of Illinois.

12 INCORRECT

If a bank prepares for its liquidity needs by holding more cash and/or marketable securities, it is using a/an ___________________ approach. A)purchased liquidity B)"hot money" C)liquidity index D)stored liquidity E)(a) and (b)

13 INCORRECT

Subtracting a bank's average core deposits from its average loans will give a measurement known as the: A)core funding B)funding index C)purchased funds index D)ladder of funds E)financing gap

14 INCORRECT

When bank customers lose faith in the banking system we may witness contagious bank runs; this is typically termed a: A)funding gap B)financing gap C)bank insolvency D)bank panic E)fiscal disturbance

15 CORRECT

After the terrorist attacks of September 11, 2001, the Federal Reserve responded by: A)making funds available through its discount window. B)closing for two consecutive days. C)announcing a temporary suspension of all monetary policy actions. D)allowing only FDIC-insured banks to receive discount window loans. E)taking over the private sector banking operations of three major New York banks.

16 INCORRECT

In 2003, the Federal Reserve changed its discount window lending procedures. There are now three credit programs offered through the discount window: primary, secondary, and _______________. A)insured-bank B)disaster relief C)seasonal D)non-depository E)international

Chapter 22: Your Results: The correct answer for each question is indicated by a 1 INCORRECT

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The "repricing gap" for a bank refers to: A)ROA minus ROE. B)rate-sensitive assets minus rate-sensitive liabilities. C)total assets minus total liabilities. D)net interest income minus overhead expenses E)total assets minus total stockholders' equity.

2 CORRECT

A "rate sensitive asset"-based on a one-year time horizon-represents a dollar amount of assets that ________________________ within one year. A)can have a change in its interest rate, based on current market conditions B)will disappear from the balance sheet C)can be removed from the bank's balance sheet, due to customer behavior D)will turn into a bank liability E)will generate an increase in the bank's stockholders' equity

3 INCORRECT

In the basic "repricing gap" model, an increase in market interest rates would: A)lower the book value of stockholders' equity, of a bank with a negative CGAP. B)lower the net interest income, of a bank with a negative CGAP. C)increase the net interest income, of a bank with a positive CGAP. D)increase the market value of bank assets. E)(a) and (b)

4 INCORRECT

Which of the following would not be classified in the "one-year, rate sensitive asset" category? A)Treasury bills with six-month maturity. B)3-year maturity business loans, with "floating" interest rates. C)Consumer loans with less than one year to maturity.

D)3-year maturity business loans, with fixed interest rates. E)(a), (b), and (c)

5 INCORRECT

The "leverage adjusted duration gap" is: A)used to measure the sensitivity of net interest income to interest rate changes. B)equal to the rate sensitive assets minus the rate sensitive liabilities. C)used to measure the sensitivity of equity value to interest rate changes. D)equal to total assets minus total liabilities E)(a) and (b)

6 CORRECT

A bank that is trying to "immunize" is trying to: A)minimize its exposure to interest rate risk. B)increase its net interest income, as interest rates change. C)increase its equity value, as interest rates change. D)accept more credit risk, to increase returns. E)(b) and (c)

7 INCORRECT

The use of "duration" in interest rate risk management focuses on: A)changes in net interest income. B)the times to "repricing" for bank assets and liabilities. C)changes in market values of bank assets and liabilities. D)changes in book value of stockholders' equity. E)(a) and (b)

8 INCORRECT

Values that are based on historical costs are called: A)market values. B)"mark to market" values. C)regulatory values. D)book values. E)(a) and (b)

9 CORRECT

Imaginary State Bank holds just two assets: (1) a loan with market value of $500,000, having duration of 2 years, and (2) a loan with market value of $250,000, having duration of 4 years. Find the duration of this bank's asset portfolio. A)2.67 B)3.00 C)1.00 D)6.00

E)2.00

10 INCORRECT

Refer to the following, for Basic Bank: One-year, rate sensitive assets $80 million One-year, rate sensitive liabilities 100 million Total assets 160 million Total liabilities 145 million What is Basic Bank's "one-year repricing gap"? A)$80 million B)$20 million C)$15 million D)-$15 million E)-$20 million

11 INCORRECT

Refer to the following, for Basic Bank: One-year, rate sensitive assets $80 million One-year, rate sensitive liabilities 100 million Total assets 160 million Total liabilities 145 million Suppose market interest rates were to fall by one percentage point. What is the expected change in Basic Bank's annual net interest income? A)Increase of $150,000 B)Increase of $200,000 C)Decrease of $800,000 D)Decrease of $150,000 E)Decrease of $200,000

12 INCORRECT

Which of the following bank balance sheet items would be categorized within the "one-year, rate sensitive liabilities"? A)18-month certificates of deposit B)6-month consumer loans C)3-month certificates of deposit D)stockholders' equity E)(a) and (c)

13 INCORRECT

The one-year "cumulative gap" (or CGAP) can be obtained by: A)adding up all assets and then subtracting all liabilities. B)adding up all assets having maturity of more than one year. C)multiplying the expected interest rate change by the "gap" for one year. D)adding up all the "gaps" for periods out to one year. E)adding up the market values of all assets and then subtracting the market values of all liabilities.

14 CORRECT

When a bank's spread ____________, its net interest income is expected to _____________.

A)increases; increase B)increases; decrease C)decreases; increase D)is constant; increase E)(b) and (c)

Refer to the following interest rate and balance sheet information for Quest National Bank: Starting interest rate (assets and liabilities): 5% 15 INCORRECT

Market Value (million) Duration Total Assets

$40

TotalLiabilities 37

6.0 2.0

If interest rates fall by 1 percentage point, what is the resulting percentage change in asset value for Quest National Bank? A)6.0% B)- 6.0% C)- 1.9% D)5.7% E)- 5.7%

Refer to the following interest rate and balance sheet information for Quest National Bank: Starting interest rate (assets and liabilities): 5% Market Value (million) Duration

16 INCORRECT Total Assets

$40

TotalLiabilities 37

6.0 2.0

What is the "leverage adjusted duration gap" for Quest National Bank? A)3.81 B)4.15 C)3.00 D)3.15 E)12.0

Refer to the following interest rate and balance sheet information for Quest National Bank: Starting interest rate (assets and liabilities): 5% 17 INCORRECT

Market Value (million) Duration Total Assets

$40

TotalLiabilities 37

6.0 2.0

If interest rates fall by 1 percentage point, what is the resulting market value change in the bank's equity? A)-$1.66 million B)$1.66 million

C)-$1.58 million D)$1.58 million E)-$1.52 million

Chapter 23: Your Results: The correct answer for each question is indicated by a 1 INCORRECT

.

A _________________ is marked to market daily. A)fixed rate loan B)futures contract C)spot contract D)forward contract E)naive hedge

2 INCORRECT

With a/an _________________, the owner has the right, but not the obligation, to buy some specified asset at a specified price. A)forward contract B)futures contract C)put option D)call option E)hedge

3 CORRECT

The seller of a put option would also be called the: A)writer B)futures buyer C)"long" party D)caller E)option owner

4 INCORRECT

Bank-24 owns bonds, but wants to hedge its position. Which of the following would make the most sense? A)Buy call options on bonds B)Buy futures contracts on bonds C)Buy put options on bonds D)Sell put options on bonds

5 INCORRECT

In an interest rate swap, the __________________ agrees to make fixed rate payments, and to receive floating rate payments. A)Call owner

B)Put owner C)Swap seller D)Swap buyer E)Swap dealer

6 INCORRECT

Bert is selling options, anticipating profitable price movements. His option sales are not motivated by a desire to reduce risk. Bert is taking ____________ positions. A)long B)naked C)future s D)forward E)spot

7 CORRECT

Standard State Bank owns bonds, and sold bond futures contracts on bonds for hedging purposes. But Standard State's bond values are less than perfectly correlated with the values of bonds specified in the futures contracts. This gives rise to: A)basis risk B)counterparty risk C)swap risk D)default risk E)systematic risk

8 INCORRECT

Last month, Mary purchased a bond futures contract; the futures price is 104 (percent of face value). Now, contracts with the same delivery date are showing a futures price of 101. Which of the following is/are true? A)Mary's contract is null and void. B)Mary promised to "sell" bonds, when she entered into the contract. C)Mary has experienced a loss on her contract. D)Mary is required to place a "reversing" trade at this point. E)(c) and (d)

9 INCORRECT

Savvy Savings Bank has a loan portfolio comprised of fixed-rate mortgage loans. Its liabilities are short-term deposits. If Savvy wants to hedge against interest rate risk, which of the following makes the most sense? A)buy a futures contract on bonds. B)sell a futures contract on stocks. C)buy an interest rate swap. D)sell an interest rate swap. E)Buy a currency swap.

10 CORRECT

If you "write" call options on bonds, then you A)gain if bond prices fall

B)lose if bond prices fall C)gain if bond prices rise D)will neither gain nor lose, no matter what happens to bond prices E)(b) and (c)

11 INCORRECT

A/an _________________contract is an agreement for the immediate exchange of funds for assets. A)future s B)forward C)call option D)spot E)put option

12 CORRECT

A futures contract is most similar to which of the following? A)forward contract B)spot contract C)call option D)put option E)basis contract

13 INCORRECT

If an institution is protected against an adverse movement of interest rates, we would say that it: A)has maximized profit B)has maximized the value of its stockholders C)has speculated optimally D)is optimized E)is immunized

14 CORRECT

American Bank takes a "short position" in Eurodollar futures, with a delivery date in three months. One week later, the Eurodollar futures price has risen. Then: A)American has lost on its futures contract. B)American is required to buy Eurodollars. C)American has gained on its futures contract. D)The delivery date will be adjusted; delivery must occur immediately. E)The Eurodollar futures price will have to fall.

15 INCORRECT

Buying a "floor": A)would not be part of a risk-reducing strategy B)is similar to buying a futures contract on interest rates C)is similar to buying a call option on interest rates

D)is similar to relying solely on "spot" market activities E)is similar to buying a put option on interest rates

16 INCORRECT

In contrast to standardized options, "over the counter" options: A)cannot be used for reducing risk B)cannot be used for speculative purposes C)have an element of default risk D)are of no interest to financial institutions E)no longer exist