UNIVERSITY OF ECONOMICS AND LAW MIDTERM TEST

FACULTY OF FINANCE AND BANKING Academic year: 2020 -2021

Duration: 45 minutes

Class:Sumartini, Code: 101

This paper
comprises 60
multiple choice
questions. Please
choose the most
appropriate answer
in each case.

Proctor 1’s signature

Proctor 2’s signature

Examiner 1’s signature

Examiner 2’s signature

1. Which of the following is not a characteristic of a typical commercial bank?

a) Most banks own few fixed assets.

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b) Most banks have a high degree of operating leverage.
c) Most banks have few fixed costs.
d) Banks generally operate with less equity capital than non-financial firms.
e) Many bank liabilities are payable on demand.

2. Loans typically fall into each of the following categories except:

a) commercial.
b) municipal.
c) real estate.
d) agricultural.
e) individual.

3. Which of the following is an advantage of static GAP analysis?

a) Static GAP analysis indicates the specific balance sheet items that are responsible for the interest rate
risk.
b) Static GAP analysis considers the cumulative impact of interest rate changes on the bank’s position.
c) Static GAP analysis considers the embedded options in loans, such as mortgage pre-payments.
d) Static GAP analysis considers the time value of money.

4. Typically, “Call loans” are:

a) automobile loans.
b) a. residential mortgages.
c) payable on demand.
d) demand deposits.
e) farm loans.

5. Duration gap analysis:

a) indicates the difference in the GAP in the time it takes to collect on loan payments versus the time to
attract deposits.
b) applies he the concept of duration to the bank’s entire income statement.
c) estimates when embedded options will be exercised.
d) applies he the concept of duration to the bank’s retained earnings.
e) applies he the concept of duration to the bank’s entire balance sheet.

6. A 20-year annual coupon bond is currently selling for its par value of $10,000 with an annual yield of
7%. If the bond is callable at par, what is the effective duration of the bond, assuming rates change by
2%?
a) 3.68 years
b) 5.52 years
c) 4.56 years
d) 20.00 years
e) 25.00 years

7. Bank assets fall into each of the following categories except:

a) demand deposits.
b) loans.
c) noninterest cash and due from banks.
d) investment securities.
e) other assets.
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8. Vault cash generally satisfies a bank's liquidity needs.
a) True
b) False

9. Banks generate their largest portion of income from:

a) loans.
b) short-term investment.
c) long-term investments.
d) demand deposits.
e) certificates of deposit.

10. If a bank has a positive GAP, a decrease in interest rates will cause interest income to __________,
interest expense to__________, and net interest income to __________.
a) decrease, decrease, decrease
b) decrease, increase, increase
c) increase, decrease, increase
d) increase, increase, decrease
e) increase, increase, increase

11. Which of the following would a bank generally classify as a long-term investment?
a) Vault cash
b) Municipal bond
c) Treasury bill
d) Cash items in process of collection
e) Repurchase agreements

12. Earnings sensitivity analysis does not consider:

a) changes in the volume of rate-sensitive assets due to a change in interest rates.
b) changes in interest rates.
c) changes in the volume of fixed-rate liabilities due to a change in interest rates.
d) mortgage prepayments.
e) Earnings sensitivity analysis considers all of the above.

13. For a bank that has a negative duration gap, a decrease in interest rates will cause a(n) _______ in
the economic value of assets, a(n) _______ in the economic value of liabilities, and a(n) _______ in the
economic value of equity.
a) increase, decrease, increase
b) decrease, decrease, increase
c) increase, increase, decrease
d) increase, increase, increase
e) decrease, increase, decrease

14. The section of a contingency plan that assesses the impact of potential adverse events on the bank’s
balance sheet is known as the _________ section?
a) quantitative
b) summary
c) narrative
d) descriptive
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e) qualitative

15. What type of GAP analysis directly measures a bank’s net interest sensitivity through the last day of
the analysis period?
a) Cumulative
b) Maturity
c) Earnings
d) Net Income
e) Periodic

16. If a bank has a negative GAP, an increase in interest rates will cause interest income to __________,
interest expense to__________, and net interest income to __________.
a) increase, decrease, increase
b) increase, increase, increase
c) decrease, decrease, decrease
d) increase, increase, decrease
e) decrease, increase, increase

17. Respondent banks buy services from correspondent banks.

a) False
b) True

18. The best measure of bank asset liquidity is the core deposits to total asset ratio.
a) False
b) True

19. If rate-sensitive assets equal $600 million and rate-sensitive liabilities equals $800 million, what is
the expected change in net interest income if rates fall by 1%?
a) Net interest income will fall by $2 million.
b) Net interest income will fall by $20 million.
c) Net interest income will increase by $2 million.
d) Net interest income will be unchanged.
e) Net interest income will increase by $20 million.

20. Which of the following allows a security's cash flows to change when interest rates change?
a) Macaulay's duration
b) Effective duration
c) Income statement duration
d) Modified duration
e) Balance sheet duration

21. Static GAP analysis focuses on the market value of stockholder’s equity.
a) False
b) True

22. To decrease asset sensitivity, a bank can:

a) shorten loan maturities.
b) buy longer-term securities.
c) pay premiums on subordinated debt.
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d) make fewer fixed rate loans.

23. If rate-sensitive assets equal $600 million and rate-sensitive liabilities equals $800 million, what is
the expected change in net interest income if rates increase by 1%?
a) Net interest income will be unchanged.
b) Net interest income will fall by $20 million.
c) Net interest income will increase by $2 million.
d) Net interest income will increase by $20 million.
e) Net interest income will fall by $2 million.

24. Which of the following is not a disadvantage of static GAP analysis?

a) Static GAP analysis often considers demand deposits as non-rate sensitive.
b) Static GAP analysis depends on the forecasted interest rates.
c) Static GAP analysis does not consider a depositor’s early withdrawal option.
d) Static GAP analysis does not consider the cumulative impact of interest rate changes on the bank’s
position.

25. Income statement GAP is also known as Omega GAP,

a) False
b) True

26. Securities that require unrealized gains or losses to be recorded on the income statement are called:
a) available-for-sale securities.
b) repurchase agreements
c) trading account securities.
d) revenue securities.
e) held-to-maturity securities.

27. If a bank has a negative GAP, a decrease in interest rates will cause interest income to __________,
interest expense to__________, and net interest income to __________.
a) increase, increase, increase
b) decrease, decrease, increase
c) increase, decrease, increase
d) decrease, decrease, decrease
e) increase, increase, decrease

28. Effective duration:

a) directly indicates how much the price of a security will change given a change in interest rates.
b) is always greater than maturity.
c) is a weighted average of the time until cash flows are received.
d) estimates when embedded options will be used.

29. GAP is defined as the difference between fixed-rate assets and fixed-rate liabilities.
a) True
b) False

30. If a bank has a positive GAP, an increase in interest rates will cause interest income to __________,
interest expense to__________, and net interest income to __________.
a) increase, increase, decrease
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b) increase, decrease, increase
c) decrease, increase, increase
d) increase, increase, increase
e) decrease, decrease, decrease

31. To increase asset sensitivity, a bank can:

a) shorten loan maturities.
b) pay premiums on subordinated debt.
c) make more fixed rate loans.
d) buy longer-term securities.

32. Core deposits tend to be more interest elastic than volatile liabilities.
a) False
b) True

33. What does a bank's duration gap measure?

a) The duration of the bank's assets minus the duration of its liabilities.
b) The duration of all rate-sensitive liabilities minus the duration of rate-sensitive assets.
c) The duration of short-term buckets minus the duration of long-term buckets.
d) The duration of all rate-sensitive assets minus the duration of rate-sensitive liabilities.
e) The duration of the bank's liabilities minus the duration of its assets.

34. If a bank expects interest rates to increase in the coming year, it should:
a) issue more 3-month CDs.
b) issue more fixed rate loans.
c) increase its GAP.
d) issue fewer variable rate loans.
e) become more liability sensitive.

35. More liquid assets tend to earn lower returns, everything else the same.
a) False
b) True

36. Put the following steps in duration gap analysis in the proper order.
I. Estimate the economic value of assets, liabilities and equity.
II. Forecast the change in the economic value of equity for various interest rates.
III. Forecast future interest rates.
Estimate the duration of assets and liabilities.
a) III, I, IV, II
b) IV, I, II, III
c) III, IV, I, II
d) I, II, III, IV
e) II, IV, I, III

37. When selling securities to meet liquidity needs, a bank should consider all of the following except:
a) the gains or losses on the securities.
b) A bank should consider all of the above when selling securities to meet liquidity needs.
c) brokerage fees.
d) lost interest income.
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e) the impact on taxes.

38. Which of the following is not considered a cash asset?

a) Demand deposits at private financial institutions
b) Demand deposits at the Federal Reserve
c) Cash items in process of collection
d) Marketable securities
e) Vault cash

39. Interest rate risk:

a) can be measured by the volatility of a bank’s net interest income given changes in the level of interest
rates.
b) can be eliminated by matching fixed rate assets with variable rate liabilities.
c) rarely has an impact on bank earnings.
d) varies inversely with a bank’s GAP.

40. Which of the following is not an advantage of larger cash balances for a bank?
a) Larger cash balances increase reserve balances.
b) Larger cash balances reduce a bank's interest expense.
c) Larger cash balances reduce the risk of paying penalties to the Federal Reserve.
d) Larger cash balances reduce the need to borrow at the discount window.
e) Larger cash balances reduce the risk of bank runs.

41. Which of the following indicates the potential demand for new loans?
a) A relatively large percentage of demand deposits
b) Large, unused commercial credit lines outstanding
c) Large deposits held by a single customer
d) The level of uninsured deposits
e) a. Low business growth and activity

42. Earnings-at-risk:
a) examines the change in asset composition, given a change in bank liabilities.
b) examines the variation in net interest income associated with various changes in interest rates.
c) is only an effective measure for 90 day intervals or less.
d) considers only interest rate “shocks.”

43. A bank’s GAP is defined as:

a) the dollar amount of rate-sensitive assets divided by the dollar amount of rate-sensitive liabilities.
b) the dollar amount of earning assets times the average liability interest rate.
c) the dollar amount of earning assets divided by the dollar amount of total liabilities.
d) the dollar amount of rate-sensitive assets minus the dollar amount of rate-sensitive liabilities.
e) the dollar amount of rate-sensitive liabilities minus the dollar amount of rate-sensitive assets.

44. Macaulay's duration:

a) is a weighted average of the time until cash flows are received.
b) estimates when embedded options will be used.
c) is always greater than maturity.
d) directly indicates how much the price of a security will change given a change in interest rates.
e) is never equal to maturity.
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45. A bank has a 1-year $1,000,000 loan outstanding, payable in four equal quarterly installments. What
dollar amount of the loan would be considered rate sensitive in the 0 – 90 day bucket?
a) $0
b) $250,000
c) $750,000
d) $500,000
e) $1,000,000

46. If rate-sensitive assets equal $500 million and rate-sensitive liabilities equals $400 million, what is
the expected change in net interest income if rates fall by 1%?
a) Net interest income will fall by $1 million.
b) Net interest income will increase by $10 million.
c) Net interest income will be unchanged.
d) Net interest income will fall by $10 million.
e) Net interest income will increase by $1 million.

47. If a bank expects interest rates to decrease in the coming year, it should:
a) become more liability sensitive.
b) issue long-term subordinated debt today.
c) issue more variable rate loans.
d) increase its GAP.
e) increase the rates paid on long-term deposits.

48. If the yield curve is inverted, a portfolio manager can take advantage of this by:
a) buying more long-term securities
b) making variable-rate, callable loans.
c) pricing more deposits on a fixed-rate basis.
d) increasing the number of rate-sensitive assets.

49. Which of the following would not be considered a commercial loan?

a) A loans to another financial institution
b) A loan to purchase a piece of industrial equipment
c) An interim construction loan
d) A working capital loan
e) A loan to expand a factory

50. Which of the following is not considered a viable long-term source of bank liquidity?
a) Short-term Treasury securities
b) Cash
c) Federal funds sold
d) High quality short-term municipal securities
e) Reverse repurchase agreements

51. Static GAP analysis focuses on managing net interest income in the short-run.
a) True
b) False

52. An asset that is rate-sensitive is generally not price sensitive.

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a) True
b) False

53. The ease of converting an asset to cash with a minimum of loss is known as:
a) liability liquidity.
b) core liquidity.
c) non-core liquidity.
d) volatile liquidity.
e) asset liquidity.

54. When is interest rate risk for a bank greatest?

a) When interest rates are volatile.
b) When inflation is high.
c) When loan defaults are high.
d) When interest rates are stable.
e) When inflation is low.

55. A bank with a negative GAP is said to be liability sensitive.

a) True
b) False

56. Which of the following will cause a bank’s 1-year cumulative GAP to increase, everything else the
same.
a) An increase in 3-month loans and an offsetting decrease in 6-month loans.
b) A decrease in 3-month CD’s and an offsetting increase in 3-year CDs.
c) An increase in 3-month loans and an offsetting increase in 3-month CDs.

57. An example of a contra-asset account is:

a) unearned income.
b) buildings and equipment.
c) revenue bonds.
d) the loan and lease loss allowance.
e) the provision for loan loss.

58. Which of the following indicates the potential for deposits leaving a bank?
a) Deposits that are inelastic to changes in interest rates
b) a. High business activity and growth
c) An aggressive bank loan officer
d) Large deposits held by a single customer
e) Small unused commercial credit lines outstanding

59. A bank is currently exactly meeting its reserve requirements of 10%. If the bank has a deposit inflow
of $10,000,000, what is the impact on its required reserve position?
a) It now has excess reserves in the amount of $9,000,000.
b) It now has excess reserves in the amount of $10,000,000.
c) It is now deficient $1,000,000 in required reserves.
d) There would be no impact on the bank's required reserves.
e) It is now deficient $9,000,000 in required reserves.

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60. A bank has $100 million in earning assets, a net interest margin of 5%, and a 1-year cumulative GAP
of $10 million. Interest rates are expected to increase by 2%. If the bank does not want net interest
income to fall by more than 25% during the next year, how large can the cumulative GAP be to achieve
the allowable change in net interest income.
a) $50 million
b) $12 million
c) $62.5 million
d) $2 million
e) $15 million

THE END

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