Tailieuqtnh Đã Chuyển Đổi 1

Chapter 2
Analyzing Bank Performance
Multiple Choice
1. Which of the following led to the sharp decline in bank profits in 2008?
a. Record high loan loss provisions
b. Record gains in trading activities
c. Significant goodwill impairment expenses
d. All of the above.
e. a. & c. only.
Answer: e
2. Which of the following is not a characteristic of a typical commercial bank?

a. Most banks own few fixed assets.
b. Most banks have a high degree of operating leverage.
c. Most banks have few fixed costs.
d. Many bank liabilities are payable on demand.
e. Banks generally operate with less equity capital than non-
financial firms.
Answer: b
3. Bank assets fall into each of the following categories except:

a. loans.
b. investment securities.
c. demand deposits.
d. noninterest cash and due from banks.
e. other assets.
Answer: c
4. Typically, “Call loans”

are: a. residential mortgages.
b. farm loans.
c. demand deposits. d.
payable on demand. e.
automobile
loans. Answer: d
5. A loan to an individual to purchase a home would be considered
a: a. consumer loan.
b. commercial loan.
c. agricultural loan.
d. construction loan.
e. real estate loan.
6. Which of the following would not be considered a commercial

loan? a. An interim construction loan
b. A working capital loan
c. A loans to another financial institution
d. A loan to purchase a piece of industrial equipment
e. A loan to expand a factory
Answer: a
7.Banks generate their largest portion of income from:

a. loans.
b. short-term investment.
c. demand deposits.
d. long-term investments.
e. certificates of
deposit. Answer: a
8.Loans typically fall into each of the following categories except:

a. real estate.
b. individual.
c. commercial.
d. agricultural.
e. municipal.
Answer: e
9.Which of the following adjustments are made to gross loans and leases to
obtain net loans and leases?
a. The loan and lease loss allowance is subtracted from gross loans
b. Unearned income is subtracted from gross interest received
c. Investment income is added to gross interest received
d. a. and b.
e. a. and c.
Answer: d
10.An example of a contra-asset account is:
a. the loan and lease loss allowance.
b. unearned income.
c. buildings and equipment.
d. revenue bonds.
e. the provision for loan
loss. Answer: a
11.Which of the following bank assets is the most liquid?

a. Long-term investments
b. Short-term investments
c. Loans
d. Demand deposits
e. Unearned income
Answer: b
11.Which of the following would a bank generally classify as a short-term investment?

a. Demand deposits
b. Deposits at the Federal Reserve
c. Repurchase agreements
d. Fed Funds purchased
e. Vault cash
Answer: c
12.All other things constant, securities that are extremely liquid:

a. earn higher rates of return than securities that are less liquid.
b. have a longer maturity than less liquid securities.
c. have lower risk than less liquid securities.
d. a. and b.
e. b. and c.
Answer: c
13.Which of the following would a bank generally classify as a long-term investment?

a. Treasury bill
b. Vault cash
c. Cash items in process of collection
d. Municipal bond
e. Repurchase agreements
Answer: d
14.Securities that are “held-to-maturity” are:
a. trading account securities.
b. recorded on the balance sheet at amortized cost.
c. marked-to-market.
d. a. and b.
e. a. and c.
Answer: b
15.Securities that require unrealized gains or losses to be recorded as a

change in stockholder’s equity are called:
a. held-to-maturity securities.
b. trading account securities.
c. available-for-sale securities.
d. revenue securities.
e. repurchase
agreements Answer: c
16.Securities that require unrealized gains or losses to be recorded on the

income statement are called:
a. held-to-maturity securities.
b. trading account securities.
c. available-for-sale securities.
d. revenue securities.
e. repurchase
agreements Answer: b
17.A negotiable instrument often used in trading goods that guarantees payment
to the owner the instrument is known as (a):
a. bankers acceptance.
b. payment guarantee.
c. commercial paper.
d. bankers payment.
e. repurchase
agreement. Answer: a
18.The largest component of “non- interest cash and due from banks” is:
a. cash items in process of collection.
b. deposits held at other financial institutions.
c. federal funds sold.
d. vault cash.
e. loans from the Federal Reserve.
Answer: a
19.The volume of net deferred credit is commonly referred to as:
a. the burden.
b. NOW balances.
c. reserve requirements.
d. equity.
e. float.
Answer: e
20._________ own(s) the bulk of demand deposit accounts.
a. Consumers
b. Businesses
c. State governments
d. The federal government
e. Non-profits
Answer: b
21.Which of the following is are only available to non-commercial customers?

a. Money Market Demand Accounts
b. Demand deposit accounts
c. Mortgage loans
d. Negotiable Orders of Withdrawal (NOW) accounts
e. Auto leases
Answer: d
22.Checking accounts with unlimited check-writing and pay interest are known as:
a. demand deposit accounts.
b. money market deposit accounts.
c. NOW accounts.
d. certificates of deposit.
e. time deposits.
Answer: c
23.Jumbo CDs that a bank obtains from a third-party broker are called:
a. money market demand accounts.
b. time deposit accounts.
c. mortgage loans.
d. brokered deposits.
e. core deposits.
Answer: d
24.Jumbo certificates of deposit (CDs) typically:
a. have maturities greater than 10 years..
b. are negotiable.
c. are $1 million in size.
d. All of the above
e. b. and c.
Answer: e
25.Unsecured liabilities created from the exchange of immediately available

funds are known as:
a. federal funds purchased.
b. repurchase agreements.
c. federal funds sold.
d. pledged securities.
e. brokered
deposits. Answer: a
26.A bank’s core deposits are:

a. vault cash.
b. stable deposits that are not typically withdrawn over short periods of time.
c.the bank’s deposits at the Federal Reserve.
d.the most interest rate sensitive liabilities of a bank.
e.deposits held in foreign offices.
Answer: b
27.Core deposits consist of all of the following except:

a. demand deposits.
b. NOW accounts.
c. jumbo certificates of deposit.
d. savings accounts.
e. money market demand
accounts. Answer: c
28.Which of the following is not considered a volatile liability?

a. Jumbo CDs
b. Deposits in foreign offices
d. Federal funds sold
e. All of the above are considered volatile
liabilities Answer: d
29. Which of the following would be the least sensitive to changes in interest rates?
a. Demand deposits
b. Repurchase agreements
c. Federal funds purchased
d. Eurodollar liabilities
e. Jumbo CDs
Answer: a
41. Economic value of equity analysis focuses on net interest income.

False
Effective duration considers a security's embedded options.

True
An investor that matches the duration of an investment with her holding period balances price risk and
reinvestment risk. True
An asset that is rate-sensitive is generally not price sensitive. True
Duration gap analysis focuses on changes in net interest income.

False
A bank with a duration gap of 1 is more sensitive to changes in the economic value of equity than a bank
with a duration gap of -1.5.
False
Banks should never assume any interest rate risk.

False
Duration of equity measures the dollar change in EVE with a 1% change in interest
rates. False
The yield curve is typically inverted at the peak of the business cycle.
True
The duration of a liability that does not pay interest must be equal to 0.
False
All of the following are components of a bank's non interest expense except:
deposit service fees
For most banks, which of the following is the largest component of non interest
expense? Personnel expenses
Increased competition, following deregulation, has lead to an increase in bank's net interest
margin. False
Demand for checking accounts is generally considered to be price

inelastic True
Relative to larger banks, smaller banks rely more on non interest income as a source of revenue.
False
Deposit service charges are a stable source of bank revenue.

True
Trading revenue for banks is highly cyclical. True

mortgage origination is countercyclical to a bank's net interest margin.
true
Banks with the highest efficiency ratios are presumed to be the most efficient.
False
Larger banks have lower efficiency ratios, on average, than smaller banks.
true
Community banks relied more on investing banking, relative to larger banks, to increase non-interest
income.
False
There is no systematic link between a bank's market value of equity and reported
expenses. true
An asset would normally be classified as rate sensitive if:

it matures during the examines time period
it represents a partial principal payment
the outstanding principal on a loan can be re priced when the base rate
changes all of the above
Earning at risk
examines the variation in net interest income associated with various changes in interest rates
Income statement GAP considers

changes in interest rates
To increase asset sensitivity, a bank can:

shorten loan maturities
To decrease asset sensitivity, a bank can:

buy longer term securities
To decrease liability sensitivity, a bank can:

pay premiums on longer term deposits
If a bank expects interest rates to decrease in the coming year, it should:

become more liability sensitive
If a bank expects interest rates to increase in the coming year, it should:

increase its GAP
In determining reserves, the banks and the Federal Reserve currently use:
a lagging reserve accounting system
Chapter 3
Managing Non-Interest Income and Non-Interest Expense
2. Which of the following is not listed on a bank’s UBPR as non-interest income?

a. Deposit service charges
b. Insurance commission fees
c. Goodwill impairment
d. Net gains on sales of loans.
e. Investment banking fees
Answer: c
4. Which of the following is not considered a non-interest expense?

a. Wages and salaries
b. Rent
c. Required reserves held at the Federal Reserve
d. Electricity
e. Employee benefits
Answer: c
3. From the following list, which two are the biggest contributors to non-interest income?
Fiduciary Activities
Deposit Service Charges
Trading Revenue
Investment Banking
Insurance Commission Fees and Income
Other Non-Interest Income
5. Fiduciary Activities & Deposit Service Charges

6. Trading Revenue & Investment Banking
7. Insurance Commission Fees and Income & Other Non-Interest Income
8. Depository Service Charges and Other Non-Interest Income
9. Fiduciary Activities and Investment Banking
Answer: d
6. All of the following are components of a bank’s non-interest expense except:.
a. deposit service fees.
b. occupancy expense.
c. goodwill impairment.
d. personnel expense.
e. other intangible amortization.
Answer: a
7. When two banks that merge have a significant duplication of bank offices such that
the merger leads to the elimination of branches and personnel, this is known as a(n):
a. out-of-market merger.
b. in-market merger.
c. new-market merger.
d. reduced-branch merger.
e. goodwill merger.
Answer: b
8. For most banks, which of the following is the largest component of non-interest expense?
a. Personnel expenses
b. Rent
c. Required reserves held at the Federal Reserve
d. Electricity
e. Depreciation on buildings and equipment
Answer: a
9. If a bank pays 62 cents in non-interest expense per dollar of net operating revenue, its
_______ is equal to 0.62.
a. burden
b. net non-interest margin
c. efficiency ratio
d. overhead ratio
e. non-interest expense
ratio Answer: c
10. The operating risk ratio measures:

a. cost controls versus fee generation.
b. fee income versus net interest margin.
c. non-interest expense versus non-interest income.
d. depositors versus employees.
e. depreciation versus required reserves.
Answer: a
11. Which of the following is considered a measure of bank productivity?
a. Return on assets
b. Return on equity
c. Assets per depositor
d. Assets per employee
e. All of the above are measures of bank productivity
Answer: d
12. __________ is not a measure of bank productivity?

a. Assets per employee
b. Average personnel expense
c. Loans per employee
d. Net income per employee
e. Number of customers per employee
Answer: e
13. Return on risk-adjusted capital is defined as:

a. Income/Allocated Risk Capital.
b. Allocated Risk Capital/Adjusted Income.
c. (Risk – Adjusted Income)/Capital.
d. Capital/Allocated Risk Capital.
e. Expenses + Target Profit.
Answer: a
14. In general, _______________ are the major non-credit cost for commercial customers.
a. personnel expenses
b. check-processing costs
c. loan administration expenses
d. fraud costs
e. default costs
Answer: b
15. ______________ is/are the primary revenue source for a majority of banks.
a. Check-processing fees
b. Investment income from deposit balances
c. Loan interest
d. Earnings credits
e. Swaps
Answer: c
16. ______________ transactions are the highest-cost type of transaction for a bank.
a. Web-based
b. ATM
c. Work station
d. Live teller
e. After-hours
Answer: d
17. Customer profitability data can be beneficial in helping bank management:

a. develop new products.
b. identify profitable target niches.
c. determine changes in product pricing.
d. All of the above
e. a. and b. only
Answer: d
18. Profitable bank customers:

a. make up a small fraction of all bank customers.
b. generally shop for the bank with the lowest price.
c. have small loan balances.
d. always avoid service charges.
e. are the most sensitive to changes
in price. Answer: a
19. Which of the following is not a cost management strategy?

a. Investing in resources to improve long-term profitability
b. Changing pricing such that total revenues increase
c. Identify operating efficiencies
d. Burden identification
e. Expense reduction
Answer: d
19. Banks experience economies of scale when:

a. marginal costs increase as total costs decrease.
b. total costs decrease as output decreases.
c. total costs increase as output increases.
d. average unit costs increase as output increases.
e. average unit costs decrease as
output increases.
Answer: e
20. Banks experience diseconomies of scale when:
a. marginal costs increase as total costs decrease.
b. total costs decrease as output decreases.
c. total costs increase as output increases.
d. average unit costs increase as output increases.
e. average unit costs decrease as
output increases. Answer: d
21. Banks can increase their operating efficiencies by:

a. reducing costs and maintaining the existing level of products and services.
b. reducing costs and reducing the existing level of products and services.
c. decreasing the level of output while maintaining the current level of expenses.
d. increasing the level of output while increasing the level of expenses.
e. decreasing workflow.
Answer: a
1. When is interest rate risk for a bank greatest?
A. ? When interest rates are volatile.
B. ? When interest rates are stable.
C. ? When inflation is high.
D. ? When inflation is low.
E. ? When loan defaults are high.
2. Interest rate risk:
A. ? varies inversely with a bank’s GAP.
B. ? can be measured by the volatility of a bank’s net interest income

given changes in the level of interest rates.
C. ? can be eliminated by matching fixed rate assets with variable rate

liabilities.
D. ? rarely has an impact on bank earnings.

3. 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 divided by the dollar amount of

total liabilities.
C. ? the dollar amount of rate-sensitive assets minus the dollar amount of

rate-sensitive liabilities.
D. ? the dollar amount of rate-sensitive liabilities minus the dollar

amount of rate-sensitive assets.
E. ? the dollar amount of earning assets times the average liability

interest rate.
4. A bank’s periodic GAP:
A. ? is defined as the dollar amount of rate-sensitive assets divided by

the dollar amount of rate-sensitive liabilities.
B. ? is defined as the dollar amount of earning assets divided by the

dollar amount of total liabilities.
C. ? compares rate-sensitive assets with rate-sensitive liabilities across all

time buckets.
D. ? compares rate-sensitive assets with rate-sensitive liabilities across a

single time bucket.
E. ? compares the dollar amount of earning assets times the average

liability interest rate.
5. A bank’s cumulative GAP:
A. ? is defined as the dollar amount of rate-sensitive assets divided by

the dollar amount of rate-sensitive liabilities.
B. ? is defined as the dollar amount of earning assets divided by the
dollar amount of total liabilities.
C. ? compares rate-sensitive assets with rate-sensitive liabilities across all

time buckets.
D. ? compares rate-sensitive assets with rate-sensitive liabilities across a

single time bucket.
E. ? compares the dollar amount of earning assets times the average

liability interest rate.
6. 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. ? $500,000
D. ? $750,000
E. ? $1,000,000
7. 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. ? An increase in 3-month loans and an offsetting increase in 3-month

CDs.
C. ? A decrease in 3-month CD’s and an offsetting increase in 3-year

CDs.
8. 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, increase
B. ? increase, decrease, increase
C. ? increase, increase, decrease
D. ? decrease, decrease, decrease
E. ? decrease, increase, increase
9. 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
__________.
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
__________.

11. 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. ? decrease, decrease, decrease
B. ? increase, increase, increase
C. ? increase, decrease, increase
D. ? increase, increase, decrease
E. ? decrease, decrease, increase
12. Put the following steps for conducting a Static GAP analysis in the proper
chronological order.
I. Forecast changes in net interest income for a variety of interest rate scenarios.
II. Select the sequential time intervals for determining when assets and liabilities are
rate-sensitive.
III. Group assets and liabilities into time “buckets.”
IV. Develop interest rate forecasts.
A. ? I, II, III, IV
B. ? IV, I, III, II
C. ? IV, I, II, III
D. ? II, III, IV, I
E. ? IV, II, III, I
13. 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 increase by 1%?
A. ? Net interest income will increase by $1 million.

B. ? Net interest income will fall by $1 million.
C. ? Net interest income will increase by $10 million.
D. ? Net interest income will fall by $10 million.
E. ? Net interest income will be unchanged.
million, what is the expected change in net interest income if rates fall by 1%?
B. ? Net interest income will fall by $1 million. Tính ra
D. ? Net interest income will fall by $10 million. Đáp án cô
million, what is the expected change in net interest income if rates fall by 1%?

17. A shift from core deposits to non-core deposits will:
A. ? always increase the amount of fixed rate assets.
B. ? always increase the amount of rate-sensitive assets.
C. ? generally increase the amount of non-earning assets.
D. ? generally reduce net interest income.
18. What type of GAP analysis directly measures a bank’s net interest sensitivity through
the last day of the analysis period?
A. ? Earnings
B. ? Net Income
C. ? Maturity
D. ? Periodic
E. ? Cumulative
19. Which of the following is an advantage of static GAP analysis?
A. ? Static GAP analysis considers the time value of money.
B. ? Static GAP analysis indicates the specific balance sheet items that
are responsible for the interest rate risk.
C. ? Static GAP analysis considers the cumulative impact of interest
rate changes on the bank’s position.
D. ? Static GAP analysis considers the embedded options in loans,

such as mortgage pre-payments.
20. Which of the following is not a disadvantage of static GAP analysis?
A. ? Static GAP analysis depends on the forecasted interest rates.
B. ? Static GAP analysis often considers demand deposits as non-rate

sensitive.
C. ? Static GAP analysis does not consider the cumulative impact of

interest rate changes on the bank’s position.
D. ? Static GAP analysis does not consider a depositor’s early

withdrawal option.
21. The GAP ratio:
A. ? is always greater than one for bank’s with a negative periodic GAP.
B. ? is equal to the volume of rate-sensitive liabilities times the volume of

rate-sensitive assets.
C. ? is equal to the volume of rate-sensitive liabilities divided by the

volume of rate-sensitive assets.
D. ? is equal to the volume of rate-sensitive assets divided by the

volume of rate-sensitive liabilities.
E. ? is always less than one for bank’s with a positive cumulative GAP.
22. 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. ? $2 million
B. ? $12 million
C. ? $15 million
D. ? $50 million
E. ? $62.5 million
23. Earnings sensitivity analysis differs from static GAP analysis by:
A. ? looking at a wide range of interest rate environments.
B. ? using perfect interest rate forecasts.
C. ? calculating a change in net interest income given a change in

interest rates.
D. ? Earnings sensitivity analysis differs from static GAP analysis in all of

the above ways.
E. ? Earnings sensitivity analysis and static GAP analysis do not differ.

They are different names for the exact same analysis.
24. Earnings-at-risk:
A. ? considers only interest rate “shocks.”
B. ? is only an effective measure for 90 day intervals or less.
C. ? examines the change in asset composition, given a change in bank

liabilities.
D. ? examines the variation in net interest income associated with

various changes in interest rates.
25. Earnings sensitivity analysis does not consider:
A. ? changes in interest rates.
B. ? changes in the volume of rate-sensitive assets due to a change 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.
26. Income statement GAP considers:
A. ? changes in interest rates.
B. ? changes in the volume of rate-sensitive assets due to a change in

interest rates.
C. ? changes in the volume of fix-rate liabilities due to a change in

interest rates.
D. ? mortgage prepayments.
27. The earnings change ratio:
A. ? is defined as yield on rate-sensitive liabilities divided by the yield on

rate-sensitive assets.
B. ? measures how the yield on an asset is assumed to change given a

1% change in some base rate.
C. ? measures the change in net interest income for a given change in

some base rate.
28. To increase asset sensitivity, a bank can:
A. ? buy longer-term securities.
B. ? pay premiums on subordinated debt.
C. ? shorten loan maturities.
D. ? make more fixed rate loans.
29. To decrease asset sensitivity, a bank can:
B. ? pay premiums on subordinated debt.
C. ? shorten loan maturities.
D. ? make fewer fixed rate loans.
30. To decrease liability sensitivity, a bank can:
B. ? attract more non-core deposits.
C. ? increase the number of floating rate loans.
D. ? pay premiums on longer-term deposits.
31. If a bank expects interest rates to decrease in the coming year, it should:
A. ? increase its GAP.
B. ? issue long-term subordinated debt today.
C. ? increase the rates paid on long-term deposits.

D. ? issue more variable rate loans.
E. ? become more liability sensitive.
32. If a bank expects interest rates to increase in the coming year, it should:
A. ? increase its GAP.
B. ? issue fewer variable rate loans.
C. ? issue more 3-month CDs.
D. ? issue more fixed rate loans.
E. ? become more liability sensitive.
33. Interest rate risk for banks arises largely from assets and liabilities that do not
reprice at the same time.
A. ? True
B. ? False
34. Static GAP analysis focuses on managing net interest income in the short-run.
A. ? True
B. ? False
35. Static GAP analysis focuses on the market value of stockholder’s equity.
A. ? True
B. ? False
36. GAP is defined as the difference between fixed-rate assets and fixed-rate liabilities.
A. ? True
B. ? False
37. Non-earning assets are classified as rate-sensitive assets for GAP analysis purposes.
A. ? True
B. ? False
38. Periodic GAP analysis compares rate-sensitive assets and rate-sensitive liabilities
across each single “time bucket.”
A. ? True
B. ? False
39. There is a constant relationship between changes in a bank’s portfolio mix and net
interest income.
A. ? True
B. ? False
40. A bank with a negative GAP is said to be liability sensitive.
A. ? True
B. ? False
41. A GAP ratio of less than one is consistent with a negative gap.
A. ? True
B. ? False
42. Income statement GAP is also known as Omega GAP,
A. ? True
B. ? False
Chapter 4
Managing Interest Rate Risk: GAP and Earnings Sensitivity
Multiple Choice
1. When is interest rate risk for a bank
greatest? a.When interest rates are
volatile. b.When interest rates are stable.
c.When inflation is high.
d.When inflation is low.
e.When loan defaults are high.
Answer: a
2. Interest rate risk:
a.varies inversely with a bank’s GAP.
b.can be measured by the volatility of a bank’s net interest income given changes
in the
level of interest rates.

c.can be eliminated by matching fixed rate assets with variable rate liabilities.
D,rarely has an impact on bank earnings.
e.All of the above
Answer: b
3. 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 divided by the dollar amount of total liabilities.
c. the dollar amount of rate-sensitive assets minus the dollar amount of rate-sensitive
liabilities.
d. the dollar amount of rate-sensitive liabilities minus the dollar amount of rate-sensitive
assets.
e. the dollar amount of earning assets times the average liability interest rate.
Answer: c
4. Keeping all other factors constant, banks can reduce the volatility of net interest
income by:
a.adjusting the dollar amount of rate-sensitive assets.
b.adjusting the dollar amount of fixed-rate liabilities.
c.using interest rate swaps.
d.Bank can reduce volatility of net interest income by doing all of the
above. e.a. and c. only
Answer: e
5. A bank’s periodic GAP:

a. is defined as the dollar amount of rate-sensitive assets divided by the dollar amount of
b. is defined as the dollar amount of earning assets divided by the dollar amount of total
liabilities.
c. compares rate-sensitive assets with rate-sensitive liabilities across all time buckets.
d. compares rate-sensitive assets with rate-sensitive liabilities across a single time bucket.
e. compares the dollar amount of earning assets times the average liability interest rate.
Answer: d
6. A bank’s cumulative GAP:

a. is defined as the dollar amount of rate-sensitive assets divided by the dollar amount of
b. is defined as the dollar amount of earning assets divided by the dollar amount of total
liabilities.
c. compares rate-sensitive assets with rate-sensitive liabilities across all time buckets.
d. compares rate-sensitive assets with rate-sensitive liabilities across a single time bucket.
e. compares the dollar amount of earning assets times the average liability interest rate.
Answer: c
7. 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.
$500,000 d.
$750,000 e.
$1,000,000
Answer: b
8. 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.An increase in 3-month loans and an offsetting increase in 3-month CDs.
c.A decrease in 3-month CD’s and an offsetting increase in 3-year CDs.
d.a. and c.
e.b. and c.
Answer: c
9. Which of the following will cause a bank’s 1-year cumulative GAP to decrease,
everything else the same.
a.An increase in 3-month loans and an offsetting increase in 9-month loans.
b.A decrease in 6-month loans and an offsetting increase in 2-year CDs.
c.An increase in 9-month CD’s and an offsetting increase in 5-year CDs.
d.a. and c.
e.b. and c.
Answer: e
10. 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, increase
b.increase, decrease, increase
c.increase, increase, decrease
d.decrease, decrease, decrease
e.decrease, increase, increase
Answer: a
11. If a bank has a negative GAP, an increase in interest rates will cause interest income to
Answer: c
12. If a bank has a positive GAP, a decrease in interest rates will cause interest income to
Answer: d
13. If a bank has a negative GAP, a decrease in interest rates will cause interest income to
e.decrease, decrease, increase
Answer: e
14. Put the following steps for conducting a Static GAP analysis in the proper chronological
order.
I. Forecast changes in net interest income for a variety of interest rate scenarios.
II. Select the sequential time intervals for determining when assets and liabilities are rate-
sensitive.
III. Group assets and liabilities into time “buckets.”
IV. Develop interest rate forecasts.
a) I, II, III, IV
b) IV, I, III, II
c) IV, I, II, III
d) II, III, IV, I
e) IV, II, III, I
Answer: e
15. An asset would normally be classified as rate-sensitive if:
a) it matures during the examined time period.

b) it represents a partial principal payment.
c) the outstanding principal on a loan can be re-priced when the base rate changes.
d) All of the above.
e) a. and c. only
Answer: d
16. Which of the following does not affect net interest income?
a) Changes in the level of interest rates.

b) Changes in the volume of earning assets.
c) Changes in the portfolio mix of earning assets.
d) The yield curve changing from upward sloping to inverted.
e) All of the above affect net interest income.
Answer: e
a) Net interest income will increase by $1 million.

b) Net interest income will fall by $1 million.
c) Net interest income will increase by $10 million.
d) Net interest income will fall by $10 million.
e) Net interest income will be unchanged.
Answer: a
($500 million - $400 million) * 1% = $1,000,000
1. Net interest income will increase by $2 million.

2. Net interest income will fall by $2 million.
5. Net interest income will be unchanged.
Answer: b
($600 million - $800 million) * 1% = -$2,000,000
19. 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%?

Answer: d
($500 million - $400 million) * -1% = $-1,000,000
20. 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%?

Answer: a
($600 million - $800 million) * -1% = $2,000,000
21. A shift from core deposits to non-core deposits will:

a. always increase the amount of fixed rate assets.
b. always increase the amount of rate-sensitive assets. c. generally increase the amount of
non-earning assets. d. generally reduce net interest income.
e. b. and d.
Answer: d
22. What type of GAP analysis directly measures a bank’s net interest sensitivity
through the last day of the analysis period?
1. Earnings
2. Net Income
3. Maturity
4. Periodic
5. Cumulative
Answer: e
23. A bank’s cumulative GAP will always be: a. greater than the periodic
GAP. b. less than the periodic GAP.
c. positive.
d. negative.
e. the sum of the interim periodic GAPs. Answer: e
24. Which of the following is an advantage of static GAP analysis?
1. Static GAP analysis considers the time value of money.

2. Static GAP analysis indicates the specific balance sheet items that are
responsible for
the interest rate risk.
3. Static GAP analysis considers the cumulative impact of interest rate changes on
the bank’s position.
4. Static GAP analysis considers the embedded options in loans, such as mortgage pre-
payments.
5. All of the above are advantages of static GAP analysis.
Answer: b
25. Which of the following is not a disadvantage of static GAP analysis?
1. Static GAP analysis depends on the forecasted interest rates.

2. Static GAP analysis often considers demand deposits as non-rate sensitive.
3. Static GAP analysis does not consider the cumulative impact of interest rate
changes on
the bank’s position.
4. Static GAP analysis does not consider a depositor’s early withdrawal option.
5. All of the above are disadvantages of static GAP analysis.
Answer: c
26. The GAP ratio:
1. is always greater than one for bank’s with a negative periodic GAP.
2. is equal to the volume of rate-sensitive liabilities times the volume of rate-sensitive
assets.
3. is equal to the volume of rate-sensitive liabilities divided by the volume of

rate-sensitive
assets.
4. is equal to the volume of rate-sensitive assets divided by the volume of

rate-sensitive
liabilities.
5. is always less than one for bank’s with a positive cumulative GAP.
Answer: d
27. 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.
1. $2 million
2. $12 million
3. $15 million
4. $50 million
5. $62.5 million
Answer: e
Target Gap/Earning Assets =
(Allowable % change in NIM)(Expected NIM)/(Expected % change in interest rates) Target

Gap/$100 = (25%*5%/2%)
Target Gap/$100 = 0.625
Target Gap = $62.5
28. Earnings sensitivity analysis differs from static GAP analysis by:
1. looking at a wide range of interest rate environments.

2. using perfect interest rate forecasts.
3. calculating a change in net interest income given a change in interest rates.
4. Earnings sensitivity analysis differs from static GAP analysis in all of the above ways.
5. Earnings sensitivity analysis and static GAP analysis do not differ. They are different
names for the exact same analysis.
Answer: a
29. Which of the following does not have an embedded option?
1. A callable Federal Home Loan Bank bond.

2. Demand deposit accounts.
3. A home mortgage loan.
4. An auto loan.
5. All of the above have embedded options.
Answer: e
30. Which of the following are likely to occur when interest rates rise sharply?
1. Fixed-rate loans are pre-paid.

2. Bonds are called.
3. Deposits are withdrawn early.
4. All of the above occur when interest rates rise sharply.
5. a. and b.
Answer: c
Chapter 5
Managing Interest Rate Risk: Economic Value of Equity
Multiple Choice
1. EVE analysis: is essentially a _____________ analysis. a. profitability

b. quality
c. liquidity
d. liquidation e. earnings Answer: d
2. Duration gap analysis:
a. applies he the concept of duration to the bank’s entire balance sheet.

b. applies he the concept of duration to the bank’s entire income statement.
c. applies he the concept of duration to the bank’s retained earnings.
d. indicates the difference in the GAP in the time it takes to collect on loan
payments
i. versus the time to attract deposits.
e. estimates when embedded options will be exercised.
f. Answer: a
3. Macaulay's duration:
a) is a weighted average of the time until cash flows are received.

b) is always greater than maturity.
c) is never equal to maturity.
d) directly indicates how much the price of a security will change given a change in interest
a. rates.
e) estimates when embedded options will be used.
Answer: a
4. Modified duration:
a) estimates when embedded options will be used.

b) directly indicates how much the price of a security will change given a change in interest
a. rates.
c) is always greater than maturity.
d) All of the above
e) a. and b.
Answer: b
5. Effective duration:
a) estimates when embedded options will be used.

b) directly indicates how much the price of a security will change given a change in interest
rates.
c) is always greater than maturity.
d) is a weighted average of the time until cash flows are received.
e) All of the above
Answer: a
6. A bond has a Macaulay's duration of 10.7 years. If rates fall from 7% to 6%, the bonds
price will:
a) increase by approximately 1%.

b) decrease by approximately 1%.
c) increase by approximately 10%.
d) decrease by approximately 10%.
e) Not enough information is given to answer the question.
Answer: c
Modified Duration = Macaulay's duration/(1+i) = 10.7/1.07 = 10
% Change in Price = -Modified duration * Change in interest rates = -10 * -1% = 10%
7. A bond has a Macaulay's duration of 21 years. If rates rise from 5% to 5.5%, the bonds price
will:
a) increase by approximately 1%.

b) decrease by approximately 1%.
c) increase by approximately 10%.
d) decrease by approximately 10%.
Answer: d
Modified Duration = Macaulay's duration/(1+i) = 21/1.05 = 20
% Change in Price = -Modified duration * Change in interest rates = -20 * 0.5% = -10%
8. A bond has a Macaulay's duration of 26.56 years. If rates rise from 6.25% to 6.50%, the
bonds price will:
a) increase by approximately 6.25%.

b) decrease by approximately 6.25%.
c) increase by approximately 6.50%.
d) decrease by approximately 6.50%.
Answer: b
% Change in Price = -Modified duration * Change in interest rates = -25 * 0.25% = -6.25%
9. A 20-year zero coupon bond with a face value of $1,000 is currently selling for $214.55.
Using the bond's modified duration, what is the approximate change in the price of the bond if
interest rates rise by 25 basis points?
a) -49.63%
b) -46.39%
c) -4.96%
d) -4.63%
Answer: d
Step 1
Find current interest rate PV =
-214.55 FV = 1,000
N=20
I=?=8%
Step 2
Since this is a zero coupon bond, Macaulay’s duration = Maturity = 20
Modified Duration = 20/(1+.07) = 18.52
% Change in Price = -Modified duration * Change in interest rates = -18.52 * 0.25% =- 4.63%
10. A 30-year zero coupon bond with a face value of $10,000 is currently selling for $2,313.77.
Using the bond's modified duration, what is the approximate change in the price of the bond
if interest rates rise by 15 basis points?
a) -15.00%
b) -4.29%
c) -0.43%
d) -0.15%
Answer: b
Step 1
Find current interest rate PV = -2,313.77
FV = 10,000
N=30
I=?=5%
Step 2
Since this is a zero coupon bond, Macaulay’s duration = Maturity = 30
Modified Duration = 30/(1+.05) = 28.57
11. A 10-year annual coupon bond is currently selling for its par value of $1,000 with an
annual yield of 5%. If the bond is callable at par, what is the effective duration of the bond,
assuming rates change by 1%?
a) 10 years
b) 7.36 years
c) 5.52 years
d) 4.60 years
e) 3.68 years
Answer: e
Step 1
Effective Duration = (Pi- - Pi+)/[P0*(i+ - i-)
If rates fall to 4%, the company will call the bond and Pi- will be the call price of $1,000 Find
Pi+ FV = 1,000
PMT = 50
I=5%+1%=6%
N=10
PV = 926.40
Step 2
Effective Duration = (1,000 – 926.40)/(1,000*(6% - 4%)) = 3.68 years
12. 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) 25.00 years
b) 20.00 years
c) 5.52 years
d) 4.56 years
e) 3.68 years
Answer: d
Step 1
If rates fall to 5%, the company will call the bond and Pi- will be the call price of $10,000 Find
Pi+ FV = 10,000
PMT = 700
I=7%+2%=9%
N=20
PV = 8,174.29
Step 2
Effective Duration = (10,000 – 8,174.29)/(10,000*(9% - 5%)) = 4.56 years
13. Which of the following is likely to have a negative effective duration?
a) A high coupon, interest only mortgage-backed security that is pre-paying at a high

rate.
b) A low coupon U.S. Treasury bond.
c) Fed Funds purchased.
d) Demand deposits
e) None of the above can have a negative effective duration.
Answer: a
14. What does a bank's duration gap measure?
a) The duration of short-term buckets minus the duration of long-term buckets.

b) The duration of the bank's assets minus the duration of its liabilities.
c) The duration of all rate-sensitive assets minus the duration of rate-sensitive
liabilities.
d) The duration of the bank's liabilities minus the duration of its assets.
e) The duration of all rate-sensitive liabilities minus the duration of rate-sensitive
assets.
Answer: b
15. Which of the following allows a security's cash flows to change when interest rates change?
a) Modified duration
b) Macaulay's duration
c) Effective duration
d) Balance sheet duration
e) Income statement duration
Answer: c
16. 16. Which of the following is true regarding duration gap analysis?
a. The magnitude of the duration gap is related to the amount of interest rate risk a bank
is subject to.
b. Management can adjust the duration gap to speculate on future interest rate changes.
c. A positive duration gap means a bank's market value of equity will decrease with
an increase in interest rates.
d. All of the above are true.
e. a. and c.
Answer: d
17. Which of the following would generally be considered price sensitive?
a. Fed funds purchased

b. Fed funds sold
d. Demand deposits
e. A 20-year zero coupon bond
Answer: e
18. 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.
IV. Estimate the duration of assets and liabilities.
a. III, I, IV, II
b. I, II, III, IV
c. III, IV, I, II
d. IV, I, II, III
e. II, IV, I, III
Answer: a
19. Which of the following is false regarding duration gap analysis?
a. Duration gap analysis does not classify assets as rate-sensitive.

b. Duration gap analysis indicates the potential change in a bank's net interest income.
c. Duration gap accounts for bank leverage.
d. Duration gap accounts for the present value of cash flows associated with all
liabilities.
e. Duration gap analysis indicates the potential change in a bank's market value of
equity.
Answer: b
Use the following bank information for questions 20 – 24.

Assets
Cash Loans T-Bonds Total
Market Value
$ 150 $ 675 $ 175
$ 1,000
Rate
10% 5%
Duration (Years)
Liabilities and Equity
Time
Market Value
$ 500 $ 400 $ 100
$ 1,000
Duration Rate (Years)
4% 1.25 6% 3.00
Deposits 2.50 CDs
5.00 Equit
20. What is the weighted average duration of assets?
1. 2.56 years
2. 3.75 years
3. 4.85 years
4. 5.00 years
5. 7.5 years
Answer: a
(675/1,000)*2.5 years +(175/1,000)*5 years = 2.56 years
21. What is the bank’s duration gap?
a. 0.53
b. 0.73
c. 0.91 d. 2.03 e. 4.58
Answer: b
Step 1
Weighted Average Duration of Liabilities = (500/900)*1.25 years + (400/900)*3 years = 2.03
years
Step 2
Duration Gap = Weighted Avg Duration of Assets – (Liabilities/Total Assets)Weighted Avg
Duration of Liabilities
Duration Gap = 2.56 years – (900/1000)*2.03 years = 0.73
22. What is the bank’s weighted average cost of liabilities?
a. $44
b. $76 c. $80 d. $94 e. $102
Answer: a
(500* 4%) + (400*6%) = 44
23. What is the bank’s expected economic net interest income?
a. $14.75
b. $32.25
c. $44.00 d. $76.25 e. $120.25
Answer: b
(10%*$675) + (5%*$175) – (4%*$500) – (6%*$400) = $32.25
24. If interest rates rise 1% for all assets and liabilities, what is the approximate expected
change in the economic value of equity?
a. –$2.56
b. $5.84
c. –$5.84
d. $6.85
e. -$6.85
Answer: e
Step 1
Calculate Weighted Average Return of Assets (10%*$675/$1,000) + (5%*$175/$1,000) =
7.625% = y
Step 2
EVE = -DGAP[ y/(1+y)]MVA = -0.73*[.01/1.07625]*$1,000 = -6.85
Use the following bank information for questions 25 – 29.
Assets
Cash Loans T-Bonds Total
Market Value
$ 200 $ 800 $ 250 $ 1,250
Rate
8.0% 4.0%
Duration (Years)
Liabilities and Equity
Time
Market Value
$ 600 $ 500 $ 150 $ 1,250
Duration Rate (Years)
2.0% 1.500 4.5% 3.125
Deposits 3.750 CDs

7.250 Equity
25. What is the weighted average duration of assets?
a. 2.56 years
b. 3.85 years
c. 4.85 years
d. 5.00 years
e. 7.5 years
Answer: b
(800/1,250)*3.75 years + (250/1,250)*7.25 years = 3.85 years
26. What is the bank’s duration gap? a. 0.53
b. 0.73 c. 0.91 d. 1.88 e. 4.58
Answer: d
Step 1
Weighted Average Duration of Liabilities = (600/1,100)*1.5 years + (500/1,100)*3.125 years
= 2.24 years
Step 2
Duration Gap = Weighted Avg Duration of Assets – (Liabilities/Total Assets)Weighted Avg
Duration of Liabilities
Duration Gap = 3.85 years – (1,100/1,250)*2.24 years = 1.88 years
27. What is the bank’s weighted average cost of liabilities? a. $24.9
b. $34.5
c. $80.0 d. $94.3 e. $102.1
Answer: b
(600* 2%) + (500*4.5%) = 34.5
28. What is the bank’s expected economic net interest income? a. $34.5
b. $32.3
c. $39.5
d. $44.0 e. $120.5
Answer: c
(8%*$800) + (4%*$250) – (2%*$600) – (4.5%*$500) = $39.5
29. If interest rates rise 1% for all assets and liabilities, what is the approximate expected
change in the economic value of equity?
a. –$2.56
b. $5.84
c. –$5.84 d. $22.19 e. -$22.19
Answer: d
Step 1
Calculate Weighted Average Return of Assets
(8%*$800/$1,250) + (4%*$250/$1,250) = 5.92%
Step 2
EVE = -DGAP[ y/(1+y)]MVA = -1.88*[-.01/1.0592]*$1,250 = 22.19
30. 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. increase, increase, decrease
c. increase, increase, increase
d. decrease, decrease, increase
e. decrease, increase, decrease
Answer: a
1. Which of the following is not considered a cash asset?
A. ? Marketable securities
B. ? Cash items in process of collection
C. ? Demand deposits at private financial institutions
D. ? Demand deposits at the Federal Reserve
E. ? Vault cash
2. Which of the following is not a reason that banks hold cash assets?
A. ? To meet customer's needs for currency.
B. ? To meet capital requirements.
C. ? To meet required reserves.
D. ? To compensate for correspondent bank services.
E. ? To assist in the check clearing process.
3. Which of the following is not considered a viable long-term source of bank liquidity?
A. ? Federal funds sold
B. ? Short-term Treasury securities
C. ? Cash
D. ? High quality short-term municipal securities
E. ? Reverse repurchase agreements
4. In which of the following ways can a bank acquire liquidity?
A. ? Selling Fed funds
B. ? Investing in repurchase agreements
C. ? Increasing the number of loans outstanding
D. ? Selling Treasury securities
E. ? Buying back outstanding bank stock
5. Which of the following is not an advantage of larger cash balances for a bank?
A. ? Larger cash balances reduce the need to borrow at the discount
window.
B. ? Larger cash balances reduce the risk of bank runs.
C. ? Larger cash balances reduce the risk of paying penalties to the

Federal Reserve.
D. ? Larger cash balances increase reserve balances.
E. ? Larger cash balances reduce a bank's interest expense.
6. Larger cash balances reduce the risk of bank runs.
A. ? a leading reserve accounting system.
B. ? a contemporaneous reserve accounting system.
C. ? a lagging reserve accounting system.
D. ? an actual reserve accounting system.
E. ? a holding reserve accounting system.
7. 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. ? It is now deficient $9,000,000 in required reserves.
E. ? There would be no impact on the bank's required reserves.
8. Which of the following indicates the potential demand for new loans?
A. ? a. Low business growth and activity
B. ? A relatively large percentage of demand deposits
C. ? Large, unused commercial credit lines outstanding
D. ? Large deposits held by a single customer
E. ? The level of uninsured deposits
9. Which of the following indicates the potential for deposits leaving a bank?
A. ? a. High business activity and growth
B. ? Deposits that are inelastic to changes in interest rates
C. ? An aggressive bank loan officer
D. ? Large deposits held by a single customer
E. ? Small unused commercial credit lines outstanding
10. Which of the following is not a measure of liability liquidity?
A. ? Total loans to total assets
B. ? Total deposits to total assets
C. ? Total equity to total assets
D. ? Loan losses to net loans
E. ? Core deposits to total assets
11. When selling securities to meet liquidity needs, a bank should consider all of
the following except:
A. ? brokerage fees.
B. ? lost interest income.
C. ? the gains or losses on the securities.
D. ? the impact on taxes.
E. ? A bank should consider all of the above when selling securities to

meet liquidity needs.
12. The ease of converting an asset to cash with a minimum of loss is known as:
A. ? asset liquidity.
B. ? volatile liquidity.
C. ? core liquidity.
D. ? liability liquidity.
E. ? non-core liquidity.
13. Which of the following is not a measure of liability liquidity?
A. ? a. Total equity to total assets
B. ? Core deposits to total assets
C. ? Total deposits to total assets
D. ? Federal funds sold to total assets
E. ? Loan losses to deposits.
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. ? narrative
B. ? qualitative
C. ? quantitative
D. ? summary
E. ? descriptive
15. Vault cash generally satisfies a bank's liquidity needs.
A. ? True
B. ? False
16. Respondent banks buy services from correspondent banks.
A. ? True
B. ? False
17. More liquid assets tend to earn lower returns, everything else the same.
A. ? True
B. ? False
18. Core deposits tend to be more interest elastic than volatile liabilities.
A. ? True
B. ? False
19. The best measure of bank asset liquidity is the core deposits to total asset ratio.
A. ? True
B. ? False
20. EVE analysis: is essentially a _____________ analysis.
A. ? profitability
B. ? quality
C. ? liquidity
D. ? liquidation
E. ? earnings
21. Duration gap analysis:
A. ? applies he the concept of duration to the bank’s entire balance sheet.
B. ? applies he the concept of duration to the bank’s entire income statement.
C. ? applies he the concept of duration to the bank’s retained earnings.
D. ? indicates the difference in the GAP in the time it takes to collect on loan
payments versus the time to attract deposits.
E. ? estimates when embedded options will be exercised.
22. Macaulay's duration:
A. ? is a weighted average of the time until cash flows are received.
B. ? is always greater than maturity.
C. ? is never equal to maturity.
D. ? directly indicates how much the price of a security will change given a change in
interest rates.
E. ? estimates when embedded options will be used.
23. Effective duration:
A. ? estimates when embedded options will be used.
B. ? directly indicates how much the price of a security will change given a change in
interest rates.
C. ? is always greater than maturity.
D. ? is a weighted average of the time until cash flows are received.
24. A bond has a Macaulay's duration of 10.7 years. If rates fall from 7% to 6%, the bonds price will:
A. ? increase by approximately 1%.
B. ? decrease by approximately 1%.
C. ? increase by approximately 10%.
D. ? decrease by approximately 10%.

% Change in Price = -Modified duration * Change in interest
rates = -10 * -1% = 10%
25. A bond has a Macaulay's duration of 21 years. If rates rise from 5% to 5.5%, the bonds price will:
A. ? increase by approximately 1%.
B. ? decrease by approximately 1%.
C. ? increase by approximately 10%.
D. ? decrease by approximately 10%.

Modified Duration = Macaulay's duration/(1+i) = 21/1.05 = 20
% Change in Price = -Modified duration * Change in interest rates = -20 * 0.5% = -10%
26. A bond has a Macaulay's duration of 26.56 years. If rates rise from 6.25% to 6.50%, the bonds price will:
A. ? increase by approximately 6.25%.
B. ? decrease by approximately 6.25%.
C. ? increase by approximately 6.50%.
D. ? decrease by approximately 6.50%.
27. A 20-year zero coupon bond with a face value of $1,000 is currently selling for $214.55. Using the bond's
modified duration, what is the approximate change in the price of the bond if interest rates rise by 25
basis points?
A. ? -49.63%
B. ? -46.39%
C. ? -4.96%
D. ? -4.63%
Find current interest rate

PV = -214.55
FV = 1,000
N=20
I=?=8%
Step 2
Since this is a zero coupon bond, Macaulay’s duration = Maturity =
20 Modified Duration = 20/(1+.07) = 18.52
28. A 30-year zero coupon bond with a face value of $10,000 is currently selling for $2,313.77. Using the
bond's modified duration, what is the approximate change in the price of the bond if interest rates rise by 15
basis points?
A. ? -15.00%
B. ? -4.29%
C. ? -0.43%
D. ? -0.15%
Find current interest rate

PV = -2,313.77
FV = 10,000
N=30
I=?=5%
Step 2
Since this is a zero coupon bond, Macaulay’s duration = Maturity =
30 Modified Duration = 30/(1+.05) = 28.57
29. A 10-year annual coupon bond is currently selling for its par value of $1,000 with an annual yield of 5%.
If the bond is callable at par, what is the effective duration of the bond, assuming rates change by 1%?
A. ? 10 years
B. ? 7.36 years
C. ? 5.52 years
D. ? 4.60 years
E. ? 3.68 years

If rates fall to 4%, the company will call the bond and Pi- will be the call price of $1,000
Find Pi+
FV = 1,000
PMT = 50
I=5%+1%=6%
N=10
PV = 926.40
Step 2
Effective Duration = (1,000 – 926.40)/(1,000*(6% - 4%)) = 3.68 years
30. 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. ? 25.00 years
B. ? 20.00 years
C. ? 5.52 years
D. ? 4.56 years
E. ? 3.68 years

If rates fall to 5%, the company will call the bond and Pi- will be the call price of
$10,000 Find Pi+
FV = 10,000
PMT = 700
I=7%+2%=9%
N=20
PV = 8,174.29
Step 2
Effective Duration = (10,000 – 8,174.29)/(10,000*(9% - 5%)) = 4.56 years
31. Which of the following is likely to have a negative effective duration?
A. ? A high coupon, interest only mortgage-backed security that is pre-paying at a

high rate.
B. ? A low coupon U.S. Treasury bond.
C. ? State Bank funds purchased.
D. ? Demand deposits
32. What does a bank's duration gap measure?
A. ? The duration of short-term buckets minus the duration of long-term buckets.
B. ? The duration of the bank's assets minus the duration of its liabilities.
C. ? The duration of all rate-sensitive assets minus the duration of rate-sensitive

liabilities.
D. ? The duration of the bank's liabilities minus the duration of its assets.
E. ? The duration of all rate-sensitive liabilities minus the duration of rate-sensitive

assets.
33. Which of the following allows a security's cash flows to change when interest rates change?
A. ? Modified duration
B. ? Macaulay's duration
C. ? Effective duration
D. ? Balance sheet duration
E. ? Income statement duration
34. Which of the following would generally be considered price sensitive?
A. ? State bank funds purchased
B. ? State bank funds sold
C. ? Repurchase agreements
D. ? Demand deposits
E. ? A 20-year zero coupon bond
35. 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. ? I, II, III, IV
C. ? III, IV, I, II
D. ? IV, I, II, III
E. ? II, IV, I, III

36. Which of the following is false regarding duration gap analysis?
A. ? Duration gap analysis does not classify assets as rate-sensitive.
B. ? Duration gap analysis indicates the potential change in a bank's net interest
income.
C. ? Duration gap accounts for bank leverage.
D. ? Duration gap accounts for the present value of cash flows associated with all
liabilities.
E. ? Duration gap analysis indicates the potential change in a bank's market value of
equity.
37. 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. ? increase, increase, decrease
C. ? increase, increase, increase
D. ? decrease, decrease, increase
E. ? decrease, increase, decrease
38. For a bank that has a positive 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.

39. For a bank that has a negative duration gap, an increase in interest rates will cause a(n) _______ in
40. For a bank that has a positive duration gap, an increase in interest rates will cause a(n) _______ in
E. ? decrease, decrease, decrease
41. To perfectly immunize a bank’s economic value of equity from changes in interest rate risk, it should:
A. ? adjust assets and liabilities such that its duration gap is equal to one.
B. ? adjust assets and liabilities such that its duration gap is greater than zero.
C. ? adjust assets and liabilities such that its duration gap is equal to zero.
D. ? adjust assets and liabilities such that its GAP is equal to zero.
E. ? adjust assets and liabilities such that its GAP is less than one.
42. Which of the following will NOT affect a bank’s duration estimate for the year?
A. ? Prepayments on loans that exceed expectations.
B. ? A 20-year corporate bond that is unexpectedly called in 6 months.
C. ? Certificates of deposit that are withdrawn early.
D. ? Holding a 30-year Treasury bond until maturity.
43. What is the strength of static GAP analysis relative to duration gap analysis?
A. ? Static GAP analysis recognizes the time value of money of each cash flow.
B. ? Static GAP analysis provides a measure of the total portfolio’s interest rate risk.
C. ? Static GAP analysis is easier to understand.
D. ? Static GAP analysis takes the long-run view while duration gap analysis takes a
shorter-run view.
E. ? The static GAP measure directly correlates with the risk of the bank, i.e., a bank
with twice the static GAP is twice as risky.
44. Which of the following is not a weakness of duration gap analysis?
A. ? It is difficult to accurately compute duration.
B. ? Each future cash flow must be discounted by the appropriate future interest rate.
C. ? The duration of a portfolio must be constantly monitored.
D. ? It is difficult to estimate the duration on zero coupon bonds.

45. If the yield curve is inverted, a portfolio manager can take advantage of this by:
A. ? pricing more deposits on a fixed-rate basis.
B. ? buying more long-term securities
C. ? making variable-rate, callable loans.
D. ? increasing the number of rate-sensitive assets.
46. A liability sensitive bank decides to reduce risk by marketing 2-year CDs paying 5% instead of NOW
accounts that pay 4%. The bank will benefit if:
A. ? the 2-year rate in one year is less than 5%.
B. ? the 1-year rate in one year is less than 6%.
C. ? the 1-year rate in one year is greater than 6%.
D. ? the 2-year rate in one year is greater than 6%.
47. Economic value of equity analysis focuses on net interest income.
A. ? True
B. ? False
48. An investor that matches the duration of an investment with her holding period balances price risk
and reinvestment risk.
A. ? True
B. ? False
49. Effective duration considers a security’s embedded options.
A. ? True
B. ? False
50. An asset that is rate-sensitive is generally not price sensitive.
A. ? True
B. ? False
51. Duration gap analysis focuses on changes in net interest income.
A. ? True
B. ? False
52. Banks should never assume any interest rate risk.
A. ? True
B. ? False
53. Duration of equity measures the dollar change in EVE with a 1% change in interest rates.
A. ? True
B. ? False
54. The duration of a liability that does not pay interest must be equal to 0.
A. ? True
B. ? False
55. Larger cash balances reduce the risk of bank runs.

a) a holding reserve accounting system.
b) an actual reserve accounting system.
c) a lagging reserve accounting system.
d) a contemporaneous reserve accounting system.
e)a leading reserve accounting system.

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Chapter 2

Analyzing Bank Performance

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

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

4. Typically, “Call loans”

6. Which of the following would not be considered a commercial

7.Banks generate their largest portion of income from:

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

11.Which of the following bank assets is the most liquid?

11.Which of the following would a bank generally classify as a short-term investment?

12.All other things constant, securities that are extremely liquid:

13.Which of the following would a bank generally classify as a long-term investment?

15.Securities that require unrealized gains or losses to be recorded as a

16.Securities that require unrealized gains or losses to be recorded on the

21.Which of the following is are only available to non-commercial customers?

25.Unsecured liabilities created from the exchange of immediately available

26.A bank’s core deposits are:

27.Core deposits consist of all of the following except:

28.Which of the following is not considered a volatile liability?

41. Economic value of equity analysis focuses on net interest income.

Effective duration considers a security's embedded options.

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

Duration gap analysis focuses on changes in net interest income.

Banks should never assume any interest rate risk.

Demand for checking accounts is generally considered to be price

Deposit service charges are a stable source of bank revenue.

Trading revenue for banks is highly cyclical. True

An asset would normally be classified as rate sensitive if:

Income statement GAP considers

To increase asset sensitivity, a bank can:

To decrease asset sensitivity, a bank can:

To decrease liability sensitivity, a bank can:

If a bank expects interest rates to decrease in the coming year, it should:

If a bank expects interest rates to increase in the coming year, it should:

Managing Non-Interest Income and Non-Interest Expense

2. Which of the following is not listed on a bank’s UBPR as non-interest income?

4. Which of the following is not considered a non-interest expense?

5. Fiduciary Activities & Deposit Service Charges

10. The operating risk ratio measures:

12. __________ is not a measure of bank productivity?

13. Return on risk-adjusted capital is defined as:

17. Customer profitability data can be beneficial in helping bank management:

18. Profitable bank customers:

19. Which of the following is not a cost management strategy?

19. Banks experience economies of scale when:

21. Banks can increase their operating efficiencies by:

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

A. ? When interest rates are volatile.

B. ? When interest rates are stable.

C. ? When inflation is high.

D. ? When inflation is low.

E. ? When loan defaults are high.

2. Interest rate risk:

A. ? varies inversely with a bank’s GAP.

B. ? can be measured by the volatility of a bank’s net interest income

C. ? can be eliminated by matching fixed rate assets with variable rate

D. ? rarely has an impact on bank earnings.

A. ? the dollar amount of rate-sensitive assets divided by the dollar

B. ? the dollar amount of earning assets divided by the dollar amount of

C. ? the dollar amount of rate-sensitive assets minus the dollar amount of

D. ? the dollar amount of rate-sensitive liabilities minus the dollar

E. ? the dollar amount of earning assets times the average liability

4. A bank’s periodic GAP:

A. ? is defined as the dollar amount of rate-sensitive assets divided by