Exam 3 - Review Questions

The following is an FI's balance sheet ($millions). Notes to Balance Sheet: Munis are 2-year 6 percent annual coupon municipal notes selling at par. Loans are floating rates, repriced quarterly. Spot discount yields for 91-day Treasury bills are 3.75 percent. CDs are 1-year pure discount certificates of deposit paying 4.75 percent. What is the duration of the municipal notes (the value of x)? a.) 1.94 years b.) 2.00 years c.) 1.00 years d.) 1.81 years e.) 0.97

a.) 1.94 years

The numbers provided by Fourth Bank of Duration are in thousands of dollars. Notes: All Treasury bills have six months until maturity. One-year Treasury notes are priced at par and have a coupon of 7 percent paid semiannually. Treasury bonds have an average duration of 4.5 years and the loan portfolio has a duration of 7 years. Time deposits have a 1-year duration and the Fed funds duration is 0.003 years. Fourth Bank of Duration assigns a duration of zero (0) to demand deposits. If the relative change in interest rates is a decrease of 1 percent, calculate the impact on the bank's market value of equity using the duration approximation. (That is, ΔR/(1 + R) = -1 percent) a.) The bank's market value of equity increase by $325,550 b.) The bank's market value of equity decreases by $325,550 c.) The bank's market value of equity increases by $336,500 d.) The bank's market value of equity decreases by $336,500 e.) There is no change in the bank's market value of equity

a.) The bank's market value of equity increases by $325,550

Suppose that the financial ratios of a potential borrowing firm took the following values: X1 = 0.30 X2 = 0 X3 = -0.30 X4 = 0.15 X5 = 2.1 Altman's discriminant function takes the form: Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5 According to Altman's credit scoring model, this firm should be considered a.) a high default risk firm b.) an indeterminant default risk firm c.) a low default risk firm d.) a lowest risk customer e.) either a low default risk firm or a lowest risk customer

a.) a high default risk firm

When does "duration" become a less accurate predictor of expected change in security prices? a.) as interest rate shocks increase in size b.) as interest rate shocks decrease in size c.) when maturity distributions of an FI's assets and liabilities are considered d.) as inflation decreases e.) when the leverage adjustment is incorporated

a.) as interest rate shocks increase in size

When does "duration" become a less accurate predictor of expected change in security prices? a.) as interest rate shocks increase in size b.) as interest rates shocks decrease in size c.) when maturity distributions of an FI's assets and liabilities are considered d.) as inflation decreases e.) when the leverage adjustment is incorporated

a.) as interest rate shocks increase in size

An FI finances a $250,000 2-year fixed-rate loan with a $200,000 1-year fixed-rate CD. Use the repricing model to determine (a) the FI's repricing (or funding) gap using a 1-year maturity bucket, and (b) the impact of a 100 basis point (0.01) decrease in interest rates on the FI's annual net interest income? a.) $0; $0 b.) -$200,000; +$2,000 c.) -$200,000; -$2,000 d.) +$50,000; -$500 e.) -$200,000; -$1,000

b.) -$200,000; +$2,000

The following information details the current rate sensitivity report for Gotbucks Bank, Inc. ($million). Calculate the funding gap for Gotbucks Bank using (a) a 30 day maturity period and (b) a 91 day maturity period? a.) -$25 and +$80 b.) -$50 and -$75 c.) -$75 and +$5 d.) +$55 and -$40 e.) 0 and 0

b.) -$50 and -$75

Third Duration Investments has the following assets and liabilities on its balance sheet. The two-year Treasury notes are zero coupon assets. Interest payments on all other assets and liabilities occur at maturity. Assume 360 days in a year. What is the duration of the liabilities? a.) 0.708 years b.) 0.354 years c.) 0.350 years d.) 0.955 years e.) 0.519 years

b.) 0.354 years

First Duration Bank has the following assets and liabilities on its balance sheet. What is the FI's leverage-adjusted duration gap? a.) 0.91 years b.) 0.83 years c.) 0.73 years d.) 0.50 years e.) 0 years

b.) 0.83 years

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually. What is the duration of the two-year loan (per $100 face value) if it is selling at par? a.) 2.00 years b.) 1.92 years c.) 1.96 years d.) 1.00 year e.) 0.91 years

b.) 1.92 years

The numbers provided are in millions of dollars and reflect market values: What is the leverage-adjusted duration gap of the FI? a.) 3.61 years b.) 3.74 years c.) 4.01 years d.) 4.26 years e.) 4.51 years

b.) 3.74 years

Consider a five-year, 8 percent annual coupon bond selling at par of $1,000. What is the duration of this bond? a.) 5 years b.) 4.31 years c.) 3.96 years d.) 5.07 years e.) not enough information to answer

b.) 4.31 years

Using a modified discriminant function similar to Altman's, Burger Bank estimates the following coefficients for its portfolio of loans: Z = 1.4X1 + 1.09X2 + 1.5X3 where X1 = debt to asset ratio; X2 = net income and X3 = dividend payout ratio Using Z = 1.682 as the cut-off rate, what should be the debt to asset ratio of the firm in order for the bank to approve the loan a.) 40.0 percent b.) 46.5 percent c.) 51.5 percent d.) 54.0 percent e.) 65.0 percent

b.) 46.5 percent

The following represents two yield curves. What spread is expected between the one-year maturity B-rated bond and the one-year Treasury bond in one year a.) 3.00 percent b.) 5.06 percent c.) 4.00 percent d.) 5.00 percent e.) 7.00 percent

b.) 5.06 percent

The numbers provided are in millions of dollars and reflect market values: What is the weighted average duration of the liabilities of the FI? a.) 5.00 years b.) 5.35 years c.) 5.70 years d.) 6.05 years e.) 6.40 years

b.) 5.35 years

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually): The cumulative probability of repayment of BBB corporate debt over the next two years is a.) 99.84 percent b.) 92.10 percent c.) 4.45 percent d.) 95.70 percent e.) 7.90 percent

b.) 92.10 percent

The following represents two yield curves What is the implied probability of repayment on one-year B-rated debt a.) 95.00 percent b.) 97.17 percent c.) 94.00 percent d.) 97.00 percent e.) 97.09 percent

b.) 97.17 percent

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually. What is the impact on the FI's equity of a 2 percent overall increase in market interest rates on all fixed-rate instruments? a.) Equity rises by $4.318 million b.) Equity declines by $2.912 million c.) Equity rises by $2.060 million d.) Equity declines by $1.880 e.) Equity does not change

b.) Equity declines by $2.912 million

The following are the assets and liabilities of a government security dealer. What is the impact over the next 30 days on the dealer's net interest income if all interest rates increase by 50 basis points? a.) Net interest income will decrease by $50,000 b.) Net interest income will decrease by $2.125 million c.) Net interest income will decrease by $475,000 d.) Net interest income will decrease by $2.375 million e.) Net interest income will increase by $750,000

b.) Net interest income will decrease by $2.125 million

Calculating modified duration involves a.) dividing the value of duration by the change in the market interest rate b.) dividing the value of duration by 1 plus the interest rate c.) dividing the value of duration by discounted change in interest rates d.) multiplying the value of duration by discounted change in interest rates e.) dividing the value of duration by the curvature effect

b.) dividing the value of duration by 1 plus the interest rate

Which of the following statements is true? a.) the optimal duration gap is zero b.) duration gap measures the impact of changes in interest rates on the market value of equity c.) the shorter the maturity of the FI's securities, the greater the FI's interest rate risk exposure d.) the duration of all floating rate debt instruments is equal to the time to maturity e.) the duration of equity is equal to the duration of assets minus the duration of liabilities

b.) duration gap measures the impact of changes in interest rates on the market value of equity

Which of the following observations is true of a spot loan a.) it involves a maximum size and a maximum period of time over which the borrower can withdraw funds b.) it involves immediate withdrawal of the entire loan amount by the borrower c.) it is an unsecured short-term debt instrument issued by corporations d.) it is a nonbank loan substitute e.) it is a line of credit

b.) it involves immediate withdrawal of the entire loan amount by the borrower

The net worth of a bank is the difference between the a.) value of retained earnings and the provision for loan losses b.) market value of assets and the market value of liabilities c.) book value of assets and book value of liabilities d.) rate-sensitive assets and rate-sensitive liabilities e.) none of the above

b.) market value of assets and the market value of liabilities

Suppose that debt-equity ratio (D/E) and the sales-asset ratio (S/A) were two factors influencing the past default behavior of borrowers. Based on past default (repayment) experience, the linear probability model is estimated as: PDi = 0.5(D/Ei) + 0.1(S/Ai). If a prospective borrower has a debt-equity ratio of 0.4 and sales-asset ratio of 1.8, the expected probability of default is a.) 0.02 b.) 0.35 c.) 0.38 d.) 0.62 e.) 0.98

c.) 0.38

An FI has financial assets of $800 and equity of $50. If the duration of assets is 1.21 years and the duration of all liabilities is 0.25 years, what is the leverage-adjusted duration gap? a.) 0.9000 years b.) 0.9600 years c.) 0.9756 years d.) 0.8844 years e.) cannot be determined

c.) 0.9756 years

The numbers provided by Fourth Bank of Duration are in thousands of dollars. Notes: All Treasury bills have six months until maturity. One-year Treasury notes are priced at par and have a coupon of 7 percent paid semiannually. Treasury bonds have an average duration of 4.5 years and the loan portfolio has a duration of 7 years. Time deposits have a 1-year duration and the Fed funds duration is 0.003 years. Fourth Bank of Duration assigns a duration of zero (0) to demand deposits. What is the duration of the bank's Treasury portfolio? a.) 1.07 years b.) 1.00 year c.) 0.98 years d.) 0.92 years e.) insufficient information

c.) 0.98 years

The numbers provided by Fourth Bank of Duration are in thousands of dollars. Notes: all Treasury bills have six months until maturity. One-year Treasury notes are priced at par and have a coupon of 7 percent paid semiannually. Treasury bonds have an average duration of 4.5 years and the loan portfolio has a duration of 7 years. Time deposits have a 1-year duration and the Fed funds duration is 0.0003 years. Fourth Bank of Duration assigns a duration of zero (0) to demand deposits. What is the duration of the bank's Treasury portfolio? a.) 1.07 years b.) 1.00 years c.) 0.98 years d.) 0.92 years e.) insufficient information

c.) 0.98 years

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually. What is the weighted average maturity of liabilities? a.) 5.50 years b.) 6.40 years c.) 1.44 years d.) 1.30 years e.) 1.10 years

c.) 1.44 years

What is the duration of an 8 percent annual payment two-year note that currently sells at par? a.) 2 years b.) 1.75 years c.) 1.93 years d.) 1.5 years e.) 1.97 years

c.) 1.93 years

Calculate the duration of a two-year corporate bond paying 6 percent interest annually, selling at par. Principal of $20,000,000 is due at the end of two years. a.) 2 years b.) 1.91 years c.) 1.94 years d.) 1.49 years e.) 1.75 years

c.) 1.94 years

The following represents two yield curves. What interest rate is expected on a one-year B-rated corporate bond in one year? (Hint: Use the implied forward rate.) a.) 10.0 percent b.) 9.09 percent c.) 14.15 percent d.) 12.0 percent e.) 17.0 percent

c.) 14.15 percent

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually. What is this FI's maturity gap? a.) 4.00 years b.) 4.28 years c.) 3.16 years d.) 4.06 years e.) 5.10 years

c.) 3.16 years

The numbers provided are in millions of dollars and reflect market values: The short-term debt consists of 4-year bonds paying an annual coupon of 4 percent and selling at par. What is the duration of the short-term debt? a.) 3.28 years b.) 3.53 years c.) 3.78 years d.) 4.03 years e.) 4.28 years

c.) 3.78 years

The duration of a soon to be approved loan of $10 million is four years. The 99th percentile increase in risk premium for bonds belonging to the same risk category of the loan has been estimated to be 5.5 percent. What is the estimated risk-adjusted return on capital (RAROC) of this loan a.) 6.36 percent b.) 7.00 percent c.) 7.13 percent d.) 10.55 percent e.) 25.45 percent

c.) 7.13 percent

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently riced at par and pay interest annually. Which of the following statements is true? a.) An increase in interest rates will benefit the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities b.) An increase in interest rates will harm the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities c.) An increase in interest rates will harm the FI since the decrease in the market value of assets will be greater than the decrease in the market value of liabilities d.) A decrease in interest rates will harm the FI since the increase in the market value of assets will be greater than the increase in the market value of liabilities e.) A decrease in interest rates will benefit the FI since the increase in the market value of assets will be smaller than the increase in the market value of liabilities

c.) An increase in interest rates will harm the FI since the decrease in the market value of assets will be greater than the decrease in the market value of liabilities

Simulations by Moody's Analytics have shown which of the following models to be relatively better predictors of corporate failure and distress a.) Z score-type models b.) S&P rating changes c.) Expected Default Frequency (EDF) models d.) Linear probability models e.) Logit models

c.) Expected Default Frequency (EDF) models

Calculate the duration of the assets to four decimal places. a.) 2.5375 years b.) 4.3750 years c.) 1.7500 years d.) 3.0888 years e.) 2.5000 years

a.) 2.5375 years

First Duration Bank has the following assets and liabilities on its balance sheet. What is the duration of the commercial loans? a.) 1.00 years b.) 2.00 years c.) 1.73 years d.) 1.91 years e.) 1.50 years

d.) 1.91 years

The duration of a consol bond is a.) less than its maturity b.) infinity c.) 30 years d.) more than its maturity e.) given by the formula D = 1/(1+R)

a.) less than its maturity

Consider a six-year maturity, $100,000 face value bond that pays a 5 percent fixed coupon annually. What is the price of the bond if market interest rates are 4 percent? a.) $105,816.44 b.) $105,287.67 c.) $105,242.14 d.) $100,000.00 e.) $106,290.56

c.) $105,242.14

Based on an 18-month, 8 percent (semiannual) coupon Treasury note selling at par. What is the duration of this Treasury note? a.) 1.500 years b.) 1.371 years c.) 1.443 years d.) 2.882 years e.) 1.234 years

c.) 1.443 years

The number provided are in millions of dollars and reflect market values: What is the effect of a 100 basis point increase in interest rates on the market value of equity of the FI? Use the duration approximation relationship. Assume r = 4 percent. a.) -27.56 million b.) -28.01 million c.) -29.85 million d.) -31.06 million e.) -33.76 million

c.) -29.85 million

What is market value of the one-year CD if all market interest rates increase by 2 percent? a.) $49.065 million b.) $50.481 million c.) $49.528 million d.) $50.971 million e.) $50.000 million

a.) $49.065 million

The balance sheet of XYZ Bank appears below. All figures in millions of US Dollars. Total one-year rate-sensitive liabilities is a.) $540 million b.) $580 million c.) $555 million d.) $415 million e.) $720 million

a.) $540 million

The following is the balance sheet of Boston Bank. The average maturity of demand deposits is estimated at 2 years. What is the repricing gap if a 0 to 3 month maturity gap is used? Ignore runoffs. a.) $60 million b.) $40 million c.) -$80 million d.) -$120 million e.) -$180 million

a.) $60 million

Consider a six-year maturity, $100,000 face value bond that pays a 5 percent fixed coupon annually. What is the price of the bond if market interest rates are 6 percent? a.) $95,082.68 b.) $95,769.55 c.) $95,023.00 d.) $100,000.00 e.) $96,557.87

a.) $95,082.68

A bond is scheduled to mature in five years. Its coupon rate is 9 percent with interest paid annually. This $1,000 par value bond carries a yield to maturity of 10 percent. What is the bond's current market price? a.) $962.09 b.) $961.39 c.) $1,000 d.) $1,038.90 e.) $995.05

a.) $962.09

The following information details the current rate sensitivity report for Gotbucks Bank, Inc. ($million). How will a decrease of 25 basis points in all interest rates affect Gotbuck's net interest income over a planning period of 91 days? a.) +$0.1875 million b.) +$0.1250 million c.) -$0.1375 million d.) +$0.0625 million e.) 0

a.) +$0.1875 million

U.S. Treasury quotes from the WSJ on Oct. 15, 2003: If yields increase by 10 basis points, what is the approximate price change on the $100,000 Treasury note? Use the duration approximation relationship. a.) +$179.39 b.) +$16.05 c.) -$1,605.05 d.) -$16.05 e.) +$160.51

a.) +$179.39

If interest rates increase 75 basis points for an FI that has a gap of -$15 million, the expected change in net interest income is a.) -$112,500 b.) +$112,500 c.) +$1,125,000 d.) -$1,125,000 e.) -$150,000

a.) -$112,500

The following are the assets and liabilities of a government security dealer. Use the repricing model to determine the funding gap for a maturity bucket of 30 days. a.) -$425 million b.) -$95 million c.) -$10 million d.) -$475 million e.) +$150 million

a.) -$425 million

Consider a five-year, 8 percent annual coupon bond selling at par of $1,000. If interest rates increase by 20 basis points, what is the approximation? a.) -$7.985 b.) -$7.941 c.) -$3.990 d.) +$3.990 e.) +$7.949

a.) -$7.985

The balance sheet of XYZ Bank appears below. All figures in millions of US Dollars. The gap ratio is a.) 0.015 b.) -0.015 c.) 0.025 d.) -0.144 e.) 0.154

a.) 0.015

Third Duration Investments has the following assets and liabilities on its balance sheet. The two-year Treasury notes are zero coupon assets. Interest payments on all other assets and liabilities occur at maturity. Assume 360 days in a year. What is the leverage-adjusted duration gap? a.) 0.605 years b.) 0.956 years c.) 0.360 years d.) 0.436 years e.) 0.189 years

a.) 0.605 years

The following information on the mortality rate of loans as estimated by an FI What is the cumulative mortality rate of the A-rated and B-rated loans for year 2 a.) 1.0 percent and 2.24 percent b.) 0.5 percent and 1.24 percent c.) 1.0 percent and 1.74 percent d.) 0.5 percent and 0.5 percent e.) 1.0 percent and 1.0 percent

a.) 1.0 percent and 2.24 percent

Using a modified discriminant function similar to Altman's, Burger Bank estimates the following coefficients for its portfolio of loans: Z = 1.4X1 + 1.09X2 + 1.5X3 where X1 = debt to asset ratio; X2 = net income and X3 = dividend payout ratio. What is the Z-score if the debt to asset ratio is 40 percent, net income is 12 percent, and the dividend payout ratio is 60 percent a.) 1.59 b.) 1.48 c.) 1.36 d.) 1.28 e.) 1.20

a.) 1.59

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually. Use the duration model to approximate the change in the market value (per $100 face value) of two-year loans if interest rates increase by 100 basis points. a.) -$1.756 b.) -$1.775 c.) +$98.24 d.) -$1.000 e.) +$1.924

b.) -$1.775

The following question are based on material in Appendix 8B. The liquidity premium theory of the term structure of interest rates a.) assumes that investors will hold long-term maturity assets if there is a sufficient premium to compensate for the uncertainty of the long-term b.) assumes that long-term interest rates are an arithmetic average of short-term rates plus a liquidity premium c.) recognizes that forward rates are perfect predictors of future interest rates d.) assumes that risk premiums increase uniformly with maturity e.) none of these

a.) assumes that investors will hold long-term maturity assets if there is a sufficient premium to compensate for the uncertainty of the long-term

First Duration Bank has the following assets and liabilities on its balance sheet. What is the FI's interest rate risk exposure? a.) exposed to increasing rates b.) exposed to decreasing rates c.) perfectly balanced d.) exposed to long-term rate changes e.) insufficient information

a.) exposed to increasing rates

Credit rationing by an FI a.) involves restricting the quantity of loans made available to individual borrowers b.) results from a positive linear relationship between interest rates and expected loan returns c.) is not used by FIs at the retail level d.) involves rationing consumer loans using price or interest rate differences e.) is only relevant to banks

a.) involves restricting the quantity of loans made available to individual borrowers

Which of the following statements does NOT reflect credit decisions at the retail level a.) loans to retail customers are more likely to be rationed through interest rates than loan quantity restrictions b.) most loan decisions at the retail level tend to be accept or reject decisions c.) mortgage loans often are discriminated based on loan to price ratios rather than interest rates d.) household borrowers require higher costs of information collection for lenders e.) retail loans tend to be smaller than wholesale loans

a.) loans to retail customers are more likely to be rationed through interest rates than loan quantity restrictions

Which of the following describes the condition known as runoff in the repricing model approach to measuring interest rate risk of an FI? a.) periodic cash flow of interest and principal amortization payments on long-term assets than can be reinvested at market rates b.) the effect that a change in the spread between rates on RSAs and RSLs has on net interest income as interest rates change c.) mismatch of asset and liabilities within a maturity bucket d.) the relations between changes in interest rates and changes in net interest income e.) those deposits that act as an FI's long-term sources of funds

a.) periodic cash flow of interest and principal amortization payments on long-term assets that can be reinvested at market rates

Cumulative default probability refers to a.) probability that a borrower will default over a specified multiyear period b.) expected maximum change in the loan rate due to a change in the risk factor on the loan c.) historic default rate experience of a bond or loan d.) expected maximum change in the loan rate due to a change in the credit premium e.) probability that a borrower will default in any given year

a.) probability that a borrower will default over a specified multiyear period

The numbers provided by Fourth Bank of Duration are in thousands of dollars. Notes: all Treasury bills have six months until maturity. One-year Treasury notes are priced at par and have a coupon of 7 percent paid semiannually. Treasury bonds have an average duration of 4.5 years and the loan portfolio has a duration of 7 years. Time deposits have a 1-year duration and the Fed funds duration is 0.0003 years. Fourth Bank of Duration assigns a duration of zero (0) to demand deposits. If the relative change in interest rates is a decrease of 1 percent, calculate the impact on the bank's market value of equity using the duration approximation. (That is, ΔR/(1 + R) = -1 percent) a.) the bank's market value of equity increases by $325,550 b.) the bank's market value of equity decreases by $325,550 c.) the bank's market value of equity increases by $336,500 d.) the bank's market value of equity decreases by $336,500 e.) there is no change in the bank's market value of equity

a.) the bank's market value of equity increases by $325,550

Because of its simplicity, smaller depository institutions still use this model as their primary measure of interest rate risk a.) the repricing model b.) the maturity model c.) the duration model d.) the convexity model e.) the option pricing model

a.) the repricing model

The following question are based on material in Appendix 8B. The term structure of interest rates assumes that a.) the risk of all assets is the same b.) the time to maturity for all assets is the same c.) the coupon rate of all assets is the same d.) the market value of assets is the same e.) all of the above

a.) the risk of all assets is the same

What does the Moody's Analytics model use as equivalent to holding a call option on the assets of the firm a.) the value of equity in a firm b.) total liabilities of a firm c.) net income of a firm d.) dividend yield of investments e.) short-term debt liabilities of a firm

a.) the value of equity in a firm

When repricing all interest sensitive assets and all interest sensitive liabilities in a balance sheet, the cumulative gap will be a.) zero b.) one c.) greater than one d.) a negative value e.) infinity

a.) zero

A $1,000 six-year Eurobond has an 8 percent coupon, is selling at par, and contracts to make annual payments of interest. The duration of this bond is 4.99 years. What will be the new price using the duration model if interest rates increase to 8.5 percent? a.) $23.10 b.) $976.90 c.) $977.23 d.) $1,023.10 e.) -$23.10

b.) $976.90

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually. If the FI finances a $500,000 2-year loan with a $400,000 1-year CD and equity, what is the leverage adjusted duration gap of this position? Use your answer to the previous question. a.) +1.25 years b.) +1.12 years c.) -1.12 years d.) +0.92 years e.) -1.25 years

b.) +1.12 years

Consider a six-ear maturity, $100,000 face value bond that pays a 5 percent fixed coupon annually. What is the percentage price change for the bond if interest rates decline 50 basis points from the original 5 percent? a.) -2.106 percent b.) +2.579 percent c.) +0.000 percent d.) +3.739 percent e.) +2.444 percent

b.) +2.579 percent

The following are the assets and liabilities of a government security dealer. Use the repricing model to determine the funding gap for a maturity bucket of 365 days. a.) +$15 million b.) -$20 million c.) -$350 million d.) -$450 million e.) -$290 million

c.) -$350 million

Borrower reputation is important in assessing credit quality because a.) good past payment performance perfectly predicts future behavior b.) preservation of a good customer/FI relationship acts as an additional incentive to encourage loan repayment c.) FIs only lend to customers they know d.) customers with poor credit histories always default on their loans e.) a reputation for honesty is important in credit appraisal

b.) preservation of a good customer/FI relationship acts as an additional incentive to encourage loan repayment

The following information details the current rate sensitivity report for Gotbucks Bank, Inc. ($million). What does Gotbucks Bank's 91-day gap positions reveal about the bank management's interest rate forecasts and the bank's interest rate risk exposure? a.) the bank is exposed to interest rate decreases and positioned to gain when interest rate decline b.) the bank is exposed to interest rate increases and positioned to gain when interest rates decline c.) the bank is exposed to interest rate increases and positioned to gain when interest rates increase d.) the bank is exposed to interest rate decreases and positioned to gain when interest rates increase e.) insufficient information

b.) the bank is exposed to interest rate increases and positioned to gain when interest rates decline

What is spread effect? a.) periodic cash flow of interest and principal amortization payments on long-term assets that can be reinvested at market rates b.) the effect that a change in the spread between rates on RSAs and RSLs has on net interest income as interest rates change c.) the effect of mismatch of asset and liabilities within a maturity bucket d.) the premium paid to compensate for the future uncertainty in a security's value e.) the value of an FI to its owenrs

b.) the effect that a change in the spread between rates on RSAs and RSLs has on net interest income as interest rates change

Which of the following is not a characteristic of a loan commitment a.) the maximum amount of the loan is negotiated at the time of the loan agreement b.) the interest rate on fixed-rate loans is determined at the time of the loan is actually taken down c.) floating-rate loans transfer the interest rate risk to the borrower d.) the time period for which the loan is available is negotiated at the time of the loan agreement e.) in a floating-rate loan the borrower pays interest rate in force when the loan is actually taken down

b.) the interest rate on fixed-rate loans is determined at the time of the loan is actually taken down

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually. What is the interest rate risk exposure of the optimal transaction in the previous question over the next 2 years? a.) the risk that interest rates will rise since the FI must purchase a 2-years CD in one year b.) the risk that interest rates will rise since the FI must sell a 1-year CD in one year c.) the risk that interest rates will fall since the FI must sell a 2-year loan in one year d.) the risk that interest rates will fall since the FI must buy a 1-year loan in one year e.) there is no interest rate risk exposure

b.) the risk that interest rates will rise since the FI must sell a 1-year CD in one year

The duration of a soon to be approved loan of $10 million is four years. The 99th percentile increase in risk premium for bonds belonging to the same risk category of the loan has been estimated to be 5.5 percent. If the fee income on this loan is 0.4 percent and the spread over the cost of funds to the bank is 1 percent, what is the expected income on this loan for the current year a.) $40,000 b.) $100,000 c.) $140,000 d.) $180,000 e.) $280,000

c.) $140,000

The balance sheet of XYZ Bank appears below. All figures in millions of US Dollars. The cumulative one-year repricing gap (CGAP) for the bank is a.) $25 million b.) -$140 million c.) $15 million d.) -$150 million e.) -$15 million

c.) $15 million

The balance sheet of XYZ Bank appears below. All figures in millions of US Dollars. Total one-year rate-sensitive assets is a.) $540 million b.) $580 million c.) $555 million d.) $415 million e.) $720 million

c.) $555 million

Consider a five-year, 8 percent annual coupon bond selling at par of $1,000 Using present value bond valuation techniques, calculate the exact price of the bond after the interest rate increase of 20 basis points a.) $1,007.94 b.) $992.02 c.) $992.06 d.) $996.01 e.) $1,003.99

c.) $992.06

Consider a five-year, 8 percent annual coupon bond selling at par of $1,000. Using present value bond valuation techniques, calculate the exact price of the bond after the interest rate increase of 20 basis points. a.) $1,007.94 b.) $992.02 c.) $992.06 d.) $996.01 e.) $1,003.99

c.) $992.06

If all interest rates decline 90 basis points (ΔR/(1 + R) = −90 basis points), what is the change in the market value of equity? a.) -$4.4300 million b.) +$3.9255 million c.) +$4.3875 million d.) +$2.5506 million e.) +$0.0227 million

c.) +$4.3875 million

The following is the balance sheet of Boston Bank. The average maturity of demand deposits is estimated at 2 years. What is the repricing gap if a 1-year maturity gap is used if runoffs are also considerd? a.) -$22 million b.) +$22 million c.) +$53 million d.) -$40 million e.) -$70 million

c.) +$53 million

The following is the balance sheet of Boston Bank. The average maturity of demand deposits is estimated a 2 years. What is the impact on net interest income in year two if interest rates increase by 50 basis points at the end of year one? Ignore runoffs. a.) +$0.210 million b.) +$0.300 million c.) -$0.300 million d.) -$0.210 million e.) +$0.600 million

c.) -$0.300 million

The duration of a soon to be approved loan of $10 million is four years. The 99th percentile increase in risk premium for bonds belonging to the same risk category of the loan has been estimated to be 5.5 percent. What is the capital (loan) risk of the loan if the current average level of interest rates for this category of bonds is 12 percent a.) -$550,000 b.) -$1,564,280 c.) -$1,964,280 d.) -$2,000,000 e.) -$2,200,000

c.) -$1,964,280

First Duration, a securities dealer, has a leverage-adjusted duration gap of 1.21 years, $60 million in assets, 7 percent equity to assets ratio, and market rates are 8 percent. What is the impact on the dealer's market value of equity per $100 of assets if the change in all interest rates is an increase of 0.5 percent [i.e., ΔR = 0.5 percent] a.) +$336,111 b.) -$0.605 c.) -$336,111 d.) +$0.605 e.) -$363,000

c.) -$336,111

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually. Can the FI immunize itself from interest rate risk exposure by setting the maturity gap equal to zero? a.) Yes, because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities b.) No, because with a maturity gap of zero, the change in the market value of assets exactly offsets the change in the market value of liabilities c.) No, because the maturity model does not consider the timing of cash flows. d.) Yes, because the timing of cash flows is not relevant to immunization against interest rate risk exposure e.) No, because a representative bank will always have a positive maturity gap

c.) No, because the maturity model does not consider the timing of cash flows

A positive gap implies that an increase in interest rates will cause _______ in net interest income. a.) no change b.) a decrease c.) an increase d.) an unpredictable change e.) no change or a increase

c.) an increase

The following question are based on material in Appendix 8B. The market segmentation theory of the term structure of interest rates a.) assumes that investors will hold long-term maturity assets if there is a sufficient premium to compensate for the uncertainty of the long-term b.) assumes that the yield curve reflects that market's current expectations of future short-term interest rates c.) assumes that market rates are determined by supply and demand conditions within fairly distinct time or maturity buckets d.) fails to recognize the forward rates are not perfect predictors of future interest rates e.) assumes that both investors and borrowers are willing to shift from one maturity sector to another to take advantage of opportunities arising from changing yields

c.) assumes that market rates are determined by supply and demand conditions within fairly distinct time or maturity buckets

What is the essential idea behind RAROC a.) evaluating the actual or contractually promised annual ROA on a loan b.) analyzing historic or past default risk experience c.) balancing expected interest and fee income less the cost of funds against the loan's expected risk d.) extracting expected default rates from the current term structure of interest rates e.) dividing net interest and fees by the amount lent

c.) balancing expected interest and fee income less the cost of funds against the loan's expected risk

How can discriminant analysis be used to make credit decisions a.) by discriminating between good and bad borrowers b.) by using statistical analysis to predict the default probabilities c.) by using statistical analysis to isolate and weight factors to arrive at default risk classification of a commercial borrower d.) by using statistical analysis to bypass qualitative credit decision making e.) by updating FI bankruptcy experiences

c.) by using statistical analysis to isolate and weight factors to arrive at default risk classification of a commercial borrower

Which of the following is the major weakness of the linear probability model a.) the model is based on past data of the borrower b.) measurement of the loan risk is difficult c.) estimated probabilities of default may lie outside the interval 0 to 1 d.) neither the market value of a firm's assets nor the volatility of the firm's assets is directly observed e.) none of these is a weakness of the linear probability model

c.) estimated probabilities of default may lie outside the interval 0 to 1

Which of the following is true of commercial paper a.) it is a secured long-term debt instrument issued by corporations b.) it is always issued via an underwriter c.) it may help a corporation to raise funds often at rates below those banks charge d.) all corporations can tap the commercial paper market e.) total commercial paper outstanding in the US is smaller than total C&I loans

c.) it may help a corporation to raise funds often at rates below those banks charge

If an FI's repricing gap is less than zero, then a.) it is deficient in its required reserves b.) it is deficient in its capital ratio requirement c.) its liability costs are more sensitive to changing market interest rates than are its asset yields d.) its liability costs are less sensitive to changing market interest rates than are its assets yields e.) the duration of the FI's liabilities exceeds the duration of FI's assets

c.) its liability costs are more sensitive to changing market interest rates than are its asset yields

The larger the size of an FI, the larger the _____ from any given interest rate shock. a.) duration mismatch b.) immunization effect c.) net worth exposure d.) net interest income e.) risk of bankruptcy

c.) net worth exposure

Credit scoring models include all of the following broad types of models EXCEPT a.) linear discriminant models b.) linear probability models c.) term structure models d.) logit models

c.) term structure models

Which of the following relationships does NOT hold in the pricing of fixed-rate assets given changes in market rate? a.) a decrease in interest rates generally leads to an increase in the value of assets b.) longer maturity assets have greater changes in price than shorter maturity assets for given changes in interest rates c.) the absolute change in price per unit of maturity time for given changes in interest rates decreases over time, although the relative changes actually increase d.) for a given percentage decrease in interest rates, assets will increase in price more than they will decrease in price for the same, but opposite increase in rates e.) none of these

c.) the absolute change in price per unit of maturity time for given changes in interest rates decreases over time, although the relative changes actually increase

The following is an FI's balance sheet ($millions). Notes to Balance Sheet: Munis are 2.year 6 percent annual coupon municipal notes selling at par. Loans are floating rates, reprice quarterly. Spot discount yields for 91-day Treasury bills are 3.75 percent. CDs are 1-year pure discount certificates of deposit paying 4.75 percent. What will be the impact, if any, on the market value of the bank's equity if all interest rates increase by 75 basis points? (i.e., ΔR/(1 + R) = 0.0075) a.) the market value of equity will decrease by $15,750 b.) the market value of equity will increase by $15,570 c.) the market value of equity will decrease by $426,825 d.) the market value of equity will increase by $426,825 e.) there will be no impact on the market value of equity

c.) the market value of equity will decrease by $426,825

First Duration, a securities dealer, has a leverage-adjusted duration gap of 1.21 years, $60 million in assets, 7 percent equity to assets ratio, and market rates are 8 percent. What conclusions can you draw from the duration gap in your answer to the previous question? a.) the market value of the dealer's equity decreases slightly if interest rates fall b.) the market value of the dealer's equity becomes negative if interest rates rise c.) the market value of the dealer's equity decreases slightly if interest rates rise d.) the market value of the dealer's equity becomes negative if interest rates fall e.) the dealer has no interest rate risk exposure

c.) the market value of the dealer's equity decreases slightly if interest rates rise

Based on an 18-month, 8 percent (semiannual) coupon Treasury note selling at par. If interest rates increase by 20 basis points (i.e., ΔR = 20 basis points), use the duration approximation to determine the approximate price change for the Treasury note. a.) $0.000 b.) $0.2775 per $100 face value c.) $2.775 per $100 face value d.) $0.2672 per $100 face value e.) $2.672 per $100 face value

d.) $0.2672 per $100 face value

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually. What is market value of the two-year CD if all market interest rates increase by 2 percent? a.) $40.381 million b.) $39.626 million c.) $40.000 million d.) $38.573 million e.) $40.769 million

d.) $38.573 million

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually. What is market value of the one-year bond if all market interest rates increase by 2 percent? a.) $60.000 million b.) $60.566 million c.) $59.444 million d.) $58.899 million e.) $61.142 million

d.) $58.899 million

Calculate the leverage-adjusted duration gap to four decimal places and state the FI's interest rate risk exposure of this institution a.) +1.0308 years; exposed to interest rate increases b.) -0.3232 years; exposed to interest rate increases c.) +0.8666 years; exposed to interest rate increases d.) +0.4875 years; exposed to interest rate increases e.) -1.3232 years; exposed to interest rate decreases

d.) +0.4875 years; exposed to interest rate increases

The following is the balance sheet of Boston Bank. The average maturity of demand deposits is estimated at 2 years. What is the repricing gap if a 3-year maturity gap is used? Ignore runoffs a.) $21 million b.) $44 million c.) -$80 million d.) -$60 million e.) -$120 million

d.) -$60 million

Third Duration Investments has the following assets and liabilities on its balance sheet. The two-year Treasury notes are zero coupon assets. Interest payments on all other assets and liabilities occur at maturity. Assume 360 days in a year. What is the duration of the assets? a.) 0.708 years b.) 0.354 years c.) 0.350 years d.) 0.955 years e.) 0.519 years

d.) 0.955 years

Calculate the duration of a two-year corporate loan paying 6 percent interest annually, selling at par. The $30,000,000 loan is 100 percent amortizing with annual payments. a.) 2 years b.) 1.89 years c.) 1.94 years d.) 1.49 years e.) 1.73 years

d.) 1.49 years

U.S. Treasury quotes from the WSJ on Oct. 15, 2003: What is the duration of the above Treasury note? Use the asked price to calculate the duration. Recall that Treasuries pay interest semiannually. a.) 3.86 years b.) 1.70 years c.) 2.10 years d.) 1.90 years e.) 3.40 years

d.) 1.90 years

An FI purchases a $9.982 million pool of commercial loans at par. The loans have an interest rate of 8 percent, a maturity of five years, and annual payments of principal and interest that will exactly amortize the loan at maturity. What is the duration of this asset? a.) 4.12 years b.) 3.07 years c.) 2.50 years d.) 2.85 years e. ) 5.00 years

d.) 2.85 years

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually. What is the weighted average maturity of assets? a.) 5.50 years b.) 6.40 years c.) 5.00 years d.) 4.60 years e.) 10.0 years

d.) 4.60 years

What is the duration of a 5-year par value zero coupon bond yielding 10 percent annually? a.) 0.50 years b.) 2.00 years c.) 4.40 years d.) 5.00 years e.) 4.05 years

d.) 5.00 years

The numbers provided by Fourth Bank of Duration are in thousands of dollars. Notes: All Treasury bills have six months until maturity. One-year Treasury notes are priced at par and have a coupon of 7 percent paid semiannually. Treasury bonds have an average duration of 4.5 years and the loan portfolio has a duration of 7 years. Time deposits have a 1-year duration and the Fed funds duration is 0.003 years. Fourth Bank of Duration assigns a duration of zero (0) to demand deposits. What is the bank's leverage adjusted duration gap? a.) 6.73 years b.) 0.29 years c.) 6.44 years d.) 6.51 years e.) 0 years

d.) 6.51 years

The numbers provided by Fourth Bank of Duration are in thousands of dollars. Notes: all Treasury bills have six months until maturity. One-year Treasury notes are priced at par and have a coupon of 7 percent paid semiannually. Treasury bonds have an average duration of 4.5 years and the loan portfolio has a duration of 7 years. Time deposits have a 1-year duration and the Fed funds duration is 0.0003 years. Fourth Bank of Duration assigns a duration of zero (0) to demand deposits. What is the bank's leverage adjusted duration gap? a.) 6.73 years b.) 0.29 years c.) 6.44 years d.) 6.51 years e.) 0 years

d.) 6.51 years

Which of the following refers to restrictions in loan and bond agreements that encourage or forbid certain actions by the borrower a.) Mortality rates b.) RAROC c.) Implicit contracts d.) Covenants e.) Credit rationing

d.) Covenants

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually. If rates do not change, the balance sheet position that maximizes the FI's returns is a.) a positive spread of 15 basis points by selling 1-year CDs to finance 2-year CDs b.) a positive spread of 100 basis points by selling 1-year CDs to finance 1-year loans c.) a positive spread of 85 basis points by financing the purchase of a 1-year loan with a 2-year CD d.) a positive spread of 165 basis points by selling 1-year CDs to finance 2-year loans e.) a positive spread of 150 basis points by selling 2-year CDs to finance 2-year loans

d.) a positive spread of 165 basis points by selling 1-year CDs to finance 2-year loans

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually. If rates do not change, the balance sheet position that maximizes the FI's return is a.) a positive spread of 15 basis points selling 1-year CDs to finance 2-years CDs. b.) a positive spread of 100 basis points by selling 1-year CDs to finance 1-year loans c.) a positive spread of 85 basis points by financing the purchase of a 1-year loan with a 2-year CD d.) a positive spread of 165 basis points by selling 1-year CDs to finance 2-year loans e.) a positive spread of 150 basis points by selling 2-year CDs to finance 2-years loans

d.) a positive spread of 165 basis points by selling 1-year CDs to finance 2-years loans

An interest rate increase a.) benefits the FI by increasing the market value of the FI's liabilities b.) harms the FI by increasing the market value of the FI's liabilities c.) harms the FI by decreasing the market value of the FI's liabilities d.) benefits the FI by decreasing the market value of the FI's liabilities e.) benefits the FI by decreasing the market value of the FI's assets

d.) benefits the FI by decreasing the market value of the FI's liabilities

What refers to the risk that the borrower is unable or unwilling to fulfill the terms promised under the loan contract a.) liquidity risk b.) interest rate risk c.) sovereign risk d.) default risk e.) solvency risk

d.) default risk

The duration of all floating rate debt instruments is a.) equal to the time to maturity b.) less than the time to repricing of the instrument c.) time interval between the purchase of the security and its sale d.) equal to time to repricing of the instrument e.) infinity

d.) equal to time to repricing of the instrument

The duration of all floating rate debt instruments is a.) equal to the time to maturity b.) less than the time to repricing of the instrument c.) time interval between the purchase of the security and its sale d.) equal to time to repricing of the instrument e.) infinity

d.) equal to time to repricing of the insturment

The numbers provided are in millions of dollars and reflect market values: A risk manager could restructure assets and liabilities to reduce interest rate exposure for this example by a.) increasing the average duration of its assets to 9.56 years b.) decreasing the average duration of its assets to 4.00 years c.) increasing the average duration of its liabilities to 6.78 years d.) increasing the average duration of its liabilities to 9.782 years e.) increasing the leverage ratio, k, to 1

d.) increasing the average duration of its liabilities to 9.782 years

Immunization of a portfolio implies that changes in _____ will not affect the value of the portfolio. a.) book value of assets b.) maturity c.) market prices d.) interest rates e.) duration

d.) interest rates

The repricing gap does not accurately measure FI interest rate risk exposure because a.) FIs cannot accurately predict the magnitude change in future interest rates b.) FIs cannot accurately predict the direction of change in future interest rates c.) accounting systems are not accurate enough to allow the calculation of precise gap measures d.) it does not recognize timing differences in cash flows within the same maturity grouping e.) equity is omitted

d.) it does not recognize timing differences in cash flows within the same maturity grouping

Which of the following observations about the repricing model is correct? a.) its information value is limited b.) it accounts for the problem of rate-insensitive asset and liability runoffs and prepayments c.) it accommodates cash flows from off-balance-sheet activities d.) it helps to determine an FI's profit exposure to interest rate changes e.) it considers market value effects of interest rate changes

d.) it helps to determine an FI's profit exposure to interest rate changes

What is the least important factor determining bankruptcy, according to the Altman Z-score model a.) working capital to assets ratio b.) retained earnings to assets ratio c.) earnings before interest and taxes to assets ratio d.) market value of equity to book value of long-term debt ratio e.) sales to assets ratio

d.) market value of equity to book value of long-term debt ratio

The repricing gap approach calculates the gaps in each maturity bucket by subtracting the a.) current assets from the current liabilities b.) long term liabilities from the fixed assets c.) rate sensitive assets from the total assets d.) rate sensitive liabilities from the rate sensitive assets e.) current liabilities from tangible assets

d.) rate sensitive liabilities from the rate sensitive assets

Immunizing the balance sheet to protect equity holders from the effects of interest rate risk occurs when a.) the maturity gap is zero b.) the repricing gap is zero c.) the duration gap is zero d.) the effect of a change in the level of interest rates on the value of the assets of the FI is exactly offset by the effect of the same change in interest rates on the liabilities of an FI e.) after-the-fact analysis demonstrates that immunization coincidentally occurred

d.) the effect of a change in the level of interest rates on the value of the assets of the FI is exactly offset by the effect of the same change in interest rates on the liabilities of the FI

Immunizing the balance sheet to protect equity holders from the effects of interest rate risk occurs when a.) the maturity gap is zero b.) the repricing gap is zero c.) the duration gap is zero d.) the effect of a change in the level of interest rates on the value of the assets of the FI is exactly offset by the effect of the same change in interest rates on the liabilities of the FI e.) after-the-fact analysis demonstrates that immunization coincidentally occurred

d.) the effect of a change in the level of interest rates on the value of the assets of the FI is exactly offset by the effect of the same change in interest rates on the liabilities of the FI

The gap ratio expresses the reprice gap for a given time period as a percentage of a.) equity b.) total liabilities c.) current lilabilities d.) total assets e.) current assets

d.) total assets

In making credit decisions, which of the following items is considered a market-specific factor a.) whether the reputation of the borrower enhances the credit application b.) whether the current debt-equity ratio is sufficiently low to not impact the probability of repayment c.) whether the debt can be secured by specific property d.) whether the position of the economy in the business cycle phase would affect the probability of borrower default e.) whether the volatility of earnings could present a period where the periodic payment of interest and principal would be at risk

d.) whether the position of the economy in the business cycle phase would affect the probability of borrower default

From the lender's point of view, debt can be evaluated as a.) writing a call option on the borrower's assets with the exercise price equal to the face value of the debt b.) buying a call option on the borrower's liabilities with the exercise price equal to the market value of the debt c.) buying a put option on the borrower's assets with the exercise price equal to the face value of the debt d.) writing a put option on the borrower's assets with the exercise price equal to the face value of the debt e.) writing a put option on the borrower's liabilities with the exercise price equal to the market value of the debt

d.) writing a put option on the borrower's assets with the exercise price equal to the face value of the debt

The balance sheet of XYZ Bank appears below. All figures in millions of US Dollars. Suppose that interest rates rise by 2 percent on both RSAs and RSLs. The expected annual change in net interest income of the bank is a.) -$300,000 b.) $500,000 c.) -$2,800,000 d.) -$3,000,000 e.) $300,000

e.) $300,000

Hadbucks National Bank current balance sheet appears below. All assets and liabilities are currently priced at par and pay interest annually. What is market value of the ten-year loan if all market interest rates increase by 2 percent? a.) $40.000 million b.) $44.916 million c.) $37.830 million d.) $42.356 million e.) $35.827 million

e.) $35.827 million

An FI purchases at par value a $100,000 Treasury bond paying 10 percent interest with a 7.5 year duration. If interest rates rise by 4 percent, calculate the bond's new value. Recall that Treasury bonds pay interest semiannually. Use the duration valuation equation. a.) $28,572 b.) $20,864 c.) $15,000 d.) $22,642 e.) $71,428

e.) $71,428

An FI purchases at par value a $100,000 Treasury bond paying 10 percent interest with a 7.5 year duration. If interest rates rise by 4 percent, calculate the bond's new value. Recall that Treasury bonds pay interest semiannually. Use the duration valuation equation. a.) $28,572 b.) $20,864 c.) $15,000 d.) $22,642 e.) $71,428

e.) $71,428

Consider a one-year maturity, $100,000 face value bond that pays a 6 percent fixed coupon annually. What is the price of the bond if market interest rates are 7 percent? a.) $99,050.15 b.) $99,457.94 c.) $99,249.62 d.) $100,000.00 e.) $99,065.42

e.) $99,065.42

Consider a one-year maturity, $100,000 face value bond that pays a 6 percent fixed coupon annually. What is the price of the bond if market interest rates are 7 percent? a.) $99,050.15 b.) $99,457.94 c.) 99,249.62 d.) $100,000.00 e.) $99,065.42

e.) $99,065.42

A bond is scheduled to mature in five years. Its coupon rate is 9 percent with interest paid annually. This $1,000 par value bond carries a yield to maturity of 10 percent. Calculate the percentage change in this bond's price if interest rates on comparable risk securities decline to 7 percent. Use the duration valuation equation. a.) +8.58 percent b.) +12.76 percent c.) -12.75 percent d.) +11.80 percent e.) +11.52 percent

e.) +11.52 percent

A bond is scheduled to mature in five years. Its coupon rate is 9 percent with interest paid annually. This $1,000 par value bond carries a yield to maturity of 10 percent. Calculate the percentage change in this bond's price if interest rates on comparable risk securities increase to 11 percent. Use the duration valuation equation. a.) +4.25 percent b.) -4.25 percent c.) +8.58 percent d.) -3.93 percent e.) -3.84 percent

e.) -3.84 percent

The duration of a soon to be approved loan of $10 million is four years. The 99th percentile increase in risk premium for bonds belonging to the same risk category of the loan has been estimated to be 5.5 percent with a projected one-year spread of 1%. The current average rate is 12% for similar risky bonds. If the minimum RAROC acceptable to the bank is 8 percent, what would be its expected percentage fee income in order for it to approve the loan a.) .157 percent b.) .331 percent c.) .471 percent d.) .531 percent e.) .571 percent

e.) .571 percent

Calculate the modified duration of a two-year corporate loan paying 6 percent interest annually. The $40,000,000 loan is 100 percent amortizing, and the current yield is 9 percent annually. a.) 2 years b.) 1.91 years c.) 1.94 years d.) 1.49 years e.) 1.36 years

e.) 1.36 years

Confidence Bank has made a loan to Risky Corporation. The loan terms include a default risk-free borrowing rate of 8 percent, a risk premium of 3 percent, an origination fee of 0.1875 percent, and a 9 percent compensation balance requirement. Required reserves at the Fed are 6 percent. What is the expected or promised gross return on the loan a.) 11.19 percent b.) 11.90 percent c.) 12.29 percent d.) 12.02 percent e.) 12.22 percent

e.) 12.22 percent

The following is information on current spot and forward term structures (assume the corporate debt pays interest annually) Using the term structure of default probabilities, the implied default probability for BBB corporate debt during the second year is a.) 4.20 percent b.) 98.0 percent c.) 2.35 percent d.) 2.71 percent e.) 3.88 percent

e.) 3.88 percent

A bond is scheduled to mature in five years. Its coupon rate is 9 percent with interest paid annually. This $1,00 par value bond carries a yield to maturity of 10 percent. What is the duration of the bond? a.) 4.677 years b.) 5.000 years c.) 4.674 years d.) 4.328 years e.) 4.223 years

e.) 4.223 years

If the spot interest rate on a prime-rated one-month CD is 6 percent today and the market rate on a two-month maturity prime-rated CD is 7 percent today, the implied forward rate on a one-month CD to be delivered one month from today is a.) 9 percent b.) 11 percent c.) 18 percent d.) 10 percent e.) 8 percent

e.) 8 percent

The following question are based on material in Appendix 8B. The yield curve a.) relates rates for different maturities of assets b.) for U.S. Treasury securities is the most commonly reported yield curve c.) may change shape over time d.) which is inverted does not last very long e.) all of these

e.) all of these

A bank that finances long-term fixed-rate mortgages with short-term deposits is exposed to a.) increases in net interest income and decreases in the market value of equity when interest rates fall b.) decreases in net interest income and decreases in the market value of equity when interest rates fall c.) decreases in net interest income and increases in the market value of equity when interest rates increase d.) increases in net interest income and increases in the market value of equity when interest rates increase e.) decreases in net interest income and decreases in the market value of equity when interest rates increase

e.) decreases in net interest income and decreases in the market value of equity when interest rates increase

Managers can achieve the results of duration matching by using these to hedge interest rate risk a.) rate sensitive assets b.) rate sensitive liabilities c.) coupon bonds d.) consol bonds e.) derivatives

e.) derivatives

Managers can achieve the results of duration matching by using these to hedge interest rate risk. a.) rate sensitive assets b.) rate sensitive liabilities c.) coupon bonds d.) consol bonds e.) derivatives

e.) derivatives

According to Altman's credit scoring model, which of the following Z scores would indicate a low default risk firm a.) less than 1 b.) 1 c.) between 1 and 1.81 d.) between 1.81 and 2.99 e.) greater than 2.99

e.) greater than 2.99

The numbers provided are in millions of dollars and reflect market values: The shortcomings of this strategy are the following except a.) duration changes as the time to maturity changes, making it difficult to maintain a continuous hedge b.) estimation of duration is difficult for some accounts such as demand deposits and passbook savings account c.) it ignores convexity which can be distorting for large changes in interest rates d.) it is difficult to compute market values for many assets and liabilities e.) it does not assume a flat term structure, so its estimation is imprecise

e.) it does not assume a flat structure, so its estimation is imprecise

Marginal default probability refers to the a.) probability that a borrower will default over a specified multiyear period b.) marginal increase in the default probability due to a change in credit premium c.) historic default rate experience of a bond or loan d.) expected maximum change in the loan rate due to a change in the credit premium e.) probability that a borrower will default in any given year

e.) probability that a borrower will default in any given year

Which of the following is NOT characteristic of the consumer loans at U.S. banks a.) non revolving consumer loans is the largest class of loans b.) credit card loans often have default rates between four and eight percent c.) usury ceilings affect the rate structure for consumer loans d.) consumer loans differ widely with respect to collateral, rates, maturity, and noninterest fees e.) revolving consumer loans include new and used automobile loans, mobile home loans, and fixed-term consumer loans

e.) revolving consumer loans include new and used automobile loans, mobile home loans, and fixed-term consume loans

From the perspective of an FI, which of the following is an advantage of a floating-rate loan a.) stable interest payments will be received throughout the loan period b.) the pre-specified interest rate remains to force over the loan contract period no matter what happens to market interest rates c.) the bank can request repayment of a loan at any time in the contract period d.) the default risk is completely eliminated e.) the interest rate risk is transferred to the borrower

e.) the interest rate risk is transferred to the borrower