Chapter 19: Assignment

is not a method used to assess interest rate risk. a. Ratio analysis b. Regression analysis c. Gap analysis d. Duration analysis e. All of these choices are methods to assess interest rate risk.

a. Ratio analysis

Banks could ensure sufficient liquidity by using most of their funds to purchase Treasury securities. a. True b. False

a. True

Some loans to high-quality customers are commonly offered at rates below the prime rate. a. True b. False

a. True

Sometimes, managers are tempted to make decisions that are in their own best interest rather than shareholder interests. a. True b. False

a. True

If a bank expects interest rates to consistently ________ over time, it will consider allocating most of its funds to rate-________ assets. a. increase; sensitive b. Answers [decrease; sensitive] and [increase; insensitive] are correct. c. decrease; sensitive d. increase; insensitive e. None of these choices are correct.

a. increase; sensitive

In a regression of a bank's stock return on an interest rate proxy and market returns, a ________ coefficient for the interest rate variable suggests that bank performance is ________ affected by ________ interest rates. a. negative; adversely; rising b. positive; favorably; declining c. negative; favorably; rising d. positive; adversely; rising e. None of these choices are correct.

a. negative; adversely; rising

A ________ gap (or gap ratio ________ than 1.00) suggests that rate-sensitive liabilities ________ rate-sensitive assets. a. negative; less than; exceed b. positive; less than; exceed c. negative; less than; are less than d. negative; greater than; exceed e. None of these choices are correct.

a. negative; less than; exceed

If interest rates ________, banks with ________ duration gaps will be ________ affected. a. rise; positive; adversely b. decrease; positive; adversely c. rise; positive; positively d. decrease; negative; positively e. None of these choices are correct.

a. rise; positive; adversely

Durango Bank has $2 million in rate-sensitive liabilities and $3 million in rate-sensitive assets. Durango's gap is ________, and Durango is probably more concerned about a(n) ________ in interest rates. a. $1 million; increase b. $1 million; decrease c. -$1 million; increase d. -$1 million; decrease e. None of these choices are correct.

b. $1 million; decrease

Durango Bank has $2 million in rate-sensitive liabilities and $3 million in rate-sensitive assets. Durango's gap ratio is a. 0.67. b. 1.50. c. $1 million. d. None of these choices are correct.

b. 1.50.

A bank can usually simultaneously maximize its return on assets and minimize credit risk. a. True b. False

b. False

A positive gap (or gap ratio of more than 1.00) suggests that rate-sensitive liabilities exceed rate-sensitive assets. a. True b. False

b. False

Floating-rate loans completely eliminate interest rate risk. a. True b. False

b. False

The Sarbanes-Oxley Act has had little impact on the monitoring conducted by the board members of commercial banks. a. True b. False

b. False

The boards of directors of banks tend to have fewer directors and a smaller percentage of outside directors than boards of other types of firms. a. True b. False

b. False

The international debt crisis has demonstrated that diversifying loans among foreign countries guarantees low risk and that loans to foreign governments are risk-free. a. True b. False

b. False

Whether a bank has a temporary or a permanent need for funds, the decision should be to borrow in the federal funds market. a. True b. False

b. False

________ is (are) least likely to be used as a method of reducing interest rate risk. a. Maturity matching b. Stock options c. Interest rate swaps d. Interest rate caps e. Floating-rate loans

b. Stock options

If a bank has a ________ duration gap, its average asset duration is probably ________ than its liability duration. a. negative; larger b. negative; smaller c. positive; larger d. None of these choices are correct.

c. positive; larger

Prussian Bank has assets with an average duration of 2.78 years and liabilities with an average duration of 3.00 years. The market value of Prussian's assets is $100 million, and the market value of Prussian's liabilities is $150 million. Prussian's duration gap is a. 1.72. b. 1.17. c. 0.78. d. -1.72. e. None of these choices are correct.

d. -1.72.

Which of the following statements is not true regarding agency problems between a bank's managers and its shareholders? a. To prevent agency problems, some banks provide stock as compensation to managers. b. Decisions that result in growth may be intended to increase employee salaries. c. The compensation to a bank's loan officers may be tied to loan volume, which encourages the loan department to provide loans without concern about risk. d. Managers are rarely tempted to make decisions that are in their own best interests rather than shareholder interests. e. All of these choices are true with respect to agency problems.

d. Managers are rarely tempted to make decisions that are in their own best interests rather than shareholder interests.

During a period of ________ interest rates, a bank's net interest margin will likely ________ if its liabilities are more rate sensitive than its assets. a. increasing; decrease b. decreasing; increase c. increasing; increase d. answers [decreasing; increase] and [increasing; decrease] are correct e. decreasing; decrease

d. answers [decreasing; increase] and [increasing; decrease] are correct

If a bank obtains a relatively large portion of its funds from conventional demand deposits, interest expenses should be relatively ________, while its noninterest expenses should be relatively ________. a. high; high b. low; low c. high; low d. low; high e. None of these choices are correct.

d. low; high

The risk of a loss due to closing out a transaction is referred to as ________ risk. a. exchange rate b. interest rate c. credit d. settlement e. None of these choices are correct.

d. settlement

Which of the following is not an advantage of a bank acquisition? a. Bank acquisitions can remove redundant operations. b. An acquiring bank may have some managerial advantages over a target, which should allow the acquirer to improve the target's performance after the acquisition. c. Some banks may be able to achieve economies of scale by acquiring other banks. d. Bank acquisitions can achieve diversification benefits as the acquirer can offer loans in some new industries. e. All of these choices are advantages of bank acquisitions.

e. All of these choices are advantages of bank acquisitions.