The compensation of bank loan officers may be tied to loan volume, which encourages a loan department to extend loans with a very high concern for risk. (T/F)
False
When cash outflows temporarily exceed cash inflows, banks are most likely to experience:
illiquidity
Banks can resolve cash deficiencies by:
creating additional liabilities or selling assets.
As the secondary market for loans has become active, banks are more able to satisfy their liquidity needs with a _______ proportion of loans while achieving _______ profitability.
higher; higher
If a bank that relies heavily on short-term deposits expects interest rates to consistently decrease over time, it would allocate most of its loans with _______ rates if it desires to maximize its expected returns. It could reduce its exposure to inter�es
fixed; variable
During a period of rising interest rates, a bank's net interest margin will likely _______ if its liabilities are _______ its assets.
decrease; more rate sensitive than
If a bank expected interest rates to consistently _______ over time, it will consider allocating most funds to rate-_______ assets.
decrease; insensitive
Petri Bank had interest revenues of $70 million last year and $30 million in interest expenses. About $300 million of Petri's $800 million in assets are rate-sensitive, while $600 million of its liabilities are rate-sensitive.
Find Interest Margin.
Find t
5.0; -300; 50.0
The measure of interest rate risk that uses the differ�ence between rate sensitive assets and rate sensitive liabil�ities is called:
Gap measurement
A gap ratio of less than one suggests that:
rate sensitive liabilities exceed rate sensitive assets.
The duration of zero-coupon bonds will be _______ the duration of coupon bonds with the same maturity.
higher than
In general, the duration of zero-coupon securities with short maturities is _______ than the duration of zero-coupon securities with long maturities.
lower than
Other things equal, assets with shorter maturities have _______ durations. Assets that generate more frequent coupon payments have _______ durations.
shorter; shorter
For most banks, the average duration of assets _______ the average duration of liabilities, so the duration gap is _______.
exceeds; positive
Other things being equal, assets with _______ maturities and _______ frequent coupon payments have shorter durations.
shorter; more
Likely methods used by a bank to reduce interest rate risk?
using interest rate caps
maturity matching
using fixed-rate loans
Which of the following financial institutions would be most willing to swap variable rate payments for fixed rate payments in order to reduce exposure to interest rate risk?
one whose assets are more interest rate sensitive than its liabilities
A typical bank will attempt to earn a _______ return and maintain credit risk at a _______ level.
reasonable; tolerable
Banks generally _______ loans and _______ their purchases of low-risk securities when the economy is weak.
reduce; increase
ROE is defined as:
(Net profit after taxes/ Assets) x (Assets/ Equity)
The greater the _______, the greater the amount of assets per dollar's worth of equity.
leverage measure
A bank has a return on assets of 2 percent, $40 million in assets, and $4 million in equity. What is the return on equity?
none of these
Which of the following is a measure for banks to assess their exposure to interest rate risk?
Duration measurement
If a bank sells CD futures, it _______ the potential adverse effect of rising interest rates and _______ the potential favorable effect of declining interest rates on its inter�est expenses.
reduces; reduces
Which of the following loan portfolios are best diversified against default risk?
consumer and commercial loans to different industries in different cities
Banks can increase their liquidity position by restructur�ing their asset portfolio to contain less _______ and more _______.
loans; Treasury Bills
Banks can reduce their liquidity position by restructuring their asset portfolio to contain less _______ and more _______.
none of these
Banks can reduce their default risk by restructuring their asset portfolio to contain less _______ and more _______.
none of these
Banks can increase their potential interest revenues by restructuring their asset portfolio to contain less _______ and more _______.
Treasury Bonds, commercial loans
If a bank desired to maximize its net interest margin, it would best achieve its goal by attempting to obtain most of its funds through _______ and use most of its funds for _______ (assuming that all loans will be repaid).
traditional demand deposits; consumer loans
A bank that holds a greater percentage of traditional demand deposits and loans will likely incur _______ non� interest expenses and have a _______ net interest margin than other banks of the same size (assuming that its loan losses are no higher than tho
greater; higher
A bank's net interest margin is commonly defined as:
(interest revenues minus interest expenses)/total assets.
A common method for banks to reduce their default risk is to:
do neither of these.
International diversification of loans can best reduce the bank's overall default risk if the countries where loans are given:
have economic cycles that do not move together over time.
A bank's net interest margin will likely decline if it has a large amount of:
rate-sensitive assets and no rate-sensitive liabilities.
Banks can reduce their required capital levels by:
reducing their loans
Research on bank mergers has generally found that the acquiring bank's stock price _______ at the time of the acquisition.
declines or remains unchanged
Bank A has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million. Bank A's net interest margin is:
-5 %
_______ analysis is not a method used to assess interest rate risk.
Efficiency
Durango Bank has $2 million in rate-sensitive liabilities and $3 million in rate-sensitive assets.
What is the gap?
Gap ratio?
gap ratio = 1.5
_______ is (are) least likely to be used as a method of reducing interest rate risk.
Stock options
Ringo Bank has a profit after taxes of $1.5 million, total assets of $50 million, and shareholder's equity of $30 million. Ringo's return on equity (ROE) is _______ percent.
5.0
Assume a bank accepts deposits on Australian dollars (A$) and makes some fixed rate loans in British pounds. Which of the following would reduce the bank's profit margin?
the A$ appreciates against the pound
The performance of a bank that continually concentrates in short term deposits in euros and adjustable rate dollar loans with equal rate sensitivity is:
adversely affected if European interest rates in�crease and U.S. rates decrease.
If a bank has assets and liabilities in dollars and euros, its exposure to interest rate risk can best be minimized if:
the rate sensitivity of assets and liabilities is matched for each currency.
The risk of a loss due to closing out a transaction is referred to as _______ risk.
settlement
Banks are more liquid as a result of securitization because it allows them to request repayment of the loan principal from the borrower upon demand. (T/F)
False
Each bank may have its own classification system of interest-rate sensitivity, because there is no perfect measurement of the gap. (T/F)
True
Floating-rate loans cannot completely eliminate interest rate risk; if the cost of funds is changing more frequently than the rate on assets, the bank's net interest margin is still affected by interest rate fluctuations. (T/F)
True
Banks tend to focus their loans in one industry so that they can specialize on one industry and reduce the credit risk of their loan portfolio. (T/F)
False
Most loan sales enable the bank originating the loan to continue servicing the loan. (T/F)
True