Chapter 21:

Your Results:
The correct answer for each question is indicated by a .

When a bank encounters a surge of deposit customers, withdrawing their funds

1 INCORRECT
unexpectedly, we say the bank is experiencing a/an:
A)funding
gap
B)bank
surrender
C)bank
run
D)excess liquidity position
E)fire sale

The _______________ of a bank are those that exhibit a higher degree of stability
2 INCORRECT
from day to day.
A)discount window borrowing
B)federal funds purchases
C)repurchase
agreements
D)core deposits
E)large, negotiable CDs

This week, Bank-A experienced an unexpectedly high amount fund requests from
3 CORRECT
customers holding loan commitments. Bank-A is experiencing the results of:
A)asset side liquidity risk
B)credit risk
C)net deposit drain
D)liability side liquidity risk
E)c and d

When a bank handles a deposit "drain" by raising funds in the fed funds market, or by
4 INCORRECT
means of "repos," we say the bank is using:
A)long-term funding
sources
B)core deposits
C)purchased liquidity
D)liquidation of assets
E)brokered deposits

If a bank is forced to raise liquidity by selling off loans on short notice, the price it can
5 CORRECT
receive on a loan sale would be termed:
A)a fire-sale price
B)the maximum liquidity price
C)the deposit drain price
 D)the face value
E)the book value

6 INCORRECT The text addresses a "liquidity index." Which of the following is/are true?
A)This index will be higher if the bank is holding more liquid assets.
B)This index will be lower if the bank is holding less liquid assets.
C)This index will be lower if relatively "quick" asset sales require lower
prices.
D)(a) and
(c)
E)(b) and (c)

7 INCORRECT The stated, per-account limit on deposit insurance, provided by the FDIC, is:
A)$2,500
B)$5,000
C)$10,000
D)$100,000
E)$250,000

8 INCORRECT In 1991, passage of FDICIA:

A)increased the discretionary power of the Federal Reserve to make "discount
window" loans.
B)limited the Federal Reserve's ability to make loans to troubled institutions.
C)lowered the maximum per-account loss coverage of FDIC insurance.
D)forced all U.S. commercial banks to be chartered by the Comptroller of the
Currency.
E)closed the Federal Reserve's "discount window."

9 INCORRECT For the life and property-casualty insurance businesses, there:

A)is a federally-sponsored insurance program, very much analogous to the
FDIC
B)is little possibility of a "run" by insurance customers, because of federally-
sponsored insurance.
C)has never been a failure by companies to meet customer claims.
D)is no permanent guarantee fund for the industry
E)(a) and
(b)

The difference between a bank's average loans and its average core deposits is called
10 CORRECT
the:
A)financing gap
B)liquidity index
C)core deposit surplus
D)stored liquidity
E)purchased liquidity
11 INCORRECT The problems at Continental Illinois Bank, in 1984, were related to the bank's:
A)very limited use of borrowed funds.
B)extensive investments in low-return, low-risk assets.
C)very small base of core deposits.
D)relatively large amount of bank capital.
E)extensive branching network in the state of Illinois.

If a bank prepares for its liquidity needs by holding more cash and/or marketable
12 INCORRECT
securities, it is using a/an ___________________ approach.
A)purchased liquidity
B)"hot
money"
C)liquidity index
D)stored liquidity
E)(a) and
(b)

Subtracting a bank's average core deposits from its average loans will give a
13 INCORRECT
measurement known as the:
A)core funding
B)funding index
C)purchased funds index
D)ladder of
funds
E)financing gap

When bank customers lose faith in the banking system we may witness contagious
14 INCORRECT
bank runs; this is typically termed a:
A)funding
gap
B)financing gap
C)bank insolvency
D)bank panic
E)fiscal disturbance

15 CORRECT After the terrorist attacks of September 11, 2001, the Federal Reserve responded by:
A)making funds available through its discount window.
B)closing for two consecutive days.
C)announcing a temporary suspension of all monetary policy actions.
D)allowing only FDIC-insured banks to receive discount window loans.
E)taking over the private sector banking operations of three major New York
banks.
 In 2003, the Federal Reserve changed its discount window lending procedures. There
16 INCORRECT are now three credit programs offered through the discount window: primary,
secondary, and _______________.
A)insured-bank
B)disaster relief
C)seasonal
D)non-depository
E)international

Chapter 22:

Your Results:
The correct answer for each question is indicated by a .

1 INCORRECT The "repricing gap" for a bank refers to:

A)ROA minus ROE.
B)rate-sensitive assets minus rate-sensitive liabilities.
C)total assets minus total liabilities.
D)net interest income minus overhead expenses
E)total assets minus total stockholders' equity.

A "rate sensitive asset"-based on a one-year time horizon-represents a dollar amount

2 CORRECT
of assets that ________________________ within one year.
A)can have a change in its interest rate, based on current market conditions
B)will disappear from the balance sheet
C)can be removed from the bank's balance sheet, due to customer behavior
D)will turn into a bank liability
E)will generate an increase in the bank's stockholders' equity

3 INCORRECT In the basic "repricing gap" model, an increase in market interest rates would:
A)lower the book value of stockholders' equity, of a bank with a negative
CGAP.
B)lower the net interest income, of a bank with a negative CGAP.
C)increase the net interest income, of a bank with a positive CGAP.
D)increase the market value of bank assets.
E)(a) and
(b)

Which of the following would not be classified in the "one-year, rate sensitive asset"
4 INCORRECT
category?
A)Treasury bills with six-month maturity.
B)3-year maturity business loans, with "floating" interest rates.
C)Consumer loans with less than one year to maturity.
 D)3-year maturity business loans, with fixed interest rates.
E)(a), (b), and (c)

5 INCORRECT The "leverage adjusted duration gap" is:

A)used to measure the sensitivity of net interest income to interest rate
changes.
B)equal to the rate sensitive assets minus the rate sensitive liabilities.
C)used to measure the sensitivity of equity value to interest rate changes.
D)equal to total assets minus total liabilities
E)(a) and
(b)

6 CORRECT A bank that is trying to "immunize" is trying to:

A)minimize its exposure to interest rate risk.
B)increase its net interest income, as interest rates change.
C)increase its equity value, as interest rates change.
D)accept more credit risk, to increase
returns.
E)(b) and (c)

7 INCORRECT The use of "duration" in interest rate risk management focuses on:
A)changes in net interest income.
B)the times to "repricing" for bank assets and liabilities.
C)changes in market values of bank assets and liabilities.
D)changes in book value of stockholders' equity.
E)(a) and
(b)

8 INCORRECT Values that are based on historical costs are called:

A)market values.
B)"mark to market" values.
C)regulatory values.
D)book values.
E)(a) and
(b)

Imaginary State Bank holds just two assets: (1) a loan with market value of
9 CORRECT $500,000, having duration of 2 years, and (2) a loan with market value of $250,000,
having duration of 4 years. Find the duration of this bank's asset portfolio.
A)2.67
B)3.00
C)1.00
D)6.00
 E)2.00

Refer to the following, for Basic Bank:

One-year, rate sensitive assets $80 million
One-year, rate sensitive liabilities 100 million
10 INCORRECT
Total assets 160 million
Total liabilities 145 million
What is Basic Bank's "one-year repricing gap"?
A)$80 million
B)$20 million
C)$15 million
D)-$15 million
E)-$20 million

Refer to the following, for Basic Bank:

One-year, rate sensitive assets $80 million
One-year, rate sensitive liabilities 100 million
11 INCORRECT Total assets 160 million
Total liabilities 145 million
Suppose market interest rates were to fall by one percentage point. What is the
expected change in Basic Bank's annual net interest income?
A)Increase of $150,000
B)Increase of $200,000
C)Decrease of $800,000
D)Decrease of $150,000
E)Decrease of $200,000

Which of the following bank balance sheet items would be categorized within the
12 INCORRECT
"one-year, rate sensitive liabilities"?
A)18-month certificates of deposit
B)6-month consumer
loans
C)3-month certificates of deposit
D)stockholders' equity
E)(a) and
(c)

13 INCORRECT The one-year "cumulative gap" (or CGAP) can be obtained by:
A)adding up all assets and then subtracting all liabilities.
B)adding up all assets having maturity of more than one year.
C)multiplying the expected interest rate change by the "gap" for one year.
D)adding up all the "gaps" for periods out to one year.
E)adding up the market values of all assets and then subtracting the market
values of all liabilities.

When a bank's spread ____________, its net interest income is expected to

14 CORRECT
_____________.
 A)increases; increase
B)increases;
decrease
C)decreases;
increase
D)is constant; increase
E)(b) and (c)

Refer to the following interest rate and balance sheet information for Quest National
Bank:
Starting interest rate (assets and liabilities): 5%
Market Value (million) Duration
15 INCORRECT
Total Assets $40 6.0
TotalLiabilities 37 2.0
If interest rates fall by 1 percentage point, what is the resulting percentage change in
asset value for Quest National Bank?
A)6.0%
B)- 6.0%
C)- 1.9%
D)5.7%
E)- 5.7%

Refer to the following interest rate and balance sheet information for Quest National
Bank:
Starting interest rate (assets and liabilities): 5%
Market Value (million) Duration
16 INCORRECT
Total Assets $40 6.0
TotalLiabilities 37 2.0
What is the "leverage adjusted duration gap" for Quest National Bank?
A)3.81
B)4.15
C)3.00
D)3.15
E)12.0

Refer to the following interest rate and balance sheet information for Quest National
Bank:
Starting interest rate (assets and liabilities): 5%
Market Value (million) Duration
17 INCORRECT
Total Assets $40 6.0
TotalLiabilities 37 2.0
If interest rates fall by 1 percentage point, what is the resulting market value change
in the bank's equity?
A)-$1.66 million
B)$1.66 million
 C)-$1.58 million
D)$1.58 million
E)-$1.52 million

Chapter 23:

Your Results:
The correct answer for each question is indicated by a .

1 INCORRECT A _________________ is marked to market daily.

A)fixed rate loan
B)futures contract
C)spot contract
D)forward contract
E)naive hedge

With a/an _________________, the owner has the right, but not the obligation, to
2 INCORRECT
buy some specified asset at a specified price.
A)forward contract
B)futures contract
C)put option
D)call option
E)hedge

3 CORRECT The seller of a put option would also be called the:

A)writer
B)futures buyer
C)"long" party
D)caller
E)option owner

Bank-24 owns bonds, but wants to hedge its position. Which of the following would
4 INCORRECT
make the most sense?
A)Buy call options on bonds
B)Buy futures contracts on bonds
C)Buy put options on
bonds
D)Sell put options on bonds

In an interest rate swap, the __________________ agrees to make fixed rate

5 INCORRECT
payments, and to receive floating rate payments.
A)Call owner
 B)Put
owner
C)Swap seller
D)Swap buyer
E)Swap dealer

Bert is selling options, anticipating profitable price movements. His option sales are
6 INCORRECT
not motivated by a desire to reduce risk. Bert is taking ____________ positions.
A)long
B)naked
C)future
s
D)forward
E)spot

Standard State Bank owns bonds, and sold bond futures contracts on bonds for
7 CORRECT hedging purposes. But Standard State's bond values are less than perfectly correlated
with the values of bonds specified in the futures contracts. This gives rise to:
A)basis risk
B)counterparty risk
C)swap risk
D)default risk
E)systematic risk

Last month, Mary purchased a bond futures contract; the futures price is 104
8 INCORRECT (percent of face value). Now, contracts with the same delivery date are showing a
futures price of 101. Which of the following is/are true?
A)Mary's contract is null and void.
B)Mary promised to "sell" bonds, when she entered into the contract.
C)Mary has experienced a loss on her contract.
D)Mary is required to place a "reversing" trade at this point.
E)(c) and (d)

Savvy Savings Bank has a loan portfolio comprised of fixed-rate mortgage loans. Its
9 INCORRECT liabilities are short-term deposits. If Savvy wants to hedge against interest rate risk,
which of the following makes the most sense?
A)buy a futures contract on bonds.
B)sell a futures contract on stocks.
C)buy an interest rate swap.
D)sell an interest rate swap.
E)Buy a currency swap.

10 CORRECT If you "write" call options on bonds, then you

A)gain if bond prices fall
 B)lose if bond prices fall
C)gain if bond prices rise
D)will neither gain nor lose, no matter what happens to bond
prices
E)(b) and (c)

A/an _________________contract is an agreement for the immediate exchange of

11 INCORRECT
funds for assets.
A)future
s
B)forward
C)call option
D)spot
E)put option

12 CORRECT A futures contract is most similar to which of the following?

A)forward contract
B)spot contract
C)call option
D)put option
E)basis contract

If an institution is protected against an adverse movement of interest rates, we would

13 INCORRECT
say that it:
A)has maximized profit
B)has maximized the value of its stockholders
C)has speculated optimally
D)is optimized
E)is immunized

American Bank takes a "short position" in Eurodollar futures, with a delivery date in
14 CORRECT
three months. One week later, the Eurodollar futures price has risen. Then:
A)American has lost on its futures contract.
B)American is required to buy Eurodollars.
C)American has gained on its futures contract.
D)The delivery date will be adjusted; delivery must occur immediately.
E)The Eurodollar futures price will have to fall.

15 INCORRECT Buying a "floor":

A)would not be part of a risk-reducing strategy
B)is similar to buying a futures contract on interest rates
C)is similar to buying a call option on interest rates
 D)is similar to relying solely on "spot" market activities
E)is similar to buying a put option on interest rates

16 INCORRECT In contrast to standardized options, "over the counter" options:

A)cannot be used for reducing
risk
B)cannot be used for speculative purposes
C)have an element of default risk
D)are of no interest to financial institutions
E)no longer exist