Bank Management

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Question 1

Free

Multiple Choice

Which of the following statements is incorrect?

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

Directors are responsible for making most of the bank's decisions regarding loans to customers, which encourages a loan department to extend loans with a very high concern for risk.

To prevent agency problems, some banks provide stock as compensation to managers.

The underlying goal behind the managerial policies of a bank is to maximize the wealth of the bank's shareholders

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Question 2

Free

Multiple Choice

Banks can resolve cash deficiencies by

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creating additional liabilities

selling assets

buying back common stock

increasing dividend payouts

A or B

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Question 3

Free

Multiple Choice

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.

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higher; higher

lower; lower

higher; lower

lower; higher

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Question 4

Free

True/False

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.

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True

False

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Question 5

Free

Multiple Choice

During a period of rising interest rates, a bank's net interest margin will likely if its liabilities are its assets.

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increase; more rate sensitive than

decrease; more rate sensitive than

increase; equally rate sensitive as

decrease; equally rate sensitive as

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Question 6

Multiple Choice

If a bank expects interest rates to consistently over time, it will consider allocating most funds to rate- assets.

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decrease; sensitive

decrease; insensitive

increase; insensitive

none of the above

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Question 7

Multiple Choice

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 itsliabilities are rate sensitive. Petri Bank's net interest margin is ____ percent.

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3.6

6.7

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Question 8

Multiple Choice

The measure of interest rate risk that uses the difference between rate-sensitive assets and rate-sensitive liabilities is called

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gap measurement.

duration measurement.

duration ratio.

gap ratio.

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Question 9

Multiple Choice

A gap ratio of less than one suggests that

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rate-sensitive assets exceed rate-sensitive liabilities.

an increase in interest rates would increase the bank's net interest margin.

rate-sensitive liabilities exceed rate-sensitive assets.

a decrease in interest rates would decrease the bank's net interest margin.

B and D

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Question 10

True/False

Each bank may have its own classification system of interest rate sensitivity, because there is no perfect measurement of the gap.

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True

False

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Question 11

Multiple Choice

The duration of zero-coupon bonds will be ____ the duration of coupon bonds with the same maturity.

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lower than

higher than

the same as

A or B, depending on the size of the coupon payment

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Question 12

Multiple Choice

Other things being equal, assets with shorter maturities have durations. Assets that generate more frequent coupon payments have durations.

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shorter; longer

shorter; shorter

longer; shorter

longer; longer

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Question 13

Multiple Choice

For most banks, the average duration of assets the average duration of liabilities, so the duration gap is .

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exceeds; zero

exceeds; negative

exceeds; positive

is less than; negative

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Question 14

Multiple Choice

Other things being equal, assets with maturities and frequent coupon payments have longer durations.

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shorter; more

shorter; less

longer; more

longer; less

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Question 15

Multiple Choice

If a bank attempts to reduce exposure to interest rate risk by replacing long-term marketable securities with more floating-rate commercial loans, it is likely that the bank's

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credit risk would decrease.

credit risk would increase.

liquidity risk would increase.

liquidity risk would decrease.

B and C

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Question 16

Multiple Choice

Which of the following is not a likely method used by a bank to reduce interest rate risk?

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maturity matching

using fixed-rate loans

using interest rate futures contracts

using interest rate caps

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Question 17

True/False

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 affectedbyinterest rate fluctuations.

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True

False

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Question 18

Multiple Choice

The of interest rate futures the potential adverse effect of rising interest rates on a bank's interest expenses.

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sale; increases

sale; reduces

purchase; reduces

both A and C are correct

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Question 19

Multiple Choice

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?

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one whose assets and liabilities are equally interest-rate sensitive

one whose assets are more interest-rate sensitive than its liabilities

one whose liabilities are more interest-rate sensitive than its assets

one whose gap ratio is equal to 1.0

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Question 20

True/False

Banks increase their risk by increasing their capital as a percentage of assets

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True

False

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Bank Management

Which of the following statements is incorrect?

Banks can resolve cash deficiencies by

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.

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.

During a period of rising interest rates, a bank's net interest margin will likely ____ if its liabilities are ____ its assets.

If a bank expects interest rates to consistently ____ over time, it will consider allocating most funds to rate- ____ assets.

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 itsliabilities are rate sensitive. Petri Bank's net interest margin is ____ percent.

The measure of interest rate risk that uses the difference between rate-sensitive assets and rate-sensitive liabilities is called

A gap ratio of less than one suggests that

Each bank may have its own classification system of interest rate sensitivity, because there is no perfect measurement of the gap.

The duration of zero-coupon bonds will be ____ the duration of coupon bonds with the same maturity.

Other things being equal, assets with shorter maturities have ____ durations. Assets that generate more frequent coupon payments have ____ durations.

For most banks, the average duration of assets ____ the average duration of liabilities, so the duration gap is ____ .

Other things being equal, assets with ____ maturities and ____ frequent coupon payments have longer durations.

If a bank attempts to reduce exposure to interest rate risk by replacing long-term marketable securities with more floating-rate commercial loans, it is likely that the bank's

Which of the following is not a likely method used by a bank to reduce interest rate risk?

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 affectedbyinterest rate fluctuations.

The ____ of interest rate futures ____ the potential adverse effect of rising interest rates on a bank's interest expenses.

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?

Banks increase their risk by increasing their capital as a percentage of 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.

During a period of rising interest rates, a bank's net interest margin will likely if its liabilities are its assets.

If a bank expects interest rates to consistently over time, it will consider allocating most funds to rate- assets.

Other things being equal, assets with shorter maturities have durations. Assets that generate more frequent coupon payments have durations.

For most banks, the average duration of assets the average duration of liabilities, so the duration gap is .

Other things being equal, assets with maturities and frequent coupon payments have longer durations.

The of interest rate futures the potential adverse effect of rising interest rates on a bank's interest expenses.