Interest rate risk: varies inversely with a bank's GAP. can be measured by the volatility of a bank's net interest income given changes in the level...

1.Interest rate risk: 

a. varies inversely with a bank's GAP. 

b. can be measured by the volatility of a bank's net interest income given changes in 

the level of interest rates. 

c. can be eliminated by matching fixed rate assets with variable rate liabilities. 

d. rarely has an impact on bank earnings. 

e. All of the above 

2. Short-term working capital loans are generally repaid with funds from: 

a. investing cash flows. 

b. issuing new debt. 

c. reductions in inventory and receivables. 

d. issuing new equity 

e. redeeming marketable securities. 

3. Duration gap analysis: 

a. applies the concept of duration to the bank's entire balance sheet. 

b. applies the concept of duration to the bank's entire income statement. 

c. applies the concept of duration to the bank's retained earnings. 

d. indicates the difference in the GAP in the time it takes to collect on loan 

payments versus the time to attract deposits. 

e. estimates when embedded options will be exercised. 

4. A bank's cumulative GAP: 

a. is defined as the dollar amount of rate-sensitive assets divided by the dollar 

amount of rate-sensitive liabilities. 

b. is defined as the dollar amount of earning assets divided by the dollar amount of 

total liabilities. 

c. compares rate-sensitive assets with rate-sensitive liabilities across all time 

buckets. 

d. compares rate-sensitive assets with rate-sensitive liabilities across a single time 

bucket. 

e. compares the dollar amount of earning assets times the average liability interest 

rate

5.Which of the following is true regarding duration gap analysis? 

a. The magnitude of the duration gap is related to the amount of interest rate risk a 

bank is subject to. 

b. Management can adjust the duration gap to speculate on future interest rate 

changes. 

c. A positive duration gap means a bank's market value of equity will decrease with 

an increase in interest rates. 

d. All of the above are true. 

e. a and c. 

6. In the credit process, which of the following activities falls under Business Development 

and Credit Analysis? 

a. Loan committee reviews 

b. Loan documentation review 

c. Officer call programs 

d. Perfect security interest 

e. Process loan payments 

7. Which of the following indicates the potential for deposits leaving a bank? 

a. High business activity and growth 

b. Deposits that are inelastic to changes in interest rates 

c. An aggressive bank loan officer 

d. Large deposits held by a single customer 

e. Small unused commercial credit lines outstanding 

8. Which of the following is not a reason that banks hold cash assets? 

a. To meet customer's needs for currency. 

b. To meet capital requirements. 

c. To meet required reserves. 

d. To compensate for correspondent bank services. 

e. To assist in the check clearing process.