QUESTION 1 When interest rate changes, the impact on a bank’s earnings depends on the repricing of their assets or liabilities. Loan A (7%, 1 year) = $100 Deposit A (2.5%, 3 months) = $250 Loan B (1

QUESTION 1 When interest rate changes, the impact on a bank’s earnings depends on the repricing of their assets or liabilities. Loan A (7%, 1 year) = $100 Deposit A (2.5%, 3 months) = $250 Loan B (10%, 2 years) = $200 Deposit B (5%, 1 year) = $ 50 Total Assets = $300 Total Liabilities = $300The net interest margin or spread 1%2%3%4%5%6%7%8%9%1 points QUESTION 2 The average maturity of its assets is larger than that of its deposits, as is typical of most banks. There is areinvestment riskre-finance risk re-pricing riskdefault risk 1 points QUESTION 3 The average duration of its assets is longer than that of its liabilities. There is a reinvestment risk re-finance risk re-pricing riskbasis point risk1 points QUESTION 4 If the loan interest rate adjusts every quarter and the deposit interest rate adjust every six months, the risk of interest rate from the different frequencies of rate adjustments is calledRepricing risk yield -curve riskbasis point riskdefault risk 1 points QUESTION 5 If the loan interest rate is 4 % mark-up on the 6 month treasury bill and the deposit interest rate is 1% mark-up on the 3 month treasury bill, the risk of interest rate like this is calledRepricing riskyield -curve risk basis point risk default risk 1 points QUESTION 6 Consider a bank that borrows $100 million in deposits at a floating rate of T-Bill plus 2% and lends at LIBOR plus 4%. Both rates are reset semi-annually. Normally, both rates move together. Assume the 3-month LIBOR rate was 3.40% and the 3-month T-Bill rate was 3.0% when the loan was disbursed. The spread is given as follows1.4%2.4%3.4%4.4%1 points QUESTION 7 Assume a bank has the following balance sheet. Determine the 2-year GAP.AssetAmount LiabilityAmountCash$100 90-day CDs$1006-month Gbonds$400 360-day CDs$200 2-yearcommercialloans$400 Time Deposits 2- year $900 5-year fixedrate loans$500 Stockholder’s equity$200 Total$1,400 Total$1,400 GAP = (RSA2 yr – RSL2 yr) 0-$100-$200-$300-$4001 points QUESTION 8 Assume a bank has the following balance sheet. When both the deposit rate and loan rate change by 2%, determine the 1-year net impact on net interest income (ΔNII)AssetAmount LiabilityAmountCash$100 90-day CDs$1006-month Gbonds$400 360-day CDs$200 2-yearcommercialloans$400 Time Deposits 2- year $900 5-year fixedrate loans$500 Stockholder’s equity$200 Total$1,400 Total$1,400 ΔNII = (RSA1-year– RSL1-year)* (.02)$2$3$4$5$61 points QUESTION 9 Assume a bank has the following balance sheetfor the 3-year GAP=$? (Hint: only rate sensitive assets and rate sensitive liabilities count)AssetPotential rate changeAmount LiabilityPotential Rate changeAmountReserves at the FedN/A$200 90-day CDs0.85%$200 6-month T-Bills2.00%$400 360-day CDs1.00%$300 3-year Consumer loans3.00%$600 Time Deposits 2- year 1.50%$1200 10-year mortgages2.00%$800 Stockholder’s equityN/A$200 Total $2000 Total $2000-300-400-500-600-7008001 points QUESTION 10 Assume a bank has the following balance sheetWhat is the net impact on net interest income (NII) for 3 YEARS.if interest rates are expected to change as specified in the Potential rate change, (compute the detailed ERA)AssetPotential rate changeAmount LiabilityPotential Rate changeAmountReserves at the FedN/A$200 90-day CDs0.85%$200 6-month T-Bills2.00%$400 360-day CDs1.00%$300 3-year Consumer loans3.00%$600 Time Deposits 2- year 1.50%$1200 10-year mortgages2.00%$800 Stockholder’s equityN/A$200 Total $2000 Total $2000$1.1$2.2$3.3$4.41 points QUESTION 11 The elasticity of the change of the price of debt toward the change in interest rate is the absolute value of (and then divided by(1 r))Convexityb. Maturity c. Duration d. Immunization 1 points QUESTION 12 ( ) is a measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates.ConvexityMaturityDuration Immunization1 points QUESTION 13 Assume a 4-year loan with a principal of $5,000 paying 7% interest. The current market yield on the loan is also 7%. What is the duration of the loan? 1.62 years2.62 years3.62 years4.62 years1 points QUESTION 14 14. Estimate the duration of Loan MBank Balance SheetCash = $ 50Loan M (7%, 6 years) = $200Deposit N (3 years, 2%) = $ 200Equity = $ 50Total Assets = $250Total Liabilities = $ 2503.1 years4.1 years5.1 years6.1 years1 points QUESTION 15 14. Estimate the duration of Deposit NBank Balance SheetCash = $ 50Loan M (7%, 6 years) = $200Deposit N (3 years, 2%) = $ 200Equity = $ 50Total Assets = $250Total Liabilities = $ 2501.942.943.944.941 points QUESTION 16 Δ%(MV) = -MD*Δr When we use this equation to evaluate a loan, this equation does not totally reflect the change in the present value of loans mainly because of the ignorance of which of the following factorsa.Convexity b. Maturity c. Duration d. Immunization 1 points QUESTION 17 16. In the following balance sheet, estimate the impact on the economic value of equity (EVE).if all interest rates decrease by 3%, EVE=$( )Loan A (7.5%, 5 year) = $500Deposit B (5%, 2 year) = $500 Total Assets = $500Total Liabilities = $50036.7338.540.2241.771 points QUESTION 18 In the following balance sheet, estimate the impact on the economic value of equity (EVE).If interest rates of assets fall by 1% and deposit rates increase by 1%. EVE=$( ) Loan A(8%, 3 year)= $150 Deposit A(5%, 2 years)=$250 Loan B(11%, 4 years)= $200 Deposit B(7%, 3 year)= $100Total Assets = $350 Total Liabilities = $35016.4417.4418.4419.441 points QUESTION 19 In the following balance sheet, Loan A(8%, 3 year)= $150 Deposit A(5%, 2 years)=$250Loan B(11%, 4 years)= $200 Deposit B(7%, 3 year)= $100Total Assets = $350 Total Liabilities = $350The GAP 3 yGAP three year0-200-400-3501 points QUESTION 20 19. In the following balance sheet, Loan A(8%, 3 year)= $150 Deposit A(5%, 2 years)=$250Loan B(11%, 4 years)= $200 Deposit B(7%, 3 year)= $100Total Assets = $350 Total Liabilities = $350The GAP 3 yr=-200 if all interest rates decrease by 3%, net impact on net interest income (ΔNII) is $6 $7 $8 $91 points QUESTION 21 20. When both deposit and loan interest rates decrease at the same speed in the market, a bank tends to( )to make money.(a. reinvestb. refinance c. keep neutral)1 points QUESTION 22 When both deposit and loan interest rates increase at the same speed in the market, a bank tends to ( ) to make profit. a. reinvest b. refinance c. keep neutral 1 points QUESTION 23 When borrowers tend to pay back the loans to bankers earlier, the bank is facinga. Repricing riskb. Yield curve risk c. Basis points riskd. Embedded options risk 1 points QUESTION 24 24. The GAP analysis and EAR analysisa. If GAP is positive and interest rate increases the same on both asset and liability sides, EAR increases.b. If GAP is negative and interest rate decreases the same on both asset and liability sides, EAR increases.c. If EARsfor year 1, year 2, year 3. ….up to year 30 are all positive, the bank should be profitable.d. If GAP for year 1, year 2, year 3. ….up to year 30 are all zero, the bank’s interest rate risk should be very low. all a,b,c,d are correct.1 points QUESTION 25 25. The Federal Reserve has tools at its disposal to implement monetary policy, which does NOT includea. Reserve requirementsb.Regulate investment banksc. Open market operationsd. Discount rate1 points QUESTION 26 26. ( ) is responsible for conducting monetary policy by influencing money supply and interest rates.a. A Commercial Bankb. A credit unionc. A Central Bankd. An investment bank1 points QUESTION 27 The use of paper moneya. people trust paper money more than metal coins.b.Improves the Durability of the currencyc.Improve the transportability of the currencye.remedies the problem of Gresham’s Lawd. Improve the scarcity of the currency 1 points QUESTION 28 When the Federal Reserve buys T-Bonds in the US market.a.Money supply increasesb. Money supply decreasesc. Irrelevant to Money Supply 1 points QUESTION 29 29. When the Federal Reserve increase the discount rate of the Fed Fund in the US market.a. Money supply increasesb. Money supply decreasesc. Irrelevant to Money Supply1 points QUESTION 30 30. By raising the reserve requirement, the central banka. Money supply increasesb. Money supply decreasesc. Irrelevant to Money Supply1 points QUESTION 31 Negative Interest ratea. This action was meant to complement the quantitative easingb. encourages banks to lend more instead of keeping them as excess reserves.c. Customers will consume more and deposit less. all are correct.1 points QUESTION 32 about SOFR and LIBORaSOFR represents the interest rate of the unsecured fundsLIBOR is a good proxy of the risk-free rateSOFRs include triparty repo data from the Bank of New York Mellon (BNYM) and the Depository Trust & Clearing Corporation (DTCC).LIBOR now in 2020 is still the most influential interest rate in the international market.1 points QUESTION 33 Deposit Insurancea.depositor indifference generates a moral hazard problem that encourages banks to engage in risky activitiesb. exists only in the USA, not in the other countries.c. It is a privately owned insurance company.d. successfully helped US to overcome the problems in 1980’s S&L crisis and 2008 Financial Crisis.1 points QUESTION 34 What are CAMELS? They are ratings assessed by bank regulators after on-site examinations.Which one is wronga. C =Capital adequacyb. A =Assurance of Assessmentc. M =Managementd. E =Earningse. L =Liquidity1 points QUESTION 35 About Insurance, which one is wrong?a. insurance firms purchase re-insurance to reduce/alleviate/diversify the risk.b. Deposit insurance is used in commercial banking businesses.c. Underwriting and reinsurance risks are the major risks for insurance companies.d. Categorized as Life insurance and non-life (property/casualty, including medical) insurance.e. The US became a dominant insurer from modest roots planted in the 16th century.