BANKING FINAL EXAM
Chapter 7
Managing Interest Rate Risk: GAP and Earnings Sensitivity
Multiple Choice
1. When is interest rate risk for a bank greatest?
a. When interest rates are volatile.
b. When interest rates are stable.
c. When inflation is high.
d. When inflation is low.
e. When loan defaults are high. - correct answer a
2. 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 - correct answer b
3. A bank's GAP is defined as:
a. the dollar amount of rate-sensitive assets divided by the dollar amount of rate-
sensitive liabilities.
b. the dollar amount of earning assets divided by the dollar amount of total
liabilities.
,BANKING FINAL EXAM
c. the dollar amount of rate-sensitive assets minus the dollar amount of rate-
sensitive liabilities.
d. the dollar amount of rate-sensitive liabilities minus the dollar amount of rate-
sensitive assets.
e. the dollar amount of earning assets times the average liability interest rate. -
correct answer c
4. Keeping all other factors constant, banks can reduce the volatility of net
interest income by:
a. adjusting the dollar amount of rate-sensitive assets.
b. adjusting the dollar amount of fixed-rate liabilities.
c. using interest rate swaps.
d. Bank can reduce volatility of net interest income by doing all of the above.
e. a. and c. only - correct answer e
5. A bank's periodic 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. - correct answer d
6. 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.
,BANKING FINAL EXAM
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. - correct answer c
7. A bank has a 1-year $1,000,000 loan outstanding, payable in four equal
quarterly installments. What dollar amount of the loan would be considered rate
sensitive in the 0 - 90 day bucket?
a. $0
b. $250,000
c. $500,000
d. $750,000
e. $1,000,000 - correct answer b
8. Which of the following will cause a bank's 1-year cumulative GAP to increase,
everything else the same.
a. An increase in 3-month loans and an offsetting decrease in 6-month loans.
b. An increase in 3-month loans and an offsetting increase in 3-month CDs.
c. A decrease in 3-month CD's and an offsetting increase in 3-year CDs.
d. a. and c.
e. b. and c. - correct answer c
9. Which of the following will cause a bank's 1-year cumulative GAP to decrease,
everything else the same.
a. An increase in 3-month loans and an offsetting increase in 9-month loans.
b. A decrease in 6-month loans and an offsetting increase in 2-year CDs.
, BANKING FINAL EXAM
c. An increase in 9-month CD's and an offsetting increase in 5-year CDs.
d. a. and c.
e. b. and c. - correct answer e
10. If a bank has a positive GAP, an increase in interest rates will cause interest
income to __________, interest expense to__________, and net interest income
to __________.
a. increase, increase, increase
b. increase, decrease, increase
c. increase, increase, decrease
d. decrease, decrease, decrease
e. decrease, increase, increase - correct answer a
11. If a bank has a negative GAP, an increase in interest rates will cause interest
income to __________, interest expense to__________, and net interest income
to __________.
a. increase, increase, increase
b. increase, decrease, increase
c. increase, increase, decrease
d. decrease, decrease, decrease
e. decrease, increase, increase - correct answer c
12. If a bank has a positive GAP, a decrease in interest rates will cause interest
income to __________, interest expense to__________, and net interest income
to __________.
a. increase, increase, increase
b. increase, decrease, increase
c. increase, increase, decrease
d. decrease, decrease, decrease
Chapter 7
Managing Interest Rate Risk: GAP and Earnings Sensitivity
Multiple Choice
1. When is interest rate risk for a bank greatest?
a. When interest rates are volatile.
b. When interest rates are stable.
c. When inflation is high.
d. When inflation is low.
e. When loan defaults are high. - correct answer a
2. 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 - correct answer b
3. A bank's GAP is defined as:
a. the dollar amount of rate-sensitive assets divided by the dollar amount of rate-
sensitive liabilities.
b. the dollar amount of earning assets divided by the dollar amount of total
liabilities.
,BANKING FINAL EXAM
c. the dollar amount of rate-sensitive assets minus the dollar amount of rate-
sensitive liabilities.
d. the dollar amount of rate-sensitive liabilities minus the dollar amount of rate-
sensitive assets.
e. the dollar amount of earning assets times the average liability interest rate. -
correct answer c
4. Keeping all other factors constant, banks can reduce the volatility of net
interest income by:
a. adjusting the dollar amount of rate-sensitive assets.
b. adjusting the dollar amount of fixed-rate liabilities.
c. using interest rate swaps.
d. Bank can reduce volatility of net interest income by doing all of the above.
e. a. and c. only - correct answer e
5. A bank's periodic 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. - correct answer d
6. 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.
,BANKING FINAL EXAM
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. - correct answer c
7. A bank has a 1-year $1,000,000 loan outstanding, payable in four equal
quarterly installments. What dollar amount of the loan would be considered rate
sensitive in the 0 - 90 day bucket?
a. $0
b. $250,000
c. $500,000
d. $750,000
e. $1,000,000 - correct answer b
8. Which of the following will cause a bank's 1-year cumulative GAP to increase,
everything else the same.
a. An increase in 3-month loans and an offsetting decrease in 6-month loans.
b. An increase in 3-month loans and an offsetting increase in 3-month CDs.
c. A decrease in 3-month CD's and an offsetting increase in 3-year CDs.
d. a. and c.
e. b. and c. - correct answer c
9. Which of the following will cause a bank's 1-year cumulative GAP to decrease,
everything else the same.
a. An increase in 3-month loans and an offsetting increase in 9-month loans.
b. A decrease in 6-month loans and an offsetting increase in 2-year CDs.
, BANKING FINAL EXAM
c. An increase in 9-month CD's and an offsetting increase in 5-year CDs.
d. a. and c.
e. b. and c. - correct answer e
10. If a bank has a positive GAP, an increase in interest rates will cause interest
income to __________, interest expense to__________, and net interest income
to __________.
a. increase, increase, increase
b. increase, decrease, increase
c. increase, increase, decrease
d. decrease, decrease, decrease
e. decrease, increase, increase - correct answer a
11. If a bank has a negative GAP, an increase in interest rates will cause interest
income to __________, interest expense to__________, and net interest income
to __________.
a. increase, increase, increase
b. increase, decrease, increase
c. increase, increase, decrease
d. decrease, decrease, decrease
e. decrease, increase, increase - correct answer c
12. If a bank has a positive GAP, a decrease in interest rates will cause interest
income to __________, interest expense to__________, and net interest income
to __________.
a. increase, increase, increase
b. increase, decrease, increase
c. increase, increase, decrease
d. decrease, decrease, decrease
