Practice Exam 2 Bank Management-Solution

f. What is the risk (standard deviation of returns) on the bank's loan portfolio of Loans A, B & C, if loan returns are uncorrelated (p = 0)?

When borrowers tend to pay back the loans to bankers earlier, the bank is facing a. Repricing risk O b. Yield curve risk O c. Basis points risk d. Embedded options risk

If a bank has a positive repricing gap (RSAs > RSLs), then: Does this bank have reinvestment or refinancing risk? If interest rates increase, net interest income will: A. Reinvestment risk, increase B. Reinvestment risk, decrease C. Refinancing risk, increase D. Refinancing risk, decrease

A bank's net interest margin represents the proportion of its investments that are financed with borrowed funds.   Group of answer choices: True False

Consider the following results of a logistic regression from the lecture video of credit card default: coefficient Intercept -10.65 Balance 0.0055 For a balance of $2,500, the conditional probability of default is O 0.9852 O 0.8808 O 0.8100 O 0.9276 0.9569

The financial performance of both Commercial Banks and Savings Banks is measured using the Net Interest Margin (NIM). a, Explain what the Net Interest Margin is measuring and evaluating. b, Cite an example of why the Net Interest Margin could turn negative.

A)What is the amount of RSA, RSL and the income gap amount? B) Calculate the duration gap. C)What is the change in this bank’s net income if the interest rises by 1%, does it go up or does it go down? Show work D) What happens when the interest rises by 1% to this bank’s asset value, liability value and the net worth in dollar amounts? Show work.

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The average maturity of its assets is larger than that of its deposits, as is typical of most banks. There is a reinvestment risk O re-finance risk O re-pricing risk default risk

Select all that are true regarding interest rate risk for the bank. A.Banksmakeprofitsfromhighratesondepositsandlowratesonloans. B.The steeper the yield curve, the more profitable the bank becomes. C.As long-term mortgage rates rise, borrowers are less likely to refinance or pay back their loans since they have locked in a lower rate, which results in slower than anticipated pay downs on the bank's MBS debt investment portfolio and a decrease in interest rate risk. D.When the short-end of the yield curve rises and the long-end falls, the bank's profits will increase. E.A bank's assets; money it lends out, and it's liabilities; money it uses to fund those assets, can mature or re-price at different times or at the same time.

Consider a bank with the following balance sheet (Shown in image):a) Calculate the equity (total asset – total liability) to asset ratio of the bank(Hint: equity to asset ratio = total equity/total asset) b) Calculate the duration and convexity of the both asset and liability sides; c) If the interest rates go up by 1%, using the duration and convexity rule to determine the networth of the bank and the equity to asset ratio; d) In c)’s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation,the bank decides to raise cash (zero duration and zero convexity) from the equity holders.How much cash does the bank need to raise? e) Do you agree with the following statement? Explain why. “The information about a bond’s duration and convexity adjustment is sufficient to quantifyinterest rate risk exposure.”

a)Calculate the equity (total asset –total liability) to asset ratio of the bank (Hint: equity to asset ratio = total equity/total asset) b)Calculate the duration and convexity of the both asset and liability sides; c)If the interest rates go up by 1%, using the duration and convexity ruleto determine the net worth of the bank and the equity to asset ratio;  d)In c)’s scenario, to maintain the equity to asset ratio at 40% which is required by the regulation, the bank decides to raise cash (zero duration and zero convexity) from the equity holders. How much cash does the bank need to raise? e)Do you agree with the following statement? Explain why.“The information about a bond’s duration and convexity adjustment is sufficient to quantify interest rate risk exposure.” please can you answer part d and e

If a bank uses credit risk score to determine who will receive a loan, the credit risk score would be considered the:    A. dependent variable    B. independent variable     C. response variable    D. classification variable

What is not an advantage of a Treasury (T) Note?   Select one: a.   Extremely liquid security.   b.   Loss of potential purchasing power (inflation > yield).   c.   An investor’s capital is secure.   d.   Better returns than a bank savings account.