FUNDAMENTALS OF CORPORATE FINANCE
10th Edition
ISBN: 9781260013962
Author: BREALEY
Publisher: RENT MCG
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Chapter 7, Problem 50QP
Implications of
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Banks use gap analysis to measure interest rate risk in their balance sheets. If firm XYZ is said to have a positive gap, this means:
Group of answer choices
C. Rate-sensitive assets exceed rate-sensitive liabilities
B. Long-term assets are funded with short-term liabilities
D. Rate-sensitive assets equal rate-sensitive liabilities
A. Liabilities reprice before assets
Give typing answer with explanation and conclusion
Q. 23 Why do commercial banks focus on relatively short-term loans?
- b/ short term loans allow rapid turnover of cash flows
- a/ short-term loans are safer
- a,b, and c
- c/ these banks need to coordinate their portfolio with changes in economic conditions and the level of interest rates
- b and c
We think of banks as being interest rate intermediaries. That is, the borrow cheaply, and then lend at higher rates, and the spread between those is their profit. But, besides interest rates, what other sorts of risks do banks face?
Chapter 7 Solutions
FUNDAMENTALS OF CORPORATE FINANCE
Ch. 7 - Prob. 1QPCh. 7 - Prob. 2QPCh. 7 - Prob. 3QPCh. 7 - Prob. 4QPCh. 7 - Prob. 5QPCh. 7 - Prob. 8QPCh. 7 - Prob. 9QPCh. 7 - Prob. 10QPCh. 7 - Prob. 11QPCh. 7 - Prob. 12QP
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Which risk ratios best answer each of the following financial questions? a. How quickly is a company able to collect its receivables? b. How quickly is a company able to sell its inventory? c. Is the company able to make interest payments as they become due?arrow_forwardWhat aspect of FHA loans made them particularly attractive to investment companies such as life insurance companies? Group of answer choices a. The increased loan-to-value ratios. b. The reduced default risk. c. The higher interest rates. d The shorter loan terms.arrow_forwardWhat is the advantage of a variable-interest loan? Protects the borrower from rising interest rates Borrower can capitalize on a reference rate decrease Makes it easier for the borrower to plan for future payments Reduces the total interest payments Which of the following tools is used to analyze the industry attractiveness in the credit application process? PESTEL analysis Management analysis Ratios analysis SWOT analysisarrow_forward
- Which of the following statements best describes financial markets? Answer a. Financial markets are a good example of unregulated markets b. Financial markets increase the speed of buying and selling, but they also increase the cost since people are earning fees for these transactions c. Financial markets today offer fewer instruments than they did in the past d. Financial markets lower the cost and increase the speed of buying and selling financial instrumentsarrow_forwardThe central bank takes action that lowers interest rates dramatically. what is the effect of it to firm value? increase or decrease and why.arrow_forwardDiscuss how banks benefit when interest rates decrease?arrow_forward
- 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, decreasearrow_forwardGross interest expenses of banks are normally higher in periods when market interest rates are higher. Group of answer choices: True Falsearrow_forwardIn rising interest rate environment, what will be the impact on highly leveraged companies? Evaluate the same in context of Credit Risk?arrow_forward
- How should a bank structure its liquid assets portfolio to take advantage of falling interest rates ? a. The bank should invest in short-term securities to minimise capital loss b. The bank should invest in long term securities to maximise capital gains. c. The bank should borrow at fixed interest rates d. The bank should issue certificate deposits with fixed interest rates. e. The bank should hold cash to maximise its interest income. Which option is correctarrow_forwardWhy have the use of standby credit letters grown in recent years? A. The growth of bank loans sought by companies in recent years B. The decreased demand for risk reduction devices C. The rapid growth of direct financing by companies D. The high cost of standby credit letters in recent yearsarrow_forwardSelect 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.arrow_forward
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