FUNDAMENTALS OF CORPORATE FINANCE
10th Edition
ISBN: 9781260013962
Author: BREALEY
Publisher: RENT MCG
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Chapter 7, Problem 50QP
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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_forwardIs it correct to state that banks’ returns will be higher if interest rates increase? Outline the advantages and drawbacks of Gap analysis and Duration analysis.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_forward
- What 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_forwardHow is the market interest rate in the short-term and long-term financial market affected under the Pure Expectations theory when suppliers and users of loanable funds expect that interest rates will decrease the next year?arrow_forwardWhich 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_forward
- The central bank takes action that lowers interest rates dramatically. what is the effect of it to firm value? increase or decrease and why.arrow_forwardhow do banks improve their net profit margin to increase Return on Equity? what are the risk implications ?arrow_forwardDiscuss how banks benefit when interest rates decrease?arrow_forward
- How does the time value of money impact investment decisions, and why is it important for both individuals and businesses to consider it when making financial decisions? Discuss the concepts of present value and future value, and explain how they are calculated. How do interest rates affect these calculations? What is the difference between simple interest and compound interest, and how does this difference influence long-term investments? Why do higher interest rates typically decrease the present value of future cash flows? Explain the role of discounting in determining the present value of future cash inflows. How do businesses use the net present value (NPV) method to assess the profitability of projects? What are some limitations of relying solely on NPV for decision- making? How does the internal rate of return (IRR) complement the NPV method? Why is it important to account for risk and uncertainty in time value of money calculations? Lastly, how can inflation erode the real…arrow_forwardIf 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_forward
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