Fin 326 Final Set #13 ('07 Midterm)

Front 1

Which of the following statements is true?
a. The duration of all floating rate debt
instruments is equal to the time to
maturity.
b. The optimal duration gap is zero
c. The shorter the maturity of the FI's securities, the greater the FI's interest rate risk exposure.
d. The duration of equity is equal to the duration of assets minus the duration of liabilities.
e. Duration gap measures the impact of unanticipated changes in interest rates on the market value of equity.

Back 1

e. Duration gap measures the impact of unanticipated changes in interest rates on the market value of equity.

Front 2

In the U.S., there are advantages of owning assets subject to the capital gains tax. Which one of the following is not such an advantage?
a. capital gains can be offset by capital losses, in the same year in which they occur.
b. capital gains tax rates are typically lower than the rate on ordinary income.
c. capital gains can be offset by prior year’s capital losses, to some extent.
d. capital gains on assets owned by mutual funds can be deferred at the discretion of the mutual fund shareholder.
e. All of the above are advantages of owning assets subject to the capital gains tax.

Back 2

d. capital gains on assets owned by mutual funds can be deferred at the discretion of the mutual fund shareholder.

Front 3

A bank that finances long-term fixed-rate mortgages with short-term deposits is exposed to
a. increases in net interest income and decreases in the market value of equity when interest rates fall
b. decreases in net interest income and decreases in the market value of equity when interest rates fall.
c. decreases in net interest income and increases in the market value of equity when interest rates increase.
d. increases in net interest income and increases in the market value of equity when interest rates increase
e. decreases in net interest income and decreases in the market value of equity when interest rates increase

Back 3

e. decreases in net interest income and decreases in the market value of equity when interest rates increase

Front 4

The following questions are based on material in Appendix 8A. The unbiased expectations theory of the term structure of interest rates
a. assumes that long-term interest rates are an arithmetic average of short-term rates.
b. assumes that the yield curve reflects the market's current expectations of future short-term interest rates
c. recognizes that forward rates are perfect predictors of future interest rates.
d. assumes that risk premiums increase uniformly with maturity.
e. None of the above is correct

Back 4

b. assumes that the yield curve reflects the market's current expectations of future short-term interest rates

Front 5

For a given category of RSAs and RSLs, Bank has a repricing gap of -$400 million. Interest rates are expected to increase 1 percent. What will be the impact on the bank’s net interest income?
a. +$4,000,000
b. -$2,000,000
c. +$2,000,000
d. -$4,000,000
e. Can’t tell because we don’t know the amount of rate sensitive assets or rate sensitive liabilities.

Back 5

d. -$4,000,000

-400*0.01= - $4M

Front 6

Recall the supply and demand curves for federal funds (FF). Holding everything else constant, if the federal funds rate decreases, then the demand for
a. reserves will not change because the Fed sets the level of required reserves.
b. excess reserves rises because they have a higher return to the banks that are borrowing FF.
c. required reserves falls because the cost of borrowing from the Fed is relatively lower.
d. excess reserves falls because they have a higher cost to the banks that are borrowing FF.
e. required reserves rises because the cost of borrowing from the Fed is relatively higher.

Back 6

b. excess reserves rises because they have a higher return to the banks that are borrowing FF.

Front 7

The OCC, when examining nationally chartered commercial banks, assigns ratings to each of the CAMELSI (pronounced "camels eye") areas. Which of the following is not one of the CAMELSI areas?
a. Asset Quality
b. Management
c. Liquidity
d. Earnings
e. Core Deposits

Back 7

e. Core Deposits

Front 8

Assets on the Fed’s balance sheet include
a. government securities and discount loans.
b. currency in circulation and reserves.
c. discount loans and reserves.
d. government securities and currency in circulation
e. none of these choices properly describe the assets on the Fed’s balance sheet.

Back 8

a. government securities and discount loans.

Currency in circulation is a liability to the Fed, as are reserves held by banks.

Front 9

If the inflation rate has an unexpected increase, what are the economic effects on the borrower and lender of a fixed-rate loan?
a. the borrower loses and the lender wins
b. the borrower loses and the lender loses
c. the borrower wins and the lender is not affected
d. the borrower wins and the lender wins
e. the borrower wins and the lender loses

Back 9

e. the borrower wins and the lender loses

Front 10

Suppose there were a sharp drop in global oil prices, leading to a positive impact on U.S. GDP. What response best describes the most likely effect of the drop in oil prices on the Fed Funds Rate?
a. The rate would increase due to a rightward shift in the demand for funds.
b. The rate would decrease due to a leftward shift in the demand for funds.
c. The rate would decrease due to a rightward shift in the supply of funds.
d. The rate would increase due to a leftward shift in the supply of funds.
e. The rate would change, but for reason(s) not listed above.

Back 10

a. The rate would increase due to a rightward shift in the demand for funds.

Front 11

The reason FIs can offer highly liquid and low price-risk contracts to savers while investing in relatively illiquid and higher price-risk assets is
a. diversification allows an FI to predict more accurately the expected returns on its asset portfolio.
b. significant amounts of portfolio risk are diversified away by investing in assets that have correlations between returns that are less than perfectly positive.
c. because individual savers cannot as easily benefit from risk diversification.
d. all of the above.

Back 11

d. all of the above.

Front 12

If the Federal Reserve were to buy dollars by selling yen the result would be to _____ the market supply of U.S. dollars and _____ the exchange rate in terms of the number of yen per U.S. dollar.
a. Increase, raise
b. Increase, lower
c. Decrease; raise
d. Decrease; lower

Back 12

c. Decrease; raise