Q u es ti o n 1 0 1 point if a bank expects interest

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If a bank expects interest rates to increase in the coming year, it should:
increase its GAP.
issue fewer variable rate loans.

issue more 3-month CDs.
issue more fixed rate loans.
become more liability sensitive.
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A bank has $100 million in earning assets, a net interest margin of 5%, and a 1-year cumulative
GAP of $10 million. Interest rates are expected to increase by 2%. If the bank does not want net
interest income to fall by more than 25% during the next year, how large can the cumulative
GAP be to achieve the allowable change in net interest income.
$2 million
$12 million
$15 million
$50 million
$62.5 million
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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 __________.
increase, increase, increase
increase, decrease, increase
increase, increase, decrease
decrease, decrease, decrease
decrease, increase, increase
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A bank’s GAP is defined as:
the dollar amount of rate-sensitive assets divided by the dollar amount of rate-sensitive
liabilities.
the dollar amount of earning assets divided by the dollar amount of total liabilities.
the dollar amount of rate-sensitive assets minus the dollar amount of rate-sensitive
liabilities.
the dollar amount of rate-sensitive liabilities minus the dollar amount of rate-sensitive
assets.
the dollar amount of earning assets times the average liability interest rate.
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Interest rate risk:
varies inversely with a bank’s GAP.
can be measured by the volatility of a bank’s net interest income given changes in the
level of interest rates.
can be eliminated by matching fixed rate assets with variable rate liabilities.
rarely has an impact on bank earnings.
All of the above
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The earnings change ratio:
is defined as yield on rate-sensitive liabilities divided by the yield on rate-sensitive
assets.
measures how the yield on an asset is assumed to change given a 1% change in some
base rate.
measures the change in net interest income for a given change in some base rate.
All of the above.
a. and c
Question 1 1 / 1 point
Which of the following are likely to occur when interest rates rise sharply?
Fixed-rate loans are pre-paid.
Bonds are called.
Deposits are withdrawn early.

All of the above occur when interest
rates rise sharply.
a. and b.
Question 2 0 / 1 point
Put the following steps for conducting a Static GAP analysis in the proper chronological order.
I. Forecast changes in net interest income for a variety of interest rate scenarios.
II. Select the sequential time intervals for determining when assets and liabilities are
rate-sensitive.
III. Group assets and liabilities into time “buckets.”
IV. Develop interest rate forecasts.