(T) 11. Banks need liquidity for both deposit withdrawals and loan demand. (T) 12. Banks face a liquidity/profitability trade-off in financial decisions. (F) 13. A bank with a GAP will see its stock price fall if the Fed tightens monetary policy. (T) 14. A zero duration gap immunizes a bank against interest rate risk. (F) 15. Adequate liability liquidity has replaced the need for asset liquidity. (F) 16. A high positive maturity GAP position is less risky than a high negative GAP position. (T) 17. A bank with a negative maturity GAP will see a decline in earnings if interest rates fall. 102
(F) 18. Interest rate risk can reduce the earnings of the bank, but not its cash flow. (T) 19. A bank with a high positive duration GAP will see a decline in value if interest rates rise. (F) 20. A bank with a negative duration GAP can “macrohedge” by selling futures. MULTIPLE-CHOICE QUESTIONS (c) 1. Banks have greater liquidity needs than other types of businesses because banks have a. a high proportion of short-term assets. b. a low proportion of capital. c. a high proportion of short-term liabilities and outstanding lines of credit. d. large amounts of financial assets. (b) 2. Banks are more subject to liquidity failures because they have a. low capital-to-asset ratios. b. a large proportion of short-term liabilities. c. a large proportion of short term loans. d. extensive short term investments. (d) 3. Managing a bank’s maturity GAP is concerned with a. managing a bank's assets. b. managing a bank's liabilities. c. managing Federal funds. d. managing the relative levels of rate-sensitive assets and liabilities. (b) 4. A bank with a high negative duration GAP can macrohedge its balance sheet by a. selling financial futures. b. buying call options on financial futures. c. reducing its rate-sensitive liabilities. d. swapping fixed-rate interest income for variable- rate interest income. (d) 5. A bank with a high negative maturity GAP can hedge its interest rate risk by a. increasing its rate-sensitive assets. b. reducing the maturity GAP to zero. c. making more long-term, fixed-rate loans. d. both a and (c) 6. Which of the following liabilities are not appropriate for liability liquidity management? a. negotiable CDS b. Federal funds c. demand deposits d. Eurodollar deposits 103
(b) 7. The bank will hedge the impact of changing interest rates on its equity value when: a. the duration of assets equals the duration of liabilities. b. the duration GAP of the bank is zero. c. the maturity GAP of the bank is zero. d. the duration of the loans matches than of the deposit sources. (c) 8. Risk-based capital ratios measures are associated with which of the following bank risks? a. interest rate risk b. liquidity risk c. credit risk d. reinvestment risk (b) 9. A match funding of a commercial loan with a large CD is an example of a. a macrohedge b. a microhedge c. increased interest rate risk d. short position (a) 10. A bank would participate in a interest rate swap macrohedge in order to: a. widen the difference between cash-flow timing and repricing of assets and liabilities b.
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