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1. A method for estimating a bank's liquidity needs by dividing its borrowed funds into

categories based upon their probability of withdrawal is known as:

a. the balance liquidity approach

b. the vulnerable fund approach

c. the state of fund approach

d. the structure of fund approach


2. Which of the following is a positive liquidity indicator ratio?

a. deposit composition ratio

b. pledged securities ratio

c. liquid securities indicator

d. capacity ratio


3. Why bank tries to control interest rate sensitivity through asset-liability management?

a. to stabilize spread between interest revenue and interest expense

b. to maximize interest revenue

c. to protect bank's value

d. both a & c


4. There are several factors that cause changes in the Net Interest Margin (NIM). Which of

following is not such factor?

a. changes in the level of interest rate

b. changes in the mix of assets and liabilities

c. changes in the maturity of long-term assets and long-term liabilities

d. changes in the volume of interest-bearing assets


5. A risk management tool that analyzes the maturities and repricing opportunities associated

with interest bearing assets and liabilities is known as:

a. interest sensitive gap management

b. duration gap management

c. both a & b

d. none of the above


6. If US Treasury bill is available for purchase at $97.25, 182 days to maturity (based on 100 par

value and a 360-day year assumption). Then the Bank Discount Rate on T-bill must be:

a. 5.67%

b. 5.44%

c. 6.00%

d. none of the above


7. If a bank holds total assets=$25 billion and equity capital=$2 billion and reports ROA=0.95%.

What is the financial firm's ROE?

a. 11.20%

b. 11.00%

c. 11.88%

d. none of the above


8. If management expects default rate of a real estate loan recently granted will probably be

close to 3%. What impact this transaction will have on bank's net profit?

a. positive

b. negative

c. no impact

d. not enough information to decide


9. If US Treasury bill is available for purchase at $95.75, 270 days to maturity (based on 100 par

value and a 365-day year assumption). Then the YTM Equivalent Yield on the T-bill must

be:

a. 5.67%

b. 5.44%

c. 6.00%

d. none of the above


10. Which of the following is not a function of investment security portfolio?

a. stabilizes bank's income

b. reduces bank's tax exposure

c. increases credit risk exposure in bank's loan portfolio

d. collateral to secured govt. deposits


11. Some authorities refer to investments as:

a. the cash account

b. the crossroads account

c. the collateral account

d. none of the above


Section 2: True/False Question

Read each statement below carefully. If you think the statement is true write TRUE or if false,

then write FALSE on the line.


1. A method for estimating a bank's excess liquidity position by focusing primarily on expected changes

in deposits & loans is known as the 'sources and uses of fund' approach.


2. Core deposits are not primarily small-denominating checking accounts that are very interest sensitive

and soon fund will be withdrawn from those accounts.


3. Based on BASEL agreement 1, Tier-1 capital includes common stock, retained earnings, cumulative

preferred stock, equity notes and long-term capital instruments.


4. Based on risk of nonpayment of dues, loans are adversely classified as doubtful loans, bad loans and

nonperforming loans.


5. Undivided profit as a capital represents fund set aside for contingencies such as legal action against

the institution.


6. When the demand for liquidity exceeds its supply, management must prepare for a liquidity surplus,

deciding where to invest excess funds immediately to avoid incurring opportunity cost.


7. Commercial paper is a money market instrument represents a bank's promise to pay the holder a

designated amount of money on a designated future date.


8. Liquidity needs are generally met either by selling assets or by borrowing or by a combination of the

two approaches.


9. If the interest cost of borrowed funds rises faster than bank income from loans & securities, the bank's

net profit will improve.


10. Interest-sensitive gap management controls the difference between the maturity of a bank's interest-

sensitive assets & the maturity of the interest-sensitive liabilities.


11. Suppose, bank has $100 million in re-priceable earning assets and $200 million in re-priceable

liabilities. Suddenly interest rates rise by 1%. As a result, the NIM will increase.


12. If a bank with asset sensitive gap anticipates an increase in interest rate, the aggressive managers

will increase interest-sensitive assets and decrease interest-sensitive liabilities.


13. The percentage change in market price of an asset is equal to its duration times the percentage

change in interest rates attached to that asset.


14. During a rise in interest rate, financial institution with a negative leverage-adjusted duration gap

will face decline in total net worth value.


15. The allowance for loan losses (ALL) is an asset account, represents an accumulated reserve against

which loans declared to be uncollectible can be charged off.


16. The degree of asset utilization (AU) is a direct measure of financial leverage- how many dollars of

assets must be supported by each dollar of equity capital.


17. Mortgage-backed bond issued in multiple tranches or classes is known as CMO.


18. Securitized assets are packaged investments assembled by security dealers that offer customers

flexible yields.


19. Pass-through security and collateralized mortgage obligations (CMO) are the only two types of

mortgage backed securitized assets available in the financial market.

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