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Finance Test

Terms in this set (25)

1.) If a bond is a discount bond, then:
a. the yield to maturity is less than the coupon rate.
b. the yield to maturity is greater than the coupon rate.
c. the yield to maturity is equal to the coupon rate.
d. its duration must be greater than its maturity.
e. its duration must be equal to its maturity.
b. the yield to maturity is greater than the coupon rate.
2.) If a bond is a premium bond, then:
a. the yield to maturity is less than the coupon rate.
b. the yield to maturity is greater than the coupon rate.
c. the yield to maturity is equal to the coupon rate.
d. its duration must be greater than its maturity.
e. its duration must be equal to its maturity.
a. the yield to maturity is less than the coupon rate.
3.) If a bond is a par bond, then:
a. the yield to maturity is less than the coupon rate.
b. the yield to maturity is greater than the coupon rate.
c. the yield to maturity is equal to the coupon rate.
d. its duration must be greater than its maturity.
e. its duration must be equal to its maturity.
c. the yield to maturity is equal to the coupon rate.
4.) Duration:
a. is always greater than maturity.
b. rises as the coupon payment rises.
c. measures how bond prices change with changes in maturity.
d. is a measure of total return.
e. is a measure of how price sensitive a bond is to a change in interest rates.
e. is a measure of how price sensitive a bond is to a change in interest rates.
5.) Everything else the same, if the yield to maturity decreased 1 percentage point, which of the following bonds would have the largest percentage increase in value?
a. A 25-year 11% coupon bond.
b. A 25-year 7.5% coupon bond.
c. A 25-year zero-coupon bond.
d. A 3-year zero coupon bond.
e. A 3-year bond with a 7.5% coupon.
c. A 25-year zero-coupon bond.
6.) Which of the following are sources of a bond's total return?
a. Coupon interest
b. Reinvestment income
c. Capital gains or losses
d. All of the above are sources of a bond's total return
d. All of the above are sources of a bond's total return
7.) A bank's GAP is defined as:
a. the dollar amount of rate-sensitive assets divided by the dollar amount of rate-sensitive liabilities.
b. the dollar amount of earning assets divided by the dollar amount of total liabilities.
c. the dollar amount of rate-sensitive assets minus the dollar amount of rate-sensitive liabilities.
d. the dollar amount of rate-sensitive liabilities minus the dollar amount of rate-sensitive assets.
e. the dollar amount of earning assets times the average liability interest rate.
c. the dollar amount of rate-sensitive assets minus the dollar amount of rate-sensitive liabilities.
8.) If a bank has a positive GAP, an increase in interest rates will cause interest income to __________, interest expense to__________, and net interest income to __________.
a. increase, increase, increase
b. increase, decrease, increase
c. increase, increase, decrease
d. decrease, decrease, decrease
e. decrease, increase, increase
a. increase, increase, increase
9.) If a bank has a negative GAP, an increase in interest rates will cause interest income to __________, interest expense to__________, and net interest income to __________.
a. increase, increase, increase
b. increase, decrease, increase
c. increase, increase, decrease
d. decrease, decrease, decrease
e. decrease, increase, increase
c. increase, increase, decrease
10.) 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 __________.
a. increase, increase, increase
b. increase, decrease, increase
c. increase, increase, decrease
d. decrease, decrease, decrease
e. decrease, increase, increase
d. decrease, decrease, decrease
11.) If a bank has a negative GAP, a decrease in interest rates will cause interest income to __________, interest expense to__________, and net interest income to __________.
a. increase, increase, increase
b. increase, decrease, increase
c. increase, increase, decrease
d. decrease, decrease, decrease
e. decrease, decrease, increase
e. decrease, decrease, increase
12.) An asset would normally be classified as rate-sensitive if:
a. it matures during the examined time period.
b. it represents a partial principal payment.
c. the outstanding principal on a loan can be re-priced when the base rate changes.
d. All of the above.
e. a. and c. only
d. All of the above.
13.) Earnings sensitivity analysis does not consider:
a. changes in interest rates.
b. changes in the volume of rate-sensitive assets due to a change in interest rates.
c. changes in the volume of fixed-rate liabilities due to a change in interest rates.
d. mortgage prepayments.
e. Earnings sensitivity analysis considers all of the above.
e. Earnings sensitivity analysis considers all of the above.
14.) To increase asset sensitivity, a bank can:
a. buy longer-term securities.
b. pay premiums on subordinated debt.
c. shorten loan maturities.
d. make more fixed rate loans.
e. All of the above.
c. shorten loan maturities.
15.) To decrease asset sensitivity, a bank can:
a. buy longer-term securities.
b. pay premiums on subordinated debt.
c. shorten loan maturities.
d. make fewer fixed rate loans.
e. All of the above.
a. buy longer-term securities.
16.) To decrease liability sensitivity, a bank can:
a. buy longer-term securities.
b. attract more non-core deposits.
c. increase the number of floating rate loans.
d. increase longer-term deposits.
e. All of the above.
d. increase longer-term deposits.
17.) If a bank expects interest rates to decrease in the coming year, it should:
a. increase its GAP.
b. issue long-term subordinated debt today.
c. increase the rates paid on long-term deposits.
d. issue more variable rate loans.
e. become more liability sensitive.
e. become more liability sensitive.
18.) If a bank expects interest rates to increase in the coming year, it should:
a. increase its GAP.
b. issue fewer variable rate loans.
c. issue more 3-month CDs.
d. issue more fixed rate loans.
e. become more liability sensitive.
a. increase its GAP.
19.) Duration gap analysis:
a. applies he the concept of duration to the bank's entire balance sheet.
b. applies he the concept of duration to the bank's entire income statement.
c. applies he the concept of duration to the bank's retained earnings.
d. indicates the difference in the GAP in the time it takes to collect on loan payments versus the time to attract deposits.
e. estimates when embedded options will be exercised.
a. applies he the concept of duration to the bank's entire balance sheet.
20.) What does a bank's duration gap measure?
a. The duration of short-term buckets minus the duration of long-term buckets.
b. The duration of the bank's assets minus the duration of its liabilities.
c. The duration of all rate-sensitive assets minus the duration of rate-sensitive liabilities.
d. The duration of the bank's liabilities minus the duration of its assets.
e. The duration of all rate-sensitive liabilities minus the duration of rate-sensitive assets.
b. The duration of the bank's assets minus the duration of its liabilities.
21.) Which of the following is false regarding duration gap analysis?
a. Duration gap analysis does not classify assets as rate-sensitive.
b. Duration gap analysis indicates the potential change in a bank's net interest income.
c. Duration gap accounts for bank leverage.
d. Duration gap accounts for the present value of cash flows associated with all liabilities.
e. Duration gap analysis indicates the potential change in a bank's market value of equity.
b. Duration gap analysis indicates the potential change in a bank's net interest income.
22.) For a bank that has a negative duration gap, a decrease in interest rates will cause a(n) _______ in the economic value of assets that is _______ than the _______ in the economic value of liabilities, and a(n) _______ in the economic value of equity.
a. increase, less, increase, decrease
b. increase, greater, increase, decrease
c. increase, less, decrease, increase
d. decrease, less, decrease, increase
e. decrease, greater, decrease, decrease
a. increase, less, increase, decrease
23.) For a bank that has a positive duration gap, a decrease in interest rates will cause a(n) _______ in the economic value of assets that is ______ than the _______ in the economic value of liabilities, and a(n) _______ in the economic value of equity.
a. increase, greater, decrease, increase
b. increase, less, increase, decrease
c. increase, greater, increase, increase
d. decrease, greater, decrease, increase
e. decrease, less, decrease, decrease
c. increase, greater, increase, increase
24.) For a bank that has a negative duration gap, an increase in interest rates will cause a(n) _______ in the economic value of assets, that is _______ than the _________ in the economic value of liabilities, and a(n) _______ in the economic value of equity.
a. increase, less, increase, increase
b. increase, less, increase, decrease
c. increase, greater, increase, increase
d. decrease, less, decrease, increase
e. decrease, greater decrease, increase
d. decrease, less, decrease, increase
25.) For a bank that has a positive duration gap, an increase in interest rates will cause a(n) _______ in the economic value of assets, that is _______ than the _________ in the economic value of liabilities, and a(n) _______ in the economic value of equity.
a. increase, greater, decrease, increase
b. increase, less, increase, decrease
c. increase, greater, increase, increase
d. decrease, less, decrease, increase
e. decrease, greater, decrease, decrease
e. decrease, greater, decrease, decrease
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