Use the following to answer questions 1-19.

Bank of Baruch($ million)

Assets:Liabilities:

91 day US Treasury bills$ 150m1 year Certificates of Deposit $ 825m

2 year commercial loans $ 75m5 year Bonds 70m

Fixed rate, 9% p.a. annually

10 year corporate loans-floating rate:Overnight Fed Funds 100m

LIBOR+50bp, semiannual roll date91-day Commercial Paper 270m

$ 505mEquity 65m

10 year floating rate mortgages

quarterly roll dates$ 600m

Notes: Commercial paper is a pure discount instrument. The 5 year bonds pay 8.5% p.a. semiannually with a yield of 7.5% p.a. and have a duration of 4.2 years. The 1 year Certificates of Deposit pay 2.75% p.a. annually. All values are market values.

  1. What is the bank’s debt to asset ratio?
  2. 5%
  3. 94.11%
  4. 95%
  5. 4.33
  6. 88.88%
  1. What is the impact on the bank’s capital value if the value of the bank’s assets declines by 10%?
  2. No change in the bank’s equity value.
  3. Equity decreases to -$68 million.
  4. Equity increases to $68 million.
  5. Equity decreases to $52 million.
  6. Equity increases to $78 million.
  1. What is the 6 month cumulative repricing gap?
  2. -$885 million
  3. +$885 million
  4. -$285 million
  5. +$285 million
  6. -$370 million
  1. What is the impact on the bank’s net interest income if interest rates fall 15 basis points over the next six months?
  2. +$1.3 million
  3. -$1.3 million
  4. +$427,500
  5. -$427,500
  6. +$555,000
  1. What is the bank’s 91 day cumulative repricing gap?

a.+$380 million

  1. -$380 million
  2. -$370 million
  3. +$750 million
  4. -$750 million
  1. What is the impact on the bank’s net interest income if interest rates rise 5 basis points over the calendar quarter?
  2. +$375,000
  3. -$375,000
  4. +$190,000
  5. -$190.000
  6. -$750,000
  1. The bank’s interest rate exposure is:
  2. lower in the short term because the 91 day repricing gap is larger than the six month repricing gap.
  3. higher in the short term because the 91 day repricing gap is smaller than the six month repricing gap.
  4. lower in the short term because the absolute value of the six month repricing gap is larger than the absolute value of the 1 year repricing gap.
  5. higher in the short term because the absolute value of the six month repricing gap is smaller than the absolute value of the 1 year repricing gap.
  6. equal in both the short and long term.
  1. How can the bank reduce its interest rate risk exposure over the next six months?
  2. Increase rate sensitive assets.
  3. Decrease rate sensitive assets.
  4. Increase rate sensitive assets and decrease rate sensitive liabilities.
  5. Decrease rate sensitive assets and increase rate sensitive liabilities.
  6. Increase rate sensitive liabilities.
  1. What is the duration of the floating rate mortgages?
  2. 0.25 years
  3. 10 years
  4. 2 years
  5. 0.5 years
  6. There is not enough information to answer the question.
  1. What is the duration of the 1 year Certificates of Deposit if they pay 2.75% p.a. interest, compounded annually?
  2. 0.25 years
  3. 1 year
  4. 2 years
  5. 0.5 years
  6. There is not enough information to answer the question.
  1. What is the duration of the 2 year commercial loans if they are selling at par? (Assume annual coupon payments.)
  2. 1.87 years
  3. 3.84 years
  4. 2 years
  5. 0.5 years
  6. 1.92 years
  1. What is the convexity of the 2 year commercial loans assuming they are selling at par and have annual coupon payments?
  2. 5.67
  3. 22.68
  4. 3.85
  5. 1.95
  6. 2.0
  1. What is the duration of the bank’s assets?
  2. 1.05 years
  3. 1.0008 years
  4. 0.94 years
  5. 0.46 years
  6. 3.85 years

14.What is the duration of the bank’s liabilities?

  1. 1.05 years
  2. 1.0008 years
  3. 0.94 years

d.0.46 years

e. 3.85 years

15.What is the bank’s duration gap?

a.-0.44 years

  1. +0.44 years
  2. –0.94 years
  3. +0.94 years
  4. -3.85 years

16.What is the impact on the bank’s equity values if interest rates decrease 50 basis points? (That is, R/(1+R) is equal to a decline of 50 basis points.)

  1. -$2.9 million
  2. +$2.9 million
  3. -$6.25 million
  4. +$6.25 million
  5. -$125,000
  1. If 1 year spot rates are 3% p.a. and 2 year spot rates are 2.5% p.a., what is the implied forward rate for delivery in one year of one year maturity securities?
  2. 3% p.a.
  3. 2% p.a.
  4. 2.5% p.a.
  5. 4% p.a.
  6. 5% p.a.
  1. Using your answer to question number 17, the market’s consensus estimate of expected future spot rates is:
  2. One year spot rates are expected to decrease by 100 basis points.
  3. Two year spot rates are expected to increase by 100 basis points.
  4. One year spot rates are expected to decrease by 200 basis points.
  5. Two year spot rates are expected to increase by 200 basis points.
  6. One year spot rates are expected to decrease by 250 basis points.
  1. What is the expected impact on the bank’s equity value if interest rates are expected to fluctuate according to the expectations incorporated into the implied forward rate from question number 17?
  2. -$11.58 million
  3. -$14.48 million
  4. -$5.79 million
  5. -$17.37 million
  6. -$2.9 million
  1. If insurance company A has an operating ratio of 95.5 and insurance company B has an operating ratio of 98.2, which company is more profitable?
  2. A
  3. B
  4. Not enough information.
  5. The operating ratio is not the determinant of profitability since it is a cost ratio.
  6. Both A and B are profitable.

Use the following information to answer questions 21-25.

Consider a FI with a bond portfolio comprised of sovereign country debt that has both interest rate and exchange rate risk exposure. The duration of assets is 3.4 years and the duration of liabilities is 5.2 years. The portfolio has assets of US$18 billion (including 2.5 billion euro) and liabilities of US$16 billion (including 4.15 billion euro) with no other currencies bought or sold forward.

21. What is the interest rate risk of the bond portfolio?

  1. The duration gap of -0.8 years implies an exposure to interest rate increases.
  2. The duration gap of –0.8 years implies an exposure to interest rate decreases.
  3. The duration gap of –1.2 years implies an exposure to interest rate increases.
  4. The duration gap of –1.2 years implies an exposure to interest rate decreases.
  5. The duration gap of +1.2 years implies an exposure to interest rate increases.

22. What is the foreign exchange rate risk of the bond portfolio?

  1. Long 2.5 billion euro – exposed to euro/US dollar exchange rate declines.
  2. Short 1.65 billion euro – exposed to euro/US dollar exchange rate declines.
  3. Short 1.65 billion euro – exposed to euro/US dollar exchange rate increases.
  4. Short 2.5 billion euro – exposed to euro/US dollar exchange rate increases.
  5. Short 4.15 billion euro – exposed to euro/US dollar exchange rate increases.

23. If there is only a 1% chance that interest rates will decline 10 basis points or more tomorrow, what is the daily earnings at risk (DEAR) on the 1% Value at Risk (VaR)?

  1. A loss of US$21.6 million or more.
  2. A loss of US$2.16 million or more.
  3. A loss of US$18 million or more.
  4. A loss of US$18 million or less.
  5. A loss of US$1.2 million or more.

24.If there is only a 1% chance that US dollar/euro exchange rates will increase by at least US$0.25 per euro tomorrow, what is the daily earnings at risk (DEAR) on the 1% Value at Risk (VaR)?

  1. A loss of US$25 million or less.
  2. A loss of US$412.5 million or more.
  3. A loss of US$1.65 million or more.
  4. A loss of US$4.15 million or more.
  5. A loss of 2.5 billion euro.

25.What is the 1% DEAR for both interest rate and currency risks if the correlation between the risk exposures is –0.05?

  1. US$69 million
  2. US$434.1 million
  3. US$416 million
  4. US$412 million
  5. 22 million euro

Use the following information to answer questions 26-29.

Eveningstar open-end fund has 1,000 shares outstanding and has the following assets in the portfolio: 200 shares of P&G priced at $20; 250 shares of Intel priced at $60; and 300 shares of Microsoft priced at $50. The Morningstar closed-end fund has the following stocks in its portfolio: 200 shares of P&G and 200 shares of Microsoft. It has a total of 500 shares outstanding.

26.What is the NAV of both funds?

  1. $45.33; $14.00
  2. $34.00; $28.00
  3. $17.00; $17.50
  4. $34.00; $35.00
  5. $45.33; $28.00

27. If Eveningstar issues another 250 shares and purchases 150 shares of Intel, what is its new NAV?

  1. $39.20
  2. $42.61
  3. $34.40
  4. $37.39
  5. $34.00

28.If the price of P&G shares rises to $25 and the price of Microsoft falls to $40, what is the new NAV of both funds? Assume that Eveningstar has 1,000 shares outstanding.

  1. $32.00; $26.00
  2. $16.00; $13.00
  3. $17.50; $17.50
  4. $32.00; $17.50
  5. $16.00; $26.00

29.Is an FI immunized itself against interest rate risk exposure if its maturity gap is set to zero?

  1. Yes, because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities.
  2. No, because with a maturity gap of zero the change in the market value of assets exactly offsets the change in the market value of liabilities.
  3. Yes, because the maturity model reaches an equilibrium at zero.
  4. No, because the timing of cash flows is relevant to immunization against interest rate risk exposure.
  5. No, because a representative bank will always have a positive maturity gap.

30.The risk that an investor will be forced to place earnings from a loan or security into a lower yielding investment is known as:

  1. liquidity risk
  2. interest rate risk
  3. credit risk
  4. foreign exchange risk
  5. off balance sheet risk

31.What type of risk focuses upon future contingencies?

  1. liquidity risk
  2. interest rate risk
  3. credit risk
  4. foreign exchange risk
  5. off balance sheet risk

32.Holding corporate bonds with fixed interest rates involves:

  1. default risk only
  2. interest rate risk only
  3. liquidity risk and interest rate risk only
  4. default risk and interest rate risk only
  5. default risk and liquidity risk only

Use the following to answer questions 33-50.

Bank of Baruch

Assets:Liabilities:

91 day US Treasury bills$ 75m1 year Certificates of Deposit $ 225m

2 year US Treasury notes $150m5 year Certificates of Deposit 35m

5 year corporate loans-floating rate:Overnight Fed Funds 105m

LIBOR+150bp, quarterly roll dateEquity 15m

$ 55m

10 year floating rate mortgages

9-month roll dates$100m

33.What is the bank’s debt to asset ratio?

  1. 3.95%
  2. 4.11%
  3. 96.05%

d.24.33

  1. 32.88%

34.What does your answer to question 33 indicate about the structure of financial intermediaries?

  1. They are highly leveraged.
  2. They are very risky.
  3. They use a lot of off-balance sheet items.
  4. They are intermediaries between funds surplus and funds deficit units.
  5. All of the above.

35.What is the 91 day cumulative repricing gap?

  1. -$25 million
  2. +$25 million
  3. -$50 million

d.+$50 million

e.-$30 million

36.What is the impact on the bank’s net interest income if interest rates fall 25 basis points over the next 91 days?

a.+$62,500

b-$62,500

c.+$125,000

d.-$125,000

e.-$75,000

37.What is the bank’s 1 year cumulative repricing gap?

a.-$100 million

b.+$100 million

c.-$50 million

d.+$50 million

e.-$25 million

38.What is the impact on the bank’s net interest income if interest rates rise 50 basis points over the next year?

a.+$500,000

b.-$500,000

c.+$125,000

d.-$125,000

e.-$750,000

39.How would you compare the bank’s interest rate risk exposure over the short term (over the next 91 days) to the longer term (over the next year)?

a.The bank is exposed to interest rate declines in both the short term and the long term.

b.The bank is exposed to interest rate declines in the long term and interest rate increases in the short term.

c.The bank is exposed to interest rate increases in the long term and interest rate declines in the short term.

d.The bank is exposed to interest rate increases in both the short term and the long term.

e.The bank has no interest rate risk exposure.

40.The bank’s interest rate exposure is:

a.higher in the short term because the 91 day repricing gap is larger than the 1 year repricing gap.

b.lower in the short term because the 91 day repricing gap is smaller than the 1 year repricing gap.

c.higher in the short term because the absolute value of the 91 day repricing gap is larger than the absolute value of the 1 year repricing gap.

d.lower in the short term because the absolute value of the 91 day repricing gap is smaller than the absolute value of the 1 year repricing gap.

e.equal in both the short and long term.

41.How can the bank reduce its 1 year interest rate risk exposure?

a.Increase rate sensitive assets.

b.Decrease rate sensitive assets.

c.Increase rate sensitive assets and decrease rate sensitive liabilities.

d.Decrease rate sensitive assets and increase rate sensitive liabilities.

e.Increase rate sensitive liabilities.

42.Which of the following statement is true?

a.The 1 year repricing gap is less accurate than the 91 day repricing gap because of the over aggregation problem.

b.The 91 day repricing gap is less accurate than the 1 year repricing gap because it excludes off balance sheet items.

c.Both repricing gaps are accurate because they include runoffs.

d. Neither repricing gap is accurate, although they both include runoffs.

e.The repricing model measures the impact of unanticipated changes in interest rates on equity values.

43.What is the duration of the US Treasury bills?

a.0.25 years

b.1 year

c.2 years

d.0.5 years

e.There is not enough information to answer the question.

44.What is the duration of the 1 year Certificates of Deposit if they pay 4% p.a. interest, compounded annually?

a.0.25 years

b.1 year

c.2 years

d.0.5 years

e.There is not enough information to answer the question.

45.If the US Treasury notes have a coupon rate of 5% p.a. and are selling at par, what is their duration? (Assume annual coupon payments.)

a.0.25 years

b.3.85 years

c.2 years

d.0.5 years

e.1.95 years

46.What is the convexity of the 5% p.a. coupon US Treasury notes assuming they are selling at par and have annual coupon payments?

a.5.3

b.10.6

c.3.85

d.1.95

e.2.0

47.What is the duration of the bank’s assets?

a.1.05 years

b.1.0008 years

c.0.089 years

d.0.96 years

e.3.85 years

48.What is the duration of the bank’s liabilities? (Assume that the 5 year Certificates of Deposit have a duration of 4 years.)

  1. 1.05 years
  2. 1.0008 years
  3. 0.089 years

d.0.96 years

e.3.85 years

49. What is the bank’s duration gap?

a.1.05 years

  1. 1.0008 years
  2. 0.089 years
  3. 0.96 years
  4. 3.85 years

50. What is the impact on the bank’s equity values if interest rates increase 75 basis points?

  1. -$667.50
  2. +$667.50
  3. -$253,650
  4. +$253,650
  5. -$125,000

ANSWER KEY

1. C

2. B

3. B

4.B

5.A

6.C

7.C

8.D

9.A

10.B

11.E

12.A

13.D

14.C

15.A

16.A

17.B

18.A

19.C

20.A

  1. D
  2. C
  3. A
  4. B
  5. D
  6. B
  7. C
  8. A
  9. D
  10. B
  11. E
  12. D
  13. C
  14. A
  15. B
  16. B
  17. A
  18. B
  19. C
  20. D
  21. C
  22. A
  23. A
  24. B
  25. E
  26. A
  27. A
  28. B
  29. C
  30. C