Chapter 19 Bank Management 431 Chapter 19 Bank Management 1 Which of the following statements is incorrect A Managers may be tempted to make decisions that are in their own best interests rather than shareholder interests B The compensation of bank loan officers may be tied to loan volume which encourages a loan department to extend loans with a very high concern for risk C To prevent agency problems some banks provide stock as compensation to managers D The underlying goal behind the managerial policies of a bank is to maximize the wealth of the bank s shareholders ANSWER B 2 When cash outflows temporarily exceed cash inflows banks are most likely to experience A higher dividend payments B illiquidity C a negative duration on its assets D an excess of capital ANSWER B 3 Banks can resolve cash deficiencies by A creating additional liabilities B selling assets C buying back common stock D increasing dividend payouts E creating additional liabilities or selling assets ANSWER E 4 As the secondary market for loans has become active banks are more able to satisfy their liquidity needs with a proportion of loans while achieving profitability A higher higher B lower lower C higher lower D lower higher ANSWER A 432 Chapter 19 Bank Management 5 If a bank that relies heavily on short term deposits expects interest rates to consistently decrease over time it would allocate most of its loans with rates if it desires to maximize its expected returns It could reduce its exposure to interest rate risk by setting rates on its loans A fixed fixed B variable fixed C variable variable D fixed variable ANSWER D 6 During a period of rising interest rates a bank s net interest margin will likely if its liabilities are its assets A increase more rate sensitive than B decrease more rate sensitive than C increase equally rate sensitive as D decrease equally rate sensitive as ANSWER B 7 If a bank expected interest rates to consistently over time it will consider allocating most funds to rate assets A decrease sensitive B decrease insensitive C increase insensitive D none of these ANSWER B The following information refers to questions 8 through 10 Petri Bank had interest revenues of 70 million last year and 30 million in interest expenses About 300 million of Petri s 800 million in assets are rate sensitive while 600 million of its liabilities are ratesensitive 8 Petri Bank s net interest margin is percent A 4 0 B 3 6 C 6 7 D 5 0 ANSWER D 9 Petri Bank s gap is million A 300 B 300 C 500 D 500 ANSWER A Chapter 19 Bank Management 433 10 Petri Bank s gap ratio is percent A 37 5 B 50 0 C 100 0 D 40 0 ANSWER B 11 The measure of interest rate risk that uses the difference between rate sensitive assets and rate sensitive liabilities is called A gap measurement B duration measurement C the duration ratio D the gap ratio ANSWER A 12 A gap ratio of less than one suggests that A rate sensitive assets exceed rate sensitive liabilities B an increase in interest rates would increase the bank s net interest margin C rate sensitive liabilities exceed rate sensitive assets D a decrease in interest rates would decrease the bank s net interest margin ANSWER C 13 The duration of zero coupon bonds will be the duration of coupon bonds with the same maturity A lower than B higher than C the same as D higher than or lower than depending on the size of the coupon payment ANSWER B 14 In general the duration of zero coupon securities with short maturities is than the duration of zero coupon securities with long maturities A higher than B lower than C equal to D higher than or lower than depending on the issuer of the securities ANSWER B 434 Chapter 19 Bank Management 15 Other things equal assets with shorter maturities have durations Assets that generate more frequent coupon payments have durations A shorter longer B shorter shorter C longer shorter D longer longer ANSWER B 16 For most banks the average duration of assets the average duration of liabilities so the duration gap is A exceeds zero B exceeds negative C exceeds positive D is less than negative ANSWER C 17 Other things being equal assets with maturities and frequent coupon payments have shorter durations A shorter more B shorter less C longer more D longer less ANSWER A 18 Which of the following is not a likely method used by a bank to reduce interest rate risk A maturity matching B using fixed rate loans C using interest rate futures contracts D using interest rate caps ANSWER B 19 Which of the following financial institutions would be most willing to swap variable rate payments for fixed rate payments in order to reduce exposure to interest rate risk A one whose assets and liabilities are equally interest rate sensitive B one whose assets are more interest rate sensitive than its liabilities C one whose liabilities are more interest rate sensitive than its assets D one whose gap ratio is equal to 1 0 ANSWER B Chapter 19 Bank Management 435 20 A typical bank will attempt to earn a return and maintain credit risk at a level A maximum high B maximum low C reasonable tolerable D very safe high ANSWER C 21 Banks generally loans and their purchases of low risk securities when the economy is weak A increase increase B reduce reduce C increase reduce D reduce increase ANSWER D 22 ROE is defined as A Net profit after taxes B C Net profit after taxes Assets Net profit after taxes Assets D Net profit after taxes Assets Equity Equity Assets Equity Equity Assets ANSWER C 23 The greater the the greater the amount of assets per dollar s worth of equity A leverage measure B ratio of equity to debt C capital ratio D proportion of loans to securities in the asset portfolio ANSWER A 436 Chapter 19 Bank Management 24 A bank has a return on assets of 2 percent 40 million in assets and 4 million in equity What is the return on equity A 10 percent B 2 percent C 2 percent D 20 percent E none of these ANSWER D 25 A bank has the following asset and liability portfolios What is the gap Rate Sensitive Assets Floating rate loans Amount in millions Rate Sensitive Liabilities 4 000 NOW accounts Amount in millions 1 750 Floating rate mortgages 1 000 MMDAs 4 500 Short term Treasury securities 1 500 Short term CDs 1 000 6 500 A B C D E 750 million 750 million 1 12 896 none of these ANSWER B 7 250 Chapter 19 Bank Management 437 26 A bank has the following asset and liability portfolios What is the gap ratio Rate Sensitive Assets Floating rate loans Amount in millions Rate Sensitive Liabilities 4 000 NOW