Asset and Liability Management
Review Questions
Course Introduction
Asset and Liability Management focuses on the strategic coordination of a company's assets and liabilities to optimize financial performance while managing risks such as interest rate fluctuations, liquidity constraints, and regulatory requirements. The course covers essential topics including gap analysis, duration management, liquidity management, capital adequacy, and the application of financial derivatives for risk mitigation. Students learn industry-standard tools and techniques for maximizing returns, maintaining solvency, and ensuring regulatory compliance, with a special emphasis on financial institutions such as banks and insurance companies. The course blends theoretical frameworks with real-world case studies to develop practical skills in balancing profitability and risk within dynamic market environments.
Recommended Textbook
Bank Management 7th Edition by Timothy W. Koch
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Chapter 1: Banking and the Financial Services Industry
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Q1) Many insurance companies have formed __________ to operate banks as part of their financial services efforts.
A)one-bank holding companies
B)multibank holding companies
C)retail subsidiaries
D)finance companies
E)financial holding companies
Answer: A
Q2) ______________ refers to the process of pooling a group of assts with similar features and issuing securities that are collateralized by the assets.
A)Originate-to-Resell
B)Securitization
C)Mortgage Collateralization
D)Deposit Origination
E)Loan-to-Distribute
Answer: B
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Chapter 2: Government Policies and Regulation
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Q1) The _________ established to Public Company Oversight Board to regulate public accounting firms that audit publicly-traded companies.
A)Riegle-Neal Interstate Banking and Branching Efficiency Act
B)Competitive Equality Banking Act
C)Financial Institutions Reform, Recovery and Enforcement Act
D)Sarbanes-Oxley Act
E)Depository Institutions Deregulation and Monetary Control Act
Answer: D
Q2) The _________ authorized the Treasury to purchase debt securities issued by the Fannie Mae, Freddie Mac, and the Federal Home Loan Banks and to purchase common stock.
A)Treasury Emergency Authority Provisions
B)Foreclosure Prevention Act
C)Troubled Asset Relief Program
D)Primary Dealer Credit Facility
E)Check 21 Act
Answer: A
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Page 4
Chapter 3: Analyzing Bank Performance
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Q1) Core deposits consist of all of the following except:
A)demand deposits.
B)NOW accounts.
C)jumbo certificates of deposit.
D)savings accounts.
E)money market demand accounts.
Answer: C
Q2) What is 1st State's burden?
A)2.5%
B)17.5%
C)25.0%
D)75.5%
E)82.5%
Answer: A
Q3) Balance sheet items are calculated for a particular point in time.
A)True
B)False
Answer: True
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Chapter 4: Managing Noninterest Income and Noninterest
Expense
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Q1) When two banks that merge have a significant duplication of bank offices such that the merger leads to the elimination of branches and personnel, this is known as a(n):
A)out-of-market merger.
B)in-market merger.
C)new-market merger.
D)reduced-branch merger.
E)goodwill merger.
Q2) If a bank pays 62 cents in non-interest expense per dollar of net operating revenue, its _______ is equal to 0.62.
A)burden
B)net non-interest margin
C)efficiency ratio
D)overhead ratio
E)non-interest expense ratio
Q3) Larger banks have lower efficiency ratios, on average, than smaller banks.
A)True
B)False
Q4) Discuss why non-interest income has become more important to a bank's profitability since deregulation in the 1980's.
6
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Chapter 5: The Performance of Nontraditional Banking Companies
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Q1) Which of the following investment banking services would be classified as Advisory Services?
A)Managing investments for governments.
B)Designing an initial public offering
C)Acting as a broker that facilitates security trading
D)Running a hedge fund
E)Proprietary trading
Q2) ______________ represent amounts owed to Goldman Sachs by brokers, the firm's customers, and counter-parties to derivative contracts.
A)collateralized agreements
B)financial instruments
C)collateralized financings
D)receivables
E)payables
Q3) If a security is a first-time placement for a firm, it is called a(n):
A)initial public offering.
B)first time equity offering.
C)primary offering.
D)secondary offering.
E)seasoned offering.
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Chapter 6: Pricing Fixed-Income Securities
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Q1) Why is knowing a bond's duration useful?
Q2) Assuming all other factors are held constant, discuss how changes in each of the following impact a bond's duration.
-Maturity
-Coupon Rate
-Market Rate
Q3) A bank quotes you a rate of 7% on a CD, compounded quarterly.What is the effective annual rate?
A)6.79%
B)6.81%
C)6.87%
D)7.13%
E)7.19%
Q4) All other things the same, longer maturity bonds have greater relative price volatility than shorter maturity bonds.
A)True
B)False
Q5) What are some of the problems with the discount yield?
Q6) Why might a security be worth more if its cash flows are "stripped "?
Page 8
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Chapter 7: Managing Interest Rate Risk: Gap and Earnings
Sensitivity
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Q1) Income statement GAP is also known as Omega GAP..
A)True
B)False
Q2) If rate-sensitive assets equal $500 million and rate-sensitive liabilities equals $400 million, what is the expected change in net interest income if rates increase by 1%?
A)Net interest income will increase by $1 million.
B)Net interest income will fall by $1 million.
C)Net interest income will increase by $10 million.
D)Net interest income will fall by $10 million.
E)Net interest income will be unchanged.
Q3) Which of the following is an advantage of static GAP analysis?
A)Static GAP analysis considers the time value of money.
B)Static GAP analysis indicates the specific balance sheet items that are responsible for the interest rate risk.
C)Static GAP analysis considers the cumulative impact of interest rate changes on the bank's position.
D)Static GAP analysis considers the embedded options in loans, such as mortgage pre-payments.
E)All of the above are advantages of static GAP analysis.
Page 9
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Chapter 8: Managing Interest Rate Risk: Economic Value of Equity
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Q1) What is the weighted average duration of assets?
A)2.56 years
B)3.85 years
C)4.85 years
D)5.00 years
E)7.5 years
Q2) For a bank that has a positive duration gap, a decrease in interest rates will cause a(n) _______ in the economic value of assets, a(n) _______ in the economic value of liabilities, and a(n) _______ in the economic value of equity.
A)increase, decrease, increase
B)increase, increase, decrease
C)increase, increase, increase
D)decrease, decrease, increase
E)decrease, increase, decrease
Q3) What is the bank's duration gap?
A)0.53
B)0.73
10
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Chapter 9: Using Derivatives to Manage Interest Rate Risk
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Q1) Which of the following is not true regarding the basis?
A)The basis systematically declines as expiration approaches.
B)The basis must equal zero at expiration.
C)The basis may not equal zero before expiration.
D)The basis may be positive or negative.
E)both b.and c.are not true regarding the basis.
Q2) When futures prices falls, buyers gain at the expense of sellers.
A)True
B)False
Q3) A trader buys a 90-day Eurodollar futures contract at 95.25.The next day, interest rates fall 4.5%.Which of the following is true? Assume that the initial and maintenance margins are $5,000.
A)The trader would have to deposit an additional $62,500 into her account.
B)The trader would have to deposit an additional $2,500 into her account.
C)The trader would have to deposit an additional $625 into her account.
D)The trader could withdraw $2,500 from her margin account.
E)The trader could withdraw $625 from her margin account.
Q4) Your bank has a positive GAP and wants to hedge against changes in interest rates.Would a collar or reverse collar serve as a better hedge? Why?
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Chapter 10: Funding the Bank
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Q1) Liability management decisions determines all of the following except:
A)interest expense on borrowed funds.
B)check handling costs.
C)personnel costs.
D)fee income.
E)loan rates.
Q2) All of the following are considered transaction accounts except:
A)negotiable orders of withdrawal.
B)automatic transfer from savings.
C)demand deposit accounts.
D)money market deposit accounts.
E)all of the above are considered transaction accounts.
Q3) A jump rate CD is also known as a(n):
A)trust CD.
B)zero coupon CD.
C)bump-up CD.
D)federal funds CD.
E)fixed-rate CD.
Q4) Briefly explain two models used to estimate the cost of equity?
Q5) What is the purpose of having a correspondent bank relationship?
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Chapter 11: Managing Liquidity
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Q1) Correspondent banking services would include which of the following?
A)Check collection
B)Data processing services
C)Federal funds trading
D)all of the above
E)a.& c.only
Q2) Which of the following is not a measure of liability liquidity?
A)Total equity to total assets
B)Core deposits to total assets
C)Total deposits to total assets
D)Federal funds sold to total assets
E)Loan losses to deposits.
Q3) The check-clearing services of correspondent banks are often used because:
A)the respondent bank is required to purchase a minimum amount of services.
B)it reduces required reserves.
C)the correspondent bank may be marketing their own services in a local community.
D)it often reduces float.
E)it decreases interest income.
Q4) How can pledging requirements make bank assets less liquid?
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Chapter 12: The Effective Use of Capital
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Q1) Why do smaller banks often have a more difficult time raising new capital compared to larger banks?
Q2) Smaller banks rely more heavily on internally generated capital than larger banks.
A)True
B)False
Q3) Which of the following is not a weakness of risk-based capital standards?
A)They ignore interest rate risk.
B)They ignore the value of deposit insurance.
C)They ignore changes in the market value of assets.
D)They ignore credit risk.
E)They ignore the value of a bank's charter.
Q4) How much Tier 1 capital does the bank have?
A)$100
B)$450
C)$700
D)$750
E)$1000
Q5) What are some of the weaknesses behind risk-based capital standards?
Q6) What is "moral hazard" and what is its impact on deposit insurance?
Page 14
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Chapter 13: Overview of Credit Policy and Loan
Characteristics
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Q1) Businesses can obtain funds from which of the following?
A)Loans from life insurance companies
B)Issuing commercial paper
C)Issuing junk bonds
D)Loans from commercial banks
E)All of the above
Q2) What are the firm's estimated working capital needs?
A)$90
B)$315
C)$660
D)$1,125
E)$2,250
Q3) How does a firm's seasonal working capital needs differ from its permanent working capital needs?
Q4) National banks can directly take equity positions in real estate projects.
A)True
B)False
Q5) What are the major differences between a values-driven credit culture and a market-share driven credit culture?
Q6) Discuss how banks benefit from the creation of the secondary mortgage market. Page 15
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Chapter 14: Evaluating Commercial Loan Requests and Managing Credit Risk
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Q1) How efficiently a firm is using its assets is measured by:
A)liquidity ratios.
B)market value ratios.
C)profitability ratios.
D)activity ratios.
E)leverage ratios.
Q2) Term loans are generally repaid with funds from:
A)investing cash flows.
B)issuing new debt.
C)reductions in inventory and receivables.
D)cash flows from operations.
E)redeeming marketable securities.
Q3) What is Dylan's cash flow from operations?
A)-$2,874,000
B)$8,126,000
C)$12,210,000
D)$19,126,000
E)$23,210,000
Q4) Why is it important to compute pro forma common size balance sheets and income statements when evaluating a commercial loan?
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Chapter 15: Evaluating Consumer Loans
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Q1) Which of the following are lenders prohibited from asking on a credit application?
A)The applicant's income
B)If the applicant has a telephone
C)If the applicant has declared bankruptcy in the past
D)How long the applicant has been on the job
E)Lenders are not prohibited from asking any of the above
Q2) The only quantitative measure of a consumer loan applicant's character is their:
A)down payment.
B)home equity.
C)time on the job.
D)credit report.
E)credit card balance.
Q3) Discuss why some are concerned at the recent increase in both credit card debt and personal bankruptcies.
Q4) Consumer loans are typically very similar such that a comprehensive analytical format can be used for all loans.
A)True
B)False
Q5) What are "high LTV" loans and why are they riskier than "low LTV" loans?
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Chapter 16: Managing the Investment Portfolio
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Q1) Which of the following would not be considered a bank qualified municipal security?
A)A Hays County general obligation bond to modernize the county fire department.
B)A Lubbock County general obligation bond to build a new sewer plant.
C)A City of San Marcos general obligation bond to pay for street repairs.
D)A City of El Paso general obligation bond to pay for a new city jail.
E)A State of Texas bond to finance road repairs.
Q2) A bank owns a zero coupon bond with 5 years to maturity and a face value of $10,000.If interest rates increase from 6% to 7%, what is the approximate change in price, using Macaulay's duration?
A)$343
B)$352
C)-$343
D)-$352
E)not enough information is given to answer the question.
Q3) In general, banks are less willing to sell securities when the market value is greater than the book value.
A)True
B)False
Q4) Discuss the liquidity risk of investing in the municipal securities market.
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Chapter 17: Global Banking Activities
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Q1) The default risk associated with loans made to borrowers outside a bank's home country is called:
A)foreign exchange risk.
B)sovereign risk.
C)euro risk.
D)country risk.
E)LC risk.
Q2) Eurobonds are subject to fewer regulations than U.S.issued bonds.
A)True
B)False
Q3) Which of the following is not true regarding Edge Act banks?
A)Edge Act banks may be owned by U.S.banks.
B)Edge Act banks may be owned by foreign banks.
C)Edge Act banks may be owned by bank holding companies.
D)Edge Act banks may be located outside the U.S.
E)Edge Act banks may be located in the U.S.
Q4) Before the Great Depression, many U.S.banks operated as universal banks.
A)True
B)False
Q5) Explain how and why bankers' acceptances are used in international trade.
Page 20
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