BFM B - Unit 30 - set 2 - Motivational Banker

1. What does Interest Rate Risk (IRR) primarily refer to in a bank's financial context?

Stability in Net Interest Income (NII)

Resistance to fluctuations in Net Interest Margin (NIM)

Exposure to adverse movements in interest rates impacting the bank's financial condition

Variability in assets' present values

Question 1 of 25

2. How is Net Interest Income (NII) calculated?

NII = Interest Income + Interest Expenses

NII = Interest Income - Interest Expenses

NII = Total Income - Total Expenses

NII = Total Assets - Total Liabilities

Question 2 of 25

3. How does changes in interest rates affect a bank's assets and liabilities?

It directly impacts the quantity of assets and liabilities

It alters the maturity dates of assets but not liabilities

Changes in interest rates alter the present value of future cash flows from assets and liabilities

It decreases the market value of liabilities but not assets

Question 3 of 25

4. What is the primary source of Gap or Mismatch Risk in the context of Interest Rate Risk (IRR)?

The timing difference between the repricing dates of assets and liabilities

The difference in the interest rates of various financial instruments

The mismatch in the principal amounts of assets and liabilities

The variation in the market value of assets and liabilities

Question 4 of 25

5. Which type of risk arises when there is a discrepancy in the magnitude of interest rate changes between different financial instruments?

Net Interest Position Risk

Basis Risk

Embedded Option Risk

Price Risk

Question 5 of 25

6. What does the Net Interest Position Risk indicate for a bank?

It reflects the mismatch between assets and liabilities in terms of principal amounts.

It signifies the volatility in net interest income due to changing market conditions.

It exposes the bank to interest rate risk based on the amount of interest earned on assets compared to liabilities.

It refers to the potential losses due to premature withdrawal of deposits before maturity.

Question 6 of 25

7. What is the primary source of Gap or Mismatch Risk in the context of Interest Rate Risk (IRR)?

The timing difference between the repricing dates of assets and liabilities

The difference in the interest rates of various financial instruments

The mismatch in the principal amounts of assets and liabilities

The variation in the market value of assets and liabilities

Question 7 of 25

8. Which type of risk arises when there is a discrepancy in the magnitude of interest rate changes between different financial instruments?

Net Interest Position Risk

Basis Risk

Embedded Option Risk

Price Risk

Question 8 of 25

9. What does the Net Interest Position Risk indicate for a bank?

It reflects the mismatch between assets and liabilities in terms of principal amounts.

It signifies the volatility in net interest income due to changing market conditions.

It exposes the bank to interest rate risk based on the amount of interest earned on assets compared to liabilities.

It refers to the potential losses due to premature withdrawal of deposits before maturity.

Question 9 of 25

10. Why has a broader focus on overall net income, including non-interest income activities, become common in assessing interest rate risk in banking?

Non-interest income activities are less sensitive to market interest rates.

Non-interest income activities are more stable than net interest income.

Non-interest income activities can be complex and sensitive to market interest rates.

Earnings variations have a minimal impact on an institution's financial stability.

Question 10 of 25

11. Why is it crucial for banks to measure interest rate risk from an economic value perspective?

Economic value includes present value of expected cash flows, impacting a bank's net worth.

Economic value assessment simplifies the calculation of interest rate risk.

Economic value remains unaffected by fluctuations in interest rates.

Economic value has no correlation with a bank's net worth.

Question 11 of 25

12. How does the bank categorize its assets, liabilities, and positions for reprising schedules?

Based on historical profits

According to current market trends

Time bands related to maturity or next repricing

Using random assignment methods

Question 12 of 25

13. What does a negative gap in gap analysis indicate?

Declining interest rates

Assets exceeding liabilities

Rising interest rates leading to declining Net Interest Income (NII)

Liabilities exceeding assets leading to rising NII

Question 13 of 25

14. How is duration calculated to measure interest rate sensitivity?

By considering only repricing risks

Using average durations for assets and liabilities

Applying weights based on estimated duration in different time bands

Solely based on coupon rates and payment timing

Question 14 of 25

15. What distinguishes simulation approaches from simple maturity-based methods in assessing interest rate risk?

They exclusively focus on reprising schedules

They involve assumptions about different position types and model various interest rate scenarios

They disregard economic value changes

They solely consider past interest rate fluctuations

Question 15 of 25

16. Which simulation type provides a more comprehensive view by incorporating changing variables and conditions over time?

Static Simulation

Dynamic Simulation

Duration Simulation

Gap Simulation

Question 16 of 25

17. Which action helps banks reduce asset sensitivity to interest rate changes?

Decreasing floating rate deposits

Selling floating rate loans

Reducing short-term borrowings

Increasing long-term lending

Question 17 of 25

18. What can banks do to reduce liability sensitivity to interest rate changes?

Decrease long-term deposits

Increase floating rate lending

Decrease short-term lending

Reduce investment portfolio maturities

Question 18 of 25

19. What strategy helps banks minimize adverse effects on net interest income related to interest rate sensitivity gaps?

Using derivatives

Managing NPAs

Setting tolerance limits

Varying the gap in line with interest rate forecasts

Question 19 of 25

20. How does extending investment portfolio maturities affect interest rate risk?

Increases asset sensitivity

Decreases asset sensitivity

Reduces liability sensitivity

Has no impact on sensitivity

Question 20 of 25

21. Why is constantly reviewing repricing structures essential for managing interest rate risk?

To increase interest rate volatility

To maintain the status quo in the portfolio

To proactively manage interest rate risk

To eliminate interest rate sensitivity

Question 21 of 25

22. Which strategy involves using financial instruments to hedge against interest rate risk?

Varying the gap in line with forecasts

Adjusting portfolio composition

Managing NPAs

Using derivatives

Question 22 of 25

23. What is the primary aim of establishing strong internal controls for interest rate risk management within banks?

Maximizing profits

Ensuring operational efficiency, compliance, and integrity

Minimizing customer interactions

Enhancing market share

Question 23 of 25

24. What elements are encompassed within the controls for interest rate risk management?

Financial projections and strategic planning

Marketing strategies and customer relations

Robust compliance culture, risk identification, defined policies, and information systems

Human resource management and employee satisfaction

Question 24 of 25

25. Which areas require particular attention to achieve risk management objectives in interest rate risk management?

Marketing strategies

Customer preferences

Approval processes, exposure limits, and independent evaluations

Administrative procedures

Question 25 of 25

BFM B – Unit 30 – set 2

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