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Chapter 22 FIN344
| Question | Answer |
|---|---|
| Repricing model | examines the impact of interest rate changes on net interest income |
| duration model | examines the impact of interest rate changes on the overall market value of an FI and thus ultimately on net worth |
| expansionary monetary policy | decreases in the target fed funds rate |
| contractionary monetary policy | involves increases in the target fed funds rate |
| repricing or funding gap | the difference between those assets whose interest rates will be repriced or changed over some future period and liabilities whose interest rates will be repriced or changed over some future period |
| rate-sensitivity | measures the time to repricing of an asset or liability |
| cumulative gap effect | the relation between changes in interest rates and changes in net interest income |
| spread effect | the effect that a change in the spread between rates on RSAs and RSLs has on net income as interest rates change |
| four major weaknesses in the repricing model | -ignores market balue effects of intereest rate changes -ignores cash flow patterns within a maturity bucket |
| cont four major weaknesses in the repricing model | -fails to deal with the problem of rate insensitive asset and liability runoffs and prepayments -ignores cash flows from off-balance-sheet activities |
| duration | -the magnitude of the interest revenues or expenses of an asset or liability -provides a good measurement of interest rate elasticity, or interest rate "sensitivity"—for assets or liabilities |
| duration gap | a measure of overall interest rate risk exposure for an FI |
| to find the duration of the total portflio of: assets or liabilities for an FI | -first determine the duration of each asset (liability) in the portfolio -then calculate the market value weighted average of the duration of the assets (liabilities) in the portfolio |
| the effects of interest rate changes on the market value of equity or net worth of an FI 3 effects | -the leverage adjusted duration gap -the size of the FI -the size of the interest rate shock |
| net worth is equal to | the difference between the market value of an FI's assets and the market value of its liabilities |
| market value or market-to-market value basis | balance sheet values that reflect current rather than historical prices |
| book value of equity capital | the difference between the BV of assets and the BV of liabilities |
| the degree to which the BV of equity deviates from the MV of equiy depends on: (3) | -interest rate volatility -examination and enfocement -loan trading |
| market-to-book ratio | a ratio that shows the discrepancy between the MV and BV of its equity |
| repricing gap model: Eq: | -focuses on changes in the interest income and interest expense of a bank. eq. rate-sensitive assets minus rate-sensitive liabilities. |
| rate sensitive | the loan may be maturing within the given maturity bucket -it has a floating interest rate that can adjust within this period |
| A bank with a negative 1-year repricing gap would expect | an increase in net interest income if interest rates fall over the coming year |
| cumulative gap | sum up the various "gaps" for all the maturity buckets out to one year, |
| repricing gap model, an increase in market interest rates would: | increase the net interest income of a bank with a positive 1-year gap |
| leverage adjusted duration gap | measures the sensitivity of bank equity value to interest rate changes |
| duration of a bank's asset portfolio. EQ. | Eq. Take the weighted average of the two durations—using "market value" weights. (((MV1/MVtotal)x#of years) + ((MV2/MVtotal)x#of years))) |
| one-year repricing gap EQ. | subtract "rate-sensitive liabilities" from "rate-sensitive assets" |
| market interest rates were to change, what's the expected change in Basic Bank's annual net interest income? | The change in net interest income equals: the "gap," multiplied by the interest rate change. |
| one-year, rate sensitive | (1) that the item will mature, or can be "repriced," within one year (2) that the item be among the liabilities of the bank's balance sheet. |
| If interest rates fall, what is the resulting percentage change in asset value? | negative duration x (% change / (1+ starting %) |
| leverage adjusted duration gap EQ. | Duration assets - (k x duration Lib), where k = Lib/Assets |
| If interest rates, what is the resulting market value change in the bank's equity | -Adjusted duration gap * Asset size * [∆R/(1 + R)] |
Created by:
muhls54