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Consider the following repricing buckets and gaps:  Repricing bucket  Assets  Liabilities  Gaps  1 day $50000$120000−$70000 1 day to 3 months $100000$70000$30000 3 to 6 months $100000$100000$0 6 to 12 months $250000$80000$1700001 to 5 years $75000$130000−$55000 Over 5 years $25000$100000−$75000\begin{array} { | l | r | r | r | } \hline \text { Repricing bucket } &{ \text { Assets } } & { \text { Liabilities } } & { \text { Gaps } } \\\hline \text { 1 day } & \$ 50000 & \$ 120000 & - \$ 70000 \\\hline \text { 1 day to 3 months } & \$ 100000 & \$ 70000 & \$ 30000 \\\hline \text { 3 to 6 months } & \$ 100000 & \$ 100000 & \$ 0 \\\hline \text { 6 to 12 months } & \$ 250000 & \$ 80000 & \$ 170000 \\\hline 1 \text { to 5 years } & \$ 75000 & \$ 130000 & - \$ 55000 \\\hline \text { Over 5 years } & \$ 25000 & \$ 100000 & - \$ 75000 \\\hline\end{array} What is the annualised change in the bank's future net interest income if the average rate change for assets and liabilities that can be repriced within one year is an increase of 100 basis points?


A) $17 000
B) -$17 000
C) $13 000
D) -$13 000

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Convexity is the major problem associated with the repricing gap.

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The term 'runoffs' refers to:


A) one-off cash flow of interest and principal amortisation payments on long-term assets
B) periodic cash flow of interest and principal amortisation payments on long-term assets
C) one-off cash flow of interest and principal amortisation payments on short-term assets
D) periodic cash flow of interest and principal amortisation payments on short-term assets

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In the last quarter ABC Bank reported the following repricing buckets:  Repricing buckets  Assets Liabilities 1 day $50$1001 day to 3 months $120$253 months to 6 months $35$1006 months to 12 months $65$751 year to 5 years $70$40 Over 5 years $60$60\begin{array} { | l l l | } \hline \text { Repricing buckets } & { \text { Assets Liabilities } } \\1 \text { day } & \$ 50 & \$ 100 \\1 \text { day to } 3 \text { months } & \$ 120 & \$ 25 \\3 \text { months to } 6 \text { months } & \$ 35 & \$ 100 \\6 \text { months to } 12 \text { months } & \$ 65 & \$ 75 \\1 \text { year to } 5 \text { years } & \$ 70 & \$ 40 \\\text { Over } 5 \text { years } & \$ 60 & \$ 60 \\\hline\end{array} Calculate the repricing gaps for each maturity bucket and the cumulative gaps

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None...

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Which of the following statements is true?


A) An FI with a repricing gap of zero is unsure about interest rate movements.
B) An FI with a repricing gap of zero expects interest rates to rise.
C) An FI with a repricing gap of zero expects interest rates to remain fall.
D) An FI with a repricing gap of zero does not measure and manage its interest rate exposures.

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The cumulative gap over the whole balance sheet by definition:


A) must be greater than zero
B) must be lower than zero
C) must equal zero
D) can take any value

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Which of the following statements is true?


A) The runoff component is rate-sensitive.
B) The runoff component is rate-insensitive.
C) The runoff component refers to interest payments on long-term liabilities that need to be refinanced at market rates.
D) The run-off component refers to interest payments on short-term liabilities that need to be refinanced at market rates.

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An FI with a negative gap of $20 million suffers a $0.2 million decrease in its net interest income if interest rates decrease by 1 per cent.

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Consider the following table: Consider the following table: What is the one-year gap adjusted for runoffs? A) $43 B) $87 C) $121 D) $78 What is the one-year gap adjusted for runoffs?


A) $43
B) $87
C) $121
D) $78

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Which of the following are rate-sensitive liabilities?


A) Short-term consumer loans, cheque accounts and three-month Treasury Notes
B) Three-month term deposits, three-month bankers' acceptances, six-month negotiable certificates of deposit and one-year term deposits
C) Short-term consumer loans, six-month negotiable certificates of deposit and one-year term deposits.
D) Short-term consumer loans, six-month Treasury Notes and three-year Treasury Bonds

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Interest rate spread is the difference between the earning assets interest rate and cash rate set by RBA.

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Consider the following table: Consider the following table: How does a decrease in the average one-year interest rate of 50 basis points affect the FI's future net interest income? A) The NII decreases by $0.435. B) The NII increases by $0.435. C) The NII remains constant. D) The NII decreases by $0.39. How does a decrease in the average one-year interest rate of 50 basis points affect the FI's future net interest income?


A) The NII decreases by $0.435.
B) The NII increases by $0.435.
C) The NII remains constant.
D) The NII decreases by $0.39.

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How do you interpret the position of an FI with a positive on-balance-sheet gap and a negative off-balance sheet gap?


A) The FI uses its on-balance-sheet activities to hedge its off-balance-sheet activities.
B) The FI uses its off-balance-sheet activities to hedge its on-balance-sheet activities.
C) The FI believes that interest rates will increase and made a mistake in setting its gap for off-balance-sheet activities.
D) The FI believes that interest rates will increase and made a mistake in setting its gap for on-balance-sheet activities.

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The cumulative repricing gap position of an FI for a given extended time period is the sum of the repricing gap values for the individual time periods that make up the extended time period.

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Consider the following information to answer the question:  Assets  Amount  Rate  Liabilities  Amount  Rate  Rate $3500000010% Rate $400000008% Sensitive  Sensitive  Fixed rate $210000009% Fixed rate $120000007% Non-earning $4000000 Equity $8000000\begin{array} { | l | l | l | l | l | l | } \hline \text { Assets } & \text { Amount } & \text { Rate } & \text { Liabilities } & \text { Amount } & \text { Rate } \\\hline \text { Rate } & \$ 35000000 & 10 \% & \text { Rate } & \$ 40000000 & 8 \% \\\hline \text { Sensitive } & & & \text { Sensitive } & & \\\hline \text { Fixed rate } & \$ 21000000 & 9 \% & \text { Fixed rate } & \$ 12000000 & 7 \% \\\hline \text { Non-earning } & \$ 4000000 & & \text { Equity } & \$ 8000000 & \\\hline\end{array} What will be the FI's net interest income at year-end if interest rates do not change?


A) $3.20 million
B) $5.39 million
C) $1.89 million
D) $1.35 million

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If the spread between rate-sensitive assets and rate-sensitive liabilities increases for a bank, future changes in interest rates will lead to an increase in net interest income.

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Which of the following statements is true?


A) A major reason for cheque accounts to be excluded from an FI's interest-sensitive liabilities is that the majority of these accounts are core deposits.
B) Cheque accounts should be treated as interest-sensitive liabilities because if interest rates fall, deposits might be withdrawn and thus will need to be replaced by higher-yielding deposits.
C) The final decision whether or not to include cheque accounts as rate sensitive liabilities must be made by predicting depositors' behaviours.
D) None of the listed options are correct.

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An FI with a neutral repricing gap in its three to six month bucket is hedged against any interest rate changes at all points in time.

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Which of the following statements is true?


A) As opposed to the duration model, the repricing gap model is a market-value based approach.
B) As opposed to the maturity model, the repricing gap model is a market-value based approach.
C) The capital loss effect is captured by the repricing model.
D) None of the listed options are correct.

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Outline what is meant by the CGAP effect and explain the relationship between interest rate changes and changes in net interest income.Specifically, indicate whether a FI would wish to hold a negative or positive CGAP and under which interest rate conditions.

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The CGAP effect describes the relations ...

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