Q:
Which of the following statements is (are) true with respect to the factors that a manager must take into account when managing the portfolios of commercial banks?
I. If interest rates are expected to rise, banks will generally lower the ratio of interest sensitive assets to interest sensitive liabilities.
II. Inflation protection is not generally needed when choosing assets for the investment portfolio.
III. The investment horizon for a bank's investment portfolio tends to be very long.
IV. With regards to the investment portfolio, liquidity is a far more important objective than asset value appreciation.
a) IV only.
b) I and III only.
c) I, III, and IV only.
d) II and IV only.
A:
The correct answer is: d)
(I) is incorrect because if interest rates are expected to rise, banks will generally "increase" the ratio of interest sensitive assets to interest sensitive liabilities. In other words, long-term bonds are issued to lock in their interest costs and at the same time, short term loans are made out so that they may be renewed at higher rates as they mature.
(II) is correct because the bank's liabilities are stated in nominal terms (ie. These liabilities will not change in accordance with inflation).
(III) is incorrect due to the fact that the investment portfolio is used to fund increases in loan demands, which can happen at any time.

MORE FAQS

  1. Which TWO statements are TRUE about writing covered calls? I ...

  2. Which statements about common shareholder rights are FALSE? I. A shareholder may exchange shares to ...

  3. Which of the following statements is(are) true with respect to the factors that a manager must take ...

  4. Which of the following are tools that are employed by the Federal Reserve in its efforts to control the money supply?

  5. Which of the following strategies is (are) appropriate? I. If a borrower has a fixed rate debt and is ...

  6. Which of the following statements is (are) true with respect to the key characteristics of the Global ...

  7. Under the Uniform Securities Act, registration with the Administrator as an investment adviser is required ...

  8. Under the Uniform Securities Act, which of the following are defined as securities ...

  9. Which of the following statements is (are) true with respect to price-earnings (P/E) multiples ...

  10. Federal covered securities are subject to which of the following requirements ...

  11. What two components are used to calculate risk-adjusted return? I ...

  12. Zero coupon bonds are frequently cited as a popular investment vehicle for education savings ...

  13. Under a pegged exchange rate system which of the following measures can be undertaken by a home country ...

  14. If a person's account is frozen, which of the following activities is allowed ...

  15. Money laundering has become a specific concern in all legitimate financial institutions worldwide ...

  16. How many attempts at each CFA exam is a candidate permitted?

  17. Do financial advisors need to pass the Series 7 exam?

  18. Do financial advisors need to be approved by FINRA?

  19. How does a broker decide which customers are eligible to open a margin account?

  20. Why is the Nasdaq more heavily weighted to tech stocks than other stock exchanges?

RELATED FAQS

  1. Which TWO statements are TRUE about writing covered calls? I ...

    The correct answer is c) I is incorrect because there is no margin requirement. III is incorrect because a call writer must ...
  2. Which statements about common shareholder rights are FALSE? I. A shareholder may ...

    The correct answer is a. I should be the the other way around: convertible bond holders can exchange their bonds for shares. ...
  3. Which of the following statements is(are) true with respect to the factors that ...

    The correct answer is: c) (I) is incorrect because while he amount of new underwriting business that may be undertaken is ...
  4. Which of the following are tools that are employed by the Federal Reserve in its ...

    I. Moral suasionII. Changing the discount rateIII. Changing the reserve requirementIV. Changing the prime interest rate A. ...
  5. Which of the following strategies is (are) appropriate? I. If a borrower has a fixed ...

    The correct answer is: a) (II) is incorrect because if an investor has floating rate assets and is expecting interest rates ...
  6. Which of the following statements is (are) true with respect to the key characteristics ...

    The correct answer is: a) (I) is incorrect. The rule is that if the Standards are more strict than local laws, yet they are ...
RELATED TERMS
  1. Interest Sensitive Liabilities

    Any type of short-term deposit held by a bank that pays a variable ...
  2. Dynamic Gap

    Refers to asset and liability risk management at financial institutions. ...
  3. Interest Sensitive Stock

    Any stock with a price that is extremely sensitive to changes ...
  4. Zero-Gap Condition

    When a financial institution's interest rate-sensitive assets ...
  5. Sensitivity

    The magnitude of a financial instrument's reaction to changes ...
  6. Price Sensitivity

    The degree to which the price of a product affects consumers ...
Trading Center