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Chapter 67 test 1 The repricing gap model is a book value accounting based model. 2 A positive repricing gap implies that a decrease in interest rates will cause interest expense to decrease more than the decrease in interest income. 3 When a bank’s repricing gap is positive, net interest income is positively related to changes in interest rates. 4 A bank with a negative repricing (or funding) gap faces reinvestment risk. 5 The economic meaning of duration is the interest elasticity of a financial assets price. 6 Duration considers the timing of all the cash flows of an asset by summing the product of the cash flows and the time of occurrence. 7 Duration is equal to maturity when at least some of the cash flows are received upon maturity of the asset. 8 Duration of a zero coupon bond is equal to the bond’s maturity. 9 As interest rates rise, the duration of a consol bond decreases. 10 For a given maturity fixed-income asset, duration decreases as the market yield increases. Multiple-Choice 1 The repricing gap approach calculates the gaps in each maturity bucket by subtracting the a. current assets from the current liabilities. b. long term liabilities from the fixed assets. c. rate sensitive assets from the total assets. d. rate sensitive liabilities from the rate sensitive assets. e. current liabilities from tangible assets. 2 A positive gap implies that an increase in interest rates will cause _______ in net interest income. a. no change b. a decrease c. an increase d. an unpredictable change e. Either A or B. 3 If interest rates decrease 50 basis points for an FI that has a gap of +$5 million, the expected change in net interest income is a. + $2,500. b. + $25,000. c. + $250,000. d. - $250,000. e. - $25,000. 4 The duration of a consol bond is a. less than its maturity. b. infinity. c. 30 years. d. more than its maturity. e. given by the formula D=1/1-R. 5 An FI has financial assets of $800 and equity of $50. If the duration of assets is