389 $
© 2014 Pearson Canada Inc.$- Your bank has the following balance sheet:
Assets Liabilities
Rate-sensitive$100 million Rate-sensitive$75 million
Fixed-rate 100 million Fixed-rate 125 million
What would happen to bank profits if the interest rates in the economy go down? Is there
anything that you could do to keep your bank from being so vulnerable to interest rate
movements?
Answer: The bank's profits would go down because it has more interest-rate sensitive assets than
liabilities. In order to reduce interest-rate sensitivity, the bank manager could use financial
derivatives such as interest-rate swaps, options, or futures. The bank manager could also try to
adjust the balance sheet so that the bank's profits are not vulnerable to the movement of the
interest rate.
Diff: 3 Type: SA Page Ref: 313
Skill: Applied
Objective List: 13.3 Discuss how bank managers manage credit risk and interest-rate risk
13.6 Off-Balance-Sheet Activities
Examples of off-balance-sheet activities include ____.
A) loan sales
B) extending loans to depositors
C) borrowing from other banks
D) selling negotiable CDs
Answer: A
Diff: 2 Type: MC Page Ref: 317
Skill: Recall
Objective List: 13.5 Illustrate how off-balance-sheet activities affect bank profits
All of the following are examples of off-balance sheet activities that generate fee income for
banks except ____.
A) foreign exchange trades
B) guaranteeing debt securities
C) back-up lines of credit
D) selling negotiable CDs
Answer: D
Diff: 2 Type: MC Page Ref: 317 - 318
Skill: Recall
Objective List: 13.5 Illustrate how off-balance-sheet activities affect bank profits