Interest rate risk:

1. varies inversely with a bank's GAP.
2. can be measured by the volatility of a bank's net interest income given changes in the level of interest rates.
3. can be eliminated by matching fixed rate assets with variable rate liabilities.
4. rarely has an impact on bank earnings.
5. All of the above

Why is the failure of a large bank more detrimental to the economy than the failure of a large steel manufacturer?

1. The bank failure usually leads to a government bailout.
2. There are fewer steel manufacturers than there are banks.
3. Since the steel company's assets are tangible, they are more easily reallocated than the intangible bank assets.
4. Everyone needs money, but not everyone needs steel.
5. The large bank failure reduces credit availability throughout the economy.

If the bank follows a defensive strategy in asset-liability management, and currently the bank has a positive adjusted duration gap, the bank would need to :

1. increase duration of liability portfolio
2. decrease duration of asset portfolio
3. increase duration of liability portfolio & decrease duration of asset portfolio
4. all of them are correct
5. none of them is correct