Q&P1:What is the process ofasset transformationperformed by a financial institution?Why does this process often lead to the creation ofinterest rate risk?What is interest rate risk?

Q&P2:What isrefinancing risk?How is refinancing risk part of interest rate risk?If an FI funds long-term assets with short-term liabilities, what will be the impact on earnings of an increase in the rate of interest?A decrease in the rate of interest?

Q&P3:What isreinvestment risk?How is reinvestment risk part of interest rate risk?If an FI funds short-term assets with long-term liabilities, what will be the impact on earnings of a decrease in the rate of interest?An increase in the rate of interest?

Q&P4:The sales literature of a mutual fund claims that the fund has no risk exposure since it invests exclusively in federal government securities which are free of default riskIs that claim true?Explain why or why not.

Q&P5:How can interest rate risk adversely affect the economic or market value of an FI?

Chapter 8

Q&P1:How do monetary policy actions made by the Federal Reserve impact interest rates?

Q&P2:How has the increased level of financial market integration affected interest rates?

Q&P3:What is the repricing gap?In using this model to evaluate interest rate risk, what is meant by rate sensitivity?On what financial performance variable does the repricing model focus?Explain?

Q&P4:What is the maturity bucket in the repricing model?Why is the length of time selected for repricing assets and liabilities important in using the repricing model?

Q&P5:What is the CGAP effect?According to the CGAP effect, what is the relation between changes in interest rates and changes in net interest income when CGAP is positive?When CGAP is negative?