Banking Exam Treasury Management 3

Question 1

In bank treasury management, 'Funds Transfer Pricing' (FTP) refers to:

Accepted Answer

An internal rate used to allocate funding costs and credits across business units

Answer

FTP is an internal mechanism where the treasury charges business units for the cost of funding their assets and credits them for deposit generation, enabling accurate profitability measurement.

Question 2

When a bank hedges interest rate risk using an interest rate swap, it typically:

Accepted Answer

Exchanges fixed-rate payments for floating-rate payments or vice versa

Answer

In an interest rate swap, counterparties exchange fixed-rate and floating-rate payment streams, allowing banks to adjust their effective interest rate exposure without altering underlying balance sheet assets.

Question 3

In fixed-income portfolio management, 'convexity' measures:

Accepted Answer

The curvature of the price-yield relationship, refining duration estimates for large rate moves

Answer

Convexity captures the second-order (non-linear) effect of interest rate changes on bond prices, improving on duration alone when interest rate moves are large.

Question 4

Under the Basel III framework, Tier 1 capital primarily consists of:

Accepted Answer

Common equity and retained earnings (Common Equity Tier 1 / CET1)

Answer

Common Equity Tier 1 (CET1) capital — primarily common shares and retained earnings — is the highest quality and most loss-absorbing form of capital under the Basel III framework.

Question 5

A bank's 'cost of funds' is best described as:

Accepted Answer

The average interest rate paid on all interest-bearing liabilities

Answer

Cost of funds is the average rate a bank pays on deposits and other borrowed money, which directly impacts profitability when compared against the yield earned on assets.

Banking Exam Practice Test

Banking Exam Practice Test

Banking Exam Treasury Management 3