CBP Treasury Management and Capital Markets 2

Question 1

What is an 'interest rate swap' used for in bank treasury operations?

Accepted Answer

A derivative contract where two parties exchange fixed and floating interest rate payments on a notional principal

Answer

An interest rate swap is a derivative agreement where one party pays a fixed interest rate and receives a floating rate (or vice versa) on a notional amount, used to manage interest rate risk.

Question 2

What is 'liquidity coverage ratio' (LCR) as required by Basel III?

Accepted Answer

The requirement that banks hold sufficient high-quality liquid assets to cover net cash outflows over a 30-day stress period

Answer

The LCR requires banks to maintain a stock of high-quality liquid assets (HQLA) equal to at least 100% of their projected net cash outflows over a 30-day stress scenario.

Question 3

In the context of bank treasury, what is 'asset-liability management' (ALM)?

Accepted Answer

A risk management framework that coordinates assets and liabilities to maximize net interest margin while controlling interest rate and liquidity risk

Answer

ALM is a comprehensive risk management process that balances the bank's assets and liabilities to achieve desired financial outcomes while managing interest rate risk, liquidity risk, and capital adequacy.

Question 4

What is a 'Treasury bond' (T-bond) and how does it function in the US capital markets?

Accepted Answer

A long-term US government debt obligation with maturities of 10 to 30 years that pays semi-annual interest

Answer

Treasury bonds are long-term US government debt securities with 10- to 30-year maturities, backed by the full faith and credit of the US government, paying semi-annual coupon interest.

Question 5

What does 'yield curve' represent and why is it important to bank treasury managers?

Accepted Answer

A chart showing the relationship between interest rates and maturities for debt instruments of equal credit quality

Answer

The yield curve plots interest rates across different maturities for similar-quality bonds; treasury managers use it to understand the term structure of rates, manage interest rate risk, and assess economic outlook.

(CBP) Certified Banking Professional Practice Test

(CBP) Certified Banking Professional Practice Test

CBP Treasury Management and Capital Markets 2