CBP Treasury Management and Capital Markets 1 — Questions and Answers
Question 1: What is the primary function of a bank's treasury department?
- Processing retail customer deposits
- Managing the bank's liquidity, funding, interest rate risk, and capital markets activities (Correct answer)
- Underwriting commercial insurance products
- Administering employee pension plans
Correct answer: Managing the bank's liquidity, funding, interest rate risk, and capital markets activities
The treasury department manages the bank's overall balance sheet, including liquidity management, funding strategy, interest rate risk, and investment portfolio activities.
Question 2: What is the federal funds rate in the US banking system?
- The interest rate the Federal Reserve charges commercial banks for emergency loans
- The interest rate at which depository institutions lend reserve balances to each other overnight (Correct answer)
- The rate at which the US Treasury borrows from commercial banks
- The minimum interest rate banks must charge on consumer loans
Correct answer: The interest rate at which depository institutions lend reserve balances to each other overnight
The federal funds rate is the target interest rate set by the FOMC at which commercial banks borrow and lend their excess reserve balances to each other on an overnight basis.
Question 3: What does 'duration' measure in the context of fixed-income portfolio management?
- The number of years until a bond matures
- The sensitivity of a bond's price to changes in interest rates (Correct answer)
- The length of time a bond has been held in a portfolio
- The time needed to liquidate a bond position in the market
Correct answer: The sensitivity of a bond's price to changes in interest rates
Duration measures a bond's price sensitivity to interest rate changes; a higher duration means greater price volatility when rates move, making it a key risk metric for fixed-income portfolios.
Question 4: In capital markets, what is a 'repurchase agreement' (repo)?
- A corporate stock buyback program
- A short-term borrowing arrangement where securities are sold with an agreement to repurchase them at a higher price (Correct answer)
- A long-term government bond issuance program
- An agreement to repurchase non-performing loans from another bank
Correct answer: A short-term borrowing arrangement where securities are sold with an agreement to repurchase them at a higher price
A repurchase agreement (repo) is a short-term secured lending transaction where one party sells securities and agrees to buy them back at a slightly higher price, effectively borrowing cash using the securities as collateral.
Question 5: What is 'net interest margin' (NIM) and why is it important to bank treasury management?
- The percentage of non-performing loans in the portfolio
- The difference between interest income earned on assets and interest paid on liabilities, expressed as a percentage of earning assets (Correct answer)
- The spread between the bank's stock price and book value
- The ratio of fee income to total revenue
Correct answer: The difference between interest income earned on assets and interest paid on liabilities, expressed as a percentage of earning assets
Net interest margin (NIM) measures the profitability of the bank's lending and investing activities versus its cost of funds, and is a key indicator of the bank's core earnings power.
Question 6: Which market serves as a primary venue for banks to issue and trade short-term debt instruments with maturities of one year or less?
- Equity capital market
- Money market (Correct answer)
- Derivatives market
- Foreign exchange spot market
Correct answer: Money market
The money market is the financial market for short-term debt instruments (maturities of one year or less), including Treasury bills, commercial paper, and certificates of deposit.
CBP Treasury Management and Capital Markets 1
What is the primary function of a bank's treasury department?