CAIIB · Bank Financial Management · Module D — Balance Sheet Management
CAIIB BFM Unit 30 — Interest Rate Risk Management: Free MCQs with Explanations
By Swarnakshi Jha (ex-banker) · Updated 29 October 2026 · Paper II of the December 2026 cycle (Saturday 12 December 2026)
This is the free practice page for CAIIB BFM Unit 30 — Interest Rate Risk Management (Module D — Balance Sheet Management). The CAIIB Mock Centre holds 311 questions on this unit alone, every one with a why-right / why-wrong explanation; below are the facts examiners keep returning to, five practice questions with explanations, and the traps that cost marks.
BFM · Module D311 MCQs in the Mock Centre5 free belowPaper on 12 December
Key facts examiners test from this unit
Why interest rate risk matters — once rates were freed, every mismatch in maturity, repricing or rate basis became a risk to earnings and to net worth.
Gap (mismatch) risk and the repricing gap — ΔNII ≈ one-year cumulative gap × change in rates.
Basis risk and net interest position risk — gaps assume rates move together; basis risk is what happens when they do not.
Changed since the textbook
ALM Directions, 2025 (28 Nov 2025). Chapter VII, Interest Rate Risk (IRR) Management (paras 90–96): earnings perspective by Traditional Gap Analysis (TGA); economic value perspective by Duration Gap Analysis (DGA); monitoring, positions in various currencies, and IRR management; the Interest Rate Sensitivity statement (Annex III); modified duration defined as the approximate % change in value for a 100 bp change (para 11). Source: RBI notification page
Investment Portfolio Directions, 2025 (28 Nov 2025). Investments in HTM, AFS and FVTPL (with HFT inside FVTPL); sales out of HTM capped at 5% of the opening HTM carrying value (more needs RBI approval; some sales excluded); AFS valuation gains and losses go to the AFS-Reserve, not the P&L. Source: TaxGuru copy
5 free practice questions — tap an option
Five practice questions from this unit. Answers lock on the first tap, exactly as in the exam, and an explanation opens underneath. The Mock Centre has all 311 questions on this unit, from easy to tough, with caselets and key-in numericals, why every other option is wrong and the exam tip — and tracks your score and revision dates.
Question 1 of 5
A bank holds one-year assets funded by two-year liabilities. Which risk does this position create?
Why (a): 30.3.1: when assets are shorter than the liabilities that fund them, the bank must reinvest the asset proceeds after the first year while still paying the locked-in cost of the liabilities, so a fall in rates would squeeze its margin: reinvestment risk. Refinancing risk is the mirror case, when liabilities run off before the assets they fund. (b) is wrong: The liabilities run longer, so no refinancing is needed. (c) is wrong: Nothing in the position points to different benchmarks. (d) is wrong: No prepayment option is described.
Question 2 of 5
A 91-day deposit funds a 5-year fixed-rate mortgage loan. What is the bank's position, and what does a rise in rates do?
Why (c): 30.3.1: "The bank is now liability sensitive ... Any increase in interest rate will cause an erosion in the liability sensitive bank's NII.". (a) is wrong: The deposit reprices faster than the loan. (b) is wrong: The maturities differ widely. (d) is wrong: Rising deposit costs erode NII.
Question 3 of 5
In XYZ Bank's gap statement, rate-sensitive assets are call money ₹50 crore and cash credit ₹40 crore; liabilities are savings ₹50 crore and fixed deposits ₹50 crore. What is the gap?
Why (b): Gap = 90 − 100 = −₹10 crore. (a) is wrong: This compares only fixed deposits with nothing. (c) is wrong: Assets total 90 and liabilities 100. (d) is wrong: Liabilities exceed assets.
Question 4 of 5
Which of these is an embedded option on the liability side of a bank's balance sheet?
Why (a): 30.3.4: premature withdrawal of deposits before their stated maturity is the liability-side option. (b) is wrong: That is on the asset side. (c) is wrong: That is on the asset side. (d) is wrong: That is the bank's own option.
Question 5 of 5
A bank must pay ₹16,000 in 5 years on a ₹10,000 zero-coupon deposit. It holds a 5-year bond paying ₹1,000 a year. If coupons are reinvested at 6%, what is the result at maturity?
Why (d): Coupons: 1,000 × 5.6371 = 5,637.1; total 15,637.1 against ₹16,000 owed: a shortfall of about ₹362.9. (a) is wrong: This reinvests at 10%. (b) is wrong: This compares with ₹15,000. (c) is wrong: The coupons grow to ₹5,637.
0 of 5 answered.
Traps in this unit
Interest rate risk is not only about NII: values move too.
Accepting the risk is normal; only excessive risk is the threat.
A matched book removes gap risk only.
Practise all 311 questions on Unit 30. The free CAIIB demo opens Units 1–2 of every paper with full explanations; the BFM Online Mock Centre unlocks all 7,600+ BFM questions, the full-length papers with caselets and key-ins, module mocks and Smart Revision for 18 months (₹1,499).
Independent study aid — not affiliated with, endorsed by, or sponsored by the Indian Institute of Banking & Finance (IIBF). Exam pattern, dates, fees and passing criteria are set by IIBF — always confirm the current rules at iibf.org.in. CAIIB content follows rules and developments up to IIBF's cut-off of 30 June 2026 (where a rule changed later, the update box says so); verify from official sources before relying on them in practice.