Question 1

Duration considers the timing of all the cash flows of an asset by summing the product of the cash flows and the time of occurrence.

Accepted Answer

A) True 
 B)False

Question 2

An FI purchases a $9.982 million pool of commercial loans at par.The loans have an interest rate of 8 percent, a maturity of five years, and annual payments of principal and interest that will exactly amortize the loan at maturity.What is the duration of this asset?

Accepted Answer

A) 4.12 years. 
B) 3.07 years. 
C) 2.50 years. 
D) 2.85 years. 
E) 5.00 years. 
A) 4.12 years. 
B) 3.07 years. 
C) 2.50 years. 
D) 2.85 years. 
E) 5.00 years.

Question 3

Duration of a fixed-rate coupon bond will always be greater than one-half of the maturity.

Accepted Answer

A) True 
 B)False

Question 4

Modified duration is defined as duration multiplied by 1 plus the interest rate.

Accepted Answer

A) True 
 B)False

Question 5

Immunization of a FIs net worth requires the duration of the liabilities to be adjusted for the amount of leverage on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 6

What is the duration of the municipal notes (the value of x)?

Accepted Answer

A) 1.94 years. 
B) 2.00 years. 
C) 1.00 years. 
D) 1.81 years. 
E) 0.97 years.
[Refer to: 9-128] 
A) 1.94 years. 
B) 2.00 years. 
C) 1.00 years. 
D) 1.81 years. 
E) 0.97 years.
[Refer to: 9-128]

Question 7

Immunizing the net worth ratio requires that the duration of the assets be set equal to the duration of the liabilities.

Accepted Answer

A) True 
 B)False

Question 8

The duration of a portfolio of assets can be found by calculating the book value weighted average of the durations of the individual assets.

Accepted Answer

A) True 
 B)False

Question 9

The rate of change in duration values is less than the rate of change in maturity.

Accepted Answer

A) True 
 B)False

Question 10

What conclusions can you draw from the duration gap in your answer to the previous question?

Accepted Answer

A) The market value of the dealer's equity decreases slightly if interest rates fall. 
B) The market value of the dealer's equity becomes negative if interest rates rise. 
C) The market value of the dealer's equity decreases slightly if interest rates rise. 
D) The market value of the dealer's equity becomes negative if interest rates fall. 
E) The dealer has no interest rate risk exposure. [Refer to: 9-80] 
A) The market value of the dealer's equity decreases slightly if interest rates fall. 
B) The market value of the dealer's equity becomes negative if interest rates rise. 
C) The market value of the dealer's equity decreases slightly if interest rates rise. 
D) The market value of the dealer's equity becomes negative if interest rates fall. 
E) The dealer has no interest rate risk exposure. [Refer to: 9-80]

Question 11

The larger the interest rate shock, the smaller the interest rate risk exposure of an FI.

Accepted Answer

A) True 
 B)False

Question 12

Immunizing the balance sheet of an FI against interest rate risk requires that the leverage adjusted duration gap (DA-kDL) should be set to zero.

Accepted Answer

A) True 
 B)False

Question 13

The cost in terms of both time and money to restructure the balance sheet of large and complex FIs has decreased over time.

Accepted Answer

A) True 
 B)False

Question 14

Dollar duration is the dollar value change in a security's price to a 1 percent change in the return on the security.

Accepted Answer

A) True 
 B)False

Question 15

For a given change in required yields, short-duration securities suffer a smaller capital loss or receive a smaller capital gain than do long-duration securities.

Accepted Answer

A) True 
 B)False

Question 16

To measure duration gap one should first determine the duration of an FI's asset portfolio and the duration of its liability portfolio.

Accepted Answer

A) True 
 B)False

Question 17

Setting the duration of the assets higher than the duration of the liabilities will exactly immunize the net worth of an FI from interest rate shocks.

Accepted Answer

A) True 
 B)False

Question 18

The shortcomings of this strategy are the following except

Accepted Answer

A) duration changes as the time to maturity changes, making it difficult to maintain a continuous hedge. 
B) estimation of duration is difficult for some accounts such as demand deposits and passbook savings account. 
C) it ignores convexity which can be distorting for large changes in interest rates. 
D) it is difficult to compute market values for many assets and liabilities. 
E) it does not assume a flat term structure, so its estimation is imprecise.
[Refer to: 9-121] 
A) duration changes as the time to maturity changes, making it difficult to maintain a continuous hedge. 
B) estimation of duration is difficult for some accounts such as demand deposits and passbook savings account. 
C) it ignores convexity which can be distorting for large changes in interest rates. 
D) it is difficult to compute market values for many assets and liabilities. 
E) it does not assume a flat term structure, so its estimation is imprecise.
[Refer to: 9-121]

Question 19

Which of the following statements about leverage-adjusted duration gap is true?

Accepted Answer

A) It is equal to the duration of the assets minus the duration of the liabilities. 
B) Larger the gap in absolute terms, the more exposed the FI is to interest rate shocks. 
C) It reflects the degree of maturity mismatch in an FI's balance sheet. 
D) It indicates the dollar size of the potential net worth. 
E) Its value is equal to duration divided by (1 + R). 
A) It is equal to the duration of the assets minus the duration of the liabilities. 
B) Larger the gap in absolute terms, the more exposed the FI is to interest rate shocks. 
C) It reflects the degree of maturity mismatch in an FI's balance sheet. 
D) It indicates the dollar size of the potential net worth. 
E) Its value is equal to duration divided by (1 + R).

Question 20

Using present value bond valuation techniques, calculate the exact price of the bond after the interest rate increase of 20 basis points.

Accepted Answer

A) $1,007.94. 
B) $992.02. 
C) $992.06. 
D) $996.01. 
E) $1,003.99. [Refer to: 9-102] 
A) $1,007.94. 
B) $992.02. 
C) $992.06. 
D) $996.01. 
E) $1,003.99. [Refer to: 9-102]

Exam 9: Interest Rate Risk II

Duration considers the timing of all the cash flows of an asset by summing the product of the cash flows and the time of occurrence.

An FI purchases a $9.982 million pool of commercial loans at par.The loans have an interest rate of 8 percent, a maturity of five years, and annual payments of principal and interest that will exactly amortize the loan at maturity.What is the duration of this asset?

Duration of a fixed-rate coupon bond will always be greater than one-half of the maturity.

Modified duration is defined as duration multiplied by 1 plus the interest rate.

Immunization of a FIs net worth requires the duration of the liabilities to be adjusted for the amount of leverage on the balance sheet.

What is the duration of the municipal notes (the value of x)?

Immunizing the net worth ratio requires that the duration of the assets be set equal to the duration of the liabilities.

The duration of a portfolio of assets can be found by calculating the book value weighted average of the durations of the individual assets.

The rate of change in duration values is less than the rate of change in maturity.

What conclusions can you draw from the duration gap in your answer to the previous question?

The larger the interest rate shock, the smaller the interest rate risk exposure of an FI.

Immunizing the balance sheet of an FI against interest rate risk requires that the leverage adjusted duration gap (DA-kDL) should be set to zero.

The cost in terms of both time and money to restructure the balance sheet of large and complex FIs has decreased over time.

Dollar duration is the dollar value change in a security's price to a 1 percent change in the return on the security.

For a given change in required yields, short-duration securities suffer a smaller capital loss or receive a smaller capital gain than do long-duration securities.

To measure duration gap one should first determine the duration of an FI's asset portfolio and the duration of its liability portfolio.

Setting the duration of the assets higher than the duration of the liabilities will exactly immunize the net worth of an FI from interest rate shocks.

The shortcomings of this strategy are the following except

Which of the following statements about leverage-adjusted duration gap is true?

Using present value bond valuation techniques, calculate the exact price of the bond after the interest rate increase of 20 basis points.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Fintech Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters

Immunizing the balance sheet of an FI against interest rate risk requires that the leverage adjusted duration gap (D_A-kD_L) should be set to zero.