Question 1

If a rise in interest rates causes a bank's market value of net worth to rise,the bank must have a:

Accepted Answer

A)  positive duration gap for its portfolio of assets and liabilities. 
B)  negative duration gap for its portfolio of assets and liabilities. 
C)  negative gap. 
D)  positive gap. 
A)  positive duration gap for its portfolio of assets and liabilities. 
B)  negative duration gap for its portfolio of assets and liabilities. 
C)  negative gap. 
D)  positive gap.

Question 2

If the current yields on three-year corporate bonds are 7% per annum and on the same day the yield in the futures market for comparable bonds is 6.50% per annum,the interest rate difference is due to:

Accepted Answer

A)  business risk. 
B)  basis risk. 
C)  credit risk. 
D)  financial risk. 
A)  business risk. 
B)  basis risk. 
C)  credit risk. 
D)  financial risk.

Question 3

If a company has issued a fixed-interest bond to investors and then later interest rates fall on comparable securities,the value of the existing fixed-interest bond:

Accepted Answer

A)  will increase. 
B)  will decrease. 
C)  will be unaffected. 
D)  depends only on the credit risk of the issuer. 
A)  will increase. 
B)  will decrease. 
C)  will be unaffected. 
D)  depends only on the credit risk of the issuer.

Question 4

Over the lifetime of a bond,the coupons received by the holder of the bond are exposed to:

Accepted Answer

A)  financial risk. 
B)  liquidity risk. 
C)  price risk. 
D)  reinvestment risk. 
A)  financial risk. 
B)  liquidity risk. 
C)  price risk. 
D)  reinvestment risk.

Question 5

Refer to the following table:
Premier National Bank
$$\begin{array} { | l | l | l | } 
\hline { \text { Premier National Bank } } \
\hline & { \text { Assets } } & \text { Liabilities } \
\hline \text { Interest-sensitive } & \$ 60 \text { million } & \$ 90 \text { million } \
\hline \text { Fixed-rate } & \$ 70 \text { million } & \$ 40 \text { million } \
\hline
\end{array}$$
Premier National bank has a repricing gap of:

Accepted Answer

A)  -30 
B)  +30 
C)  +60 
D)  0 
A)  -30 
B)  +30 
C)  +60 
D)  0

Question 6

For a given bond,the curvature of the price-yield curve is termed:

Accepted Answer

A)  modified duration. 
B)  immunisation. 
C)  sensitivity. 
D)  convexity. 
A)  modified duration. 
B)  immunisation. 
C)  sensitivity. 
D)  convexity.

Question 7

With a four-year bond of face value $1000 paying an annual coupon of 6%,if current market yields of 6% change to 7%:

Accepted Answer

A)  its duration will increase. 
B)  the duration price formula will underestimate the change in price. 
C)  the duration price formula will overestimate the change in price. 
D)  its duration will decrease. 
A)  its duration will increase. 
B)  the duration price formula will underestimate the change in price. 
C)  the duration price formula will overestimate the change in price. 
D)  its duration will decrease.

Question 8

When a financial institution matches its interest rate-sensitive assets with its interest-sensitive liabilities:

Accepted Answer

A)  all assets have the same maturity. 
B)  all liabilities have the same maturity. 
C)  it typically earns no profit. 
D)  interest rate risk is neutralised. 
A)  all assets have the same maturity. 
B)  all liabilities have the same maturity. 
C)  it typically earns no profit. 
D)  interest rate risk is neutralised.

Question 9

The difference between interest-sensitive assets and interest-sensitive liabilities is termed the:

Accepted Answer

A)  interest-sensitivity index. 
B)  rate-risk index. 
C)  gap. 
D)  duration. 
A)  interest-sensitivity index. 
B)  rate-risk index. 
C)  gap. 
D)  duration.

Question 10

Discuss duration in combination with the relationship between bond prices versus changes in yields.

Accepted Answer

Duration can be used to calculate the pe

Question 11

In relation to interest rate risk,reinvestment rate risk refers to the risk:

Accepted Answer

A)  associated with a shortfall in interest payments. 
B)  of reinvesting in riskier assets. 
C)  of reinvesting in bonds of low investment grade. 
D)  of reinvesting at unknown interest rates. 
A)  associated with a shortfall in interest payments. 
B)  of reinvesting in riskier assets. 
C)  of reinvesting in bonds of low investment grade. 
D)  of reinvesting at unknown interest rates.

Question 12

If the maturity of a portfolio of deposits for a bank is longer than its portfolio of term loans,the bank is exposed to:

Accepted Answer

A)  interest rate risk. 
B)  reinvestment risk. 
C)  yield-to-maturity risk. 
D)  systematic risk. 
A)  interest rate risk. 
B)  reinvestment risk. 
C)  yield-to-maturity risk. 
D)  systematic risk.

Question 13

In the context of interest rate risk,reinvestment risk occurs when a fall in interest rates causes bond coupons to earn less than before.

Accepted Answer

A) True 
 B)False

Question 14

The measure that takes into account the timing and present values of cash flows associated with financial assets or liabilities is:

Accepted Answer

A)  convexity. 
B)  duration. 
C)  novation. 
D)  ARBL. 
A)  convexity. 
B)  duration. 
C)  novation. 
D)  ARBL.

Question 15

The duration of a coupon bond is:

Accepted Answer

A)  greater than the maturity of the bond. 
B)  equal to the maturity of the bond. 
C)  decreases when its maturity of the bond increases. 
D)  a measure of the length of time it takes to repay the cost of the bond. 
A)  greater than the maturity of the bond. 
B)  equal to the maturity of the bond. 
C)  decreases when its maturity of the bond increases. 
D)  a measure of the length of time it takes to repay the cost of the bond.

Question 16

Repricing-gap analysis is the monitoring of the interest rate sensitivities of an organisation's assets.

Accepted Answer

A) True 
 B)False

Question 17

Techniques to manage interest rate exposure include:

Accepted Answer

A)  diversifying between short-term and long-term debt issues. 
B)  monitoring and adjusting the maturity structure of assets and liabilities. 
C)  financing short-term and long-term debt through both intermediated and direct finance. 
D)  all of the given answers. 
A)  diversifying between short-term and long-term debt issues. 
B)  monitoring and adjusting the maturity structure of assets and liabilities. 
C)  financing short-term and long-term debt through both intermediated and direct finance. 
D)  all of the given answers.

Question 18

One problem with duration gap analysis is that it:

Accepted Answer

A)  is calculated assuming that the yield curve does not change. 
B)  is calculated assuming the yield curve is flat. 
C)  does not measure the sensitivity of net worth to interest rate changes. 
D)  does not measure the sensitivity of income to interest rate changes. 
A)  is calculated assuming that the yield curve does not change. 
B)  is calculated assuming the yield curve is flat. 
C)  does not measure the sensitivity of net worth to interest rate changes. 
D)  does not measure the sensitivity of income to interest rate changes.

Question 19

The relative proportion of a company's assets and liabilities maturing at different time intervals is:

Accepted Answer

A)  investment structure. 
B)  maturity structure. 
C)  term structure of interest rates. 
D)  the yield curve. 
A)  investment structure. 
B)  maturity structure. 
C)  term structure of interest rates. 
D)  the yield curve.

Question 20

If an organisation has more interest-sensitive assets than liabilities,a _______ in interest rates will _______ the organisation's profits.

Accepted Answer

A)  rise; increase 
B)  rise; decrease 
C)  fall; increase 
D)  fall; not affect 
A)  rise; increase 
B)  rise; decrease 
C)  fall; increase 
D)  fall; not affect

Exam 14: Interest Rate Risk

If a rise in interest rates causes a bank's market value of net worth to rise,the bank must have a:

If the current yields on three-year corporate bonds are 7% per annum and on the same day the yield in the futures market for comparable bonds is 6.50% per annum,the interest rate difference is due to:

If a company has issued a fixed-interest bond to investors and then later interest rates fall on comparable securities,the value of the existing fixed-interest bond:

Over the lifetime of a bond,the coupons received by the holder of the bond are exposed to:

Refer to the following table: Premier National Bank Premier National Bank Assets Liabilities Interest-sensitive \ 60 million \ 90 million Fixed-rate \ 70 million \ 40 million Premier National bank has a repricing gap of:

For a given bond,the curvature of the price-yield curve is termed:

With a four-year bond of face value $1000 paying an annual coupon of 6%,if current market yields of 6% change to 7%:

When a financial institution matches its interest rate-sensitive assets with its interest-sensitive liabilities:

The difference between interest-sensitive assets and interest-sensitive liabilities is termed the:

Discuss duration in combination with the relationship between bond prices versus changes in yields.

In relation to interest rate risk,reinvestment rate risk refers to the risk:

If the maturity of a portfolio of deposits for a bank is longer than its portfolio of term loans,the bank is exposed to:

In the context of interest rate risk,reinvestment risk occurs when a fall in interest rates causes bond coupons to earn less than before.

The measure that takes into account the timing and present values of cash flows associated with financial assets or liabilities is:

The duration of a coupon bond is:

Repricing-gap analysis is the monitoring of the interest rate sensitivities of an organisation's assets.

Techniques to manage interest rate exposure include:

One problem with duration gap analysis is that it:

The relative proportion of a company's assets and liabilities maturing at different time intervals is:

If an organisation has more interest-sensitive assets than liabilities,a _______ in interest rates will _______ the organisation's profits.

A Modern Financial System: An Overview

Commercial Banks

Non-Bank Financial Institutions

The Share Market and the Corporation

Corporations Issuing Equity in the Share Market

Investors in the Share Market

Forecasting Share Price Movements

Mathematics of Finance: An Introduction to Basic Concepts and Calculations

Short-Term Debt

Medium-To-Long-Term Debt

International Debt Markets

Government Debt, monetary Policy and the Payments System

An Introduction to Interest Rate Determination and Forecasting

Foreign Exchange: The Structure and Operation of the Fx Market

Foreign Exchange: Factors That Influence the Exchange Rate

Foreign Exchange: Risk Identification and Management

An Introduction to Risk Management and Derivatives

Future Contracts and Forward Rate Agreements

Options

Interest Rate Swaps, Cross-Currency Swaps and Credit Default

Filters

If an organisation has more interest-sensitive assets than liabilities,a _ in interest rates will _ the organisation's profits.