Exam 9: Interest Rate Risk II

In duration analysis,the times at which cash flows are received are weighted by the relative importance in present value terms of the cash flows arriving at each point in time.

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually. -If the FI finances a $500,000 2-year loan with a $400,000 1-year CD and equity,what is the leveraged adjusted duration gap of this position? Use your answer to the previous question.

The economic meaning of duration is the interest elasticity of a financial asset's price.

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

The duration of a consol bond is

An FI can immunize its portfolio by matching the maturity of its asset with its liabilities.

Immunizing the balance sheet to protect equity holders from the effects of interest rate risk occurs when

Normally,duration is less than the maturity for a fixed income asset.

-Calculate the leverage-adjusted duration gap to four decimal places and state the FI's interest rate risk exposure of this institution.

The duration of all floating rate debt instruments is

Deep discount bonds are semi-annual fixed-rate coupon bonds that sell at a market price that is less than par value.

Investing in a zero-coupon asset with a maturity equal to the desired investment horizon is one method of immunizing against changes in interest rates.

The numbers provided by Fourth Bank of Duration are in thousands of dollars. Notes: All Treasury bills have six months until maturity.One-year Treasury notes are priced at par and have a coupon of 7 percent paid semiannually.Treasury bonds have an average duration of 4.5 years and the loan portfolio has a duration of 7 years.Time deposits have a 1-year duration and the Fed funds duration is 0.003 years.Fourth Bank of Duration assigns a duration of zero (0)to demand deposits. -What is the duration of the bank's Treasury portfolio?

Larger coupon payments on a fixed-income asset cause the present value weights of the cash flows to be lower in the duration calculation.

Third Duration Investments has the following assets and liabilities on its balance sheet. The two-year Treasury notes are zero coupon assets. Interest payments on all other assets and liabilities occur at maturity. Assume 360 days in a year. -If interest rates increase by 20 basis points,what is the approximate change in the market price using the duration approximation?

An FI has financial assets of $800 and equity of $50.If the duration of assets is 1.21 years and the duration of all liabilities is 0.25 years,what is the leverage-adjusted duration gap?

All fixed-income assets exhibit convexity in their price-yield relationships.

Third Duration Investments has the following assets and liabilities on its balance sheet. The two-year Treasury notes are zero coupon assets. Interest payments on all other assets and liabilities occur at maturity. Assume 360 days in a year. -Using present value bond valuation techniques,calculate the exact price of the bond after the interest rate increase of 20 basis points.

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.

Convexity is a desirable effect to a portfolio manager because it is easy to measure and price.