Question 1

The smaller the leverage-adjusted duration gap,the more exposed the FI is to interest rate shocks.

Accepted Answer

A) True 
 B)False

Question 2

What is the price of the bond if market interest rates are 6 percent?

Accepted Answer

A) $95,082.68. 
B) $95,769.55. 
C) $95,023.00. 
D) $100,000.00. 
A) $95,082.68. 
B) $95,769.55. 
C) $95,023.00. 
D) $100,000.00.

Question 3

One method of changing the positive leverage adjusted duration gap for the purpose of immunizing the net worth of a typical depository institution is to increase the duration of the assets and to decrease the duration of the liabilities.

Accepted Answer

A) True 
 B)False

Question 4

Why does immunization against interest rate shocks using duration for fixed-income securities work?

Accepted Answer

A) Because interest rate changes are relatively predictable. 
B) Because the gains or losses on reinvested cash flows that result from an interest rate change are exactly offset by losses or gains from the security when it is sold. 
C) Because the fixed-income security gravitates toward its maturity value as it approaches its maximum duration. 
D) Because cash flows that result from the security are not reinvested so they are not affected by interest rate changes in the same way as the security's gain or loss when it is sold. 
A) Because interest rate changes are relatively predictable. 
B) Because the gains or losses on reinvested cash flows that result from an interest rate change are exactly offset by losses or gains from the security when it is sold. 
C) Because the fixed-income security gravitates toward its maturity value as it approaches its maximum duration. 
D) Because cash flows that result from the security are not reinvested so they are not affected by interest rate changes in the same way as the security's gain or loss when it is sold.

Question 5

Duration increases with the maturity of a fixed-income asset at a decreasing rate.

Accepted Answer

A) True 
 B)False

Question 6

For a given maturity fixed-income asset,duration increases as the promised interest payment declines.

Accepted Answer

A) True 
 B)False

Question 7

The numbers provided are in millions of dollars and reflect market values:  
-What is the leverage-adjusted duration gap of the FI?

Accepted Answer

A) 3.61 years. 
B) 3.74 years. 
C) 4.01 years. 
D) 4.26 years. 
A) 3.61 years. 
B) 3.74 years. 
C) 4.01 years. 
D) 4.26 years.

Question 8

As interest rates rise,the duration of a consol bond decreases.

Accepted Answer

A) True 
 B)False

Question 9

The greater is convexity,the more insurance a portfolio manager has against interest rate increases and the greater potential gain from rate decreases.

Accepted Answer

A) True 
 B)False

Question 10

Matching the maturities of assets and liabilities is not a perfect method of immunizing the balance sheet because the timing of the cash flows is likely to differ between the assets and liabilities.

Accepted Answer

A) True 
 B)False

Question 11

A $1,000 six-year Eurobond has an 8 percent coupon,is selling at par,and contracts to make annual payments of interest.The duration of this bond is 4.99 years.What will be the new price using the duration model if interest rates increase to 8.5 percent?

Accepted Answer

A) $23.10. 
B) $976.90. 
C) $977.23. 
D) $1,023.10. 
A) $23.10. 
B) $976.90. 
C) $977.23. 
D) $1,023.10.

Question 12

A bond is scheduled to mature in five years.Its coupon rate is 9 percent with interest paid annually.This $1,000 par value bond carries a yield to maturity of 10 percent.Calculate the percentage change in this bond's price if interest rates on comparable risk securities decline to 7 percent.Use the duration valuation equation.

Accepted Answer

A) +8.58 percent 
B) +12.76 percent 
C) -12.75 percent 
D) +11.80 percent 
E) +11.52 percent 
A) +8.58 percent 
B) +12.76 percent 
C) -12.75 percent 
D) +11.80 percent 
E) +11.52 percent

Question 13

An FI purchases at par value a $100,000 Treasury bond paying 10 percent interest with a 7.5 year duration.If interest rates rise by 4 percent,calculate the bond's new value. Recall that Treasury bonds pay interest semiannually.Use the duration valuation equation.

Accepted Answer

A) $28,572 
B) $20,864 
C) $15,000 
D) $22,642 
E) $71,428 
A) $28,572 
B) $20,864 
C) $15,000 
D) $22,642 
E) $71,428

Question 14

The numbers provided are in millions of dollars and reflect market values:  
-A risk manager could restructure assets and liabilities to reduce interest rate exposure for this example by

Accepted Answer

A) increasing the average duration of its assets to 9.56 years. 
B) decreasing the average duration of its assets to 4.00 years. 
C) increasing the average duration of its liabilities to 6.78 years. 
D) increasing the average duration of its liabilities to 9.782 years. 
A) increasing the average duration of its assets to 9.56 years. 
B) decreasing the average duration of its assets to 4.00 years. 
C) increasing the average duration of its liabilities to 6.78 years. 
D) increasing the average duration of its liabilities to 9.782 years.

Question 15

What is the duration of a 5-year par value zero coupon bond yielding 10 percent annually?

Accepted Answer

A) 0.50 years. 
B) 2.00 years. 
C) 4.40 years. 
D) 5.00 years. 
A) 0.50 years. 
B) 2.00 years. 
C) 4.40 years. 
D) 5.00 years.

Question 16

The numbers provided are in millions of dollars and reflect market values:  
-The short-term debt consists of 4-year bonds paying an annual coupon of 4 percent and selling at par.What is the duration of the short-term debt?

Accepted Answer

A) 3.28 years 
B) 3.53 years 
C) 3.78 years. 
D) 4.03 years. 
A) 3.28 years 
B) 3.53 years 
C) 3.78 years. 
D) 4.03 years.

Question 17

All else equal,as compared to an annual payment fixed income security,a semi-annual payment security has a

Accepted Answer

A) lower duration value and lower market value. 
B) higher duration but lower price sensitivity. 
C) lower duration and more cash flows. 
D) higher duration and more cash flows. 
A) lower duration value and lower market value. 
B) higher duration but lower price sensitivity. 
C) lower duration and more cash flows. 
D) higher duration and more cash flows.

Question 18

Duration is related to maturity in a linear manner through the interest rate of the asset.

Accepted Answer

A) True 
 B)False

Question 19

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. 
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.

Question 20

Immunization of a portfolio implies that changes in _____ will not affect the value of the portfolio.

Accepted Answer

A) book value of assets 
B) maturity 
C) market prices 
D) interest rates 
A) book value of assets 
B) maturity 
C) market prices 
D) interest rates

Exam 9: Interest Rate Risk II

The smaller the leverage-adjusted duration gap,the more exposed the FI is to interest rate shocks.

What is the price of the bond if market interest rates are 6 percent?

One method of changing the positive leverage adjusted duration gap for the purpose of immunizing the net worth of a typical depository institution is to increase the duration of the assets and to decrease the duration of the liabilities.

Why does immunization against interest rate shocks using duration for fixed-income securities work?

Duration increases with the maturity of a fixed-income asset at a decreasing rate.

For a given maturity fixed-income asset,duration increases as the promised interest payment declines.

The numbers provided are in millions of dollars and reflect market values: -What is the leverage-adjusted duration gap of the FI?

As interest rates rise,the duration of a consol bond decreases.

The greater is convexity,the more insurance a portfolio manager has against interest rate increases and the greater potential gain from rate decreases.

Matching the maturities of assets and liabilities is not a perfect method of immunizing the balance sheet because the timing of the cash flows is likely to differ between the assets and liabilities.

A $1,000 six-year Eurobond has an 8 percent coupon,is selling at par,and contracts to make annual payments of interest.The duration of this bond is 4.99 years.What will be the new price using the duration model if interest rates increase to 8.5 percent?

An FI purchases at par value a $100,000 Treasury bond paying 10 percent interest with a 7.5 year duration.If interest rates rise by 4 percent,calculate the bond's new value. Recall that Treasury bonds pay interest semiannually.Use the duration valuation equation.

The numbers provided are in millions of dollars and reflect market values: -A risk manager could restructure assets and liabilities to reduce interest rate exposure for this example by

What is the duration of a 5-year par value zero coupon bond yielding 10 percent annually?

The numbers provided are in millions of dollars and reflect market values: -The short-term debt consists of 4-year bonds paying an annual coupon of 4 percent and selling at par.What is the duration of the short-term debt?

All else equal,as compared to an annual payment fixed income security,a semi-annual payment security has a

Duration is related to maturity in a linear manner through the interest rate of the asset.

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

Immunization of a portfolio implies that changes in _____ will not affect the value of the portfolio.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Firms and Investment Banks

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Risks of Financial Institutions

Interest Rate Risk I

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

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Technology and Other Operational Risks

Liability and Liquidity Management

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Capital Adequacy

Product and Geographic Expansion

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Swaps

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