Question 1

The larger the size of an FI,the larger the _________ from any given interest rate shock.

Accepted Answer

A) duration mismatch 
B) immunization effect 
C) net worth exposure 
D) net interest income 
A) duration mismatch 
B) immunization effect 
C) net worth exposure 
D) net interest income

Question 2

The numbers provided are in millions of dollars and reflect market values:  
-What is the weighted average duration of the liabilities of the FI?

Accepted Answer

A) 5.00 years. 
B) 5.35 years. 
C) 5.70 years. 
D) 6.05 years. 
A) 5.00 years. 
B) 5.35 years. 
C) 5.70 years. 
D) 6.05 years.

Question 3

A key assumption of Macaulay duration is that the yield curve is flat so that all cash flows are discounted at the same discount rate.

Accepted Answer

A) True 
 B)False

Question 4

Calculating modified duration involves

Accepted Answer

A) dividing the value of duration by the change in the market interest rate. 
B) dividing the value of duration by 1 plus the interest rate. 
C) dividing the value of duration by discounted change in interest rates. 
D) multiplying the value of duration by discounted change in interest rates. 
A) dividing the value of duration by the change in the market interest rate. 
B) dividing the value of duration by 1 plus the interest rate. 
C) dividing the value of duration by discounted change in interest rates. 
D) multiplying the value of duration by discounted change in interest rates.

Question 5

What is the effect of a 100 basis point increase in interest rates on the market value of equity of the FI? Use the duration approximation relationship.Assume r = 4 percent.

Accepted Answer

A) -27.56 million. 
B) -28.01 million. 
C) -29.85 million. 
D) -31.06 million. 
A) -27.56 million. 
B) -28.01 million. 
C) -29.85 million. 
D) -31.06 million.

Question 6

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 interest rates increase by 20 basis points (i.e. ,$\Delta$R = 20 basis points),use the duration approximation to determine the approximate price change for the Treasury note.

Accepted Answer

A) $0.000. 
B) $0.2775 per $100 face value. 
C) $2.775 per $100 face value. 
D) $0.2672 per $100 face value. 
A) $0.000. 
B) $0.2775 per $100 face value. 
C) $2.775 per $100 face value. 
D) $0.2672 per $100 face value.

Question 7

Using a fixed-rate bond to immunize a desired investment horizon means that the reinvested coupon payments are not affected by changes in market interest rates.

Accepted Answer

A) True 
 B)False

Question 8

If all interest rates decline 90 basis points ($\Delta$R/(1 + R)= -90 basis points),what is the change in the market value of equity?

Accepted Answer

A) -$4.4300 million 
B) +$3.9255 million 
C) +$4.3875 million 
D) +$2.5506 million 
A) -$4.4300 million 
B) +$3.9255 million 
C) +$4.3875 million 
D) +$2.5506 million

Question 9

First Duration Bank has the following assets and liabilities on its balance sheet:  
-What is the duration of the commercial loans?

Accepted Answer

A) 1.00 years. 
B) 2.00 years. 
C) 1.73 years. 
D) 1.91 years. 
A) 1.00 years. 
B) 2.00 years. 
C) 1.73 years. 
D) 1.91 years.

Question 10

Buying a fixed-rate asset whose duration is exactly equal to the desired investment horizon immunizes against interest rate risk.

Accepted Answer

A) True 
 B)False

Question 11

-Calculate the duration of the liabilities to four decimal places.

Accepted Answer

A) 2.05 years. 
B) 1.75 years. 
C) 2.22 years. 
D) 2.125 years. 
A) 2.05 years. 
B) 1.75 years. 
C) 2.22 years. 
D) 2.125 years.

Question 12

For a given maturity fixed-income asset,duration decreases as the market yield increases.

Accepted Answer

A) True 
 B)False

Question 13

Duration measures the average life of a financial asset or financial liability.

Accepted Answer

A) True 
 B)False

Question 14

The economic interpretation of duration is

Accepted Answer

A) the percentage of the current market price of a security that is accounted for by the book value of the security. 
B) the interest elasticity of a security to a small change in interest rates. 
C) the maturity elasticity of a security to a small change in cash flows of the security. 
D) the price elasticity of a security to a small change in interest rates. 
A) the percentage of the current market price of a security that is accounted for by the book value of the security. 
B) the interest elasticity of a security to a small change in interest rates. 
C) the maturity elasticity of a security to a small change in cash flows of the security. 
D) the price elasticity of a security to a small change in interest rates.

Question 15

The leverage adjusted duration of a typical depository institution is positive.

Accepted Answer

A) True 
 B)False

Question 16

Suppose a pension fund must have $10,000,000 five years from now to make required payments to retirees.If the pension wants to guarantee the funds are available regardless of future interest rate changes,it should

Accepted Answer

A) sell a 5-year duration bond so that it matures with a book value of $10,000,000. 
B) sell $10,000,000 face value discount bonds with a duration of five years. 
C) purchase 7-year,semi-annual coupon bonds that have a duration of five years. 
D) purchase 8-year,annual payment bonds that have a dollar duration of $10,000,000. 
A) sell a 5-year duration bond so that it matures with a book value of $10,000,000. 
B) sell $10,000,000 face value discount bonds with a duration of five years. 
C) purchase 7-year,semi-annual coupon bonds that have a duration of five years. 
D) purchase 8-year,annual payment bonds that have a dollar duration of $10,000,000.

Question 17

What is the price of the bond if market interest rates are 4 percent?

Accepted Answer

A) $105,816.44. 
B) $105,287.67. 
C) $105,242.14. 
D) $100,000.00. 
A) $105,816.44. 
B) $105,287.67. 
C) $105,242.14. 
D) $100,000.00.

Question 18

Attempts to satisfy the objectives of shareholders and regulators requires the bank to use the same duration match in the protection of net worth from interest rate risk.

Accepted Answer

A) True 
 B)False

Question 19

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 20

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 rates do not change,the balance sheet position that maximizes the FI's returns is

Accepted Answer

A) a positive spread of 15 basis points by selling 1-year CDs to finance 2-year CDs. 
B) a positive spread of 100 basis points by selling 1-year CDs to finance 1-year loans. 
C) a positive spread of 85 basis points by financing the purchase of a 1-year loan with a 2-year CD. 
D) a positive spread of 165 basis points by selling 1-year CDs to finance 2-year loans. 
A) a positive spread of 15 basis points by selling 1-year CDs to finance 2-year CDs. 
B) a positive spread of 100 basis points by selling 1-year CDs to finance 1-year loans. 
C) a positive spread of 85 basis points by financing the purchase of a 1-year loan with a 2-year CD. 
D) a positive spread of 165 basis points by selling 1-year CDs to finance 2-year loans.

Exam 9: Interest Rate Risk II

The larger the size of an FI,the larger the _________ from any given interest rate shock.

The numbers provided are in millions of dollars and reflect market values: -What is the weighted average duration of the liabilities of the FI?

A key assumption of Macaulay duration is that the yield curve is flat so that all cash flows are discounted at the same discount rate.

Calculating modified duration involves

What is the effect of a 100 basis point increase in interest rates on the market value of equity of the FI? Use the duration approximation relationship.Assume r = 4 percent.

Using a fixed-rate bond to immunize a desired investment horizon means that the reinvested coupon payments are not affected by changes in market interest rates.

If all interest rates decline 90 basis points ( Δ\DeltaΔ R/(1 + R)= -90 basis points),what is the change in the market value of equity?

First Duration Bank has the following assets and liabilities on its balance sheet: -What is the duration of the commercial loans?

Buying a fixed-rate asset whose duration is exactly equal to the desired investment horizon immunizes against interest rate risk.

-Calculate the duration of the liabilities to four decimal places.

For a given maturity fixed-income asset,duration decreases as the market yield increases.

Duration measures the average life of a financial asset or financial liability.

The economic interpretation of duration is

The leverage adjusted duration of a typical depository institution is positive.

Suppose a pension fund must have $10,000,000 five years from now to make required payments to retirees.If the pension wants to guarantee the funds are available regardless of future interest rate changes,it should

What is the price of the bond if market interest rates are 4 percent?

Attempts to satisfy the objectives of shareholders and regulators requires the bank to use the same duration match in the protection of net worth from interest rate risk.

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.

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 rates do not change,the balance sheet position that maximizes the FI's returns is

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Firms and Investment Banks

Financial Services: Mutual Fund and Hedge Fund Companies

Financial Services: Insurance Companies

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

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

If all interest rates decline 90 basis points ( $\Delta$ R/(1 + R)= -90 basis points),what is the change in the market value of equity?