Exam 9: Interest Rate Risk II

Investing in a zero-coupon asset with a maturity equal to the desired investment horizon removes interest rate risk from the investment management process.

What is the percentage price change for the bond if interest rates decline 50 basis points from the original 5 percent?

Market value accounting reflects economic reality of an FIs balance sheet.

The following is an FI's balance sheet ($millions). Notes to Balance Sheet. Munis are 2-year 6 percent annual coupon municipal notes selling at par. Loans are floating rates, repriced quarterly. Spot discount yields for 91-day Treasury bills are 3.75 percent. CDs are 1-year pure discount certificates of deposit paying 4.75 percent. -What is this bank's interest rate risk exposure,if any?

The use of duration to predict changes in bond prices for given changes in interest rate changes will always underestimate the amount of the true price change.

Perfect matching of the maturities of the assets and liabilities will always achieve perfect immunization for the equity holders of an FI against interest rate risk.

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

The error from using duration to estimate the new price of a fixed-income security will be less as the amount of convexity increases.

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. -What is the duration of this Treasury note?

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. -If the relative change in interest rates is a decrease of 1 percent,calculate the impact on the bank's market value of equity using the duration approximation. (That is, $\Delta$ R/(1 + R)= -1 percent)

For given changes in interest rates,the change in the market value of net worth of an FI is equal to the difference between the changes in the market value of the assets and market value of the liabilities.

When does "duration" become a less accurate predictor of expected change in security prices?

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

The following is an FI's balance sheet ($millions). Notes to Balance Sheet. Munis are 2-year 6 percent annual coupon municipal notes selling at par. Loans are floating rates, repriced quarterly. Spot discount yields for 91-day Treasury bills are 3.75 percent. CDs are 1-year pure discount certificates of deposit paying 4.75 percent. -What will be the impact,if any,on the market value of the bank's equity if all interest rates increase by 75 basis points?

Consider a one-year maturity,$100,000 face value bond that pays a 6 percent fixed coupon annually.What is the price of the bond if market interest rates are 7 percent?

Calculate the duration of a two-year corporate loan paying 6 percent interest annually,selling at par.The $30,000,000 loan is 100 percent amortizing with annual payments.

The fact that the capital gain effect for rate decreases is greater than the capital loss effect for rate increases is caused by convexity in the yield-price relationship.

Duration is the weighted-average present value of the cash flows using the timing of the cash flows as weights.

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

As the investment horizon approaches,the duration of an unrebalanced portfolio that originally was immunized will be less than the time remaining to the investment horizon.