Question 1

-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. 
E) 4.28 years. 
A) 3.28 years. 
B) 3.53 years. 
C) 3.78 years. 
D) 4.03 years. 
E) 4.28 years.

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

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

Question 4

Duration of a zero coupon bond is equal to the bond's maturity.

Accepted Answer

A) True 
 B)False

Question 5

-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. 
E) 6.40 years. 
A) 5.00 years. 
B) 5.35 years. 
C) 5.70 years. 
D) 6.05 years. 
E) 6.40 years.

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

The difference between the changes in the market value of the assets and market value of liabilities for a given change in interest rates is, by definition, the change in the FI's net worth.

Accepted Answer

A) True 
 B)False

Question 8

The cost in terms of both time and money to restructure the balance sheet of large and complex FIs has decreased over time.

Accepted Answer

A) True 
 B)False

Question 9

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 10

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 $$\begin{array} { | c | c | } 
\hline \text { Assets } & \text { Liabilities } \
\hline \text { 1-year loan rate: } 7.50 \text { percent } & \text { 1-year CD rate: } 6.50 \text { percent } \
\hline \text { 2-year loan rate: } 8.15 \text { percent } & \text { 2-year CD rate: } 6.65 \text { percent } \
\hline
\end{array}$$
-What is the duration of the two-year loan (per $100 face value) if it is selling at par?

Accepted Answer

A) 2.00 years 
B) 1.92 years 
C) 1.96 years 
D) 1.00 year 
E) 0.91 years 
A) 2.00 years 
B) 1.92 years 
C) 1.96 years 
D) 1.00 year 
E) 0.91 years

Question 11

Which of the following statements about leverage adjusted duration gap is true?

Accepted Answer

A) It is equal to the duration of the assets minus the duration of the liabilities. 
B) Larger the gap in absolute terms, the more exposed the FI is to interest rate shocks. 
C) It reflects the degree of maturity mismatch in an FI's balance sheet. 
D) It indicates the dollar size of the potential net worth. 
E) Its value is equal to duration divided by (1 + R). 
A) It is equal to the duration of the assets minus the duration of the liabilities. 
B) Larger the gap in absolute terms, the more exposed the FI is to interest rate shocks. 
C) It reflects the degree of maturity mismatch in an FI's balance sheet. 
D) It indicates the dollar size of the potential net worth. 
E) Its value is equal to duration divided by (1 + R).

Question 12

Duration of a fixed-rate coupon bond will always be greater than one-half of the maturity.

Accepted Answer

A) True 
 B)False

Question 13

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 $$\begin{array} { | c | c | } 
\hline \text { Assets } & \text { Liabilities } \
\hline \text { 1-year loan rate: } 7.50 \text { percent } & \text { 1-year CD rate: } 6.50 \text { percent } \
\hline \text { 2-year loan rate: } 8.15 \text { percent } & \text { 2-year CD rate: } 6.65 \text { percent } \
\hline
\end{array}$$
-What is the interest rate risk exposure of the optimal transaction in the previous question over the next 2 years?

Accepted Answer

A) The risk that interest rates will rise since the FI must purchase a 2-year CD in one year. 
B) The risk that interest rates will rise since the FI must sell a 1-year CD in one year. 
C) The risk that interest rates will fall since the FI must sell a 2-year loan in one year. 
D) The risk that interest rates will fall since the FI must buy a 1-year loan in one year. 
E) There is no interest rate risk exposure. 
A) The risk that interest rates will rise since the FI must purchase a 2-year CD in one year. 
B) The risk that interest rates will rise since the FI must sell a 1-year CD in one year. 
C) The risk that interest rates will fall since the FI must sell a 2-year loan in one year. 
D) The risk that interest rates will fall since the FI must buy a 1-year loan in one year. 
E) There is no interest rate risk exposure.

Question 14

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.

Accepted Answer

A) True 
 B)False

Question 15

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 16

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 $$\begin{array} { | c | c | } 
\hline \text { Assets } & \text { Liabilities } \
\hline \text { 1-year loan rate: } 7.50 \text { percent } & \text { 1-year CD rate: } 6.50 \text { percent } \
\hline \text { 2-year loan rate: } 8.15 \text { percent } & \text { 2-year CD rate: } 6.65 \text { percent } \
\hline
\end{array}$$
-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. 
E) a positive spread of 150 basis points by selling 2-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. 
E) a positive spread of 150 basis points by selling 2-year CDs to finance 2-year loans.

Question 17

$$\begin{array} { | l | r | c | c | } 
\hline \text { Assets } & \text { Amount } & \text { Rate } & \text { Duration } \
\hline \text { Cash } & \$ 75 \text { million } & & \
\hline \text { Loans } & \$ 750 \text { million } & 12 \text { percent } & 1.75 \text { years } \
\hline \text { Treasuries } & \$ 175 \text { million } & 9 \text { percent } & 7.00 \text { years } \
\hline \text { Liabilities and Equity } & & & \
\hline \text { Time Deposits } & \$ 350 \text { million } & 7 \text { percent } & 1.75 \text { years } \
\hline \text { CDs } & \$ 575 \text { million } & 8 \text { percent } & 2.50 \text { years } \
\hline \text { Equity } & \$ 75 \text { million } & & \
\hline
\end{array}$$
-If all interest rates decline 90 basis points (?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 
E) +$0.0227 million 
A) -$4.4300 million 
B) +$3.9255 million 
C) +$4.3875 million 
D) +$2.5506 million 
E) +$0.0227 million

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

$1,000 face value, 9% annual coupon, 5 year maturity, 10% rate $$\begin{array} { | l | l | l | l | l | } 
\hline \mathrm { PV } = 962.09 & \mathrm { FV } = 1,000 & \mathrm { I } = 10 & \mathrm {~N} = 5 & \text { PMT } = 90 \
\hline
\end{array}$$
-What is the duration of the bond?

Accepted Answer

A) 4.677 years. 
B) 5.000 years. 
C) 4.674 years. 
D) 4.328 years. 
E) 4.223 years 
A) 4.677 years. 
B) 5.000 years. 
C) 4.674 years. 
D) 4.328 years. 
E) 4.223 years

Exam 9: Interest Rate Risk II

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

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

Duration of a zero coupon bond is equal to the bond's maturity.

-What is the weighted average duration of the liabilities of the FI?

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

The difference between the changes in the market value of the assets and market value of liabilities for a given change in interest rates is, by definition, the change in the FI's net worth.

The cost in terms of both time and money to restructure the balance sheet of large and complex FIs has decreased over time.

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.

Which of the following statements about leverage adjusted duration gap is true?

Duration of a fixed-rate coupon bond will always be greater than one-half of the maturity.

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.

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.

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

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.

$1,000 face value, 9% annual coupon, 5 year maturity, 10% rate =962.09 =1,000 =10 =5 PMT =90 -What is the duration of the bond?

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