Question 1

The duration of a portfolio of assets can be found by calculating the book value weighted average of the durations of the individual assets.

Accepted Answer

A) True 
 B)False

Question 2

Duration is related to maturity in a nonlinear manner through the current yield to maturity of the asset.

Accepted Answer

A) True 
 B)False

Question 3

Immunizing the net worth ratio requires that the duration of the assets be set equal to the duration of the liabilities.

Accepted Answer

A) True 
 B)False

Question 4

Modified Duration, semi-annual
 $$M D = \frac { D } { \left( 1 + \frac { 1 } { 2 } R \right) } = \frac { 7.50 } { ( 1.05 ) } = 7.143$$ Dollar Duration
 $$\text { Dollar Duration } = M D \times P = 7.143 \times 100,000 = 714,300$$ Change in Price
 $$\Delta P = - \text { Dollar Duration } \times \Delta R = 714,300 \times 0.04 = - 28,572$$ New Price
 $$100,000 - 28,572 = \$ 71,428$$
-What is the duration of an 8 percent annual payment two-year note that currently sells at par?

Accepted Answer

A) 2 years. 
B) 1.75 years. 
C) 1.93 years. 
D) 1.5 years. 
E) 1.97 years. 
A) 2 years. 
B) 1.75 years. 
C) 1.93 years. 
D) 1.5 years. 
E) 1.97 years.

Question 5

Marking-to-market accounting is a market value accounting method that reflects the purchase prices of assets and liabilities.

Accepted Answer

A) True 
 B)False

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

Immunizing net worth from interest rate risk using duration matching requires that the duration match must be realigned periodically as the maturity horizon approaches.

Accepted Answer

A) True 
 B)False

Question 9

First Duration, a securities dealer, has a leverage-adjusted duration gap of 1.21 years, $60 million in assets, 7 percent equity to assets ratio, and market rates are 8 percent.
-What is the impact on the dealer's market value of equity per $100 of assets if the change in all interest rates is an increase of 0.5 percent [i.e., ΔR = 0.5 percent]

Accepted Answer

A) +$336,111. 
B) -$0.605. 
C) -$336,111. 
D) +$0.605. 
E) -$363,000. 
A) +$336,111. 
B) -$0.605. 
C) -$336,111. 
D) +$0.605. 
E) -$363,000.

Question 10

$$\begin{array} { | l | l | l | l | l | } 
\hline \text { Rate } & \text { Maturity } & \text { Ask } & \text { Change } & \text { Ask yield } \
\hline 7.1250 & \text { Oct 15,2005 } & 102 : 08 & - 1 & 5.9156 \
\hline
\end{array}$$
-If yields increase by 10 basis points, what is the approximate price change on the $100,000 Treasury note? Use the duration approximation relationship.

Accepted Answer

A) +$179.39 
B) +$16.05 
C) -$1,605.05 
D) -$16.05 
E) +$160.51 
A) +$179.39 
B) +$16.05 
C) -$1,605.05 
D) -$16.05 
E) +$160.51

Question 11

$$\begin{array} { | l | r | c | c | } 
\hline \text { Assets } & \text { Amount } & \text { Rate } & \text { Duration } \
\hline \text { Cash } & \$ 75 \text { million } & & \
\hline \text { Loans } & \$ 750 \text { million } & 12 \text { percent } & 1.75 \text { years } \
\hline \text { Treasuries } & \$ 175 \text { million } & 9 \text { percent } & 7.00 \text { years } \
\hline \text { Liabilities and Equity } & & & \
\hline \text { Time Deposits } & \$ 350 \text { million } & 7 \text { percent } & 1.75 \text { years } \
\hline \text { CDs } & \$ 575 \text { million } & 8 \text { percent } & 2.50 \text { years } \
\hline \text { Equity } & \$ 75 \text { million } & & \
\hline
\end{array}$$
-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. 
E) 2.50 years. 
A) 2.05 years. 
B) 1.75 years. 
C) 2.22 years. 
D) 2.125 years. 
E) 2.50 years.

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

-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?

Accepted Answer

A) The market value of equity will decrease by $15,750. 
B) The market value of equity will increase by $15,750. 
C) The market value of equity will decrease by $426,825. 
D) The market value of equity will increase by $426,825. 
E) There will be no impact on the market value of equity. 
A) The market value of equity will decrease by $15,750. 
B) The market value of equity will increase by $15,750. 
C) The market value of equity will decrease by $426,825. 
D) The market value of equity will increase by $426,825. 
E) There will be no impact on the market value of equity.

Question 15

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.

Accepted Answer

A) True 
 B)False

Question 16

The immunization of a portfolio against interest rate risk means that the portfolio will neither gain nor lose value when interest rates change.

Accepted Answer

A) True 
 B)False

Question 17

In most countries FIs report their balance sheet using market value accounting.

Accepted Answer

A) True 
 B)False

Question 18

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.

Accepted Answer

A) True 
 B)False

Question 19

$$\left[ D _ { A } - D _ { L } k \right] = \left[ 0.955 - 0.354 \times \left( \frac { 1,710 } { 1,730 } \right) \right] = [ 0.955 - 0.350 ] = 0.605$$ Consider a five-year, 8 percent annual coupon bond selling at par of $1,000.
-What is the duration of this bond?

Accepted Answer

A) 5 years. 
B) 4.31 years. 
C) 3.96 years. 
D) 5.07 years. 
E) Not enough information to answer. 
A) 5 years. 
B) 4.31 years. 
C) 3.96 years. 
D) 5.07 years. 
E) Not enough information to answer.

Question 20

-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. 
E) 4.51 years. 
A) 3.61 years. 
B) 3.74 years. 
C) 4.01 years. 
D) 4.26 years. 
E) 4.51 years.

Exam 9: Interest Rate Risk II

The duration of a portfolio of assets can be found by calculating the book value weighted average of the durations of the individual assets.

Duration is related to maturity in a nonlinear manner through the current yield to maturity of the asset.

Immunizing the net worth ratio requires that the duration of the assets be set equal to the duration of the liabilities.

Marking-to-market accounting is a market value accounting method that reflects the purchase prices of assets and liabilities.

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 leverage adjusted duration of a typical depository institution is positive.

Immunizing net worth from interest rate risk using duration matching requires that the duration match must be realigned periodically as the maturity horizon approaches.

Rate Maturity Ask Change Ask yield 7.1250 Oct 15,2005 102:08 -1 5.9156 -If yields increase by 10 basis points, what is the approximate price change on the $100,000 Treasury note? Use the duration approximation relationship.

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

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

-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?

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.

The immunization of a portfolio against interest rate risk means that the portfolio will neither gain nor lose value when interest rates change.

In most countries FIs report their balance sheet using market value accounting.

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.

-What is the leverage-adjusted duration gap of the FI?

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