Exam 9: Interest Rate Risk II

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

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

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

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

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

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.

Calculate the duration of the assets to four decimal places.

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

For small change in interest rates, market prices of bonds are inversely proportional to their

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

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

An FI can immunize its portfolio by matching the maturity of its asset with its liabilities.

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

Calculating modified duration involves

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

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.

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 FI's interest rate risk exposure?

What is the duration of an 8 percent annual payment two-year note that currently sells at par?

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.