Question 1

What is this bank's interest rate risk exposure, if any?

Accepted Answer

A) The bank is exposed to decreasing interest rates because it has a negative duration gap of -0.21 years. 
B) The bank is exposed to increasing interest rates because it has a negative duration gap of -0.21 years. 
C) The bank is exposed to increasing interest rates because it has a positive duration gap of +0.21 years. 
D) The bank is exposed to decreasing interest rates because it has a positive duration gap of +0.21 years. 
E) The bank is not exposed to interest rate changes since it is running a matched book.
[Refer to: 9-128] 
A) The bank is exposed to decreasing interest rates because it has a negative duration gap of -0.21 years. 
B) The bank is exposed to increasing interest rates because it has a negative duration gap of -0.21 years. 
C) The bank is exposed to increasing interest rates because it has a positive duration gap of +0.21 years. 
D) The bank is exposed to decreasing interest rates because it has a positive duration gap of +0.21 years. 
E) The bank is not exposed to interest rate changes since it is running a matched book.
[Refer to: 9-128]

Question 2

Use the duration model to approximate the change in the market value (per $100 face value) of two-year loans if interest rates increase by 100 basis points.

Accepted Answer

A) -$1.756 
B) -$1.775 
C) +$98.24 
D) -$1.000 
E) +$1.924 [Refer to: 9-95] 
A) -$1.756 
B) -$1.775 
C) +$98.24 
D) -$1.000 
E) +$1.924 [Refer to: 9-95]

Question 3

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.

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

The economic meaning of duration is the interest elasticity of a financial asset's price.

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) 7.25 years. 
B) 7.75 years. 
C) 8.25 years. 
D) 8.75 years. 
E) 9.25 years.
[Refer to: 9-121] 
A) 7.25 years. 
B) 7.75 years. 
C) 8.25 years. 
D) 8.75 years. 
E) 9.25 years.
[Refer to: 9-121]

Question 8

Managers can achieve the results of duration matching by using these to hedge interest rate risk.

Accepted Answer

A) Rate sensitive assets. 
B) Rate sensitive liabilities. 
C) Coupon bonds. 
D) Consol bonds. 
E) Derivatives. 
A) Rate sensitive assets. 
B) Rate sensitive liabilities. 
C) Coupon bonds. 
D) Consol bonds. 
E) Derivatives.

Question 9

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 10

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.
[Refer to: 9-128] 
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.
[Refer to: 9-128]

Question 11

Duration is equal to maturity when at least some of the cash flows are received upon maturity of the asset.

Accepted Answer

A) True 
 B)False

Question 12

Calculate the duration of a two-year corporate bond paying 6 percent interest annually, selling at par.Principal of $20,000,000 is due at the end of two years.

Accepted Answer

A) 2 years. 
B) 1.91 years. 
C) 1.94 years. 
D) 1.49 years. 
E) 1.75 years. 
A) 2 years. 
B) 1.91 years. 
C) 1.94 years. 
D) 1.49 years. 
E) 1.75 years.

Question 13

A bond is scheduled to mature in five years.Its coupon rate is 9 percent with interest paid annually.This $1,000 par value bond carries a yield to maturity of 10 percent.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

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. 
E) The average time it will take to equate the present value of future cash flows from the security to the cost of the security. 
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. 
E) The average time it will take to equate the present value of future cash flows from the security to the cost of the security.

Question 15

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 16

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 17

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. 
E) -33.76 million.
[Refer to: 9-121] 
A) -27.56 million. 
B) -28.01 million. 
C) -29.85 million. 
D) -31.06 million. 
E) -33.76 million.
[Refer to: 9-121]

Question 18

If the FI finances a $500,000 2-year loan with a $400,000 1-year CD and equity, what is the leveraged adjusted duration gap of this position? Use your answer to the previous question.

Accepted Answer

A) +1.25 years 
B) +1.12 years 
C) -1.12 years 
D) +0.92 years 
E) -1.25 years [Refer to: 9-95] 
A) +1.25 years 
B) +1.12 years 
C) -1.12 years 
D) +0.92 years 
E) -1.25 years [Refer to: 9-95]

Question 19

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. [Refer to: 9-102] 
A) 5 years. 
B) 4.31 years. 
C) 3.96 years. 
D) 5.07 years. 
E) Not enough information to answer. [Refer to: 9-102]

Question 20

What is the duration of a 5-year par value zero coupon bond yielding 10 percent annually?

Accepted Answer

A) 0.50 years. 
B) 2.00 years. 
C) 4.40 years. 
D) 5.00 years. 
E) 4.05 years. 
A) 0.50 years. 
B) 2.00 years. 
C) 4.40 years. 
D) 5.00 years. 
E) 4.05 years.

Exam 9: Interest Rate Risk II

What is this bank's interest rate risk exposure, if any?

Use the duration model to approximate the change in the market value (per $100 face value) of two-year loans if interest rates increase by 100 basis points.

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.

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

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

The economic meaning of duration is the interest elasticity of a financial asset's price.

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

Managers can achieve the results of duration matching by using these to hedge interest rate risk.

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.

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?

Duration is equal to maturity when at least some of the cash flows are received upon maturity of the asset.

Calculate the duration of a two-year corporate bond paying 6 percent interest annually, selling at par.Principal of $20,000,000 is due at the end of two years.

A bond is scheduled to mature in five years.Its coupon rate is 9 percent with interest paid annually.This $1,000 par value bond carries a yield to maturity of 10 percent.What is the duration of the bond?

The economic interpretation of duration is

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

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.

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.

If the FI finances a $500,000 2-year loan with a $400,000 1-year CD and equity, what is the leveraged adjusted duration gap of this position? Use your answer to the previous question.

What is the duration of this bond?

What is the duration of a 5-year par value zero coupon bond yielding 10 percent annually?

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