Question 1

Which of the following statements is true?

Accepted Answer

A) The optimal duration gap is zero. 
B) Duration gap measures the impact of changes in interest rates on the market value of equity. 
C) The shorter the maturity of the FI's securities, the greater the FI's interest rate risk exposure. 
D) The duration of all floating rate debt instruments is equal to the time to maturity. 
E) The duration of equity is equal to the duration of assets minus the duration of liabilities. 
A) The optimal duration gap is zero. 
B) Duration gap measures the impact of changes in interest rates on the market value of equity. 
C) The shorter the maturity of the FI's securities, the greater the FI's interest rate risk exposure. 
D) The duration of all floating rate debt instruments is equal to the time to maturity. 
E) The duration of equity is equal to the duration of assets minus the duration of liabilities.

Question 2

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 3

A risk manager could restructure assets and liabilities to reduce interest rate exposure for this example by

Accepted Answer

A) increasing the average duration of its assets to 9.56 years. 
B) decreasing the average duration of its assets to 4.00 years. 
C) increasing the average duration of its liabilities to 6.78 years. 
D) increasing the average duration of its liabilities to 9.782 years. 
E) increasing the leverage ratio, k, to 1.
[Refer to: 9-121] 
A) increasing the average duration of its assets to 9.56 years. 
B) decreasing the average duration of its assets to 4.00 years. 
C) increasing the average duration of its liabilities to 6.78 years. 
D) increasing the average duration of its liabilities to 9.782 years. 
E) increasing the leverage ratio, k, to 1.
[Refer to: 9-121]

Question 4

What is the bank's leverage adjusted duration gap?

Accepted Answer

A) 6.73 years 
B) 0.29 years 
C) 6.44 years 
D) 6.51 years 
E) 0 years. [Refer to: 9-108] 
A) 6.73 years 
B) 0.29 years 
C) 6.44 years 
D) 6.51 years 
E) 0 years. [Refer to: 9-108]

Question 5

What is the FI's leverage-adjusted duration gap?

Accepted Answer

A) 0.91 years. 
B) 0.83 years. 
C) 0.73 years. 
D) 0.50 years. 
E) 0 years. [Refer to: 9-92] 
A) 0.91 years. 
B) 0.83 years. 
C) 0.73 years. 
D) 0.50 years. 
E) 0 years. [Refer to: 9-92]

Question 6

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.Calculate the percentage change in this bond's price if interest rates on comparable risk securities increase to 11 percent.Use the duration valuation equation.

Accepted Answer

A) +4.25 percent 
B) -4.25 percent 
C) +8.58 percent 
D) -3.93 percent 
E) -3.84 percent 
A) +4.25 percent 
B) -4.25 percent 
C) +8.58 percent 
D) -3.93 percent 
E) -3.84 percent

Question 7

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
[Refer to: 9-119] 
A) +$179.39 
B) +$16.05 
C) -$1,605.05 
D) -$16.05 
E) +$160.51
[Refer to: 9-119]

Question 8

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 9

The smaller the leverage-adjusted duration gap, the more exposed the FI is to interest rate shocks.

Accepted Answer

A) True 
 B)False

Question 10

Duration measures the average life of a financial asset or financial liability.

Accepted Answer

A) True 
 B)False

Question 11

What is the duration of the liabilities?

Accepted Answer

A) 0.708 years. 
B) 0.354 years. 
C) 0.350 years. 
D) 0.955 years. 
E) 0.519 years. [Refer to: 9-102] 
A) 0.708 years. 
B) 0.354 years. 
C) 0.350 years. 
D) 0.955 years. 
E) 0.519 years. [Refer to: 9-102]

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

Calculate the modified duration of a two-year corporate loan paying 6 percent interest annually.The $40,000,000 loan is 100 percent amortizing, and the current yield is 9 percent annually.

Accepted Answer

A) 2 years. 
B) 1.91 years. 
C) 1.94 years. 
D) 1.49 years. 
E) 1.36 years. 
A) 2 years. 
B) 1.91 years. 
C) 1.94 years. 
D) 1.49 years. 
E) 1.36 years.

Question 14

A $1,000 six-year Eurobond has an 8 percent coupon, is selling at par, and contracts to make annual payments of interest.The duration of this bond is 4.99 years.What will be the new price using the duration model if interest rates increase to 8.5 percent?

Accepted Answer

A) $23.10. 
B) $976.90. 
C) $977.23. 
D) $1,023.10. 
E) -$23.10. 
A) $23.10. 
B) $976.90. 
C) $977.23. 
D) $1,023.10. 
E) -$23.10.

Question 15

The value for duration describes the percentage increase in the price of a fixed-income asset for a given increase in the required yield or interest rate.

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. $$\begin{array} { | c | l | } 
\hline \text { Assets } & { \text { Liabilities } } \
\hline \text { 1-year loan rate: } 7.50 \text { percent } & \text { 1-year CD rate: } 6.50 \text { percent } \
\hline \text { 2-year loan rate: } 8.15 \text { percent } & \text { 2-year CD rate: } 6.65 \text { percent } \
\hline
\end{array}$$ [Reference: 8-95]
-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. [Refer to: 9-95] 
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. [Refer to: 9-95]

Question 17

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

Accepted Answer

A) -2.106 percent. 
B) +2.579 percent. 
C) +0.000 percent. 
D) +3.739 percent. 
E) +2.444 percent. [Refer to: 9-83] 
A) -2.106 percent. 
B) +2.579 percent. 
C) +0.000 percent. 
D) +3.739 percent. 
E) +2.444 percent. [Refer to: 9-83]

Question 18

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.
[Refer to: 9-121] 
A) 3.61 years. 
B) 3.74 years. 
C) 4.01 years. 
D) 4.26 years. 
E) 4.51 years.
[Refer to: 9-121]

Question 19

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.
[Refer to: 9-115] 
A) 2.05 years. 
B) 1.75 years. 
C) 2.22 years. 
D) 2.125 years. 
E) 2.50 years.
[Refer to: 9-115]

Question 20

Dollar duration of a fixed-income security is defined as

Accepted Answer

A) the dollar value change in the price of a security to a one-percent change in the return on the security. 
B) the dollar value change in the price of a security to a change in the Macaulay's duration of the security. 
C) The market price of a security following a one-percent change in the return on the security. 
D) Macaulay's duration divided by one plus the interest rate times the market price of the security. 
E) the modified duration of a security times the price of the security. 
A) the dollar value change in the price of a security to a one-percent change in the return on the security. 
B) the dollar value change in the price of a security to a change in the Macaulay's duration of the security. 
C) The market price of a security following a one-percent change in the return on the security. 
D) Macaulay's duration divided by one plus the interest rate times the market price of the security. 
E) the modified duration of a security times the price of the security.

Exam 9: Interest Rate Risk II

Which of the following statements is true?

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.

A risk manager could restructure assets and liabilities to reduce interest rate exposure for this example by

What is the bank's leverage adjusted duration gap?

What is the FI's leverage-adjusted duration gap?

If yields increase by 10 basis points, what is the approximate price change on the $100,000 Treasury note? Use the duration approximation relationship.

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

The smaller the leverage-adjusted duration gap, the more exposed the FI is to interest rate shocks.

Duration measures the average life of a financial asset or financial liability.

What is the duration of the liabilities?

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

Calculate the modified duration of a two-year corporate loan paying 6 percent interest annually.The $40,000,000 loan is 100 percent amortizing, and the current yield is 9 percent annually.

A $1,000 six-year Eurobond has an 8 percent coupon, is selling at par, and contracts to make annual payments of interest.The duration of this bond is 4.99 years.What will be the new price using the duration model if interest rates increase to 8.5 percent?

The value for duration describes the percentage increase in the price of a fixed-income asset for a given increase in the required yield or interest rate.

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

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

Calculate the duration of the liabilities to four decimal places.

Dollar duration of a fixed-income security is defined as

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