Question 1

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 2

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 decline to 7 percent.Use the duration valuation equation.

Accepted Answer

A) +8.58 percent 
B) +12.76 percent 
C) -12.75 percent 
D) +11.80 percent 
E) +11.52 percent 
A) +8.58 percent 
B) +12.76 percent 
C) -12.75 percent 
D) +11.80 percent 
E) +11.52 percent

Question 3

What is the duration of the commercial loans?

Accepted Answer

A) 1.00 years. 
B) 2.00 years. 
C) 1.73 years. 
D) 1.91 years. 
E) 1.50 years. [Refer to: 9-92] 
A) 1.00 years. 
B) 2.00 years. 
C) 1.73 years. 
D) 1.91 years. 
E) 1.50 years. [Refer to: 9-92]

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Matching the maturities of assets and liabilities is not a perfect method of immunizing the balance sheet because the timing of the cash flows is likely to differ between the assets and liabilities.

Accepted Answer

A) True 
 B)False

Question 6

A key assumption of Macaulay duration is that the yield curve is flat so that all cash flows are discounted at the same discount rate.

Accepted Answer

A) True 
 B)False

Question 7

What is the duration of this Treasury note?

Accepted Answer

A) 1.500 years. 
B) 1.371 years. 
C) 1.443 years. 
D) 2.882 years. 
E) 1.234 years. [Refer to: 9-95] 
A) 1.500 years. 
B) 1.371 years. 
C) 1.443 years. 
D) 2.882 years. 
E) 1.234 years. [Refer to: 9-95]

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

Interest elasticity is the percentage change in the price of a bond for any given change in interest rates.

Accepted Answer

A) True 
 B)False

Question 10

An FI purchases at par value a $100,000 Treasury bond paying 10 percent interest with a 7.5 year duration.If interest rates rise by 4 percent, calculate the bond's new value. Recall that Treasury bonds pay interest semiannually.Use the duration valuation equation.

Accepted Answer

A) $28,572 
B) $20,864 
C) $15,000 
D) $22,642 
E) $71,428 
A) $28,572 
B) $20,864 
C) $15,000 
D) $22,642 
E) $71,428

Question 11

The duration of a consol bond is

Accepted Answer

A) less than its maturity. 
B) infinity. 
C) 30 years. 
D) more than its maturity. 
E) given by the formula D = 1/(1-R). 
A) less than its maturity. 
B) infinity. 
C) 30 years. 
D) more than its maturity. 
E) given by the formula D = 1/(1-R).

Question 12

Which of the following statements is true regarding effects of interest rate changes on the market value of an FI's equity or net worth?

Accepted Answer

A) the leverage adjusted duration gap reflects the degree of duration mismatch in an FI's balance sheet. 
B) the size of the FI reflects the scale of the FI and its potential net worth exposure from any given interest rate shock. 
C) the size of the interest rate shock; the larger the size the greater the FI's exposure. 
D) A, B, and C are true. 
E) none of the above are true. 
A) the leverage adjusted duration gap reflects the degree of duration mismatch in an FI's balance sheet. 
B) the size of the FI reflects the scale of the FI and its potential net worth exposure from any given interest rate shock. 
C) the size of the interest rate shock; the larger the size the greater the FI's exposure. 
D) A, B, and C are true. 
E) none of the above are true.

Question 13

Convexity is a desirable effect to a portfolio manager because it is easy to measure and price.

Accepted Answer

A) True 
 B)False

Question 14

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.
[Refer to: 9-121] 
A) 3.28 years. 
B) 3.53 years. 
C) 3.78 years. 
D) 4.03 years. 
E) 4.28 years.
[Refer to: 9-121]

Question 15

Larger coupon payments on a fixed-income asset cause the present value weights of the cash flows to be lower in the duration calculation.

Accepted Answer

A) True 
 B)False

Question 16

For a given maturity fixed-income asset, duration decreases as the market yield increases.

Accepted Answer

A) True 
 B)False

Question 17

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. [Refer to: 9-80] 
A) +$336,111. 
B) -$0.605. 
C) -$336,111. 
D) +$0.605. 
E) -$363,000. [Refer to: 9-80]

Question 18

If interest rates increase by 20 basis points, what is the approximate change in the market price using the duration approximation?

Accepted Answer

A) -$7.985 
B) -$7.941 
C) -$3.990 
D) +$3.990 
E) +$7.949 [Refer to: 9-102] 
A) -$7.985 
B) -$7.941 
C) -$3.990 
D) +$3.990 
E) +$7.949 [Refer to: 9-102]

Question 19

Which of the following statements is true regarding duration?

Accepted Answer

A) increases with the maturity of a fixed-income security but at a decreasing rate. 
B) decreases as the yield on a security increases. 
C) decreases as the coupon or interest payment increases. 
D) is equal to the maturity of an immunized security. 
E) all of the above are true. 
A) increases with the maturity of a fixed-income security but at a decreasing rate. 
B) decreases as the yield on a security increases. 
C) decreases as the coupon or interest payment increases. 
D) is equal to the maturity of an immunized security. 
E) all of the above are true.

Question 20

The duration of all floating rate debt instruments is

Accepted Answer

A) equal to the time to maturity. 
B) less than the time to repricing of the instrument. 
C) time interval between the purchase of the security and its sale. 
D) equal to time to repricing of the instrument. 
E) infinity. 
A) equal to the time to maturity. 
B) less than the time to repricing of the instrument. 
C) time interval between the purchase of the security and its sale. 
D) equal to time to repricing of the instrument. 
E) infinity.

Exam 9: Interest Rate Risk II

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

What is the duration of the commercial loans?

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

Matching the maturities of assets and liabilities is not a perfect method of immunizing the balance sheet because the timing of the cash flows is likely to differ between the assets and liabilities.

A key assumption of Macaulay duration is that the yield curve is flat so that all cash flows are discounted at the same discount rate.

What is the duration of this Treasury note?

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

Interest elasticity is the percentage change in the price of a bond for any given change in interest rates.

An FI purchases at par value a $100,000 Treasury bond paying 10 percent interest with a 7.5 year duration.If interest rates rise by 4 percent, calculate the bond's new value. Recall that Treasury bonds pay interest semiannually.Use the duration valuation equation.

The duration of a consol bond is

Which of the following statements is true regarding effects of interest rate changes on the market value of an FI's equity or net worth?

Convexity is a desirable effect to a portfolio manager because it is easy to measure and price.

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?

Larger coupon payments on a fixed-income asset cause the present value weights of the cash flows to be lower in the duration calculation.

For a given maturity fixed-income asset, duration decreases as the market yield increases.

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]

If interest rates increase by 20 basis points, what is the approximate change in the market price using the duration approximation?

Which of the following statements is true regarding duration?

The duration of all floating rate debt instruments is

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Fintech Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters