Question 1

What is the duration of the bank's Treasury portfolio?

Accepted Answer

A) 1.07 years. 
B) 1.00 year. 
C) 0.98 years. 
D) 0.92 years. 
E) Insufficient information. [Refer to: 9-108] 
A) 1.07 years. 
B) 1.00 year. 
C) 0.98 years. 
D) 0.92 years. 
E) Insufficient information. [Refer to: 9-108]

Question 2

All else equal, as compared to an annual payment fixed income security, a semi-annual payment security has a

Accepted Answer

A) lower duration value and lower market value. 
B) higher duration but lower price sensitivity. 
C) lower duration and more cash flows. 
D) higher duration and more cash flows. 
E) none of the options. 
A) lower duration value and lower market value. 
B) higher duration but lower price sensitivity. 
C) lower duration and more cash flows. 
D) higher duration and more cash flows. 
E) none of the options.

Question 3

As interest rates rise, the duration of a consol bond decreases.

Accepted Answer

A) True 
 B)False

Question 4

What is the duration of the two-year loan (per $100 face value) if it is selling at par?

Accepted Answer

A) 2.00 years 
B) 1.92 years 
C) 1.96 years 
D) 1.00 year 
E) 0.91 years [Refer to: 9-95] 
A) 2.00 years 
B) 1.92 years 
C) 1.96 years 
D) 1.00 year 
E) 0.91 years [Refer to: 9-95]

Question 5

What is the duration of the above Treasury note? Use the asked price to calculate the duration.Recall that Treasuries pay interest semiannually.

Accepted Answer

A) 3.86 years. 
B) 1.70 years. 
C) 2.10 years. 
D) 1.90 years. 
E) 3.40 years.
[Refer to: 9-119] 
A) 3.86 years. 
B) 1.70 years. 
C) 2.10 years. 
D) 1.90 years. 
E) 3.40 years.
[Refer to: 9-119]

Question 6

A relatively high numerical value of the duration of an asset means which of the following t?

Accepted Answer

A) Low sensitivity of an asset price to interest rate shocks. 
B) High interest inelasticity of a bond. 
C) High sensitivity of an asset price to interest rate shocks. 
D) Lack of sensitivity of an asset price to interest rate shocks. 
E) Smaller capital loss for a given change in interest rates. 
A) Low sensitivity of an asset price to interest rate shocks. 
B) High interest inelasticity of a bond. 
C) High sensitivity of an asset price to interest rate shocks. 
D) Lack of sensitivity of an asset price to interest rate shocks. 
E) Smaller capital loss for a given change in interest rates.

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

Suppose a pension fund must have $10,000,000 five years from now to make required payments to retirees.If the pension wants to guarantee the funds are available regardless of future interest rate changes, it should

Accepted Answer

A) sell a 5-year duration bond so that it matures with a book value of $10,000,000. 
B) sell $10,000,000 face value discount bonds with a duration of five years. 
C) purchase 7-year, semi-annual coupon bonds that have a duration of five years. 
D) purchase 8-year, annual payment bonds that have a dollar duration of $10,000,000. 
E) none of the options since future interest rates are too unpredictable. 
A) sell a 5-year duration bond so that it matures with a book value of $10,000,000. 
B) sell $10,000,000 face value discount bonds with a duration of five years. 
C) purchase 7-year, semi-annual coupon bonds that have a duration of five years. 
D) purchase 8-year, annual payment bonds that have a dollar duration of $10,000,000. 
E) none of the options since future interest rates are too unpredictable.

Question 9

If the relative change in interest rates is a decrease of 1 percent, calculate the impact on the bank's market value of equity using the duration approximation. (That is, ΔR/(1 + R) = -1 percent)

Accepted Answer

A) The bank's market value of equity increases by $325,550. 
B) The bank's market value of equity decreases by $325,550. 
C) The bank's market value of equity increases by $336,500. 
D) The bank's market value of equity decreases by $336,500. 
E) There is no change in the bank's market value of equity. [Refer to: 9-108] 
A) The bank's market value of equity increases by $325,550. 
B) The bank's market value of equity decreases by $325,550. 
C) The bank's market value of equity increases by $336,500. 
D) The bank's market value of equity decreases by $336,500. 
E) There is no change in the bank's market value of equity. [Refer to: 9-108]

Question 10

Consider a one-year maturity, $100,000 face value bond that pays a 6 percent fixed coupon annually.What is the price of the bond if market interest rates are 7 percent?

Accepted Answer

A) $99,050.15. 
B) $99,457.94. 
C) $99,249.62. 
D) $100,000.00. 
E) $99,065.42. 
A) $99,050.15. 
B) $99,457.94. 
C) $99,249.62. 
D) $100,000.00. 
E) $99,065.42.

Question 11

What is the interest rate risk exposure of the optimal transaction in the previous question over the next 2 years?

Accepted Answer

A) The risk that interest rates will rise since the FI must purchase a 2-year CD in one year. 
B) The risk that interest rates will rise since the FI must sell a 1-year CD in one year. 
C) The risk that interest rates will fall since the FI must sell a 2-year loan in one year. 
D) The risk that interest rates will fall since the FI must buy a 1-year loan in one year. 
E) There is no interest rate risk exposure. [Refer to: 9-95] 
A) The risk that interest rates will rise since the FI must purchase a 2-year CD in one year. 
B) The risk that interest rates will rise since the FI must sell a 1-year CD in one year. 
C) The risk that interest rates will fall since the FI must sell a 2-year loan in one year. 
D) The risk that interest rates will fall since the FI must buy a 1-year loan in one year. 
E) There is no interest rate risk exposure. [Refer to: 9-95]

Question 12

Calculate the leverage-adjusted duration gap to four decimal places and state the FI's interest rate risk exposure of this institution.

Accepted Answer

A) +1.0308 years; exposed to interest rate increases. 
B) −0.3232 years; exposed to interest rate increases. 
C) +0.8666 years; exposed to interest rate increases. 
D) +0.4875 years; exposed to interest rate increases. 
E) −1.3232 years; exposed to interest rate decreases.
[Refer to: 9-115] 
A) +1.0308 years; exposed to interest rate increases. 
B) −0.3232 years; exposed to interest rate increases. 
C) +0.8666 years; exposed to interest rate increases. 
D) +0.4875 years; exposed to interest rate increases. 
E) −1.3232 years; exposed to interest rate decreases.
[Refer to: 9-115]

Question 13

What is the leverage-adjusted duration gap?

Accepted Answer

A) 0.605 years. 
B) 0.956 years. 
C) 0.360 years. 
D) 0.436 years. 
E) 0.189 years. [Refer to: 9-102] 
A) 0.605 years. 
B) 0.956 years. 
C) 0.360 years. 
D) 0.436 years. 
E) 0.189 years. [Refer to: 9-102]

Question 14

Attempts to satisfy the objectives of shareholders and regulators requires the bank to use the same duration match in the protection of net worth from interest rate risk.

Accepted Answer

A) True 
 B)False

Question 15

Buying a fixed-rate asset whose duration is exactly equal to the desired investment horizon immunizes against interest rate risk.

Accepted Answer

A) True 
 B)False

Question 16

What is the price of the bond if market interest rates are 6 percent?

Accepted Answer

A) $95,082.68. 
B) $95,769.55. 
C) $95,023.00. 
D) $100,000.00. 
E) $96,557.87. [Refer to: 9-89] 
A) $95,082.68. 
B) $95,769.55. 
C) $95,023.00. 
D) $100,000.00. 
E) $96,557.87. [Refer to: 9-89]

Question 17

If all interest rates decline 90 basis points (ΔR/(1 + R) = −90 basis points), what is the change in the market value of equity?

Accepted Answer

A) -$4.4300 million 
B) +$3.9255 million 
C) +$4.3875 million 
D) +$2.5506 million 
E) +$0.0227 million
[Refer to: 9-115] 
A) -$4.4300 million 
B) +$3.9255 million 
C) +$4.3875 million 
D) +$2.5506 million 
E) +$0.0227 million
[Refer to: 9-115]

Question 18

What is the duration of the assets?

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 19

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 20

What is the price of the bond if market interest rates are 4 percent?

Accepted Answer

A) $105,816.44. 
B) $105,287.67. 
C) $105,242.14. 
D) $100,000.00. 
E) $106,290.56. [Refer to: 9-89] 
A) $105,816.44. 
B) $105,287.67. 
C) $105,242.14. 
D) $100,000.00. 
E) $106,290.56. [Refer to: 9-89]

Exam 9: Interest Rate Risk II

What is the duration of the bank's Treasury portfolio?

All else equal, as compared to an annual payment fixed income security, a semi-annual payment security has a

As interest rates rise, the duration of a consol bond decreases.

What is the duration of the two-year loan (per $100 face value) if it is selling at par?

What is the duration of the above Treasury note? Use the asked price to calculate the duration.Recall that Treasuries pay interest semiannually.

A relatively high numerical value of the duration of an asset means which of the following t?

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

Suppose a pension fund must have $10,000,000 five years from now to make required payments to retirees.If the pension wants to guarantee the funds are available regardless of future interest rate changes, it should

If the relative change in interest rates is a decrease of 1 percent, calculate the impact on the bank's market value of equity using the duration approximation. (That is, ΔR/(1 + R) = -1 percent)

Consider a one-year maturity, $100,000 face value bond that pays a 6 percent fixed coupon annually.What is the price of the bond if market interest rates are 7 percent?

What is the interest rate risk exposure of the optimal transaction in the previous question over the next 2 years?

Calculate the leverage-adjusted duration gap to four decimal places and state the FI's interest rate risk exposure of this institution.

What is the leverage-adjusted duration gap?

Attempts to satisfy the objectives of shareholders and regulators requires the bank to use the same duration match in the protection of net worth from interest rate risk.

Buying a fixed-rate asset whose duration is exactly equal to the desired investment horizon immunizes against interest rate risk.

What is the price of the bond if market interest rates are 6 percent?

If all interest rates decline 90 basis points (ΔR/(1 + R) = −90 basis points), what is the change in the market value of equity?

What is the duration of the assets?

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

What is the price of the bond if market interest rates are 4 percent?

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