Question 1

Immunizing the balance sheet to protect equity holders from the effects of interest rate risk occurs when

Accepted Answer

A) the maturity gap is zero, so that all assets have a matching-maturity liability. 
B) the repricing gap is zero, so that all assets have a matching liability that reprices at the same time. 
C) the modified duration gap of the balance sheet is zero. 
D) the effect of a change in the level of interest rates on the value of the assets of the FI is exactly offset by the effect of the same change in interest rates on the liabilities of the FI. 
E) When the modified duration is equal to the dollar duration. 
A) the maturity gap is zero, so that all assets have a matching-maturity liability. 
B) the repricing gap is zero, so that all assets have a matching liability that reprices at the same time. 
C) the modified duration gap of the balance sheet is zero. 
D) the effect of a change in the level of interest rates on the value of the assets of the FI is exactly offset by the effect of the same change in interest rates on the liabilities of the FI. 
E) When the modified duration is equal to the dollar duration.

Question 2

The error from using duration to estimate the new price of a fixed-income security will be less as the amount of convexity increases.

Accepted Answer

A) True 
 B)False

Question 3

When does "duration" become a less accurate predictor of expected change in security prices?

Accepted Answer

A) As interest rate shocks increase in size. 
B) As interest rate shocks decrease in size. 
C) When maturity distributions of an FI's assets and liabilities are considered. 
D) As inflation decreases. 
E) When the leverage adjustment is incorporated. 
A) As interest rate shocks increase in size. 
B) As interest rate shocks decrease in size. 
C) When maturity distributions of an FI's assets and liabilities are considered. 
D) As inflation decreases. 
E) When the leverage adjustment is incorporated.

Question 4

Calculate the duration of a two-year corporate loan paying 6 percent interest annually, selling at par.The $30,000,000 loan is 100 percent amortizing with annual payments.

Accepted Answer

A) 2 years. 
B) 1.89 years. 
C) 1.94 years. 
D) 1.49 years. 
E) 1.73 years. 
A) 2 years. 
B) 1.89 years. 
C) 1.94 years. 
D) 1.49 years. 
E) 1.73 years.

Question 5

Normally, duration is less than the maturity for a fixed income asset.

Accepted Answer

A) True 
 B)False

Question 6

For given changes in interest rates, the change in the market value of net worth of an FI is equal to the difference between the changes in the market value of the assets and market value of the liabilities.

Accepted Answer

A) True 
 B)False

Question 7

Duration of a zero coupon bond is equal to the bond's maturity.

Accepted Answer

A) True 
 B)False

Question 8

An FI has financial assets of $800 and equity of $50.If the duration of assets is 1.21 years and the duration of all liabilities is 0.25 years, what is the leverage-adjusted duration gap?

Accepted Answer

A) 0.9000 years. 
B) 0.9600 years. 
C) 0.9756 years. 
D) 0.8844 years. 
E) Cannot be determined. Leverage-adjusted duration gap
$$- \left[ D _ { A } - D _ { L } k \right] = - \left[ 1.21 - 0.25 \times \left( \frac { 800 - 50 } { 800 } \right) \right] = - [ 1.21 - 0.234375 ] = - 0.9756$$ 
A) 0.9000 years. 
B) 0.9600 years. 
C) 0.9756 years. 
D) 0.8844 years. 
E) Cannot be determined. Leverage-adjusted duration gap
$$- \left[ D _ { A } - D _ { L } k \right] = - \left[ 1.21 - 0.25 \times \left( \frac { 800 - 50 } { 800 } \right) \right] = - [ 1.21 - 0.234375 ] = - 0.9756$$

Question 9

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 bond's current market price?

Accepted Answer

A) $962.09. 
B) $961.39. 
C) $1,000. 
D) $1,038.90. 
E) $995.05. 
A) $962.09. 
B) $961.39. 
C) $1,000. 
D) $1,038.90. 
E) $995.05.

Question 10

The greater is convexity, the more insurance a portfolio manager has against interest rate increases and the greater potential gain from rate decreases.

Accepted Answer

A) True 
 B)False

Immunizing the balance sheet to protect equity holders from the effects of interest rate risk occurs when

The error from using duration to estimate the new price of a fixed-income security will be less as the amount of convexity increases.

When does "duration" become a less accurate predictor of expected change in security prices?

Calculate the duration of a two-year corporate loan paying 6 percent interest annually, selling at par.The $30,000,000 loan is 100 percent amortizing with annual payments.

Normally, duration is less than the maturity for a fixed income asset.

For given changes in interest rates, the change in the market value of net worth of an FI is equal to the difference between the changes in the market value of the assets and market value of the liabilities.

Duration of a zero coupon bond is equal to the bond's maturity.

An FI has financial assets of $800 and equity of $50.If the duration of assets is 1.21 years and the duration of all liabilities is 0.25 years, what is the leverage-adjusted duration gap?

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 bond's current market price?

The greater is convexity, the more insurance a portfolio manager has against interest rate increases and the greater potential gain from rate decreases.

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

Exam 9: Interest Rate Risk II

Immunizing the balance sheet to protect equity holders from the effects of interest rate risk occurs when

The error from using duration to estimate the new price of a fixed-income security will be less as the amount of convexity increases.

When does "duration" become a less accurate predictor of expected change in security prices?

Calculate the duration of a two-year corporate loan paying 6 percent interest annually, selling at par.The $30,000,000 loan is 100 percent amortizing with annual payments.

Normally, duration is less than the maturity for a fixed income asset.

For given changes in interest rates, the change in the market value of net worth of an FI is equal to the difference between the changes in the market value of the assets and market value of the liabilities.

Duration of a zero coupon bond is equal to the bond's maturity.

An FI has financial assets of $800 and equity of $50.If the duration of assets is 1.21 years and the duration of all liabilities is 0.25 years, what is the leverage-adjusted duration gap?

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 bond's current market price?

The greater is convexity, the more insurance a portfolio manager has against interest rate increases and the greater potential gain from rate decreases.

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