Question 1

Duration_________ as the yield _________.

Accepted Answer

A)  increases; increases 
B)  falls ; increases 
C)  is unchanged; increases 
D)  falls; falls 
A)  increases; increases 
B)  falls ; increases 
C)  is unchanged; increases 
D)  falls; falls

Question 2

If the duration gap is negative, a fall in interest rates will result in a net capital gain on our position.

Accepted Answer

A) True 
 B)False

Question 3

One problem with duration hedges is that they are only accurate for very small changes in the interest rate.

Accepted Answer

A) True 
 B)False

Question 4

The cover ratio is a static measure which shows the situation which prevails at the present time.

Accepted Answer

A) True 
 B)False

Question 5

The objective of the corporate risk manager is to:

Accepted Answer

A)  minimise cost of funding. 
B)  ensure a known cost of funding. 
C)  maintain zero corporate risk. 
D)  A and B. 
A)  minimise cost of funding. 
B)  ensure a known cost of funding. 
C)  maintain zero corporate risk. 
D)  A and B.

Question 6

The 'modified duration' of a security refers to the percentage change in the yield when the interest rate changes 1%.

Accepted Answer

A) True 
 B)False

Question 7

Suppose you are a bond portfolio manager and you expect interest rates to increase. You will_________ your duration by_________ long- term maturity bonds if you want to manage your risk.

Accepted Answer

A)  increase; buying 
B)  decrease; selling 
C)  decrease; buying 
D)  increase; selling 
A)  increase; buying 
B)  decrease; selling 
C)  decrease; buying 
D)  increase; selling

Question 8

The convexity (CX) of a ZCB is given by:

Accepted Answer

A)  CX = (Term) squared. 
B)  CX = (Term) squared + (Term). 
C)  CX = (Term) × (market yield) squared. 
D)  CX = (Term) × (market yield). 
A)  CX = (Term) squared. 
B)  CX = (Term) squared + (Term). 
C)  CX = (Term) × (market yield) squared. 
D)  CX = (Term) × (market yield).

Question 9

An active manager will actually attempt to choose times of refinancing to take advantage of projected future changes in interest rates.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is a problem with duration hedges?

Accepted Answer

A)  It is not accurate with large changes in interest rates. 
B)  The hedge is instantaneous. 
C)  The position is only immunised against uniform shifts in the yield curve. 
D)  All of the above. 
A)  It is not accurate with large changes in interest rates. 
B)  The hedge is instantaneous. 
C)  The position is only immunised against uniform shifts in the yield curve. 
D)  All of the above.

Question 11

Modified duration is calculated as:

Accepted Answer

A)  duration multiply by convexity. 
B)  duration divided by 12. 
C)  duration divided by (1+ interest rate). 
D)  duration multiply by interest rate. 
A)  duration multiply by convexity. 
B)  duration divided by 12. 
C)  duration divided by (1+ interest rate). 
D)  duration multiply by interest rate.

Question 12

When we are dealing with a full portfolio, we need to take account of the presence of capital (equity) in that portfolio and thus have to adjust DGAP.

Accepted Answer

A) True 
 B)False

Question 13

The duration gap (DGAP) of a portfolio uses current market values of assets and liabilities.

Accepted Answer

A) True 
 B)False

Question 14

Convexity cannot be used to construct a more accurate hedge for a security.

Accepted Answer

A) True 
 B)False

Question 15

A portfolio is exposed to interest rate increases causing a loss of capital when:

Accepted Answer

A)  the average duration of assets is less than the average duration of liabilities. 
B)  both ZCBs and annuities are held. 
C)  the average duration of assets is greater than the average duration of liabilities. 
D)  neither ZCBs nor annuities are held. 
A)  the average duration of assets is less than the average duration of liabilities. 
B)  both ZCBs and annuities are held. 
C)  the average duration of assets is greater than the average duration of liabilities. 
D)  neither ZCBs nor annuities are held.

Question 16

Convexity increases as:

Accepted Answer

A)  the market yield falls. 
B)  the value of the coupon payment falls. 
C)  the term of the security increases. 
D)  all of the above. 
A)  the market yield falls. 
B)  the value of the coupon payment falls. 
C)  the term of the security increases. 
D)  all of the above.

Question 17

'Duration' refers to:

Accepted Answer

A)  the period of time remaining in the life of a security until it matures. 
B)  the maturity of a security. 
C)  the period of time an investor has held the security. 
D)  the weighted average of the maturities of the security's cash flows. 
A)  the period of time remaining in the life of a security until it matures. 
B)  the maturity of a security. 
C)  the period of time an investor has held the security. 
D)  the weighted average of the maturities of the security's cash flows.

Question 18

A position is said to be 'immunised' when a change in interest rates will have a zero- dollar effect on assets and a zero- dollar effect on liabilities.

Accepted Answer

A) True 
 B)False

Question 19

Modified duration is adjusted for the curvature in the yield curve.

Accepted Answer

A) True 
 B)False

Question 20

Critically discuss the use of duration to hedge against interest rate risk.

Accepted Answer

Duration is a measure of the sensitivity

Duration_ as the yield _.

If the duration gap is negative, a fall in interest rates will result in a net capital gain on our position.

One problem with duration hedges is that they are only accurate for very small changes in the interest rate.

The cover ratio is a static measure which shows the situation which prevails at the present time.

The objective of the corporate risk manager is to:

The 'modified duration' of a security refers to the percentage change in the yield when the interest rate changes 1%.

Suppose you are a bond portfolio manager and you expect interest rates to increase. You will_ your duration by_ long- term maturity bonds if you want to manage your risk.

The convexity (CX) of a ZCB is given by:

An active manager will actually attempt to choose times of refinancing to take advantage of projected future changes in interest rates.

Which of the following is a problem with duration hedges?

Modified duration is calculated as:

When we are dealing with a full portfolio, we need to take account of the presence of capital (equity) in that portfolio and thus have to adjust DGAP.

The duration gap (DGAP) of a portfolio uses current market values of assets and liabilities.

Convexity cannot be used to construct a more accurate hedge for a security.

A portfolio is exposed to interest rate increases causing a loss of capital when:

Convexity increases as:

'Duration' refers to:

A position is said to be 'immunised' when a change in interest rates will have a zero- dollar effect on assets and a zero- dollar effect on liabilities.

Modified duration is adjusted for the curvature in the yield curve.

Critically discuss the use of duration to hedge against interest rate risk.

Financial Markets

Debt Securities and Markets

Introduction to Financial Calculations

Banks and Other Deposit Taking Institutions

The Payments System

Managed and Superannuation Funds

Interest Rates, the Yield Curve and Monetary Policy

The Foreign Exchange Market

Listed Securities

Fixed Rate Derivatives

Options

Global Financial Crisis

Managing Foreign Exchange Risk

Filters

Exam 14: Managing Interest Rate Risk

Duration_________ as the yield _________.

If the duration gap is negative, a fall in interest rates will result in a net capital gain on our position.

One problem with duration hedges is that they are only accurate for very small changes in the interest rate.

The cover ratio is a static measure which shows the situation which prevails at the present time.

The objective of the corporate risk manager is to:

The 'modified duration' of a security refers to the percentage change in the yield when the interest rate changes 1%.

Suppose you are a bond portfolio manager and you expect interest rates to increase. You will_________ your duration by_________ long- term maturity bonds if you want to manage your risk.

The convexity (CX) of a ZCB is given by:

An active manager will actually attempt to choose times of refinancing to take advantage of projected future changes in interest rates.

Which of the following is a problem with duration hedges?

Modified duration is calculated as:

When we are dealing with a full portfolio, we need to take account of the presence of capital (equity) in that portfolio and thus have to adjust DGAP.

The duration gap (DGAP) of a portfolio uses current market values of assets and liabilities.

Convexity cannot be used to construct a more accurate hedge for a security.

A portfolio is exposed to interest rate increases causing a loss of capital when:

Convexity increases as:

'Duration' refers to:

A position is said to be 'immunised' when a change in interest rates will have a zero- dollar effect on assets and a zero- dollar effect on liabilities.

Modified duration is adjusted for the curvature in the yield curve.

Critically discuss the use of duration to hedge against interest rate risk.

Financial Markets

Debt Securities and Markets

Introduction to Financial Calculations

Banks and Other Deposit Taking Institutions

The Payments System

Managed and Superannuation Funds

Interest Rates, the Yield Curve and Monetary Policy

The Foreign Exchange Market

Listed Securities

Fixed Rate Derivatives

Options

Global Financial Crisis

Managing Foreign Exchange Risk

Filters

Duration_ as the yield _.

Suppose you are a bond portfolio manager and you expect interest rates to increase. You will_ your duration by_ long- term maturity bonds if you want to manage your risk.