Exam 14: Managing Interest Rate Risk

A perpetuity (a bond with an infinite life) has a finite duration because after a certain point (depending on the interest rate), cash flows are so heavily discounted that they no longer affect the average.

In the immunisation process:

The error in the approximation increases as the size of the yield change increases because the price- yield curve is convex.

The duration of a coupon bond_________ at a _________rate as its term .

The performance of fund managers is often judged against that of a benchmark portfolio.

Insulating a portfolio from the effects of interest rate changes is known as:

DGAP protects us against uniform changes in yields in the future but not in the near future.

When DGAP < 0, DA is below DL. An interest rate fall will cause the asset to increase in value by less than the liability; that is, our net position will deteriorate.

Can derivatives be used to enhance hedging?

Which of the following is a characteristic of a bullet portfolio?

The sensitivity of the security price to its term.

Convexity also has the additive property possessed by duration.

A 'bullet portfolio' is one where:

Marked- to- market implies that assets and liabilities are bought and sold on a daily basis.

Which of the following statements is correct?

Marked- to- market implies that assets and liabilities are valued at market prices.

The duration of a zero- coupon bond is constant and is equal to its term regardless of the yield.

Ensuring a known cost of funding is appropriate for active managers.

The sensitivity of a bond's price to a change in interest rates is known as:

There is a trade- off between achieving the lowest possible average cost of borrowing and obtaining certainty about these costs. One of the advantages of derivative instruments is that they can be used to improve the terms of this trade- off.