Exam 9: Interest Rate Risk II

The following is an FI's balance sheet ($millions). Notes to Balance Sheet: Munis are 2-year 6 percent annual coupon municipal notes selling at par. Loans are floating rates, repriced quarterly. Spot discount yields for 91-day Treasury bills are 3.75 percent. GICs are 1-year pure discount certificates of deposit paying 4.75 percent. What is this bank's interest rate risk exposure, if any?

Duration of a fixed-rate coupon bond will always be greater than one-half of the maturity.

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.

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

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.

All fixed-income assets exhibit convexity in their price-yield relationships.

The value for duration describes the percentage increase in the price of an asset for a given increase in the required yield or interest rate.

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

Third Duration Investments has the following assets and liabilities on its balance sheet. The two-year Treasury notes are zero coupon assets. Interest payments on all other assets and liabilities occur at maturity. Assume 360 days in a year. What is the leverage-adjusted duration gap?

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs). All interest rates are fixed and paid annually. What is the interest rate risk exposure of the optimal transaction in the previous question over the next 2 years?

The cost in terms of both time and money to restructure the balance sheet of large and complex FIs has decreased over time.

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

Consider a six-year maturity, $100,000 face value bond that pays a 5 percent fixed coupon annually. What is the percentage price change for the bond if interest rates decline 50 basis points from the original 5 percent?

Which of the following statements is true?

A $1,000 six-year Eurobond has an 8 percent coupon, is selling at par, and contracts to make annual payments of interest. The duration of this bond is 4.99 years. What will be the new price using the duration model if interest rates increase to 8.5 percent?

Investing in a zero-coupon asset with a maturity equal to the desired investment horizon removes interest rate risk from the investment management process.

For a given change in required yields, short-duration securities suffer a smaller capital loss or receive a smaller capital gain than do long-duration securities.

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

The duration of a portfolio of assets can be found by calculating the book value weighted average of the durations of the individual assets.

Duration measures the average life of a financial asset.