Question 1

Consider a six-year maturity, $100,000 face value bond that pays a 5 percent fixed coupon annually. 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. 
A) $95,082.68. 
B) $95,769.55. 
C) $95,023.00. 
D) $100,000.00. 
E) $96,557.87.

Question 2

The duration of a consol bond is

Accepted Answer

A) less than its maturity. 
B) infinity. 
C) 30 years. 
D) more than its maturity. 
E) given by the formula D = 1/(1 - R). 
A) less than its maturity. 
B) infinity. 
C) 30 years. 
D) more than its maturity. 
E) given by the formula D = 1/(1 - R).

Question 3

For small change in interest rates, market prices of bonds move in an inversely proportional manner according to the size of the

Accepted Answer

A) equity. 
B) asset value. 
C) liability value. 
D) duration value. 
E) equity and asset value. 
A) equity. 
B) asset value. 
C) liability value. 
D) duration value. 
E) equity and asset value.

Question 4

Marking-to-market accounting is a market value accounting method that reflects the purchase prices of assets and liabilities.

Accepted Answer

A) True 
 B)False

Question 5

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.   If rates do not change, the balance sheet position that maximizes the FI's returns is

Accepted Answer

A) a positive spread of 15 basis points by selling 1-year CDs to finance 2-year CDs. 
B) a positive spread of 100 basis points by selling 1-year CDs to finance 1-year loans. 
C) a positive spread of 85 basis points by financing the purchase of a 1-year loan with a 2-year CD. 
D) a positive spread of 165 basis points by selling 1-year CDs to finance 2-year loans. 
E) a positive spread of 150 basis points by selling 2-year CDs to finance 2-year loans. 
A) a positive spread of 15 basis points by selling 1-year CDs to finance 2-year CDs. 
B) a positive spread of 100 basis points by selling 1-year CDs to finance 1-year loans. 
C) a positive spread of 85 basis points by financing the purchase of a 1-year loan with a 2-year CD. 
D) a positive spread of 165 basis points by selling 1-year CDs to finance 2-year loans. 
E) a positive spread of 150 basis points by selling 2-year CDs to finance 2-year loans.

Question 6

For a given maturity fixed-income asset, duration increases as the promised interest payment declines.

Accepted Answer

A) True 
 B)False

Question 7

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. Calculate the percentage change in this bond's price if interest rates on comparable risk securities decline to 7 percent. Use the duration valuation equation.

Accepted Answer

A) +8.58 percent 
B) +12.76 percent 
C) -12.75 percent 
D) +11.80 percent 
E) +11.52 percent 
A) +8.58 percent 
B) +12.76 percent 
C) -12.75 percent 
D) +11.80 percent 
E) +11.52 percent

Question 8

First Duration, a securities dealer, has a leverage-adjusted duration gap of 1.21 years, $60 million in assets, 7 percent equity to assets ratio, and market rates are 8 percent. What conclusions can you draw from the duration gap in your answer to the previous question?

Accepted Answer

A) The market value of the dealer's equity decreases slightly if interest rates fall. 
B) The market value of the dealer's equity becomes negative if interest rates rise. 
C) The market value of the dealer's equity decreases slightly if interest rates rise. 
D) The market value of the dealer's equity becomes negative if interest rates fall. 
E) The dealer has no interest rate risk exposure. 
A) The market value of the dealer's equity decreases slightly if interest rates fall. 
B) The market value of the dealer's equity becomes negative if interest rates rise. 
C) The market value of the dealer's equity decreases slightly if interest rates rise. 
D) The market value of the dealer's equity becomes negative if interest rates fall. 
E) The dealer has no interest rate risk exposure.

Question 9

What is the duration of a 5-year par value zero coupon bond yielding 10 percent annually?

Accepted Answer

A) 0.50 years. 
B) 2.00 years. 
C) 4.40 years. 
D) 5.00 years. 
E) 4.05 years. 
A) 0.50 years. 
B) 2.00 years. 
C) 4.40 years. 
D) 5.00 years. 
E) 4.05 years.

Question 10

Duration considers the timing of all the cash flows of an asset by summing the product of the cash flows and the time of occurrence.

Accepted Answer

A) True 
 B)False

Question 11

Calculate the duration of a two-year corporate bond paying 6 percent interest annually, selling at par. Principal of $20,000,000 is due at the end of two years.

Accepted Answer

A) 2 years. 
B) 1.91 years. 
C) 1.94 years. 
D) 1.49 years. 
E) 1.75 years. 
A) 2 years. 
B) 1.91 years. 
C) 1.94 years. 
D) 1.49 years. 
E) 1.75 years.

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

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. 
B) the repricing gap is zero. 
C) the duration gap 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) after-the-fact analysis demonstrates that immunization coincidentally occurred. 
A) the maturity gap is zero. 
B) the repricing gap is zero. 
C) the duration gap 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) after-the-fact analysis demonstrates that immunization coincidentally occurred.

Question 14

Duration is equal to maturity when at least some of the cash flows are received upon maturity of the asset.

Accepted Answer

A) True 
 B)False

Question 15

One method of changing the positive leverage adjusted duration gap for the purpose of immunizing the net worth of a typical depository institution is to increase the duration of the assets and to decrease the duration of the liabilities.

Accepted Answer

A) True 
 B)False

Question 16

The rate of change in duration values is less than the rate of change in maturity.

Accepted Answer

A) True 
 B)False

Question 17

U.S. Treasury quotes from the WSJ on Oct. 15, 2003:   If yields increase by 10 basis points, what is the approximate price change on the $100,000 Treasury note? Use the duration approximation relationship.

Accepted Answer

A) +$179.39 
B) +$16.05 
C) -$1,605.05 
D) -$16.05 
E) +$160.51 
A) +$179.39 
B) +$16.05 
C) -$1,605.05 
D) -$16.05 
E) +$160.51

Question 18

The larger the size of an FI, the larger the _________ from any given interest rate shock.

Accepted Answer

A) duration mismatch 
B) immunization effect 
C) net worth exposure 
D) net interest income 
E) risk of bankruptcy 
A) duration mismatch 
B) immunization effect 
C) net worth exposure 
D) net interest income 
E) risk of bankruptcy

Question 19

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 5 percent?

Accepted Answer

A) $100,952.38. 
B) $101,238.10. 
C) $100,963.71. 
D) $100,000.00. 
E) $101,108.27. 
A) $100,952.38. 
B) $101,238.10. 
C) $100,963.71. 
D) $100,000.00. 
E) $101,108.27.

Question 20

The fact that the capital gain effect for rate decreases is greater than the capital loss effect for rate increases is caused by convexity in the yield-price relationship.

Accepted Answer

A) True 
 B)False

Exam 9: Interest Rate Risk II

Consider a six-year maturity, $100,000 face value bond that pays a 5 percent fixed coupon annually. What is the price of the bond if market interest rates are 6 percent?

The duration of a consol bond is

For small change in interest rates, market prices of bonds move in an inversely proportional manner according to the size of the

Marking-to-market accounting is a market value accounting method that reflects the purchase prices of assets and liabilities.

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. If rates do not change, the balance sheet position that maximizes the FI's returns is

For a given maturity fixed-income asset, duration increases as the promised interest payment declines.

First Duration, a securities dealer, has a leverage-adjusted duration gap of 1.21 years, $60 million in assets, 7 percent equity to assets ratio, and market rates are 8 percent. What conclusions can you draw from the duration gap in your answer to the previous question?

What is the duration of a 5-year par value zero coupon bond yielding 10 percent annually?

Duration considers the timing of all the cash flows of an asset by summing the product of the cash flows and the time of occurrence.

Calculate the duration of a two-year corporate bond paying 6 percent interest annually, selling at par. Principal of $20,000,000 is due at the end of two years.

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

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

Duration is equal to maturity when at least some of the cash flows are received upon maturity of the asset.

One method of changing the positive leverage adjusted duration gap for the purpose of immunizing the net worth of a typical depository institution is to increase the duration of the assets and to decrease the duration of the liabilities.

The rate of change in duration values is less than the rate of change in maturity.

U.S. Treasury quotes from the WSJ on Oct. 15, 2003: If yields increase by 10 basis points, what is the approximate price change on the $100,000 Treasury note? Use the duration approximation relationship.

The larger the size of an FI, the larger the _________ from any given interest rate shock.

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 5 percent?

The fact that the capital gain effect for rate decreases is greater than the capital loss effect for rate increases is caused by convexity in the yield-price relationship.

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