Question 1

Consider a five-year, 8 percent annual coupon bond selling at par of $1,000. What is the duration of this bond?

Accepted Answer

A) 5 years. 
B) 4.31 years. 
C) 3.96 years. 
D) 5.07 years. 
E) Not enough information to answer. 
A) 5 years. 
B) 4.31 years. 
C) 3.96 years. 
D) 5.07 years. 
E) Not enough information to answer.

Question 2

Investing in a zero-coupon asset with a maturity equal to the desired investment horizon is one method of immunizing against changes in interest rates.

Accepted Answer

A) True 
 B)False

Question 3

Based on an 18-month, 8 percent (semiannual) coupon Treasury note selling at par. If interest rates increase by 20 basis points (i.e., ΔR = 20 basis points), use the duration approximation to determine the approximate price change for the Treasury note.

Accepted Answer

A) $0.000. 
B) $0.2775 per $100 face value. 
C) $2.775 per $100 face value. 
D) $0.2672 per $100 face value. 
E) $2.672 per $100 face value. 
A) $0.000. 
B) $0.2775 per $100 face value. 
C) $2.775 per $100 face value. 
D) $0.2672 per $100 face value. 
E) $2.672 per $100 face value.

Question 4

Duration normally is less than the maturity for a fixed income asset.

Accepted Answer

A) True 
 B)False

Question 5

The smaller the leverage adjusted duration gap, the more exposed the FI is to interest rate shocks.

Accepted Answer

A) True 
 B)False

Question 6

The use of duration to predict changes in bond prices for given changes in interest rate changes will always underestimate the amount of the true price change.

Accepted Answer

A) True 
 B)False

Question 7

The economic meaning of duration is the interest elasticity of a financial assets price.

Accepted Answer

A) True 
 B)False

Question 8

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 9

A key assumption of Macaulay duration is that the yield curve is flat so that all cash flows are discounted at the same discount rate.

Accepted Answer

A) True 
 B)False

Question 10

First Duration Bank has the following assets and liabilities on its balance sheet   What is the FI's leverage-adjusted duration gap?

Accepted Answer

A) 0.91 years. 
B) 0.83 years. 
C) 0.73 years. 
D) 0.50 years. 
E) 0 years. 
A) 0.91 years. 
B) 0.83 years. 
C) 0.73 years. 
D) 0.50 years. 
E) 0 years.

Question 11

The numbers provided are in millions of dollars and reflect market values:   The short-term debt consists of 4-year bonds paying an annual coupon of 4 percent and selling at par. What is the duration of the short-term debt?

Accepted Answer

A) 3.28 years. 
B) 3.53 years. 
C) 3.78 years. 
D) 4.03 years. 
E) 4.28 years. 
A) 3.28 years. 
B) 3.53 years. 
C) 3.78 years. 
D) 4.03 years. 
E) 4.28 years.

Question 12

The numbers provided by Fourth Bank of Duration are in thousands of dollars.   Notes: All Treasury bills have six months until maturity. One-year Treasury notes are priced at par and have a coupon of 7 percent paid semiannually. Treasury bonds have an average duration of 4.5 years and the loan portfolio has a duration of 7 years. Term deposits have a 1-year duration and the Interbank deposits duration is 0.003 years. Fourth Bank of Duration assigns a duration of zero (0) to demand deposits. What is the bank's leverage adjusted duration gap?

Accepted Answer

A) 6.73 years 
B) 0.29 years 
C) 6.44 years 
D) 6.51 years 
E) 0 years. 
A) 6.73 years 
B) 0.29 years 
C) 6.44 years 
D) 6.51 years 
E) 0 years.

Question 13

The difference between the changes in the market value of the assets and market value of liabilities for a given change in interest rates is, by definition, the change in the FI's net worth.

Accepted Answer

A) True 
 B)False

Question 14

The numbers provided by Fourth Bank of Duration are in thousands of dollars.   Notes: All Treasury bills have six months until maturity. One-year Treasury notes are priced at par and have a coupon of 7 percent paid semiannually. Treasury bonds have an average duration of 4.5 years and the loan portfolio has a duration of 7 years. Term deposits have a 1-year duration and the Interbank deposits duration is 0.003 years. Fourth Bank of Duration assigns a duration of zero (0) to demand deposits. If the relative change in interest rates is a decrease of 1 percent, calculate the impact on the bank's market value of equity using the duration approximation.
(That is, ΔR/(1 + R) = -1 percent)

Accepted Answer

A) The bank's market value of equity increases by $325,550. 
B) The bank's market value of equity decreases by $325,550. 
C) The bank's market value of equity increases by $336,500. 
D) The bank's market value of equity decreases by $336,500. 
E) There is no change in the bank's market value of equity. 
A) The bank's market value of equity increases by $325,550. 
B) The bank's market value of equity decreases by $325,550. 
C) The bank's market value of equity increases by $336,500. 
D) The bank's market value of equity decreases by $336,500. 
E) There is no change in the bank's market value of equity.

Question 15

The numbers provided are in millions of dollars and reflect market values:   A risk manager could restructure assets and liabilities to reduce interest rate exposure for this example by

Accepted Answer

A) increasing the average duration of its assets to 9.56 years. 
B) decreasing the average duration of its assets to 4.00 years. 
C) increasing the average duration of its liabilities to 6.78 years. 
D) increasing the average duration of its liabilities to 9.782 years. 
E) increasing the leverage ratio, k, to 1. 
A) increasing the average duration of its assets to 9.56 years. 
B) decreasing the average duration of its assets to 4.00 years. 
C) increasing the average duration of its liabilities to 6.78 years. 
D) increasing the average duration of its liabilities to 9.782 years. 
E) increasing the leverage ratio, k, to 1.

Question 16

In most countries FIs report their balance sheet using market value accounting.

Accepted Answer

A) True 
 B)False

Question 17

Attempts to satisfy the objectives of shareholders and regulators requires the bank to use the same duration match in the protection of net worth from interest rate risk.

Accepted Answer

A) True 
 B)False

Question 18

Deep discount bonds are semi-annual fixed-rate coupon bonds that sell at a market price that is less than par value.

Accepted Answer

A) True 
 B)False

Question 19

Using a fixed-rate bond to immunize a desired investment horizon means that the reinvested coupon payments are not affected by changes in market interest rates.

Accepted Answer

A) True 
 B)False

Question 20

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 duration of the liabilities?

Accepted Answer

A) 0.708 years. 
B) 0.354 years. 
C) 0.350 years. 
D) 0.955 years. 
E) 0.519 years. 
A) 0.708 years. 
B) 0.354 years. 
C) 0.350 years. 
D) 0.955 years. 
E) 0.519 years.

Exam 9: Interest Rate Risk II

Consider a five-year, 8 percent annual coupon bond selling at par of $1,000. What is the duration of this bond?

Investing in a zero-coupon asset with a maturity equal to the desired investment horizon is one method of immunizing against changes in interest rates.

Based on an 18-month, 8 percent (semiannual) coupon Treasury note selling at par. If interest rates increase by 20 basis points (i.e., ΔR = 20 basis points), use the duration approximation to determine the approximate price change for the Treasury note.

Duration normally is less than the maturity for a fixed income asset.

The smaller the leverage adjusted duration gap, the more exposed the FI is to interest rate shocks.

The use of duration to predict changes in bond prices for given changes in interest rate changes will always underestimate the amount of the true price change.

The economic meaning of duration is the interest elasticity of a financial assets price.

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.

A key assumption of Macaulay duration is that the yield curve is flat so that all cash flows are discounted at the same discount rate.

First Duration Bank has the following assets and liabilities on its balance sheet What is the FI's leverage-adjusted duration gap?

The numbers provided are in millions of dollars and reflect market values: The short-term debt consists of 4-year bonds paying an annual coupon of 4 percent and selling at par. What is the duration of the short-term debt?

The difference between the changes in the market value of the assets and market value of liabilities for a given change in interest rates is, by definition, the change in the FI's net worth.

The numbers provided are in millions of dollars and reflect market values: A risk manager could restructure assets and liabilities to reduce interest rate exposure for this example by

In most countries FIs report their balance sheet using market value accounting.

Attempts to satisfy the objectives of shareholders and regulators requires the bank to use the same duration match in the protection of net worth from interest rate risk.

Deep discount bonds are semi-annual fixed-rate coupon bonds that sell at a market price that is less than par value.

Using a fixed-rate bond to immunize a desired investment horizon means that the reinvested coupon payments are not affected by changes in market interest rates.

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 duration of the liabilities?

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