Question 1

The duration of all floating rate debt instruments is

Accepted Answer

A) equal to the time to maturity. 
B) less than the time to repricing of the instrument. 
C) time interval between the purchase of the security and its sale. 
D) equal to time to repricing of the instrument. 
E) infinity. 
A) equal to the time to maturity. 
B) less than the time to repricing of the instrument. 
C) time interval between the purchase of the security and its sale. 
D) equal to time to repricing of the instrument. 
E) infinity.

Question 2

Larger coupon payments on a fixed-income asset cause the present value weights of the cash flows to be lower in the duration calculation.

Accepted Answer

A) True 
 B)False

Question 3

The numbers provided are in millions of dollars and reflect market values:   The shortcomings of this strategy are the following except

Accepted Answer

A) duration changes as the time to maturity changes, making it difficult to maintain a continuous hedge. 
B) estimation of duration is difficult for some accounts such as demand deposits and savings accounts. 
C) it ignores convexity which can be distorting for large changes in interest rates. 
D) it is difficult to compute market values for many assets and liabilities. 
E) it does not assume a flat term structure, so its estimation is imprecise. 
A) duration changes as the time to maturity changes, making it difficult to maintain a continuous hedge. 
B) estimation of duration is difficult for some accounts such as demand deposits and savings accounts. 
C) it ignores convexity which can be distorting for large changes in interest rates. 
D) it is difficult to compute market values for many assets and liabilities. 
E) it does not assume a flat term structure, so its estimation is imprecise.

Question 4

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 4 percent?

Accepted Answer

A) $105,816.44. 
B) $105,287.67. 
C) $105,242.14. 
D) $100,000.00. 
E) $106,290.56. 
A) $105,816.44. 
B) $105,287.67. 
C) $105,242.14. 
D) $100,000.00. 
E) $106,290.56.

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.   What is the duration of the two-year loan (per $100 face value) if it is selling at par?

Accepted Answer

A) 2.00 years 
B) 1.92 years 
C) 1.96 years 
D) 1.00 year 
E) 0.91 years 
A) 2.00 years 
B) 1.92 years 
C) 1.96 years 
D) 1.00 year 
E) 0.91 years

Question 6

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.   Use the duration model to approximate the change in the market value (per $100 face value) of two-year loans if interest rates increase by 100 basis points.

Accepted Answer

A) -$1.756 
B) -$1.775 
C) +$98.24 
D) -$1.000 
E) +$1.924 
A) -$1.756 
B) -$1.775 
C) +$98.24 
D) -$1.000 
E) +$1.924

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. What is the bond's current market price?

Accepted Answer

A) $962.09. 
B) $961.39. 
C) $1,000. 
D) $1,038.90. 
E) $995.05. 
A) $962.09. 
B) $961.39. 
C) $1,000. 
D) $1,038.90. 
E) $995.05.

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 is the impact on the dealer's market value of equity per $100 of assets if the change in all interest rates is an increase of 0.5 percent [i.e., ΔR = 0.5 percent]

Accepted Answer

A) +$336,111. 
B) -$0.605. 
C) -$336,111. 
D) +$0.605. 
E) -$363,000. 
A) +$336,111. 
B) -$0.605. 
C) -$336,111. 
D) +$0.605. 
E) -$363,000.

Question 9

Calculate the duration of a two-year corporate loan paying 6 percent interest annually, selling at par. The $30,000,000 loan is 100 percent amortizing with annual payments.

Accepted Answer

A) 2 years. 
B) 1.89 years. 
C) 1.94 years. 
D) 1.49 years. 
E) 1.73 years. 
A) 2 years. 
B) 1.89 years. 
C) 1.94 years. 
D) 1.49 years. 
E) 1.73 years.

Question 10

First Duration Bank has the following assets and liabilities on its balance sheet   What is the FI's interest rate risk exposure?

Accepted Answer

A) Exposed to increasing rates. 
B) Exposed to decreasing rates. 
C) Perfectly balanced. 
D) Exposed to long-term rate changes. 
E) Insufficient information. 
A) Exposed to increasing rates. 
B) Exposed to decreasing rates. 
C) Perfectly balanced. 
D) Exposed to long-term rate changes. 
E) Insufficient information.

Question 11

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 7 percent?

Accepted Answer

A) $99,050.15. 
B) $99,457.94. 
C) $99,249.62. 
D) $100,000.00. 
E) $99,065.42. 
A) $99,050.15. 
B) $99,457.94. 
C) $99,249.62. 
D) $100,000.00. 
E) $99,065.42.

Question 12

Duration of a zero coupon bond is equal to the bond's maturity.

Accepted Answer

A) True 
 B)False

Question 13

Immunizing the balance sheet of an FI against interest rate risk requires that the leverage adjusted duration gap (DA-kDL) should be set to zero.

Accepted Answer

A) True 
 B)False

Question 14

As the investment horizon approaches, the duration of an unrebalanced portfolio that originally was immunized will be less than the time remaining to the investment horizon.

Accepted Answer

A) True 
 B)False

Question 15

The numbers provided are in millions of dollars and reflect market values:   What is the weighted average duration of the assets of the FI?

Accepted Answer

A) 7.25 years. 
B) 7.75 years. 
C) 8.25 years. 
D) 8.75 years. 
E) 9.25 years. 
A) 7.25 years. 
B) 7.75 years. 
C) 8.25 years. 
D) 8.75 years. 
E) 9.25 years.

Question 16

Duration increases with the maturity of a fixed-income asset at a decreasing rate.

Accepted Answer

A) True 
 B)False

Question 17

Calculating modified duration involves

Accepted Answer

A) dividing the value of duration by the change in the market interest rate. 
B) dividing the value of duration by 1 plus the interest rate. 
C) dividing the value of duration by discounted change in interest rates. 
D) multiplying the value of duration by discounted change in interest rates. 
E) dividing the value of duration by the curvature effect. 
A) dividing the value of duration by the change in the market interest rate. 
B) dividing the value of duration by 1 plus the interest rate. 
C) dividing the value of duration by discounted change in interest rates. 
D) multiplying the value of duration by discounted change in interest rates. 
E) dividing the value of duration by the curvature effect.

Question 18

Immunization of a portfolio implies that changes in _____ will not affect the value of the portfolio.

Accepted Answer

A) book value of assets 
B) maturity 
C) market prices 
D) interest rates 
E) duration 
A) book value of assets 
B) maturity 
C) market prices 
D) interest rates 
E) duration

Question 19

The numbers provided are in millions of dollars and reflect market values:   What is the effect of a 100 basis point increase in interest rates on the market value of equity of the FI? Use the duration approximation relationship. Assume r = 4 percent.

Accepted Answer

A) -27.56 million. 
B) -28.01 million. 
C) -29.85 million. 
D) -31.06 million. 
E) -33.76 million. 
A) -27.56 million. 
B) -28.01 million. 
C) -29.85 million. 
D) -31.06 million. 
E) -33.76 million.

Question 20

The larger the interest rate shock, the smaller the interest rate risk exposure of an FI.

Accepted Answer

A) True 
 B)False

Exam 9: Interest Rate Risk II

The duration of all floating rate debt instruments is

Larger coupon payments on a fixed-income asset cause the present value weights of the cash flows to be lower in the duration calculation.

The numbers provided are in millions of dollars and reflect market values: The shortcomings of this strategy are the following except

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 4 percent?

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 duration of the two-year loan (per $100 face value) if it is selling at par?

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. What is the bond's current market price?

Calculate the duration of a two-year corporate loan paying 6 percent interest annually, selling at par. The $30,000,000 loan is 100 percent amortizing with annual payments.

First Duration Bank has the following assets and liabilities on its balance sheet What is the FI's interest rate risk exposure?

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 7 percent?

Duration of a zero coupon bond is equal to the bond's maturity.

Immunizing the balance sheet of an FI against interest rate risk requires that the leverage adjusted duration gap (DA-kDL) should be set to zero.

As the investment horizon approaches, the duration of an unrebalanced portfolio that originally was immunized will be less than the time remaining to the investment horizon.

The numbers provided are in millions of dollars and reflect market values: What is the weighted average duration of the assets of the FI?

Duration increases with the maturity of a fixed-income asset at a decreasing rate.

Calculating modified duration involves

Immunization of a portfolio implies that changes in _____ will not affect the value of the portfolio.

The numbers provided are in millions of dollars and reflect market values: What is the effect of a 100 basis point increase in interest rates on the market value of equity of the FI? Use the duration approximation relationship. Assume r = 4 percent.

The larger the interest rate shock, the smaller the interest rate risk exposure of an FI.

Why Are Financial Institutions Special

Deposit-Taking Institutions

Finance Companies

Securities, Brokerage, and Investment Banking

Mutual Funds, Hedge Funds, and Pension Funds

Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Credit Risk: Individual Loans

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization Index

Filters

Immunizing the balance sheet of an FI against interest rate risk requires that the leverage adjusted duration gap (D_A-kD_L) should be set to zero.