Exam 6: Interest Rate Risk Measurement: the Duration Model

Consider a security with a face value of $100 000, which is to be repaid at maturity. The security pays an annual coupon of 8 per cent and has a maturity of three years. The current discount rate is 10 per cent. What is the security's current price (round to two decimals)?

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

Which of the following statements about leverage adjusted duration gap is true?

Convexity is defined as:

An FI has financial assets of $800 and equity of $50. If the duration of assets is 1.21 years and the duration of all liabilities is 0.25 years, what is the leverage-adjusted duration gap?

The leverage adjusted duration gap reflects the degree of duration mismatch in an FI's balance sheet.

Which of the following is indicated by high numerical value of the duration of an asset?

Discuss the following proposition: While in theory duration matching allows an FI to immunise against interest rate risk, the reality is that it is too costly and too time-consuming to be useful.

Consider an asset with a current market value of $250 000 and a duration of 3.3 years. Assume the asset is partially funded through zero-coupon bonds which currently sells for $225 000 and has a maturity of 4 years. The current discount rate is 15 per cent and interest rates are expected to increase by 150 basis points. Which of the following statements is true?

Using the duration gap to measure the change in an FI's net worth in case of large interest rate shocks:

The duration of an asset or a liability for which there are intervening cash flows between issue and maturity:

Would you consider convexity of a fixed-income security to be desirable or undesirable for an FI? Explain your opinion.

In order to achieve a zero duration gap, an FI can:

The larger the numerical value of the duration of an asset or liability, the less sensitive the price of that asset or liability is to changes in the interest rate.

Which of the following statements are incorrect?

Immunisation of a portfolio implies that changes in _______ will not affect the value of the portfolio.

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

The greater is convexity, the more insurance a portfolio manager has against interest rate increases and the greater potential gain from rate decreases.

Calculating modified duration involves:

When does 'duration' become a less accurate predictor of expected change in security prices?