Exam 6: Interest Rate Risk Measurement: the Duration Model

Consider a security with a duration of 2.78 years. The current interest rate level is 10 per cent p.a. How does the price of the security change if interest rates decrease by 100 basis points (round to two decimals)?

Duration is seen as a more complete measure of an asset or a liability's interest rate sensitivity than maturity because it takes into account the:

Which of the following statements are incorrect?

The lower the coupon or interest payment on a security:

The duration of a zero-coupon bond:

The maturity of a fixed-income security is always smaller than its duration.

An FI purchases at par value a $100 000 Treasury bond paying 10 per cent interest with a 7.5 year duration. If interest rates rise by 4 per cent, calculate the bond's new value. Recall that Treasury bonds pay interest semi-annually. Use the duration valuation equation.

It is not possible to measure the duration of a perpetuity as a perpetuity has no maturity.

The duration gap can be used to measure how changes in the interest rate affect an FI's:

Which of the following statements is true?

For large interest rate shocks and large convexity of a fixed-income security or portfolio:

Consider a security with a face value of $100 000 to be repaid at maturity. The maturity of the security is 3 years. The coupon rate is 9 per cent p.a. and coupon payments are made semi-annually. The current discount rate is 12 per cent p.a. What is the security's duration (round your answer to two decimals)?

In simple words, duration measures the average life of an asset or liability.

The modified duration is defined as:

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. Calculate the duration gap for this scenario:

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

An FI has a leverage-adjusted duration gap of 1.21 years, $60 million in assets, 7 per cent equity to assets ratio, and market rates are 8 per cent. What is the impact on the dealer's market value of equity per $100 of assets if the relative change in all interest rates is an increase of 0.5 per cent [i.e., R/(1+R) = 0.5 per cent]?

Which of the following statements is true?

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

The leverage adjusted duration gap measures: