Question 1

The larger an FI's absolute leverage adjusted duration gap:

Accepted Answer

A) the less exposed the FI is to interest rate shocks. 
B) the more exposed the FI is to interest rate shocks. 
C) the lower the FI's net worth. 
D) None of the listed options are correct. 
A) the less exposed the FI is to interest rate shocks. 
B) the more exposed the FI is to interest rate shocks. 
C) the lower the FI's net worth. 
D) None of the listed options are correct. B

Question 2

Which of the following statements is true?

Accepted Answer

A) The optimal duration gap is zero. 
B) Duration gap measures the impact of unanticipated changes in interest rates on the market value of equity. 
C) The shorter the maturity of the FI's securities, the greater the FI's interest rate risk exposure. 
D) The duration of all floating rate debt instruments is equal to the time to maturity. 
A) The optimal duration gap is zero. 
B) Duration gap measures the impact of unanticipated changes in interest rates on the market value of equity. 
C) The shorter the maturity of the FI's securities, the greater the FI's interest rate risk exposure. 
D) The duration of all floating rate debt instruments is equal to the time to maturity. B

Question 3

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

Accepted Answer

A) Low sensitivity of an asset price to interest rate shocks. 
B) High interest inelasticity of a bond. 
C) High sensitivity of an asset price to interest rate shocks. 
D) Lack of sensitivity of an asset price to interest rate shocks. 
A) Low sensitivity of an asset price to interest rate shocks. 
B) High interest inelasticity of a bond. 
C) High sensitivity of an asset price to interest rate shocks. 
D) Lack of sensitivity of an asset price to interest rate shocks. C

Question 4

The statement that a portfolio is immunised using duration matching:

Accepted Answer

A) means that the FI is entirely hedged against interest rate risks. 
B) is misleading as duration matching is a dynamic process and only hedges the FI against instantaneous interest rate changes. 
C) is misleading as duration matching is a dynamic process and only hedges the FI against interest rate changes that occur within a month. 
D) None of the listed options are correct. 
A) means that the FI is entirely hedged against interest rate risks. 
B) is misleading as duration matching is a dynamic process and only hedges the FI against instantaneous interest rate changes. 
C) is misleading as duration matching is a dynamic process and only hedges the FI against interest rate changes that occur within a month. 
D) None of the listed options are correct.

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

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. 
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.

Question 7

How can a negative duration gap of 0.21 years be interpreted?

Accepted Answer

A) The FI is exposed to decreasing interest rates because it has a negative duration gap of 0.21 years. 
B) The FI is exposed to increasing interest rates because it has a negative duration gap of 0.21 years. 
C) The FI is not exposed to interest rate changes since it is running a matched book. 
D) The FI's exposure will depend on its maturity gap. 
A) The FI is exposed to decreasing interest rates because it has a negative duration gap of 0.21 years. 
B) The FI is exposed to increasing interest rates because it has a negative duration gap of 0.21 years. 
C) The FI is not exposed to interest rate changes since it is running a matched book. 
D) The FI's exposure will depend on its maturity gap.

Question 8

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?

Accepted Answer

A) 0.9000 years 
B) 0.9600 years 
C) 0.9756 years 
D) 0.8844 years 
A) 0.9000 years 
B) 0.9600 years 
C) 0.9756 years 
D) 0.8844 years

Question 9

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

Accepted Answer

A) net worth. 
B) maturity gap strategy. 
C) liquidity strategy. 
D) All of the listed options are correct. 
A) net worth. 
B) maturity gap strategy. 
C) liquidity strategy. 
D) All of the listed options are correct.

Question 10

As interest rates increase (decrease) the value of an asset or a liability decreases (increases).

Accepted Answer

A) True 
 B)False

Question 11

Duration is defined as:

Accepted Answer

A) the weighted-average time to maturity of a series of cash flows, using the relative present values of the cash flows as weights. 
B) the weighted-average present values of a series of cash flows using the timing of the cash flows as weights. 
C) the standard deviation of the time to maturity of a series of cash flows. 
D) an asset's or a liability's time to maturity. 
A) the weighted-average time to maturity of a series of cash flows, using the relative present values of the cash flows as weights. 
B) the weighted-average present values of a series of cash flows using the timing of the cash flows as weights. 
C) the standard deviation of the time to maturity of a series of cash flows. 
D) an asset's or a liability's time to maturity.

Question 12

Assume that the required yield to maturity on a consol bond increases from 6 per cent to 12 per cent.What is the impact on the consol bond's duration?

Accepted Answer

A) As there are no intervening cash flows between issue and maturity, the duration will always equal the bond's maturity. 
B) As interest rates rise, the duration of consol bonds falls. 
C) As interest rates rise, the duration of consol bonds rises. 
D) There will be no impact on the bond's duration. 
A) As there are no intervening cash flows between issue and maturity, the duration will always equal the bond's maturity. 
B) As interest rates rise, the duration of consol bonds falls. 
C) As interest rates rise, the duration of consol bonds rises. 
D) There will be no impact on the bond's duration.

Question 13

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:

Accepted Answer

A) -0.3 years 
B) 0.3 years 
C) -0.7 years 
D) 0.7 years 
A) -0.3 years 
B) 0.3 years 
C) -0.7 years 
D) 0.7 years

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

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

Question 16

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

Accepted Answer

Duration is not an appropriate tool for

Question 17

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.

Accepted Answer

Critics charge that although in theory d

Question 18

Using the leverage adjusted duration gap, it is possible to measure the effect of changing interest rates on an FI's net worth.

Accepted Answer

A) True 
 B)False

Question 19

Duration is a less accurate predictor for the change in an FI's net worth in case of large interest rate shocks because it assumes a:

Accepted Answer

A) linear relationship between the change in an asset or liability's price and the change in the interest rate, while the true relationship is convex. 
B) linear relationship between the change in an asset or liability's price and the change in the interest rate, while the true relationship is concave. 
C) convex relationship between the change in an asset or liability's price and the change in the interest rate, while the true relationship is linear. 
D) concave relationship between the change in an asset or liability's price and the change in the interest rate, while the true relationship is linear. 
A) linear relationship between the change in an asset or liability's price and the change in the interest rate, while the true relationship is convex. 
B) linear relationship between the change in an asset or liability's price and the change in the interest rate, while the true relationship is concave. 
C) convex relationship between the change in an asset or liability's price and the change in the interest rate, while the true relationship is linear. 
D) concave relationship between the change in an asset or liability's price and the change in the interest rate, while the true relationship is linear.

Question 20

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

Accepted Answer

A) equals the asset or the liability's maturity. 
B) exceeds the asset or the liability's maturity. 
C) is smaller than the asset or the liability's maturity. 
D) Not enough information to answer this question. 
A) equals the asset or the liability's maturity. 
B) exceeds the asset or the liability's maturity. 
C) is smaller than the asset or the liability's maturity. 
D) Not enough information to answer this question.

The larger an FI's absolute leverage adjusted duration gap:

Which of the following statements is true?

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

The statement that a portfolio is immunised using duration matching:

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

Calculating modified duration involves:

How can a negative duration gap of 0.21 years be interpreted?

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

As interest rates increase (decrease) the value of an asset or a liability decreases (increases).

Duration is defined as:

Assume that the required yield to maturity on a consol bond increases from 6 per cent to 12 per cent.What is the impact on the consol bond's duration?

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

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

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

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.

Using the leverage adjusted duration gap, it is possible to measure the effect of changing interest rates on an FI's net worth.

Duration is a less accurate predictor for the change in an FI's net worth in case of large interest rate shocks because it assumes a:

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

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters

Exam 6: Interest Rate Risk Measurement: The Duration Model

The larger an FI's absolute leverage adjusted duration gap:

Which of the following statements is true?

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

The statement that a portfolio is immunised using duration matching:

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

Calculating modified duration involves:

How can a negative duration gap of 0.21 years be interpreted?

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

As interest rates increase (decrease) the value of an asset or a liability decreases (increases).

Duration is defined as:

Assume that the required yield to maturity on a consol bond increases from 6 per cent to 12 per cent.What is the impact on the consol bond's duration?

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

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

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

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.

Using the leverage adjusted duration gap, it is possible to measure the effect of changing interest rates on an FI's net worth.

Duration is a less accurate predictor for the change in an FI's net worth in case of large interest rate shocks because it assumes a:

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

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters