Question 1

The special feature of consol bonds is that:

Accepted Answer

A) their duration equals their maturity. 
B) their maturity is infinite, while their duration is finite. 
C) their maturity is finite, while their duration is infinite. 
D) both, their maturity and their duration, are infinite. 
A) their duration equals their maturity. 
B) their maturity is infinite, while their duration is finite. 
C) their maturity is finite, while their duration is infinite. 
D) both, their maturity and their duration, are infinite.

Question 2

Which of the following statements most appropriately responds to the critique that duration matching is costly and time consuming?

Accepted Answer

A) The critique is valid, however, the speed has been eased and transaction costs of balance sheet restructuring have been lowered due to growth of purchased funds, asset securitisation and loan sales markets. 
B) The critique is valid and FIs should spend funds in order to develop more efficient interest rate risk management tools. 
C) The critique is valid, particularly because it is not possible for managers to get the same results of direct duration matching by taking positions in derivatives markets. 
D) None of the listed options are correct. 
A) The critique is valid, however, the speed has been eased and transaction costs of balance sheet restructuring have been lowered due to growth of purchased funds, asset securitisation and loan sales markets. 
B) The critique is valid and FIs should spend funds in order to develop more efficient interest rate risk management tools. 
C) The critique is valid, particularly because it is not possible for managers to get the same results of direct duration matching by taking positions in derivatives markets. 
D) None of the listed options are correct.

Question 3

Duration is a direct measure of the interest rate sensitivity of an asset or liability, which means that:

Accepted Answer

A) the smaller the duration, the more sensitive the price of that asset or liability. 
B) the larger the duration, the less sensitive the price of that asset or liability. 
C) the larger the duration, the more sensitive the price of that asset or liability. 
D) None of the listed options are correct. 
A) the smaller the duration, the more sensitive the price of that asset or liability. 
B) the larger the duration, the less sensitive the price of that asset or liability. 
C) the larger the duration, the more sensitive the price of that asset or liability. 
D) None of the listed options are correct.

Question 4

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

Accepted Answer

A) It is equal to the duration of the assets minus the duration of the liabilities. 
B) The larger the gap in absolute terms, the more exposed the FI is to interest rate shocks. 
C) It reflects the degree of maturity mismatch in an FI's balance sheet. 
D) It indicates the dollar size of the potential net worth and its value is equal to duration divided by (1+R). 
A) It is equal to the duration of the assets minus the duration of the liabilities. 
B) The larger the gap in absolute terms, the more exposed the FI is to interest rate shocks. 
C) It reflects the degree of maturity mismatch in an FI's balance sheet. 
D) It indicates the dollar size of the potential net worth and its value is equal to duration divided by (1+R).

Question 5

The lower the coupon or interest payment on a security:

Accepted Answer

A) the lower its duration. 
B) coupon or interest payments have no impact on a security's duration. 
C) the higher its duration. 
D) None of the listed options are correct. 
A) the lower its duration. 
B) coupon or interest payments have no impact on a security's duration. 
C) the higher its duration. 
D) None of the listed options are correct.

Question 6

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)?

Accepted Answer

A) The price of the security will decrease by 1 per cent. 
B) The price of the security will increase by 1 per cent. 
C) The price of the security will decrease by 2.50 per cent. 
D) The price of the security will increase by 2.50 per cent. 
A) The price of the security will decrease by 1 per cent. 
B) The price of the security will increase by 1 per cent. 
C) The price of the security will decrease by 2.50 per cent. 
D) The price of the security will increase by 2.50 per cent.

Question 7

Duration matching is a desirable interest rate risk management tool as it captures changes in interest rates over long periods of time.

Accepted Answer

A) True 
 B)False

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

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.Which of the following statements is true?

Accepted Answer

A) The FI is benefiting from increasing interest rates as it has a negative duration gap of 0.3 years. 
B) The FI is exposed to increasing interest rates as it has a negative duration gap of 0.3 years. 
C) The FI is exposed to increasing interest rates as it has a positive duration gap of 0.3 years. 
D) The FI is exposed to decreasing interest rates as it has a positive duration gap of 0.3 years. 
A) The FI is benefiting from increasing interest rates as it has a negative duration gap of 0.3 years. 
B) The FI is exposed to increasing interest rates as it has a negative duration gap of 0.3 years. 
C) The FI is exposed to increasing interest rates as it has a positive duration gap of 0.3 years. 
D) The FI is exposed to decreasing interest rates as it has a positive duration gap of 0.3 years.

Question 10

One method of changing the positive leverage adjusted duration gap for the purpose of immunising the net worth of a typical depository institution is to increase the duration of the assets and to decrease the duration of the liabilities.

Accepted Answer

A) True 
 B)False

Question 11

The modified duration is defined as:

Accepted Answer

A) duration multiplied by (1 + R). 
B) duration divided by (1 + R). 
C) duration minus (1 + R). 
D) duration plus (1 + R). 
A) duration multiplied by (1 + R). 
B) duration divided by (1 + R). 
C) duration minus (1 + R). 
D) duration plus (1 + R).

Question 12

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 duration (round to two decimals)?

Accepted Answer

A) 2.78 years 
B) 3 years 
C) 0.36 years 
D) 1.94 years 
A) 2.78 years 
B) 3 years 
C) 0.36 years 
D) 1.94 years

Question 13

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)?

Accepted Answer

A) 2.68 years 
B) 2.68 half-years 
C) 3 years 
D) 0.38 years 
A) 2.68 years 
B) 2.68 half-years 
C) 3 years 
D) 0.38 years

Question 14

The bank has a negative maturity gap.Is the bank exposed to interest rate increases or decreases and why?

Accepted Answer

A) Interest rate increases because the value of its assets will rise more than its liabilities. 
B) Interest rate increases because the value of its assets will fall more than its liabilities. 
C) Interest rate decreases because the value of its assets will rise less than its liabilities. 
D) Interest rate decreases because the value of its assets will fall more than its liabilities. 
A) Interest rate increases because the value of its assets will rise more than its liabilities. 
B) Interest rate increases because the value of its assets will fall more than its liabilities. 
C) Interest rate decreases because the value of its assets will rise less than its liabilities. 
D) Interest rate decreases because the value of its assets will fall more than its liabilities.

Question 15

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)?

Accepted Answer

A) $124 000 
B) $95 026.30 
C) $19 894.82 
D) $100 000 
A) $124 000 
B) $95 026.30 
C) $19 894.82 
D) $100 000

Question 16

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

Accepted Answer

A) 0.50 years 
B) 2 years 
C) 4.40 years 
D) 5 years 
A) 0.50 years 
B) 2 years 
C) 4.40 years 
D) 5 years

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is true?

Accepted Answer

A) Convexity is desirable because the larger the convexity the greater the interest rate protection against interest rate decreases and the greater the potential gains following increasing interest rates. 
B) Convexity is desirable because the larger the convexity the greater the interest rate protection against interest rate rises and the greater the potential gains following decreasing interest rates. 
C) Convexity is undesirable because the larger the convexity the lower the interest rate protection against interest rate rises and the smaller the potential gains following decreasing interest rates. 
D) Convexity is undesirable because the larger the convexity the lower the interest rate protection against interest rate decreases and the smaller the potential gains following increasing interest rates. 
A) Convexity is desirable because the larger the convexity the greater the interest rate protection against interest rate decreases and the greater the potential gains following increasing interest rates. 
B) Convexity is desirable because the larger the convexity the greater the interest rate protection against interest rate rises and the greater the potential gains following decreasing interest rates. 
C) Convexity is undesirable because the larger the convexity the lower the interest rate protection against interest rate rises and the smaller the potential gains following decreasing interest rates. 
D) Convexity is undesirable because the larger the convexity the lower the interest rate protection against interest rate decreases and the smaller the potential gains following increasing interest rates.

Question 19

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 price (round your answer to two decimals)?

Accepted Answer

A) $127 000.00 
B) $100 000.00 
C) $76 046.08 
D) $92 624.01 
A) $127 000.00 
B) $100 000.00 
C) $76 046.08 
D) $92 624.01

Question 20

Immunisation 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) interest rates 
D) duration 
A) book value of assets 
B) maturity 
C) interest rates 
D) duration

The special feature of consol bonds is that:

Which of the following statements most appropriately responds to the critique that duration matching is costly and time consuming?

Duration is a direct measure of the interest rate sensitivity of an asset or liability, which means that:

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

The lower the coupon or interest payment on a security:

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 matching is a desirable interest rate risk management tool as it captures changes in interest rates over long periods of time.

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.

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.Which of the following statements is true?

One method of changing the positive leverage adjusted duration gap for the purpose of immunising the net worth of a typical depository institution is to increase the duration of the assets and to decrease the duration of the liabilities.

The modified duration is defined as:

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 duration (round to two decimals)?

The bank has a negative maturity gap.Is the bank exposed to interest rate increases or decreases and why?

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)?

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.

Which of the following statements is true?

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

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 special feature of consol bonds is that:

Which of the following statements most appropriately responds to the critique that duration matching is costly and time consuming?

Duration is a direct measure of the interest rate sensitivity of an asset or liability, which means that:

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

The lower the coupon or interest payment on a security:

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 matching is a desirable interest rate risk management tool as it captures changes in interest rates over long periods of time.

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.

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.Which of the following statements is true?

One method of changing the positive leverage adjusted duration gap for the purpose of immunising the net worth of a typical depository institution is to increase the duration of the assets and to decrease the duration of the liabilities.

The modified duration is defined as:

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 duration (round to two decimals)?

The bank has a negative maturity gap.Is the bank exposed to interest rate increases or decreases and why?

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)?

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.

Which of the following statements is true?

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

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