Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) the error will not change compared to smaller interest rate shocks and lower convexity. 
B) the error will be smaller compared to smaller interest rate shocks and lower convexity. 
C) the error will be greater compared to smaller interest rate shocks and lower convexity. 
D) there will be no error as duration measures changes accurately. 
A) the error will not change compared to smaller interest rate shocks and lower convexity. 
B) the error will be smaller compared to smaller interest rate shocks and lower convexity. 
C) the error will be greater compared to smaller interest rate shocks and lower convexity. 
D) there will be no error as duration measures changes accurately.

Question 3

The effect of interest rate changes on the market value of an FI's net worth breaks down into three effects, these being the leverage adjusted duration gap, the:

Accepted Answer

A) size of the FI and the reputation of the FI. 
B) size of the FI and the size of the interest rate shock. 
C) reputation of the FI and the size of the interest rate shock. 
D) size of the FI and the direction of the interest rate changes. 
A) size of the FI and the reputation of the FI. 
B) size of the FI and the size of the interest rate shock. 
C) reputation of the FI and the size of the interest rate shock. 
D) size of the FI and the direction of the interest rate changes.

Question 4

Which of the following statements is true?

Accepted Answer

A) All assets and liabilities are convex. 
B) All fixed income securities, including those with special option features, are convex. 
C) All assets are convex, all liabilities are convex and all fixed income securities, including those with special option features, are convex. 
D) None of the listed options are correct. 
A) All assets and liabilities are convex. 
B) All fixed income securities, including those with special option features, are convex. 
C) All assets are convex, all liabilities are convex and all fixed income securities, including those with special option features, are convex. 
D) None of the listed options are correct.

Question 5

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?

Accepted Answer

A) The current net worth of the position is $25 000 and if interest rates increase the net worth will not be affected. 
B) The current net worth of the position is $25 000 and if interest rates increase the net worth will increase, too. 
C) The current net worth of the position is $25 000 and if interest rates increase the net worth will decrease. 
D) The current net worth of the position cannot be determined, however, if interest rates increase the net worth will increase, too. 
A) The current net worth of the position is $25 000 and if interest rates increase the net worth will not be affected. 
B) The current net worth of the position is $25 000 and if interest rates increase the net worth will increase, too. 
C) The current net worth of the position is $25 000 and if interest rates increase the net worth will decrease. 
D) The current net worth of the position cannot be determined, however, if interest rates increase the net worth will increase, too.

Question 6

With increasing maturity of a fixed-income asset or liability the asset or liability's duration:

Accepted Answer

A) increases, but at a decreasing rate. 
B) decreases. 
C) increases at an increasing rate. 
D) increases at a constant rate. 
A) increases, but at a decreasing rate. 
B) decreases. 
C) increases at an increasing rate. 
D) increases at a constant rate.

Question 7

As interest rates increase the price of an asset or liability:

Accepted Answer

A) remains constant. 
B) decreases. 
C) increases. 
D) increases and it increases at a faster rate. 
A) remains constant. 
B) decreases. 
C) increases. 
D) increases and it increases at a faster rate.

Question 8

Duration measures changes in an FI's net worth inaccurately if interest rate changes are large.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) produces exact results. 
B) only produces exact results if interest rates change instantaneously. 
C) produces approximate results only due to concavity. 
D) produces approximate results only due to convexity. 
A) produces exact results. 
B) only produces exact results if interest rates change instantaneously. 
C) produces approximate results only due to concavity. 
D) produces approximate results only due to convexity.

Question 10

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

Accepted Answer

A) the maturity gap is zero. 
B) the repricing gap is zero. 
C) the duration gap is zero. 
D) the effect of a change in the level of interest rates on the value of the assets of the FI is exactly offset by the effect of the same change in interest rates on the liabilities of the FI. 
A) the maturity gap is zero. 
B) the repricing gap is zero. 
C) the duration gap is zero. 
D) the effect of a change in the level of interest rates on the value of the assets of the FI is exactly offset by the effect of the same change in interest rates on the liabilities of the FI.

Question 11

The leverage adjusted duration gap measures:

Accepted Answer

A) the change in an FI's net worth if interest rates change. 
B) the degree of duration mismatch in an FI's profit and loss statement. 
C) the degree of duration mismatch in an FI's balance sheet. 
D) All of the listed options are correct. 
A) the change in an FI's net worth if interest rates change. 
B) the degree of duration mismatch in an FI's profit and loss statement. 
C) the degree of duration mismatch in an FI's balance sheet. 
D) All of the listed options are correct.

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

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]?

Accepted Answer

A) +$336 111 
B) -$0.605 
C) -$336 111 
D) +$0.605 
A) +$336 111 
B) -$0.605 
C) -$336 111 
D) +$0.605

Question 14

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:

Accepted Answer

A) size of cash flows. 
B) timing of cash flows. 
C) size of cash flows and the asset or liability's time to maturity. 
D) time of arrival of all cash flows plus the asset or liability's maturity. 
A) size of cash flows. 
B) timing of cash flows. 
C) size of cash flows and the asset or liability's time to maturity. 
D) time of arrival of all cash flows plus the asset or liability's maturity.

Question 15

The duration of a zero-coupon bond is always smaller than its maturity.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A) duration mismatch 
B) immunisation effect 
C) net worth exposure 
D) net interest income 
A) duration mismatch 
B) immunisation effect 
C) net worth exposure 
D) net interest income

Question 17

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

Accepted Answer

A) change the duration of its assets only. 
B) change the duration of its liabilities only. 
C) change the duration of both, assets and liabilities. 
D) All of the listed options are correct. 
A) change the duration of its assets only. 
B) change the duration of its liabilities only. 
C) change the duration of both, assets and liabilities. 
D) All of the listed options are correct.

Question 18

The duration of a zero-coupon bond:

Accepted Answer

A) is smaller than its maturity. 
B) exceeds its maturity. 
C) equals its maturity. 
D) depends on the size and timing of intervening cash flows between issue and maturity. 
A) is smaller than its maturity. 
B) exceeds its maturity. 
C) equals its maturity. 
D) depends on the size and timing of intervening cash flows between issue and maturity.

Question 19

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.

Accepted Answer

A) +$28 571.43 
B) -$20 864.46 
C) +$20 864.46 
D) -$28 571.43 
A) +$28 571.43 
B) -$20 864.46 
C) +$20 864.46 
D) -$28 571.43

Question 20

Which of the following statements are incorrect?

Accepted Answer

A) Investing in a zero-coupon asset with a maturity equal to the desired investment horizon is one method of immunising against changes in interest rates. 
B) Investing in a zero-coupon asset with a maturity equal to the desired investment horizon removes interest rate risk from the investment management process. 
C) Buying a fixed-rate asset whose duration is exactly equal to the desired investment horizon immunises against interest 
D) Using a fixed-rate bond to immunisea desired investment horizon means that the reinvested coupon payments are not affected by changes in market interest rates. 
A) Investing in a zero-coupon asset with a maturity equal to the desired investment horizon is one method of immunising against changes in interest rates. 
B) Investing in a zero-coupon asset with a maturity equal to the desired investment horizon removes interest rate risk from the investment management process. 
C) Buying a fixed-rate asset whose duration is exactly equal to the desired investment horizon immunises against interest 
D) Using a fixed-rate bond to immunisea desired investment horizon means that the reinvested coupon payments are not affected by changes in market interest rates.

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

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

The effect of interest rate changes on the market value of an FI's net worth breaks down into three effects, these being the leverage adjusted duration gap, the:

Which of the following statements is true?

With increasing maturity of a fixed-income asset or liability the asset or liability's duration:

As interest rates increase the price of an asset or liability:

Duration measures changes in an FI's net worth inaccurately if interest rate changes are large.

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

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

The leverage adjusted duration gap measures:

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

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:

The duration of a zero-coupon bond is always smaller than its maturity.

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

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

The duration of a zero-coupon bond:

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.

Which of the following statements are incorrect?

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

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

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

The effect of interest rate changes on the market value of an FI's net worth breaks down into three effects, these being the leverage adjusted duration gap, the:

Which of the following statements is true?

With increasing maturity of a fixed-income asset or liability the asset or liability's duration:

As interest rates increase the price of an asset or liability:

Duration measures changes in an FI's net worth inaccurately if interest rate changes are large.

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

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

The leverage adjusted duration gap measures:

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

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:

The duration of a zero-coupon bond is always smaller than its maturity.

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

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

The duration of a zero-coupon bond:

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.

Which of the following statements are incorrect?

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