Question 1

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  False

Question 2

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 B

Question 3

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 B

Question 4

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 5

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 6

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

Accepted Answer

A) True 
 B)False

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

The FI's portfolio is immunised when the weighted-average duration of the bond portfolio exactly equals the weighted-average maturity of the bond portfolio.

Accepted Answer

A) True 
 B)False

Question 9

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% and has a maturity of three years.The current discount rate is 10%.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 10

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.

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

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 13

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 14

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

Question 15

The FI's portfolio is immunised when the weighted-average duration of the bond portfolio exactly equals the FI's desired investment horizon.

Accepted Answer

A) True 
 B)False

Question 16

Consider a security with a face value of $100 000 to be repaid at maturity.The maturity of the security is three years.The coupon rate is 9% per annum and coupon payments are made semi-annually.The current discount rate is 12% per annum.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 17

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 18

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 19

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

Accepted Answer

A) True 
 B)False

Question 20

Immunisation does not require constant portfolio rebalancing when interest rates move.

Accepted Answer

A) True 
 B)False

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

The special feature of consol bonds is that:

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

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

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

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

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

The FI's portfolio is immunised when the weighted-average duration of the bond portfolio exactly equals the weighted-average maturity of the bond portfolio.

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% and has a maturity of three years.The current discount rate is 10%.What is the security's current price (round to two decimals)?

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

The leverage adjusted duration gap measures:

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.

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

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

The FI's portfolio is immunised when the weighted-average duration of the bond portfolio exactly equals the FI's desired investment horizon.

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:

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.

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

Immunisation does not require constant portfolio rebalancing when interest rates move.

Why Are Financial Institutions Special

The Financial Service Industry: Depository Institutions

The Financial Service Industry: Other Financial Institutions

Risks of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Managing Interest Rate Risk Using Off-Balance-Sheet Instruments

Managing Interest Rate Risk Using Securitisation

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 Risks

Capital Management and Adequacy

Filters

Exam 6: Interest Rate Risk Measurement: the Duration Model

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

The special feature of consol bonds is that:

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

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

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

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

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

The FI's portfolio is immunised when the weighted-average duration of the bond portfolio exactly equals the weighted-average maturity of the bond portfolio.

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% and has a maturity of three years.The current discount rate is 10%.What is the security's current price (round to two decimals)?

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

The leverage adjusted duration gap measures:

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.

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

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

The FI's portfolio is immunised when the weighted-average duration of the bond portfolio exactly equals the FI's desired investment horizon.

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:

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.

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

Immunisation does not require constant portfolio rebalancing when interest rates move.

Why Are Financial Institutions Special

The Financial Service Industry: Depository Institutions

The Financial Service Industry: Other Financial Institutions

Risks of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Managing Interest Rate Risk Using Off-Balance-Sheet Instruments

Managing Interest Rate Risk Using Securitisation

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 Risks

Capital Management and Adequacy

Filters