Question 1

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 2

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 3

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 4

Suppose the yield of five-year bond with 8% coupon is 10%.Its duration is:

Accepted Answer

A) less than 5 years 
B) 5 years 
C) from 5 to 10 years 
D) more than 10 years 
A) less than 5 years 
B) 5 years 
C) from 5 to 10 years 
D) more than 10 years

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 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% 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 7

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

Accepted Answer

A) True 
 B)False

Question 8

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 9

An FI purchases at par value a $100 000 Treasury Bond paying 10% interest with a 7.5 year duration.If interest rates rise by 4%, 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 10

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 11

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 12

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 13

Which of the following statements is 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 immunise a 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 immunise a desired investment horizon means that the reinvested coupon payments are not affected by changes in market interest rates.

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 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%.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 16

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 17

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

Accepted Answer

A) True 
 B)False

Question 18

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 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 19

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

Question 20

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

The duration of a zero-coupon bond:

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:

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

Suppose the yield of five-year bond with 8% coupon is 10%.Its duration is:

The lower the coupon or interest payment on a security:

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

Which of the following statements is true?

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

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

The statement that a portfolio is immunised using duration matching:

Duration is defined as:

Which of the following statements is incorrect?

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

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%.Which of the following statements is true?

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

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

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

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

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

The duration of a zero-coupon bond:

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:

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

Suppose the yield of five-year bond with 8% coupon is 10%.Its duration is:

The lower the coupon or interest payment on a security:

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

Which of the following statements is true?

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

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

The statement that a portfolio is immunised using duration matching:

Duration is defined as:

Which of the following statements is incorrect?

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

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%.Which of the following statements is true?

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

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

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

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

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