Question 1

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 2

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

Question 3

Consider a security with a duration of 2.78 years.The current interest rate level is 10% per annum.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%. 
B) The price of the security will increase by 1%. 
C) The price of the security will decrease by 2.50%. 
D) The price of the security will increase by 2.50%. 
A) The price of the security will decrease by 1%. 
B) The price of the security will increase by 1%. 
C) The price of the security will decrease by 2.50%. 
D) The price of the security will increase by 2.50%.

Question 4

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 5

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

Accepted Answer

A) True 
 B)False

Question 6

Assume that the required yield to maturity on a consol bond increases from 6% to 12%.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 7

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 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

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 10

Consider a consol bond with a required yield to maturity of 9%.What is the consol bond's duration (round to two decimals)?

Accepted Answer

A) Infinite as the bond has no maturity 
B) 0 years 
C) 9.33 years 
D) 12.11 years 
A) Infinite as the bond has no maturity 
B) 0 years 
C) 9.33 years 
D) 12.11 years

Question 11

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

Accepted Answer

A) 5 years 
B) 10 years 
C) 11 years 
D) 15 years 
A) 5 years 
B) 10 years 
C) 11 years 
D) 15 years

Question 12

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

Accepted Answer

A) True 
 B)False

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%.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

Immunisation requires constant portfolio rebalancing when interest rates move.

Accepted Answer

A) True 
 B)False

Question 15

Suppose the yield of consol bond is 10%.Its duration is:

Accepted Answer

A) 5 years 
B) 10 years 
C) 11 years 
D) 15 years 
A) 5 years 
B) 10 years 
C) 11 years 
D) 15 years

Question 16

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 17

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 18

When does 'duration' become a less accurate predictor of expected change in security prices?

Accepted Answer

A) As interest rate shocks increase in size. 
B) As interest rate shocks decrease in size. 
C) When maturity distributions of an FI's assets and liabilities are considered. 
D) As inflation decreases. 
A) As interest rate shocks increase in size. 
B) As interest rate shocks decrease in size. 
C) When maturity distributions of an FI's assets and liabilities are considered. 
D) As inflation decreases.

Question 19

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 20

Convexity is defined as:

Accepted Answer

A) the degree of curvature of the price-yield curve around some maturity level 
B) the degree of curvature of the price-yield curve around some price level 
C) the degree of curvature of the price-yield curve around some interest rate level 
D) None of the listed options are correct. 
A) the degree of curvature of the price-yield curve around some maturity level 
B) the degree of curvature of the price-yield curve around some price level 
C) the degree of curvature of the price-yield curve around some interest rate level 
D) None of the listed options are correct.

The modified duration is defined as:

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

Consider a security with a duration of 2.78 years.The current interest rate level is 10% per annum.How does the price of the security change if interest rates decrease by 100 basis points (round to two decimals)?

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

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

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

Which of the following statements is true?

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.

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:

Consider a consol bond with a required yield to maturity of 9%.What is the consol bond's duration (round to two decimals)?

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

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

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%.Calculate the duration gap for this scenario:

Immunisation requires constant portfolio rebalancing when interest rates move.

Suppose the yield of consol bond is 10%.Its duration is:

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

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

When does 'duration' become a less accurate predictor of expected change in security prices?

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

Convexity is defined as:

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 modified duration is defined as:

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

Consider a security with a duration of 2.78 years.The current interest rate level is 10% per annum.How does the price of the security change if interest rates decrease by 100 basis points (round to two decimals)?

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

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

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

Which of the following statements is true?

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.

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:

Consider a consol bond with a required yield to maturity of 9%.What is the consol bond's duration (round to two decimals)?

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

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

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%.Calculate the duration gap for this scenario:

Immunisation requires constant portfolio rebalancing when interest rates move.

Suppose the yield of consol bond is 10%.Its duration is:

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

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

When does 'duration' become a less accurate predictor of expected change in security prices?

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

Convexity is defined as:

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