Question 1

If yield is greater than 0 then the modified duration is .... the Macaulay duration:

Accepted Answer

A) greater than 
B) equal to 
C) smaller than 
D) None of the listed options are correct. 
A) greater than 
B) equal to 
C) smaller than 
D) None of the listed options are correct.

Question 2

The duration gap can be used to measure how changes in the interest rate affect an FI's:

Accepted Answer

A) net worth 
B) maturity gap strategy 
C) liquidity strategy 
D) All of the listed options are correct. 
A) net worth 
B) maturity gap strategy 
C) liquidity strategy 
D) All of the listed options are correct.

Question 3

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 4

Calculating modified duration involves:

Accepted Answer

A) dividing the value of duration by the change in the market interest rate 
B) dividing the value of duration by 1 plus the interest rate 
C) dividing the value of duration by discounted change in interest rates 
D) multiplying the value of duration by discounted change in interest rates 
A) dividing the value of duration by the change in the market interest rate 
B) dividing the value of duration by 1 plus the interest rate 
C) dividing the value of duration by discounted change in interest rates 
D) multiplying the value of duration by discounted change in interest rates

Question 5

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 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 6

Which of the following statements is true?

Accepted Answer

A) The optimal duration gap is zero. 
B) Duration gap measures the impact of unanticipated changes in interest rates on the market value of equity. 
C) The shorter the maturity of the FI's securities, the greater the FI's interest rate risk exposure. 
D) The duration of all floating rate debt instruments is equal to the time to maturity. 
A) The optimal duration gap is zero. 
B) Duration gap measures the impact of unanticipated changes in interest rates on the market value of equity. 
C) The shorter the maturity of the FI's securities, the greater the FI's interest rate risk exposure. 
D) The duration of all floating rate debt instruments is equal to the time to maturity.

Question 7

Which of the following statements is incorrect?

Accepted Answer

A) Convexity is a desirable effect to a portfolio manager because it is easy to measure and price. 
B) All fixed-income assets exhibit convexity in their price-yield relationships. 
C) The greater is convexity, the more insurance a portfolio manager has against interest rate increases and the greater potential gain from rate decreases. 
D) The fact that the capital gain effect for rate decreases is greater than the capital loss effect for rate increases is caused by convexity in the yield-price relationship. 
A) Convexity is a desirable effect to a portfolio manager because it is easy to measure and price. 
B) All fixed-income assets exhibit convexity in their price-yield relationships. 
C) The greater is convexity, the more insurance a portfolio manager has against interest rate increases and the greater potential gain from rate decreases. 
D) The fact that the capital gain effect for rate decreases is greater than the capital loss effect for rate increases is caused by convexity in the yield-price relationship.

Question 8

An FI has a leverage-adjusted duration gap of 1.21 years, $60 million in assets, 7% equity to assets ratio, and market rates are 8%.What is the impact on the dealer's market value of equity per $100 of assets if the relative change in all interest rates is an increase of 0.5% [i.e.$\Delta$R/(1+R) = 0.5%]?

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 9

An FI has financial assets of $800 and equity of $50.If the duration of assets is 1.21 years and the duration of all liabilities is 0.25 years, what is the leverage-adjusted duration gap?

Accepted Answer

A) 0.9000 years 
B) 0.9600 years 
C) 0.9756 years 
D) 0.8844 years 
A) 0.9000 years 
B) 0.9600 years 
C) 0.9756 years 
D) 0.8844 years

Question 10

What is the duration of a five-year par value zero-coupon bond yielding 10% 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 11

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 12

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 13

As interest rates decrease 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

If yield is greater than 0 then the modified duration is .... the Macaulay duration:

The duration gap can be used to measure how changes in the interest rate affect an FI's:

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

Calculating modified duration involves:

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 duration (round to two decimals)?

Which of the following statements is true?

Which of the following statements is incorrect?

An FI has financial assets of $800 and equity of $50.If the duration of assets is 1.21 years and the duration of all liabilities is 0.25 years, what is the leverage-adjusted duration gap?

What is the duration of a five-year par value zero-coupon bond yielding 10% annually?

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

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

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

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

If yield is greater than 0 then the modified duration is .... the Macaulay duration:

The duration gap can be used to measure how changes in the interest rate affect an FI's:

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

Calculating modified duration involves:

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 duration (round to two decimals)?

Which of the following statements is true?

Which of the following statements is incorrect?

An FI has financial assets of $800 and equity of $50.If the duration of assets is 1.21 years and the duration of all liabilities is 0.25 years, what is the leverage-adjusted duration gap?

What is the duration of a five-year par value zero-coupon bond yielding 10% annually?

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

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

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

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