Question 1

Banks should never assume any interest rate risk.

Accepted Answer

A) True 
 B)False

Question 2

Use the following bank information for questions 
  
-What is the weighted average duration of assets?

Accepted Answer

A) 2.56 years 
B) 3.85 years 
C) 4.85 years 
D) 5.00 years 
E) 7.5 years 
A) 2.56 years 
B) 3.85 years 
C) 4.85 years 
D) 5.00 years 
E) 7.5 years

Question 3

For a bank that has a positive duration gap, an increase in interest rates will cause a(n) _______ in the economic value of assets, a(n) _______ in the economic value of liabilities, and a(n) _______ in the economic value of equity.

Accepted Answer

A) increase, decrease, increase 
B) increase, increase, decrease 
C) increase, increase, increase 
D) decrease, decrease, increase 
E) decrease, decrease, decrease 
A) increase, decrease, increase 
B) increase, increase, decrease 
C) increase, increase, increase 
D) decrease, decrease, increase 
E) decrease, decrease, decrease

Question 4

A bond has a Macaulay's duration of 26.56 years.If rates rise from 6.25% to 6.50%, the bonds price will:

Accepted Answer

A) increase by approximately 6.25%. 
B) decrease by approximately 6.25%. 
C) increase by approximately 6.50%. 
D) decrease by approximately 6.50%. 
E) Not enough information is given to answer the question. 
A) increase by approximately 6.25%. 
B) decrease by approximately 6.25%. 
C) increase by approximately 6.50%. 
D) decrease by approximately 6.50%. 
E) Not enough information is given to answer the question.

Question 5

Which of the following is not a weakness of duration gap analysis?

Accepted Answer

A) It is difficult to accurately compute duration. 
B) Each future cash flow must be discounted by the appropriate future interest rate. 
C) The duration of a portfolio must be constantly monitored. 
D) It is difficult to estimate the duration on zero coupon bonds. 
E) All of the above are weaknesses of duration gap analysis. 
A) It is difficult to accurately compute duration. 
B) Each future cash flow must be discounted by the appropriate future interest rate. 
C) The duration of a portfolio must be constantly monitored. 
D) It is difficult to estimate the duration on zero coupon bonds. 
E) All of the above are weaknesses of duration gap analysis.

Question 6

Duration gap analysis focuses on changes in net interest income.

Accepted Answer

A) True 
 B)False

Question 7

Use the following bank information for questions 
  
-What is the weighted average duration of assets?

Accepted Answer

A) 2.56 years 
B) 3.75 years 
C) 4.85 years 
D) 5.00 years 
E) 7.5 years 
A) 2.56 years 
B) 3.75 years 
C) 4.85 years 
D) 5.00 years 
E) 7.5 years

Question 8

For a bank that has a negative duration gap, an increase in interest rates will cause a(n) _______ in the economic value of assets, a(n) _______ in the economic value of liabilities, and a(n) _______ in the economic value of equity.

Accepted Answer

A) increase, decrease, increase 
B) increase, increase, decrease 
C) increase, increase, increase 
D) decrease, decrease, increase 
E) decrease, increase, decrease 
A) increase, decrease, increase 
B) increase, increase, decrease 
C) increase, increase, increase 
D) decrease, decrease, increase 
E) decrease, increase, decrease

Question 9

Macaulay's duration:

Accepted Answer

A) is a weighted average of the time until cash flows are received. 
B) is always greater than maturity. 
C) is never equal to maturity. 
D) directly indicates how much the price of a security will change given a change in interest rates. 
E) estimates when embedded options will be used. 
A) is a weighted average of the time until cash flows are received. 
B) is always greater than maturity. 
C) is never equal to maturity. 
D) directly indicates how much the price of a security will change given a change in interest rates. 
E) estimates when embedded options will be used.

Question 10

Effective duration:

Accepted Answer

A) estimates when embedded options will be used. 
B) directly indicates how much the price of a security will change given a change in interest rates. 
C) is always greater than maturity. 
D) is a weighted average of the time until cash flows are received. 
E) All of the above 
A) estimates when embedded options will be used. 
B) directly indicates how much the price of a security will change given a change in interest rates. 
C) is always greater than maturity. 
D) is a weighted average of the time until cash flows are received. 
E) All of the above

Question 11

Which of the following will not affect a bank's duration estimate for the year?

Accepted Answer

A) Prepayments on loans that exceed expectations. 
B) A 20-year corporate bond that is unexpectedly called in 6 months. 
C) Certificates of deposit that are withdrawn early. 
D) Holding a 30-year Treasury bond until maturity. 
E) All of the above will affect a bank's estimated duration for the year. 
A) Prepayments on loans that exceed expectations. 
B) A 20-year corporate bond that is unexpectedly called in 6 months. 
C) Certificates of deposit that are withdrawn early. 
D) Holding a 30-year Treasury bond until maturity. 
E) All of the above will affect a bank's estimated duration for the year.

Question 12

A 20-year annual coupon bond is currently selling for its par value of $10,000 with an annual yield of 7%.If the bond is callable at par, what is the effective duration of the bond, assuming rates change by 2%?

Accepted Answer

A) 25.00 years 
B) 20.00 years 
C) 5.52 years 
D) 4.56 years 
E) 3.68 years 
A) 25.00 years 
B) 20.00 years 
C) 5.52 years 
D) 4.56 years 
E) 3.68 years

Question 13

The duration of a liability that does not pay interest must be equal to 0.

Accepted Answer

A) True 
 B)False

Question 14

A bank with a duration gap of 1 is more sensitive to changes in the economic value of equity than a bank with a duration gap of -1.5.

Accepted Answer

A) True 
 B)False

Question 15

For a bank that has a positive duration gap, a decrease in interest rates will cause a(n) _______ in the economic value of assets, a(n) _______ in the economic value of liabilities, and a(n) _______ in the economic value of equity.

Accepted Answer

A) increase, decrease, increase 
B) increase, increase, decrease 
C) increase, increase, increase 
D) decrease, decrease, increase 
E) decrease, increase, decrease 
A) increase, decrease, increase 
B) increase, increase, decrease 
C) increase, increase, increase 
D) decrease, decrease, increase 
E) decrease, increase, decrease

Question 16

The yield curve is typically inverted at the peak of the business cycle.

Accepted Answer

A) True 
 B)False

Question 17

A bond has a Macaulay's duration of 21 years.If rates rise from 5% to 5.5%, the bonds price will:

Accepted Answer

A) increase by approximately 1%. 
B) decrease by approximately 1%. 
C) increase by approximately 10%. 
D) decrease by approximately 10%. 
E) Not enough information is given to answer the question. 
A) increase by approximately 1%. 
B) decrease by approximately 1%. 
C) increase by approximately 10%. 
D) decrease by approximately 10%. 
E) Not enough information is given to answer the question.

Question 18

What is the strength of static GAP analysis relative to duration gap analysis?

Accepted Answer

A) Static GAP analysis recognizes the time value of money of each cash flow. 
B) Static GAP analysis provides a measure of the total portfolio's interest rate risk. 
C) Static GAP analysis is easier to understand. 
D) Static GAP analysis takes the long-run view while duration gap analysis takes a shorter-run view. 
E) The static GAP measure directly correlates with the risk of the bank, i.e., a bank with twice the static GAP is twice as risky. 
A) Static GAP analysis recognizes the time value of money of each cash flow. 
B) Static GAP analysis provides a measure of the total portfolio's interest rate risk. 
C) Static GAP analysis is easier to understand. 
D) Static GAP analysis takes the long-run view while duration gap analysis takes a shorter-run view. 
E) The static GAP measure directly correlates with the risk of the bank, i.e., a bank with twice the static GAP is twice as risky.

Question 19

Use the following bank information for questions 
  
-What is the bank's expected economic net interest income?

Accepted Answer

A) $34.5 
B) $32.3 
C) $39.5 
D) $44.0 
E) $120.5 
A) $34.5 
B) $32.3 
C) $39.5 
D) $44.0 
E) $120.5

Question 20

Effective duration considers a security's embedded options.

Accepted Answer

A) True 
 B)False

Banks should never assume any interest rate risk.

Use the following bank information for questions -What is the weighted average duration of assets?

For a bank that has a positive duration gap, an increase in interest rates will cause a(n) ___ in the economic value of assets, a(n) _ in the economic value of liabilities, and a(n) _____ in the economic value of equity.

A bond has a Macaulay's duration of 26.56 years.If rates rise from 6.25% to 6.50%, the bonds price will:

Which of the following is not a weakness of duration gap analysis?

Duration gap analysis focuses on changes in net interest income.

Use the following bank information for questions -What is the weighted average duration of assets?

For a bank that has a negative duration gap, an increase in interest rates will cause a(n) ___ in the economic value of assets, a(n) _ in the economic value of liabilities, and a(n) _____ in the economic value of equity.

Macaulay's duration:

Effective duration:

Which of the following will not affect a bank's duration estimate for the year?

A 20-year annual coupon bond is currently selling for its par value of $10,000 with an annual yield of 7%.If the bond is callable at par, what is the effective duration of the bond, assuming rates change by 2%?

The duration of a liability that does not pay interest must be equal to 0.

A bank with a duration gap of 1 is more sensitive to changes in the economic value of equity than a bank with a duration gap of -1.5.

For a bank that has a positive duration gap, a decrease in interest rates will cause a(n) ___ in the economic value of assets, a(n) _ in the economic value of liabilities, and a(n) _____ in the economic value of equity.

The yield curve is typically inverted at the peak of the business cycle.

A bond has a Macaulay's duration of 21 years.If rates rise from 5% to 5.5%, the bonds price will:

What is the strength of static GAP analysis relative to duration gap analysis?

Use the following bank information for questions -What is the bank's expected economic net interest income?

Effective duration considers a security's embedded options.

Banking and the Financial Services Industry

Government Policies and Regulation

Analyzing Bank Performance

Managing Noninterest Income and Noninterest Expense

The Performance of Nontraditional Banking Companies

Pricing Fixed-Income Securities

Managing Interest Rate Risk: Gap and Earnings Sensitivity

Using Derivatives to Manage Interest Rate Risk

Funding the Bank

Managing Liquidity

The Effective Use of Capital

Overview of Credit Policy and Loan Characteristics

Evaluating Commercial Loan Requests and Managing Credit Risk

Evaluating Consumer Loans

Managing the Investment Portfolio

Global Banking Activities

Filters

Exam 8: Managing Interest Rate Risk: Economic Value of Equity

Banks should never assume any interest rate risk.

Use the following bank information for questions -What is the weighted average duration of assets?

For a bank that has a positive duration gap, an increase in interest rates will cause a(n) _______ in the economic value of assets, a(n) _______ in the economic value of liabilities, and a(n) _______ in the economic value of equity.

A bond has a Macaulay's duration of 26.56 years.If rates rise from 6.25% to 6.50%, the bonds price will:

Which of the following is not a weakness of duration gap analysis?

Duration gap analysis focuses on changes in net interest income.

Use the following bank information for questions -What is the weighted average duration of assets?

For a bank that has a negative duration gap, an increase in interest rates will cause a(n) _______ in the economic value of assets, a(n) _______ in the economic value of liabilities, and a(n) _______ in the economic value of equity.

Macaulay's duration:

Effective duration:

Which of the following will not affect a bank's duration estimate for the year?

A 20-year annual coupon bond is currently selling for its par value of $10,000 with an annual yield of 7%.If the bond is callable at par, what is the effective duration of the bond, assuming rates change by 2%?

The duration of a liability that does not pay interest must be equal to 0.

A bank with a duration gap of 1 is more sensitive to changes in the economic value of equity than a bank with a duration gap of -1.5.

For a bank that has a positive duration gap, a decrease in interest rates will cause a(n) _______ in the economic value of assets, a(n) _______ in the economic value of liabilities, and a(n) _______ in the economic value of equity.

The yield curve is typically inverted at the peak of the business cycle.

A bond has a Macaulay's duration of 21 years.If rates rise from 5% to 5.5%, the bonds price will:

What is the strength of static GAP analysis relative to duration gap analysis?

Use the following bank information for questions -What is the bank's expected economic net interest income?

Effective duration considers a security's embedded options.

Banking and the Financial Services Industry

Government Policies and Regulation

Analyzing Bank Performance

Managing Noninterest Income and Noninterest Expense

The Performance of Nontraditional Banking Companies

Pricing Fixed-Income Securities

Managing Interest Rate Risk: Gap and Earnings Sensitivity

Using Derivatives to Manage Interest Rate Risk

Funding the Bank

Managing Liquidity

The Effective Use of Capital

Overview of Credit Policy and Loan Characteristics

Evaluating Commercial Loan Requests and Managing Credit Risk

Evaluating Consumer Loans

Managing the Investment Portfolio

Global Banking Activities

Filters

For a bank that has a positive duration gap, an increase in interest rates will cause a(n) ___ in the economic value of assets, a(n) _ in the economic value of liabilities, and a(n) _____ in the economic value of equity.

For a bank that has a negative duration gap, an increase in interest rates will cause a(n) ___ in the economic value of assets, a(n) _ in the economic value of liabilities, and a(n) _____ in the economic value of equity.

For a bank that has a positive duration gap, a decrease in interest rates will cause a(n) ___ in the economic value of assets, a(n) _ in the economic value of liabilities, and a(n) _____ in the economic value of equity.