Question 1

Duration of equity measures the dollar change in EVE with a 1% change in interest rates.

Accepted Answer

A) True 
 B)False

Question 2

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 3

How does effective duration differ from modified duration?

Accepted Answer

Effective duration and modified duration

Question 4

A liability sensitive bank decides to reduce risk by marketing 2-year CDs paying 5% instead of NOW accounts that pay 4%. The bank will benefit if:

Accepted Answer

A)  the 2-year rate in one year is less than 5%. 
B)  the 1-year rate in one year is less than 6%. 
C)  the 1-year rate in one year is greater than 6%. 
D)  the 2-year rate in one year is greater than 6%. 
E)  Not enough information is given to determine the correct answer. 
A)  the 2-year rate in one year is less than 5%. 
B)  the 1-year rate in one year is less than 6%. 
C)  the 1-year rate in one year is greater than 6%. 
D)  the 2-year rate in one year is greater than 6%. 
E)  Not enough information is given to determine the correct answer.

Question 5

Put the following steps in duration gap analysis in the proper order.
I.	Estimate the economic value of assets, liabilities and equity.
II.	Forecast the change in the economic value of equity for various interest rates.
III.	Forecast future interest rates.
IV.	Estimate the duration of assets and liabilities.

Accepted Answer

A)  III, I, IV, II 
B)  I, II, III, IV 
C)  III, IV, I, II 
D)  IV, I, II, III 
E)  II, IV, I, III 
A)  III, I, IV, II 
B)  I, II, III, IV 
C)  III, IV, I, II 
D)  IV, I, II, III 
E)  II, IV, I, III

Question 6

EVE analysis: is essentially a _____________ analysis.

Accepted Answer

A)  profitability 
B)  quality 
C)  liquidity 
D)  liquidation 
E)  earnings 
A)  profitability 
B)  quality 
C)  liquidity 
D)  liquidation 
E)  earnings

Question 7

Which of the following allows a security's cash flows to change when interest rates change?

Accepted Answer

A)  Modified duration 
B)  Macaulay's duration 
C)  Effective duration 
D)  Balance sheet duration 
E)  Income statement duration 
A)  Modified duration 
B)  Macaulay's duration 
C)  Effective duration 
D)  Balance sheet duration 
E)  Income statement duration

Question 8

Use the following bank information for questions .
 $\begin{array}{|l|l|l|l|l|l|l|l|}
\hline &\begin{array}{c}
\text { Market } \
\text { Value }
\end{array} &\text { Rate } & \begin{array}{c}
\text { Duration } \
\text { (Years) }
\end{array} & \begin{array}{c}\text { Liabilities }\
\text { and } \
\text { Equity }
\end{array} & \begin{array}{c}
\text { Market } \
\text { Value }
\end{array} & \text { Rate } & \begin{array}{c}
\text { Duration } \
\text { (Years) }
\end{array} \
\hline\text { Cash } & \$  150 & && \text {Time Deposits } & \$  500 & 4 \% & 1.25 \
\hline \text { Loans } & \$  675 & 10 \% & 2.50 &\text { CDs } & \$  400 & 6 \% & 3.00 \
\hline\text { T-Bonds }&\$175&5\%&5.00&\text { Equity }&\$100&&\
\hline\text { Total }&\$1,000&&&&\$1,000\
\hline
\end{array}$
-What is the bank's duration gap?

Accepted Answer

A)  0.53 
B)  0.73 
C)  0.91 
D)  2.03 
E)  4.58 
A)  0.53 
B)  0.73 
C)  0.91 
D)  2.03 
E)  4.58

Question 9

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 10

Modified 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)  All of the above 
E)  a. and b. 
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)  All of the above 
E)  a. and b.

Question 11

A 10-year annual coupon bond is currently selling for its par value of $1,000 with an annual yield of 5%. If the bond is callable at par, what is the effective duration of the bond, if the interest rates change by 1%? The price of the bond at a 6% interest rate equals $926.40.

Accepted Answer

A)  10 years 
B)  7.36 years 
C)  5.52 years 
D)  4.60 years 
E)  3.68 years 
A)  10 years 
B)  7.36 years 
C)  5.52 years 
D)  4.60 years 
E)  3.68 years

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%? The price of the bond at a 9% interest rate equals $8,174.29.

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

Use the following bank information for questions .
 $\begin{array}{|l|l|l|l|l|l|l|l|}
\hline &\begin{array}{c}
\text { Market } \
\text { Value }
\end{array} &\text { Rate } & \begin{array}{c}
\text { Duration } \
\text { (Years) }
\end{array} & \begin{array}{c}\text { Liabilities }\
\text { and } \
\text { Equity }
\end{array} & \begin{array}{c}
\text { Market } \
\text { Value }
\end{array} & \text { Rate } & \begin{array}{c}
\text { Duration } \
\text { (Years) }
\end{array} \
\hline\text { Cash } & \$  200 & && \text {Time Deposits } & \$  600 &2.0 \% & 1.500 \
\hline \text { Loans } & \$ 800 & 8.0 \% & 3.750 &\text { CDs } & \$  500 & 4.5 \% & 3.125 \
\hline\text { T-Bonds }&\$250&4.0\%&7.250&\text { Equity }&\$150&&\
\hline\text { Total }&\$1,250&&&&\$1,250\
\hline
\end{array}$
-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)  7.50 years 
A)  2.56 years 
B)  3.85 years 
C)  4.85 years 
D)  5.00 years 
E)  7.50 years

Question 14

Economic value of equity analysis focuses on net interest income.

Accepted Answer

A) True 
 B)False

Duration of equity measures the dollar change in EVE with a 1% change in interest rates.

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

How does effective duration differ from modified duration?

A liability sensitive bank decides to reduce risk by marketing 2-year CDs paying 5% instead of NOW accounts that pay 4%. The bank will benefit if:

EVE analysis: is essentially a _____________ analysis.

Which of the following allows a security's cash flows to change when interest rates change?

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

Modified duration:

A 10-year annual coupon bond is currently selling for its par value of $1,000 with an annual yield of 5%. If the bond is callable at par, what is the effective duration of the bond, if the interest rates change by 1%? The price of the bond at a 6% interest rate equals $926.40.

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 price of the bond at a 9% interest rate equals $8,174.29.

Economic value of equity analysis focuses on net interest income.

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: Duration Gap and Economic Value of Equity

Duration of equity measures the dollar change in EVE with a 1% change in interest rates.

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

How does effective duration differ from modified duration?

A liability sensitive bank decides to reduce risk by marketing 2-year CDs paying 5% instead of NOW accounts that pay 4%. The bank will benefit if:

EVE analysis: is essentially a _____________ analysis.

Which of the following allows a security's cash flows to change when interest rates change?

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

Modified duration:

A 10-year annual coupon bond is currently selling for its par value of $1,000 with an annual yield of 5%. If the bond is callable at par, what is the effective duration of the bond, if the interest rates change by 1%? The price of the bond at a 6% interest rate equals $926.40.

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 price of the bond at a 9% interest rate equals $8,174.29.

Economic value of equity analysis focuses on net interest income.

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