Question 1

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.E) All of the above
F) A) and B)

Question 2

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) .E) B) and C)
F) A) and C)

Question 3

Consider a security with a face value of $100 000 to be repaid at maturity.The maturity of the security is 3 years.The coupon rate is 9 per cent p.a.and coupon payments are made semi-annually.The current discount rate is 12 per cent p.a.What is the security's duration (round your answer to two decimals) ?

Accepted Answer

A)  2.68 years
B)  2.68 half-years
C)  3 years
D)  0.38 yearsE) All of the above
F) B) and D)

Question 4

What is the duration of a 5-year par value zero coupon bond yielding 10 per cent annually?

Accepted Answer

A)  0.50 years
B)  2 years
C)  4.40 years
D)  5 yearsE) A) and B)
F) A) and D)

Question 5

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) .E) A) and B)
F) B) and C)

Question 6

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.E) B) and D)
F) B) and C)

Question 7

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)  durationE) A) and B)
F) A) and C)

Question 8

One method of changing the positive leverage adjusted duration gap for the purpose of immunising the net worth of a typical depository institution is to increase the duration of the assets and to decrease the duration of the liabilities.

Accepted Answer

A) True 
 B)False

Question 9

The special feature of consol bonds is that:

Accepted Answer

A)  their duration equals their maturity.
B)  their maturity is infinite, while their duration is finite.
C)  their maturity is finite, while their duration is infinite.
D)  both, their maturity and their duration, are infinite.E) A) and B)
F) A) and C)

Question 10

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.E) B) and D)
F) None of the above

Question 11

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 12

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 per cent and has a maturity of three years.The current discount rate is 10 per cent.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 yearsE) All of the above
F) A) and B)

Question 13

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.E) A) and D)
F) B) and D)

Question 14

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 15

Consider a security with a face value of $100 000 to be repaid at maturity.The maturity of the security is 3 years.The coupon rate is 9 per cent p.a.and coupon payments are made semi-annually.The current discount rate is 12 per cent p.a.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)  $92 624.01E) All of the above
F) B) and C)

Question 16

Duration matching is a desirable interest rate risk management tool as it captures changes in interest rates over long periods of time.

Accepted Answer

A) True 
 B)False

Question 17

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.E) B) and D)
F) A) and B)

Question 18

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

Question 19

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 per cent and has a maturity of three years.The current discount rate is 10 per cent.What is the security's current price (round to two decimals) ?

Accepted Answer

A)  $124 000
B)  $95 026.30
C)  $19 894.82
D)  $100 000E) None of the above
F) A) and D)

Question 20

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 per cent.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.E) A) and D)
F) All of the above

Exam 6: Interest Rate Risk Measurement: The Duration Model

Which of the following statements is true?

Correct Answer
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The lower the coupon or interest payment on a security:

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

Correct Answer
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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 per cent and has a maturity of three years.The current discount rate is 10 per cent.What is the security's duration (round to two decimals) ?

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

Correct Answer
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Duration matching is a desirable interest rate risk management tool as it captures changes in interest rates over long periods of time.

Correct Answer
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The modified duration is defined as:

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

Correct Answer
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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 per cent.Which of the following statements is true?

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

Correct Answer
verified

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

Correct Answer
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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.

Correct Answer
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One method of changing the positive leverage adjusted duration gap for the purpose of immunising the net worth of a typical depository institution is to increase the duration of the assets and to decrease the duration of the liabilities.

Correct Answer
verified

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

Correct Answer
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Correct Answer
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The special feature of consol bonds is that:

Correct Answer
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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 per cent and has a maturity of three years.The current discount rate is 10 per cent.What is the security's current price (round to two decimals) ?

Correct Answer
verified

What is the duration of a 5-year par value zero coupon bond yielding 10 per cent annually?

Correct Answer
verified

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

Correct Answer
verified

Exam 6: Interest Rate Risk Measurement: The Duration Model

Which of the following statements is true?

Correct AnswerverifiedShow Answer

The lower the coupon or interest payment on a security:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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 per cent and has a maturity of three years.The current discount rate is 10 per cent.What is the security's duration (round to two decimals) ?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Duration matching is a desirable interest rate risk management tool as it captures changes in interest rates over long periods of time.

Correct AnswerverifiedShow Answer

The modified duration is defined as:

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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 per cent.Which of the following statements is true?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

One method of changing the positive leverage adjusted duration gap for the purpose of immunising the net worth of a typical depository institution is to increase the duration of the assets and to decrease the duration of the liabilities.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The special feature of consol bonds is that:

Correct AnswerverifiedShow Answer

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 per cent and has a maturity of three years.The current discount rate is 10 per cent.What is the security's current price (round to two decimals) ?

Correct AnswerverifiedShow Answer

What is the duration of a 5-year par value zero coupon bond yielding 10 per cent annually?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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