CH 9

Chapter Nine
Interest Rate Risk II
Multiple-Choice
1. Which of the following is indicated by high numerical value of the duration of an asset?
a. Low sensitivity of an asset price to interest rate shocks.
b. High interest inelasticity of a bond.
c. High sensitivity of an asset price to interest rate shocks.
d. Lack of sensitivity of an asset price to interest rate shocks.
e. Smaller capital loss for a given change in interest rates.
Answer: C
2. For small change in interest rates, market prices of bonds move in an inversely proportional manner
according to the size of the
a. equity.
b. asset value.
c. liability value.
d. duration value.
e. Answers A and B only.
Answer: D
3. Which of the following statements about leverage adjusted duration gap is true?
a. It is equal to the duration of the assets minus the duration of the liabilities.
b. 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.
e. Its value is equal to duration divided by (1+R).
Answer: B
4. The larger the size of an FI, the larger the _________ from any given interest rate shock.
a. duration mismatch
b. immunization effect
c. net worth exposure
d. net interest income
e. risk of bankruptcy
Answer: C
5. Managers can achieve the results of duration matching by using these to hedge interest rate risk.
a. Rate sensitive assets.
1
b. Rate sensitive liabilities.
c. Coupon bonds.
d. Consol bonds.
e. Derivatives.
Answer: E
6. Immunizing the balance sheet to protect equity holders from the effects of interest rate risk occurs when
a. the maturity gap is zero.
b. the repricing gap is zero.
c. the duration gap is zero.
d. the effect of a change in the level of interest rates on the value of the assets of the FI is exactly
offset by the effect of the same change in interest rates on the liabilities of the FI.
e. after-the-fact analysis demonstrates that immunization coincidentally occurred.
Answer: D
7. The duration of a consol bond is

a. less than its maturity.
b. infinity.
c. 30 years.
d. more than its maturity.
e. given by the formula D=1/1-R.
Answer: A
8. Immunization of a portfolio implies that changes in _____ will not affect the value of the portfolio.
a. book value of assets
b. maturity
c. market prices
d. interest rates
e. duration
Answer: D
9. When does "duration" become a less accurate predictor of expected change in security prices?
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.
e. When the leverage adjustment is incorporated.
Answer: A
10. An FI has financial assets of $800 and equity of $50. If the duration of assets is 1.21 years and the
2
duration of all liabilities is 0.25 years, what is the leverage-adjusted duration gap?
a. 0.9000 years.
b. 0.9600 years.
c. 0.9756 years.
d. 0.8844 years.
e. Cannot be determined.
Answer: C
11. Calculate the duration of a two-year corporate bond paying 6 percent interest annually, selling at par.
Principal of $20,000,000 is due at the end of two years.
a. 2 years.
b. 1.91 years.
c. 1.94 years.
d. 1.49 years.
e. 1.75 years.
Answer: C
12. Which of the following statements is true?

a. The optimal duration gap is zero.
b. Duration gap measures the impact of 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.
e. The duration of equity is equal to the duration of assets minus the duration of liabilities.
Answer: B
13. A $1,000 six-year Eurobond has an 8 percent coupon, is selling at par, and contracts to make annual
payments of interest. The duration of this bond is 4.99 years. What will be the new price using the
duration model if interest rates increase to 8.5 percent?
a. $23.10.
b. $976.90.
c. $977.23.
d. $1,023.10.
e. -$23.10.
Answer: B
14. What is the duration of a 5-year par value zero coupon bond yielding 10 percent annually?
a. 0.50 years.
b. 2.00 years.
c. 4.40 years.
3
d. 5.00 years.
e. 4.05 years.
Answer: D
15. Calculating modified duration involves

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.
e. dividing the value of duration by the curvature effect.
Answer: B
Use the following information to answer the next three (3) questions:
Consider a six-year maturity, $100,000 face value bond that pays a 5 percent fixed coupon annually.
16. What is the price of the bond if market interest rates are 4 percent?
a. $105,816.44.
b. $105,287.67.
c. $105,242.14.
d. $100,000.00.
e. $106,290.56.
Answer: C
17. What is the price of the bond if market interest rates are 6 percent?
a. $95,082.68.
b. $95,769.55.
c. $95,023.00.
d. $100,000.00.
e. $96,557.87.
Answer: A
18. What is the percentage price change for the bond if interest rates decline 50 basis points from the
original 5 percent?
a. -2.106 percent.
b. +2.579 percent.
c. +0.000 percent.
d. +3.739 percent.
e. +2.444 percent.
Answer: B
4
Use the following information to answer the next two (2) questions:
Based on an 18-month, 8 percent (semiannual) coupon Treasury note selling at par.

19. What is the duration of this Treasury note?
a. 1.500 years.
b. 1.371 years.
c. 1.443 years.
d. 2.882 years.
e. 1.234 years.
Answer: C
20. If interest rates increase by 20 basis points (i.e., ∆R = 20 basis points), use the duration approximation
to determine the approximate price change.
a. $0.000.
b. $0.2775 per $100 face value.
c. $2.775 per $100 face value.
d. $0.2672 per $100 face value.
e. $2.672 per $100 face value.
Answer: B

CH 9

Uploaded by

Copyright:

Available Formats

CH 9

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CH 9

Uploaded by

Copyright:

Available Formats

Chapter Nine

Interest Rate Risk II

7. The duration of a consol bond is

12. Which of the following statements is true?

15. Calculating modified duration involves

Based on an 18-month, 8 percent (semiannual) coupon Treasury note selling at par.

You might also like