FIN 440: Chapter 9 (Interest Rate Risk)

Use the following to answer questions 1-3:What is the duration of the commercial loans? A) 1.00 years B) 2.00 years C) 1.73 years D) 1.91 years E) 1.50 years

1.91 years

If interest rates increase by 20 basis points, what is the approximate change in the market price using the duration approximation? A) -$7.985 B) -$7.943 C) -$3.990 D) +$3.990 E) -$7.942

A) -$7.985

Munis are 2-year 6 percent annual coupon municipal notes selling at par. Loans are floating rates, repriced quarterly. Spot discount yields for 91-day Treasury bills are 3.75 percent. CDs are 1-year pure discount certificates of deposit paying 4.75 percent. What is the duration of the municipal notes (the value of x)? A) 1.94 years B) 2.00 years C) 1.00 year D) 1.81 years E) 0.97 years

A) 1.94 years

Use the following to answer questions 6-9: 6. Calculate the duration of the assets. A) 2.54 years. B) 4.375 years. C) 1.75 years. D) 3.08 years. E) 2.50 years.

A) 2.54 years Dassets =(75/100)x0+(750/1000)x1.75+(175/1000)x7=2.5375

Use the following to answer questions 1-3:What is the FI's interest rate risk exposure? A) Exposed to increasing rates B) Exposed to decreasing rates C) Perfectly balanced D) Exposed to long-term rate changes E)Insufficient information

A) Exposed to increasing rates

Use the following to answer questions 1-3:What is the FI's leverage-adjusted duration gap? A) 0.91 years B) 0.83 years C) 0.73 years D) 0.50 years E) 0

B) 0.83 years

Questions refer to a five-year, 8 percent annual coupon bond selling at par of $1,000. 4. What is the duration of this bond? A) 5 years B) 4.31 years C) 3.96 years D) 5.07 years E) not enough information to answer

B) 4.31 years

If all interest rates decline 90 basis points (DR/(1+R) = -90 basis points), what is the change in the market value of equity? A) -$4.430 million B) +$3.925 million C) +$4.410 million D) +$2.550 million E) +$0.022 million

C) +$4.410 million

. Calculate the duration of the liabilities. A) 2.05 years. B) 1.75 years. C) 2.22 years. D) 2.125 years. E) 2.50 years.

C) 2.22 years.

What is this bank's interest rate risk exposure, if any?

C) The bank is exposed to increasing interest rates because it has a positive duration gap of +0.21 years.

What will be the impact, if any, on the market value of the bank's equity if all interest rates increase by 75 basis points? (i.e., DR/(1+R) = 0.0075)

C) The market value of equity will decrease by $426,825.

. Calculate the leveraged-adjusted duration gap and state the FI's interest rate risk exposure. A) +1.03 years; exposed to interest rate increases. B) +0.32 years; exposed to interest rate increases. C) +0.86 years; exposed to interest rate increases. D) +0.49 years; exposed to interest rate increases.

D) +0.49 years; exposed to interest rate increases.

Duration normally is less than the maturity of a fixed-rate coupon asset.

True

In duration analysis, the times at which cash flows are received are weighted by the relative importance in present value terms of the cash flows arriving at each point in time.

True

The leverage adjusted duration of a typical depository institution is positive.

True

Duration considers the timing of all of the cash flows of an asset by summing the product of the present values of cash flows multiplied by the time of occurrence.

false

Setting the duration of the assets to the duration of the liabilities multiplied by the leverage ratio will exactly immunize the net worth of an FI from interest rate shocks.

false

The leverage adjusted duration gap for an FI is equal to the duration of the assets minus the duration of the liabilities multiplied by the leverage ratio.

false

Duration of a zero coupon bond is equal to the bonds maturity.

true

For given changes in interest rates, the change in the market value of net worth is equal to the difference in the changes of the market value of the assets and liabilities.

true