Question 1

If the yield curve is inverted, a portfolio manager can take advantage of this by:

Accepted Answer

A)  pricing more deposits on a fixed-rate basis.
B)  buying more long-term securities
C)  making variable-rate, callable loans.
D)  increasing the number of rate-sensitive assets.
E)  All of the above.F) A) and C)
G) C) and D)

Question 2

What does a bank's duration gap measure?

Accepted Answer

A)  The duration of short-term buckets minus the duration of long-term buckets.
B)  The duration of the bank's assets minus the duration of its liabilities.
C)  The duration of all rate-sensitive assets minus the duration of rate-sensitive liabilities.
D)  The duration of the bank's liabilities minus the duration of its assets.
E)  The duration of all rate-sensitive liabilities minus the duration of rate-sensitive assets.F) B) and D)
G) B) and E)

Question 3

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 durationF) B) and C)
G) None of the above C

Question 4

To perfectly immunize a bank's economic value of equity from changes in interest rate risk, it should:

Accepted Answer

A)  adjust assets and liabilities such that its duration gap is equal to one.
B)  adjust assets and liabilities such that its duration gap is greater than zero.
C)  adjust assets and liabilities such that its duration gap is equal to zero.
D)  adjust assets and liabilities such that its GAP is equal to zero.
E)  adjust assets and liabilities such that its GAP is less than one.F) A) and E)
G) None of the above C

Question 5

For a bank that has a negative 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, decreaseF) None of the above
G) B) and E)

Question 6

A bond has a Macaulay's duration of 10.7 years.If rates fall from 7% to 6%, 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.F) A) and B)
G) A) and C)

Question 7

How does effective duration differ from modified duration?

Accepted Answer

Effective duration and modified duration...

Question 8

Use the following bank information for questions 
 
-What is the bank's weighted average cost of liabilities?

Accepted Answer

A)  $24.9
B)  $34.5
C)  $80.0
D)  $94.3
E)  $102.1F) A) and E)
G) B) and C)

Question 9

Discuss why a bank may have to sacrifice yield to vary its duration gap.

Accepted Answer

A bank may have to sacrifice yield to va...

Question 10

Which of the following is false regarding duration gap analysis?

Accepted Answer

A)  Duration gap analysis does not classify assets as rate-sensitive.
B)  Duration gap analysis indicates the potential change in a bank's net interest income.
C)  Duration gap accounts for bank leverage.
D)  Duration gap accounts for the present value of cash flows associated with all liabilities.
E)  Duration gap analysis indicates the potential change in a bank's market value of equity.F) A) and B)
G) B) and C) B

Question 11

An asset that is rate-sensitive is generally not price sensitive.

Accepted Answer

A) True 
 B)False

Question 12

Duration gap analysis:

Accepted Answer

A)  applies he the concept of duration to the bank's entire balance sheet.
B)  applies he the concept of duration to the bank's entire income statement.
C)  applies he the concept of duration to the bank's retained earnings.
D)  indicates the difference in the GAP in the time it takes to collect on loan payments versus the time to attract deposits.
E)  estimates when embedded options will be exercised.F) A) and B)
G) B) and E)

Question 13

What are the weaknesses of using static GAP analysis versus duration gap analysis?

Accepted Answer

A)  Static GAP ignores the time value of money.
B)  Static GAP ignores the cumulative impact of interest rate changes on a bank's risk profile.
C)  Static GAP does not proscribe the treatment of demand deposits.
D)  All of the above are weaknesses of using static GAP analysis versus duration gap analysis.
E)  a.and b.F) A) and E)
G) A) and D)

Question 14

A 30-year zero coupon bond with a face value of $10,000 is currently selling for $2,313.77.Using the bond's modified duration, what is the approximate change in the price of the bond if interest rates rise by 15 basis points?

Accepted Answer

A)  -15.00%
B)  -4.29%
C)  -0.43%
D)  -0.15%
E)  Not enough information is given to answer the question.F) A) and D)
G) A) and E)

Question 15

Which of the following is true regarding duration gap analysis?

Accepted Answer

A)  The magnitude of the duration gap is related to the amount of interest rate risk a bank is subject to.
B)  Management can adjust the duration gap to speculate on future interest rate changes.
C)  A positive duration gap means a bank's market value of equity will decrease with an increase in interest rates.
D)  All of the above are true.
E)  a.and c.F) A) and C)
G) A) and B)

Question 16

EVE analysis: is essentially a _____________ analysis.

Accepted Answer

A)  profitability
B)  quality
C)  liquidity
D)  liquidation
E)  earningsF) A) and D)
G) D) and E)

Question 17

Use the following bank information for questions 
 
-What is the bank's duration gap?

Accepted Answer

A)  0.53
B)  0.73
C)  0.91
D)  2.03
E)  4.58F) A) and E)
G) C) and D)

Question 18

Use the following bank information for questions 
 
-If interest rates rise 1% for all assets and liabilities, what is the approximate expected change in the economic value of equity?

Accepted Answer

A)  -$2.56
B)  $5.84
C)  -$5.84
D)  $22.19
E)  -$22.19F) B) and D)
G) B) and C)

Question 19

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

Accepted Answer

A)  $14.75
B)  $32.25
C)  $44.00
D)  $76.25
E)  $120.25F) C) and D)
G) A) and E)

Question 20

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, assuming rates change by 1%?

Accepted Answer

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

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

If the yield curve is inverted, a portfolio manager can take advantage of this by:

Correct AnswerverifiedShow Answer

What does a bank's duration gap measure?

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

Correct AnswerverifiedC

To perfectly immunize a bank's economic value of equity from changes in interest rate risk, it should:

Correct AnswerverifiedC

For a bank that has a negative 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.

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A bond has a Macaulay's duration of 10.7 years.If rates fall from 7% to 6%, the bonds price will:

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How does effective duration differ from modified duration?

Correct AnswerAnswered by ExamLex AIEffective duration and modified duration...View AnswerShow Answer

Use the following bank information for questions -What is the bank's weighted average cost of liabilities?

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Discuss why a bank may have to sacrifice yield to vary its duration gap.

Correct AnswerAnswered by ExamLex AIA bank may have to sacrifice yield to va...View AnswerShow Answer

Which of the following is false regarding duration gap analysis?

Correct AnswerverifiedB

An asset that is rate-sensitive is generally not price sensitive.

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Duration gap analysis:

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What are the weaknesses of using static GAP analysis versus duration gap analysis?

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A 30-year zero coupon bond with a face value of $10,000 is currently selling for $2,313.77.Using the bond's modified duration, what is the approximate change in the price of the bond if interest rates rise by 15 basis points?

Correct AnswerverifiedShow Answer

Which of the following is true regarding duration gap analysis?

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EVE analysis: is essentially a _____________ analysis.

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Use the following bank information for questions -What is the bank's duration gap?

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Use the following bank information for questions -If interest rates rise 1% for all assets and liabilities, what is the approximate expected change in the economic value of equity?

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

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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, assuming rates change by 1%?

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C

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C

For a bank that has a negative 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.

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Answered by ExamLex AI
Effective duration and modified duration...
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A bank may have to sacrifice yield to va...
View Answer

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B

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