Q&A Hero

Q: The rate of change in duration values is less than the rate of change in maturity.

Q: Immunizing net worth from interest rate risk using duration matching requires that the duration match must be realigned periodically as the maturity horizon approaches.

Q: The cost in terms of both time and money to restructure the balance sheet of large and complex FIs has decreased over time.

Q: Immunizing the net worth ratio requires that the duration of the assets be set equal to the duration of the liabilities.

Q: Attempts to satisfy the objectives of shareholders and regulators requires the bank to use the same duration match in the protection of net worth from interest rate risk.

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

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

Q: Immunization of an FIs net worth requires the duration of the liabilities to be adjusted for the amount of leverage on the balance sheet.

Q: Setting the duration of the assets higher than the duration of the liabilities will exactly immunize the net worth of an FI from interest rate shocks.

Q: The larger the interest rate shock, the smaller the interest rate risk exposure of an FI.

Q: The smaller the leverage adjusted duration gap, the more exposed the FI is to interest rate shocks.

Q: Immunizing the balance sheet of an FI against interest rate risk requires that the leverage adjusted duration gap (DA-kDL) should be set to zero.

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

Q: The duration of a portfolio of assets can be found by calculating the book value weighted average of the durations of the individual assets.

Q: Matching the maturities of assets and liabilities is not a perfect method of immunizing the balance sheet because the timing of the cash flows is likely to differ between the assets and liabilities.

Q: Perfect matching of the maturities of the assets and liabilities will always achieve perfect immunization for the equity holders of an FI against interest rate risk.

Q: The immunization of a portfolio against interest rate risk means that the portfolio will neither gain nor lose value when interest rates change.

Q: An FI can immunize its portfolio by matching the maturity of its asset with its liabilities.

Q: Using a fixed-rate bond to immunize a desired investment horizon means that the reinvested coupon payments are not affected by changes in market interest rates.

Q: Deep discount bonds are semi-annual fixed-rate coupon bonds that sell at a market price that is less than par value.

Q: Buying a fixed-rate asset whose duration is exactly equal to the desired investment horizon immunizes against interest rate risk.

Q: Investing in a zero-coupon asset with a maturity equal to the desired investment horizon removes interest rate risk from the investment management process.

Q: Investing in a zero-coupon asset with a maturity equal to the desired investment horizon is one method of immunizing against changes in interest rates.

Q: For a given change in required yields, short-duration securities suffer a smaller capital loss or receive a smaller capital gain than do long-duration securities.

Q: The value for duration describes the percentage increase in the price of an asset for a given increase in the required yield or interest rate.

Q: Larger coupon payments on a fixed-income asset cause the present value weights of the cash flows to be lower in the duration calculation.

Q: For a given maturity fixed-income asset, duration increases as the promised interest payment declines.

Q: For a given maturity fixed-income asset, duration decreases as the market yield increases.

Q: Duration increases with the maturity of a fixed-income asset at a decreasing rate.

Q: As interest rates rise, the duration of a consol bond decreases.

Q: Duration of a zero coupon bond is equal to the bond's maturity.

Q: Duration is related to maturity in a nonlinear manner through the current yield to maturity of the asset.

Q: Duration is related to maturity in a linear manner through the interest rate of the asset.

Q: Duration of a fixed-rate coupon bond will always be greater than one-half of the maturity.

Q: Duration is equal to maturity when at least some of the cash flows are received upon maturity of the asset.

Q: Duration normally is less than the maturity for a fixed income asset.

Q: 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.

Q: Duration is the weighted-average present value of the cash flows using the timing of the cash flows as weights.

Q: A key assumption of Macaulay duration is that the yield curve is flat so that all cash flows are discounted at the same discount rate.

Q: Duration considers the timing of all the cash flows of an asset by summing the product of the cash flows and the time of occurrence.

Q: The economic meaning of duration is the interest elasticity of a financial assets price.

Q: Duration measures the average life of a financial asset.

Q: The difference between the changes in the market value of the assets and market value of liabilities for a given change in interest rates is, by definition, the change in the FI's net worth.

Q: Marking-to-market accounting is a market value accounting method that reflects the purchase prices of assets and liabilities.

Q: In most countries FIs report their balance sheet using market value accounting.

Q:

Q: If all interest rates decline 90 basis points (ΔR/(1 + R) = -90 basis points), what is the change in the market value of equity? A. -$4.4300 millionB. +$3.9255 millionC. +$4.3875 millionD. +$2.5506 millionE. +$0.0227 million

Q: For a given change in interest rates, fixed-rate liabilities with longer-term maturities will have smaller changes in price than liabilities with shorter maturities.

Q: The change in economic value of a fixed-rate liability for a decrease in interest rates is considered to be good news.

Q: The market value of a fixed-rate liability will increase as interest rates rise, although the market value of a fixed-rate asset will decrease as interest rates rise.

Q: The market value of a fixed-rate liability will decrease as interest rates rise, just as the market value of a fixed-rate asset will decrease as interest rates rise.

Q: For a given change in interest rates, fixed-rate assets with long-term maturities will have smaller changes in price than assets with shorter maturities.

Q: When interest rates increase, banks are more likely to be forced to increase rate-sensitive liabilities to replace decreased balances in demand deposits and savings accounts.

Q: To be more precise in measuring interest rate risk, the runoff component of long-term mortgages should be considered in the time buckets in which the maturities actually occur.

Q: In general, the interest rate spread (spread effect) between rate sensitive assets and rate sensitive liabilities is positively related to the change in net interest income.

Q: If the interest rate spread between rate sensitive assets and rate sensitive liabilities increases for a bank, future increases in interest rates will lead to an increase in net interest income.

Q: Defining buckets of time over wider intervals creates greater accuracy in the use of the repricing model because fewer calculations are required.

Q: Defining buckets of time over a range of maturities assures the capture of all relevant information necessary to accurately assess the interest rate risk exposure of an FI.

Q: Because the repricing model ignores the market value effect of changing interest rates, the repricing gap is an incomplete measure of the true interest rate risk exposure of an FI.

Q: The gap ratio is useful because it indicates the scale of the interest rate exposure by dividing the gap by the asset size of the institution.

Q: Runoff in demand deposits in a repricing model is typically lower during periods of falling interest rates.

Q: Retail passbook savings accounts should be considered as part of rate sensitive liabilities because the rates on these accounts rarely change.

Q: One reason to exclude demand deposits when estimating a bank's repricing gap is because, by regulation, explicit interest cannot be paid on these deposits.

Q: One reason to include demand deposits when estimating a bank's repricing gap is because rising interest rates could lead to high withdrawals.

Q: A bank with a negative repricing (or funding) gap faces refinancing risk.

Q: A bank with a negative repricing (or funding) gap faces reinvestment risk.

Q: When a bank's repricing gap is positive, net interest income is positively related to changes in interest rates.

Q: The cumulative repricing gap position of an FI for a given extended time period is the sum of the repricing gap values for the individual time periods that make up the extended time period.

Q: A positive repricing gap implies that a decrease in interest rates will cause interest expense to decrease more than the decrease in interest income.

Q: The repricing model is a simplistic approach to focusing on the exposure of net interest income to changes in market levels of interest rates for given maturity periods.

Q: In the repricing gap model, assets or liabilities are rate sensitive within a given time period if the dollar values of each are subject to receiving a different interest rate should market rates change.

Q: The maturity gap model estimates the difference between interest earned and interest paid during a given period of time.

Q: The repricing gap model is a book value accounting based model.

Q: The Bank for International Settlements (BIS) requires depository institutions to have interest rate risk management systems.

Q: Because the increased level of financial market integration has increased the speed with which interest rate changes are transmitted among countries, control of U.S. interest rates by the Federal Reserve is more difficult and less certain.

Q: When the Fed finds it necessary to slow economic activity, it allows interest rates to fall.

Q: Because of its complexity, small depository institutions rarely use the repricing, or funding gap, model.

Q: The economic insolvency of many thrift institutions during the 1980s was due, at least in part, to unexpected increases in interest rates.

Q: Which theory of term structure argues that individual investors have specific maturity preferences? A. The unbiased expectations theory. B. The liquidity premium theory. C. The loanable funds theory. D. The market segmentation theory. E. None of the above.

Q: Which theory of term structure states that long-term rates are equal to the geometric average of current and expected short-term rates plus a risk premium that increases with the maturity of the security? A. The unbiased expectations theory. B. The liquidity premium theory. C. The loanable funds theory. D. The market segmentation theory. E. None of the above.