1. In most countries FIs report their balance sheet using market value accounting.
2. Marking –to-market accounting is a market value accounting method that reflects the purchase prices of
assets and liabilities.
3. 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.
4. Duration measures the average life of a financial asset.
5. The economic meaning of duration is the interest elasticity of a financial assets price.
6. 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.
7. 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.
8. Duration is the weighted-average present value of the cash flows using the timing of the cash flows as
weights.
9. 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.
10. Duration normally is less than the maturity for a fixed coupon asset.
11. Duration is equal to maturity when at least some of the cash flows are received upon maturity of the asset.
12. Duration of a fixed-rate coupon bond will always be greater than one-half of the maturity.
13. Duration is related to maturity in a linear manner through the interest rate of the asset.
14. Duration is related to maturity in a nonlinear manner through the current yield to maturity of the asset.
15. Duration of a zero coupon bond is equal to the bond’s maturity.
16. As interest rates rise, the duration of a consol bond decreases.
17. Duration increases with the maturity of a fixed-income asset at a decreasing rate.
18. For a given maturity fixed-income asset, duration decreases as the market yield increases.
19. For a given maturity fixed-income asset, duration increases as the promised interest payment declines.
20. Larger coupon payments on a fixed-income asset cause the present value weights of the cash flows to be
lower in the duration calculation.
21. 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.
22. 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.
23. 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.
24. Investing in a zero-coupon asset with a maturity equal to the desired investment horizon removes interest
rate risk from the investment management process.
25. Buying a fixed-rate asset whose duration is exactly equal to the desired investment horizon immunizes
against interest rate risk.
26. Deep discount bonds are semi-annual fixed-rate coupon bonds that sell at a market price that is less than par
value.
27. 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.
28. An FI can immunize its portfolio by matching the maturity of its asset with its liabilities.
29. The immunization of a portfolio against interest rate risk means that the portfolio will neither gain nor lose
value when interest rates change.
30. 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.
31. 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.
32. The duration of a portfolio of assets can be found by calculating the book value weighted average of the
durations of the individual assets.
33. 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.
34. 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.
35. The smaller the leverage adjusted duration gap, the more exposed the FI is to interest rate shocks.
36. The larger the interest rate shock, the smaller the interest rate risk exposure of an FI.
37. 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.
38. Immunization of an FIs net worth requires the duration of the liabilities to be adjusted for the amount of
leverage on the balance sheet.
39. The leverage adjusted duration of a typical depository institution is positive.
40. 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.
41. 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.
42. Immunizing the net worth ratio requires that the duration of the assets be set equal to the duration of the
liabilities.
43. The cost in terms of both time and money to restructure the balance sheet of large and complex FIs has
decreased over time.
44. Immunizing net worth from interest rate risk using duration matching requires that the duration match must
be realigned periodically as the maturity horizon approaches.
45. The rate of change in duration values is less than the rate of change in maturity.
46. As the investment horizon approaches, the duration of an unrebalanced portfolio that originally was
immunized will be less than the time remaining to the investment horizon.
47. The use of duration to predict changes in bond prices for given changes in interest rate changes will always
48. The fact that the capital gain effect for rate decreases is greater than the capital loss effect for rate increases
is caused by convexity in the yield-price relationship.
49. Convexity is a desirable effect to a portfolio manager because it is easy to measure and price.
50. All fixed-income assets exhibit convexity in their price-yield relationships.
51. The greater is convexity, the more insurance a portfolio manager has against interest rate increases and the
greater potential gain from rate decreases.
52. The error from using duration to estimate the new price of a fixed-income security will be less as the
amount of convexity increases.
53. Which of the following is indicated by high numerical value of the duration of an asset?
54. For small change in interest rates, market prices of bonds move in an inversely proportional manner
according to the size of the
55. Which of the following statements about leverage adjusted duration gap is true?
56. The larger the size of an FI, the larger the _________ from any given interest rate shock.
57. The duration of all floating rate debt instruments is
58. Managers can achieve the results of duration matching by using these to hedge interest rate risk.
59. Immunizing the balance sheet to protect equity holders from the effects of interest rate risk occurs when
60. The duration of a consol bond is
61. Immunization of a portfolio implies that changes in _____ will not affect the value of the portfolio.
62. When does “duration” become a less accurate predictor of expected change in security prices?
63. An FI has financial assets of $800 and equity of $50. If the duration of assets is 1.21 years and the duration
of all liabilities is 0.25 years, what is the leverage-adjusted duration gap?
64. 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.
65. Calculate the duration of a two-year corporate loan paying 6 percent interest annually, selling at par. The
$30,000,000 loan is 100 percent amortizing.
66. Calculate the modified duration of a two-year corporate loan paying 6 percent interest annually. The
$40,000,000 loan is 100 percent amortizing, and the current yield is 9 percent annually.
67. Which of the following statements is true?
68. An FI purchases a $9,982 million pool of commercial loans at par. The loans have an interest rate of 8
percent, a maturity of five years, and annual payments of principal and interest that will exactly amortize the
loan at maturity. What is the duration of this asset?
69. 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?
70. An FI purchases at par value a $100,000 Treasury bond paying 10 percent interest with a 7.5 year duration.
If interest rates rise by 4 percent, calculate the bond’s new value.
Recall that Treasury bonds pay interest semiannually. Use the duration valuation equation.
71. What is the duration of a two-year note selling at par and receiving 8 percent interest annually?
72. What is the duration of a 5-year par value zero coupon bond yielding 10 percent annually?
73. Calculating modified duration involves
74. What is the impact on the dealer’s market value of equity per $100 of assets if the relative change in all
interest rates is an increase of 0.5 percent [i.e., R/(1+R) = 0.5 percent]
75. What conclusions can you draw from the duration gap in your answer to the previous question?
76. What is the price of the bond if market interest rates are 7 percent?
77. What is the price of the bond if market interest rates are 5 percent?
78. What is the percentage price change for the bond if interest rates increase 50 basis points from the original 6
percent?
79. What is the price of the bond if market interest rates are 4 percent?
80. What is the price of the bond if market interest rates are 6 percent?
81. What is the percentage price change for the bond if interest rates decline 50 basis points
from the original 5 percent?
82. What is the duration of the commercial loans?
83. What is the FI’s leverage-adjusted duration gap?
84. What is the FI’s interest rate risk exposure?
85. If rates do not change, the balance sheet position that maximizes the FI‘s returns is
86. What is the interest rate risk exposure of the optimal transaction in the previous question over the next 2
years?
87. What is the duration of the two-year loan (per $100 face value) if it is selling at par?
88. If the FI finances a $500,000 2-year loan with a $400,000 1-year CD and equity, what is the leveraged
adjusted duration gap of this position? Use your answer to the previous question.
89. Use the duration model to approximate the change in the market value (per $100 face value) of two-year
loans if interest rates increase by 100 basis points.
90. What is the duration of this Treasury note?
91. If interest rates increase by 20 basis points (i.e., R = 20 basis points), use the duration approximation to
determine the approximate price change.