• University of Saskatchewan

• COMM 469

Quiz 2

Posted Answers

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.

2. 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).

3. The duration of all floating rate debt instruments is A. equal to the time to maturity. B. less than the time to repricing of the instrument. C. time interval between the purchase of the security and its sale. D. equal to time to repricing of the instrument. E. infinity.

4. 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.

5. From the perspective of an FI, which of the following is an advantage of a floating-rate loan? A. Stable interest payments will be received throughout the loan period. B. The pre-specified interest rate remains in force over the loan contract period no matter what happens to market interest rates. C. The bank can request repayment of a loan at any time in the contract period. D. The default risk is completely eliminated. E. The interest rate risk is transferred to the borrower.