How to calculate cumulative repricing gap

FIN Assessment & Liabilities

True / False Questions
1 Because the economies of the U.S. and other overseas countries have become more integrated, the risks of financial intermediation have decreased.
TRUE FALSE
2 Interest rate risk stems from the impact of both anticipated and unanticipated changes in interest rates on FI profitability.
TRUE FALSE
3 An FI is short-funded when the maturity of its liabilities is less than the maturity of its assets.
TRUE FALSE
4 An FI is exposed to reinvestment risk by holding longer-term assets relative to liabilities.
TRUE FALSE
5 An FI that is short-funded faces the risk that the return of reinvesting assets could exceed the cost of funding those assets.
TRUE FALSE
6 Exactly matching the maturities of assets and liabilities will provide a perfect hedge against interest rate risk for an FI.
TRUE FALSE
7 Matching the maturities of assets and liabilities supports the asset transformation function of FIs.
TRUE FALSE
8 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.
TRUE FALSE
9 A positive repricing gap implies that a decrease in interest rates will cause interest expense to decrease more than the decrease in interest income.
TRUE FALSE
10 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.
TRUE FALSE
11 When a bank's repricing gap is positive, net interest income is positively related to changes in interest rates.
TRUE FALSE
12 A bank with a negative repricing (or funding) gap faces reinvestment risk.
TRUE FALSE
13 A bank with a negative repricing (or funding) gap faces refinancing risk.
TRUE FALSE
14 One reason to include demand deposits when estimating a bank's repricing gap is because rising interest rates could lead to high withdrawals.
TRUE FALSE
15 Duration normally is less than the maturity for a fixed coupon asset.
TRUE FALSE
16 Duration is equal to maturity when at least some of the cash flows are received upon maturity of the asset.
TRUE FALSE
17 Duration of a fixed-rate coupon bond will always be greater than one-half of the maturity.
TRUE FALSE
18 Duration is related to maturity in a linear manner through the interest rate of the asset.
TRUE FALSE
19 Duration is related to maturity in a nonlinear manner through the current yield to maturity of the asset.
TRUE FALSE
20 Duration of a zero coupon bond is equal to the bond's maturity.
TRUE FALSE
21 Immunization of a portfolio implies that changes in _____ will not affect the value of the portfolio.
A. book value of assets
B. maturity
C. market prices
D. interest rates
E. duration
22 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?
A. 0.9000 years.
B. 0.9600 years.
C. 0.9756 years.
D. 0.8844 years.
E. Cannot be determined.
23 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.
A. 2 years.
B. 1.91 years.
C. 1.94 years.
D. 1.49 years.
E. 1.75 years.
24 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?
A. $23.10.
B. $976.90.
C. $977.23.
D. $1,023.10.
E. -$23.10.
25 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.
26 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?
A. 4.12 years.
B. 3.07 years.
C. 2.50 years.
D. 2.85 years.
E. 5.00 years.
27 What is the duration of a 5-year par value zero coupon bond yielding 10 percent annually?
A. 0.50 years.
B. 2.00 years.
C. 4.40 years.
D. 5.00 years.
E. 4.05 years.
28 Calculating modified duration involves
A. dividing the value of duration by the change in the market interest rate.
B. dividing the value of duration by 1 plus the interest rate.
C. dividing the value of duration by discounted change in interest rates.
D. multiplying the value of duration by discounted change in interest rates.
E. dividing the value of duration by the curvature effect.
For questions 29 - 31, consider a one-year maturity, $100,000 face value bond that pays a 6 percent fixed coupon annually.
29 What is the price of the bond if market interest rates are 7 percent?
A. $99,050.15.
B. $99,457.94.
C. $99,249.62.
D. $100,000.00.
E. $99,065.42.
30 What is the price of the bond if market interest rates are 5 percent?
A. $100,952.38.
B. $101,238.10.
C. $100,963.71.
D. $100,000.00.
E. $101,108.27.
31 What is the percentage price change for the bond if interest rates increase 50 basis points from the original 6 percent?
A. -0.1033 percent.
B. -0.4766 percent.
C. -0.4695 percent.
D. 0.0000 percent.
E. -0.2907 percent.
For questions 32 - 34, consider a six-year maturity, $100,000 face value bond that pays a 5 percent fixed coupon annually.
32 What is the price of the bond if market interest rates are 4 percent?
A. $105,816.44.
B. $105,287.67.
C. $105,242.14.
D. $100,000.00.
E. $106,290.56.
33 What is the price of the bond if market interest rates are 6 percent?
A. $95,082.68.
B. $95,769.55.
C. $95,023.00.
D. $100,000.00.
E. $96,557.87.
34 What is the percentage price change for the bond if interest rates decline 50 basis points
from the original 5 percent?
A. -2.106 percent.
B. +2.579 percent.
C. +0.000 percent.
D. +3.739 percent.
E. +2.444 percent.
For questions 35 - 37, consider a five-year, 8 percent annual coupon bond selling at par of $1,000.
35 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.
36 If interest rates increase by 20 basis points, what is the approximate change in the market price using the duration approximation?
A. -$7.98.
B. -$7.94.
C. -$3.99.
D. +$3.99.
E. +$7.94.
37 Using present value bond valuation techniques, calculate the exact price of the bond after the interest rate increase of 20 basis points.
A. $1,007.94.
B. $992.02.
C. $992.06.
D. $996.01.
E. $1003.99.
For questions 38 - 41, a bond is scheduled to mature in five years. Its coupon rate is 9 percent with interest paid annually. This $1,000 par value bond carries a yield to maturity of 10 percent.
38 What is the bond's price?
A. $962.09.
B. $961.39.
C. $1,000.
D. $1,038.90.
E. $995.05.
39 What is the duration of the bond?
A. 4.677 years.
B. 5.000 years.
C. 4.674 years.
D. 4.328 years.
E. 4.223 years.
40 Calculate the percentage change in this bond's price if interest rates on comparable risk securities decline to 7 percent. Use the duration valuation equation.
A. +8.58 percent.
B. +12.76 percent.
C. -12.75 percent.
D. +11.80 percent.
E. +11.52 percent.
41 Calculate the percentage change in this bond's price if interest rates on comparable risk securities increase to 11 percent. Use the duration valuation equation.
A. +4.25 percent.
B. -4.25 percent.
C. +8.58 percent.
D. -3.93 percent.
E. -3.84 percent.
For questions 42 - 45, consider the information below:
42 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.
43 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.
44 Calculate the leverage-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.
E. -1.32 years; exposed to interest rate decreases.
45 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. +$4.378 million.
D. +$2.550 million.
E. +$0.022 million.
46 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.
47 Managers can achieve the results of duration matching by using these to hedge interest rate risk.
A. Rate sensitive assets.
B. Rate sensitive liabilities.
C. Coupon bonds.
D. Consol bonds.
E. Derivatives.
48 Immunizing the balance sheet to protect equity holders from the effects of interest rate risk occurs when
A. the maturity gap is zero.
B. the repricing gap is zero.
C. the duration gap is zero.
D. the effect of a change in the level of interest rates on the value of the assets of the FI is exactly offset by the effect of the same change in interest rates on the liabilities of the FI.
E. after-the-fact analysis demonstrates that immunization coincidentally occurred.
49 The duration of a consol bond is
A. less than its maturity.
B. infinity.
C. 30 years.
D. more than its maturity.
E. given by the formula D=1/1-R.
50 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.
Sheet2