WorksheetsLecture 5 - Interest rate risk II
Total questions: 15
Worksheet time: 8mins
A banker says Macaulay duration is just the number of years until a bond matures. Which response best corrects this view?
It shows the bond’s final maturity date in calendar years
It shows the weighted average time to receive the bond’s cash flows
It shows the number of coupon payments left before maturity
It shows how much yield changes over one calendar year
Two bonds are identical except that one has a lower yield to maturity. Holding all else constant, which bond is likely to have the higher duration?
The bond with the higher yield, because discounting is stronger
The bond with the lower yield, because later cash flows carry more weight
Both bonds have the same duration, because maturity is unchanged
The answer depends only on whether coupons are paid annually
A bank holds a zero-coupon bond to maturity. Which statement best describes the duration of that bond?
It equals modified duration because no coupon is paid
It equals time to maturity because all cash flow comes at the end
It is shorter than maturity because discounting reduces timing risk
It depends mainly on how often interest would have been paid
Two 10-year bonds have the same yield to maturity. Bond X pays an 8% coupon and Bond Y pays a 6% coupon. Which conclusion is most appropriate?
Bond X has higher duration because it pays more cash over time
Bond Y has higher duration because more value comes later
Both have the same duration because they share the same maturity
Duration cannot be compared unless both bonds trade at par
A portfolio manager compares the same bond under two different yield environments. If yield to maturity rises while coupon and maturity stay unchanged, what usually happens to duration?
It rises because future cash flows become more rate sensitive
It stays unchanged because duration depends only on maturity
It falls because nearer cash flows receive relatively more weight
It moves closer to maturity because coupon effects disappear
A risk analyst wants a measure that links a small change in yield to an approximate percentage change in bond price. Which measure is most suitable?
Macaulay duration, because it measures average timing of cash flows
Modified duration, because it estimates price sensitivity to yield changes
Dollar duration, because it measures cash coupons over a holding period
Convexity, because it gives the exact price change for any rate move
A bank tracks the dollar duration of a bond position. If yields rise slightly, what is the most likely effect on that bond’s dollar duration?
It rises because the higher yield increases the bond’s market value
It falls because the bond price drops when yields move upward
It stays the same because duration measures are fixed at issuance
It turns negative because convexity changes the price-yield relationship
A bank uses both repricing gap analysis and duration analysis to assess interest rate risk. Which pairing best matches each tool to what it mainly measures?
Repricing gap focuses on short-run earnings, while duration focuses on value effects
Repricing gap focuses on long-run value, while duration focuses on annual earnings
Both tools mainly measure short-run earnings under rate shocks
Both tools mainly measure economic value under rate shocks
A bank’s asset duration is longer than its liability duration. If market interest rates rise, which outcome is most likely?
Economic value of equity rises because liabilities fall more than assets
Net interest income must rise immediately because assets reprice more slowly
Economic value of equity falls because assets lose more value than liabilities
Economic value of equity stays stable because both sides face the same shock
Why is dollar duration useful when a bank hedges interest rate risk with swaps or futures?
It converts interest rate risk into maturity terms for easier comparison
It removes the need to estimate bond prices before placing hedges
It replaces scenario analysis by giving a complete risk measure
It helps size the hedge by showing dollar sensitivity to yield changes
An analyst is valuing a bond with semiannual coupons using a duration formula originally presented in annual terms. What adjustment is normally required?
Keep the annual yield unchanged and double the coupon amount only
Double the yield per period and halve the number of payment periods
Halve the yield per period and double the number of payment periods
Leave both the yield and number of periods unchanged in the formula
Which bond is generally expected to show the greatest price volatility from a given change in interest rates?
A short-maturity bond with a high coupon rate
A long-maturity bond with a low coupon rate
A long-maturity bond with a high coupon rate
A short-maturity bond with a low coupon rate
A bank wants to manage interest rate risk using a duration-based governance framework. Which control is most consistent with that approach?
Set limits only on short-run earnings changes under rate shocks
Require every asset position to maintain a modified duration below one
Set a limit on the allowed EVE decline under a defined rate shock
Ban zero-coupon securities because they always create excessive risk
A bank has assets with a longer average maturity than its liabilities. Using the maturity model, what is the most likely effect of a rise in market interest rates?
Economic value of equity rises because assets benefit more than liabilities
Economic value of equity falls because assets lose more value than liabilities
Economic value of equity stays unchanged because only earnings are affected
Economic value of equity is unchanged because maturity does not affect value
Why can the maturity model give an incomplete picture of a bank’s true interest rate risk exposure?
It ignores leverage, so the same gap can matter differently across banks
It adjusts fully for leverage, which can hide important timing effects
It captures all cash flow timing, which can overstate valuation effects
It reflects full present value sensitivity for every asset and liability
