QUESTION 4Why does immunization against interest rate shocks using duration for fixed-income securities work?  A.It doesn’t work because perfect immunization is impossible to accomplish.B.Because the gains or losses on reinvested cash flows that result from an interest rate change are exactly offset by losses or gains from the security when it is sold.C.Because interest rate changes are relatively predictable.D.Because the fixed-income security gravitates toward its maturity value as it approaches its maximum duration.E.Because cash flows that result from the security are not reinvested so they are not affected by interest rate changes in the same way as the security’s gain or loss when it is sold.

Which of the following statements is TRUE?A.Duration is the weighted-average time to maturity on the loan using the present values of the cash flows as weights.B.An FI can immunize its portfolio by matching the maturity of its asset with its liabilities. C.The smaller the leverage-adjusted duration gap, the more exposed the FI is to interest rate shocks. D.The larger the numerical value of duration, the more sensitive is the price of that asset or liability to changes or shocks in interest rates.E.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.

Which of the following statements is TRUE with regard to the following statement: Immunizing the balance sheet to protect equity holders from the effects of interest rate risk occurs when A.When the modified duration is equal to the dollar duration.B.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.C.the maturity gap is zero, so that all assets have a matching-maturity liability.D.the modified duration gap of the balance sheet is zero.E.the repricing gap is zero, so that all assets have a matching liability that reprices at the same time.

Which of the following statements is FALSE?A.For a given maturity fixed-income asset, duration decreases as the market yield increases. B.Duration of a zero coupon bond is equal to the bond's maturity. C.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. D.The economic meaning of duration is the interest elasticity of a financial asset’s price. E.Duration increases with the maturity of a fixed-income asset at a decreasing rate.

Which of the following statements is FALSE?A.The economic meaning of duration is the interest elasticity of a financial asset’s price. B.Duration of a zero coupon bond is equal to the bond's maturity. C.Duration increases with the maturity of a fixed-income asset at a decreasing rate. D.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. E.For a given maturity fixed-income asset, duration decreases as the market yield increases.

For a bank with a positive duration gap, an increase in interest rates will:Question 2Answerto.increase the likelihood of insolvency.b.does not affect the likelihood of insolvencyc.decrease the likelihood of insolvency.d.result in increased loan trading