Final exam preparation questions. 1.

Immunizing the balance sheet to protect equity holders from the effects of interest rate risk occurs when 2. Immunization of a portfolio implies that changes in (book value of assets, maturity, market prices, interest rates, duration) will not affect the value of the portfolio. 3. When does "duration" become a less accurate predictor of expected change in security prices? 4. 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?. 5. 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. 6. An 18-month, 8 percent (semiannual) coupon Treasury note selling at par. What is the duration of this Treasury note? 7. The two-year Treasury notes are zero coupon assets. Interest payments on all other assets and liabilities occur at maturity. Assume 360 days in a year. Assets: Liabilities: $ 300 million 30-day Treasury bills $ 1,150 million 14-day repos $ 550 million 90-day Treasury bills $ 560 million 1-year commercial paper $ 700 million 2-year Treasury notes $ 20 million equity $ 180 million 180-day municipal notes What is the duration of the assets? 8. 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? 9. 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. 10. 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. 11. 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? 12. 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? 13. 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. 14. Calculating modified duration involves (Hint: look at the formula) 15. All of the following statements are true for fixed-rate bonds except (Hint: look at particularities of such type of binds). 16. The convexity adjustment what do regarding prices? 17. The portfolio of a bank that contains assets and liabilities that are relatively illiquid and held for longer holding periods 18. How can we define market risk in absolute terms? 19. Which benefit of market risk measurement (MRM) provides senior management with information on the risk exposure taken by FI traders? 20. Market risk measurement considers the return-risk ratio of traders, which may allow a more rational compensation system to be put in place. Thus MRM aids in

21. Using the MRM to identify the potential return per unit of risk in different areas by comparing returns to market risk in areas of trading so more capital and resources can be directed to these areas is considered to be which of the following? 22. A reason for the use of MRM for the purpose of identifying potential misallocations of resources caused by prudential regulation is which of the following? 23. The earnings at risk for an FI is a function of 24. In calculating the VAR of fixed-income securities, 25. Daily earnings at risk (DEAR) is calculated as 26. Price volatility is calculated as 27. Which of the following is a problem encountered while using more observations in the back simulation approach? 28. VAR is calculated as 29. Which of the following is not a characteristic of a loan commitment? 30. Which of the following observations is true of a spot loan? 31. From the perspective of an FI, which of the following is an advantage of a floating-rate loan? 32. Which of the following observations concerning floating-rate loans is not true? 33. This is true of commercial paper. 34. Which of the following is not characteristic of the real estate portfolio for most banks? 35. Revolving loans are credit lines 36. Which of the following factors affect the promised return an FI achieves on any loan? 37. Which of the following is not a qualitative factor in credit risk analysis? 38. Which of the following statements involving the promised return on a loan is not true? 39. Which of the following statements does not reflect credit decisions at the retail level? 40. Credit rationing 41. Which of the following statements does not reflect a borrower-specific factor often used in qualitative default risk models? 42. In making credit decisions, the following item is considered a market-specific factor. 43. What refers to the risk that the borrower is unable or unwilling to fulfill the terms promised under the loan contract? 44. Which of the following refers to restrictions in loan and bond agreements that encourage or forbid certain actions by the borrower? 45. Credit scoring models include all of the following broad types of models except 46. In making credit decisions, the following item is considered a market-specific factor. 47. Borrower reputation is important in assessing credit quality because 48. Which of the following loan applicant characteristics is not relevant in the credit approval decision? 49. This is true of the prime lending rate. 50. How can discriminant analysis be used to make credit decisions? 51. What is the most important factor determining bankruptcy, according to the Altman Z-score model? 52. What is the least important factor determining bankruptcy, according to the Altman Z-score model? 53. Confidence Bank has made a loan to Risky Corporation. The loan terms include a default riskfree borrowing rate of 8 percent, a risk premium of 3 percent, an origination fee of 0.1875 percent, and a 9 percent compensating balance requirement. Required reserves at the Fed are 6 percent. What is the expected or promised gross return on the loan? 54. Which of the following methods measure loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for unusual declines? 55. Migration analysis is a tool to measure credit concentration risk and refers to

56. What does KMVs Portfolio Manager Model use to identify the overall risk of the portfolio? 57. A weakness of migration analysis to evaluate credit concentration risk is that 58. Which of the following observations concerning concentration limits is not true? 59. Which of the following is not a source of foreign exchange risk? 60. The market in which foreign currency is traded for immediate delivery is the 61. The FI is acting as a FX market agent for its customers when it 62. A positive net exposure position implies that the FI is 63. A negative net exposure position implies that the FI is 64. The reasons nonbank FIs have less FX risk than major money center banks include 65. The FI is acting as a hedger when it 66. FX risk exposure of an FI essentially relates to this type of activity. 67. When purchasing and selling foreign currencies to allow customers to take positions in