FIN FINAL EXAM

EVE analysis is essentially a _____ analysis

• profitability

• quality

• liquidity

• liquidation

• earnings

Which of the following allows a security's cash flows to change when interest rates change?

• Modified Duration

• Macaulay's Duration

• Effective Duration

• Balance Sheet Duration

• Income Statement Duration

The steps to conducting a Duration GAP are:

1. 1. Estimate the market values of bank assets and liabilities

2. 2. Estimate the weighted average duration of assets and the weighted duration of liabilities

3. 3. Forecast interest rates

4. 4. Forecast changes in EVE across different interest rate environments

• 1) Forecast Interest Rates

• 2) Forecast Interest Rates

• 3) Forecast changes in EVE across different interest rate environments

• 4) Forecast changes in EVE across different interest rate environments

Which of the following is false regarding duration gap analysis?

• Duration gap analysis does not classify assets as rate-sensitive

• Duration gap analysis indicates the potential change in a bank's net interest income

• Duration gap accounts for bank leverage

• Duration gap accounts for the present value of cash flows associated with all liabilities

• Duration gap analysis indicates the potential change in a bank's market value of equity

A bank has calculated their duration GAP to be -1.77 as interest rates decrease what would you expect to happen?

• The market value of their assets will decrease. The market value of their liabilities will also decrease, but less than their assets. And therefore the economic value of their equity should also decrease.

• The market value of their assets will increase. The market value of their liabilities will also increase, but not as much as their assets. And therefore the economic value of their equity should also increase.

• The market value of their assets will increase. The market value of their liabilities will also decrease, and will decrease more than that of their assets. And therefore the economic value of their equity will increase.

• The market value of their assets will increase. The market value of their liabilities will also increase, and will increase more than their assets. And therefore the economic value of their equity will decrease.

Which of the following is NOT a way to shorten asset duration?

• Buy short-term securities and sell long-term securities

• Buy securities without call options

• Sell zero coupon bonds and buy semi-annual coupon bonds of the same maturity

Which of the following is NOT a weakness of duration gap analysis?

• It is difficult to accurately compute duration

• Each future cash flow must be discounted by the appropriate future interest rate

• It is difficult to estimate the duration on zero coupon bonds

Macaulay's duration:

• is a weighted average of the time until cash flows are received.

• is always greater than maturity.

• is never equal to maturity.

• directly indicates how much the price of a security will change given a change in interest rates.

• estimates when embedded options will be used.

Which of the following is likely to have a negative effective duration?

• A high coupon, interest only mortgage-backed security that is pre-paying at a high rate.

• A low coupon U.S. Treasury bond.

• Fed Funds purchased.

• Demand deposits

Which of the following will not affect a bank's duration estimate for the year?

• Prepayments on loans that exceed expectations.

• A 20-year corporate bond that is unexpectedly called in 6 months.

• Certificates of deposit that are withdrawn early.

• Holding a 30-year Treasury bond until maturity.

• Holding a 2 year zero coupon bond until maturity.