FIN INTERMEDIARIES quiz notes
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QUIZ 8
EVE analysis: is essentially a _____________ analysis.
liquidation
Duration gap analysis:
Correct!
applies he the concept of duration to the bank’s entire balance sheet.
A bond has a Macaulay's duration of 7.1 years. If interest rates change from 9.04% to 7.81%, what should the percent change be in the bond price? Since
I have not specified the actual term, interest rates, or anything else, please use the
modified duration formula
to approximate the answer.
Please respond without
the percent sign.
If you calculate that the price will
increase by 13.45%, then enter
13.45
without the % sign.
And make
sure the sign is correct (positive or negative matter).
Correct!
Correct Answer
-8.01
A bond has a Macaulay's duration of 3.5 years. If interest rates change from 11.11% to 6.82%, what should the percent change be in the bond price? Since I have not specified the actual term, interest rates, or anything else, please use the
modified duration formula
to approximate the answer.
Please respond
without
the percent sign.
If you calculate that the price will increase by 13.45%, then enter
13.45
without the % sign.
And make sure the sign is correct (positive or negative matter).
You Answered
Correct Answer
-13.51
Assume we have a 10 year 8.88% coupon bond selling for $1,000 and callable at par with semi-annual compounding. What would be the
effective
duration
if the interest rates could change by 50 basis points (annually)?
Please enter your answer to the nearest hundredth
(in other words if you calculate a duration of 1.23456 years, you must enter at least 1.23).
You Answered
Correct Answer
6.4
margin of error
+/-
0.05
Assume we have a 13 year 11.10% coupon bond selling for $1,000 and callable at par with semi-annual compounding. What would be the
effective
duration
if the interest rates could change by 50 basis points (annually)?
Please enter your answer to the nearest hundredth
(in other words if you calculate a duration of 1.23456 years, you must enter at least 1.23).
You Answered
Correct Answer
6.63
Which of the following allows a security's cash flows to change when interest rates change?
Effective duration
The steps to conducting a
Duration GAP
are:
1.
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.
Answer 1:
Forecast interest rates.
Answer 2:
Forecast interest rates.
Answer 3:
Forecast changes in EVE across different interest rate environments.
Answer 4:
Forecast changes in EVE across different interest rate environments.
Which of the following is
false
regarding duration gap analysis?
Duration gap analysis indicates the potential change in a bank's net interest income.
A bank has the following balance sheet:
ASSETS
Market Value
Yield
Duration
LIAB. & EQUITY
Market Value
Yield
Duration
Cash
85
1-yr Time deposit
565
3.4%
0.9
3-yr Commercial loan
733
11.0%
1.6
3-yr CD
202
3.2%
2.6
6-yr Treasury bond
191
4.2%
3.8
Equity
???
????
????
What is the
weighted average duration of assets
?
Correct Answer
1.9
A bank has the following balance sheet:
ASSETS
Market Value
Yield
Duration
LIAB. & EQUITY
Market Value
Yield
Duration
Cash
120
1-yr Time deposit
10
4.7%
0.6
3-yr Commercial loan
714
11.4%
1.8
3-yr CD
5
6.9%
2.7
6-yr Treasury bond
238
8.7%
4.3
Equity
???
????
????
What is the
weighted average duration of liabilities
? Please
answer to the nearest hundredth
(if you calculate 1.23456, then you must answer at least to the
1.23
level).
Correct!
Correct Answer
1.3
A bank has the following balance sheet:
ASSETS
Market Value
Yield
Duration
LIAB. & EQUITY
Market Value
Yield
Duration
Cash
111
1-yr Time deposit
502
5.0%
0.6
3-yr Commercial loan
744
8.1%
2.4
3-yr CD
179
7.0%
3.0
6-yr Treasury bond
238
6.5%
4.6
Equity
???
????
????
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What is the bank's
duration gap
? Please
answer to the nearest hundredth
(if you calculate 1.23456, then you must answer at least to the
1.23
level).
Correct!
Correct Answer
1.87
A bank has the following balance sheet:
ASSETS
Market Value
Yield
Duration
LIAB. & EQUITY
Market Value
Yield
Duration
Cash
107
1-yr Time deposit
580
3.2%
0.6
3-yr Commercial loan
611
11.5%
2.5
3-yr CD
209
6.0%
2.9
6-yr Treasury bond
176
4.4%
4.3
Equity
???
????
????
What is the
weighted average duration of assets
?
Correct!
Correct Answer
2.6
A bank has the following balance sheet:
ASSETS
Market Value
Yield
Duration
LIAB. & EQUITY
Market Value
Yield
Duration
Cash
85
1-yr Time deposit
3
3.6%
0.9
3-yr Commercial loan
649
9.8%
1.6
3-yr CD
5
4.9%
2.8
6-yr Treasury bond
204
6.9%
5.5
Equity
???
????
????
What is the
weighted average duration of liabilities
? Please
answer to the nearest hundredth
(if you calculate 1.23456, then you must answer at least to the
1.23
level).
Correct!
Correct Answer
2.09
A bank has the following balance sheet:
ASSETS
Market Value
Yield
Duration
LIAB. & EQUITY
Market Value
Yield
Duration
Cash
98
1-yr Time deposit
581
3.3%
0.6
3-yr Commercial loan
789
10.9%
1.8
3-yr CD
173
4.6%
2.8
6-yr Treasury bond
246
6.6%
5.8
Equity
???
????
????
What is the bank's
expected economic net interest income
? Please
answer to the nearest hundredth
(if you calculate 1.23456, then you must answer at least to the
1.23
level).
You Answered
Correct Answer
75.11
If a bank has calculated their duration GAP to be 2.59, as interest rates decrease what would you expect to happen?
The market value of their assets will increase. The market value of their liabilitieis will also increase, but not as much as their assets. And therefore, the economic value of their equity will increase.
If a bank has calculated their duration GAP to be -1.77, as interest rates increase what would you expect to happen?
The market value of their assets will decrease. 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.
Which of the following will
not
affect a bank’s duration estimate for the year?
Holding a 2 year zero coupon bond until maturity.
If the yield curve is inverted, a portfolio manager can take advantage of this by:
buying more long-term securities.
To perfectly immunize a bank’s economic value of equity from changes in interest rate risk, it should:
adjust assets and liabilities such that its duration gap is equal to zero.
Which of the following is NOT a weakness of duration gap analysis?
It is difficult to estimate the duration on zero coupon bonds.
Chapter 6 quiz You are an art investor. You just purchased a painting from a famous artist. You paid $9,780,859 for that painting. The collector from which you bought the painting claims to have held the painting for 23 years. She claims she earned a return of 33.90% per year.
What did she pay for the painting 23 years ago?
Please enter your response to the nearest penny.
Correct!
Correct Answer
11,869.26
Chapter 10
___________ includes federal funds purchased, repurchase agreements and Federal Home Loan Bank borrowings.
Correct!
Borrowed funding
All of the following are considered transaction accounts
except
:
negotiable orders of withdrawal.
On-us checks
cashed
are:
checks drawn on a bank's own customer's account.
High interest rates in the late 1990’s on large CDs lead to the introduction of:
callable CDs.
A bank estimates that their average balance on demand deposit accounts is $1,624, net of float. Each account costs the bank $179 per year in processing
costs. The bank collects an average of $8.33 per month on each account in service charges. Assume reserve requirements are 10%. What is the net cost of an average demand deposit?
Correct!
Correct Answer
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11.68
In regards to repurchase agreements, the margin is:
the difference between the market value of the collateral and the amount of the loan.
A primary difference between "intelligent" smart cards and "memory" smart cards is that:
memory cards can only store information.
___________ includes transaction accounts, MMDAs, savings accounts and small time deposits.
Retail funding
Which of the following would
not
be considered "hot money"?
Retail demand deposits
Which of the following is true regarding money market deposit accounts (MMDAs)?
A maximum of three checks per month may be written on a MMDA account.
Overdraft fees:
represent a risk charge.
Large depositors [
check all that apply
]:
often get free checking.
receive more personalized service.
receive the highest interest rates.
CDs sold at a steep discount from par and appreciate to face value at maturity are known as:
zero coupon CDs.
A bank estimates that their average balance on demand deposit accounts is $1,823, net of float. Each account costs the bank $146 per year in processing costs. The bank collects an average of
$5.29 per month on each account in service charges. Assume reserve requirements are 10%. What is the net cost of an average demand deposit?
ered
8.58
A brokered deposit would most likely take which of the following forms?
Jumbo CDs
Federal funds:
can only be traded by banks.
Which of the following is primarily used as collateral for borrowings from the Federal Home Loan Bank Board?
Real estate loans
Liquidity risk is a function of many factors. Which of the following is NOT one of those factors?
Funding sources.
Given the marginal cost estimates associated with obtaining additional interest-checking account funding in the table below,
what is the estimated marginal cost of obtaining additional interest-checking balances?
[
Please respond in percent without the "%" sign at the end - e.g. if the answer is 12.35%, just respond with 12.35.
]
Market interest rate
2.00%
Servicing costs (as % of balance)
1.88%
Acquisition costs (as % of balance)
0.43%
Deposit insurance costs (as % of balance)
0.22%
Net investable balance
84.45%
Correct!
Correct Answer
5.36
Question 12
0
/ 9
pts
Given the marginal cost estimates associated with obtaining additional interest-checking account funding in the table below,
what is the estimated marginal cost of obtaining additional interest-checking balances?
[
Please respond in percent without the "%" sign at the end - e.g. if the answer is 12.35%, just respond with 12.35.
]
Market interest rate
2.32%
Servicing costs (as % of balance)
2.12%
Acquisition costs (as % of balance)
0.78%
Deposit insurance costs (as % of balance)
0.34%
Required reserves
10.00%
Float
5.39%
You Answered
Correct Answer
6.57
All of the following are true about Federal Home Loan Bank (FHLB) advances except:
Because the FHLB is a government agency, FHLB advances are available to all banks that pay taxes. Liability management decisions determines all ________ following except:
Loan rates
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Related Questions
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Complete the missing information in the table below. Assume that all bonds pay interest semiannually.
Do not use negative signs with answer.
Round percentages to one decimal place (ex. 0.0345 = 3.5%).
Round all other values to the nearest whole number.
Annual
Yield
Years to
Coupon
Issue
Maturity
Rate
Face value
Proceeds
Firm 1
8.00%
15
7.00%
$500,000 $
Firm 2
3.00%
10
0.00% $
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Firm 4
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H5.
Show proper step by step calculation
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What is the Macaulay duration of a bond with a coupon of 5.4 percent, nine years to maturity, and a current price of $1,055.40? What is
the modified duration?
Note: Do not round intermediate calculations. Round your answers to 3 decimal places.
Answer is complete but not entirely correct.
Macaulay
Modified
Duration
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Bha
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Suppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is $1,000.
Maturity (Years)
1
2
3
4
5
Show Transcribed Text
B) How could you construct a 1-year forward loan beginning in year 3? (Face Value)
C) How could you construct a 1-year forward loan beginning in year 4? (Face Value)
Required A Required B
Complete this question by entering your answers in the tabs below.
Face value
Rate of synthetic loan
→ Show Transcribed Text
Price
$ 970.93
898.39
836.92
How could you construct a 1-year forward loan beginning in year 3?
Note: Round your Rate of synthetic loan answer to 2 decimal places.
Required A
776.20
685.42
Required B
Face value
Rate of synthetic loan
Required C
7.85 %
Required C
How could you construct a 1-year forward loan beginning in year 4?
Note: Round your Rate of synthetic loan answer to 2 decimal places.
Ċ
13.29 %
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The prices of zero-coupon bonds with various maturities are given:
maturity in years
price
1
975.66
2
885.89
3
821.92
4
759.20
5
670.20
A) How could you construct a 1-year forward loan beginning in year 3?
face value = ?
rate of synthetic loan = ?
B) How could you construct a 1-year forward loan beginning in year 4?
face value = ?
rate of synthetic loan = ?
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Question 5
Suppose that discount bond prices are as follows:
see picture
a. A customer of your bank wants a forward contract to borrow $20M in three years from now for one year. What would be your quote to the customer?
b. How would you confirm the rate?
c. If customer accepts your offer, how would you lock-in the cash flows. Is there an arbitrage opportunity available? Show the entire cashflows chart.
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ff2
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Only Part A
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a. Using the bond pricing formula, calculate the price of the bond and duration.
ABC
b. Calculate the convexity of the bond.
c. Using the calculations from above, what is the "approximated bond price change"
using duration and convexity, if the interest rate increases by 1%?
d. What is the actual change in the bond price if the interest rate increases by 1%?
e. Based on c) and d) above, discuss the roles of duration and convexity in estimating
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Related Questions
- Yu.4arrow_forwardApplying Time Value of Money Concepts Complete the missing information in the table below. Assume that all bonds pay interest semiannually. Do not use negative signs with answer. Round percentages to one decimal place (ex. 0.0345 = 3.5%). Round all other values to the nearest whole number. Annual Yield Years to Coupon Issue Maturity Rate Face value Proceeds Firm 1 8.00% 15 7.00% $500,000 $ Firm 2 3.00% 10 0.00% $ $705,347 Firm 3 6.50% 5.00% $500,000 $458,353 Firm 4 % 12 3.50% $1,000,000 $1,114,103 Firm 5 0.80% 20 2.00% $700,000 $arrow_forwardH5. Show proper step by step calculationarrow_forward
- Check my work mode: This shows what is correct or incorrect for the work you have completed so far. It does not indicate com What is the Macaulay duration of a bond with a coupon of 5.4 percent, nine years to maturity, and a current price of $1,055.40? What is the modified duration? Note: Do not round intermediate calculations. Round your answers to 3 decimal places. Answer is complete but not entirely correct. Macaulay Modified Duration 7.410 x Years 7.082 Yearsarrow_forwardBhaarrow_forwardSuppose that the prices of zero-coupon bonds with various maturities are given in the following table. The face value of each bond is $1,000. Maturity (Years) 1 2 3 4 5 Show Transcribed Text B) How could you construct a 1-year forward loan beginning in year 3? (Face Value) C) How could you construct a 1-year forward loan beginning in year 4? (Face Value) Required A Required B Complete this question by entering your answers in the tabs below. Face value Rate of synthetic loan → Show Transcribed Text Price $ 970.93 898.39 836.92 How could you construct a 1-year forward loan beginning in year 3? Note: Round your Rate of synthetic loan answer to 2 decimal places. Required A 776.20 685.42 Required B Face value Rate of synthetic loan Required C 7.85 % Required C How could you construct a 1-year forward loan beginning in year 4? Note: Round your Rate of synthetic loan answer to 2 decimal places. Ċ 13.29 %arrow_forward
- Suppose you purchase solution this question general accountingarrow_forwardThe prices of zero-coupon bonds with various maturities are given: maturity in years price 1 975.66 2 885.89 3 821.92 4 759.20 5 670.20 A) How could you construct a 1-year forward loan beginning in year 3? face value = ? rate of synthetic loan = ? B) How could you construct a 1-year forward loan beginning in year 4? face value = ? rate of synthetic loan = ?arrow_forwardQuestion 5 Suppose that discount bond prices are as follows: see picture a. A customer of your bank wants a forward contract to borrow $20M in three years from now for one year. What would be your quote to the customer? b. How would you confirm the rate? c. If customer accepts your offer, how would you lock-in the cash flows. Is there an arbitrage opportunity available? Show the entire cashflows chart.arrow_forward
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