FIN 306 FINAL EXAM QUESTIONS ANSWERED CORRECTLY LATEST UPDATE 2026

FIN 306 FINAL EXAM QUESTIONS ANSWERED CORRECTLY LATEST UPDATE 2026 True or False? A rate sensitive asset is an asset whose interest rates will be repriced or changed over some future period. - Answers True True or False If a bank has a negative repricing gap, the bank is exposed to refinancing risk, or the risk that interest rates will increase and the cost of rolling over or reborrowing funds will be higher than the interest revenue being earned on assets. - Answers True A bank has rate sensitive assets of $100 and rate sensitive liabilities of $70. If interest rates increased by 1%, what would be the expected annual change in net interest income? - Answers $0.30 100-70 = 30 1% x 30 = .30 A bank is facing a forecast of rising interest rates. What is the ideal repricing and duration gap? - Answers Positive repricing gap and negative duration gap A negative repricing gap is preferred when interest rates are expected to rise (interest income will go up by more than interest expense goes up), and the negative duration gap implies a positive relationship between changes in interst rates and changes in the market value of the financial institution. True or False The higher the duration, the less sensitive the bond price is to changes in interest rates. - Answers False A bank has three assets. It has $75 million invested in consumer loans with a 3-year duration, $39 million invested in T-Bonds with a 16-year duration, and $39 million in 6-month maturity T-Bills with a 0.5-year duration. What is the duration of the bank's asset portfolio in years? - Answers (75/153)*3 + (39/153)*16 + (39/153)*0.5 = 5.6765 years A bond has three years left until it matures, the yield to maturity on the bond is 5% and the annual coupon rate is 6%. If the face value (par value) of the bond is $1000, calculate the bond's duration in years. - Answers Bond price equals 1027.23 Duration numerator is 60/1.05 + (2*60)/1.05^2 + (3*1060)/1.05^3 = 2,912.99 So duration is 2912.99/1027.23 = 2.8358 years A bank has DA = 2.4 years and DL= 0.9 years. The bank has total equity of $82 million and total assets of $850 million. What is the bank's duration gap in years? - Answers 2.4 - 0.9035*0.9 where k = (850-82)/850 = 0.9035 Duration gap model - Answers incorporates the impact of interest rate changes on the overall market value of an FI's balance sheet and ultimately on its owners' equity or net worth Insolvency risk - Answers the result, a consequence, or an outcome of excessive amounts of one or more of the risks taken by an FI (for example, liquidity risk, credit risk, and interest rate risk) If the Fed wants to slow down the economy - Answers it will tighten monetary policy by taking actions that raise interest rates If the Fed wants to stimulate the economy - Answers it allows interest rates to fall Duration - Answers measures the interest rate sensitivity of an asset or liability's value to small changes in interest rates Effect of interest rate changes on the market value of an FI's equity or net worth (∆E) breaks down into three effects - Answers Leverage-adjusted duration gap = DA - kDL. Size of the FI. Size of the interest rate shock Difficulties in Applying the Duration Model to Real-World FI Balance Sheets - Answers Duration matching can be costly. Immunization is a dynamic problem. Large interest rate changes and convexity. True or False Gains and losses on a futures contract must be recognized daily. - Answers True Futures contracts are marked-to-market. Microhedging - Answers using a derivative securities contract to hedge a specific asset or liability, basis risk involved True or False Writing a call option on a bond pays off if interest rates rise. - Answers True This is true since when interest rates rise, prices go down, but by writing (selling) a call option you benefit when prices go down (since the call option buyer will pay the call premium and not exercise the option). Which of the following bond option positions increase in value when interest rates increase? - Answers Long put; written call When interest rates rise, you would want to sell a call option (and gain the call premium when bond prices fall) or buy a put option (and gain a payoff when bond prices drop and you can sell for a higher price - the exercise price). A financial institution's balance sheet has assets with an average duration of 7 years and liabilities with an average duration of 5 years. Leverage (k) is equal to 85% at this FI. What type of interest rate risk does the duration gap leave this FI exposed to? - Answers The positive DGAP leaves the bank exposed to interest rate increases. DGAP = 7-.85*5 = 2.75 years Positive duration gap means that equity values will decline if interest rates increase. A financial institution has several bonds listed as assets on their balance sheet. As interest rates change, what is the safest way for the FI to hedge the value of these bonds? - Answers purchase a put option on the bond. If the bond price drops, you have the option to sell at a higher price if you buy a put option on the bond. True or False Forward contracts have no counterparty credit risk while futures contracts do have counterparty credit risk. - Answers False Credit swaps can help to hedge _______ by having the buyer make fixed payments to the swap seller and the seller pay the buyer only in the event of default. - Answers credit risk In a pure vanilla swap, Bank A sends fixed payments to Bank B, while Bank B sends variable payments to Bank A. In this way, Bank A and Bank B both can align their cash flows on the asset and liability side of the balance sheet (all fixed or all variable) which in turn reduces each institution's ____________. - Answers Duration gap True or False Dodd-Frank aims to have most derivatives trade on market platforms where appropriate (rather than OTC) and requires that institutions hold capital relative to the risks they are taking in off-balance sheet trades. It also promotes greater transparency in the derivatives market in order to minimize systemic risk. - Answers True Speculators - Answers buy derivative contracts to profit from a price increase or sell to profit from a price decrease. Hedgers - Answers take a position in a derivative contract as protection against an increase or decrease in the price of a security spot contract - Answers an agreement to transact involving the immediate exchange of assets and funds forward contract - Answers agreement to transact involving the future exchange of a set amount of assets at a set price -future (spot) price or interest rate on an asset is uncertain -Often involve underlying assets that are nonstandardized