FIN 306 Final Exam 2026 Exam Questions LATEST
VERSIONS 200 QUESTIONS AND CORRECT
VERIFIED ANSWERS WITH RATIONALES (100%
CORRECT) A+ GRADED ASSURED
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? - CORRECT ANSWER: 2.4 -
0.9035*0.9
where k = (850-82)/850 = 0.9035
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? -
CORRECT ANSWER: $0.30
100-70 = 30
1% x 30 = .30
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? -
CORRECT ANSWER: (75/153)*3 + (39/153)*16 + (39/153)*0.5 = 5.6765 years
A bank is facing a forecast of rising interest rates. What is the ideal repricing and duration gap? -
CORRECT ANSWER: 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.
,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. - CORRECT ANSWER: 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 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? - CORRECT
ANSWER: 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.
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? - CORRECT ANSWER: 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 pass-through security is best characterized as - CORRECT ANSWER: a security with a pro
rata claim to the underlying pool of assets
Advantages of loan sales and securitization typically include all but which one of the following?
- CORRECT ANSWER: Increase in net interest income
All are true about Mortgage Backed Bonds - CORRECT ANSWER: -In MBBs, the mortgages
stay on the balance sheet while in a typical CMO, they are removed from the balance sheet.
-The balance sheet becomes less liquid with MBBs; it becomes more liquid with CMOs.
-The FDIC bears much of the risk of MBBs (mortgages used as collateral for bonds)
, Buying a call option - CORRECT ANSWER: right to BUY underlying asset in the future
Buying a put option - CORRECT ANSWER: right to SELL underlying asset in the future
CDOs - CORRECT ANSWER: collateralized debt obligations containing a diversified collection
of junk bonds or risky bank loans
Class A CMO - CORRECT ANSWER: holders have the least prepayment protection as all
principal prepayments are first paid to this tranche until they have been paid off in full
Class B CMO - CORRECT ANSWER: After all Class A C M Os have been retired, remaining
cash flows (after coupon payments) are used to retire Class B bonds
Class B holders have higher prepayment protection than Class A
Class C CMO - CORRECT ANSWER: holders have the most prepayment protection, and are
attractive to insurance companies and pension funds. This is the last tranche to receive principal
payments
CLOs - CORRECT ANSWER: collateralized loan obligations containing high-quality, low-
default risk loans
Credit default swaps (CDSs) - CORRECT ANSWER: allow FIs to better hedge credit risk
Credit swaps and the crisis - CORRECT ANSWER: -Lehman Brothers and AIG sold credit
default swaps worth billions of dollars in payments insuring mortgage-backed securities (MBS)
-When mortgage security values collapsed, required outflows at these firms far exceeded capital
VERSIONS 200 QUESTIONS AND CORRECT
VERIFIED ANSWERS WITH RATIONALES (100%
CORRECT) A+ GRADED ASSURED
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? - CORRECT ANSWER: 2.4 -
0.9035*0.9
where k = (850-82)/850 = 0.9035
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? -
CORRECT ANSWER: $0.30
100-70 = 30
1% x 30 = .30
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? -
CORRECT ANSWER: (75/153)*3 + (39/153)*16 + (39/153)*0.5 = 5.6765 years
A bank is facing a forecast of rising interest rates. What is the ideal repricing and duration gap? -
CORRECT ANSWER: 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.
,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. - CORRECT ANSWER: 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 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? - CORRECT
ANSWER: 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.
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? - CORRECT ANSWER: 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 pass-through security is best characterized as - CORRECT ANSWER: a security with a pro
rata claim to the underlying pool of assets
Advantages of loan sales and securitization typically include all but which one of the following?
- CORRECT ANSWER: Increase in net interest income
All are true about Mortgage Backed Bonds - CORRECT ANSWER: -In MBBs, the mortgages
stay on the balance sheet while in a typical CMO, they are removed from the balance sheet.
-The balance sheet becomes less liquid with MBBs; it becomes more liquid with CMOs.
-The FDIC bears much of the risk of MBBs (mortgages used as collateral for bonds)
, Buying a call option - CORRECT ANSWER: right to BUY underlying asset in the future
Buying a put option - CORRECT ANSWER: right to SELL underlying asset in the future
CDOs - CORRECT ANSWER: collateralized debt obligations containing a diversified collection
of junk bonds or risky bank loans
Class A CMO - CORRECT ANSWER: holders have the least prepayment protection as all
principal prepayments are first paid to this tranche until they have been paid off in full
Class B CMO - CORRECT ANSWER: After all Class A C M Os have been retired, remaining
cash flows (after coupon payments) are used to retire Class B bonds
Class B holders have higher prepayment protection than Class A
Class C CMO - CORRECT ANSWER: holders have the most prepayment protection, and are
attractive to insurance companies and pension funds. This is the last tranche to receive principal
payments
CLOs - CORRECT ANSWER: collateralized loan obligations containing high-quality, low-
default risk loans
Credit default swaps (CDSs) - CORRECT ANSWER: allow FIs to better hedge credit risk
Credit swaps and the crisis - CORRECT ANSWER: -Lehman Brothers and AIG sold credit
default swaps worth billions of dollars in payments insuring mortgage-backed securities (MBS)
-When mortgage security values collapsed, required outflows at these firms far exceeded capital
