FINANCE 306 FINAL EXAM CORRECT
100%
Because of convexity, the duration model of interest rate risk is less accurate when -
ANSWERThe interest rate shock is large
What is the duration of a 2-year bond that pays an annual coupon of 10% and whose
current yield to maturity is 12%? Use $1000 as the face value - ANSWER1.91 years
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? - ANSWER5.7 years
Writing a call is riskier than buying a put - ANSWERTrue
Firms typically use ____ positions in futures contracts to hedge an asset that declines in
value as interest rates rise - ANSWERShort
A macrohedge is a - ANSWERHedge of an entire balance sheet
A forward hedge is different from a futures hedge in that: - ANSWERForwards contracts
can involve nonstandardized amounts whereas futures are standardized
You have taken a long position in a call option on ABC common stock. The option has
an exercise price of $100 and the stock is currently trading at $110. The option premium
is $8. What is your net profit on the option if ABC's stock price increases to $111 at
expiration? - ANSWER$3
Explain how securitization reduces interest rate risk - ANSWERBuying into the security,
investors take the position as the lender. Securitization allows the original lender or
creditor to removed the assets from the balance sheet allowing them to underwrite
additional loans
In a plain vanilla swap - ANSWEROne participant pays a fixed rate of interest and the
other party pays a variable rate of interest.`
Advantages of securitization typically all but which one of the following -
ANSWERIncrease in net interest income
Which one of the following forms of securitization is usually double securitization -
ANSWERCollateralized mortgage obligations
The FDIC is concerned about issuance of mortgage-backed bonds (MBBs) because: -
ANSWERThe agency is concerned about investors prepayment risk
100%
Because of convexity, the duration model of interest rate risk is less accurate when -
ANSWERThe interest rate shock is large
What is the duration of a 2-year bond that pays an annual coupon of 10% and whose
current yield to maturity is 12%? Use $1000 as the face value - ANSWER1.91 years
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? - ANSWER5.7 years
Writing a call is riskier than buying a put - ANSWERTrue
Firms typically use ____ positions in futures contracts to hedge an asset that declines in
value as interest rates rise - ANSWERShort
A macrohedge is a - ANSWERHedge of an entire balance sheet
A forward hedge is different from a futures hedge in that: - ANSWERForwards contracts
can involve nonstandardized amounts whereas futures are standardized
You have taken a long position in a call option on ABC common stock. The option has
an exercise price of $100 and the stock is currently trading at $110. The option premium
is $8. What is your net profit on the option if ABC's stock price increases to $111 at
expiration? - ANSWER$3
Explain how securitization reduces interest rate risk - ANSWERBuying into the security,
investors take the position as the lender. Securitization allows the original lender or
creditor to removed the assets from the balance sheet allowing them to underwrite
additional loans
In a plain vanilla swap - ANSWEROne participant pays a fixed rate of interest and the
other party pays a variable rate of interest.`
Advantages of securitization typically all but which one of the following -
ANSWERIncrease in net interest income
Which one of the following forms of securitization is usually double securitization -
ANSWERCollateralized mortgage obligations
The FDIC is concerned about issuance of mortgage-backed bonds (MBBs) because: -
ANSWERThe agency is concerned about investors prepayment risk
