Homework Answers
A duration Gap is generallly defined as the sensitivity of bond price in relation to the changes in the interest rates.
The answer will be the option B because by paying the variable rate of interest and receiving the fixed rate we can lock the interest receiving amount and the duration gap will become alomst NIL for us.
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An Fl with a positive duration gap could do which of the following to reduce the...
Which of the following is not true for an institution with a positive duration gap? A....
Which of the following is not true for an institution with a positive duration gap? A. It is hurt by increasing interest rates. B. It may hedge its interest rate risk by buying interest rate futures. C. It may hedge its interest rate risk by buying puts on interest rate futures. D. It may hedge its interest rate risk by paying fixed and receiving floating rate in an interest rate swap. E. All of the above are true.
Consider the following balance sheet (in millions) for an FI: Assets Duration = 13 years $...
Consider the following balance sheet (in millions) for an FI: Assets Duration = 13 years $ 970 Liabilities Duration = 5 years Equity $ 900 70 a. What is the Fl's duration gap? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) b. What is the Fl's interest rate risk exposure? c. How can the Fl use futures and forward contracts to create a macrohedge? d. What is the impact on the Fi's equity value...
4. Consider the following balance sheet (in millions) for an FI: Assets Duration = 10 years...
4.
Consider the following balance sheet (in millions) for an FI: Assets Duration = 10 years $ 910 Liabilities Duration = 4 years Equity $ 810 100 a. What is the Fl's duration gap? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) b. What is the Fl's interest rate risk exposure? c. How can the Fl use futures and forward contracts to create a macrohedge? d. What is the impact on the FI's equity...
A bank could reduce asset sensitivity if gap is positive by: A) decreasing its long-term securities...
A bank could reduce asset sensitivity if gap is positive by: A) decreasing its long-term securities as a percentage of total assets B) shortening the average maturity of its loans C) replacing variable rate loans with fixed rate loans D) all of the above E) none of the above
The derivatives markets contain different types of contracts. Forward contracts, futures contracts, options, and swaps are...
The derivatives markets contain different types of contracts. Forward contracts, futures contracts, options, and swaps are some common types of derivatives contracts. True or False: One of the major differences between futures and forward contracts is that forward contracts are revalued and marked-to-market daily, whereas futures contracts are traded on an organized exchange. O False True Which of the following are used to hedge against fluctuating interest rates, stock prices, and exchange rates? Commodity futures Financial futures O Ahmad feels...
14. Junk bonds are bonds that are rated less than investment grade by bond-rating agencies a)...
14. Junk bonds are bonds that are rated less than investment grade by bond-rating agencies a) True b) False 15. A secured loan has a claim to specific assets ofthe borrower in the case of default. a) True b) False 16. In a conventional interest rate swap agreement, the swap buyer agrees to make a number of fixed interest rate payments to the swap seller a) True b) False 17. Currency swaps can be designed to reduce foreign exchange risk....
Determine the optimal hedge ratio for Treasury bonds worth $1,000,000 with a duration of 12.45, y...
Determine the optimal hedge ratio for Treasury bonds worth $1,000,000 with a duration of 12.45, yielding 11.9 percent if the futures has a price of $90,000, a duration of 8.5 years and an implied yield of 9.5 percent. a. 16.27 b. 16.63 c. 7.42 d. 11.11 e. none of the above which of the following is the interpretation of a VAR of $5 million for one year at .05. a. the probability is .05 that the firm will lose at...
On December 31, 2018 (i.e., assume this is today), a commercial bank owns a 4.50% U.S....
On December 31, 2018 (i.e., assume this is today), a commercial bank owns a 4.50% U.S. Treasury Bond due December 31, 2033, with a face value of $20 million, and with annual interest payments. The current market interest rate yield to maturity for this bond is 5.35 %, so this means the current market value of the bond is selling for $18,276,472.20, which means the bank has already lost value. The bank is concerned about losing even more value for...
1. Which of the following trades implies that ownership has been taken? a. Buying a futures...
1. Which of the following trades implies that ownership has been taken? a. Buying a futures contract. b. Selling a futures contract. c. Buying a stock. d. Shorting a stock. e. None of the above implies ownership. The following transactions are the only ones made during the first 4 days a futures contract trades. Answer question 2 based on this table. DAY TRANSACTION S O 1 A Long 30, B Short 30 2 A Long 55, C Short 55 3...
Name Date Principles of Finance Chapters 1 & 2 Week 6 11. Which of the following...
Name Date Principles of Finance Chapters 1 & 2 Week 6 11. Which of the following statements is correct? a. A warrant is basically a long-term option that enables the holder to sell common stock back to the firm at an agreed upon price, at a specified time in the future. b. Generally, warrants are distributed along with preferred stock in order to make the preferred stock less risky. c. If a company issuing coupon paying debt wanted to reduce...
Consider the following balance sheet (in millions) for an FI: Assets Duration = 13 years $ 970 Liabilities Duration = 5 years Equity $ 900 70 a. What is the Fl's duration gap? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) b. What is the Fl's interest rate risk exposure? c. How can the Fl use futures and forward contracts to create a macrohedge? d. What is the impact on the Fi's equity value...
4.
Consider the following balance sheet (in millions) for an FI: Assets Duration = 10 years $ 910 Liabilities Duration = 4 years Equity $ 810 100 a. What is the Fl's duration gap? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) b. What is the Fl's interest rate risk exposure? c. How can the Fl use futures and forward contracts to create a macrohedge? d. What is the impact on the FI's equity...
The derivatives markets contain different types of contracts. Forward contracts, futures contracts, options, and swaps are some common types of derivatives contracts. True or False: One of the major differences between futures and forward contracts is that forward contracts are revalued and marked-to-market daily, whereas futures contracts are traded on an organized exchange. O False True Which of the following are used to hedge against fluctuating interest rates, stock prices, and exchange rates? Commodity futures Financial futures O Ahmad feels...
14. Junk bonds are bonds that are rated less than investment grade by bond-rating agencies a) True b) False 15. A secured loan has a claim to specific assets ofthe borrower in the case of default. a) True b) False 16. In a conventional interest rate swap agreement, the swap buyer agrees to make a number of fixed interest rate payments to the swap seller a) True b) False 17. Currency swaps can be designed to reduce foreign exchange risk....
On December 31, 2018 (i.e., assume this is today), a commercial bank owns a 4.50% U.S. Treasury Bond due December 31, 2033, with a face value of $20 million, and with annual interest payments. The current market interest rate yield to maturity for this bond is 5.35 %, so this means the current market value of the bond is selling for $18,276,472.20, which means the bank has already lost value. The bank is concerned about losing even more value for...
1. Which of the following trades implies that ownership has been taken? a. Buying a futures contract. b. Selling a futures contract. c. Buying a stock. d. Shorting a stock. e. None of the above implies ownership. The following transactions are the only ones made during the first 4 days a futures contract trades. Answer question 2 based on this table. DAY TRANSACTION S O 1 A Long 30, B Short 30 2 A Long 55, C Short 55 3...
Name Date Principles of Finance Chapters 1 & 2 Week 6 11. Which of the following statements is correct? a. A warrant is basically a long-term option that enables the holder to sell common stock back to the firm at an agreed upon price, at a specified time in the future. b. Generally, warrants are distributed along with preferred stock in order to make the preferred stock less risky. c. If a company issuing coupon paying debt wanted to reduce...
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