44. Which of the following are likely to occur when Interest rates ri a. Fixed-r

Question

44. Which of the following are likely to occur when Interest rates ri a. Fixed-rate loans are pre-paid. b. Bonds are called. c. Deposits are withdrawn early d. All of the above occur when interest rates rise sharply. e· a.and b. se sharplyt 45. Duration gap analysis: a applies the the concept of duration to the bank's entire balance sheet. b. applies th c applies the the concept of duration to the bank's retained earnings. d. indicates the difference in the GAP in the time it takes to collect on loan e the concept of duration to the bank's entire income statement. payments versus the time to attract deposits e estimates when embedded options will be exercised. 46. Modified duration: A estimates when embedded options will be used. B directly indicates how much the price of a security will change given a change in interest rates. C is always greater than maturity. D All of the above E a. and b. 47. Effective duration: estimates when embedded options will be used. b. a. directly indicates how much the price of a security will change given a change in interest rates. c. is always greater than maturity. d. is a weighted average of the time until cash flows are received. e. All of the above 48. includes transaction accounts, MMDAs, savings accounts and small time deposits. a. Retail funding b. Wholesale funding c. Borrowed funding d. Equity funding e. Lockbox funding

Explanation / Answer

44.c.Deposits are withdrawn early..basically to create new deposits with higher rates.

45.d.Indicates the diference in the GAP in time it takes to collect on loan payments versus time to attract deposts.

Duration GAP = Duration of assets - (Market value of liabilities / Market value of assets) x Duration of Liabilities

46.b.directly indicates how much the price of a security will change given a change in interest rates.

because it folllows the concept that interest rates and bond prices move in opposite direction.

47.a.estimtates when embedded options will be used.

if bond has embedded options we need effective duration as modified duration only changes yiel dto duration whereas effective duration changes yield and also bond cashflows to get duration

48.a.Retail funding

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