Macaulay duration is the optimal holding period to immunize the interest rate risks, namely to make the reinvestment risk and selling price risk offset one another completely. O True O False
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- ubmit The longer the time to maturity, the lower the security's price sensitivity to an interest rate change, ceteris paribus. True or False True FalseSome characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Characteristic Component Symbol This is the premium that reflects the risk associated with changes in interest rates for a long-term security. It changes over time, depending on the expected rate of return on productive assets exchanged among market participants and people’s time preferences for consumption. This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value. It is calculated by adding the inflation premium to r*. Over the past several years, Germany, Japan, and Switzerland have had lower interest rates than the United States due to lower values of this premium. It is based on the bond’s rating; the higher the rating, the lower the premium added, thus lowering…What is duration gap model? Explain the concept of duration. How duration measure can be used to protect a financial intermediary against interest rate risk?
- If a security is underpriced (i.e., intrinsic value > price), then what is the relationship between its market capitalization rate and its expected rate of return?Goodyear, a U.S. firm, sells tires to Airbus UK, and will receive payment of £1,000,000 in one year. Goodyear's bank quotes the information below: o The spot exchange rate is o The 1-year interest rate on dollars is ius = 2.00% e$/£ $1.50/£ %3D o The 1-year interest rate on pounds is iUK = 5.50% o The 1-year forward rate on pounds is fs/£ = $1.45/£ %3D In addition, Goodyear contacts private forecasters in the market and concludes: o The 1-year-ahead expected exchange rate on the Pound is eex £ = $1.40/£Rm-R is read as: O a. The return offered by the market over and above the risk-free rate O b. Market risk premium- Oc. Excess return on the market C. Od. All options are correct
- 1. Lower duration means higher interest rates risk (inverse relationship). Select one: True FalseWhich of the following is included inthe risk-free rate? O A. the default premium O B. the expected inflation premium O C. the liquidity premium O D. the maturity premium O E. All of the above are included in the risk-free rate. Reset SelectionThe static GAP focuses on monitoring net interest income in the long term. Select one: True False
- INTEREST RATE RISK In the context of the repricing gap model, what is the spread effect? How does it affect the change in net interest income?Explain whether you agree or disagree with the following statement: “The riskless interest rate is the real short-term interest rate that would prevail if there were no transitory financial disturbances.K possible Risk-Free Rate. What is a risk-free rate? Give an example of an investment with a risk free rate. Why is there no risk? A risk-free rate is: (Select the best answer below.) OA. an interest rate that is not guaranteed on an investment for a specified period. OB. an interest rate guaranteed on an investment for a unspecified period. OC. an interest rate guaranteed on an investment for a specified period. OD. an interest rate that is not guaranteed on an investment for an unspecified period. There is no risk because a risk-free investment: (Select the best answer below.) OA. pays an interest rate guaranteed on an investment for an unspecified period. OB. would pay investors even if the financial institution went into bankruptcy. OC. is a checking account. OD. is a zero interest loan.