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?

Q: What is Interest Rate Risk and Cash Flow Risk

A: Interest rate risk: The interest rate risk is the risk that occurs due to the change in the interest…

Q: What are some of the risks involved in short-term vs. long-term financing ?

A: Financing refers to providing or borrowing capital so as to run the operations of the business…

Q: In what way does leverage increase the riskiness of a loan?

A: The advantage a financial specialist or investor gets from utilizing debt is called financial…

Q: Is it true that current liabilities are riskier than long-term liabilities?

A: Liabilities: Liabilities are debt and obligations of a business. These are the claims against the…

Q: How do an investment's required rate of return vary with perceived risk? Explain with an example?

A: Required rate of return refers to the rate which the investors expects from their investments. This…

Q: o calculate the Internal Rate of Return, you need to know what interest rate to start with. True or…

A: Internal rate of return (IRR) is the rate at which NPV is zero

Q: If a security is underpriced (i.e., intrinsic value > price), then what is the relationship…

A: Intrinsic value of a security is the fair value based on the assessment of its fundamentals and…

Q: Explain whether you agree or disagree with the following statement:

A: Interest rate risk is the risk arising from the fluctuations in the interest rates. It depends…

Q: Explain the concept of “Value-at-Risk” (VAR) in the context of banks’ credit risk management. How is…

A: Credit Risk: A bank engages in the business of accepting deposits and funds and lending the funds…

Q: o risk premiums influence financial decisions regarding risk and re

A: Step 1 A risk premium is an investment return that is expected to generate more than the level of a…

Q: How does risk affect interest rates?

A: The risk and the interest rates are in a direct relationship that is, the greater the risk the…

Q: What is the compensation for price risk in finance? How do they arise and what issues arise due to…

A: Price risk: Price risk can be defined as the risk that price of a security may reduce. This risk is…

Q: What is risks and interest rate

A: Risks and interest rate are tied together in case of fixed income instruments like bonds.

Q: Explain how behavioural finance is related to market anomalies

A: Behavioural finance is the study of the behaviour of investors in making investment decisions.…

Q: What are the major drivers of portfolio-level credit risk?

A: Financial institutions are frequently mapping and controlling the risk from credit exposures at…

Q: a) What is the general characteristics of Risk Financing – Risk Retention Methods

A: Hi, Thanks for the Question, Since you asked multiple questions, we will answer first question for…

Q: Suggest what is the best financial instrument to offset market risk exposure and from market…

A: The question is based on the concept of hedging the market risk and volatility by use of a proper…

Q: What does the financial breakeven point shows?

A: A breakeven point is a situation of no loss no profit. The breakeven point is generally calculated…

Q: Explain the challenges policymakers face when interest rates are very low.

A: An interest rate is referred to as an amount that is charged over as well as above the principal…

Q: What is the relation between the present value of an investment and time and interest rate?

A: The concept of present value of an investment and time and interest rate is an important concept of…

Q: How can we determine the borrowing rate of return?

A: The borrowing rate of return is the return that is charged on the borrowings made by the firms or…

Q: Explain risk-free nominal rate of interest rate

A: This is the raw rate of return which does not take inflation into consideration. This is the rate…

Q: Distinguish between the initial rate of interest and the expected yield on an ARM. What is the…

A: Introduction: The adjustable rate mortgage is one of the method used to calculate the interest rate…

Q: What is the role of transferring credit risk? What is the various instruments used to transfer this…

A: Risk transfer is a management strategy that involves transferring the risk from one party to another…

Q: INTEREST RATE RISK  In the context of the repricing gap model, what is the spread effect? How does…

A: The repricing gap model is based on the consideration that a bank's exposure to interest rate risk…

Q: What is the internal rate of return? How is it used? How does it relate to the concept of compound…

A: The internal rate of return (IRR) is a capital budgeting metric used to gauge the benefit of…

Q: Provide some idea of the effect of the sensitivity of security prices to changes in market interest…

A: Sensitivity of interest rate (IR) is a technique of measuring change in the price of securities in…

Q: which of the following risks is most closely associated with off balance sheet? trading risk

A: Off balance sheet practice means when some liabilities and assets are not part of company's balance…

Q: What type of security can be used to minimize both price risk and reinvestment riskfor an investor…

A: The term price risk refers to the increase or decrease in the price of the bonds as a result of…

Q: Immunization is intended to protect a portfolio against interest rate risk. What should be done? How…

A: Immunization is the strategy under which the checks on the interest rates are provided to the firms.…

Q: What is Interest Risk and Cash Flow Risk?

A: Risk exists in all business operations and transactions however the business should take actions to…

Q: Explain current liabilities are riskier than long-term liabilities?

A: Liabilities:   A liability is a sum of money owed by the company towards external entities like a…

Q: The risk structure of interest rates and the term structure of interest rates are identical. True or…

A: The risk structure of interest rate refers to the differences in default risk, liquidity, and Income…

Q: How should derivatives be used in risk management? What problems can occur?

A: Derivatives are financial instruments that have values derived from other assets like stocks, bonds,…

Q: What is the importance of market risk premium?

A: Market risk premium Variance of the market return and the risk-free rate. It depicts the equity…

Q: Can default risks be adequately covered by the choice of a suitably high interest rate compared to…

A: Yes, Default risks can be adequately covered by choice of high interest rates in comparison to the…

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary. 

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.