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Mid-Term Test Paper (CM20488 FRM Sem B 2009_10, Final Version 1)

Mid-Term Test Paper (CM20488 FRM Sem B 2009_10, Final Version 1)

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Multiple Choice Questions (20%; 0.5% for each question) 1. The risk that an investor will be forced to place earnings from a loan or security into a lower yielding investment is known as A. liquidity risk. B. reinvestment risk. C. credit risk. D. foreign exchange risk. 2. Risk management for financial intermediaries deals with 3. When repricing all interest rate sensitive assets and liabilities in a balance sheet, the cumulative gap will be 4. The earnings at risk for an FI is a function of 5. If interest rates decrease 40 basis points for an FI that has a cumulative gap of -$25 million, the expected change in net interest income is A. +$100,000. B. -$100,000. C. -$625,000. D. -$625,000. 1
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6. Which of the following observations concerning floating-rate loans is not true ? 7. Can an FI immunize itself against interest rate risk exposure even though its maturity gap is not zero ? 8. Consider a 6-year maturity, $100,000 face value bond that pays a 5% fixed coupon annually, what is the price of the bond if market interest rates are 6% ? 9. (I) Prices of longer-maturity bonds respond less dramatically to changes in interest rates. (II) Prices & returns for long-term bonds are less volatile than those for shorter-term bonds. A. (I) is true, (II) is false B. (I) is false, (II) is true C. Both are true D. Both are false 2
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