Chapter 9

Question 1

What is duration?

Answer 1

It is the length of time it takes to breakeven

Question 2

If rates go up, how is duration affected?

Answer 2

Duration goes down (breakeven happens faster)

Question 3

If rates go down, how is duration affected?

Answer 3

Duration goes up (longer to breakeven)

Question 4

If a FI holds a fixed mortgage to maturity and rates go up, what happens to runoff? Why?

Answer 4

You have a positive runoff because the FI is re-investing at a higher rate

Question 5

What do banks look for in terms of duration?

Answer 5

They want shorter duration since they breakeven quicker

Question 6

Is duration shorter than maturity?

Answer 6

Yes, always. Because you get paid interest payments and therefore achieve breakeven before maturity

Question 7

What is one acceptation for duration being longer than maturity?

Answer 7

On a zero coupon bond where duration = maturity

Question 8

*If there is a positive gap (A>L) and rates go up, what happens to NII and duration?

Answer 8

NII goes up and duration decreases
->because the FI is renewing the assets that are bigger than liab in an environment where rates went up

Question 9

*If there is a positive gap (A>L) and rates go down, what happens to NII and duration?

Answer 9

NII goes down and duration increases
->because rates go down, now the assets are being renewed at a lower interest rate therefore increasing duration

Question 10

*If there is a negative gap (A<L) and rates go up, what happens to NII and duration?

Answer 10

NII goes down and duration increases
-> because rates go up, now you need to renew the liabilities at a higher interest rate which increases duration

Question 11

*If there is a negative gap (A<L) and rates go down, what happens to NII and duration?

Answer 11

NII goes up and duration decreases
-> because rates go down, you now need to pay less interest on the liab as before which decreases duration