1.What is the difference between book value accounting and market value accounting? How do interest rate changes affect the value of bank assets and liabilities under the two methods? What is marking to market?
2.What are the two different general interpretations of the concept of duration, and what is the technical definition of this term? How does duration differ from maturity?
3.A six-year, $10,000 CD pays 6 percent interest annually and has a 6 percent yield to maturity. What is the duration of the CD? What would be the duration if interest were paid semiannually? What is the relationship of duration to the relative frequency of interest payments?
4.What is dollar duration? How is dollar duration different from duration?
5.Identify and discuss three criticisms of using the duration model to immunize the portfolio of a financial institution.
6.In general, what changes have occurred in the financial markets that would allow financial institutions to restructure their balance sheets more rapidly and efficiently to meet desired goals? Why is it critical for an investment manager who has a portfolio immunized to match a desired investment horizon to rebalance the portfolio periodically? What is convexity? Why is convexity a desirable feature to capture in a portfolio of assets?
7.What is meant by market risk?
8.Why is the measurement of market risk important to the manager of a financial institution?
9.What is meant by daily earnings at risk (DEAR)? What are the three measurable components? What is the price volatility component?
10.What is meant by value at risk (VAR)? How is VAR related to DEAR in J.P. Morgan’s RiskMetrics model? What would be the VAR for the bond in problem (4) for a 10-day period? What statistical assumption is needed for this calculation? Could this treatment be critical?