In which of the following cases interest rate risk is expected to rise? 1) An insurance...

In which of the following cases interest rate risk is expected to rise?

1)	An insurance company plans to buy bonds in two months.

2)	A commercial bank plans to issue CDs in three months.

3)	A finance company has assets with a duration of six years and liabilities with a duration of 13 years.

4)	None of the above

Expert Solution

Answer : 2) A commercial bank plans to issue CDs in three months.

Explanations :

1) An insurance company plans to buy bonds in two months. : Bond prices increase with decreasing the interest rate and vice-a-versa. So Insurance Company buying for two months means bond price increase due to deacrease in interest rate.

2) A commercial bank plans to issue CDs in three months. : A commercial bank plans to issue CDs in three months. The bank should sell a forward or futures contract to protect against an increase in interest rates. Selling a forward or futures contract commits the bank to sell (borrow) at the interest rate in the forward or futures.

3) A finance company has assets with a duration of six years and liabilities with a duration of 13 years. : The finance company should buy a forward contract to protect against decreasing interest rates that would cause the value of liabilities to increase more than the assets.

jeff jeffy answered 1 year ago

Which of the following statement regarding interest rate risk is true? A. Interest rate risk is...

Which of the following statement regarding interest rate risk is true? A. Interest rate risk is a positive relationship between bond price and interest rate. B. The longer the maturity, the lower the interest rate risk. C. The higher the coupon rate, the higher the interest rate risk. D. The higher the coupon rate, the lower the interest rate risk

If interest is expected to rise, should a bank issue loans at a fixed rate or...

If interest is expected to rise, should a bank issue loans at a fixed rate or variable rate? Why?

EXPECTED INTEREST RATE The real risk-free rate is 2.55%. Inflation is expected to be 2.75% this...

EXPECTED INTEREST RATE The real risk-free rate is 2.55%. Inflation is expected to be 2.75% this year, 4.25% next year, and 3.15% thereafter. The maturity risk premium is estimated to be 0.05 × (t - 1)%, where t = number of years to maturity. What is the yield on a 7-year Treasury note? Do not round your intermediate calculations. Round your answer to two decimal places. %

Which of the following sentences is FALSE? Select one: a. Interest rate risk is the risk...

Which of the following sentences is FALSE? Select one: a. Interest rate risk is the risk that results from the changes in interest rates and thereby impact the bond value. b. As a bond approaches maturity, the price of the bond will approach its par value until, the bond is worth its face value at maturity. c. The value of a bond that pays semiannual interest is greater than that of an otherwise equivalent annual coupon interest paying bond. d....

The real risk-free rate of interest is 1%, inflation is expected to be 1.5% this year,...

The real risk-free rate of interest is 1%, inflation is expected to be 1.5% this year, 2% next year, and 3% per year for the next 5 years. The maturity risk premium is a function of time to maturity = 0.2* (1-t) %. The default risk premium on a corporate bond is 0.9%; and liquidity premium is 0.5%. a. What is the IP over the next 4 years? b. Find the yield on a 4-year T-bond. c. Find the yield...

Assume that the risk-free rate of interest is 6% and the expected rate of return on...

Assume that the risk-free rate of interest is 6% and the expected rate of return on the market is 16%. Consider the following questions. a. A share of stock sells for $50 today. It will pay a dividend of $6 per share at the end of the year. Its beta is 1.2. What do investors expect the stock to sell for at the end of the year? b. I am buying a firm with an expected perpetual cash flow of...

When a change in a country’s nominal interest rate is caused by a rise in the expected real interest rate, the domestic currency appreciates

Discuss the following statements. a.“When a change in a country’s nominal interest rate is caused by a rise in the expected real interest rate, the domestic currency appreciates. When the change in caused by a rise in expected inflation, the currency depreciates.” b.“When domestic and foreign bonds are perfect substitutes, a central bank should be indifferent about using domestic or foreign assets to implement monetary policy.”

The interest rate is 13% while the expected inflation rate is 15%. Which of the following...

The interest rate is 13% while the expected inflation rate is 15%. Which of the following is true regarding this observation? ____ A) The real interest rate is roughly 2% B) The lender earns 13% interest at the expense of the borrower from a loan C) The borrower is subsidized by the lender in a loan D) None of the above

1. Levels of which of the following hormones would be expected to rise if one needed...

1. Levels of which of the following hormones would be expected to rise if one needed more energy in order to run up some stairs? thyroid stimulating hormone (TSH) Somatostatin growth hormone ADRENOCORTICOTROPIC 2. The first heart sound occurs at which of the following moments? the end of isovolumetric contraction the end of isovolumetric relaxation the end of ventricular systole WRONG the end of ventricular diastole 3.Which of the following occurs during the ejection stage of the cardiac cycle? ASK...

Which of the following statements regarding risk is(are) CORRECT? I. Interest rate risk is the variability...

Which of the following statements regarding risk is(are) CORRECT? I. Interest rate risk is the variability of a security’s returns resulting from changes in interest rates. II. Inflation risk, or purchasing power risk, is the variability of security returns caused by the decline in the purchasing power of invested dollars. I only II only Both I and II Neither I nor II

Question