Financial Risk Manager Part 2
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An American financial institution's finance officer is scrutinizing the company's balance sheet and seeks to understand the potential impact on the institution's equity resulting from changes in interest rates. To assess this, the finance officer has asked a supervisor to perform a duration analysis to evaluate how a 100-basis-point change in interest rates could affect the institution's equity.
A
The percentage change in the value of an asset or liability resulting from a 100-bps change in interest rates is directly proportional to its duration but is unaffected by the corresponding percentage change in interest rates.
B
Using USD 100 million of cash to pay a cash dividend will not affect the overall asset duration of the bank.
C
A prepayable mortgage loan has a higher duration than an identical non-prepayable loan and is typically more sensitive to overall interest rate changes
D
The sensitivity of assets and liabilities to changes in interest rates is greater when the coupon is lower, the duration is higher, or the overall level of interest rates is lower.