Explanation:
The sensitivity of asset and liability values to changes in interest rates is higher for instruments with lower coupons, higher durations, and lower overall interest rates. When the coupon is lower, more of the bond's return is realized at maturity, leading to higher duration and sensitivity. Higher duration directly corresponds to increased sensitivity. Lower overall interest rate levels also mean that a given basis point change results in a larger percentage price change compared to higher interest rate environments.
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Q.5391 Thomas Peters, the Chief Risk Officer at ABC Bank, is assessing the bank's net worth sensitivity to a potential interest rate change. By conducting duration analysis, Mr. Peters evaluates the impact of a 200-basis point change in interest rates on the bank's net worth. Which of the following statements accurately represents the conclusion made by the CRO?
A
A non-prepayable loan has a lower duration compared to a prepayable mortgage loan, making it less sensitive to overall interest rate changes.
B
Assets and liabilities exhibit higher sensitivity to changes in interest rates when the coupon is lower, the duration is higher, or the overall level of interest rates is lower.
C
The percentage change in the value of an asset or liability caused by a 200-basis point change in interest rates is directly related to its duration and remains unaffected by the corresponding percentage change in interest rates.
D
Paying a cash dividend of USD 50 million using cash will have no impact on the overall asset duration of the bank.
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