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LOS j: Critique the risks associated with managing a portfolio against a liability structure, including interest rate risk, contingent claim risk, and cap risk. ffice ffice" />
Q1. Which of the following refers to the risk that floating rate assets may have an upper bound on the interest rate whereby a maximum rate of interest on the asset is achieved?
A) Cap risk.
B) Call risk.
C) Interest rate risk.
Correct answer is A)
Cap risk is the risk that the interest rate is capped (has a maximum) and that interest income from the asset is then capped.
Q2. Which of the following refers to the differences in interest rate sensitivity of the firm’s assets relative to its liabilities?
A) Interest rate risk.
B) Cap risk.
C) Tracking error risk.
Correct answer is A)
Interest rate risk refers to differences in the interest rate sensitivity of the firm’s assets versus its liabilities.
Q3. Which of the following risks associated with managing a bond portfolio is least accurate?
A) Combination matching for multiple liabilities is the same as horizon matching.
B) Contingent claim risk is the risk that interest rates could increase, resulting in the cost of the firm's liabilities exceeding the return on its fixed-rate assets.
C) Price risk and reinvestment risk are the two components that comprise interest rate risk.
Correct answer is B)
Contingent claim risk (a.k.a. call risk or prepayment risk) is the risk that interest rates could decrease with the bonds in the portfolio being called resulting in reinvesting the principal at reduced rates of return. To adjust for this potential, rather than simply comparing the portfolio duration to that of the liability, the manager must consider the convexity of the bonds. Cap risk is the risk that interest rates could increase, resulting in the cost of the firm’s liabilities exceeding the return on its floating rate assets if those assets contain caps.
Q4. Which of the following is the best definition of cap risk? Cap risk is the risk:
A) that the funding rate used to purchase a floating rate note exceeds the notes cap rate.
B) associated with the issuer of a floating rate note with an embedded cap.
C) that a floating rate note has an embedded cap.
Correct answer is A)
Cap risk is the risk that the cost of the firm's interest rate-sensitive liabilities exceeds the return on its capped assets in an environment of rising interst rates. Cap risk is a particular concern to investors who borrow at a floating rate.
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发表于 2009-3-6 09:07
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