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1 Which of the following statements is true? Select one: a
1 Which of the following statements is true? Select one: a. The duration of equity is equal to the duration of assets minus the duration of liabilities. b. Duration gap measures the impact of changes in interest rates on the market value of equity. c. The optimal duration gap is zero. d. The shorter the maturity of the FI's securities, the greater the FI's interest rate risk exposure. e. The duration of all floating rate debt instruments is equal to the time to maturity.
2 A bondholder purchased an 10 percent coupon, $1,000 par three-year bond at a 7
percent yield. Interest rates then immediately fell to 6 percent and his bond was called
at a price of $1,080. He reinvested his money and earned 6 percent on the $1,080 for
three years.
- Did the call help or hurt the bondholder?
- What was his three-year rate of return on his original investment?
Expert Solution
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Duration gap will be measuring the impact of change in the interest rate on the market value of equity.this is one of the mismatches that can occur and they can cause as asset liability mismatch.
All the other options are false.
Correct answer will be option (b) Duration gap measures the impact of change in interest rate on the market value of equity.
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please find attached.
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