1. When the leverage-adjusted duration gap is negative, an increase in interest rates will cause a decrease in the market value of equity of depository institutions.

A. True

B. False

2. Which of the following statements regarding catastrophe bonds is true?

A. Institutional investors are particularly interested in catastrophe bonds because of their portfolio diversification benefits.

B. The yields are lower than traditional bonds like treasuries.

C. The yields are lower than asset-backed securities and commercial mortgage-backed securities.

D. There currently do not exist any potential challenges to the catastrophe bonds market.

E. Catastrophic property damage risks are highly correlated with the risks of other asset classes.

3. Which of the following statements regarding the repricing gap is true?

A. A negative gap will expose FI to reinvestment risk.

B. A negative gap implies that RSAs is greater than RSLs.

C. A positive gap implies that an increase in interest rates will cause a decrease in net interest income.

D. A positive gap will expose FI to refinancing risk.

E. A negative gap implies that an increase in interest rates will cause a decrease in net interest income.

4. Greater convexity of fixed-income securities causes larger errors in the duration-based estimate of price changes.

A. True

B. False

5. Which of the following statements regarding the duration model is not true?

A. The greater convexity causes larger errors in the duration-based estimate of price changes.

B. Immunization is a dynamic problem; therefore, it requires regular B/S rebalancing within the financial institution.

C. All of the options.

D. Duration matching can be costly.

E. Duration becomes the more accurate measure of interest rate sensitivity with the large interest rate changes.