The Following Information Is About Current Spot Rates for Second

question 72

Multiple Choice

The following information is about current spot rates for Second Duration Savings' assets (loans) and liabilities (CDs) . All interest rates are fixed and paid annually. If the FI finances a $500,000 2-year loan with a $400,000 1-year CD and equity, what is the leveraged adjusted duration gap of this position? Use your answer to the previous question.

• A)+1.25 years
• B)+1.12 years
• C)-1.12 years
• D)+0.92 years
• E)-1.25 years

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Definitions:

Market Risk Premium

The extra return over the risk-free rate that investors require to compensate them for the risk of investing in the stock market.

Risky Investment

An investment that carries a high level of risk of loss, along with the potential for significant returns.

Risk-free Investment

An investment which is thought to have no risk of financial loss, though in reality, such an investment is virtually nonexistent.

Expected Rate of Return

The weighted average of all possible returns for an investment, accounting for the probability of each outcome.