Consider an Asset with a Current Market Value of $250

question 40

Multiple Choice

Consider an asset with a current market value of $250 000 and a duration of 3.3 years. Assume the asset is partially funded through zero-coupon bonds which currently sells for $225 000 and has a maturity of 4 years. The current discount rate is 15 per cent. Which of the following statements is true?

• A) The FI is benefiting from increasing interest rates as it has a negative duration gap of 0.3 years.
• B) The FI is exposed to increasing interest rates as it has a negative duration gap of 0.3 years.
• C) The FI is exposed to increasing interest rates as it has a positive duration gap of 0.3 years.
• D) The FI is exposed to decreasing interest rates as it has a positive duration gap of 0.3 years.

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Definitions:

Overvalued

A term used to describe an asset or security whose price is believed to be higher than its intrinsic value.

Consolidated Balance Sheet

A consolidated financial report that shows the assets, liabilities, and shareholders' equity of a parent company along with its subsidiaries as though they are one entity.

Inventory

The components, items in the process of completion, and completed products which form part of a company's assets that are available or will soon be available for sale.

Fair Value

The estimated price at which an asset or liability could be traded in an orderly transaction between market participants at the measurement date.