The Effect of Interest Rate Changes on the Market Value

question 22

Multiple Choice

The effect of interest rate changes on the market value of an FI's net worth breaks down into three effects, these being the leverage adjusted duration gap, the:

• A)size of the FI and the reputation of the FI
• B)size of the FI and the size of the interest rate shock
• C)reputation of the FI and the size of the interest rate shock
• D)size of the FI and the direction of the interest rate changes

---

Definitions:

Maintenance Margin

The minimum amount of equity that must be maintained in a margin account to avoid a margin call, expressed as a percentage of the current market value.

Rate of Return

The upward or downward movement in the value of an investment across a chosen timeframe, expressed as a percentage of the investment's initial investment.

Margin

Describes securities purchased with money borrowed from a broker. Current maximum allowed margin on stock purchases is 50%.

Sell the Stock

An action where an investor disposes of their ownership in a corporation through the sale of its shares.