FIN 306 CAPITAL BUDGETING 2026
ASSESSMENT QUESTIONS SOLUTIONS
STRUCTURED STUDY SHEET
◉ True or False
If a bank has a negative repricing gap, the bank is exposed to
refinancing risk, or the risk that interest rates will increase and the
cost of rolling over or reborrowing funds will be higher than the
interest revenue being earned on assets.
Answer: True
◉ A bank has rate sensitive assets of $100 and rate sensitive
liabilities of $70. If interest rates increased by 1%, what would be
the expected annual change in net interest income?
Answer: $0.30
100-70 = 30
1% x 30 = .30
,◉ A bank is facing a forecast of rising interest rates. What is the ideal
repricing and duration gap?
Answer: Positive repricing gap and negative duration gap
A negative repricing gap is preferred when interest rates are
expected to rise (interest income will go up by more than interest
expense goes up), and the negative duration gap implies a positive
relationship between changes in interst rates and changes in the
market value of the financial institution.
◉ True or False
The higher the duration, the less sensitive the bond price is to
changes in interest rates.
Answer: False
◉ A bank has three assets. It has $75 million invested in consumer
loans with a 3-year duration, $39 million invested in T-Bonds with a
16-year duration, and $39 million in 6-month maturity T-Bills with a
0.5-year duration. What is the duration of the bank's asset portfolio
in years?
Answer: (75/153)*3 + (39/153)*16 + (39/153)*0.5 = 5.6765 years
◉ A bond has three years left until it matures, the yield to maturity
on the bond is 5% and the annual coupon rate is 6%. If the face value
, (par value) of the bond is $1000, calculate the bond's duration in
years.
Answer: Bond price equals 1027.23
Duration numerator is 60/1.05 + (2*60)/1.05^2 + (3*1060)/1.05^3
= 2,912.99
So duration is 2912.99/1027.23 = 2.8358 years
◉ A bank has DA = 2.4 years and DL= 0.9 years. The bank has total
equity of $82 million and total assets of $850 million. What is the
bank's duration gap in years?
Answer: 2.4 - 0.9035*0.9
where k = (850-82)/850 = 0.9035
◉ Duration gap model
Answer: incorporates the impact of interest rate changes on the
overall market value of an FI's balance sheet and ultimately on its
owners' equity or net worth
◉ Insolvency risk
Answer: the result, a consequence, or an outcome of excessive
amounts of one or more of the risks taken by an FI (for example,
liquidity risk, credit risk, and interest rate risk)
◉ If the Fed wants to slow down the economy
ASSESSMENT QUESTIONS SOLUTIONS
STRUCTURED STUDY SHEET
◉ True or False
If a bank has a negative repricing gap, the bank is exposed to
refinancing risk, or the risk that interest rates will increase and the
cost of rolling over or reborrowing funds will be higher than the
interest revenue being earned on assets.
Answer: True
◉ A bank has rate sensitive assets of $100 and rate sensitive
liabilities of $70. If interest rates increased by 1%, what would be
the expected annual change in net interest income?
Answer: $0.30
100-70 = 30
1% x 30 = .30
,◉ A bank is facing a forecast of rising interest rates. What is the ideal
repricing and duration gap?
Answer: Positive repricing gap and negative duration gap
A negative repricing gap is preferred when interest rates are
expected to rise (interest income will go up by more than interest
expense goes up), and the negative duration gap implies a positive
relationship between changes in interst rates and changes in the
market value of the financial institution.
◉ True or False
The higher the duration, the less sensitive the bond price is to
changes in interest rates.
Answer: False
◉ A bank has three assets. It has $75 million invested in consumer
loans with a 3-year duration, $39 million invested in T-Bonds with a
16-year duration, and $39 million in 6-month maturity T-Bills with a
0.5-year duration. What is the duration of the bank's asset portfolio
in years?
Answer: (75/153)*3 + (39/153)*16 + (39/153)*0.5 = 5.6765 years
◉ A bond has three years left until it matures, the yield to maturity
on the bond is 5% and the annual coupon rate is 6%. If the face value
, (par value) of the bond is $1000, calculate the bond's duration in
years.
Answer: Bond price equals 1027.23
Duration numerator is 60/1.05 + (2*60)/1.05^2 + (3*1060)/1.05^3
= 2,912.99
So duration is 2912.99/1027.23 = 2.8358 years
◉ A bank has DA = 2.4 years and DL= 0.9 years. The bank has total
equity of $82 million and total assets of $850 million. What is the
bank's duration gap in years?
Answer: 2.4 - 0.9035*0.9
where k = (850-82)/850 = 0.9035
◉ Duration gap model
Answer: incorporates the impact of interest rate changes on the
overall market value of an FI's balance sheet and ultimately on its
owners' equity or net worth
◉ Insolvency risk
Answer: the result, a consequence, or an outcome of excessive
amounts of one or more of the risks taken by an FI (for example,
liquidity risk, credit risk, and interest rate risk)
◉ If the Fed wants to slow down the economy
