Skip to content

FRM Part II · FRM Exam Part II · Monetary and Fiscal Policy: Safeguarding Stability and Trust

A bank holds a bond portfolio with a market value of USD 2,000 million and a modified duration of 6. Policy tightening lifts yields by 100 basis points in parallel. Ignoring convexity, the bank's Common Equity Tier 1 capital is USD 900 million before the shock. Assuming all losses flow through to CET1 (fair value through capital), what is the CET1 after the shock?

The portfolio loses market value equal to duration times the yield change times value: 6 x 1% x USD 2,000 million, or USD 120 million. Subtracting this from USD 900 million of CET1 leaves USD 780 million after the shock.

  1. AUSD 780 millionCorrect
  2. BUSD 1,020 million
  3. CUSD 880 million
  4. DUSD 700 million

Explanation

Loss = 2,000 x 6 x 0.01 = USD 120 million. CET1 = 900 - 120 = USD 780 million. The 1,020 figure adds the loss with the wrong sign; 880 uses duration of 1 on only a fraction of the book; 700 doubles the shock.

Did you get it right without looking?

One question tells you little. A timed set on Monetary and Fiscal Policy: Safeguarding Stability and Trust shows your real accuracy, how long you take and where you lose marks.

Practise Monetary and Fiscal Policy: Safeguarding Stability and TrustFree diagnostic mock

More Monetary and Fiscal Policy: Safeguarding Stability and Trust questions