HW_11_Solutions_Chapters_24_25[1]

# HW_11_Solutions_Chapters_24_25[1] - Chapter 24 10 Chicago...

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Chapter 24 10. Chicago Avenue Bank has the following assets: Asset Value Duration (in years) T-Bills \$100,000,000 0.55 Consumer Loans \$ 40,000,000 2.35 Commercial Loans \$ 15,000,000 5.90 What is Chicago Avenue Bank’s asset portfolio duration? Solution: Total assets = 155 M Asset duration = 0.55 × (100/155) + 2.35 × (40/155) + 5.90 × (15/155) = 1.53 years 11. A bank added a bond to its retained portfolio. The bond has a duration of 12.3 years and cost \$1,109. Just after buying the bond, the bank discovered that market interest rates are expected to rise from 8% to 8.75%. What is the expected change in the bond’s value? Solution: Duration 1 0.0075 12.3 \$1,109 \$94.73 1 0.08 P i P i P Δ Δ = − × + Δ = − × × = − + 26. The percentage change in net worth as a percentage of assets is % Δ NW = DUR GAP × Δ i /(1 + i ) = ( 1.33) × 0.03/(1 + 0.08) = 0.037 = 3.7%. With \$100 million of assets, this means net worth increases by \$5.7 million, from \$10 million to \$15.7 million. Since the bank has an even larger net worth, it is clearly solvent and will certainly stay in business.

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Chapter 24 Risk Management in Financial Institutions 137 Chapter 25 s Quantitative Problem 5. You would buy a \$100 million worth, i.e. 1000 contracts, of long-term bond futures contract with an expiration date of one year in the future. This means that you would be entitled to delivery of the long-term bond at today’s price so that the current rate would be locked in. 6.
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## This note was uploaded on 09/07/2011 for the course FIN 353 taught by Professor Cobus during the Spring '08 term at S.F. State.

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HW_11_Solutions_Chapters_24_25[1] - Chapter 24 10 Chicago...

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