HW_11_Solutions_Chapters_24_25[1]

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

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
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.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

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.

Page1 / 5

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

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online